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GTAP Resource #1474

"Quad Trade Preferences for LDCs: A quantitative analysis of their utilization and options to improve it"
by Inama, Stefano


Unilateral tariff preferences in favour of developing countries are usually regarded as a "second-best" arrangement that may also divide developing countries
For more than a decade, it has been pointed out, in the UNCTAD Special Committee on Preferences, that available preferences are not fully utilized, but the extent of under-utilization and the reasons for it have not been well documented until now. This study provides the first quantifications of this under-utilization and indicates options for improving it.
The conventional wisdom during and immediately after the Uruguay Round was that the value of trade preferences to developing countries was decreasing because of the erosion of the preferential margins as a result of MFN tariff reductions.
The 1996 Singapore Ministerial Declaration started to refocus the attention of the trading community on the idea of unilateral preferences by launching the idea of special trade preferences for LDCs,
In response to the Singapore proposal, a number of initiatives were undertaken to provide more favourable market access conditions for LDCs through the EBA and AGOA. The Canadian and the Japanese GSP, have also been improved with expanded product coverage.
Using new data sources on a time series basis, this study analyses, in some detail, past and present features of these preferential market access initiatives of the Quad countries and their utilization.
The study finds that, in 2001, imports from all LDC effective beneficiaries covered by the Quad initiatives totalled 66 per cent, leaving more than a quarter of LDC exports, mostly textiles and garments, not covered by any preferential initiative. Out of this potential coverage, only a fraction actually received trade preferences at the time of customs clearance in the preference-giving countries. Thus, the utility of the Quad initiatives recorded a low of 42 per cent in 2001.
Moreover, the study points out that the real picture is even more sombre than this. Utilization and benefits of these trade preferences are concentrated in few country/product pairs. Beyond some relative success stories, the picture is dismal.
For example, ACP preferences granted under the former Lomé Convention and presently under Cotonou, recorded an extremely uneven picture. On one hand, a substantial part of ACP-LDCs trade is already duty-free under MFN (out of US$8.4 billion, only 2.2 billion was dutiable in 2002). On the other hand, an examination of the utilization figures shows a high utilization rate for some country/products pairs and low utilization for others.
The utilization rate under the GSP scheme of the United States appears extremely high, totalling over 90 per cent, while the coverage rate is about 44 per cent. However, if petroleum oils from Angola are excluded from the calculation, the coverage rate drops to 4 per cent and the amount actually receiving trade preferences from all remaining LDCs is equivalent to US$ 122 million.
Under the EBA, differently from the US GSP schemes, textiles and products are covered and are granted duty-free treatment. However, these preferences are subject to strict rules of origin impeding the utilization of most competitive inputs and suppliers.
Mainly because of these rules of origin requirements, the utilization rate of the EBA in the area of textile and clothing is as low as 56 per cent in 2002 (45 percent in 2001); this means that exports of textiles and clothing totalling roughly US$ 1.6 billion were levied a 10 per cent MFN average instead of getting duty-free status. Although some form of derogation has been granted, countries such as Cambodia have experienced utilization rates below 10 per cent since 1997.
Overall, the volume of preferential trade under the GSP scheme of Japan was rather steady at US$ 200 million from 1994 to 2001, while the volume of preferential trade under the scheme of Canada was at a single-digit level over the same period (US$ 8 million in 2001). results.
Part I of the study examines in detail the present features, coverage and utilization rates of the Quad major unilateral trade preferences in favour of LDCs.
Part II analyses the reasons for low utilization of trade preferences and the linkage with rules of origin by introducing an innovative methodological approach. For example, it finds, on the basis of available trade statistics, that the restriction on importing fabric to make finished garments has had a drastic impact on the utilization rate of Bangladesh and Cambodia.. Some of the current features of rules of origin go against the very concept of trade facilitation.
The final part of the study provides an estimation of the trade effects of comprehensive coverage and full utilization of unilateral preferences utilizing WITS. It indicates that significant trade effects could be generated by improved preferential market access if changes are made to the actual coverage and rules of origin.
Rules of origin and related administrative procedures have almost remained the same since the early 1970s, when preferential margins were significantly higher than at present. Some earlier studies conducted in developed countries quantified the cost needed to comply with administrative requirements related to origin as 3 per cent of the value of the goods concerned..
The study concludes that the utilization of existing trade preferences has been inhibited by a combination of factors like limited product coverage, strict rules of origin and burdensome administrative requirements. It provided a quantification of the extent of under utilization due to these factors.

Resource Details (Export Citation) GTAP Keywords
Category: 2004 Conference Paper
Status: Published
By/In: Presented at the 7th Annual Conference on Global Economic Analysis, Washington DC, USA
Date: 2004
Version: draft final
Created: Inama, S. (4/30/2004)
Updated: Inama, S. (4/30/2004)
Visits: 2,359
No keywords have been specified.

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