This post is part of CGD’s work looking at the UK’s role in delivering shared prosperity beyond Brexit. We’ll be looking into further ideas in the coming weeks.
Unless the UK government takes action to prevent it, Brexit could penalize some of the world’s poorest countries. Currently, UN-designated least developed countries (LDCs) receive duty-free, quota-free access to the UK market for virtually all goods under the Everything But Arms (EBA) program. Committing now to provide the same access to LDCs immediately upon Brexit, and to improve it thereafter, would be good for the UK and good for development. This is a practical policy proposal; it’s easy to implement and wouldn’t compromise the UK’s negotiations with the EU or the process of gaining World Trade Organisation approval for the UK’s approach to trading relations as an independent member. Whether the UK will be part of the EU customs union is unclear. Committing now to extend full market access to LDCs will shield them from harm, regardless of the outcome.
How would this work?
Taking the example of footwear: by default imports from outside the EU customs union are subject to a tariff of between 3 and 17 percent. The EU’s Generalised System of Preferences charges lower tariffs on many imports from all developing countries, while the EBA goes to zero tariffs for (virtually) all imports from countries on the UN’s list of LDCs. This means that leather shoes produced in Ethiopia, for example, are subject to a 0 percent tariff. The same shoes produced in the USA would be subject to an 8 percent tariff and therefore be, all else equal, 8 percent more expensive. This gives LDC exporters an advantage over their competitors in other countries, helping them increase exports and create jobs.
Good for development
The EBA scheme provides LDCs’ otherwise disadvantaged exporting industries with a small, much-needed advantage, but it could be even more effective as a development tool. Some countries still struggle to gain EBA access for some goods, because they can’t source enough of the inputs for those goods internally or from other EBA countries to satisfy the scheme’s complex rules of origin. Nontariff barriers resulting from EU regulation, for example of product safety, can be difficult to overcome. Most importantly, LDCs struggle to provide the stable business environment needed to attract investment and suffer from slow, expensive internal transport and other costs.
Still, EBA helps. Some LDCs rely heavily on EBA trading preferences to the UK for their exports. Gambia sends 14 percent and Bangladesh 10 percent of their exports to the UK. If EBA preferences abruptly ceased to apply to those exports, businesses in some of the poorest countries in the world would suffer. Moreover, the UK could expand the benefits to more countries by simplifying the rules for gaining entry and providing more aid for trade to LDCs.
Good for the UK
Reducing tariffs on imports makes goods in the UK cheaper. This is great for people who need a new pair of shoes, but it’s also great for people who need imports of basic commodities or simple manufactured items to produce more complex manufactured items for re-export. Reducing tariffs on imports of goods can hurt domestic firms that compete with imports. However, LDCs are not, by and large, serious competitors for UK producers. Declaring that market access to the UK would continue even in the event of the UK leaving the customs union would also show a commitment to openness and continued leadership in the effort to foster sustainable development around the world. Moreover, providing duty-free, quota-free market access for LDCs would be consistent with WTO rules and would not require negotiation with or approval from other WTO members.
EBA is not enough
Building on EBA-like preferences would help to make the UK a world leader in development-friendly trade policy. The LDC category is unavoidably arbitrary and excludes many very poor, commodity-dependent countries, such as Nigeria, that do not meet the criteria for vulnerability. So, the UK should also look for ways to support countries that are poor, but not on the LDC list. That could be by offering a more generous general preference program, or by expanding the list of countries eligible for duty-free, quota-free market access, as one of us proposed in a CGD working paper. That said, committing to extend this access to LDCs immediately upon Brexit taking effect is a good start. More than that, it’s a win-win, and so supporting the idea is just good common sense.