WORLD TRADE ORGANIZATION

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1 WORLD TRADE ORGANIZATION WT/COMTD/LDC/W/46 23 October 2009 ( ) Sub-Committee on Least-Developed Countries MARKET ACCESS FOR PRODUCTS AND SERVICES OF EXPORT INTEREST TO LEAST-DEVELOPED COUNTRIES Note by the Secretariat 1 Table of Contents I. INTRODUCTION...3 II. TRENDS IN LDC TRADE...4 A. MAJOR PRODUCTS AND MAJOR MARKETS FOR LDC EXPORTS...5 B. HAVE THE LDCS GAINED MARKET SHARE?...11 III. MARKET ACCESS CONDITIONS FOR LDC EXPORTS...15 A. INTRODUCTION...15 B. TRENDS IN MARKET ACCESS FOR PRODUCTS OF EXPORT INTEREST TO LDCS...15 C. TARIFF TREATMENT OF LDC EXPORTS IN SELECTED MARKETS...16 IV. RECENT INITIATIVES TO IMPROVE MARKET ACCESS...24 A. IMPLEMENTATION OF THE HONG KONG MINISTERIAL DECISION ON DFQF MARKET ACCESS TO LDCS...25 B. OTHER INITIATIVES...26 V. THE LDCS AND THE GLOBAL FINANCIAL CRISIS...26 A. GLOBAL TRENDS IN LDC TRADE DURING THE CRISIS...29 B. THE CHALLENGE OF FINANCING TRADE AND TRADE DEFICITS...34 VI. CONCLUSION...35 ANNEX This document has been prepared under the Secretariat's own responsibility and without prejudice to the positions of Members and to their rights and obligations under the WTO.

2 Page 2 List of Tables Table 1: Export prices of primary commodities, Table 2: Commercial services exports by LDCs, Table 3: Trends in tariff treatment on merchandises imported by developed countries, Table 4: Preferential duty-free access for LDC exports to developed countries Table 5: Tariff treatment of LDC exports in selected developed markets, Table 6: Market access for LDC exports to developing countries, Table 7: Tariff treatment of LDC exports in selected developing markets, Table 8: Average monthly variation of merchandise exports of the World and the LDCs, January 2006-June Annex Tables Annex Table 1: Merchandise exports and imports of LDCs by selected country grouping, Annex Table 2: Export prices of primary commodities, Annex Table 3: Measures in favour of exports originating from LDCs List of Charts Chart 1(a): Share of top three LDC products in their total merchandise exports, Chart 1(b): Share of commercial services in LDC total exports, Chart 2: Composition of LDC exports by major products, Chart 3: Top 15 markets for LDC exports of goods, Chart 4: Comparative evolution of LDCs' product specialization, Chart 5: Comparative evolution of main LDC markets, Chart 6: Monthly evolution of World and LDC exports, January 2006-June Chart 7: Monthly evolution of LDC exports by main product groups, January 2006-June List of Boxes Box 1: The dynamics of LDC exports between 2000 and 2007 using the SSA Box 2: Recent trends affecting external trade in goods and services Box 3: Tourism in the face of the global crisis Box 4: International initiative to restore trade finance... 35

3 Page 3 I. INTRODUCTION 1. World economic growth - measured by gross domestic product (GDP) - slowed abruptly in 2008 against the backdrop of the worst financial crisis since the 1930s. The crisis began as a financial turmoil in the US with the collapse of the sub-prime market and the rise in financial tensions in July 2007 before spreading quickly to the rest of the banking system with the bankruptcy of major financial institutions in September 2008; it has now become a global recession affecting economic activity in virtually all countries, developed as well as developing. 2. Least-developed countries (LDCs), known to be particularly vulnerable to external shocks, were not spared by the global crisis. They depend heavily on a few products for most of their export revenues, and these trade revenues weigh a lot in their national income. The collapse of commodity prices during the initial phase of the crisis (September 2008-March 2009) severely affected the value of their exports, and the partial recovery that has been perceptible since then remains largely dependent on the evolution of the international prices of oil and minerals. 3. The initial impact of the financial crisis was felt most particularly on developed economies, at least from an economic perspective, and its intensity was largely unexpected. 2 Industrialized countries only managed a meagre 0.8 per cent growth in 2008, leading to a decrease in per capita income. 3 Developing economies, on the other hand, expanded their output in 2008 by 5.4 per cent, down from 7.7 per cent in 2007, but slightly below their average rate of 5.6 per cent for the period. Against this adverse general context, LDCs (as a group) were able to grow at 6.3 per cent in 2008, in line with their average growth of 6.2 per cent. 4. International trade has been specially affected. World merchandise trade growth in real terms (i.e., adjusted for price changes) slowed significantly in 2008 to 2 per cent, compared to 6 per cent in 2007, and the WTO forecasts for 2009 decrease the number to minus 10 per cent. By most indicators, the present crisis stands out for its magnitude and duration. Although it is possible to find episodes of trade collapsing with a similar intensity in the history of nations, it is the first time that such a synchronized decline across the world is observed. Globalization served as transmitter of growth in the 1990s and early 2000s between increasingly intertwined national economies; the same transmission channels most particularly, international trade and finance have acted as magnifiers during the current crisis. 5. In the second half of 2009, there are signs that the crisis is reaching the bottom. The banking crisis created by the accumulation of "toxic assets" appears to be under control, and the main international financial markets are regaining some of the lost grounds. Domestic activity in large emerging countries are stabilizing or even regaining strength, buoyed by government packages or improving business and consumer confidence. Similar symptoms, albeit much weaker, are also apparent in some developed economies Among the factors expected to boost demand for imports, at least in the short term, are the rebuilding of business inventories after the rapid pace at which they were disposed of in the first half of this year. In June 2009, world trade was up by more than 2 per cent over the previous month, the strongest month-to-month rise since mid Despite these positive short-term signals, world trade 2 Due to better social security provisions, the social implications of the economic downturn may be less severe in those countries, even when the relative magnitude of the economic shock is much higher. 3 Weighting GDP in national currencies at their market exchange rates to US dollars. 4 According to OECD, aggregate gross domestic product is expected to decline by 3.7 per cent this year against a forecast of 4.1 per cent made just three months ago (PPP-based). Source: OECD, "What is the economic outlook for OECD countries? An interim assessment", 3 September 2009.

