The 153 members of the World Trade Organization (WTO) have not yet managed to reach an agreement in the on-going negotiations of the Doha Development Agenda (DDA) despite widespread evidence of its potential to contribute to global well-being. Trade in agriculture has been at the heart of the negotiations and one of the stumbling blocks that has proven difficult to overcome. Meanwhile, there has been a proliferation of Regional Trade Agreements (RTAs). Whether such agreements ultimately help or hinder the multilateral trading system and how to harness them to promote multilaterism is hotly debated.

Many developed countries grant preferential access to developing countries to facilitate expansion of the developing countries’ export sectors and increase their welfare. Although the objective is laudable, there are questions about the effectiveness of preferential agreements in helping developing countries.

Multilateralism versus regionalism
Trade is an important contributor to globalisation which has spurred world-wide economic growth, raising incomes and living standards. Through multilateralism and successive negotiations first at the GATT and now the WTO, average tariffs on manufacturing products have fallen drastically, contributing to large increases in international trade.

Extensive analyses, both inside and outside the OECD, have shown that multilateral trade liberalisation offers the prospect of global economic benefits that go well beyond the scope of any regional trade accord. These results underpin the advantages of enhancing a solid rules-based multilateral trading system.

Tariffs and subsidies to agriculture began to be disciplined for the first time in the Uruguay Round concluded in 1994, but are still high relative to manufacturing. OECD work finds that a further 50% reduction in all tariffs and domestic support could increase global welfare by some USD 44 billion per annum, although some countries may not gain. Most of the gains would be a result of tariff reductions in agriculture.

Annual global welfare gains from multilateral 50% reduction in tariffs and domestic support  Click here to view full-size graphic

Furthermore, the scale of these gains depends on the fact that the liberalisation is multilateral with all countries moving together. In contrast to multilateral liberalisation the global welfare effects of a potential RTA between OECD countries and any of the BRIICs (Brazil, Russia, India, Indonesia and China) tend to be much smaller.

If countries are active in seeking and concluding RTAs it is because they potentially generate welfare gains for the countries that participate in them. There are 421 RTAs and 230 of these were in force as of the end of 2008. Most of them are Free Trade Agreements or non-reciprocal agreements, Custom Unions account for less than 10%. About 35% to 50% of total trade is among countries belonging to RTAs.

Impact of RTAs
Although these agreements can provide deeper and broader liberalisation among participating countries, by nature they are discriminatory against other countries. The non-discriminatory most favoured nation clause is a major argument for multilateralism as a first best approach for efficient allocation of resources and freer trade in the world economy. In contrast, RTAs can reduce global welfare through trade diversion: while new or increased trade flows are generated within the regions covered, trade with non-participants may be hampered.

Other concerns have been raised about RTAs: lack of transparency (e.g. RTAs are not always notified to WTO or are not always well-publicised to traders); poor implementation and lack of predictability because agreements are not well understood or conditions are too burdensome (e.g. rules of origin may be very complex); lack of consistency due to overlapping memberships and rules; and power asymmetries that may result in developing or small countries being at a disadvantage.

On the other hand, RTAs may, in addition to their primary effect of increasing market access for the participating countries, help to promote or lock-in domestic reforms. They can also lay the ground for further liberalisation and improved regulatory co-operation in ways that go beyond WTO provisions, and they may constitute testing grounds for international progress in new policy areas such as services or the environment.

Agriculture’s treatment in RTAs differs significantly depending on the countries involved. In some instances agriculture is effectively omitted or very long transition periods are built in, and RTAs have the same difficulty in overcoming deeply entrenched sensitivities as the multilateral system. In other cases, RTAs have provided some impetus to market opening efforts in agriculture or to reducing tariff escalation.

In agriculture as well as more generally, the challenge is to identify those aspects of RTA design and implementation that have opened the way for further liberalisation, and to investigate how these features can be generalised to the benefit of the multilateral trading system.

Preference and preference erosion — a brake on the DDA
Preference erosion has been raised as an issue during the DDA negotiations because some developing countries that have benefitted significantly from preferences fear the consequences when general tariff cuts erode the value of their preferential margins.

Canada, Japan, the European Union, and the United States are the largest providers of preferential schemes to developing countries. Least developed countries (LDCs) receive the largest preferential margins. An OECD study shows that at the beginning of the decade these preferences were worth almost USD 1.4 billion, 80% of which originated in preferences granted by the EU.

Value of preferential margins to developing countries  Click here to view full-size graphic

Problems with programme implementation that prevent developing countries from fully benefitting from these schemes include inconsistent rules of origin, and uncertainty about programme eligibility. Some programmes may have encouraged countries to specialise in products for which they may not have comparative advantage.

How big a problem is preference erosion likely to be when the DDA is concluded?  According to OECD studies, overall average tariff rates suggest that preference erosion could be a considerable problem. But much of agricultural imports (30% to 46%) into Canada, Japan, the EU and the United States are duty-free on an MFN basis anyway so preference erosion is not an issue for this group of products.

At the other extreme, some sensitive products with relatively large tariff rates are excluded from many of the preferential schemes, hence for these products preference erosion is again not an issue, and multilateral liberalisation would benefit all exporters.

In fact, serious loss from preference erosion would be confined to a relatively small number of countries exporting a narrow basket of commodities such as sugar, bananas and tobacco. Specific targeted efforts to help these economies diversify and adjust is an alternative that may be preferred to the negotiation of complex exemptions and exceptions, which may in the end not be in the long-term development interests of the countries in question.

A way forward could include:

• A speedy conclusion to the DDA, locking in reforms that are non-discriminatory thus maximizing global welfare.
• Utilise the Aid for Trade Initiative to provide targeted aid to improve the competitiveness of the export sector of developing countries harmed by preference erosion.

 

References:

• Liapis, Peter S. (2007), Preferential Trade Agreements: How Much Do They Benefit Developing Economies?
• OECD (2009), Ongoing consideration of regional trade agreements: main issues and possible further work
• OECD (2008), Globalisation and Emerging Economies: Brazil, Russia, India, Indonesia, China and South Africa
• OECD (2006), Agricultural policy and trade reform: potential effects at global, national and household levels