Market Access and the World’s Poordocuments.worldbank.org/curated/en/285571468337817024/... ·...

With the conclusion of the UruguayRound and a wave of unilateral re-forms, barriers to trade have fallen

substantially around the globe, spurring thegrowth of world trade. Developing countries asa whole gained significant market share—about7 percent—in world nonenergy merchandisetrade, thanks mainly to ambitious domestic pol-icy reforms in the 1990s.

Global protection hits the poor hardestHowever, progress in lowering barriers haslagged in two of the sectors with both the high-est protection and with the greatest impact onpoverty—agriculture and labor-intensive man-ufactures (such as textiles and clothing). Agri-culture and other labor-intensive products mat-ter to the world’s poor because they representmore than half of low-income countries’ ex-ports, and about 70 percent of least-developedcountries’ export revenues.

Developing countries themselves are part ofthe problem. Although South-South trade is amuch smaller share of total trade, average tar-iffs in manufactures are three times higher fortrade among developing countries than forexports to high-income countries. Taken to-gether and because of high protection for labor-intensive products around the globe, the world’spoor face tariffs that are, on average, roughlytwice as high as those imposed on the nonpoor.

Protection that affects the poor takes severalforms, including tariff peaks, quotas for textilesand clothing, tariff escalation, and agriculturalsubsidies in high-income countries. In textiles

and clothing, the opening of markets has beenslow, because the implementation of the WorldTrade Organization (WTO) agreement allowsimporters the leeway to select the products to be freed of quota restrictions. Thus despiteprogress made by the agreement, foregone ex-port earnings for developing countries are size-able. And due to still-high tariffs, market accesswill remain restricted even after the quotashave been abolished in 2005.

A “development round” would help—These issues provide fertile areas where recip-rocal negotiations in a “development round”could provide substantial benefits for develop-ment. Open trade in agriculture and labor-intensive manufactures would raise incomesamong the world’s poor.

—but effectiveness requires cooperativepolicies to complement negotiationsGlobal cooperation beyond negotiations couldalso expand trade. For example, most prefer-ential access schemes to high-income countries’markets only partly breach the walls of pro-tection. Their limited coverage and variousother impediments to trade undermine theirotherwise positive effects. The recent EuropeanUnion’s “Everything But Arms” initiative miti-gates these problems by removing barriers onexports from least-developed countries. Exten-sion of this initiative to the United States,Japan, Canada, and other higher-income coun-tries would greatly stimulate the exports andgrowth of the least-developed countries.

37

Market Access and the World’s Poor

2

Beyond these, “aid for trade” can helpcountries take advantage of new market open-ings. Providing assistance for countries to im-plementing WTO-sponsored reforms, design-ing programs that protect the poor duringreform, and upgrading work skills will helpensure that trade benefits the poor. Moreover,domestic reforms and assistance to improvebackbone services—such as transport, finance,and communications—can better link the poorto the global marketplace.

A changing landscape ofmerchandise trade

The 1990s witnessed a boom in worldtrade, with an average annual increase of

6.3 percent in the volume of global merchan-dise trade (1990–99)—outpacing global grossdomestic product (GDP) growth by an aver-age 4.2 percent per year over the same timeperiod. Exports grew faster than output inevery major region.

Developing countries gained market sharein world merchandise trade—The share of developing countries in globalexport markets rose by almost 7 percentagepoints, to about 25 percent of world non-energy merchandise trade, primarily on thestrength of superior performance in manufac-turing (figure 2.1). However the details behindthese headlines reveal divergent trends—withsome sectors and some countries enjoying ex-ceptional growth, while others remained al-most stagnant.

—but poor countries remained on the sidelines, dependent on slowgrowing commodities and labor intensive manufacturesDeveloping countries as a whole improvedtheir penetration of world markets, but the ex-port share of the 49 least-developed countries(LDCs) shrank from 3 percent in the 1950s toaround 0.5 percent in the early 1980s, and hashovered around this very low rate over the lasttwo decades (UNCTAD 2001). The least-

developed countries continue to be dependenton agriculture and labor-intensive manufac-tures, which together account for about 70percent of LDC exports.

The expansion of trade volumes in thesesectors did not keep pace with world tradegrowth, which has undermined the growthprospects of the LDCs and hindered the battleto reduce poverty. South-South trade repre-sents about 30 percent of low-income coun-tries’ nonenergy merchandise exports, and ismore important than for middle-income coun-tries. Exports of low-income countries to otherdeveloping countries increased rapidly, espe-cially in agriculture. In labor-intensive man-ufactures, South-South trade is far more important in textiles than it is in clothing, foot-wear, and leather, both for low-income and formiddle-income countries.

Moreover across products, the increase indeveloping countries’ exports was uneven. Inlabor-intensive manufactures, developing coun-tries’ market share increased sharply and nowsurpasses that of high-income countries. By con-trast, in agriculture, another labor-intensive sec-tor, developing countries’ market share rosemore modestly. This rise in market share wasdriven by South-South trade, with about one-third of all developing countries’ agriculturalexports now directed to other developing coun-tries—up from just about 20 percent in the early1990s. The slow increase of developing coun-tries’ share in world agricultural exports partlyreflects developing countries’ export diversifica-tion out of agriculture, and partly reflects sur-plus production from high-income countries.

Exports of the poorest countries are evenmore concentrated in agriculture and labor-intensive manufactures. Sub-Saharan Africanagricultural products provide about 60 per-cent of export revenues, with little contribu-tion from manufactures.1

Labor-intensive exports can spurpro-poor growth

In developing countries—in particular thepoorest where inexpensive labor is plentiful—

G L O B A L E C O N O M I C P R O S P E C T S

38

M A R K E T A C C E S S A N D T H E W O R L D ’ S P O O R

39

Figure 2.1 Changing global trade patterns

Source: World Bank staff calculations, based on U.N. Comtrade. Source: World Bank staff calculations, based on U.N. Comtrade.

Source: World Bank staff calculations, based on WTO data. Source: World Bank staff calculations, based on U.N. Comtrade.

0Manufactures

Oil and other

Mining products(including oil)

Agriculturalproducts

1

2

3

4

5

6

7

0Agriculture Clothing Textile Footwear &

Leather

2

4

6

8

10

12

14

In percent of world exports for each product group (left axis)In US$ billion (over bars)Average annual growth in volume terms, 1990–99, in percent

1991–92 1998–99 1991–92 1998–99 1991–92 1998–99

60212

125

193129

1263580

50

40

30

20

10

0

Total non-energymerchandise

Agriculture

Exports to developing countries

Exports from LDC

Exports fromMiddle-income countries

Agricultural products

Labor-intensivemanufactures

Exports from low-income countries

Exports to high-income countries

Labor-intensivemanufactures

1991–92

1991

–92

1998

–99

1991

–92

1998

–99

1991

–92

1998

–99

1991

–92

1998

–99

1991

–92

1998

–99

1998–99 1991–92 1998–99 1991–92 1998–99

Total non-energymerchandise

Agriculture Labor-intensivemanufactures

0

10

20

30

40

50

60

70

80In percent of total nonenergy merchandise exports for each country group

—and developing countries increased theirshare in the global market

Export growth outpaced growth of outputeverywhere—

—and poor countries remain dependent onthese sectors

The shares of labor-intensive products in worldexports declined—

Source: World Bank staff calculations. Source: World Bank staff calculations.

100

80

90

70

50

60

40

20

30

01970 1975 1980 1985 1990 1995

10

Percent of developing countries’ exports In percent of world exports for each product group

0

10

20

30

40

50

60

Manufactured exports have boomed— —but poor countries did less well

In percent of world nonenergy merchandise exports

Exports

Output

Manufactures

Agriculture

1991–92

1998–99

Sub-SaharanAfrica

LDC Low-income Middle-income High-income

export-led growth can accelerate the reductionof poverty. Faster export growth can boostincome growth of the poor, first, by stimulatingoverall economic growth. On average, everyadditional percentage point of growth in house-hold consumption reduces the number of peo-ple living on less than $1 a day by an estimated2 percent (World Bank 2000a). And among alldeveloping countries, successful integratingcountries—the top third of developing coun-tries ranked by an increase in trade-GDP ra-tios—grew faster (Dollar forthcoming). Duringeach of the past two decades, the developingcountries that have had fast export growth—leading to an increase in the share of nonenergymerchandise exports in GDP—have also had,on average, 1 percent higher real GDP growth(figure 2.2).

But if growth is necessary to reduce poverty,the pattern of growth also matters. Export-ledgrowth can reduce poverty more directly whenit fosters employment in labor-intensive sectors

where the poor have a stake. Capital-intensiveand import-substituting growth has generallynot been effective in alleviating poverty; agri-cultural growth, where there is a low concen-tration of land ownership and labor-intensivetechnologies are used, has almost always helpedto alleviate poverty (Gaiha 1993; Datt andRavallion 1998). Exports of textiles and cloth-ing have also spurred labor-intensive growth inmanufacturing, contributing to the reduction ofurban poverty, especially among women.

—Agricultural exports can reduce rural povertyRural poverty accounts for nearly 63 percentof poverty worldwide, reaching 90 percent inChina and Bangladesh, and between 65 and 90 percent in Sub-Saharan Africa (Khan 2000).Developing countries that have had more rapidagricultural export growth have also tended tohave more rapid growth of agricultural GDP(figure 2.3). Thus increased agricultural ex-ports contribute to increased agricultural in-come growth and reduced rural poverty.

The effects of trade growth on povertywould be muted if exports expanded at theexpense of domestic food production. But inmost cases, increased exports of nonfood agri-cultural commodities (such as coffee, cocoa, orcotton) provided hard currency to purchase in-puts for food crop production, which boostsoverall agricultural growth. In Vietnam, for ex-ample, nonfood crop production and U.S. dol-lar exports (primarily coffee) rose by about 15percent per year from 1990 to 1998, followingeconomic reforms. This boosted fertilizer useand contributed to a nearly 50 percent rise infood crop production over the same period.Agricultural GDP grew by 4.6 percent per year,and rural poverty fell to 45 percent in 1998—down from 66 percent in 1993 (World Bank2000b).

In Uganda, nonfood crop productionsurged following marketing liberalization inthe early 1990s. This surge was followed by atripling of fertilizer use and a rise in food cropproduction. Thus, increased exports (primar-ily coffee) boosted agricultural GDP growth


40

Figure 2.2 A rising share of exports inGDP is associated with faster growthAverage real GDP growth per year, percent

Decreasing exportshare in GDP

Increasing exportshare in GDP

Note: Sample includes only developing countries. Exportsrefer to nonenergy merchandise exports. Data fromnational accounts in constant 1995 dollars. Number ofcountries with increasing (decreasing) export share in GDP: 1980–89: 23 (63), 1990–99: 57 (29).

Source: World Bank staff calculations.

3.5

3

2.5

2

1.5

1

0.5

0

1980–89 1990–99

to about 4.4 percent per year, and eventuallycontributed to increased exports of other crops,creating a virtuous circle in agriculture. Ruralpoverty fell from 60 percent in 1992 to 39percent in 2000, and among the poorest quin-tile of population primary school enrollmentrose from 51 percent to 69 percent in the sameperiod (World Bank 2001a).

Cross-country comparisons confirm that in-creases in agricultural exports rarely occur atthe expense of food crop production. Ratherthan competing for scarce resources, the twoare positively correlated at the national level(figure 2.3). Thus increased agricultural ex-ports and increased food production are a win-win combination for developing countries.

Exports of textiles and clothing tend toreduce urban poverty—Many developing countries have become majorexporters of textiles and clothing (T&C), butothers, especially in Sub-Saharan Africa, haveyet to take advantage of this card. Low-costlabor and a competitive exchange rate are twoimportant enablers of T&C exports. Institu-

tional arrangements that give duty-free and ef-ficient access to inputs and foreign investors areno less important. Most success stories amongdeveloping countries confirm that booming ex-ports of textiles and clothing fostered broadoutput growth (table 2.1).