4 Page 4 in June 2009 was still about 20 per cent below its peak of April Although the international economy is still far from its previous level of activity, some key commodity prices such as fuels, are on the rise again, constraining the purchasing power of net-oil importing countries. What is more worrying is that credit has slowed down dramatically and is not likely to bottom-out yet, while unemployment rates are reaching peak levels. These adverse developments are laying the ground for another negative demand-driven shock based on an increased risk aversion that may negatively affect both household consumption and productive investment of firms. 7. Against this background, this Note first looks at trends in LDCs trade, in particular how their share of world trade has changed in the period 2000 to 2007/2008, depending on the period up to which statistics are available. It then analyses the impact of the crisis on LDCs. The basic mandate of the Note stems from the WTO Work Programme for LDCs (WT/COMTD/LDC/11) which provides for an annual review of market access for products originating from LDCs. In the context of the discussions on the previous market access review study, a request was made for the study to reflect the ongoing financial crisis and its impact on the LDCs. The Note focuses on short-term dynamics observed during the most recent months, while the analysis of the structural trends affecting LDC exports is principally used as a background to identify the strengths and vulnerabilities. Despite its specificity, this document should not be viewed as a stand-alone study. It should be read in conjunction with the previous versions prepared by the Secretariat, in order to gauge the different factors that influence international trade and market access conditions for LDC exports The statistical coverage of LDCs is known for its incompleteness and untimeliness. These usual limitations are even more acute when it comes to recompiling and analysing quarterly or monthly statistics. In many cases, the Secretariat had to rely on mirror statistics, using imports reported by LDC partners, while remaining data gaps had to be imputed, when reasonably robust information was available for such an inference. In particular, mirror statistics were compiled from databases such as the UN COMTRADE or Global Trade Atlas, which contain comprehensive coverage of the developed countries' trade, and substantial coverage for trade of major developing countries and economies in transition. This allows estimating the share of the LDCs' trade with not just developed countries but also with developing economies. The disadvantage of using mirror data, however, is that data unavailability of LDCs and other developing economies does not allow to take into consideration intra-trade among the LDCs, as well as trade with non-reporting developing countries. In addition, the total figures based on mirror data may differ from total exports as reported by the LDCs. Whenever possible, the Note uses national reported figures for total trade. II. TRENDS IN LDC TRADE 9. It is well known that LDCs are particularly vulnerable to external shocks. They are not only dependent on a few products for most of their export revenues, but these trade revenues weigh a lot in their national income. 7 In order to understand how this structural vulnerability affects the LDCs during crisis, the paper analyses the trends in LDC exports, including in the context of risk factors conditioned by: (i) the changes affecting global trade since the beginning of the crisis; (ii) the shocks affecting the specific products exported by the LDCs; and (iii) the economic situation of their main markets of destination. 8 5 Preliminary estimate based on CPB Netherlands Bureau for Economic Policy Analysis. 6 The previous note by the Secretariat is contained in WT/COMTD/LDC/W/42/Rev.1. 7 LDC exports accounted for 33 per cent of their aggregate GDP in The shares were especially high in the case of oil-exporting LDCs such as Angola (72 per cent), Chad (52 per cent) or Equatorial Guinea (49 per cent). 8 This diagnostic follows the methodology suggested by Shift-Share Analysis (SSA). According to it, the evolution of national exports can be attributed to: (i) the global trends affecting international trade; (ii) the world demand for specific products and product groups; (iii) the dynamism of their respective markets of

