Trade and Development and NAMA

United Nations Conference of Trade and Development Trade and Development and NAMA International Trade and the Doha Round New York, December 2007 Santiago Fernández de Córdoba Economist UNCTAD

Content Part 1 Trade, development and poverty Risks and gains - Trade related adjustment costs Part 2 NAMA - the Context Analyzing different NAMA liberalization scenarios

Trade Liberalization brings efficiency and economic Growth Recent economic history proves that countries with less barriers to international trade experience faster economic progress, Dani Rodrik Policies oriented towards international trade are among the most important factors that promote economic growth and convergence of developing countries, Jeffrey Sachs Trade reform isn't about charity, it's about justice, and (it) is an unstoppable idea. Bono

Trade and its connections to development Trade liberalization increases efficiency and economic growth: Better allocation of resources Allows for capital accumulation Stronger competition Investment friendly setting Trade and development are connected through trade policy Market liberalization Capital Flows Domestic policies should be coordinated with trade policies through: Macroeconomic stability Appropriate institutional reforms Social, development and employment policies Economic development Generally, gains will come in the medium/long run

However, will trade liberalization reduce poverty? A liberal trade regime is not sufficient to reduce poverty but is almost certainly necessary Developing countries own liberalization should be supplemented with complementary policies to stimulate adjustment and flexibility Effects of trade liberalization: indirect and direct effects

Effect of trade liberalization Indirect Effect Trade liberalization is assumed to stimulate growth but, ultimately, this is an empirical matter Trade liberalization enhances productivity Economic growth reduces absolute poverty However, in low income countries trade liberalization can increase inequality Direct Effects The government account: Reduction of tariff revenues Prices and markets: Incomes are affected by price changes induced by trade Factor markets: Unemployment and wage effects

Who should liberalize? The benefits a country achieves from its own liberalization are usually larger than the benefits it gets from its partners liberalization Developing countries have had very different rates of export growth although trading regimes of developed countries are relatively similar across developing countries Developing countries own trade policies are a large explanation to export growth

Trade liberalization and poverty: evidence Chile Liberalized trade regime unilaterally 1974-2000 Economic growth of 7% per year (1985-2000) Poverty declined by more than 50% between 1987 and 1998 China Trade to GDP grew from 11% in 1978 to 50% in 2000 Economic growth of 10% per year in last 25 years Poverty declined from 30% (1978) to 15% (1998) India Trade to GDP grew from 10% in 1980 to 25% in 2000 Economic growth of 6% per year (1980-2000) Poverty declined from 45% (1980) to 26% (2000) Bangladesh Trade to GDP grew from 17% in 1990 to 30% in 2000 Economic growth of 4.8% per year (1991-2000) Poverty declined from 59% in (1974) to 50% (2000) Source: Sadiq Ahmed and Zaidi Sattar (2004) Trade Liberalization, Growth and Poverty Reduction The case of Bangladesh, World Bank Working paper

Gains from Doha: Increase Welfare and Exports Developing Countries Sum of Additional Welfare in $B Percentage Increase of Exports 80 60 69 63 64 54 50 49 6 5 4 4.3 3.5 3.9 40 3 2.8 2.5 2.5 20 2 1 0 Swiss WTO 0 Swiss WTO Ambitious Moderate Flexible These long term gains can only be realized by mitigating against the short term risks (1) India, China and Brazil

Risk of trade liberalization Trade liberalization involves some risks: Unemployment Reduction in tariff revenue Import liberalization precedes supply side response Adjustment costs: Short term costs related to the reallocation of labor and capital between sectors after the process of trade liberalization Private sector: unemployment, re-training costs, obsolete capital, transition costs Public sector: loss of tax revenue, efforts to maintain macro stability, implementation of reforms, programs to increase competitiveness

Risks: Employment losses in certain sectors Percent Changes in Labor Usage Relate to Base, by Sector Swiss Formula, Ambitious Scenario Asia Americas Africa and Middle East Machinery and Equipment Non Ferrous Metals Other Manufacturing Motor Vehicles Electronics China -2.8-4.1-0.2-10.4 6.7 India -2.2-25.9-2.1-5.6-1 Rest of South Asia -8.7-13.4-7.3-36.8-14.9 South East Asia 0.2-6.4-2.3-6.6-1.7 Brazil -5.2 3.2-2 -4.3-1 Central America and Caribbean -6.3-8.2-6.2-2.1-6.8 Andean Pact -4.7 6.4-2.9-9.6-10.7 Argentina, Chile & Uruguay 3.2-1.4-2 9.3-7.6 Middle East and North Africa 0.2 5.8-1.5 1.9 5.1 Sub Saharan Africa -0.6 8-0.5 0.6-3.5