Increased T&C exports are associated withgrowth of local manufacturing, through de-mand linkages and increased purchasingpower among workers. In all successful textileexporters the share of private investment inGDP considerably increased during exportbooms. However, to benefit from backwardlinkages, the domestic suppliers of the T&Cindustry must be competitive and responsive.2

For example, Pakistan seems to be a case oflow industrial linkages and spillovers, as theincrease in the share of manufacturing valueadded in GDP was just about the same as thatof the T&C industry. Pakistan remained fo-cused on protective policies to boost the cot-ton-processing sector on the back of abundantdomestic cotton production (including, for ex-ample, export controls on cotton), rather thanrelying on globally integrated production


41

Figure 2.3 Increases in exports and agricultural production go hand-in-hand

Source: World Bank staff calculations, based on FAO data.

–2

0

2

4

6

8

Agriculture GDP vs. export growth

Agricultural GDP growth (percent/year, 1980–98) Food production growth (percent/year, 1980–99)

Food production vs. agriculture export growth

7

6

5

4

3

2

1

0–10 –5 0

Agricultural export growth (percent/year, dollars 1980–98)

5 10 –10 –5 0 5 10 15

using best-available materials. By contrast, inMauritius and Tunisia, T&C export growthwas accompanied by broad manufacturinggrowth.

Growth in textiles and clothing also bol-sters employment and real wages. In Mauri-tius, growing T&C exports had a tremendousimpact on unemployment, which was at 14percent before the export boom and wasvirtually absorbed by 1992. Eventually theshortage of labor became a constraint on theexpansion of output, bringing about a nearly50 percent wage increase. Part of Mauritius’T&C production moved thus to Madagascar.

Because of faster employment and wagegrowth for low-skilled workers in all countrieswith T&C export booms, poverty declined sig-nificantly (table 2.1). As T&C manufactur-ing is typically concentrated in urban areas,urban poverty was more drastically reduced. InBangladesh, one of the poorest countries withoverwhelming rural population, total povertydeclined slowly; however during the exportboom in clothing, urban poverty dropped byalmost one-third (World Bank 1999b). Thus to effectively contribute to the reduction ofpoverty, trade liberalization in agriculture andlabor-intensive manufactures must go hand inhand.

—but trade liberalization affects the poorin various waysDomestic trade policy reform lays the ground-work for better use of productive resources to

improve export performance. Poor workersand farmers will benefit from domestic tradepolicy reform, thanks to faster export growth,increased demand for their labor, and higherwages and producer prices. But trade liberal-ization can also affect the poor in the shortterm in complex ways that depend on countrycircumstances (see Winters 2000). These effectsare difficult to track because trade policy re-form is often undertaken in tandem with othermajor reforms that may also affect the poor—such as labor market reform, product marketderegulation, or public enterprise reform.

Trade policy does have important short-term effects on the poor through three chan-nels. Trade policy reform will, first, affect thepoor by changing the prices of their consump-tion basket. Trade liberalization will shift rel-ative prices, eventually increasing the prices oftraded relative to nontraded goods and reduc-ing the prices of imported relative to locallyproduced goods.

The overall impact on the poor through theprice channel depends both on the compositionof their consumption and on other reforms thatmay concurrently affect prices (such as thephasing out of subsidies and price controls). Onbalance, in net food exporting countries, whilepoor farmers may gain from higher producerprices, poor urban dwellers may suffer fromhigher food prices. In Ghana for example,while the rural sector gained from the reformand overall poverty was substantially reduced,living standards in Accra deteriorated in


42

Poverty rate2

Table 2.1 Major export booms in textiles and clothing and effects on economic performance and poverty

Bangladesh1 Madagascar Mauritius Pakistan Tunisia

Period 1975–80 1980–95 1992–95 1996–99 1980–85 1986–92 1980–85 1986–90 1980–86 1987–93

Share of T&C in exports (%) 0.2 39.3 7.7 19.1 27.7 47.8 36.5 53.7 19.3 34.7Real GDP growth per year (%) 3.3 4.7 1.2 3.6 2.2 7.4 7.4 6.0 3.9 4.3Share of manufacturing value

added in GDP (%) 16 16.4 14.3 15.0 16.9 23.9 15.6 16.9 13.5 16.6Total Head Count 58.5 53.1 60.2 — 19.5 10.6 49.6 33.9 19.9 14.1Urban Head Count 50.2 35.0 — — — — 38.2 28.0 12.0 8.9

Note: 1Exports of clothing. 2According to the national definition–end of period. For each country, the second column, indicates T&C export booms.Source: World Bank staff calculations.

1988–92. By contrast, in net food importingcountries, poor consumers may benefit fromlower domestic prices of imported food. Expe-rience from Haiti illustrates the complex impactof trade liberalization on the poor (box 2.1).

Second, wages and employment may notalways change as expected, depending on thepre-reform structure of protection. If for ex-ample, the protected sectors employ many ofthe poor, they may suffer in the transition toan open trade regime. This is more likely inmiddle-income countries, where sectors inten-sive in unskilled labor are often protected asthey face stiff competition from low-cost pro-ducers (Davis 1996; Wood 1997). For exam-ple, in Mexico, a country that implemented anambitious trade policy reform program from1985 to 1988, the nominal tariff and importlicense coverage in apparel and footwear wasamong the highest in manufacturing (Revenga

1995). A similar pre-reform pattern of protec-tion was also found in Morocco (Currie andHarrison 1997). A more common pattern isthat the politically connected sectors that re-ceive the most protection are the ones em-ploying workers with higher wages.

A third channel is through the effects ofgovernment taxing and spending. Institutionaldisruptions can mitigate the benefits of tradeliberalization for the poor. The abolition of themarketing boards for export crops sometimesled to abandoning key services that they oftenprovided—such as research, quality monitor-ing, maintenance of rural roads, and credit tosmall farmers (Winters 2000; World Bank2000a). In Zambia, for example, the abolitionof the marketing board led to abandoning thepurchase of maize in remote areas. There isalso concern that, in the absence of reforms tobroaden the tax base, reduced government rev-


43

The bold steps to liberalize trade in Haiti begin-ning in 1986 that continued throughout the

1990s have not produced rising incomes or reduc-tions in poverty. Today with per capita income ofless than $500 and about two-thirds of the peopleliving in rural areas, and more than 80 percent of the rural population living below the poverty line,Haiti remains the poorest country in the WesternHemisphere.

Prior to trade liberalization, the agricultural sec-tor of Haiti was highly protected through tariffs (40to 50 percent) and subject to many nontariff barriersand import prohibitions. Reforms brought down tar-iffs on rice, an important food staple, to 3 percent.The real price of rice to consumers was reduced by50 percent and imports of rice jumped from zero toabout half of domestic demand. Domestic rice pro-duction also fell—by more than 40 percent com-pared with the 1985–90 levels.

Does this mean that the poor suffered from thetrade reform as some have contended (Oxfam Inter-national 2001)? Not necessarily. To be sure, some

Box 2.1 The aftermath of trade liberalization inagriculture: lessons from Haiti

poor, small farmers were forced out of rice produc-tion. On the other hand, many urban and rural poorwere better off, because most of Haiti’s poor werenot producers of rice, but rather consumers who hadbeen paying a high tax on a very basic food staple,curtailing their rice consumption. When rice becamemore affordable, national consumption doubled, andmost of the poor were better off.

Yet this is only part of a story that does nothave a happy ending. Severe governance problemseroded macroeconomic stability, discouraged invest-ment, and undermined the capacity of the govern-ment to provide meaningful assistance for the poor,much less build infrastructure and institutions tosupport and sustain trade capacity. The eventual vir-tual collapse of the state has left Haiti mired inpoverty. This underscores the lesson that trade policycannot substitute for good governance and a pro-poor development strategy.

Source: Oxfam International 2001; IMF Staff Reports for the1999 and 2000 Article IV Consultations; World Bank staff.

enues from trade-related taxes may trigger adecrease in social expenditures targeted for thepoor. For example, Tanzania trade policy re-form in the mid-1980s shifted income towardthe largely untaxed small farmers, small enter-prises, and the informal sector, thus reducingthe domestic tax ratio (Kanaan 2000).

In sum the evidence is clearer on the long-term consequences for the poor: on average, in countries where outward orientation has in-creased, income growth of the poor has keptpace with mean income growth (figure 2.4).3

And on average, globalizers have grown faster,thus witnessing accelerated reduction of poverty.By contrast, countries where outward orienta-tion has decreased have seen slower growth,and the poor in those countries have alsofallen behind. Nonetheless the transition tothese higher growth rates can take time andreform can impose short-term costs on thepoor in some countries. Hence, governmentshave to design trade reforms carefully, provide

adequate social protection, and ensure maxi-mum access to retraining opportunities.

Market access barriers limit export opportunities ofdeveloping countries

The Uruguay round of trade negotiationsmade a significant contribution toward

lowering global barriers to merchandise tradeon two fronts: improving market access, thanksto the reduction of tariffs and quantitativerestrictions on a number of products; and ex-tending multilateral disciplines to previously ex-cluded sectors—particularly agriculture, textiles,and clothing. As a result of multilateral trade ne-gotiations and unilateral reforms, average tariffrates have been halved—although they still re-main high in South Asia and in the Middle Eastand North Africa (figure 2.5).4 Progress in low-ering tariff barriers has been particularly im-portant for more skill-intensive manufactures,on which an increasing number of developingcountries in East Asia, Eastern Europe and Cen-tral Asia, and Latin America rely for exports.For example, the largely duty-free trade in in-formation technology products that came intoforce with the “Information Technology Agree-ment” of the Uruguay Round strongly boostedSouth-North trade in the information and com-munications technology sector.

Tariff walls are high, especially in labor-intensive productsHowever despite progress, labor-intensiveproducts still remain extensively protected.Tariff protection for agricultural commoditiesis higher than for manufactures, both in indus-trial and in developing countries. But in high-income countries the average tariff rate onagriculture is almost double the tariff for man-ufactures. Applied tariffs on labor-intensivemanufactures also largely surpass the averagefor industrial goods. Compared to industrialproducts as a whole, labor-intensive manufac-tures are again more protected in high-incomethan in developing countries, by an estimatedone-third.


44

Figure 2.4 In globalizing economies thepoor participate in stronger growthPercent of change per year

Note: Sample includes 129 time periods, based ondeveloping countries’ household surveys. Outward orientation is measured by the share of trade flows(the sum of exports and imports) in GDP. Periods of increasing outward orientation are those when the share of trade flows in GDP increases by at least 0.5percentage points per year.


0.0Increasing

outward orientation

Average income growth

Income growth of the poorest20 percent of the population

Decreasingoutward orientation

0.5

1.0

1.5

2.0

2.5

3.0


45

Figure 2.5 Tariffs still impede trade

Source: World Bank, based on WTO data.Source: World Bank, based on WTO data.

Source: World Bank, based on WTO data. Source: World Bank.

Average MFN tariffs (unweighted in percent) Average MFN tariffs in 1997–99 (unweighted in percent)

—but tariff protection in agriculture is higher than inmanufactures.

In a decade, average tariffs have been almosthalved—

—but tariff escalation is also common in developingcountries

Tariffs escalate steeply in the Quad—especially in agriculture—

Source: World Bank staff estimates, based on WTO data. Note: Tariff peaks are defined as tariffs greater than 15 percent.

Source: World Bank, based on OECD tariff files.