5 Page The main structural components which are of interest are product specialization and market diversification. Some products will be more affected than others during the crisis, either in their price (e.g., oil) or in the volume of the demand (e.g., investment goods), or in both aspects. Some markets are also more affected than others. This is particularly the case during the present crisis, where developed countries are the most affected and the hypothesis of decoupling of rest of the world from industrialized economies is put to test. The two effects (products and markets) are not independent; as for some products, the LDC exports are very specialized. For example, the bulk of clothing exports goes to developed markets, while some specific agricultural exports belong almost entirely to South-South trade. 11. Following the path of the so-called SSA, the present document revises the recent trends affecting product and market specialization of LDCs, identifying the underlying factors of growth. On the basis of these results, the document evaluates which are the most vulnerable "export niches" in terms of the combined "product x market" mix and the most probable crisis scenarios. 12. A word of caution is required on the limitations of this exercise. The SSA is a "bottom-up" tool commonly used by analysts to identify main factors behind past trends in large data sets. It is more a growth-accounting method than a fully-fledged statistical procedure. 9 Since it does not rely explicitly on economic or statistical hypothesis, it is to be used as an exploratory device rather than as a modelling one. For these reasons, the analysis of the possible impacts of the crisis derived from SSA does not pretend to forecast what will happen, but only identifies and evaluates the possible outcome based on the main structural characteristics that affected past trends. A. MAJOR PRODUCTS AND MAJOR MARKETS FOR LDC EXPORTS 13. Trends in LDCs exports and external balances are influenced by export specialization of individual economies. Due to the lower degree of development of their productive sectors, LDCs are traditionally heavily dependent on a few products where they enjoy some natural comparative advantage (primary commodities as far as trade in goods is concerned, and tourism for service exporters). Even when LDCs were able to diversify into manufacture, the range of exported products is usually limited to a few labour-intensive industries, mostly in textile and clothing. destination; and (iv) the influence of national and residual factors that may have affected the supply and competitiveness of export activity. See WT/COMTD/LDC/W/42/Rev.1 for an introduction to SSA and its application to LDCs' trade structure and trends. 9 In particular, the method in its traditional form does not provide for the possibility of formally testing the robustness of the results.

6 Page 6 Chart 1(a): Share of top three LDC products in their total merchandise exports, 2007 Comoros Mauritania Sudan Lesotho Yemen Equatorial Guinea Guinea-Bissau Liberia Chad Angola United Rep. of Tanzania Eritrea Senegal Nepal Uganda LDC Average (74 per cent) Afghanistan Togo Tuvalu Cape Verde Ethiopia Gambia Vanuatu Maldives Solomon Isds Somalia Benin Dem. Rep. of the Congo Niger Mozambique Rwanda Cambodia Haiti Bangladesh Bhutan Malawi Myanmar Kiribati Timor-Leste Guinea Samoa Djibouti Central Zambia African Rep. Burkina Mali Faso Sierra Leone Lao People's Dem. Rep. Madagascar Sao Tome and Principe Burundi Chart 1(b): Share of commercial services in LDC total exports, 2007 Tanzania Madagascar Rw anda Gambia Ethiopia Djibouti Eritrea Comoros Maldives Vanuatu Samoa Equ. Guinea 100 Angola Chad Guinea 90 Sudan 80 Bangladesh 70 Myanmar 60 Zambia Mauritania Yemen Lesotho Burkina Faso Senegal Bhutan Sao Tome & P Solomon Isl. Cambodia Nepal Togo Haiti Benin Uganda Lao PDR Mali Niger Burundi Guinea-B. C. African R. Congo, DR. Sierra Leone Mozambique Malaw i Source: WTO.

