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Trade-led growth, the WTO and the Developing Countries

by Basudeb Guha-Khasnobis

During successive rounds of the GATT and, since 1995, the WTO regime, the world community has been trying to move towards freer trade. The WTO regime has been turbulent so far, with the developing countries voicing their concerns about the development-credibility of the new regime. Such differences notwithstanding, the potential role of international trade in rescuing nations out of poverty traps and helping them embark on a path of positive economic growth are remains well grounded in economic theory. The broad objec- tive of the recent UNU-WIDER project titled 'The Impact of the WTO Regime on Developing Countries' was to evaluate, as of the present, the prospects as well as the challenges of such trade-led growth.

Unilateral Preferential Trade Arrangements 

A particular emphasis of the project was to assess the extent to which the actual flow of trade is affected by some of the important trade related policies originating in both the developed as well as developing countries. The universal adoption of the most favoured nation (MFN) principle remains the ultimate goal of the ongoing process of trade negotiations, but its all-inclusive character makes it a time consuming, long-term possibility at best. Preferential trading arrangements (PTA) are crucial as quick and stop-gap solutions. At the end of the day, it is through PTAs that the rich and poor countries interact in more substantive ways. PTAs have proliferated in recent years, a phenomenon which is often cited as an indication that the WTO is a failing process. Without trying to decimate the gravity of some obvious problems with the WTO, one may differ with that interpretation and assert instead that the WTO has been an important catalyst in triggering PTAs and enhancing trade flows between countries. Examination of a number of preferential trading arrangements initiated by the US, the EU and Japan revealed significant incremental exports resulting from these initiatives for several developing and least developed countries. At the same time, the projections indicated that LDC exports would have been almost US$7 billion, or 148 per cent, higher in 2000 than was observed, had the US levied no tariffs on imports from LDCs. The remaining EU barriers, on the other hand, are relatively few and their elimination would lead to a 2.6 per cent expansion in imports from LDC countries. The removal of existing barriers in Japan would increase imports from LDCs by approximately 69 per cent. Thus, there is still a considerable amount of scope for unilateral trade liberalization, especially by the US, which can boost LDC exports quite significantly.

Liberalization of Agriculture: The Role of OECD Domestic Support Measures

The role of OECD domestic support measures is crucial in the debate on the liberalization of trade in agriculture. The welfare impacts, of changes in both the level as well as mix of domestic support measures in the OECD, on developing countries depend on whether they are net exporters or net importers of protected products as well as on the bilateral trade patterns. Trade specialization indexes calculated over the past three decades for programme crops (the grains and oilseeds which receive a large share of the domestic support in OECD countries), bounded between +1 and -1, describe the export (positive sign) and import (negative sign) orientation of each region. With few exceptions, these show substantial declines over this period, implying that many poorer countries have turned into net importers of these products over the period under investigation. As a result, it was found that an across-the-board, 50 per cent cut in all domestic support for OECD agriculture leads to welfare losses for most of the developing regions, as well as for the combined total group of developing countries. The 50 per cent cut in domestic support also results in large declines in farm incomes in Europe, and, to a lesser degree, North America, making such a reform package an unlikely political event. An alternative approach to reforming agricultural policies in the OECD would be to focus on broad-based reductions in market price support. In the EU for instance, domestic support has increasingly replaced border measures. According to the modeling results from the project, a shift from market price support to land-based payments could generate a 'win-win' outcome whereby farm incomes are maintained and world price distortions are reduced.

Tariff Escalation

During successive rounds of the GATT, and especially after the formation of the WTO, average tariff rates have come down in almost every country. However, average tariff for a particular sector is not a reliable indicator of the degree of 'openness' of that sector. Among other limitations, it conceals information about the degree of escalation of tariff rates between products of that sector which go through different levels of processing. Thus, even though available trade statistics indicate that average tariff rates are mostly declining in all countries, a closer examination reveals the continuation, often deepening, of tariff escalation. Trade liberalization (tariff reduction, to be precise) is heavily dependent on political and lobbying pressures within the domestic economy. An examination of the implications of tariff escalation on factor rewards, especially, relative wages, in a stylized economy showed that skilled labour and capital owners are likely to gain from it. It seems reasonable to imagine that these two groups in any country have greater lobbying power, relative to unskilled labour. Therefore, one of the reasons why governments of developed countries feel compelled to preserve such differential rates of protection between stages of production is lobbying by skilled labour and capi- tal owners. If skilled labour groups are an equally influential lobby in developing countries, our theoretical model predicts that liberalization of the service sector in these countries may be slow and difficult. Thus, an important implication of the analysis is that lobbying by selected groups in developed countries may divert attention away from the fact that the removal of tariff escalation is a 'win-win' strategy. It can help promote processed exports from developing countries, benefit unskilled workers in the North and simultaneously, generate support for liberalization of the service sector in the South. All three issues are central in trade debates at the present time. 

Basudeb Guta-Ktasnobis is director of the WIDER project The Impact of the WTO Agreement on Low Income Countries, and editor of the forthcoming book The WTO, Developing Countries and the Doha Development Agenda', with Palgrave Macmillan, 2004.