Pathways from Preferential Trade

The Politics of Trade Adjustment in Africa, the Caribbean and Pacific

T. Heron

• Publisher: Palgrave Macmillan
• Year: 2013
• ISBN:
  9781137307927
• Topic: Política y relaciones internacionales
• Subtopic: Comercio y aranceles

Tony Heron examines recent global policy responses to the erosion of non-reciprocal tariff and quota preferences caused trade liberalizing by focusing on a sample of small, middle income countries which have historically enjoyed favourable access to OECD markets.

1

Introduction

As the 21st century dawns, relations between the EU and the ACP countries should be put on a new footing to take account not only of changed political and economic conditions for development but also of changed attitudes in Europe. The colonial and post-colonial periods are behind us and a more politically open international environment enables us to lay down the responsibilities of each partner less ambiguously.

European Commission, November 1996.

We reaffirm that provisions for special and differential treatment are an integral part of the WTO Agreements. We note the concerns expressed regarding their operation in addressing specific constraints faced by developing countries, particularly least-developed countries. ... We therefore agree that all special and differential treatment provisions shall be reviewed with a view to strengthening them and making them more precise, effective and operational.

Doha Ministerial Declaration, December 2001.

The publication of this book comes hard on the heels of the tenth anniversary of two separate global initiatives, each of which offered an ambitious prospectus for redefining trade and development cooperation between rich and poor countries that has since foundered. The first of these is the WTO Doha Development Agenda (DDA). As is well known, the DDA was launched in the aftermath of the terrorists attacks of 11 September 2001 – and two years after the acrimonious failure of the 1999 Seattle ministerial, when mass civic mobilization and violent street demonstrations came to symbolize the discord between developed and developing countries regarding the content and indeed the overall desirability of a new round of trade liberalization. The unique sense of global solidarity generated by 9/11 provided the necessary impetus to kick-start global trade talks, but policy makers also used the opportunity to recalibrate the tone and objectives of the round to address developing country grievances expressed during the Seattle debacle. In the ten years or so since then, however, the WTO has demonstrably failed to translate these aims into a concrete package of development measures capable of satisfying the institution’s disparate membership. In July 2011, the WTO Director General Pascal Lamy declared that, ‘what we are seeing today is the paralysis in the negotiating function of the WTO ... What we are facing is the inability of the WTO to adapt and adjust to emerging global trade priorities’ (ICTSD 2011). What this suggested, in short, was that the WTO Secretariat was close to throwing in the towel on the Doha round – and that the attempt to redefine the relationship between rich and poor countries within the multilateral trade system had proven to be a bridge too far.

The second global initiative to have recently marked its tenth anniversary is the EU-ACP Cotonou Partnership Act of 2000. In this case, the original objective was to replace preferences hitherto granted unilaterally under the 1975 Lomé convention with a series of region-wide reciprocal Economic Partnership Agreements (EPAs), designed to comply with Article XXIV of the General Agreement on Tariffs and Trade (GATT).¹ The EPAs were not, however, limited to satisfying multilateral trade rules as Cotonou also made provision for liberalization in areas like services, investment and competition policy, not covered by Lomé and hence subject to the original GATT ruling against it. The merits of this comprehensive approach appeared to be underlined when the Caribbean became the first region among the ACP group of countries to sign a ‘full’ EPA in October 2008 (see Chapter 3). Yet to date this agreement remains the only one of its kind. Elsewhere, ACP countries have either chosen not to sign an EPA and rely on inferior preferences or else conclude far less ambitious ‘goods only’ interim agreements. The European Commission’s response to this limited take-up was to, first, permit countries to conclude interim EPAs bilaterally in the absence of region-wide consensus and then, later, turn the screw on recalcitrant states by threatening to revoke preferential access granted temporarily by the EU while at the same time tightening eligibility for alternative preferences available through the Generalized System of Preferences (GSP). Whether or not this ‘carrot and stick’ approach will ultimately work is doubtful, but either way the final outcome of the negotiations is likely to fall a long way short of the ambitious plans laid out in 2000.