7 Page Export concentration has been a structural characteristic of LDC economies. 10 The recent trends in commodity prices reinforce this tendency, not only by increasing the weight of those commodities, but also for discouraging diversification efforts. 11 On average, almost three quarters of total merchandise exports depended upon only three main products (which change from LDC to LDC). For eight countries, the top three products account for more than 95 per cent of their export receipts, illustrating the vulnerability of these economies to fluctuations in international trade. 15. Some LDCs also depend on service exports for a sizeable share of their total export receipts. Travel, a close proxy of tourism receipts, is the dominant sector, especially for small islands where it represents the main source of export revenues (Kiribati and Solomon Islands are also exporters of business services, as well as telecommunications services). Transportation an activity closely related to trade in goods is especially important for Djibouti, Ethiopia and Myanmar. The dependence on a few products and services matter most when the global economy goes through a period of structural changes, as was the case in the recent years. It even becomes a critical aspect when a crisis strikes. Before analysing the vulnerability of each product group during the present crisis, their past contribution to the growth of LDC exports is outlined below. 16. Chart 2 indicates a rapid rise in the value of fuels and mineral exports between 2000 and 2007 (more than 27 per cent on average, year on year). Fuels and minerals, already the major export products in 2000 (43 per cent of total exports) have now assumed a clear dominant position (67 per cent). Chart 2: Composition of LDC exports by major products, Textiles Machinery and transport Others Process manufactures Agr. raw materials Food Clothing Fuels and minerals Note: Number over 2007 bar indicates average annual growth rate ( ). 17. This increased concentration on commodities reduced the weight of clothing, the second product in importance, to below 13 per cent. All other product groups are now contributing less than 10 per cent to the total export value. Process manufactures (iron and steel, chemicals, pharmaceuticals and other semi-manufactures) are the sole items that registered a single digit average 10 In international economics, export concentration is usually associated with the small size of the country, but this relation does not hold within the LDC group, where export concentration is highest for the ten largest economies, ranked either by GDP or trade (see WT/COMTD/LDC/W/42/Rev.1). 11 The non-traditional activities appear less lucrative to domestic investors due to their lower relative prices. In addition, exchange rate appreciation linked to commodity booms the so-called Dutch Disease reduces the international competitiveness of labour intensive activities, such as light manufacture.

8 Page 8 annual growth; their share in the export structure of the group dropped therefore from 8 to 4 per cent during the period. 18. The increase in the value of fuels and mineral exports is the result of an increase in both international prices and volume exported. As indicated in Table 1, prices alone explain slightly more than half of the changes from 2000 to The increase in production capacities reflects, inter alia, the large share of foreign direct investments (FDI) that was directed towards the extractive industries. 12 The process of other commodities increased at a much slower pace since the year 2000, even though food products registered a surge in Among the products of interest to LDCs, it should be noted that the price of rice, bananas and coffee increased substantially over the period. In relation, the average unit value of manufacture trade grew much more slowly, at an annual average rate of 4 per cent for the period. 12 As mentioned by UNCTAD, in recent years, there has been a significant increase in FDI flows to the primary sector, mainly the extractive industries, and a consequent increase in the share of that sector in global FDI flows. (Source: UNCTAD, World Investment Report 2008.)

9 Page 9 Table 1: Export prices of primary commodities, (Annual and quarterly percentage changes) Q-o-Q Annual average Q1 Q2 Q3 Q Food and beverages Agricultural raw materials Minerals and nonferrous metals (excluding crude petroleum) Total of above Energy All primary commodities Memo item: Manufacture Unit Value Note: The indices are period averages based on dollar prices. The data for manufacture correspond to unit values. The quarterly figures are not seasonally adjusted. Source: WTO. 19. Commercial service exports are of particular importance to many LDCs, such as Tanzania, Cambodia, Ethiopia, Senegal and Bangladesh. Travel, a close proxy of tourism receipts, is the dominant sector of LDC services exports, representing 52 per cent of the balance-of-payment receipts of commercial services in 2008 (see Table 2). This activity grew steadily since the beginning of 2000, at an average annual rate of 15 per cent, and was particularly dynamic during the last three years. This promising sector is vulnerable in the present economic cycle, because a large part of these revenues originate from tourists arriving from developed countries, where the economic impact of the crisis has been primarily felt. Table 2: Commercial services exports by LDCs, (US$ million and percentages) Value a Commercial services Transport Travel Other commercial services Composition a Commercial services Transport Travel Other commercial services a Preliminary estimate. Source: WTO. 20. After travel, the category of "other commercial services" accounted for 27 per cent of services exports in This sector has registered a renewed dynamism in the last year, however, it is still growing at a rate below that of the LDC commercial services exports. In 2007, among the LDCs, the five largest exporters of "other commercial services" were Bangladesh (14 per cent), Senegal 13 This category includes, inter alia, incomes for licenses and royalties, as well as transactions such as construction, computer and information, and other business services (legal, accounting, management and public relation services). These services are sometimes traded involving the presence of natural persons in the recipient countries (mode 4).

