WTO and the challenges for trade-led growth


Washington D.C. - 23 September 2004 During successive rounds of the GATT, and since 1995 the WTO regime, the world community has been trying to move towards freer trade. So far the WTO regime has been turbulent with the developing countries voicing their concerns about the development-credibility of the new regime. Such differences notwithstanding, the potential role of international trade in rescuing nations from poverty traps and helping them embark on a path of positive growth remains well grounded in economic theory. A new study by the World Institute for Development Economics Research of the United Nations University (UNU-WIDER), "The impact of the WTO regime on developing countries" evaluates the present status, the prospects, and the challenges of such trade-led growth. The study will be presented at the Infoshop of the World Bank on 23 September by Basudeb Guha-Khasnobis, the director of the study and Thomas Hertel, one of the contributors to the study.

    Several important questions are raised in this study:

  • Can the WTO reassert its development-credibility by ensuring that Doha truly becomes the Development Round, regardless of the failure of the Cancun talks?
  • What should the negotiating strategy of the developing countries be?
  • Will the political constituencies in the OECD allow reform of domestic agricultural support in a way that benefits developing countries?
  • How large are the effects of regional disparities in agricultural trade in the developing countries?
  • Are the Preferential Trading Agreements doing enough for the least developed countries? How much more can the US, the EU and Japan do to increase the exports of least developed countries?

Analytical answers with policy receommendations are offered to these and other questions on trade and development.

The study concludes that the markets of farm products remain the most costly of all market distortions in world trade. Of all the economic gains expected in 2005 from removing trade barriers in goods that will still be in place after all Uruguay Round commitments are implemented, almost half (48 per cent) would come from agricultural and processed food policy reform in OECD countries. The gains from global trade liberalization in agriculture will be even more for those developing countries, who will make complementary reforms of their domestic policies. Welfare impacts on developing countries depend on whether they are net exporters or net importers of protected products.

The study shows that across-the-board, 50 per cent cut in all domestic support for OECD agriculture leads to welfare losses for most of the developing regions, as well as for the combined total group of developing countries. The 50 per cent cut in domestic support also results in large declines in farm incomes in Europe as well as North America. This makes such a reform package an unlikely political event'.

A shift from market price support to land-based payments could generate a 'win-win' outcome whereby farm incomes are maintained and world price distortions are reduced. In the context of large developing countries, there can be substantive differences in the impact of agricultural trade liberalization on the welfare of farmers depending on where they are located. Any aggregate or average estimate of such welfare effects could be misleading at least as far as the political feasibility of such liberalization, as well the implication for poverty alleviation are concerned.

In manufacturing, only 6 percent of all lines are bound duty free, implying that there is considerable scope for further liberalization. Also, while average tariffs have fallen, tariff-escalation continues to affect export of processed (high value-added) goods from developing countries negatively. The need to grant substantial trade preferences to the least developed countries (LDC) was emphasized in the Doha Ministerial Declaration. In this connection, it is observed that in the recent past, preferential trading regimes (PTA) have increased exports from the least developed countries (e.g., from the Caribbean and African LDCs). Much more can be done, especially with respect to the US administered PTA programs if the residual protection can be removed. To be precise, for the US, on average, a one per cent increase in the average tariff reduces imports by 8.3 per cent. Further, a one per cent tariff preference leads to a 19.4 per cent increase in trade for the exporter in question. These numbers are reasonably large, suggesting significant potential benefits for LDCs from the unilateral preference programs.

The worldwide distribution of gains and losses of the Everything But Arms initiative showed moderate, but useful, welfare and trade gains with the largest gains being recorded for sub-Saharan Africa. In particular, the EU sugar market appeared as the single most important source of change. The increased market access for LDCs comes mostly at the expense of other preference-receiving countries. The estimates showed that only a handful of LDCs would see total trade increase by more than US$100,000, from a combination of trade creation and trade diversion effects. Malawi, the biggest winner, stands to increase its cane sugar exports by more than US$ 25 million. Other African LDCs (Madagascar, Tanzania, and Zambia) are likely to see their cane sugar exports increase by between US$5 and 10 million. The only Asian LDC that shows incremental exports of more than US$100,000 is Myanmar. The estimates also suggest that Sudan is likely to see significant increases in its exports of molasses and cereals. The largest losers from negative trade diversion, in absolute values, are the current major ACP sugar exporters (Mauritius, Aruba, Fiji, and Guyana).

Export subsidies in the developing countries are gradually to be phased out. Two points may be noted in this respect. First, the fine prints of the various clauses which allow export promoting measures in the short-run are extremely cumbersome to be of any real value to the LDCs. These ought to be simplified and made more transparent. Second, the need for such subsidies will automatically disappear if the developing countries themselves undertake domestic economic reform and remove the usual anti-export bias.

Basudeb Guha-Khasnobis explains 'that the Developing countries as a group are not against freer trade, although they are often misunderstood as being so! Developing countries are basically unhappy about what they have received as benefits of a freer world trading regime relative to what they are being seemingly forced to offer. However, certain groups of population within both developing as well as developed countries are against freer trade because they stand to lose from it at least in the short run, in the absence of any guarantees for compensation. Thus, it will require more and more innovative balancing acts from the WTO to push forward the engine of freer trade. The prognosis, the study finds, is a positive one'.

Source: Eurekalert & others

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