Market Access for Developing Countries

• Author: Hans Peter Lankes
• Position: Chief of the Trade Policy Division of the IMF's Policy Development and Review Department

Poor countries could boost growth and reduce poverty by expanding exports to the rich countries and to each other. But, despite the progress made in trade liberalization under successive multilateral agreements, many barriers persist in both developing and industrial countries.

Living standards in Korea, only 50 years ago a poor country dependent on foreign aid for half its national budget, have been catching up to those in the industrial countries. One of the reasons is a strong export sector that has fueled Korea's economic growth while evolving to keep up with changes in international demand.

Most developing countries, however, unlike Korea, have been unable to overcome the obstacles to expanding and diversifying their exports. The primary commodities on which many rely for export earnings have faced stagnant demand and been battered by volatile prices, and the two sectors in which developing countries have a strong comparative advantage-agriculture and labor-intensive manufactures, like textiles and clothing-are heavily protected not only in the industrial countries but in developing countries as well.

Most quantitative restrictions and other nontariff barriers have been converted into tariffs since the Uruguay Round of trade talks, improving the transparency of trade regimes. Protectionism has actually increased in some cases, however, and trade barriers are still higher for the products typically exported by developing countries than for those from industrial countries. This is partly because developing countries made little effort to participate in multilateral trade talks before the Uruguay Round and partly because of the political sensitivity of liberalizing agriculture and labor-intensive manufactures. Developing countries themselves have high tariffs that limit trade among them. The average tariff in developing countries is 14 percent, and in the least developed countries, 17.9 percent, compared with 5.2 percent in the industrial countries. This article focuses on protection in merchandise trade. The liberalization of trade in services, which is generally subject to far greater restrictions, offers opportunities for developing countries that, according to some estimates, are even greater than in merchandise trade (for instance, in labor-intensive services that require the temporary movement of workers (World Bank, 2002)).

Patterns of protection

Developing and industrial countries both pay dearly for protectionism. Estimates from a variety of sources (in particular, World Bank, 2002) of annual static welfare gains from eliminating barriers to merchandise trade range from $250 billion to $620 billion, of which one-third to one-half would accrue to developing countries. The response of investment and technology to a freer international trade regime would generate additional dynamic gains.

And yet protection persists, in many guises and to a greater extent than is revealed by the customary references to average most-favored-nation (MFN) tariffs. These do not reflect specific tariffs and tariff-rate quotas, trade remedies such as antidumping duties, and the effects of rules of origin and environmental and technical standards. Nor do the averages capture the impact of tariff peaks and escalation, preference schemes, or measures that contribute to the uncertainty of market access and therefore discourage export expansion.

Table 1 presents the combined ad valorem tariff equivalents (AVEs) (import tariffs as a percentage of the value or price of imported products) of various protectionist measures from the perspective of groups of exporting countries. It shows that, while Canadian and European Union (EU) barriers hit low- and middle-income exporters hardest, Japanese (in agriculture) and U.S. protection is highest on the products exported by the least developed countries (LDCs).

[ SEE THE GRAPHIC AT THE ATTACHED RTF ]

Specific tariffs and tariff-rate quotas. These account for a significant share of the AVEs shown in Table 1. A specific tariff, an absolute amount of money charged per unit of imports regardless of the price (for example, euros 350 a ton on sugar imports into the EU), is generally regarded as less transparent and more distortionary than an ad valorem tariff. With tariff-rate quotas, the tariff is different above or below a specific quantity or value of imported items. Tariff-rate quotas, established under the Uruguay Round, were originally intended to ensure minimum market access for sensitive products. However, out-of-quota tariffs can be prohibitive, and even in-quota tariffs are often high.

Tariff peaks and tariff escalation. Although average industrial tariffs have dropped, between 6 and 14 percent of Quad (Canada, the EU, Japan, and the United States, in World Trade Organization (WTO) parlance) tariff lines are subject to "tariff peaks" (tariffs at or over 15 percent). In Canada and the United States, tariff peaks are concentrated in textiles and clothing, in the EU and Japan, in agriculture, food products, and footwear. Tariff peaks are even more common in developing countries. Estimates suggest that if all tariffs were capped at 15 percent, AVEs on textiles and clothing would drop 20 percent for imports from most countries into the United States and 59 percent for imports from China, while AVEs on agricultural and food products imported by the EU would drop 40-60 percent.

Tariff escalation, which is seen in both industrial and developing countries, is designed to protect a processing or manufacturing industry in the importing country, which sets low tariffs on imported materials used by its industry and higher tariffs on imported finished products that would compete with the domestic industry's own products. This creates hurdles for countries trying to move up the technology ladder, discouraging them from...