10 Page 10 (11 per cent), Madagascar (8 per cent), Tanzania (8 per cent), and Ethiopia (7 per cent). The sector is also important for some smaller LDCs such as the Solomon Islands. 21. Transportation services are the smallest component of LDC services exports representing 21 per cent in This sector is closely linked to trade in goods, and registered an average annual growth of nearly 15 per cent since As a result of high correlation of transportation services with trade in goods, this sector is particularly exposed to the crisis. Transportation services are especially important for LDCs such as Djibouti and Ethiopia, where they account for more than half of services exports. 22. In 2007, the EU overtook the US as the main importer of LDC products, purchasing 28 per cent of their exports (against 26 per cent for the US). Chart 3 reveals that the market for LDC exports have increasingly become diversified, with developing economies, such as China, India and Thailand having a greater weight in LDC exports than one would expect from their share in world total imports. 14 As a result of this geographical redistribution of trade flows, LDC exports in 2007 to other developing economies represented 48 per cent of their total exports, showing lower dependence on developed markets. 23. Throughout recent years, developing economies have become the major destination for LDC exports of mineral fuels (56 per cent in 2006), copper (83 per cent), wood products (87 per cent), cotton (89 per cent) or some food products like vegetables and oil seeds (84 and 73 per cent). Interestingly, these products where South-South trade has been particularly important for LDCs are also those where international prices have been increasing. On the contrary, developed economies remain largely a dominant export destination for manufactured articles such as clothing (95 per cent for products under HS 61and 62 chapters), where changes in prices have been much more moderate. Developed country markets are also the main destination of exports for some high value-added agricultural and food products such as fish and crustaceans, beverages or tobacco, with 67, 73 and 57 per cent, respectively. 14 While China purchases 24 per cent of all LDC exports, its weight as a world import market (excluding intra-eu trade) is only 8.5 per cent. These respective numbers are 6.2 and 1.9 per cent for India and 5.1 and 1.4 per cent for Thailand. As indicated in a previous report (WT/COMTD/LDC/W/42/Rev.1), this may be due to geographical proximity and specific Preferential Trade Agreements (PTAs) or Regional Trade Agreements (RTAs), as well as a closer match between LDCs' domestic production capabilities and developing economies' demand.

11 Page 11 Chart 3: Top 15 markets for LDC exports of goods, (US$ billion) Ethiopia Norway Singapore Hong Kong, China Viet Nam Saudi Arabia Republic of Korea Canada Chinese Taipei Thaila nd J a pan India C hina Unite d States European Union (27) Source: WTO. B. HAVE THE LDCS GAINED MARKET SHARE? 24. The objective of this section is to determine whether the performance of LDC merchandise exports was merely due to the overall dynamism of world trade (riding the global tide) or if it was due to their specialization in products or market diversity. The aim is to further understand the dynamics of main markets and products that are relevant to LDCs in order to identify possible scenarios for the crisis. Using 45 graphs, it is possible to see whether LDCs gained (or lost) market share in dynamic niches (products or importers that have been growing at a rapid pace) or if they gained (or lost) relevance in mature or declining niches (products or importers that have been growing at, or below, world average). The analysis covers the period from 2000 to Points above/below the 45 line are those for which LDCs have gained/lost market share; the size of the point indicates the importance of the corresponding market for LDCs (either as an exported product or a market of destination) during Chart 4 indicates that, with the exception of "fuels" and "other minerals" (two dynamic products at world level), the LDCs have gained market share in mature products (food) and stagnating ones (textiles, clothing, and agricultural raw materials). This pattern is to be expected in developing countries. 15 The LDCs have been losing ground in the relative dynamic niche of "process manufactures", i.e., capital intensive industries such as iron and steel, pharmacy, chemicals and other semi-finished products. 15 According to the traditional "product cycle" theory, innovative products are usually produced in industrialized countries, and the production moves progressively to developing countries when the product is entering maturity and goes for mass production. This traditional pattern has been radically transformed in the recent years with the internationalization of global supply chains that are out-sourcing the production of relatively innovative products.

12 Page 12 Chart 4: Comparative evolution of LDCs' product specialization, (annual average growth, per cent) 30 Scatter plots: 25 Total merchandise exports Fuels and minerals LDC exports Clothing Others 10 5 Textiles Machinery Agr. raw materials Food Process manufactures World trade Source: WTO. 26. Applying the same analytical device to their main markets of destination (Chart 5), it is interesting to see that LDCs are gaining market shares in the two most dynamic markets (China and India). They also tend to increase their presence in mature markets such as Canada, Chinese Taipei, Japan and the US. 16 Their sales to the EU, another mature market, are also growing slightly above world average. While LDCs have reinforced their presence in Thailand, an emerging economy, they are losing market shares in Norway, Korea and Singapore. 16 It should be noted that the LDCs benefit from preferential access to these countries.

13 Page 13 Chart 5: Comparative evolution of main LDC markets, (annual average growth, per cent) 0.4 Average change in imports from LDCs Hong Kong, China Canada Chin. Taipei Japan Thailand US A EU (27) Norway Rep. of Korea Singapore India Saudi Arabia China Viet Nam Average change in imports from world Source: WTO 27. The above-mentioned results on the relative dynamics of LDCs' market shares in the space of products and markets of destination are confirmed when applying the shift-share analysis (see Box 1). Most LDC exporters did better than just "riding the tide", either because they were able: (i) to amplify an initial favourable specialization in dynamic products (exporters of fuels and other minerals) and markets (large emerging economies like China and India); or (ii) because they were able to increase their market share in mature markets (typically, light manufacture sold to developed countries). The only category of LDC exporters that could not increase its export performance, but followed the global trend, was the agricultural exporters.

