Policy Responses to Preference Erosion
17 Pages
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Policy Responses to Preference Erosion


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17 Pages


The Status Quo. • Many countries benefit from non-reciprocal trade preferences. • Recently deeper preferences for LDCs. • Result: Increasing discrimination ...



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Policy Responses to Preference Erosion
Bernard Hoekman
World Bank and CEPR
IFRI, Paris – October 28, 2005
The Status Quo
Many countries benefit from non-reciprocal trade preferences
Recently deeper preferences for LDCs
Result: Increasing discrimination between developing countries
But, value declining as ever more reciprocal trade preferences and lower MFN barriers
Focus of paper
Premise: Nondiscriminatory, MFN liberalization has characteristics of a global public good
Implication: will lead to erosion for those currently benefiting from preferential access
– The magnitude of erosion
– Solutions in- or outside the trading system?
– Policy options under each of these approaches?
How large is erosion?
Very country and product specific A function of MFN protection, who gets the rents and how restrictive origin rules are – Recent estimates suggest costs of origin are about 4% on average Assuming away transactions costs, one estimate of loss from full erosion in EU to LDCs = some $600 million Larger numbers if one considers the impact of removal of apparel quotas on 1-1-2005
More on erosion losses
Poorest countries (LDC+) vs. middle-income countries and small/vulnerable
– Poorest have not been able to diversify; less benefits and thus less erosion
– Some middle income countries specialized in “high rent” products – sugar, bananas (quotas, not tariffs)
In absolute terms “GSP losses” > LDC losses
Research: big losers highly concentrated in small # of countries and products.
Solutions “Within” the WTO
Don’t liberalize highly distorted markets
Grant other preferences elsewhere (e.g., mode 4)
Shift to other trade policy instruments—e.g., import subsidies for preferred country exports
– continued discrimination against less preferred nations;
– opportunity costs of OECD reform foregone
That said, (1) relax origin rules as a transitional mechanism to maintain preference margins longer
(2) Improve special and differential treatment rules
Solutions “Outside” the WTO
Preference losses due to removal of unilateral concessions—going outside WTO allows this to be reflected. Options:
Use existing assistance mechanisms of IFIs
Create a stand-alone “compensation” fund (in WTO?)
Part of expanded aid for trade, e.g., via an enhanced Integrated Framework (LDC+)
1. Existing multilateral mechanisms
Focus on short-run adjustment (IMF) and structural development agenda (MDBs)
Instrument = loans (even if concessional)
No link between bilateral nature of issue
Whether trade gets financed is endogenous
Assistance is temporary
No direct link to affected private sector
But, assistance placed in an overall development program and macro/policy framework
2. A Compensation Fund
Pro’s: – Directly targets the problem – Grant-based transfers – Direct support for global MFN trade reform – Can allow the private sector to be directly compensated—more “ownership”/support Con’s: – Goes against conventional wisdom on earmarking funds – Risk of non-additionality (“diversion” of aid) – Erosion just one source of adjustment pressure – why only this?
3. Address Erosion as part an Aid for Trade Initiative
Adjustment shocks occur often; many exceed erosion
Trade capacity needs exceed value of erosion loss
Bilateral nature of problem can be recognized
– E.g., a window under an IF+; regional funds (EDF?)
Ensures funds go to national trade priorities
Helps address problem that many of the poorest countries would not lose much through erosion
Quantifying the transfer
Erosion of what? Include ATC? FTAs?
If compensation pursued, limit transfers for erosion that is caused by Doha
– To support the global public good via reform in OECD and moving system back towards MFN
What methodology to use?