The Alleged Negative Effect of EU Preferential Trade Agreements on Developing Countries - Research Paper Example

The Alleged Negative Effect of EU Preferential Trade Agreements on Developing Countries Introduction One of the biggest issues confronted by the multilateral trading system in the current century is the launching of preferential trade agreements (PTAs). The magnitude and number of these settlements are growing drastically (Nilsson & Matsson 2009). The failure of another Doha Round ministerial convention in Geneva in 2008 will reinforce the movement toward preferential agreements (McQueen 2007). Furthermore, the international financial and economic instability has additionally lessened the eagerness of legislators to advocate trade liberalisation. In numerous developing countries, the trend is shifting from trade liberalisation to economic independence (Candau & Jean 2006). The multilateral trading system is enduring from the instability of the economy while preferential agreements keep on flourishing. Nowadays, no developing country is withdrawing from this development. Even if the European Union (EU), which began with the enforcement in 1958 of a customs union, has been putting into effects preferential agreements for several years, other developing countries, particularly those in East Asia, did not aid the increase in the prevalence of preferential agreements (Hoekman & Prowse 2005). Nevertheless, in the recent decades, developing economies, such as China, have further strengthened this risky development. Because of the failure of the Geneva ministerial convention in 2008, there will be heightened need for PTAs (Hoekman & Prowse 2005). The issues raised in the recent decade will occur again. The absence of growth in the multilateral stage will be considered as the major justification for preferential agreements and, apparently, this claim is currently more compelling than before (Falvey & Reed 2002). With the absence of any possible settlement on the Doha Development Round, the international economy is seasoned once again for a new batch of preferential agreements. However, policymakers should understand the risks that PTAs create for developing countries. Theoretically, preferential agreements rule out countries (Candau & Jean 2006). Liberalisation is PTAs’ deal and countries make compromises in them, yet these are exclusive to the signatories. Hence, preferential agreements exclude (Evenett 2008). Given this fact, the first most favourable solution would be to remove preferential agreements in general. Countries, without preferential agreements, could either agree in multilateral discussions on liberalisation plans or have unilateral trade regulations (Hoekman et al. 2008). Nowadays, nevertheless, this is not a possible suggestion. All countries would have to concur with the restrictions of PTAs. Hence, the challenge at present is to enforce mechanisms that lessen the unfavourable effects of PTAs, in particular on developing countries. This issue will be thoroughly discussed in this paper. Preferential Trade Agreements: Favourable or Unfavourable to Developing Countries? Several studies have investigated the effect of the trade preferences of EU on imports from developing nations. Majority have reported favourable outcomes, specifically for the preferences provided to the African, Caribbean and Pacific (ACP) states (Persson and Wilhelmsson 2007), which are aiming for sustainable development and reduction of poverty levels. Evenett (2008) emphasises that the effect of the EU Generalised Scheme of Tariff Preferences (GSP), which guarantees that exporters from developing countries are charged with lesser duties, relies on which of the EU GSP agreement that is concerned and that the organisational expenditures related with acquiring level of preferences to that margins of preference of not below 4.5% are non-utilised (Nilsson & Matsson 2009, 5). Other scholars, such as Cipollina and Salvati (2008), study the effect of preferences of the EU in the industry of agriculture. These scholars reported that the preferential schemes of the EU have a substantial effect on the imported goods of the EU albeit disparities across goods. McQueen (2007) observes that even though the restrictions of the preferences of the EU are recognised, a dependence on obsolete empirical support has resulted in a miscalculation of the favourable outcomes of EU preferences. McQueen (2007) emphasises that a problem with a direct evaluation of the utilisation rate and the preference margin is that the choice to use preferences relies on several variables aside from merely the preference margin, like the knowledge of the traders of the system as well as variables establishing the cost and benefits from sourcing to a specific market. Over-utilisation may take place if they miscalculate compliance expenditures and underutilisation if exporters are uninformed of the preferences (Nilsson & Matsson 2009). Bureau and colleagues (2006) examines the EU utilisation in the sector of agriculture and the effect of these preferences as much as movements of trade are involved. They measure markers of preference utilisation in the sectors of fisheries, food, and agriculture and econometrically measure the hidden disadvantage of utilising a specific preference to justify why certain systems are employed. The preliminary major finding is that the level