Preferential Tariffs, WTO and Developing Countries: Do the Gains from Multilateral Market Access Outweigh Preferential Access?

Abstract

WTO trade negotiations on market access follow the MFN treatment. However, an increasing share of trade falls under preferential regimes. For agriculture, trade liberalization analyses have showed that the impact on developing countries (DC) is not uniform, partly from omitting preferences. In this paper, we examine whether preference-recipient DC benefit more from across the board tariff cuts than from preferences. We employ a global CGE model with detailed preference-inclusive tariff database to examine the differential impact of trade liberalization on DC subject to preferences versus MFN-based market access. We focus on the European Union- the world largest preferences provider- and run two experiments of tariff cuts by the EU: a 50% across-the-board MFN tariff cut on agricultural products with or without comparable preferential tariff cuts. Results show that EU preferences confer a market access advantage for beneficiary countries, especially the Least Developed and ACP countries, which is eroded under MFN tariff cuts. A combination of across-the-board MFN and preferential tariff cuts (to preserve margins of preference) enable some but not all preferential partners to preserve or increase its trade with the EU. Moreover, the composition of trade changes and the magnitude of trade loss will vary between partners and products and depends on the specifics of the preferential regime. As a follow up to the present study, we will further examine trade and welfare impacts in the case of select key agricultural products subject to tariff preferences within preferential quotas or tariff-rate quotas.