Average MFN tariffs in 1997–99 (unweighted, in percent) MFN tariff lines in tariff peak (in percent for each product group; 1999)

Labor-intensive manufacturers are alsosheltered—

—as widespread tariff peaks shelter agriculture andlabor-intensive manufactures in the Quad

Average unweighted tariffs in percent (1998–99) Average unweighted tariffs in percent (1998–99)

0

10

20

30

40

50

60

70South Asia

E. Asia

Latin Americaand theCaribbean


AfricaMiddle EastandNorth Africa

E. EuropeandCentral Asia

E. Asia

E. EuropeandCentral Asia

1986–88

1993–95

1997–99Developing

High-income

Africa

Developing

High-income

0

5

10

15

20

25

30Agriculture Manufactures

South Asia

Middle EastandNorth Africa

05

1015202530354045


East Asia

EasternEurope

FootwearIndustrialproducts

Textile andclothing

Developing

Industrial

South Asia Middle EastandNorth Africa

01020304050607080

All goods


Primary food Processedfood

Textile andclothing

Footwear

EU Japan USA Canada

0


United

States

Europe

an

Union

Canad

a

Japa

nUnit

ed

States

Europe

an

Union

Canad

a

Japa

n

Industrial products

2

46

810

1214

16First stageSemi-processedFully processed


Industrial products

0Developing High-income Developing High-income

5

10

15

20

25

30First stageSemi-processedFully processed

Trade barriers on labor-intensive productsare commonly raised through tariff peaks (tar-iffs exceeding 15 percent) on imports of “sensi-tive commodities.” Imports at tariff peaks rep-resent about 5 percent of total Quad (Canada,European Union (EU), Japan, and United States)imports from developing countries, and morethan 11 percent of total Quad imports fromLDCs (Hoekman, Ng, and Olarreaga 2001).

Within the Quad, tariff peaks are wide-spread but their pattern differs (figure 2.5). InNorth America, tariff peaks are commonlyfound in industrial goods, particularly on im-ports of textiles and clothing. By contrast, tar-iff peaks in the EU and Japan are common inagriculture—especially on imports of processedfood, and tariff peaks on imports of footwearare widespread across all Quad markets andsurpass those found in textile and clothing. Indeveloping countries, tariff peaks are prevalentalso, because applied tariffs are close to the tar-iff peak threshold.

Tariff escalation is a major concern fordeveloping countries Tariffs often rise significantly with the level ofprocessing (tariff escalation) in many high-income and developing countries. Tariff esca-lation in high-income countries has the poten-tial of reducing demand for processed importsfrom developing countries, hampering diver-sification into higher–value added exports(Blackhurst, Enders, and Francois 1996).

In high-income countries, tariffs escalatesteeply, especially on agricultural products (fig-ure 2.5). In the Quad, tariffs on more processedagricultural commodities are comparativelyhigher in the EU and Japan, while in the UnitedStates there is evidence of reverse escalation be-tween unprocessed and semiprocessed com-modities. Though less prevalent, tariff escalationalso affects imports of industrial products—es-pecially at the semiprocessed stage. Examples ofsuch products, in which many developing coun-tries have a comparative advantage, include tex-tiles and clothing; leather and leather products;wood, paper, and pulp; furniture; rubber prod-ucts; and metals.

In developing countries, too, the average tar-iff for fully processed agricultural products andmanufactures is higher than on unprocessedproducts. The reduction of tariff peaks in theQuad and other countries would mitigate tariffescalation. In the EU and Japan, for example,tariff peaks are more widespread on imports ofprocessed food than on primary food imports(figure 2.5). Trade of products where moreprocessed exports from LDCs have a chance ofbreaking through would thus receive a boost.

Despite progress, trade in agricultureremains heavily distortedThe Uruguay Round Agreement on Agriculture(URAA), which came into force in 1995,marked an important step in improving accessto sheltered agricultural markets in high-income countries. A wide range of nontariffbarriers was abolished, including quantitativeimport restrictions, variable import levies, anddiscretionary import licensing. These barrierswere converted to ordinary tariffs (tariffica-tion). Existing and new tariffs were bound, andthese bindings were subject to reduction. De-veloping countries were allowed more compli-ance flexibility through longer implementationperiods and lower reduction commitments.

Because international agricultural prices inthe base period for the URAA (1986–88) wereway below high domestic prices supported byquotas, the conversion of quotas into tariffequivalents resulted in high rates of tariff pro-tection (OECD 2001a; World Bank forthcom-ing). Moreover tariff reduction commitmentsinvolved a simple average across products, cre-ating much leeway to spread reductions un-evenly, with lower cuts in more sensitive com-modities. Hence scheduled tariff reductions overthe URAA implementation period may not havereduced protection enough to significantly im-prove market access and boost agriculturaltrade (Diakosavvas 2001).

Tariff peaks in agriculture occur frequentlyon processed products and temperate commodi-ties. They are less common on unprocessed fruitsand vegetables and tropical commodities, whichare not produced in high-income countries but


46

are major export crops of least-developed coun-tries. Thus tariff peaks could be seen as not tar-geting developing countries in particular, sincesuch tariff peaks can be found where marketshares of developing countries in Quad importsare comparatively low. However, many devel-oping countries in temperate zones have thepotential of competing as lower-cost producersin temperate commodities. Hence besides pro-viding sizeable market price support to high-income countries’ producers, developing coun-tries’ exporters may be displaced by high tariffpeaks, especially in the EU where intra-EU tradeis duty-free. Indeed, intra-EU trade in productgroups with a high share of tariff-peak lines isprevalent, at about 70 percent of EU countries’agricultural imports. By contrast, when tariffpeaks are less widespread, non-EU suppliersseem to have more opportunities.

Concerns about market access also arisefrom the poor performance of tariff quotas(TRQs) introduced by the URAA with the aimof securing a minimum level of market access.5

The average fill rates of TRQs have been lowand declining, from 67 percent in 1995 to 63percent in 1998, while about a quarter of tar-iff quotas were filled to less than 20 percent.Evidence as to whether the method of adminis-tration of tariff-quota allocations may have aninfluence on the fill rates is still unclear (WTO2001; OECD 2001a). But the low fill ratecould reflect high “in-quota” rates; in someQuad markets in-quota rates are above the av-erage for agriculture (OECD 1999a). And, forspecific products, over-quota rates skyrocket—such as the EU 130 percent tariff for above-quota bananas.

Support to agriculture is sizable and growing At an estimated $245 billion in 2000—aboutfive times the level of international developmentassistance—support to agricultural producers inhigh-income countries remains sizeable (OECD2001b). Total support to agriculture (as definedby the OECD) is even higher, at about $327 bil-lion in 2000—or 1.3 percent of OECD coun-tries’ GDP.6

Support is often rationalized on the non-economic benefits of agriculture, which are not properly valued by the market—such as environmental protection, food security, andmaintenance of rural communities (Winters1990; Maier and Shobavashi 2001). But exten-sive support may be counterproductive forthese goals because subsidies, in addition to ac-counting for the “multifunctionality” of agri-culture, have a number of side effects. For ex-ample, production-linked subsidies encourageenvironmentally unsustainable farming prac-tices, boosting the use of chemicals, fertilizer,and fuel in order to produce additional outputbeyond what competitive conditions woulddictate. Agriculture now thus contributes aboutone-fifth of global greenhouse gases—50 per-cent of methane and 70 percent of nitrousoxide—while high-income countries accountfor the major share of global agricultural green-house gas emissions (OECD 1999b).7 Enhanc-ing the environmental performance of agricul-ture remains a challenge, but efforts should relyon appropriate incentive policies, tailored tolocal environmental circumstances and de-mands (OECD 2001d).

Production-related support in high-incomecountries also distorts agricultural commod-ity trade and affects developing countries. Itboosts production of agricultural commodi-ties and reduces agricultural imports, thus dis-placing developing-country exports in high-income countries’ markets. The case of theU.S. subsidies to sugar producers illustratesboth the pernicious impact of support on de-veloping countries’ exporters, and the largecosts borne by high-income countries’ con-sumers and taxpayers (box 2.2).

The unwanted production surpluses aredumped into world markets with the aid ofexport subsidies, depressing prices for manytemperate agricultural commodities (Burfisher2001). The case of growing EU exportablesurpluses of wheat illustrates the potential dis-tortions to trade (box 2.3). The incidence isgenerally negative for agricultural exporters—especially developing countries that exporttemperate commodities or have the capacity of


47

becoming low-cost exporters. There are also,however, benefits for net food-importing devel-oping countries from lower import prices forfood (Freeman and others 2000).

The URAA also covered trade-distortingmeasures of support and export subsidies (box2.4). The value of support subject to reductioncommitments in OECD countries declined sig-nificantly, to about 65 percent of its level inthe base period. However during the imple-mentation period, this was largely offset by in-creased support under measures exempt fromreduction commitments, so that in 1997 over-all support was practically unchanged from its

base-period level.8 Subsidies that were exemptfrom reduction commitments now account forabout 60 percent of total OECD-country agri-cultural support, even though some of thesesubsidies may affect production and trade(OECD 2001a).

The overall level of support to producers—asmeasured by the OECD’s producer support esti-mates (PSE)—has further increased since 1998,in response to the decline in world commodityprices, and now represents about 35 percent ofgross farm receipts (figure 2.6).9 And becausesupport is counter-cyclical, it insulates farmersin high-income countries from changes in world


48

The United States began to directly intervene tosupport agricultural commodity prices in 1933

with the introduction of the Agricultural AdjustmentAct. The Act has been modified many times, but isstill the basis of most of the U.S. agricultural policy.Sugar is one of the most protected commoditiesunder U.S. policy (see figure).

The United States is the world’s largest con-sumer of sweeteners, with the equivalent of 142pounds of raw sugar consumed per person per year.The U.S. sugar industry is heavily subsidized, withabout half of sugar producers’ revenues coming fromgovernment support. U.S. sugar producers have beenprotected from lower world market prices since theearly 1980s, by successive farm legislations that pro-vided price supports through restrictive import con-trols. On average, U.S. sugar producers have received2.6 times the world market price for sugar since themid-1980s (see figure).

Apart from protecting sugar production, domes-tic support to sugar also provides higher than worldmarket prices to corn syrup producers. This has en-couraged the development of an important HighFructose Corn Sweetener (HFCS) industry that nowsupplies half of the country’s sweetener consumption,especially in products such as soft drinks. HFCS pro-duction is now four times higher than in 1980, andsurpasses sugar production, which has increased byabout 50 percent (according to the U.S. Departmentof Agriculture). Sugar imports by the United States

Box 2.2 U.S. sugar policy and its impact on imports

fell by one-half over the period, from 4.3 milliontons in 1980 to slightly less than 2 million tons in1998. The sugar policy costs foreign sugar producersan estimated $1.5 billion in lost sales.

Source: World Bank staff, based on Sheales and others 1999.

Steady support to U.S. sugar producers

Source: OECD; World Bank.

Ratio of U.S. sugar priceto free-market price

PSE refined sugar equivalent

U.S. sugar price

PSE total agriculture

0

1986 19901988 1992 19961994 1998 2000

10

20

30

40

50

60

70

80

0

0.5

1

1.5

2

2.5

3

3.5

4

Producer support estimate(PSE), in percent of grossfarm receipts

prices and makes production less responsive toswings in demand. As a result, world commod-ity prices become more volatile, and duringdownturns the burden of adjustment is shifteddisproportionately to producers in developingcountries who enjoy much lower levels of sup-port (Tyers and Anderson 1992; Winters 1994).

Over the past 15 years support to agriculturein high-income countries has declined only mar-ginally as a share of gross farm receipts. Theoutlook is unclear, because the reduction com-mitments are sectorwide, allowing governmentsmuch leeway to target the reductions, while in-

creasing support for specific “sensitive” com-modities. Many commodities of export interestfor developing countries remain heavily subsi-dized—such as, for example, rice and sugar,where support covers as much as 80 and 45 per-cent of gross farm receipts (OECD 2001b).