of utilisation is high; very few of imported goods qualified for these preferences are in fact traded outside a preferential system (ibid, p. 8). Scholars observe that even though percentages of preference utilisation may be high, preferences may be incapable of producing substantial trade movements (Nilsson & Matsson 2009). Thus, a high utilisation rate does not imply that the preferences are ‘capable’ with regard to generating trade. The second major discovery is that justifications for the occasionally low exports level of developing countries, despite of high preferences, rest beyond the tariff protection concern (Hoekman et al. 2008). A number of scholars assume that technical provisions in the importing nations, limitations in supply, and administrative incompetency in the exporting nations appear to be the primary hindrances to a higher utilisation of preferences (Candau and Jean 2006) discovered a below 75 percent utilisation, which falls under underutilisation, of EU preferences in: (1) non-LDCs in some manufacturing goods; (2) exports of non-LDCs of clothing and textile industries, not including nations with a contractual settlement with the EU; and (3) exports of non-African LDCs of clothing and textile (Candau & Jean 2006, 2). UNCTAD (2003) states that majority of the imports of EU from ACP LDCs are ‘duty-free and that dutiable imports account for just about 25% of total EU imports from the ACP LDCs’ (as cited in Nilsson & Matsson 2009, 6). As an outcome, under the present export arrangements, preferences serve a narrow function for these nations. The document also refers to signs that low utilisation rates of preference are primarily the outcome of the inflexibility and/or intricacy of ancillary conditions and rules of origin (ibid, p. 6). Because requirements are tied to the advantages of preferences of trade, their value is not merely an issue of constitutional privileges, but also of privileges gained in practice; this fact has major implications to the costs and benefits of PTAs to developing countries. Gaining advantage from a preferential arrangement necessitates conforming to a number of conditions: entirely administrative concerns, technical provisions, other particular circumstances, and, specifically, rules of origin (RoOs), which are employed to identify the product’s country of origin for global trade purposes (Brenton & Ikezuki 2005). Due to the disadvantage and at times the difficulty of these limitations, the advantage of PTAs cannot be regarded as involuntary, risk-free or absolute (Evenett 2008). Thus, it is vital to evaluate what level trade preferences of the EU are really utilised by exporters. RoOs indicate standards for products to be regarded as coming from the country, and hence to be qualified for preferential treatment. Adequate transformation, as expressed for example by an adjustment in categorization heading, and local content conditions, normally shown as added local value’s minimum share, are the most general standards employed in practice (Hoekman et al. 2008). RoOs are rationalised by the necessity to prevent trade aversion, such as repeated exporting through the products of countries receiving preference (Candau & Jean 2006, p. 12) fundamentally generated in a third nation. RoOs prevent abuse of preference arrangements, perhaps strengthening the advantage of the system for the preference-receiving nation to the point that they generate an inducement to venture in the preference-receiving nation so as to gain advantage from preferential access to the market (Candau & Jean 2006). Nevertheless, there is an immediate cost related to satisfying RoOs. Needed administrative rules and regulations is capably burdensome and risky if it necessitates a related accounting procedure diverging in definition and scale from the structure mandated by national laws (Low et al. 2005). RoOs limit the sourcing of in-between products. These costs have been the target of thorough evaluation due to the prevalent mistrust that conditions related with PTAs, and particularly RoOs, are employed as protective instrument that weaken the advantage of preferential access (Evenett 2008). Falvey and Reed (2002) demonstrate that RoOs permit the conditions of trade of the importing nation to be enhanced in intermediate and final products, and can be a corresponding instrument to the most favourable tariff. It has been claimed as well that RoOs are employed in several cases as export grants, as long as limiting regulations can generate an inducement for the nation receiving the preference to source its goods in the nation granting the preference (Falvey & Reed 2002). Examining the utilisation of different preferential arrangements independently may be erroneous. When a nation is qualified for a number of preferential arrangements, as is the case with a lot of developing nations, as much as right of entry to the US or the EU market is involved, an underutilisation of a particular arrangement can only imply that another arrangement is deemed more advantageous by the exporter (Hoekman & Prowse 2005). Underutilisation, hence, may not be dilemma because the exporter still reaps the privileges of preferential treatment, even though the margin of preference accessible under the preferred arrangement may be lower than within the one with more constraining policies (Hoekman & Prowse 2005). Everything but Arms (EBA) is an initiative of the European Union under which all imports to the EU from the Least Developed Countries are duty free and quota free, with the exception of armaments Everything but Arms’ (EBA), (which is a programme of the EU within which every import to the EU from LDCs are quota and duty free, excluding weapons) extremely low rate of utilisation may significantly imply that exporters favour utilising the preferential treatment provided through the Cotonou contract, which they have utilised extensively and which has less constraining RoOs (Evenett 2008). Gallezot and Bureau demonstrated that when appropriate consideration of these conflicting preference schemes is given, non-reciprocal trade preferences of the US and the EU are roughly 90 percent used in agricultural commodities (Hoekman et al. 2008, 21). Moreover, they demonstrate that the presence of another preferential system significantly reduces the use of a certain preferential regime, and that this justifies the low utilisation of the scheme of EBA by sub-Saharan African nations (Stevens & Kennan 2004). In summing up four empirical studies conducted in Mauritius, Lesotho, Kenya, and Botswana, Stevens and Kennan (2004) admit that quite little exports, roughly 1 to 6 percent from these developing nations to the EU do not gain any advantage from any preference (ibid, p. 8). They reported that it is innately unlikely that for the nations and goods investigated have not been appropriately used (Stevens & Kennan 2004, 8), provided the scale of margins of preferences, and the position they occupy in established regime of the exports of these nations. Furthermore, Stevens and Kennan (2004) stated that a thorough examination does not imply product coverage substantially constraining the advantage of the Cotonou agreement. Hence, no substantial exports are produced to the EU of goods for which preferences were unavailable. Preference Erosion Unilateral preferences given by OECD nations launched an unavoidable conflict between ‘more preferred’ developing nations, usually recipients from earlier colonial governments, and other developing nations with regard to the consequences of the liberalisation of MFN by preference-granting nations (Nilsson & Matsson 2009). Interests in preference erosion have turned out to be one of the major contentions in the arbitrations around the Doha Development Agenda (DDA) (Low et al. 2005). Nevertheless, these issues are old. For instance, in the 1970s the outcome of liberalisation related to the Tokyo Round on the advantages acquired by developing nations from the GSP was widely disputed (Cipollina & Salvatici 2008). In the recent decade the magnitude and scope of unilateral preferential schemes has widened substantially, particularly for LDCs. It is claimed by several beneficiary countries and donor nations that, consequently, this preference value has considerably grown (Hoekman et al. 2008). Thus, it is not unexpected that preference erosion has been the target of scrutiny in the present multilateral negotiations. Systematic investigations of the outcomes of preferences are heightened by the problem of determining the particular effect of preferences in contrast to other variables (Candau & Jean 2006). The identified rate of export growth from beneficiaries to the preference-granting countries, for instance, is not useful without manipulating other variables (Evenett 2008). Methodological and data difficulties help clarify the reason policy-focused literature has inclined to depend greatly on explanatory markers. Four markers are specifically general (Hoekman, Martin & Braga 2008): (1) measurement of margins of preference, or the disparity between preferential tariff for goods and MFN; (2) possible coverage, or the proportion between covered goods and the dutiable imports coming from recipient nations; (3) utilisation, or the percentage between imports that in fact obtain preferential treatment and imports that are covered theoretically, an indicator of how successfully recipients are able to utilise preferences; and (4) value, or the percentage between the utility of imports that obtain preferences to dutiable goods from a certain exporter. The preference scheme becomes less liberal when the percentage is lowered (ibid, p. 25). Nonetheless, to concentrate on these factors presents at best a one-sided perception of the economic worth of a preferential system (Hoekman et al. 2008). To facilitate a more accurate measurement of the preferences value, these factors have to be considered (Hoekman et al. 2008): (1) the liabilities of compliance in relation to documentation, such as in justifying compliance to rules of origin; (2) the financial disadvantage of acquiring inputs from more costly suppliers in order to conform with origin conditions; (3) the diverse weaknesses and restrictions represented in preferential arrangements; and (4) the allocation of associated rents (ibid, pp. 25-26). Prior to evaluating preference erosion cost, it is important to have a fundamental knowledge of the worth of the trade flows being produced by the preferential system. The most basic measure of these trade flows is founded on the disparity between the actual tariffs and the MFN tariffs that would be valid on its exports without preferential scheme (Persson & Wilhelsson 2007). As Low and colleagues (2005) and Bouet and associates (2005) have