Q&A with Kimberly Elliott: Opening Markets for Poor Countries: Are We There Yet?

CGD senior fellow Kimberly Ann Elliott answers questions about her new working paper, Opening Markets for Poor Countries: Are We There Yet? She also explains how a CGD working group that she co-chairs aims to improve trade preference programs to eliminate tariffs and other barriers that rich countries continue to impose on exports from the world’s poorest countries.

Q: You have been working on the issue of rich-world market access for the world’s poorest countries for several years. What’s new in this working paper?

A: This paper offers a systematic ranking of trade preference programs that major rich countries provide for the least-developed countries (LDCs)—a sort of beauty contest to see which program is most attractive. The EU claimed the crown when it introduced the Everything But Arms (EBA) program in 2001; this year they will finish the phase-in of 100 percent duty-free, quota-free (DFQF) market access for LDCs. But many American and African observers argue that the U.S. African Growth and Opportunity Act (AGOA), introduced the same year, is better because its rules of origin make it far easier for poor countries to actually utilize the preferences offered.

Q: So how do you determine the rankings, and who wins?

A: My assessment in the paper compares programs across three dimensions—product coverage, rules of origin, and how long programs last before needing reauthorization. Canada comes out ahead because it scores very well, and sometimes the best, on all three dimensions.

Q: Since average tariffs in rich countries are low, why are trade preference programs for developing countries still important?

A: Average tariffs hide the peaks—often above 15 percent—that typically hit exactly those products that poor countries are good at producing—agricultural products, textiles and clothing, and footwear. The existing preference programs do not fully address this problem. One of the most restrictive EU rules of origin under the EBA is on apparel, which requires poor countries to manufacture the cloth that goes into the clothing they assemble and sew for export. That’s hard for small countries lacking economies of scale, and it’s contrary to the practice in today’s global supply chains, where fabric from one country is often sewn into garments elsewhere.

Q: Are things better under the U.S. program?

A: On rules of origin, yes, but not on other dimensions of the program. U.S. preferences for low-income countries other than Haiti and those in Africa exclude textiles, apparel, and footwear completely. So exports from Bangladesh, Cambodia, and other poor countries in Asia pay peak tariffs on these items. That amounts to a total of nearly $1 billion in import duties for Bangladeshi and Cambodian exports, far more than they receive in U.S. foreign assistance. And even the more generous programs for Africa and Haiti maintain restrictions on key agricultural products, including sugar.

Q: Wouldn’t further reducing tariffs on products from poor countries result in a flood of imports, undermining U.S. industry and increasing unemployment at a time when the U.S. economy is already in trouble?

A: Not at all. The LDCs account for under 1 percent of total U.S. non-oil imports. Bangladesh and Cambodia have a higher share of U.S. clothing imports, but even there the impact would be small, as a forthcoming CGD working paper (which I’ve written together with Antoine Bouet and David Laborde of the International Food Policy Research Institute) shows. Using a general equilibrium model that estimates the effects of the OECD countries adopting 100 percent duty-free, quota-free for all LDCs, we show that U.S. production of textiles would fall by just under 1 percent and production of apparel by less than that.

Q: You co-chair the CGD Working Group on Global Trade Preference Reform. What issues is this group striving to address?

A: The working group aims to anchor policy discussions of trade with the poorest countries in the development conversation rather than the mercantilist, bargaining model that dominates trade policy debates. Poor countries do not have chits they need to bargain for access, nor are they a threat to domestic producers in rich countries. But they nonetheless need market access to develop private sectors capable of supplying local, regional, and international markets. We are designing a proposal for preference reform that would expand product coverage, remove rules of origin as a non-tariff barrier, and reduce uncertainty for investors by making programs permanent or at least longer-term.

Q: The working group sent a letter to the G-20 leaders in September calling on them to implement 100 percent duty-free, quota-free market access for the least-developed countries by the end of this year. Do you see any prospect of this happening?

A: We wanted to be ambitious, but in reality I think the end of this year is extremely optimistic. Next year, however, the EU could adopt the rules-of-origin reform that was presented to the member states a few years ago, and key members of the U.S. Congress say they are committed to passing preference reform legislation next year as well. We will be releasing our working group report early in 2010, and we will certainly be cheering them on, or prodding them from behind, as the case may be.