There is, then, an obvious (and as we shall see not unrelated) parallel between the negotiating impasse in the DDA and that in the EPAs. Although, clearly, these two diplomatic arenas are characterized by different policy agendas, participants and political dynamics, the theme that cuts across the five substantive chapters in this book is that they share a common institutional pathology in the ways in which they have sought to redefine the relationship between rich and poor countries, especially in relation to the principle of special and differential treatment (SDT). Although SDT is indelibly associated with the GATT, the term was not actually enshrined in the organization’s legal texts until 1979. By this point, the principles underpinning it had already been operationalized de facto in the form of two sets of institutional practices that came to define the relationship between rich and poor countries in the GATT: namely, asymmetrical reciprocity and unilateral trade preferences. Asymmetrical reciprocity, on the one hand, refers to the institutional practice whereby the developed countries waived developed countries of their obligations under Article I to offer reciprocal market access. This institutional practice did not, it is important to note, amount to a legally definable obligation; rather, it was part of an ad hoc and highly informal process by which the enforcement of GATT disciplines was over time applied to the developing countries with less and less consistency.

On the other hand, unilateral trade preferences refer to the institutional practice by which the developed countries granted one-way market access to the developed countries, above and beyond that offered on a most-favoured nation (MFN) basis to all GATT members. Although such preferences were omitted from the GATT at the time of its creation, calls for their inclusion became progressively louder as the numerical balance of the organization’s membership began to shift in favour of the developing countries in the late 1950s and 1960s. This culminated in the creation of the GSP in 1968, later made permanent by 1979 Enabling Clause. Yet, as in the case of asymmetrical reciprocity, GATT disciplines governing unilateral preferences were never placed on an entirely secure legal footing. First, although the Enabling Clause legally empowered the contracting parties to grant non-reciprocal trade preferences (provided that they were offered to all developing countries and did not discriminate between them) there was nothing requiring them to do so. In fact, all decisions regarding the duration of preferences, graduation, product coverage and preference margins were left entirely to the discretion of the preference-granting country (Hoekman and Özden 2005). By far the most significant anomaly with the GSP was the legal ambiguity surrounding eligibility from preferences. While providing the legal grounds for preferential treatment in favour of developing countries the logically prior task of defining a ‘developing’ country was never satisfactorily resolved. Although the narrower concept of ‘least developed’ was codified under the Enabling Clause (referring to those countries formally classified as such by the United Nations), developing country status under the GATT became a matter of self-declaration – a practice that continues to this day under the WTO. In other words, aside from the Least Developed Countries (LDCs), the concept of a ‘developing’ county in relation to preferential trade came to have close to no legal standing within the multilateral trading system.

The full significance of these anomalies only became fully apparent following the conclusion of the Uruguay round and the introduction of a much-strengthened Dispute Settlement Understanding (DSU) under the WTO. In the meantime, the legal ambiguity surrounding the GSP was complicated further by two additional sets of complexities that were to make the subsequent task of recasting SDT on the basis of WTO-compatible principles all the more formidable. The first of these centres on the prior co-existence of the GSP with GATT-inconsistent preference schemes like Lomé. Although Lomé is usually the first to be cited with respect to inconsistency with multilateral trade disciplines (and hence it is not surprising that it was the first to fall foul of the WTO), it was no different in kind to discriminatory preferences schemes still offered by the likes of Australia, Canada and the United States. The key summative point is that each of these schemes was crafted in an era in which the opaqueness of GATT legal norms, coupled with the limited reach of its dispute-settlement system, meant that there were few consequences for violating either the spirit or the letter of multilateral trade rules. But in the era of the WTO and its enhanced dispute-settlement system, this opaqueness means that where preference-granting countries have signalled that their intention is to reshape these schemes in a more WTO-consistent mould – which is the case in each of the examples cited above – there are few precedents for how this might be achieved other than in accordance with Article XXIV, which makes no provision for SDT. In short, the legal ambiguity surrounding SDT for the developing countries did not end with the creation of the WTO on 1 January 2005.

