Trade and development

Tariff preferences

 

Under derogations from the rules of the multilateral trading system, developed countries are permitted to grant tariff preferences to developing economies in a non-reciprocal manner (via the Generalised System of Preferences or on a categorical, regional or bilateral basis). In some cases, developing countries have come to rely on market access advantages associated with these preferences.

 

While multilateral tariff liberalisation has the potential to yield broad welfare gains for the global economy, in some cases the associated erosion of preference margins may result in hardships for preference-reliant countries.

 

Tariff preferences can expand market access for beneficiary countries. Indeed, some developing countries have come to rely on such preferential access. Consequently, some World Trade Organisation member countries have raised concerns about adjustment costs associated with possible reductions in preference margins that might arise as a consequence of multilateral tariff liberalisation under the current Doha Development Agenda negotiations.

 

Recent OECD research indicates that vulnerability to preference erosion does occur, but it is less frequent than a quick glance at the aggregate preferential trade flows might suggest. A number of reasons can account for the limited dependence of most developing countries on preferential tariff schemes.

 

First, substantial shares of imports from developing countries enter preference-giving countries via duty-free or low MFN tariff rates.

 

Secondly, large shares of the preferential imports enter under a rather limited number of tariff lines.

 

Thirdly, in volume terms imports under preferential programmes are often dominated by a few large developing countries such as Brazil, China, India, Indonesia, Thailand or South Africa, among others that may have better capacity to adjust than less diversified economies.

 

Fourthly, the literature suggests that constraints built into the preferential programmes sometimes limit their utility due to exclusion of products of particular interest or difficulties faced in satisfying the programme conditions (e.g. rules of origin).

 

Multilateral tariff liberalisation, on the other hand, can open new opportunities for improved resource allocation and diversification of export markets. The associated gains can offset negative effects of preference erosion. Potential outcomes may be further enhanced if developing countries participate by liberalising their own markets.

 

Overall, it appears that, globally and for a majority of developing regions, liberalisation by preference-granting countries will result in positive welfare gains.  However, in a few cases, there are net negative changes in welfare that appear to be associated with preference erosion.  A variety of policy options exist that may facilitate adjustment in such cases.

 

More reading:

 

OECD Working Paper on Trade Policy No. 33: The Australian preferential tariff regime

 

Policy brief: Making Open Markets Work for Development

 

OECD Working Paper on Trade Policy Nol 20