Preferential Trading Arrangements for Developing Countries

Abstract

Free trade is supposed to augment world output by guiding resources to their best possible usage at any point of time, and it can also help sustain this efficient usage of resources over a period of time, resulting in higher growth rates. Therefore, policies that try to shelter economic agents from the competitive forces of the world market impede the spillover benefits and dynamic gains from trade. Given the potential role of trade in poverty alleviation through higher growth rates, the main dilemma for developing country governments is to figure out how trade policy should take into account the fact that the current global trade environment is indeed distorted by numerous policies pursued by trading partners. Measures, originating at home or abroad, which restrict market access for developing countries’ exports, or raise the prices of their imports, have negative effects on investment incentives and the growth potential of their economies. For example, high rates of subsidisation and trade barriers in agriculture in the developed countries drive developing countries out of major markets and often lead to import surges that bestow extreme adversity on their farmers. It is well known that the existence of such policies has become a major political barrier to further trade policy reform in developing countries. Since 1995, the (World Trade Organisation)WTO has been a forum to set the rules of the game, while at the same time, to negotiate improved market access. A rulesbased world trading system is beneficial to developing countries as many of them are small players in world markets with no real ability to influence the policies of richer and larger countries. A rules-based system can in principle also be beneficial by reducing policy uncertainty, potentially boosting domestic investment. Obviously, the realisation of these potential benefits depends on getting the rules ‘right’. Ensuring that the majority of stakeholders, especially the developing countries, perceive the rules as supportive of development is the most important challenge for the WTO (Hoekman et al., 2003). Granting trade preferences for development purposes originates in the Prebisch– Singer findings on the secular decline in the terms of trade for agricultural commodities. This, coupled with the notion that only manufacturing could provide stability and jobs in developing countries, led to two important policy prescriptions including intervention in favour of import-competing manufacturing industry, and the creation of non-reciprocal tariff preferences to boost manufactured exports from the developing countries. Developing countries have since held on to a strategy of seeking ‘differential and more favourable treatment’ (Hudec, 1987; Finger, 1991, 2002; Michalopoulos, 2000,