The second set of complexities concern the relationship between the continued viability of unilateral preferences and wider patterns of trade liberalization. There has, of course, always been something of an uneasy relationship between the principles of SDT, on the one hand, and MFN, on the other. But prior to the Uruguay round the tension was arguably more theoretical than real, due to the fact that relatively high MFN tariffs – coupled with the existence of quantitative restrictions such as those administered under the auspices of the Multi Fibre Arrangement (MFA) – meant that liberalization did not necessarily jeopardize trade preferences. After Uruguay, however (which led, among many other things, to average MFN tariff reductions by the developed countries of around 36 per cent alongside the phasing out of the MFA), the policy space available for granting preference was considerably diminished. The political consequences of this, in terms of the collective action dynamics of the multilateral trade system, was supposedly to remove the incentive preference-receiving countries had for supporting freer trade (see below). This explains why the WTO’s Aid for Trade (AfT) scheme was initially couched in terms of a ‘compensation clause’ (Page 2005) rather than the longer-term goal of integrating developing and least-developed countries into the world trading system. But since such a scheme would only appeal to those developing countries adversely affected by preference erosion (as the process has become known) – and patently not those developing countries discriminated against – it is unclear how such a scheme might achieve wider traction in the WTO. In any case, although the Uruguay accords have arguably been the single biggest contributing factor to the erosion of preferences, the main thrust of liberalization since then has come from regional and bilateral sources that are to some extent outside of multilateral jurisdiction. Hence, one has to question whether or not compensating small – and already marginalized – preference-receiving countries is really central to the fate of the global trade system.

The specific purpose of this book is to explore the global politics and political economy of trade preference erosion, against the backdrop the aforementioned complexities. In particular, we are interested in the political implications – that is to say, how reforms have played out in practice – of the shift from traditional forms of SDT associated with asymmetrical reciprocity and unilateral trade preferences towards reciprocal free trade with a greater emphasis of ‘supply-side’ measures such as technical assistance, trade-related capacity building and so on. Although much of the debate concerning the diminishing space for trade preferences has concentrated on the legal obstacles created by the strengthening of multilateral trade rules, it is important to acknowledge that this process has been accompanied by an intellectual consensus that has come to see preference erosion as not only unavoidable but also desirable. The starting point for this consensus is the premise that unilateral trade preferences rarely, if ever, succeed in promoting either long-term economic growth or export diversification. The explanation provided for this is that preferences are, generally speaking, either characterized by low-utilization rates (because ‘supply-side’ constraints or bureaucratic obstacles such as complicated rules of origin discourage the take-up of preferences) or the bulk of the economic rents fall to importing firms rather than preference-receiving countries (Mattoo, Roy and Subramanian 2003; Brenton and Manchin 2003; Olarreaga and Özden 2005). In addition, preferential trade is said to inhibit the process of internal policy reform, distort trade and constitute an impediment to multilateral liberalization, since preference-receiving countries have a vested interest in defending the status quo in order to protect preference margins (Panagariya 2002; Francois, Hoekman and Manchin 2006; Hoekman 2006). Finally, as alluded to earlier, because multilateral liberalization is seen from this perspective as a ‘global public good’, the best means of supporting preference-dependent countries is through targeted financial assistance and compensatory schemes which serve to build ‘supply-side’ capacity in these countries but in ways that are ‘non-trade distorting’ for third parties. This, in essence, is the intellectual consensus that has dominated the policy debate around preference erosion, including most notably in the diplomatic settings that form the backdrop to this book: the DDA and the EPAs.

