Public Information Notice No. 02/110

Public Information Notice: IMF Executive Board Discusses Market Access for Developing Country Exports

September 27, 2002

On September 18, 2002, the Executive Board of the International Monetary Fund (IMF) discussed the paper on "Market Access for Developing Country Exports--Selected Issues" which was prepared by staffs of the Fund and the World Bank.¹

Background

The paper was prepared as part of ongoing work on international trade issues at the IMF and World Bank, which also covers advice and programs at the individual country level, policy research--especially on the challenges set out in the Doha Development Agenda--and technical and capacity building assistance. It follows a similar joint paper prepared in 2001. The paper proposes that, while integration into global markets offers the potential for more rapid growth and poverty reduction, market barriers to key developing country exports have made it difficult for them to take full advantage of this opportunity. Evidence points to agricultural markets as being particularly distorted, with many Organization for Economic Cooperation and Development countries imposing a range of external barriers along with providing considerable support for domestic farmers. Textiles and clothing exports from developing countries also face high barriers. Tariff barriers on these goods far exceed those on other manufactured products, in industrial and developing countries alike. Despite an international agreement to phase out quotas on textile and clothing trade, most barriers will remain in place until 2005--at which time the removal of quotas is expected to result in sharp adjustment pressures.

The paper demonstrates that protection carries a high price for industrial and developing countries alike, and that it imposes disproportionate burdens on the poor. Protection has raised the prices of necessities in industrial countries, particularly for items important to lower-income households. In developing countries, barriers to exports of labor-intensive goods have slowed job-creation and stymied attempts to move up the chain of production towards higher-value added items. According to estimates presented in the paper, industrial country restrictions on trade in textiles and clothing have prevented the creation of well over 20 million jobs in developing countries, many of which would represent a step out of rural poverty. However, in line with other research in this area, the model results also show that the largest gains for both developing and industrial countries come from liberalizing their own trade regimes.

The paper identifies priority areas for reform. It concludes that improving market access for developing country exports will require a comprehensive approach to liberalization. Key issues include the phasing out of tariff peaks, broad-based agricultural reform, the rapid liberalization of textile and apparel trade, tougher disciplines on the application of trade remedy rules, preferential market access schemes by all industrialized countries for exports from least developed countries, and significant market access and other trade-related reforms in developing countries themselves.

Executive Board Assessment

Directors welcomed the opportunity to discuss the issue of market access for developing country exports, especially given the context of the multilateral trade negotiations in progress at the WTO. While the WTO provides the proper framework for these negotiations, the Fund, working closely with the World Bank and the WTO, has an important role to play in promoting and actively supporting trade liberalization among its members. This involves systematically raising the awareness of the benefits of free trade and of the costs imposed by market access restrictions in the context of the Fund's bilateral and multilateral surveillance activities, as well as policy advice and technical assistance in its areas of competence in support of countries' liberalization efforts, including on the timing and sequencing of liberalization, and on strategies to address the social and dislocation effects of trade reform. Directors underscored the complementarity between trade integration and financial integration, and the crucial importance of market access for the exports of developing countries to improve their prospects for durable growth and poverty reduction and ensure their successful integration in the globalized economy.

Directors agreed that further steps toward eliminating the barriers to developing country exports, preferably on a multilateral basis, would bring significant benefits to both developing and industrial countries. To take full advantage of this win-win opportunity, however, will require careful management of the transition process and, in developing countries, domestic policies that promote a vigorous supply response.

Directors agreed that the levels of protection in OECD markets remain particularly high for a number of products of great interest to developing country exports, at considerable cost to both developed and developing countries. They noted that the estimated global welfare gains from the elimination of tariff and quota restrictions on merchandise trade--in both industrial and developing countries--range from US$250 billion to US$680 billion annually, with the gains to developing countries far outweighing annual aid budgets. Several Directors considered that the indirect and medium-term benefits of liberalization would be significantly higher, as a result of better global resource allocation. While recognizing that some of the most significant benefits would derive from countries' liberalizations of their own trade regimes, and encouraging continued efforts by developing countries in this regard, Directors generally agreed that the industrial countries have a key role to play in driving forward the process of multilateral liberalization.

Agriculture was seen by many Directors as the area in most critical need of reform, and, in this context, a number of Directors expressed concern that earlier trends in OECD countries toward more open agricultural markets and lower subsidies have recently been put into question. Going forward, many Directors stressed that on-going initiatives to de-link financial support from agricultural production should be pursued vigorously, and called for ambitious reforms in the Doha trade round. Directors concurred with the view that meaningful liberalization of agricultural trade will have to proceed on a multilateral basis, addressing border protection and subsidies in both industrial and developing countries.

Recognizing the potential for significant terms of trade shifts associated with agricultural liberalization and their impact on net food importing developing countries, Directors saw a need for food-importing poor countries to receive appropriately targeted assistance--including from the Fund--to mitigate the effects of higher food prices resulting from liberalization. Directors will have an opportunity to return to this issue on the occasion of the forthcoming review of the Compensatory Financing Facility.

Directors also noted the market restrictions on exports of textiles and clothing from developing countries, and highlighted the potentially large benefits from further liberalization of trade in this sector. Many Directors emphasized that an early and gradual phasing out of textile and clothing quotas under the Agreement on Textiles and Clothing, initiated well before the end of the implementation period in 2005, would ease the adjustment for suppliers in both industrial and developing countries.

Many Directors expressed concern about the growing use of trade remedy actions such as antidumping procedures, and called for greater discipline in the application of such remedies to deter their use as a protectionist device. Another area requiring attention is the rapid increase in scope and complexity of technical barriers and standards (including health, safety, and product standards). While necessary for the smooth functioning of trade and to address legitimate health and safety concerns, Directors underscored the importance of ensuring that the restrictiveness of these standards does not go beyond what is required to meet their objectives. Several Directors saw this as a priority to allow least developed countries to reap the full benefit of the welcome initiatives taken by industrial countries to grant duty and quota free access to LDC exports. Directors agreed that technical assistance, including through the Integrated Framework for Trade-Related Technical Assistance, should support developing countries' efforts to implement the standards.

Directors stressed that improved access to developed country markets needs to be supported by continued wide-ranging reforms, which will allow developing countries to reap the benefits of closer integration with the world trading system. In particular, further reform of their own trade regimes and the elimination of anti-export biases will be key to fostering a vigorous supply response, and promoting the further development of South-South trade. As part of a comprehensive development and poverty reduction strategy it will also remain important to correct inefficiencies in key infrastructure and financial services and to press ahead with institutional and legal reforms, that are critical to attracting Foreign Direct Investment and improving export competitiveness. In this regard, Directors encouraged the further integration of trade issues in poverty reduction strategies, as well as close collaboration with the World Bank to assess the poverty and social impacts of trade reforms. The staff will prepare a comprehensive review of Fund advice on trade policy and related issues, for discussion by the Executive Board over the course of 2003.

Directors reconfirmed the conclusions of the Biennial Surveillance Review that the Fund should, as part of its surveillance process, monitor trade policies that have a global or regional impact in addition to its traditional reporting on domestic distortions. In particular, Fund surveillance should highlight market access barriers and trade-distorting subsidies where these are significant impediments to developing country growth and poverty reduction, and help to identify possible vulnerabilities stemming from shifts in trade flows or changes in the rules of the world trading system. Given the significant benefits from liberalization that would accrue to developed economies, most Directors also supported enhancing public awareness of the large domestic costs of existing trade distortions and the potentially large domestic gains from removing them by exploring ways of covering these costs and benefits in Article IV reports.