14 Page 14 Box 1: The dynamics of LDC exports between 2000 and 2007 using the SSA According to the SSA, 76 per cent of the growth of LDC exports was based on the strength of their sale of fuels and minerals. If LDCs benefited from the global tide, this explains less than half (46 per cent) of their export performance. Their initial product mix in the year 2000, with an already high composition of fuels and minerals, helped somewhat (9 per cent) in explaining their growth, while their geographical diversification was, on the contrary, a negative aspect (-2 per cent). The LDCs' capacity to adapt their exports to changing environment is, according to the SSA method, imputable for 46 per cent of their performance between 2000 and They increase their market share in dynamic products such as fuels and minerals (thanks to higher investment and production) and redirected their exports to the most dynamic markets (China and India). They were also able to increase their presence in developed economies (see Charts 5 and 7). Ranking high in the performance index was easier for oil exporters and producers of other minerals, because (i) they benefited from most of the FDI inflow which entered the LDCs; and (ii) commodities are standard products that are easily redirected from one market to another. The performance of LDCs specializing in manufacture or agriculture is very similar in terms of overall results (about 15 per cent annual growth); but it is very heterogeneous in its sources. The "agricultural exporters" in fact diversified (agriculture explained just half of the export performance, the rest being equally distributed between extractive activities and manufactures). Their limited natural resources in fuels and other minerals helped them in seizing some of the momentum benefiting these commodities, but in general their export structure did not adapt to the changes in global trade. The manufacture exporters, on the contrary, suffered from a bad positioning in both products and markets (international prices have been growing only slowly, and are mainly exported to developed markets, which are growing less than world average). But these countries were able, through increased competitiveness, to gain market share in their traditional markets. As a result, 44 per cent of their export performance is due to the "residual", the SSA proxy for global competitiveness. Table: SSA decomposition of changes in LDC exports, (percentages) Annual Total Global effect Composition Geographical Residual growth distribution LDC Group Fuels and mining Manufacture Agriculture Oil exporters Fuels and mining Manufacture Agriculture Other Minerals Fuels and mining Agriculture Manufacture Agricultural exporters Agriculture Manufacture Fuels and mining Manufacture exporters Manufacture Fuels and mining Agriculture Note: See WT/COMTD/LDC/W/42/Rev.1 for a description of the methodology. Source: WTO.

15 Page 15 III. MARKET ACCESS CONDITIONS FOR LDC EXPORTS A. INTRODUCTION 28. This chapter presents a series of descriptive and analytical indicators on the evolution in market access conditions, including duty-free access to LDC products, and the average tariffs on products of specific interest to LDCs. The most recent situation concerning the tariff treatment of LDC exports in developed and developing markets has also been examined. 29. Traditionally, LDCs have benefited from non-reciprocal preferences for their merchandise exports in developed country markets. More recently, a number of developing countries have granted preferences to LDCs, under a series of multilateral, bilateral and regional preferential market-access schemes. South-South trade has grown rapidly since 1990 and its value now represents 16 per cent of world trade (43 per cent of total developing countries' exports). B. TRENDS IN MARKET ACCESS FOR PRODUCTS OF EXPORT INTEREST TO LDCS 30. Table 3 shows trends in the tariff treatment that LDC exports received in developed country markets between 1996 and The indicator shows that there is virtually no progress in duty-free access for the LDCs as a group since 2004, whereas duty-free access for the developing countries as a whole has continued to increase. Nevertheless, a closer analysis of this indicator shows that most of the improvements recorded for developing countries in general is due to the elimination of tariffs under the most favoured nation (MFN) treatment, rather than an extension of true preferential treatment. 31. The margin of true preferential duty-free treatment for the group of developing countries has been fluctuating around 20 per cent for the last ten years. The LDCs however have been increasingly benefiting from a true preferential access, from only 35 per cent of their exports in the late 1990s to more than 50 per cent today. The margin of true preference is particularly high for clothing and textiles (62 and 59 per cent, respectively), while it is only 33 per cent for agriculture. Average results for the LDC group may hide quite large heterogeneities at individual level. Most LDCs benefit from duty-free access under the various preferential agreements in developed markets. The remaining gap is concentrated in a few LDCs, especially from Asia, as they face MFN tariffs on exports of their textile and clothing products in the US market. 32. Table 4 also shows that the average tariffs charged by developed countries on agricultural goods, textiles and clothing, fell over the period Compared to the treatment received by all developing countries, the margin of preference is especially significant in case of agricultural products. The difference between average tariffs paid by LDC agricultural exports in relation to the group of developing countries is higher than 6 percentage points. The margin of preference on products such as textiles and clothing is less significant (around two percentage points above the average tariffs faced by developing countries). Here again, the situation differs from country to country. The African and small island LDCs benefited from very low tariff rates on most of their exports (virtually zero for all products in the case of Haiti; from 3 per cent on agricultural products to zero on clothing for African LDCs; and one per cent and five per cent, respectively for the LDCs in Pacific islands). 33. It is important to mention that these indicators are based on the assumption that existing preferences are fully utilized by LDCs. Some preferential regimes have conditions that impede their