In exploring the global politics and political economy of preference erosion, we are not primarily concerned with the veracity of the above judgements regarding the economic utility of non-reciprocal preferences (although the political naivety of some of the policy recommendations associated with these judgements is soon revealed); nor do we make the case for the continuation of preferential trade and the postponement of further liberalization. Rather, the main aim is to probe a little deeper into global trade and development politics to ask why traditional forms of SDT did not meet basic policy objectives and, more to the point, why newer forms of SDT have, at least so far, achieved only modest results. Critics of the traditional unilateral trade preferences are not wrong to point to technical deficiencies such as low utilization rates and unintended distributive effects, but they are unable to provide a satisfactory explanation for why non-reciprocal preferences fared so badly in the post-war period – or why in many cases it has proven so difficult to reform them and persuade preference-receiving countries of the merits of reciprocal free trade. It is our view that, rather than focusing on technical deficiencies, we must first explore the historical and institutional correlates of SDT within the context of the GATT, since this holds the key to understanding the peculiar way that unilateral preferences were operationalized in the post-war period – and, paradoxically, why certain developing countries have proved unwilling to give them up, in spite of their patchy record in fostering economic growth and diversification. Once this is established, we can then move on to explore such questions as the political implications of the shift towards reciprocity, characterized by power asymmetry and uneven patterns of trade diplomacy (Chapter 3); the impact of differential levels of preference dependence and utilization on the political leverage of preference-granting countries in extolling the virtues of regional integration and reciprocal free trade (Chapter 4); understanding the distinctive pathways of ostensibly similar countries with respect to exposure to preference erosion and trade adjustment (Chapter 5); and, finally, the global and regional politics of preference erosion in the light of the attempt to recast SDT away from one-way preferences towards ‘supply-side’ forms of development cooperation (Chapter 6).

Research base

The book constitutes the main output from a three-year UK ESRC project, involving more than 100 interviews conducted between January, 2009 and September, 2011. The book is organized thematically but each chapter is underpinned by a case study approach, based on intensive fieldwork carried out in six preference-dependent countries: Belize, Fiji, Jamaica, Lesotho, Mauritius and Swaziland. This research was supplemented with a series of interviews and ‘off-the-record’ briefings with key policy makers in the bureaucratic capitals of Brussels, Canberra, Geneva, London, Pretoria and Washington, DC. Although the specific political and economic characteristics of each case – and its position in the global trading system – is in some senses unique, we aim for generalizability according to what they share in common. First, all six countries are classified as ‘small states’ according to criteria set out by the Commonwealth Secretariat (1997), that is, a population of no more than 1.5 million people or otherwise comparable due to reasons of history and geography. Second, all six are broadly comparable with respect to per capita income, export dependence and reliance on preferential trade. Third, all six have figured prominently in at least one of the three most significant non-LDC specific trade preference schemes analysed in the book: the Lomé/Cotonou Agreement (Belize, Fiji, Jamaica, Lesotho, Mauritius and Swaziland), African Growth and Opportunity Act (AGOA) (Mauritius, Lesotho and Swaziland) and Caribbean Basin Economic Recovery/Trade Partnership Act (CBERA/CBTPA) (Jamaica and Belize). Fourth, and related to this, the six cases provide a representative sample of export dependence in one or more of the three sectors most exposed by tariff and quota preference erosion: bananas (Belize and Jamaica), sugar (Belize, Fiji, Jamaica, Mauritius and Swaziland) and garments (Jamaica, Lesotho and Mauritius). Finally, the six cases provide a representative sample of the key regions affected by preference erosion: Southern and Eastern Africa (Lesotho, Mauritius and Swaziland), the Caribbean (Belize, Jamaica) and Pacific (Fiji).

In summary, a key assumption of the book is that, while the liberalization of trade has entailed adjustment costs for both large and small developing countries and LDCs, preference erosion is particularly onerous for small states such as the ones identified here because: (i) even though they often enjoy higher incomes than larger states a much higher proportion of this is derived from internation...

Table of contents

• Cover
• Title
• 1 Introduction
• 2 The Rise and Fall of Preferential Trade
• 3 Understanding the EU-ACP Economic Partnership Agreements: The Case of the CARIFORUM
• 4 European Policy Diffusion and the Politics of Regional Integration in the Pacific
• 5 Developmentalism and the Political Economy of Trade Adjustment in Mauritius
• 6 Southern Africa and the Global Politics of Trade Preference Erosion
• 7 Conclusion
• Notes
• Bibliography
• Index