CAP reform and the value of trade preferences
Some agricultural tariffs are very high in the EU (roughly 100% for beef and dairy products for example). However, many developing countries can export under preferential regimes, with lower or zero tariffs. The preferences are uneven across countries, but the Least Developed Countries as well as the African, Caribbean and Pacific (ACP) countries benefit from very generous preferences. These preferences are a significant source of income, since the beneficiary countries can sell their products in the EU at a much higher price than the world one.
If tariffs are further reduced, the value of these preferences will also be reduced. For example, the average tariff faced by US exports of beverages and tobacco to the EU is presently 23.5 percent, while the tariff faced by African exports is 2.2 percent. One suggested structure of tariff reductions in the Doha Round would mean little change for Africa, while the tariffs faced by US exports would fall to 7.7%. The preference margin for Africa would only be 6.7% instead of 21.3%. As a result, African countries would face much greater competition on the EU market from more efficient producers such as the US or Argentina.
The erosion of preferences, whether due to multilateral tariff reductions or unilateral reform of the Common Agricultural Policy (e.g. reform of the sugar sector), will result in significant losses for LDCs and ACP countries. Some studies suggest that ACP countries could lose more than $2bn from preference erosion and that the benefits of the ‘Everything But Arms’ initiative for LDCs would be greatly diminished. Other studies are less pessimistic, suggesting that the aggregate losses will be small and only significant for a small number of countries.
This issue is particularly relevant for tropical products. Take the example of bananas, which symbolise the trade liberalisation demands of many Latin American countries. The opening up of export markets for Latin American bananas threatens to erode the preferences awarded by the EU to ACP countries.
Preference erosion is not a good reason in itself to stop the trend towards multilateral liberalisation, but how to offset the adverse effects for the affected countries needs specific consideration, including possible compensation.
Preference Erosion in the Doha Round
A key issue, especially for developing countries, is whether multilateral tariff reductions agreed under the Doha Development Round will adversely affect their market access to developed countries. Like previous trade rounds, a significant objective of the negotiations is to reduce trade barriers and open up new market opportunities for WTO Members. However, unlike previous rounds, concern about the erosion of non-reciprocal preferences has found clear expression in the principal negotiating texts.
On preference erosion, the EU supports the LDCs’ request for longer implementation period for tariff reduction on products of key LDC interest in the major markets like the EU and the US. The Doha draft modalities recognise long-standing preferences and undertake to provide targeted technical assistance to promote the diversification of existing production in the territories of preference receiving Member. It is still undecided in the modalities whether preference erosion products will be exempt from tariff cuts for 10 years or whether tariffs cuts will be implemented in annual instalments over a period that is two years longer than the implementation period for developing country Members for tariff cuts.
Resources:
Alexandraki, K., Preference Erosion: Cause For Alarm? (PDF), 2005
Useful briefing paper that examines which middle-income developing countries are most vulnerable to preference erosion
Topp, V., Are Trade Preferences Helpful in Advancing Economic Developmnt? (PDF), 2003
A speptical look at trade preferences which argues that the longer-tern interests of developing countries are best served by comprehensive global trade liberalisation