Export subsidies are particularlydamagingThe effectiveness of URAA in disciplining ex-port subsidies is also questionable. Because ex-port subsidies in the 1986–88 base period weresizeable, the limited reduction commitments


49

Agriculture was given a central role when theoriginal European Economic Community (EEC)

established the Common Agricultural Policy (CAP)in 1957. The basic market support set out in theTreaty of Rome remains much the same today, de-spite successive reforms to the CAP since the early1990s. The CAP was very successful at achieving itsgoals of food self-sufficiency and stable producerprices. In fact, it was so successful that it encouragedfarmers to produce more than was needed, whichcaused intervention stocks to build and commoditiesto be exported using export refunds. Wheat produc-tion is a case in point.

The first nine countries to join the EEC accountfor nearly 90 percent of EU wheat production. Thesecountries have adjusted to the high and stable wheatprices established by the CAP, and they have re-sponded by increasing yields by 2.5 percent per yearsince 1970, compared to only 1 percent per year forthe United States, the world’s largest wheat exporter.Domestic support for wheat (as measured by theOECD’s producer support estimates) remains size-able in the EU despite several reforms to the CAP.From 52 percent of gross farm receipts on average in1986–88, it declined only marginally to an estimated48 percent in 1998–2000.

The impact of high wheat prices was not only toincrease production, but also to reduce demand andfurther contribute to the surpluses. Net exports ofwheat surged to 22.8 million tons in 1992, and thendeclined somewhat due to CAP reform measuresduring the 1990s (see figure). One of the consequences

Box 2.3 Wheat production with CAP support

of the CAP was that lower cost producers were de-prived of a market for their products. Argentina forexample, is a low cost producer that could supplywheat to the EU. With more than 50 percent of itsexports concentrated on agricultural products andagro-processing manufactures, Argentina in particu-lar may be suffering from trade distorting subsidies(see Nogues 2000).

Source: World Bank staff.

EU wheat production and net importsMillion tons

–401960 1970 1980

Production

Net imports

1990 2000

–20

0

20

40

60

80

100

taken in the URAA leave broad margins forcontinued subsidization. Thus for a number ofproducts, permitted subsidized exports duringURAA implementation were larger than actualsubsidized exports in the first half of the 1990s(OECD 2001a; World Bank forthcoming). Andthe share of subsidized exports has even in-

creased for many products of export interest todeveloping countries. For example, subsidizedexports of wheat represented 25 percent of totalwheat exports in 1998, up from 7 percent in1995, while subsidized exports of sugar rose to31 from 19 percent in the same period (Ingcoand Winters 2001).


50

Akey objective of the URAA was to reduce trade-distorting support to agriculture, while

creating room for government policies to design ap-propriate nondistorting support schemes, in responseto country-specific circumstances. Three maincategories of support were distinguished:

a) Trade-distorting support (often referred to as“amber box” measures), such as market price–support through administered prices supported by restrictive trade measures and production-related subsidies (based on output or on the useof inputs).

b) Support with no, or minimal, distorting effect ontrade (often referred to as “green box” measures).These may include a vast array of programs, suchas decoupled income support measures; paymentscovering services for research and development;pest and disease control; infrastructural services;domestic food aid; structural adjustment and re-gional assistance; and environmental programs.

c) A category of direct payments under production-limiting programs—the so-called blue box mea-sures—was also distinguished.

Reduction commitments were scheduled ontrade-distorting support, expressed in terms of a “totalaggregate measurement of support” (AMS). Under theURAA, developed countries are required to reducetotal base-period AMS by 20 percent over a period ofsix years. Developing countries with AMS commit-ments are subject to a 13 percent reduction over 10years. Measures in the “green box”—and also, undercertain conditions, in the “blue box”—have beenexempt from URAA reduction commitments.

Box 2.4 Bringing support to agriculture and export subsidies under multilateral rules:A long-awaited endeavor

Export subsidies in agriculture allow countries toexport production surpluses to the world market atprices below the high prices prevailing in their domes-tic markets. Export subsidies were about $7 billion onaverage in 1995–98, of which 90 percent was grantedby the EU. In the URAA high-income countries agreedto reduce base-period subsidized exports by 21 per-cent, in equal steps over six years—and to cut the cor-responding budgetary outlays by 36 percent. Develop-ing countries agreed to a 14 percent reduction insubsidized export volumes over a 10-year period.

Source: OECD 2001a; WTO 2001; World Bank forthcoming.

Billions of dollars

01986–88 1995 1996 1997

50

100

150

200

250

300

Aggregate measure of supportBlue box Green box

In the EU, the Agenda 2000 Common Agri-cultural Policy (CAP) reform marked a step inthe right direction to reduce the need for ex-port subsidies by cutting the support prices forcereals, beef, and dairy, but it is unlikely to be sufficient to eliminate the EU exportablesurpluses in the years ahead. In addition to di-rect export subsidies, officially supported ex-port credits have expanded during the 1998Asian financial crisis, and are largely used inthe United States. By resulting in targeted costdiscounts for buyers, export credits might havesimilar distorting effects on trade as direct ex-port subsidies. The URAA called for negotia-tion of export credit disciplines, which has notyet been achieved.

Due to remaining restrictions on textilesand clothing, developing countries foregosizeable export earningsThe Uruguay Round Agreement on Textilesand Clothing (ATC) provides for the gradualphaseout of the multifiber arrangement (MFA)country–specific quotas over a 10-year period,ending in 2005 (box 2.5). The ATC was an im-

portant step to improve developing countries’access to high-income countries’ markets, be-cause it became very difficult for the importersto introduce new quotas. Moreover, the ATCabolished voluntary export restraints in re-sponse to pressure from developing countries.These measures were identical in form with theMFA quotas.

However the effectiveness of ATC in freeingup markets has been limited by two main short-comings. First, scheduled quota integration is“back-loaded,” with quota-free market accessfor nearly half of all imports due only at the endof the transition. Hence the transition is un-likely to be smooth for currently shielded pro-ducers. This could disrupt the post-ATC regimeby encouraging calls for higher tariff protection,or for more intensive use of contingent protec-tion measures (box 2.6). And in textiles, afterthe Uruguay Round, the use of contingent pro-tection measures has increased faster than inother sectors. In 1998–99, initiations of an-tidumping investigations in textiles represented11 percent of total, up from only about 5 per-cent, on average, in 1990–92 (WTO 2001).


51

Figure 2.6 Support to agriculture in theQuad is growing . . .

. . . partly due to the fall in commodityprices

Source: OECD. Source: World Bank; OECD.

Producer support estimate in percent In U.S. billionsof gross farm receipts (left axis) (over bars)

Total food prices inconstant dollars(weighted index; 1990=100)

Producer supportestimate in percent

of gross farm receipts(total OECD countries)

0Japan EU Canada United

States

10

20

30

40

50

60

7056

105

451

52

98

6

39

1986–901991–941995–971998–2000

20

25

30

35

115

Producer supportestimate (right)

PSE trend

Food prices (left)

110

105

100

95

90

85

80

1986 1988 1990 1992 1994 1996 1998 2000

40

45

Second, the ATC rules for the removal ofquotas are framed in terms of overall importshares in textiles and clothing, rather than interms of the number of quotas. This allowsimporting countries the leeway to select theproducts to be freed of quota restrictions ineach step, which slows the pace of liberali-zation.10 Up to 2000, more than 33 percent of trade was integrated, fulfilling the mini-mum ATC requirements. But products thathave been freed of quotas by the EU and theUnited States represent only small shares oftheir total textile and clothing imports—about6 percent of 1995–97 imports for the UnitedStates and less than 5 percent for the EU(ITCB 1999). Moreover, the products of inter-est to developing countries that were inte-grated tend to have low value added—such astops, yarns, and fabrics—with clothing repre-senting only a small share of the total.

Due to the slow pace of the liberalization,potential benefits for developing countries arebeing eroded, and foregone export earnings aresizeable. For example, on current trends, theshare of intra-EU trade in textiles and clothingcould further decline from 49 to around 43 per-cent of total EU countries’ imports by the ATCexpiration in 2005. Assuming a twice-as-fastdecline under a more ambitious liberalization,this share could drop by an additional 7 per-cent. Thus foregone export earnings for re-strained developing countries in the EU couldbe as high as $10 billion a year. In the UnitedStates, after the creation of the North AmericanFree Trade Agreement, restrained suppliers weredisplaced by booming textile and clothing ex-ports from Mexico, which grew by about 35percent per year. Despite these trade diversioneffects, the sharp increase in Mexican exportsillustrates the potential for other restrained low-


52

The Multifiber Arrangement (MFA) that enteredinto force in 1974 (like its predecessors the

Short- and Long-term Cotton Arrangements between1961 and 1973) established rules for the impositionof country-specific quotas, either through bilateralagreements or unilateral actions. This conflicted withthe General Agreement on Tariffs and Trade (GATT)principle of nondiscrimination against trading part-ners. As of 1995, only the United States, EU,Canada, and Norway continued to use quotas to re-strict their imports of textiles.

The return to GATT rules has two components:(1) a schedule for freeing textiles and clothing fromimport quotas (the “integration” component of theATC); (2) additional provisions for acceleratedgrowth of remaining non-integrated quotas (the so-called liberalization component of the ATC). Prod-ucts remaining under restriction will be allowed anadditional increase in quota growth rates—above thegeneral 6 percent annual growth agreed under theMFA. Such products will have their quota increased

Box 2.5 A primer on the agreement on textiles and clothing

by an additional 16 percent in the first step, 25 per-cent in the second, and 27 percent in the third.

The ATC is being implemented in four steps. Inthe first step, which took effect on January 1, 1995,WTO members had to secure quota-free market ac-cess matching, at a minimum, 16 percent of the totalvolume of their 1990 imports. In the second step,which started on January 1, 1998, an additional 17percent of total 1990 imports had to be integrated,followed by an additional 18 percent in the thirdstep, which commences on January 1, 2002. Finally,on January 1, 2005, quota-free access correspondingto the remaining 49 percent of total 1990 importsmust be secured.

The choice of products to be integrated is left tothe importing country, but they must cover at leastone item from each of four major product groups:yarns and tops, fabrics, made-ups, and clothing.

Source: Based on ICTB 1999.

cost producers to expand their exports, shouldmarket-access obstacles be removed.

Evaluating the impact of MFA quota aboli-tion requires a model comprehensive enoughto take into account the interplay betweensuppliers, as well as the sectoral interactions of each economy (see also chapter 6, andKathuria and others (2001) for South Asia).Given the equally slow pace of liberalization inNorth America, a rough estimate of foregoneexport earnings for developing countries could

be twice the estimated amount in the EU—equivalent to about 12 percent of total devel-oping countries’ textile and clothing exports.

Market access in textiles and clothing willremain restricted even after the MFA-relatedquotas have been abolished, because tariff bar-riers are high. While 90 percent of total high-income countries’ imports of manufactures facetariff rates below 10 percent, only about halfof textile and clothing imports face such lowtariffs. Moreover 28 percent of total OECD


53

Import-competing firms are often tempted to resortto antidumping laws—which are permitted by

WTO rules—to allege unfair trade practices by for-eign competitors. A firm is said to be dumping if itsexport price is less than either the price in its homemarket or the average cost of production. Antidump-ing laws enable nations to impose offsetting dutieson imports found to be both dumping products onthe domestic market and causing “material injury”to a domestic industry. The main users of these lawswere developed countries, but increasingly develop-ing countries have taken recourse to these laws (seeFigure). Industrial and developing nations areequally targeted by antidumping actions.