16 Page 16 full utilization, for example rules of origins, and the actual rate of utilization may be as low as 40 per cent for products such as textiles and clothing. 17 Table 3: Trends in tariff treatment on merchandises imported by developed countries, (percentages) a. Duty-free treatment of exports (excluding arms and oil) Developing Countries a of which true preference b Least-developed Countries of which true preference b Agricultural goods Developing Countries a Least-developed Countries Textiles Developing Countries a Least-developed Countries Clothing Developing Countries a Least-developed Countries b. Average tariffs on exports (trade weighted) c Agricultural goods Developing Countries a Least-developed Countries Textiles Developing Countries a Least-developed Countries Clothing Developing Countries a Least-developed Countries a All developing countries, including LDCs. b The true preference margin is calculated by subtracting from the total duty-free access all products receiving duty-free treatment under MFN regime. c The average tariffs are weighted by trade flows and based on best applicable tariffs (MFN and preferential treatments granted to developing countries). Average tariffs were weighted using a standard export structure based on data, to limit the impact of the year to year changes in export composition and relative prices on the indicators. Source: Based on CAMAD compiled by ITC, UNCTAD and WTO. C. TARIFF TREATMENT OF LDC EXPORTS IN SELECTED MARKETS 34. The next sections analyse in more detail the coverage of duty-free access and the average duties faced by LDC exports in their main export markets in developed and developing countries. The statistical analysis of the preferential treatments presented in the following tables differentiates between theoretical coverage for agriculture and non-agricultural products (all tariff lines) and the part of the tariff schedule most relevant to LDCs (tariff lines with actual imports from LDCs). The tables also indicate the resulting average tariffs, weighted by the value of the respective trade flows. These indicators are again based on the best tariff available, under the assumption that existing preferences are fully utilized by exporters. 17 WT/COMTD/LDC/W/37.

17 Page 17 (a) Market access conditions facing LDC exports in selected developed countries 35. Table 5 presents detailed information on market access conditions in selected developed markets for the year The table is organized in three sets of indicators. The first set of four columns compares the number of duty-free tariff lines granted to LDCs with regard to the MFN regime. Given supply-side limitations, not all these opportunities are utilized; the next four columns show the same information, but based on those tariff lines where trade was reported for the reference year. Finally, the third indicator complements the information at tariff-line level by presenting the corresponding imports and trade weighted duty averages. 36. In 2007, many developed countries provided total or nearly total duty-free status to LDC exports, both in terms of tariff lines and import value. This was in particular the case for Australia, Canada, EC, Japan, New Zealand and Norway. Switzerland provided duty-free access for over 96 per cent of the value of its imports from LDCs, while the percentage of preferential duty-free tariff lines was only 85 per cent, due principally to lower coverage in agriculture. 18 An opposite situation is observed in the US, where almost 100 per cent of the value of imported agricultural goods entered duty free, while the coverage was low (22 per cent)for non-agricultural products. 37. Overall, the review of selected, importing developed country markets reveal that on average (weighted), LDCs benefit from preferential duty-free treatment on 91 per cent of the dutiable MFN tariff lines (see Table 4). The coverage of preferential duty-free access is 100 per cent or close to it for non-agricultural raw materials (principally minerals and fuels). Over 91 per cent of manufactured products actually exported (tariff line with imports) benefit from duty-free treatment, while this percentage rises to 93 per cent in the case of agriculture. 38. Interestingly, the actual duty-free treatment for agricultural exports (tariff lines with imports) is much higher than the total coverage considering all agricultural tariff lines, with or without imports from LDCs (93 and 80 per cent, respectively). This difference originates principally from two preference granting countries, Switzerland and the US, and may be explained by two effects. The first one is related to the fact that LDC exporters would avoid trading in those lines where they do not have preferential treatment over other competitors; the second rationale is that the protected tariff lines cover principally products of temperate agriculture where the importing countries have their own production; these are normally not produced by LDCs that are mainly located in tropical areas. Table 4: Preferential duty-free access for LDC exports to developed countries Sector Number of tariff lines a Tariff lines with imports Preferential duty free imports b in per cent of total tariff lines in per cent of total imports Total Agriculture Non-agriculture Ores Petroleum a Percentage of tariff lines exempted of duty under preferential LDC schemes in relation to dutiable tariff lines under MFN regime (excluding all MFN duty-free treatment). b Percentage of imports exempted of duty under preferential LDC schemes. The data refer to the LDCs as a Group. Source: WTO. 18 As of September 2009, Switzerland grants DFQF market access to all products from all LDCs (See Section IV).

