Article

Research: Benefits from Lower Trade Tariffs are Likely to Offset Losses

Author(s):
International Monetary Fund. External Relations Dept.
Published Date:
May 2006
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For developing countries with preferential access to developed countries’ markets, the World Trade Organization’s (WTO) current Doha Round of negotiations raises an important question: what will multilateral tariff reductions mean for their access to export markets? A new IMF Working Paper finds that, in practice, a large share of developing countries’ exports do not currently enjoy preferences, so there is less to lose from preference erosion than might be thought. Moreover, for many developing countries, a multilateral lowering of tariffs is likely to produce a net expansion of market access.

How do preferences work? Many developed countries permit developing countries to export their products to developed countries at lower tariff rates—and, in some cases, at zero tariff rates—than those applied to other WTO members. Thus, the worry is that tariff cuts across the board for all members, as envisaged under the Doha Round, would reduce the relative advantage that developing countries’ exports currently enjoy—that is, the “preference margin” would be eroded. At the same time, however, one advantage of tariff cuts would be the gains in market access for goods that do not currently receive preferences, which would offset losses from preference erosion. The question, of course, is whether the gains will outweigh the losses.

Preferences are not so generous

The study’s authors argue that preferences are, in fact, less generous than they seem: they do not apply to a large proportion of products and are subject to restrictive rules. In the United States, for example, the Generalized System of Preferences applies to only about half of the tariff lines. Certain articles, such as textiles, watches, footwear, handbags, luggage, steel, glass, and electronic equipment, are ineligible for the scheme. In addition, duty-free access for eligible products is subject to “competitive needs limitations” for each product and country. These limits come into play once a country’s imports reach 50 percent of the value of total U.S. imports of a given product or if those imports exceed a certain dollar value.

Average tariffs are higher than they seem

Exports from the poorest countries, except those in Africa, face higher tariffs to enter developed countries’ markets than do exports from developed countries.

Average tariff paid

on imports

into the

United States
Average tariff paid

on imports

into the

European Union
Exporting country(percent)(percent)
African LDCs0.070.80
Non-African LDCs13.145.10
Other developing countries1.822.37
Developed countries1.152.89
Note: For each product, defined at the U.S. tariff-line level, the average tariff is calculated as the value of duties collected divided by the value of goods imported. Tariffs are averaged across all goods. LDCs = least developed countries.Data: World Integrated Trade Solution, U.S. Census Bureau, and European Union.
Note: For each product, defined at the U.S. tariff-line level, the average tariff is calculated as the value of duties collected divided by the value of goods imported. Tariffs are averaged across all goods. LDCs = least developed countries.Data: World Integrated Trade Solution, U.S. Census Bureau, and European Union.

In the European Union (EU), a broader range of goods is eligible for preferences, but other restrictions mean that developing countries’ exports are often subject to the non-preferential rate. Restrictive rules of origin often make it too costly for developing countries to take advantage of all the preferences. In some cases, the EU’s product-specific rules of origin allow as little as 5 percent of inputs to be imported and specify processing requirements for those imports. For a product to receive preferences at an EU border, a form must also be stamped by an officially designated government authority. In many cases, therefore, developing countries’ exports still face high trade barriers.

Moreover, despite various preference schemes, exports from some least developed countries (LDCs) and other developing countries to developed countries are subject to high average tariffs. This discrepancy, the authors explain, is due to different commodity composition and different preference schemes. For all goods, on average, exports from non-African LDCs to the United States and the EU are subject to higher tariffs than are exports from developed countries (see table, previous page). For those goods in which countries have a comparative advantage, and thus export a large share, LDC and other developing country exports face a higher tariff than do developed countries’ exports to the United States. This does not hold for exports going to the EU, which offers tariff reductions for LDCs under its Everything But Arms program and its program for African, Caribbean, and Pacific countries. Exports by non-African LDCs face the highest average tariffs in both the United States and the EU. African LDCs’ exports face the lowest average tariffs on these goods.

