7 Trade with Developing Countries Flashcards
How can trade policy help development of poor countries?
Common development policy key to european integration:
- Aid and technical assistance
- Trade
Common trade policy:
- Preferential or reduction of import restrictions
- Less strict measures on unfair trade practices
- Trade facilitation and changing trade-related rules
E.g. Cotonou Agreement - EU and ACP countries
- Negotiating trade agreements with ASEAN
What is generalised system of preferences?
Preferential tariff system with some countries
- Formal system of exemption from more general rules of the WTO
Under WTO, most favoured nation principle:
- Have to treat imports of all other WTO members no worse than they treat imports of their most favoured trading partner
- Means same tariff for all members
GSP allows lower tariffs for the least developed countries without lowering tariffs for rich countries
What are the advantages of GSP?
- Export productivity effects (heterogenous firms)
- Future expected profit - investments in R&D, tech, IT
- Access market of developed countries, where there is love for quality - need to improve quality of goods
- Learning from foreign competitiors
Evidence from Mercosur:
- Brazil tariffs for argentinean products fell from average of 30% in 1991 to 0 in 1995
- Exports to Brazil quadrupled due to reduction in tariffs: industries with bigger reductions more likely to: enter the export market, upgrade their technology, increase skill intensity
- Economies of scale - EU instead of small local markets
- Diversification of export products and markets
- Skilled upgrading in non exporting industries - due to spillover
- Infant industry argument - emerging industries low EofS to compete with firms from other countries and so must be protected (be careful with tihs one - indsutry should have potential comparative advantage)
What are some arguments against GSP?
- Trade diversion - replaces more efficient suppliers
- Inefficient - most EU tariffs low, margin of benefit small
- Weakens GATT and WTO - preference recipients concerned about losing preferences rather than global freer trade; WTO accepts preferntial treatment of DCs in principle
- Political motivation - why some countries and not others
How do you graph the generalised system of preferences?
on page 2
EU market faces two supply sources - GSP and the rest of the world
- EU initially non preferential tariff t against both sources. The EU then offers tariff free access to GSP supplies:
Before GSP:
- EU consumers pay at P* and consume Q* - imported exclusively from the rest of the world
Tax revenues are A + B + C
Initially effect is that GSP supply shifts from SGSP+T to SGSP
- EU consumers still pay price P* and consumer Q*
- GSP countries export to EU - q1 - creates trade diversion.
- Rest of the world reduces imports to Q* to q1
- EU taxpayers lose A and B
- GSP countries gain PS of A
- Global loss of B
The graph of today shows that firm produces at s1 where MC=pw
- Pw < average costs so losses and shuts down
- Tariff increases price to Pw+t, allows industry to produce at s2 and survive - net loss in welfare b + d
The graph of future shows average cost curve falls through leaning to AC1 -> firm can produce quantity S3 at the price pw without tariff protection and earn producer surplus of e
What is the history of GSP
Started 1971 - voluntary agreement with developing countries to promote exports
Variants:
- Standard - partial/entire removal of tariffs on two thirds of products
- GSP+ - full removal for countries implementing international conventions relatign to human and labour rights, environmental and good performance
- Everything but arms - duty free access to all products except arms and ammunitions
About 5.5% EU total imports from Generalised System of Preferences (2013)
- About 93bn euro imports in the EU received GSP preferences (74 standard, 4.5 GSP+, 14bn EBA)
Focus on 88 poor countries without other preferntial trade agreements:
- Included Algeria, Egypt, Morocco
- Excluded high/MIC during most recent three years
What is product graduation
Some developing countries have low per capita income but very competitive export secotrs
- Countries lost GSP advantages for a product if it had more than 15% of EU GSP imports of that product
What are the percentage of products with GSP treatment?
Most raw materials and tropical products get free entry without GSP
About 14% of products benefit from GSP, utilisation rate only 55% due to:
- Administrative requirements
- Rules of Origin - no GSP treatment if a significant percentage of the components is imported (unless EU)
Only 8% of DC products sold to EU got 0 GSP or reduced tariff treatment
What is the relationship between GSP and the UK post brexit - what are the frameworks
Follow previous EU schemes:
- Least developed countries framework: for countries UN classifies as LDCD - imports from them have quota free access and nil rates of import duty on all goods other than arms and ammunition
General frameowrk: countries WB classifies and low income/lower middle income - oimports reduced rates of import duty
Enhanced framework:
- Countries classified as low income and lower middle income countries and economically vulnerable due to lack of export diversification and integration with international trading system
- Must implement convention relation to human and labour rights, the environment and good governance. Imports from these countries have 0 rate of improt duty on certain goods
What is some empirical evidence for the effects of generalized system of preferences
Increase in eligible products by about 4% - 5.5bn euros
- Displaced EU production by 2.1bn euros
Displaced imports from rest of world by 3.4bn euros
Significant benfits to firms in developing and emerging coutnries - especially China in past - PS increased about 10% - helped industrialisation/DC development
Hers and Wagner 2011:
- GSP fosters developing country exports in short run, hampers in long run
- GSP granting coutnries able to promote own exports initially, while in long run exports decrease
Person and Wilhemsson - EU non reciprocal trade preferences for developing countries on export diversification - positie effects for general GSP and GSP+