In addition, some nations take action againstimports that they suspect may have been subsidizedby another government. These so-called countervail-ing duty cases are also allowed under WTO rulesand, if an investigation reveals that allegedly subsi-dized imports have injured a domestic industry, thena tariff can be placed on the products in question.Both antidumping laws and countervailing duty lawsare referred to as “unfair trade laws,” reflecting theview that dumping and subsidization tilt the com-mercial playing field towards foreign firms. However,the more widespread resort to “unfair trade laws” isdiluting the gains from trade liberalization.

Disrupting surges in imports can be far betterhandled through the use of safeguard measures.These afford domestic firms the chance to adjust togreater competition from abroad, but do so only fora fixed period of time. WTO rules allow members toimpose temporary restrictions on imports that are

Box 2.6 Anti-dumping—and better alternatives

causing serious injury to a domestic industry. Be-cause the import protection is temporary, tradingpartners know that their market access has not beenpermanently reduced. By contrast, the antidumpingand countervailing duty laws are often implementedin such a way that the tariffs once imposed they arealmost never withdrawn. Worse still, if nations be-lieve that the market access obtained during a tradenegotiation are going to be permanently eroded bythe use of the unfair trade laws, then they will be lessinclined to start trade negotiations in the first place.


Developing countries are victims andplayers in the rising game of antidumpingAntidumping cases initiated by developed and developingcountries, 1986–1998

01986 1988 1990 1992 1994 1996 1998

20

40

60

80

100

120

140

160

180

200

220

Developed

Developing

countries’ imports of textile and clothing stillface tariff peaks, down only marginally from35 percent in the pre–Uruguay Round regime(OECD 2001c).11

Preferential market access for developingcountry exportsPreferential access schemes to high-incomecountries’ markets, such as the generalized sys-tem of preference (GSP) and the LDC regimes,aim to partly mitigate the effects of high most-favored nation (MFN) tariffs on export prod-ucts of developing countries. The United Na-tion’s 48 least-developed countries benefit fromLDC preferential access in all Quad countries,where 75 percent of their exports are sold.12

Even though on average, these preferentialschemes look relatively generous (Hoekmanand others 2001), a number of factors erodetheir effectiveness in reducing trade barriersfaced by poor countries. First, preferencesmainly apply to products that already face rel-atively low MFN tariffs (below 10 percent).The margins of preference on tariff peaks aresignificantly lower—with the exception of theEU, where the LDC preference margin for tar-iff peak products is about 70 percent. Thismargin is only 25 percent in Canada and 30percent in Japan and the United States. Reflect-ing the selectivity of preferences and the struc-ture of LDC exports, high tariffs are thus com-mon in some Quad markets on products onwhich LDC beneficiaries reveal some compara-tive advantage (figure 2.7).

Second, tariff preferences under GSP andLDC regimes can also be easily eroded by non-tariff measures, such as antidumping, safe-guards, rules of origin, and graduation mecha-nisms. The case of the safeguard measuresapplied by Japan on imports of Shiitake mush-rooms from China illustrates this point (box2.7). Finally, the GSP (and LDC regime implic-itly) have graduation mechanisms that are re-lated to income and market shares. They aretime-bound and subject to (uncertain) renewal.Countries graduate if they pass a certain percapita income threshold and if they expandtheir exports of products beyond a certain im-

port share in the market of the GSP-grantingcountry.

There is evidence that tariff preferences helpthe least-developed countries take advantage ofbetter export opportunities in Quad markets. Inthe post–Uruguay Round period, LDC exportsto the EU that receive high preferences, havegrown by about 8 percent per year on average,outpacing growth of LDC exports that receivemedium or low preferences (figure 2.8). A sim-ilar pattern is seen in Canada and Japan.13

On balance, global tariffs penalizedeveloping countries—The post–Uruguay Round tariff structure penal-izes developing countries as a whole becausetheir exports tend to be concentrated in prod-ucts where market access is highly restricted.Trade-weighted applied tariffs convey a sense oftariff incidence across countries and productgroups (figure 2.9).14 In manufactures, develop-ing country exporters face, on average, highertrade-weighted tariffs than other suppliers, bothin high-income and in developing countries’markets. Tariff walls faced by developing-


54

Figure 2.7 Despite preferences, LDCexports to the Quad often face high tariffsIn percent of LDC exports to each market (1996–99)


0

20

40

60

80

100

Low tariffs<5%

Medium tariffs5–15%

Tariff peaks>15%

EU

Japan

United States

Canada

country exporters of manufactures in develop-ing countries’ markets are about three timeshigher than in high-income countries’ markets.

In agriculture, developing-country suppliersface lower trade-weighted tariffs than do otherexporters, both in high-income and in develop-ing countries’ markets. This is because tradepreferences to some extent mitigate the impactof tariff protection on developing countries,while a large share of developing countries’exports is in tropical commodities, for whichtariff protection is relatively low. By contrast,high-income countries’ agricultural exports aremainly concentrated in temperate agriculturalcommodities and dairy products, which facewidespread tariff peaks.

Because average applied tariffs in agricul-ture are higher in developing countries, South-South trade of agricultural commodities faceshigher trade-weighted tariffs than exports fromthe South to the North (South-North trade).With an increasing share of developing coun-tries’ manufactured and agricultural exportsbeing directed toward other developing coun-

tries, high levels of tariff protection in the Southmay also impede prospects for export-ledgrowth. Trade in agriculture may suffer morefrom high levels of protection in middle-incomedeveloping countries because markets in thesecountries are growing fast, reflecting fast popu-lation and income growth. High tariff protec-tion in middle-income developing countries mayalso damage the export opportunities of low-income countries, especially in agriculture andin textiles where the export market shares oflow-income countries have increased rapidly.

—and denies the world’s poor access tothe global marketsBecause developing countries are home to theworld’s poor—56 percent of the world’s pop-ulation defined as those living on less than $2 per day (World Bank 2000c)—high tariffbarriers on developing countries’ exports actas a roadblock to market access by the poor.Compared with the nonpoor of the world,poor people are more exposed to high penal-ties of the global system of protection.


55

Shiitake mushroom are among the most popularmushrooms in Japan, where an estimated 30,000

farmers grow them. Japanese trading companiesbegan in the early 1990s to encourage Chinese farm-ers to use Japanese spores and modern cultivationtechniques to improve the quality of Chinese mush-rooms to Japanese standards. The effort was a hugesuccess. In the humid mountainous climate of Fujianprovince, as well as in Shandong, farmers quicklyadapted and China became a global mushroomgiant. The same techniques were applied to othermushrooms, and exports climbed to $120 millionper year. Farmers’ incomes in Fujian and Shandongrose, and consumers in Japan seemed happy to getthe shiitake mushrooms at one-third the price ofdomestically produced shiitakes.

But Japan’s shiitake farmers feared for their jobsand sought protection from the government. Thegovernment responded. Japan at first threatened to

Box 2.7 Mushroom warsuse inspection requirements as a veiled form of pro-tection. But since April 17, 2001, imports over 8,000tons face a tariff of 266 percent, while an amend-ment to the tariff code imposed temporary emer-gency import curbs. The import curbs will be imple-mented for up to 200 days through November 8. Itis the first time Japan has invoked import curb mea-sures under the WTO’s ordinary safeguard mecha-nism designed to slow imports to allow a specificindustry to adjust to heightened competition fromforeign suppliers. The Chinese government urgedJapanese officials to reconsider the action, to noavail. China has retaliated by imposing punitiveduties on several Japanese exports. It is likely thatthe mushroom war is not over.

Source: The Economist, February 8, 2001; The Guardian, April19, 2001; Peoples’ Daily, April 17, 2001; Financial Times, June20, 2001.

The world’s poor generally earn their livingin the rural sector and other labor-intensiveactivities—such as light manufacturing, infor-mal services, and construction. When theseproducts find their way to the world markets,they face high tariff barriers—such as thosefaced by agricultural commodities and labor-intensive manufactures. Labor services faceparticular restrictions—for example, restric-tions on temporary cross-border movementsof workers for the provision of constructionservices (see chapter 3).

One way to quantify the incidence of pro-tection—albeit in rough fashion—is to look ateffective tariffs faced by the different incomegroups in access to the world markets. Despitethe existing preferential access schemes for de-veloping countries’ exports, the world’s poorface tariffs that are more than twice as high asthe nonpoor face (box 2.8). This fact is inde-pendent of their position in the relative scaleof poverty. Making world merchandise tradework for the world’s poor would require boldsteps to remove this disparity.

Liberalizing trade to promotedevelopment

Removal of trade barriers on labor-intensiveproducts will generate shared benefits,

both for high-income and developing countries(these are quantified in chapter 6). Benefits fordeveloping countries would include greater ac-cess to high-income countries’ agricultural andapparel markets and more buoyant demand inindustrial countries as a result of lower pricesto consumers. Middle-income countries thathave access to international capital marketsbut still depend greatly on exports of protectedproducts (for example, Argentina), could pos-sibly see a decline in the risk premia they face,because more buoyant growth of export rev-enues could make their balance of paymentsless vulnerable to economic swings. With bet-ter access to global markets, domestic policyreforms become important to create exportopportunities and absorb the dynamic gainsfrom trade.


56

Figure 2.8 LDC exports can grow fastwhen tariff preferences are significantLDC export growth

Note: Rankings of LDC preference margins on GSP tariffs: >10 percent = high preference; 3–10 percent = mediumpreference; <3 percent = low preference.

Source: World Bank staff calculations, based onU.N. Comtrade.

–15

–10

–5

0

5

10

15

20

25

30

Highpreference

Mediumpreference

Lowpreference

EU

Canada

JapanUnited States

(1996–99, average per year, in percent)

Figure 2.9 Opposite patterns of tariff incidence in manufactures andagricultureTrade-weighted tariffs (average 1998–99), in percent

Note: Trade-weighted tariffs, using 1997 applied tariffsand trade weights: excluding intra-EU trade.

Source: Based on IMF-WB 2001.

0

5

10

15

20

25

30

35

Manufactures

Expor

ter

high-

incom

e

Expor

ter

deve

loping

Expor

ter

deve

loping

Expor

ter

high-

incom

e

Agricultural commodities

Importer high-incomeImporter developing

Domestic policies to create export opportunitiesDeveloping countries have gone a long way to-ward removing many of the domestic obstaclesto export-led growth. Tariffs are lower every-where, the anti-export bias embedded in thedomestic trade regimes and sectoral policieshas been reduced, while more sound macro-economic policies have led to more competitiveexchange rates. However, while macroeco-nomic policy and trade policy reforms were

ambitious, the pace of agricultural reforms has been uneven both at the commodity andcountry levels (Townsend 1999; Shepherd andFarolfi 1999; Akiyama and others 2001).Moreover a number of structural impedimentshamper export diversification into manufac-tures in the poorest countries—especially inSub-Saharan Africa (Fosu and others 2001).

Deepening the reform process in two direc-tions is key to realizing the trade promise forgrowth and poverty reduction: (a) reducing


57

Effective tariffs faced by people in different in-come groups convey a sense of uneven access to

the world markets (see figure). For people in eachincome group, effective tariffs are calculated on thebasis of the trade-weighted tariffs faced by exports of their home countries. For simplicity, it is assumedthat all poor can be found in labor-intensive mer-chandise production, while the nonpoor earn theirliving across the whole array of economic activities.Thus calculations of effective tariffs on those livingon less than $2 per day are based on trade-weightedtariffs faced by countries for exports of agriculturalproducts and labor-intensive manufactures. Calcula-tions of effective tariffs on the nonpoor are based ontrade-weighted tariffs faced by countries across ex-ports of all goods. Trade-weighted tariffs are calcu-lated from using 1998 applied tariffs and tradeweights.