18 Page The opposite effect can be observed in the case of manufacture, where an actual duty-free tariff line coverage of 91 per cent translates in only a 73 per cent of the trade value, indicating that, contrary to agriculture, a large share of the trade is not covered by preferences. This result is almost entirely due to the tariffs faced by Asian LDC exporters of clothing in the US market As mentioned in WT/COMTD/LDC/W/42/Rev.1, despite the MFN treatment imposed on their textile and clothing exports, Bangladesh and Cambodia consolidated their positions in the US market when quotas were lifted, with total exports of textiles and clothing growing at an annual average of 15 and 19 per cent, respectively, from 2004 to 2007.

19 Table 5: Tariff treatment of LDC exports in selected developed markets, 2007 NUMBER OF TARIFF LINES a IMPORTS (million US$ and percentage) b Member Sector TARIFF REGIME WITH IMPORTS LDC MFN LDC LDC Beneficiaries Dutiable TOTAL Dutiable Dutiable % duty free All partners Number Dutiable MFN LDC scheme All partners TOTAL Dutiable imp. % duty free Weighted applied duty c Australia Total Agriculture Non-agriculture Ores Canada European Communities Japan New Zealand Norway Petroleum Total Agriculture Non-agriculture Ores Petroleum Total Agriculture Non-agriculture Ores Petroleum Total Agriculture Non-agriculture Ores Petroleum Total Agriculture Non-agriculture Ores Petroleum Total Agriculture Non-agriculture Ores Petroleum WT/COMTD/LDC/W/46 Page 19

20 NUMBER OF TARIFF LINES a IMPORTS (million US$ and percentage) b Member Sector TARIFF REGIME WITH IMPORTS LDC MFN LDC LDC Beneficiaries Dutiable TOTAL Dutiable Dutiable % duty free All partners Number Dutiable MFN LDC scheme All partners TOTAL Dutiable imp. % duty free Weighted applied duty c Switzerland Total Agriculture Non-agriculture Ores United States Petroleum Total Agriculture Non-agriculture Ores Petroleum a Based on HS 2007 classification. The Table uses the WTO Agreement on Agriculture definition of Agriculture. b Imports are based on IDB and CAMAD data, and may differ with those reported in Annex Tables due to differences in coverage, in particular for the definition of agricultural products. c Excludes non ad valorem duties if no AVEs have been provided. Source: WTO, UNCTAD, ITC. WT/COMTD/LDC/W/46 Page 20

21 Page 21 (b) Market access conditions facing LDC exports in selected developing countries 40. The information available for developing countries on existing preference schemes for LDCs is limited. The analysis of market access conditions in developing countries is therefore reduced to studying the treatment actually received by the LDC exports to these markets, mostly on an MFN-basis, as indicated by the share of duty-free imports and average tariffs, weighted by the import values. 41. Table 7 shows a significant degree of heterogeneity in tariff structure of different developing country markets. Some countries grant extensive, and even full duty-free access on agricultural and non-agricultural products, under the MFN regime. It is, in particular, the case of Hong Kong, China; and Singapore. China and Malaysia are granting duty-free treatment to 90 per cent or more of their tariff lines, even if the residual average tariff may remain relatively high for some categories of products. Chile, however, does not provide full duty-free access, but the average tariff is low (6 per cent) for both agricultural and non-agricultural products. 42. The (weighted) average tariff faced by LDCs in developing countries was nearly 12 per cent in 2006, with much higher rates for agriculture than non agricultural products (Table 6). Seventy-three per cent of the total value of LDC exports was granted duty-free status, which resulted principally from the favourable treatment of their exports of fuel and non-fuel minerals. On the other hand, only 30 per cent of their agricultural exports was accepted free of duty, while the remaining agricultural exports faced an average tariff of 26 per cent. This situation illustrates the wide dispersion of tariffs facing South-South trade, and the potential for improving LDCs' market access in developing countries. Table 6: Market access for LDC exports to developing countries, 2006 Sector Number of MFN duty-free tariff lines Tariff lines with imports MFN duty-free imports Weighted import duties in per cent of total tariff lines in per cent of total imports Total Agriculture Non-agriculture Ores Petroleum Source: WTO.