Cutting tariffs, widening access

To study the impact of multilateral tariff cuts—and, hence, changes in market access—the authors proxy changes in import demand by the United States and the EU under three scenarios (see table, this page). Their results show that, if the Doha Round leads to a multilateral tariff reduction, many of the poorer countries stand to gain more from increased access to developed countries’ markets than they will lose from preference erosion.

The countries that are likely to lose market access as a result of multilateral tariff cuts are those few that receive very large benefits under existing preference schemes.

A uniform 40 percent cut in tariffs, for example, would enable all country groups—except the African LDCs—to enjoy increases in market access to the United States and the EU (see table above, columns 1-3). African LDCs would experience a small loss of 0.15 percent, on average. But countries have been negotiating the number of tariff lines that would be allowed to be excluded from tariff cuts. And if, for example, 3 percent of the highest tariff lines were excluded, then the gains in market access for all export country groupings would decline (see columns 4-6). The largest gains for all country groups would occur with a tiered formula in agriculture (see columns 7-9).

Winners and losers

Not all developing countries increase their market access under all the scenarios analyzed. In Haiti, for example, preference erosion may cause large losses from reduced clothing exports. Sub-Saharan African countries may see a decline in their exports of minerals, particularly crude petroleum, to the United States.

Gaining ground through lower tariffs

A 40 percent uniform multilateral tariff cut would improve market access for all the country groups, except the African LDCs.

Change in import demand by:
EUU.SE.U and U.SEUU.SE.U and U.SEUU.SE.U and U.S
Export countryNo exclusionsExclusion of highest 3 percent tariff linesTiered formula in agriculture
(percent change in market access)
African LDCs0.64-1.01-0.150.17-0.75-0.270.83-1.01-0.04
Non-African LDCs4.1413.908.544.0810.647.044.1613.908.55
Other developing2.841.862.282.121.631.833.191.882.43
Developed2.971.591.982.411.471.723.271.602.08
All2.891.732.142.261.551.793.211.742.27
Note: The tiered formula in agriculture is based on the Harbinson proposal, which estimates a 40 percent cut in tariffs under 20 percent; a 50 percent cut in tariffs between 20 percent and 80 percent; and a 60 percent cut in tariffs above 80 percent, with a 100 percent cap. LDCs - least developed countries. Data: Authors’ calculations.
Note: The tiered formula in agriculture is based on the Harbinson proposal, which estimates a 40 percent cut in tariffs under 20 percent; a 50 percent cut in tariffs between 20 percent and 80 percent; and a 60 percent cut in tariffs above 80 percent, with a 100 percent cap. LDCs - least developed countries. Data: Authors’ calculations.

All of the policy simulations show that non-African LDCs would enjoy the largest percentage increase in access to the combined U.S. and EU markets, particularly for clothing exports. Among developing countries, Mexico would experience net losses, mainly because tariff cuts by the United States for other countries would reduce Mexico’s current preference margins. China and South Asian countries would gain from further tariff cuts because they benefit little from existing preferences.

Overall, the authors conclude, reducing multilateral tariffs under the Doha Round will increase access for many developing countries to the import markets of developed countries, more than offsetting the losses resulting from preference erosion. The countries that are likely to lose market access as a result of multilateral tariff cuts are those few that receive very large benefits under existing preference schemes. To maximize the net gains in market access, countries should pursue tariff reductions for all tariff lines and opt for a tiered formula of tariff cuts, with higher-than-average tariff cuts in agriculture.

Mary Amiti

IMF Research Department

This article is based on IMF Working Paper No. 06/10, “Will the Doha Round Lead to Preference Erosion?” by Mary Amiti and John Romalis. Copies are available for $15.00 each from IMF Publication Services. Please see page 160 for ordering details. The full text is also available on the IMF’s website (www.imf.org).

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