Effective tariffs faced by each income group arecalculated as the sum of trade-weighted tariffs facedby the exports of different countries, using asweights the share of each country’s population ineach income group (based on 1998 poverty data).Since by global standards even the relatively poor inall high-income countries have consumption greaterthan $2 per day, the whole population of these coun-tries is in the nonpoor group.

Due to their size, China and India are the twosingle countries that weigh more in these calcula-tions. The trade-weighted tariff on exports of labor-intensive products from China is 15.5 percent andfor India 15.1 percent. China accounts for 29 and 21 percent respectively of the world’s poor anddeeply poor (those living on less than $1 a day).

Box 2.8 Calculating effective tariffs faced by the poor

India represents 27 and 40 percent of poor people ineach of the two groups. The trade-weighted tariffson labor-intensive exports from China and India aremultiplied by these population shares to determinethe contribution of the two countries in the effectivetariffs faced by each of the two groups of poor. ButChina and India also account for 19 and 4 percent,respectively, of the world’s nonpoor. These popula-tion shares, along with the “all-inclusive” trade-weighted tariffs faced by China and India (estimatedat 8.3 and 8.5 percent) are used in the calculation ofeffective tariffs faced by the nonpoor.


The poor face high tariffsEffective tariff faced by income groups (in percent, 1997–98)

0

2

4

6

8

10

12

14

16

Deeply poor<$1/day

Poor $1–$2/day Nonpoor>$2/day

further tariff and non-tariff barriers to trade ina context of supportive policies that link thepoor to expanded market opportunities andcushion transitional costs for any displacedgroup; and (b) building trade capacity by up-grading “behind-the-border” institutions, rang-ing from customs and ports to telecommunica-tions and domestic transport.

Reducing tariffs and other barriers totrade can increase incomes, butadjustment costs cannot be ignoredReducing tariffs and other trade barriers willnot automatically lead to higher growth. Tradepolicy cannot substitute for a developmentprogram. However trade reform is an impor-tant component of a development strategy, anddeveloping countries, with average tariff levelsthree times that of the high-income countries,have ample scope for capturing further gainsfrom trade reform. Most analyses suggest thatunilateral reduction in barriers can produce the greatest and quickest gains. Several coun-tries have realized this and undertaken impor-tant domestic trade policy reforms—includingChile, China, and Costa Rica.

Improving integration into the world trad-ing system involves lowering trade barriersand reforming domestic institutions in waysthat may initially hurt low-income consumers,unskilled workers in sheltered industries, andpreviously shielded producers—especially sub-sistence farmers in remote areas with deficientrural infrastructure. Producers of import-com-peting commodities that receive dispropor-tionate support may suffer from lower levelsof protection, at the same time that poor con-sumers benefit from lower prices.

Even though the benefits from trade inte-gration would eventually outstrip the costs,deployment of temporary safety nets—such assupport to displaced producers and retrain-ing—would help cushion the costs of disloca-tion for specific groups, and would ensure thattrade-led growth is pro-poor (World Bank1997, box 2.9). Efforts would also be neededto cushion the consequences for affected coun-tries of the reorientation of export flows,

should the preferential market access regimesfor specific commodities be discontinued. Thiswould require increased donor support. At thesame time, policy should remove distortions,with the aim of facilitating the redeploymentof labor and released resources from the in-dustry that enjoyed support. Although labormarkets are inherently more flexible in devel-oping countries, distortions—linked, for ex-ample, to state enterprise employment—oftenobstruct labor markets and hold back the ad-justment to reforms.

Building trade capacity by upgrading“behind-the-border” institutionsIf a country’s investment climate is poor and itsinstitutions and infrastructure are weak, sim-ply changing relative price incentives throughtrade policy may do little to promote sustainedgrowth. In several cases, as for example, inHaiti (box 2.1), failure to respond to opportu-nities created by trade liberalization has beenrelated to poor macroeconomic policies thathave fed volatility and discouraged investment.Weakness of “behind-the-border” institutionscan have a similar dampening effect, as occursin transport, utilities, and communications.Improving regulation and competition in thesesectors would strengthen the export responseby reducing the cost of exporting. In agricul-ture, this is key to ensuring competitiveness in rapidly expanding markets for high-valuedcommodities where competition is stiff—suchas, for example, fruits, vegetables, meats, andcut flowers.

Effective duty drawback and indirect taxrebate mechanisms, are important to over-come the anti-export bias often embedded intrade regimes. Export finance is often a majorconstraint inhibiting exports in many low-in-come countries. Inadequacies may result fromthe overall weakness of the financial sector ormay reflect difficulties in assessing creditwor-thiness of traders. While ensuring availabilityof trade finance is a matter that needs to beleft to the private sector, any effort to expandexports and to promote increased opportuni-ties for the poor in the export sector needs


58

complementary policies to help overcomecredit bottlenecks. Appropriately managedmatching grants can be an effective instrumentto assist small firms to penetrate export mar-kets. Product standards based on interna-tional norms facilitate market linkages, andact as safety, health, quality, or environmentalsafeguards. Developing countries face a diffi-cult challenge in this area, as they need to es-tablish efficient testing, certification, and lab-oratory accreditation requirements to attainsanitary, phytosanitary, and product stan-dards. Low-income developing countries needboth technical and financial assistance to meetthis goal. Marketing of exports is a challeng-ing task for all low-income countries, because

they have to improve information on marketopportunities; overcome problems of productand country brand; and meet concerns aboutquality. Foreign partners and FDI can be help-ful in providing needed contacts and expertise.But local associations of exporters or produc-ers can also help. Cooperatives and similarventures can help improve marketing whileensuring that benefits from exports accrue tosmall poor farmers. However, transparencyand competition in these institutions is impor-tant, or poor farmers may receive lower pricesfor their outputs.

In agriculture, in particular, where the stakesfor poverty reduction are high, additional com-panion policies and institutions would be


59

Since segments of the poor may be hurt by tradeliberalization in the short run, determining the in-

cidence of the tariff structure on the poor, and de-ploying appropriately tailored safety nets is impor-tant to ensure that subsequent growth is inclusive,and secure domestic support for reform. Deploymentof safety nets raises two broad policy options: Em-ploy general social safety nets, or establish safetynets targeted to those who are harmed by the tradereform (World Bank, 2001c).

Country-wide safety nets seem more appropriatethan special safety net programs for trade-relatedproblems. Fundamentally, it is difficult to justifysafety net programs to poor people who suffer fromtrade reform and deny assistance to other poor peo-ple who suffer from unemployment from other dis-ruptions, such as technological change, or domesticdemand shifts. As the main need for the poor duringa difficult transition period is likely to be food, oneapproach is a time limited food subsidy and distribu-tion program. However, targeting a food subsidy isdifficult, and often subject to abuse, while the bene-fits may also spillover to middle and upper incomegroups. An alternative is an untargeted subsidy oninferior goods, as has been pursued in Egypt (Adams,2000).

Box 2.9 Designing appropriate safety nets to ensuretrade reforms are pro-poor

Direct income support tends to be the most effi-cient type of social safety net. But proper manage-ment of means-tested programs of support requiresimportant administrative capabilities, which poorcountries often do not possess. One approach, whichwas employed successfully in Jordan, is to initiallyprovide a money payment to a wide range of house-holds, and subsequently narrow the program to onlylow-income families. Because distinguishing the poorfrom the non-poor may be difficult, workfare pro-grams may be more generally applicable, and havebeen proven effective under certain circumstances(Ravallion, 1999), as individuals can self-identify forthese programs.

The World Bank’s Poverty Reduction StrategySourcebook outlines best practices for deploying so-cial safety nets in event of dislocation. In addition,the Bank is working with other donors through theIntegrated Framework studies to ensure that bestpractices are tailored to local capabilities and institu-tions. But there are no easy answers as liberalizationaffects the poor differently depending on country cir-cumstances. The Bank intends to further deepen itsknowledge and provide policymakers with analyticaltools needed to answer some key questions.


needed to improve the supply response to mar-ket incentives. Some of these policies demandconsiderable up-front mobilization of resources,and should be backed by donor support. Exam-ples include stepped up investment in rural in-frastructure, which is a key enabler of agricul-tural exports in developing countries. Securingsufficient supply of credit at competitive condi-tions is important to encourage private sectorinvestment into storage, transportation, andmarketing of agricultural products. Increasedinvestment in skills through education andtraining in rural areas is needed to bolster pro-ductivity in agriculture, and to enhance the abil-ity of absorbing emerging technologies—espe-cially those stemming from the biotechnologyrevolution.

But other initiatives in agriculture wouldneed to improve the regulatory and policy en-vironment. Continued trade policy reformsshould redress the still remaining anti-exportbias in developing countries’ agriculture. Re-forms of pricing policies should be stepped up,because in a number of LDC producer pricesare still compressed compared to border prices,thus limiting export incentives.

Efficient land policies and land tenure insti-tutions are also key to improving the function-ing of land markets, securing property rights to farmland, and supporting the emergence ofmore efficient farm structures. Enhancing landrights and transferability can increase a farm-er’s ability to produce both for subsistence andfor income, improve their incentives to invest,and enhance their ability to obtain credit (seealso Freeman and others 2000).

High-income countries can helpDomestic policies in developing countries havea greater chance of success if high-incomecountries realize their interest in developmentsuccess. One policy high-income countries canadopt is following the lead of the EuropeanUnion. Its “Everything but Arms” proposalgrants duty-free and quota-free access in allbut 25 lines related to arms trade.15 OtherQuad countries have also announced initia-

tives that extend existing preferential access toLDC or African countries, but they all fallshort of a full coverage.16

A number of studies have found that theexport growth gains for LDCs could be signif-icant if all Quad markets granted duty-free ac-cess to LDC (Hoekman and others 2001; Ian-chovichina and others 2001; UNCTAD 2001).The projected trade diversion and decline inother developing countries’ exports are negli-gible, since LDCs represent only a small partof world merchandise trade, and other devel-oping countries’ exports are more diversified.According to a study (Hoekman and others2001), even if all Quad members were to grantLDCs duty-free access for only tariff-peakitems, non-oil LDC exports would increase byan estimated 11 percent, while other develop-ing countries’ exports would decline only mar-ginally—by an estimated 0.1 percent.

Extending duty-free market access to allLDC exporters would also help mitigate thedrawbacks of current preferential accessschemes targeted on specific beneficiaries.These schemes often distort trade, because theydisplace low-cost producers elsewhere in thedeveloping world. The case of the EU prefer-ential regime for bananas illustrates this point(box 2.10). Moreover, preferential access tohigh-income country agricultural markets withhighly subsidized domestic prices provides apremium over world prices to the countriesreceiving the preferences. This form of “aid-through-trade” is not an efficient way of pro-viding aid because it creates dependence and is targeted to particular economic activitiesrather than to identified areas of need.

High-income countries can also provide“aid for trade.” This could include increasedgrant aid for trade policy analysis (such as inthe integrated framework program discussedin chapter 6), technical assistance on imple-mentation of standards, and aid for aspects ofdevelopment that affect the “soft infrastruc-ture” of the investment climate, such as gov-ernance. No less important is disciplining theburgeoning recourse to contingent protection.


60

Open regionalism could promote trade creation—Regional arrangements continue to proliferate,and are likely to remain an enduring feature of the trade panorama. Smaller membershipsmake it easier to negotiate the increasingly im-portant issues inherent in trade and regulatoryregimes, while small countries often can exer-cise greater influence in regional arrangements.