Risks: Tariff revenue losses 10 0 % Change in Tariff Revenue Relative to Base for Developing Countries Base Revenues: $156 b Swiss WTO % -10-20 -21-14 -12-30 -40-50 -41-29 -36 Ambitious Moderate Flexible

Policies to cope with adjustment Phase-in policy changes Labor and capital have more time to adjust Time to implement tax reforms to make up revenue losses Paying compensation to potential losers Social policies and safety nets: Unemployment benefits Retraining Pension portability Long-term policies: Education Health Physical infrastructure, especially transport

Developing a supply response: domestic policies Macro-economic stability Good governance can help promote FDI Political stability, functioning institutions, legal framework Competitive real effective exchange rate Functioning capital markets Tax reforms to complement trade reforms Expenditure on infrastructure Labour market reforms External financial support («Aid for Trade»)

Conclusions of this first part! Benefits in the long run, but adjustment costs in the short run The challenge for developing countries is to determine the special and differential treatment they require Therefore a cautious or measured approach may be preferable, as the Doha Declaration recognized (non-full reciprocity) Gains will only be possible through a development-centred agreement and strategies to reduce the adjustment costs Developing Countries need coherent trade policies and trade negotiating strategies

Non-Agriculture Market Access Part 1 Trade, development and poverty Risks and gains - Trade related adjustment costs Part 2 NAMA - the Context Analyzing different NAMA liberalization scenarios

WTO Doha Ministerial Declaration Begin negotiations to reduce/eliminate tariffs, including tariff peaks, high tariffs, tariff escalation and non tariff barriers, especially on products of export interest to developing countries. No a priori exclusions Take into account the special needs and interests of developing countries, including through less than full reciprocity in reduction commitments.

Collapse of the Round? Geneva 2006: collapse of the negotiations Reasons: - US refuses to accept deeper reductions in agricultural subsidies - EU refuses to accept deeper reductions in agricultural tariffs - Developing countries refuse to accept deeper reduction in industrial tariffs The negotiations resumed, although none of the counterparts have changed their position Risks if the negotiations fail: - main losers: developing countries - risks: increase in FTA s Is there political will to conclude the negotiations?

Developing Countries have been lowering their tariff on industrial goods % MFN Applied Rates of Selected Developing Countries 90 80 70 60 50 40 30 20 10 Bangladesh Brazil India Developing countries have carried out autonomous liberalization Malawi Philippines Developing Countries 0 1994 2004 Source: WITS/TRAINS

Developing Countries and LDCs have faced higher tariff rates MFN Average Applied Tariff Rates by Country Grouping Exporter Developed Country Developing Country LDC Developed country 1.31 2.12 3.05 Importer Developing country 9.00 6.26 6.33 LDC 10.88 14.79 9.95 Source: UNCTAD Computations WITS/TRAINS Database

Tariff peaks on products of export interest to developing countries Number of Tariff Peaks Among Selected Developed Countries Leather Footwear Fish and Seafood Preparations Textiles Apparel, knit Apparel, not knit Tariff peaks: Three times the national average 0 50 100 150 200 250 Number of Tariff Peaks USA Japan EU Source: UNCTAD Computations WITS/TRAINS Database

Tariff escalation remains an issue for developing countries Binding coverage Percentage of bound items Tariff Escalation Trade Weighted Averages 100 98.6 20 17.2 % 80 60 40 77.5 43.9 % 16 12 8 9.4 8 12 20 0 Developed Developing LDC 4 0 3.3 3.6 3.2 1.2 0.5 Developed Developing LDC Primary Intermediate Final Source: UNCTAD Computations WITS/TRAINS Database

Where are we? NAMA Main proposals: Two options for the formula: 1. A simple Swiss formula (with one or two coefficients) 2. An ABI formula Non-bound tariffs: Constant nonlinear increase; between 5 and 30 percentage points Elimination of sectors: Voluntary Possible flexibilities for developing countries: Exclusion of reductions for countries whose tariff binding is < 35% Between [70-100]% of tariff lines to a tariff of 28.5%

Key issues in the NAMA negotiations Formula Tariffs and development strategies Sectoral Elimination Less than Full Reciprocity, Special and Differential Treatment What is negotiated? Sensitive Products Issues for Developing Countries Preference Erosion Loss of Tariff Revenue Tariff Binding Tariffs and binding coverage Credit for Autonomous Liberalization Bias in protection against developing countries

