The effectiveness of trade preference schemes that UNCTAD negotiated in the 1970s to spur the development of less-economically developed countries has declined, according to an UNCTAD report.
The Trade Preferences Outlook 2024 report suggests cross-border FDI collaboration as one of the instruments that could aid developing countries instead, in light of a significant rise in non-tariff barriers to trade.
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“The question becomes of whether these schemes were utilised for a development that is stable and inclusive, and of course, adheres to the principles of sustainable development? [They were] not,” Mia Mikic, the former director of the UN Economic and Social Commission for Asia and the Pacific Trade, Investment and Innovation Division, said at an online dialogue concerning the report and its findings on Asia and the Pacific.
One of these schemes was the generalised system of preferences (GSP), where developed countries would give developing countries preferential trade conditions. The US and the EU, for example, gave developing countries low or no-tariff schemes, allowing their exports to be more competitive on the global market.
Growth opportunities in Bangladesh
Muhammad Navid Safiullah, Bangladesh’s Foreign Trade Institute CEO, said on the call that these sorts of trade preference schemes had helped Bangladesh grow its economy. He added that 70% of the country’s exports are done under duty-free quota-free market access rules.
Given Bangladesh’s economic progress, it would soon “graduate” to developing nation status and would not have access to the same sort of non-reciprocal trade preferences, meaning its “export sector will be the most affected one.”
He said an increase in free trade agreements (FTAs) with destinations like the EU, UK and US could help Bangladesh maintain its competitiveness. The country has completed 31 FTA feasibility studies and is set to start its economic partnership agreement with Japan soon. “We will soon begin negotiations with Singapore and South Korea as well,” Safiullah added.
Non-tariff measures affecting LDC competitiveness
Pritam Banerjee, the head of the Centre of WTO Studies, which is part of India’s Institute of Foreign Trade, had a more cautious opinion of FTAs and how they have or have not benefitted developing countries.
“FTAs have actually led to relative preference erosion because […] increasingly countries give FTA preferential rates and so it means that GSP rates are now competing with whatever preferential rates have extended across the board,” he explained.
He also highlighted how complex rules of origin can prevent the integration of global value chains and increase the cost of trade, particularly for least-developed countries’ (LDC) exporters. These regulations, which determine where a product is sourced, have been on the rise as countries and regional blocs seek to increase transparency across supply chains.
However, they have been controversial in the past, as they can have damaging economic effects on countries that do not have the necessary data-collection infrastructure. The implementation of the EU’s Deforestation Regulation, for example, was delayed for a year after backlash from low and middle-income countries.
Banerjee also flagged a piece of US legislation that could have major implications for exporters in LDCs called the Axing Nonmarket Tariff Evasion Act. He explained it was significant because it “upends the standard operating procedure of rules of origin, which was based on either some kind of transformation of the product or value addition”.
The legislation makes it so that if a product is made in a “facility that is either owned or controlled by a country that is seen to be inimical to US economic interests, then that particular product will not qualify for any trade agreement benefits”.
He worried that this “proliferation of standards which do not adhere to the global standard” will make it harder for LDCs to compete, particularly as major economies pursue expansive industrial policies.
On the topic of growing sustainability requirements in FTAs for LDCs, he cautioned colleagues to “be careful what you wish for, because some of those very disciplines […] might mitigate against investment [and] increase costs to a point that you cease to be competitive”.
Given this trade environment, Banerjee called on developed countries to help the investment promotion efforts of developing countries. He highlighted that smaller investment promotion agencies (IPAs) may not have the resources to pursue the “complicated and expensive exercise” of trade promotion. In this sense, there is space for the trade promotion bodies of developing countries “which are very good at doing this” to “assist their counterparts in LDCs and developing countries”.
Importance of capacity building
Lastly, Mia Mikic, a research associate at the University of Waikato, discussed how insufficient capacity building in developing countries had prevented trade preference schemes from reaching their full potential.
“You can remove all the barriers, but if you don’t have sustained capacity to deliver the same quality […] then of course you won’t be able to move your development along on the spectrum,” she explained.
She highlighted the importance of aligning trade preference schemes on the import and export side. “If you have preferences on the export side, but you don’t have equivalent preferences for importers that have to import various parts and components, then you have no ability to be price competitive.”
Mikic explained that, looking forward, countries should not think just about increasing trade but rather about the quality of that trade to make it more diversified, inclusive and sustainable. Part of this effort, she added, is looking at which industries employ the most people in developing and poor countries.
On average, only around 11% of these populations work in the industrial sector, which shows the inadequacy of basing “progress only on that small sector and doing nothing in the other ones”. She added that it was important to highlight how there has been “high […] production concentration in terms of actually capturing the benefits of trade that have not been spread across the economy in all of these countries”.
Conclusion
The outlook report recommended that countries expand their cooperation methods beyond tariff schemes. A few of these recommendations included increasing non-tariff measures, providing a GSP for the services industry, increasing FDI, creating preferential transfer of technology in favour of LDCs and increasing development cooperation.