“Open regionalism” holds the potential tostimulate global trade and improve the effi-ciency of regional producers. But regionalarrangements can also become a vehicle forprotection, trade diversion, and unintended in-efficiency. Key conditions to benefit from ex-panded trade and investment include loweringcommon external trade barriers, stimulating

competition, reducing transaction costs, andreinforcing nondiscriminatory investment andservices policies (World Bank 2001b).17

North-South regional agreements are morelikely to improve welfare than South-Southarrangements, because they usually result inlower trade barriers with less trade diversion,and because the greater structural differencesin North-South economies produce greatergains from trade creation (World Bank 2000d).Although South-South arrangements can bemade to work, a number of regional integra-tion agreements have had negative or ambigu-ous effects on income. In particular, agree-ments between richer and poorer developingcountries are likely to generate losses for thepoorer ones when their imports are diverted


61

Bananas are almost exclusively exported by devel-oping countries to high-income countries, with

the four dominant exporters (Ecuador, Costa Rica,Colombia, and the Philippines) accounting for three-quarters of global exports. The two major importers,the United States and the EU, cover approximately60 percent of the world market, currently estimatedbetween $5 and $6 billion.

During the 1990s, bananas were a source oftrade dispute, often termed the “transatlantic bananatrade war.” The trade dispute reflects primarily EUimport policies. In 1997, 40 percent of the EU ba-nana market was supplied by domestic productionand duty-free imports from African, Caribbean, andPacific (ACP) countries, with the rest being importedfrom non-ACP banana producers (the so-called “dol-lar bananas,” primarily from Latin America), whowere subject to quotas and tariffs.

By restricting imports from non-ACP exporters,the EU import regime causes its domestic bananaprices to be much higher than other markets—onaverage, about two-thirds higher than in the UnitedStates. Furthermore, the regime de facto guaranteeshigh prices to EU and ACP producers, which hasbeen the political justification for such intervention.

Box 2.10 The banana dispute: good intentions . . .bad policies?

Apart from the income transfer from EU con-sumers to ACP and EU banana producers, a numberof other effects are in place. High prices lower EUbanana demand. If EU per capita banana consump-tion was the same as in the United States, total ba-nana consumption in the EU would increase by morethan 10 percent. This additional demand would raiseworld prices, while lower-cost banana producerswould export more. The current quota/tariff combina-tion is an inefficient and expensive way to provide aid.Borell (1999), for example, reported that for everydollar that ACP producers receive as aid throughhigher banana prices, EU consumers pay $5.30.

Ecuador, Guatemala, Mexico, and the UnitedStates brought a complaint before the WTO in 1997.The panel ruled against the EU banana importregime. The EU has recently reached an agreementwith the United States and Ecuador that allows moreimport licenses, based on historical allocation, until2006 when ACP preferences will be retained onlythrough tariff protection.


toward the richer members whose firms arenot internationally competitive.

Reflecting large differences in costs betweenhigh-income and developing countries, North-South arrangements hold also the greatestpromise for trade creation in agricultural prod-ucts and labor-intensive manufactures. By con-trast, a regional approach—even on a South-South basis—seems promising in the regulationof services, when combined with a nondiscrim-inatory approach to liberalization (Subraman-ian and others 2000). Possible areas of cooper-ation—by pooling resources and expertise andby upgrading and harmonizing standards—would include domestic regulation in sectorssuch as financial services, telecommunications,power, and transport.

—but multilateral policies hold the key to a sustained improvement in market access—The next trade round has the potential to im-prove access for developing countries’ mer-chandise exports to high-income markets, par-ticularly in agriculture and labor-intensivemanufactures, where the stakes for the reduc-tion of poverty are high. The Quad countries—the United States, EU, Japan, and Canada—would serve their interest in expanding tradeand development well if they put serious con-cessions on the table in these areas.

Offering to link “aid for trade” to progressin reforms in developing countries would alsoserve the interest of development well. Thetrade round should also provide more interna-tional aid and technical assistance in key sec-tors, such as agriculture, where the poor coun-tries need to build trade capacity.

Developing countries too (especially themiddle-income countries) should join multilat-eral efforts to further liberalize merchandisetrade if they want to maximize the benefitsfrom freer global markets. Because merchan-dise trade among developing countries is set toaccelerate further, outpacing the growth ofworld trade, reducing trade barriers in devel-oping countries holds a key promise in in-creasing the development impact of trade.

An agenda of multilateral trade policy op-tions to make merchandise trade work for thepoor would need to respond to three mainchallenges.

—reducing distortions in agricultural trade—Removal of distortions to agricultural trade re-quires coordinated efforts in different direc-tions. As a first priority, MFN-applied tariffsshould be reduced, on average by half in high-income countries, and by one-third in develop-ing countries. Agricultural tariff peaks in high-income countries should be phased out. Tariffsshould also become more transparent by limit-ing the use of specific and compound tariffs.The EU and Japan should take the lead becausein these countries tariff peaks on agriculturalimports and specific tariffs are more prevalent.The size of tariff quotas should be increasedand the “in-quota” tariff rates should be elimi-nated to improve the very low tariff quota fillrates, and the over-quota tariffs should be con-siderably cut to expand market access. Re-moval of tariff peaks in the Quad will help re-duce the tariff escalation that hampers trade in more processed agricultural products andhigher value-added manufactures. But multilat-eral surveillance should also be enhanced, toprogressively eliminate tariff escalation in bothhigh-income and developing countries.

As a second step, agricultural tariffs shouldbe bound to levels close to MFN-applied rates,particularly in developing countries wherebound rates are very high. Binding of tariffrates will improve the predictability of theglobal tariff system. High bound tariffs createample scope for tariff protection to rise withoutinfringing WTO commitments. Investors’ riskscould thus increase, limiting the benefits frommore open trade.

The third step would require a much bolderoverhaul of the system of support provided byhigh-income countries to agriculture. Morebinding disciplines should be introduced onproduction-affecting support, also encompass-ing subsidies that are currently exempt fromURAA reduction commitments (“Blue Box,”


62

“Green Box,” and “de minimis” measures).As a benchmark, the producer support esti-mate in high-income (OECD-member) coun-tries should be cut on average by half as ashare of gross farm receipts. This should becoupled with an accelerated phaseout of ex-port subsidies—especially in the EU, wheretheir usage continues to be widespread. Tolevel the playing field, officially supported ex-port credits—which are more prevalent in theUnited States—should also be brought undermultilateral disciplines.

—expanding access in labor-intensivemanufactures—The phaseout of the remaining quantitativerestrictions in textiles and clothing should bestepped up, ahead of the ATC expiration in2005, because the removal of quotas has been“back-loaded.” But this will not be enough toimprove market access for developing countries.Applied tariffs in textiles and clothing remainexcessively high and should be cut on averageby half in high-income countries, and by one-third in developing countries. Tariff peaksshould be phased out—especially in the UnitedStates and Canada where they are prevalent.Tariffs on footwear should be reduced across allQuad countries.

To build confidence that trade in textilesand clothing will be freed up in the post-ATCregime, the increasing trend in the use of con-tingent protection (especially in textiles)should be halted. Reducing the wide discrep-ancies between bound and applied tariffswould help build trust, because these discrep-ancies provide the scope for using tariffs assafeguards or for balance-of-payments reasons(Laird forthcoming). And multilateral surveil-lance should be enhanced, to eliminate tariffescalation on labor-intensive manufactures inboth high-income and developing countries.

—and eliminating tariff peaks andescalation on all productsEliminating tariff peaks that now discriminateagainst labor-intensive products would add con-siderably to the export potential of developing

countries. Similarly, reducing escalation in tar-iff codes in the developed and developingcountries alike will produce more efficient, usu-ally pro-poor growth.

Notes1. Moreover, in Sub-Saharan Africa agricultural

exports are concentrated in five major crops (cocoa,coffee, cotton, sugar, and tobacco), which, in 1990–95,accounted for an estimated 62 percent of total agri-cultural exports. Export concentration has hardlychanged over time, since these same five crops repre-sented 63 percent of total agricultural exports in the1970s (Ingco and others 2001).

2. Export processing zones (EPZs) were often usedextensively—for example, in Tunisia, Bangladesh, andMauritius—to overcome the anti-export bias of do-mestic trade policy regimes and support export-ori-ented T&C industries. But their effectiveness in pro-moting spillovers to the rest of the economy has beenquestioned. By creating economic enclaves, EPZs oftenimpair backward linkages with the rest of the econ-omy, as the supply chain of exporting firms may relymore on imported, duty-free, intermediate goods thanon local producers. Such impediments to local produc-tion linkages could be seen, for example, in the case ofBangladesh (World Bank 1999a).

3. The data on income distribution for the countriesincluded in the sample are from household surveys re-ported in Deininger and Squire 1996, but in some coun-tries household surveys measure expenditures, while inothers they measure income. When household surveysreport expenditure (47 out of 129 observations), con-sumption growth of the poorest 20 percent of the pop-ulation is compared to growth in average per capitaconsumption—otherwise it is compared to growth in percapita GDP. Time periods span irregular intervals foreach country—depending on the availability of house-hold surveys of acceptable quality. To smooth out short-run fluctuations in income or expenditure, time periodsspan at least 3 years, with an average duration of 6.8years. The geographical breakdown of the sample is: EastAsia—31; Latin America and the Caribbean—50; Mid-dle East and North Africa and Europe and CentralAsia—15; South Asia—18; Sub-Saharan Africa—15.

4. In developing countries, applied tariffs are, onaverage, about three times higher than in industrialcountries, partly because developing countries rely moreon trade-related taxes to raise revenue. In developingcountries, the coverage of nontariff barriers, includingstate trading monopolies, has also been considerablyreduced (Martin forthcoming).

5. Tariff quotas allow a lower-tier, or “in-quota,”rate to be set at low levels, with the second-tier, or


63

“over-quota,” rate set at a higher level—close to thelevel of protection enjoyed before the URAA. The dis-tribution of TRQs among countries and product groupsreflects the incidence of tariffication. More than one-quarter of all tariff quotas apply to fruits and vegetables,with the next four more important groups being meat,cereals, dairy products, and oilseeds (WTO 2001).

6. Support to agricultural producers refers to theproducer support estimate (PSE) computed by theOECD. The PSE is an indicator of the annual monetaryvalue of gross transfers from consumers and taxpayersto farmers, measured at the farmgate level, arising frompolicy measures that support agriculture. These trans-fers include both government subsidies to agriculture(taxpayer transfers) and effective market price supportthrough trade policies to restrict imports (transfers fromconsumers). A wider indicator of support, calculated bythe OECD, is the total support estimate (TSE). In addi-tion to transfers included in the PSE, the TSE also in-cludes an estimate of general services support providedto agriculture—for example, public research and devel-opment, agricultural schools, inspection services, andinfrastructure.

7. To be sure, the global impact of subsidy reductionin OECD countries on agricultural greenhouse gas emis-sions is uncertain, as production could increase in coun-tries with higher emission intensity per unit of output.

8. In the EU and Japan, production-related total ag-gregate measurement of support (AMS) and “blue box”measures still account for the majority of support (83percent in the EU and 53 percent in Japan), while in theUnited States support is now provided mainly under“green box” measures (84 percent).

9. Domestic support to agriculture is also high out-side the Quad. For example, in the Republic of Korea, atan estimated $17.3 billion on average during 1998–2000, the PSE covered 66 percent of gross farm receipts,and was more than four times higher than in Canada(OECD 2001b).

10. For example, in 1990 only about 58 percent ofEU imports were under quota restrictions, which leftmuch room to defer the “integration” of restrainedproducts.

11. These high levels of protection also have a largecost for high-income countries’ consumers. Accordingto a study, in 1997, quotas and tariffs on textiles andclothing cost to EU consumers about $10 billion, whilethe loss of production efficiency due to the sheltering ofdomestic production will have cost another $10 billion(Francois, Glismann, and Spinanger 2000). Hence, eachjob saved through the delayed freeing up of the EU tex-tiles and clothing market costs an estimated $24,000per year in textiles and $35,000 per year in clothing.