Swiss Formula T 1 = (a x T 0 ) (a + T 0 ) Final Tariff (%) 8 7 6 5 4 3 2 1 0 0 20 40 60 80 100 Initial Tariff (%)

WTO- ABI Formula t 1 = ( B ta ) t0 ( B ta ) + t0 WTO Proposal (B=1) F in a l T a riff (% ) 20 15 10 5 0 32 % Base Average 16 % Base Average 8% Base Average 4% Base Average 0 20 40 60 80 100 Initial Tariff (%) Weighted Averages, t a Ecuador 18% Egypt 24% Pakistan 10%

Proposals reduce developing countries tariffs considerably Initial tariff: 3.4% Weighted Averages (%) Initial tariff: 12.5% Developed countries Developing countries 2 1.5 1.4 20 15 17.1 15.3 1 0.5 0.5 0.7 0.5 0.5 0.9 10 5 3.4 6.4 9.2 5 0 Swiss WTO 0 Swiss WTO Ambitious Moderate Flexible (1) India, China and Brazil

Current negotiations present an opportunity to address trade barriers that remain Focus should be on tariff peaks, high tariffs and escalation not on averages. Developed countries tariffs on developing countries exports are twice the rate imposed on developed countries. More important than the formula is the level of ambition intended. Including sectoral elimination as a modality has a greater impact on the final outcome than the choice of formula Developing countries may achieve some important trade and welfare gains, but these gains come at a cost lower tariff revenues, and reductions in output and employment in some sectors Liberalization should be accompanied by provisions intended to facilitate adjustment

United Nations Conference on Trade and Development Santiago Fernandez de Cordoba UNCTAD fernandezdecordoba@un.org santiago.fernandez.de.cordoba@unctad.org

Ecuador Initial tariff: 17.8% Weighted Average (%) Initial tariff: 10.7% Bound Applied 20 15 10 5 5.4 7.1 10 7.1 13.5 14.9 15 10 5 5 6.5 8.3 6 9.8 10.2 0 Swiss WTO 0 Swiss WTO Ambitious Moderate Flexible Source: UNCTAD, 2006

Egypt Initial tariff: 24.4% Weighted Average (%) Initial tariff: 14.5% Bound Applied 25 20 15 10 5 5.8 7.4 11 9.3 17.6 19.8 15 10 5 5.1 6.3 8.7 7.6 12 12.6 0 Swiss WTO 0 Swiss WTO Ambitious Moderate Flexible Source: UNCTAD, 2006

Pakistan Initial tariff: 10.4% Weighted Average (%) Initial tariff: 19.4% Bound Applied 50 40 30 20 10 7.5 9.5 16 15 37.5 42 25 20 15 10 5 7.2 13.3 16.4 12.5 19.2 19.3 0 Swiss WTO 0 Swiss WTO Ambitious Moderate Flexible Source: UNCTAD, 2006

Drafting the Scenarios 1 Non-linear formulae considered Swiss WTO 2 For each formula, three different cases are considered based on the other elements that are currently under negotiation Ambitious Moderate Flexible In addition, a free trade scenario is considered

Defining Adjustment Costs Adjusting Adjusting to to what? what? Trade reforms Globalization more broadly Who Who is is affected? affected? How How are are they they affected? affected? Labour (skilled vs. unskilled) Capital (financial vs. physical) Unemployment, lower wages Transition costs, obsolescence Who Who bears bears the the costs? costs? Public sector Private sector Possible Possible definition? definition? Short Short term term costs costs of of transition transition from from one one state state to to another. another. These These costs costs can can be be regarded regarded as as the the costs costs of of reallocating reallocating labour labour and and capital capital (inputs (inputs of of production) production) from from one one sector sector to to another another after after a process process of of trade trade liberalization liberalization

What are Trade-related Adjustment Costs? Costs Costs borne borne by by Private Private Sector Sector Costs Costs borne borne by by Public Public Sector Sector Labour: Unemployment Lower wages Re-training Capital: Opportunity cost of temporarily unemployed capital Cost of capital rendered obsolete Transition costs in shifting capital from one activity to another Fiscal and economic: Loss in tax revenue Erosion of preferential benefits Efforts to ensure macroeconomic stability Unemployment benefits and retraining Implementation of trade-related reforms Costs of improving industry competitiveness Non Trade Concerns: Food security, support to rural areas Environmental concerns