highlighted, this indicator is an upper limit on the trade flows to the point that numerous countries benefit from preferences, suggesting that actual margins of preference should be altered for the margins of preference being obtained by other nations. It is also vital to take into account the administrative costs. The findings reported by Brenton and Ikezuki (2005) provide the margin proportionate to the total export value from the nation to the granting economy. On the contrary, the outcomes founded on the findings of Low and colleagues (2005) point to the margin solely on those goods for which there is a favourable evident preference, non-zero duty, and exports. Nevertheless, the general picture is quite encouraging in terms of broad continuity between the other indicators. The common margins broadly have a tendency to be greater in Europe in relation to the other economies (Stevens & Kennan 2004). In majority of studies, common preference indicators appear to be lower in Japan than in the US or the EU (Bureau et al. 2006), but not with the indicators of Low and colleagues (2005), which are influenced by extremely high preferences on products from Cambodia and preference margins of approximately 50% on goods from Mauritius and Bangladesh (Low et al. 2005, 6). Due to the value given to helping developing countries in the structuring of preference systems, there are astonishingly small disparities between the margins of preference given to developing countries under EU’s preference systems (Nilsson & Matsson 2009). On the contrary, Australia and Canada seem to grant significantly greater preference margins to the less developed countries, with the margin greater for these countries than for developing countries in general (Nilsson & Matsson 2009). The disparity between the two indicators may show distinct product coverage, with more limited product coverage from non-LDCs, a disparity that will be shown in the indicators of the general preference value (Candau & Jean 2004). Although the standard assistance rates to exports of developing country indicated are comparatively small, available studies on the subject emphasise the quite significant disparity in the margins of preference between nations. Candau and Jean (2006) demonstrate that preference margins of the EU were significantly greater than the export value in Dominica and Seychelles, even after permitting partial preference utilisation (Hoekman et al. 2006). For Senegal and St. Lucia, they make up more than 5% (ibid, p. 10). Researchers, such as Dean and Wainio (2006) demonstrate even higher conflicting trends in the preferences of US. Although the common utilities of the preferences of the US is just 0.5% of the export value, Swaziland and Lesotho had margins in 2003 greater than 15%, mainly due to preferences of clothing (Hoekman et al. 2006, 10). The debate about the most favourable way to deal with preference erosion in the perspective of multilateral negotiations is a vital element of the arbitrations on the Doha round’s development domain (Hoekman & Prowse 2005). Even though one may claim that the board of adjudicators remains out with regard to the developmental effects of PTAs, there is mounting substantiation of the notion of detaching development support from trade regulations, moving from ‘trade as aid’ to ‘aid for trade’ (ibid, p. 3) as explained by the World Bank and IMF and Hoekman and Prowse (2005). This mounting agreement, nevertheless, is disputed by similar attempts to intensify current preferential systems and/or launch other preferential schemes. Multilateral trade concessions offer further uproar to the debate to the point that they facilitate agreements between protectionist motives in countries of OECD and preference-reliant sectors in developing countries (Evenett 2008). Liberalisation of trade at the multilateral level has a greater positive impact for majority of developing countries than one-sided agreements settled in bilateral concessions with regions or countries. Nevertheless, the unsuccessful convention of the WTO in Cancun may concentrate the attention of the EU to regional and bilateral concessions (Evenett 2008). The EU was previously bargaining free trade concessions with ASEAN and had started to bargain Economic Partnership Agreement (EPAs) with countries of ACP (Candau & Jean 2006). Although bilateral and multilateral regional arbitrations can be handled at the same time, widening of the former can pressure inadequate resources for negotiation, particularly in developing countries (Candau & Jean 2006). More significantly, a regime of inequitable liberalisation is not automatically productivity-boosting, even for member states, and is apparently unfavourable for non-members that are ruled out from any privileges related to trade development and may endure as a result of trade diversion (Stevens & Kennan 2004). Furthermore, regionalism may dynamically function to weaken the process of multilateral negotiations, due to the fact that regional concessions create preference margins for member states over non-members (Hoekman et al. 2008). Per se, multilateral liberalisation, for constituents of a preferential trade agreement, can have disadvantages related to preference erosion. Works on the methodologies to measure the value of preferences and assess the effect of erosion of preferences has been quite short (Nilsson & Matsson 