12. Other preferential schemes offer better access tosome developing countries, such as those received by

African, Caribbean, and Pacific, southern Mediter-ranean and Eastern European countries in the Euro-pean Union; and those received by Mexico, Israel, An-dean countries, and the Caribbean Community in theUnited States.

13. LDC exports to the United States show an op-posite pattern. However, high-preference exports rep-resent less than 1 percent of LDC exports to the UnitedStates, which suggests that the outcome could be sensi-tive also to other barriers—such as standards, rules oforigin, antidumping, safeguards, distribution, and soforth.

14. Trade-weighted applied tariffs may to some ex-tent underestimate the degree of tariff protection, sincehighly restrictive tariffs, which are likely to reducetrade flows, receive small weights in the constructionof the index.

15. However, for three sensitive agricultural prod-ucts—bananas, rice, and sugar—the liberalization willbe phased in during a rather lengthy transition period,to be completed by 2009 for rice and sugar, and 2006for bananas.

16. Japan’s “99 percent Initiative on Industrial Tar-iffs” does not cover agricultural products where tariffbarriers are particularly high. The U.S. “African Growthand Opportunity Pact” that grants duty-free and quota-free access to the United States does not include sensitiveagricultural products (for which there are tariff quotas),nor apparel and clothing, which have their own prefer-ential regime—including quotas and relatively restrictiverules of origin.

17. For example, Harrison, Rutherford, and Tarr(1997) estimate that Chile was able to profit from itsfree trade agreement with MERCOSUR due to the factthat it lowered its external uniform tariff from 11 to 6 percent.

ReferencesAdams, R. 2000. “Self-targeted Subsidies: The Political

and Distributional Impact of the Egyptian FoodSubsidy System.” Economic Development and Cul-tural Change, 49(1), 115–36.

Akiyama, T., J. Baffes, D. Larson, and P. Varangis. 2001.Commodity Market Reforms: Lessons from TwoDecades. Washington, D.C.

Blackhurst, R., A. Enders, and J. Francois. 1996. “TheUruguay Round and Market Access: Opportuni-ties and Challenges for Developing Countries.” InThe Uruguay Round and the Developing Coun-tries W. Martin and L. A. Winters, editors. NewYork: Cambridge University Press.

Borell, B. 1999. “Bananas: Straightening Out Bent Ideason Trade as Aid.” Presented in the WTO Confer-ence on Agriculture and the New Trade Agenda inthe WTO 2000 Negotiations. October 1–2. Geneva.


64

Burfisher, M. 2001. “The Road Ahead: Agricultural Pol-icy Reform in the WTO: Summary Report.” Agri-culture Economic Report No. 797, United StatesDepartment of Agriculture. Washington, D.C.

Currie, J., and A. Harrison. 1997. “Trade Reform andLabor Market Adjustment in Morocco.” Journalof Labor Economics 15(3): S44–S72.

Datt, G., and M. Ravallion. 1998. “Farm Productivityand Rural Poverty in India.” Journal of Develop-ment Studies (34): 62–58.

Davis, D.R. 1996. “Trade Liberalization and IncomeDistribution.” NBER Working Paper 5693. August.

Deininger, K., and L. Squire 1996. “A New Data SetMeasuring Income Inequality.” The World BankEconomic Review (10): 565–91.

Diakosavvas, D. 2001. “The Uruguay Round Agree-ment on Agriculture in Practice: How Open areOECD Markets?” Presented at the World BankConference on Leveraging Trade, Global MarketIntegration, and the New WTO Negotiations forDevelopment. July 23–24. Washington, D.C.

Dollar, David. Forthcoming. “Post-1980 Globalizers.”In “Globalization” Policy Research Report. WorldBank, Washington, D.C.

Fosu, A. K., S. M. Nsouli, and A. Varoudakis. 2001.Policies to Promote Competitiveness in Manufac-turing in Sub-Saharan Africa. Development CentreSeminars with the International Monetary Fund,and the African Economic Research Consortium.OECD, Paris.

Francois, J., H. Glisman, and D. Spinanger. 2000. “TheCost of EU Trade Protection in Textiles andClothing.” Working Paper No 997, Kiel Institutefor World Economics, Kiel, Germany. August.

Freeman, F., J. Melanie, I. Roberts, D. Vanzetti, A. Tieluand B. Beutre, 2000. “The Impact of AgriculturalTrade Liberalization on Developing Countries.”ABARE Research Report 2000.6. Canberra.

Gaiha, R. 1993. “Design of Poverty Alleviation inRural Areas.” United Nations Food and Agricul-ture Organization, Rome.

Harrison, G. W., T. F. Rutherford, and D. G. Tarr. 1997.“Trade Policy Options for Chile: A QuantitativeEvaluation.” Policy and Research Working PaperNo 1783. World Bank, Washington D.C. June.

Hoekman, B., F. Ng, and M. Olarreaga. 2001. “TariffPeaks in the Quad and Least-Developed CountryExports.” February. World Bank, Washington,D.C. Processed.

IMF (International Monetary Fund)–World Bank.2001. “Market Access for Developing CountriesExports.” Joint Paper. April, Washington, D.C.

Ianchovichina, E., A. Mattoo, and M. Olarreaga. 2001.“Unrestricted Market Access For Sub-SaharanAfrica: How much Is It worth and Who Pays?”World Bank, Washington, D.C. February. Processed.

Ingco, M., and L.A. Winters, (eds). 2001. AgriculturalTrade Liberalisation in a New Trade Round. Dis-cussion Paper No. 418. The World Bank, Septem-ber, Washington, D.C.

Ingco, M., T. Kandiero, and J. A. Mistiaen. 2001. “Sub-Saharan Africa and the New WTO Trade Negoti-ations in Agriculture: Economic Analyses of Inter-ests and Options.” Presented at the World BankConference on “Leveraging Trade, Global Marketintegration, and the New WTO Negotiations forDevelopment.” Washington, D. C. July 23–24.

ITCB (International Textiles and Clothing Bureau).1999. “Agreement on Textiles and Clothing: Eval-uation of Implementation.” August. Geneva.

Kanaan, O. 2000. “Tanzania’s Experience with TradeLiberalization.” Finance & Development (37) June:30–33.

Kathuria, S., W. Martin, and A. Bhardwaj. 2001. “Im-plications of MFA Abolition for South AsianCountries.” World Bank, Washington, D.C. April.Processed.

Khan, M. H. 2000. “Rural Poverty in DevelopingCountries.” Finance & Development December.International Monetary Fund, Washington, D.C.

Laird, S. Forthcoming. “Market Access For Merchan-dise: How Large Are the Barriers?” In “Trade Pol-icy for Developing Countries in a Global Economy:A Handbook.” Washington, D.C.: World Bank.

Maier, Leo, and M. Shobayashi. 2001. “Multifunc-tionality: Towards an Analytical Framework.”Summary and Conclusions. April, Paris.

Martin, W. Forthcoming. “Trade Policies, DevelopingCountries, and Globalization.” In “Globaliza-tion” Policy Research Report. World Bank, Wash-ington, D.C.

Nogues, J. J. 2000. “El Sistema Multilateral de Co-mercio y el Desbalance de la Rueda Uruguay.”December. Buenos Aires.

OECD 1999a. “Post–Uruguay Round Tariff Regimes:Achievements and Outlook.” Paris.

——— 1999b. “National Climate Policies and theKyoto Protocol.” Paris

——— 2001a. “The Uruguay Round Agreement onAgriculture: An Evaluation of Its Implementationin OECD Countries.” Paris.

——— 2001b. “Agricultural Policies in OECD Coun-tries: Monitoring and Evaluation 2001.” Com-mittee for Agriculture. May. Paris.

——— 2001c. “Trade and Development Issues in Non-OECD Countries.” Trade Committee. April. Paris.

——— 2001d. “Improving the Environmental Perfor-mance of Agriculture: Policy Options and MarketApproaches.” Paris.

Oxfam International. 2001. “Rigged Trade and NotMuch Aid: How Rich Countries Help to Keep theLeast-Developed Countries Poor.” May. London.


65

Ravallion, M. 1999. “Protecting the Poor in Crisis.”PREM Note no. 12, The World Bank. Washing-ton, D.C.

Revenga, A. 1995. “Employment and Wage Effects of Trade Liberalization: The Case of MexicanManufacturing.” Policy Research Working Paper1524. World Bank, Washington, D.C.

Sheales, T., S. Gordon, A. Hafi, and C. Toyne. 1999.“Sugar: International Policies Affecting MarketExpansion.” ABARE Research Report 99.14.Canberra.

Sheperd, A. W., and S. Farolfi. 1999. “Export Crop Lib-eralization in Africa: A Review.” Food and Agri-culture Organization Agricultural Services BulletinNo. 135. Rome.

Subramanian, A., E. Gelbard, and others. 2000.“Trade and Trade Policies in Eastern and South-ern Africa.” IMF Occasional Paper No. 196. Au-gust. Washington, D.C.

Townsend, R. 1999. “Agricultural Incentives in Sub-Saharan Africa.” World Bank Technical PaperNo. 444. August. Washington, D.C.

Tyers, R., and Anderson, K. 1992. Disarray in WorldFood Markets: A Quantitative Assessment. Cam-bridge University Press, Cambridge.

UNCTAD (United Nations Conference on Trade andDevelopment). 2001. “Duty and Quota Free Mar-ket Access for LDCs: An Analysis of Quad Initia-tives.” London and Geneva.

Winters, L. A. 1990. “The So-Called Non-EconomicObjectives of Agricultural Support.” OECD Eco-nomic Studies No. 13: 238–66.

Winters, L. A. 1994. “The LDC Perspective,” in K. A.Ingersent, A. J. Rayner, and R. C. Hine (eds.). Agri-culture in the Uruguay Round, St. Martin’s Press,New York, 157–181.

———. 2000. “Trade and Poverty: Is there a Connec-tion?” In “Trade, Income Disparity and Poverty,”Geneva: World Trade Organization.

Wood, A. 1997. “Openness and Wage Inequality inDeveloping Countries: The Latin American Chal-lenge to East Asian Conventional Wisdom.” TheWorld Bank Economic Review (11): 33–57.

World Bank. 1997. Global Economic Prospects and theDeveloping Countries 1997. Washington, D.C.

———. 1999a. “Bangladesh Trade Liberalization: ItsPace and Impacts.” South Asia Region. Novem-ber. Washington, D.C.

———. 1999b. “Bangladesh. From Counting the Poorto Making the Poor Count.” Washington, D.C.

———. 2000a. World Development Report 2000/2001.Washington, D.C.

———. 2000b. “Vietnam Development Report 2000:Attacking Poverty.” Washington, D.C.

———. 2000c. Global Economic Prospects and theDeveloping Countries 2001. Washington, D.C.

———. 2000d. Trade Blocs. Washington, D.C.———. 2001a. “Uganda Poverty Status Report 2001.”

February. Washington, D.C. Draft.———. 2001b. “Leveraging Trade for Development.”

Development Committee. April. Washington, D.C.World Bank. 2001c. “Trade Policy and Poverty,” in

Poverty Reduction Strategy Sourcebook. Wash-ington, D.C.

World Bank. forthcoming. Agriculture and the GlobalTrading Systems, (draft) M. Ingco (ed), May 2001,Washington, D.C.

WTO (World Trade Organization). 2001. “Market Ac-cess: Unfinished Business.” Special Studies. May.Geneva.


66

Date post:	23-Apr-2020
Category:	Documents
Upload:	others
View:	2 times
Download:	0 times

Market Access and the World’s Poordocuments.worldbank.org/curated/en/285571468337817024/... ·...

Documents