2009). This is unexpected due to the blatant interests of capably susceptible nations, but can be clarified by the degree of the challenges in acquiring consistent and trustworthy information and measures in several domains, such as the efficient protection of particular major industries in the Quad, specifically the agricultural sector, the efficient use of preferences, the response of recipients of preference to export supply, and the features of rent allocation between importers and exporters (Nilsson & Matsson 2009). However, a number of studies on this subject matter are available and have normally addressed the aforementioned issues by making the outcomes provisional on established assumptions. The European Union serves a primary function with respect to the exports of developing countries, due to its market size, and due to a large number of its non-reciprocal and reciprocal preferential agreements. This paper finds out, from a number of studies, that the tariff preferences of the EU are vital for several developing countries, particularly in sub-Saharan Africa. Although the standard figures are important, the reliance to the preferences of the EU is especially vital for only a few Caribbean and African nations (Hoekman et al. 2008). On the whole, the use of these preferential treatments eventually becomes stable. According to the discussion, the sole instance where underutilisation seems a considerable loss to recipient nations is the programme of EBA for less developed countries in South Asia (Evenett 2008). The newness of the initiative of the EBA is part of the discussion, as shown in the modest but important increase documented during 2001 (Hoekman et al. 2008). Nevertheless, the restrictions mandated by rules of origin on the major export products of South-Asia LDCs, namely textile and clothing, seem as the primary cause of underutilisation. Loosening these regulations could be an effective means to significantly boost the advantages beneficiary nations are likely to get from the system, at least in so much as the industry of textile and clothing is involved, and possibly as well for other manufacturing products (Candau & Jean 2006). Conclusions Nonetheless, one of the major findings of this paper is that, among developing countries, susceptibility to erosion of preferences is connected enormously with only three major goods, namely, textile and clothing, bananas, and sugar (Bureau et al. 2006). The two latter goods account for three-quarters of the present margin of preference of nations that have an overall preference margin higher than five percent of their export value (Nilsson & Matsson 2009). The apparent repercussion is that the policy deliberation, and any assistance for development, should rather be focused on these products and the nations greatly reliant on them. A wider concentration is prone to disruption. Another repercussion is that growth in the banana and sugar systems of the United States and the EU is the most important (Nilsson & Matsson 2009). In actual fact, to the point that these systems are adjusted outside of the paradigm of the WTO, and plans for reform for both goods are certainly in progress in the EU (Hoekman et al. 2008), erosion of preference as an outcome of a multilateral trade agreement would turn out to be less important. References Bouët A., Jean, S. and Fontagné, L. (2005) “Is erosion of preferences a serious concern?” In Agricultural Trade Reform and the Doha Development Agenda, edited by K. Anderson and W. Martin, Washington, D.C.: The World Bank, forthcoming Brenton, P and Ikezuki, T. 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(2008) “The European Union’s Generalised System of Preferences: An Assessment of the Evidential Base,” Paper presented at the CEPR discussion meeting: 22 What have EU Trade Policies done for developing countries? A Look at the evidence. Brussels, June. Falvey R. and Reed, G. (2002) “Rules of Origin as Commercial Policy Instruments,” International Economic Review, 43(2), pp. 393-407. Hoekman, B., Martin, w. & Braga, C.A. (2008) “Quantifying the Value of Preferences and Potential Erosion Losses,” mimeo. Hoekman, B. and Prowse, S. (2005) “Policy Responses to Preference Erosion: From Trade as Aid to Aid for Trade,” Paper prepared for the International Symposium on “Preference Erosion: Impacts and Policy Responses.” Geneva, June 13-14, processed. Low, P. Piermanti, R. and Richetering, J. (2005) “Multilateral Solutions to the Erosions of non-reciprocal Preferences in NAMA”, ERSD- 2005-05, Geneva, World Trade Organization. McQueen, M. (2007) “Are EU non-reciprocal trade preference passé?” Intereconomics. Bureau, J., Chakir, R. & Gallezot, J. (2006) “The Utilisation of Trade Preferences for Developing Countries in the Agri-Food Sector,” Journal of Agricultural Economics, 58(2), 175-198. Nilsson, L. & Matsson, N. (2009) “Truths and Myths about the Openness of EU Trade Policy and the Use of EU Trade Preferences,” European Commission, 1-18. Persson, M. & Wilhelsson, F. (2007) “Assessing the Effects of EU Trade Preferences for Developing Countries,” Paper presented at the ETSG annual meeting, Dublin, Ireland. Stevens, Chris and Kennan, Jane. (2004) “Making Preferences More Effective,” Institute for Development Studies briefing paper. UNCTAD (2003) “Trade Preferences for LDCs: An Early Assessment of Benefits and Possible Improvements.” Read More