This blog orginally apeared on Vox on 5/27/09
The economic crisis is hitting the world’s poorest countries through falling trade and commodity prices. This column argues that the US should respond by further opening its market to exports from small, poor economies. That would not only provide an additional stimulus to those economies but also strengthen US global leadership, give a boost to the Doha Round, and serve broader US national interests by helping to promote political stability in some very shaky parts of the world.
“The World’s poorest developing nations have a special place in the Obama trade agenda.”
-US Trade Representative Ron Kirk, Georgetown University, 29 April 2009
While welcome, it is not yet clear how Ambassador Kirk’s words, and the President’s commitment, will be turned into action – and the need for action is urgent.
The latest projections say global trade will fall by roughly 10% this year and stagnate next year, growing by less than 1%, according to the IMF. In a recent paper, Gary Hufbauer and Sherry Stephenson (2009) analyse the impact of the crisis on developing-country trade and find that it is more severe for smaller, poorer countries than for the top 20 developing-country exporters. The world’s poorest countries are generally not well-integrated in global financial markets and mostly avoided the direct effects of the financial crisis, but the associated fall in trade and global commodity prices is hammering them. The World Bank recently estimated that more than 50 million people will remain trapped in extreme poverty as a result of a financial crisis that they had no role in creating.
Most of the drop in trade and commodity prices is due to sharply falling demand in rich countries, and, to a far smaller degree, reduced access to trade finance. Trade policies in the US and other rich countries are not, so far, playing a significant role, but there are worrying trends. Chad Bown (2009) is tracking anti-dumping and other ad hoc trade “remedy” measures for the World Bank’s trade monitoring initiative and has found sharp increases in both the initiation of investigations and imposition of measures in the second half of 2008 and first quarter of 2009. In the US, only three new anti-dumping investigations were launched in the last half of 2008 and, again, in the first quarter of 2009, but the number of new anti-dumping measures imposed jumped from just two in the first half of last year to 21 in the second half, the largest increase anywhere, though India continued to lead in number of measures imposed for the year as a whole (Bown 2009). Hufbauer and Stephenson document a wider range of trade measures adopted in the face of the crisis, with subsidies to the auto and financial sectors dominating in the rich countries and traditional border measures being a more important tool in budget-constrained developing countries.
What the U.S. could do
Many of the trade policy steps that countries should take, or avoid, in coping with the crisis are well covered on this site.1 Avoiding additional protectionist measures is at the top of the list. Completing the Doha Round of multilateral trade negotiations is also more important than ever, as it would help to constrain the use of at least some protectionist measures.
But the Doha Round, under the best of circumstances, will take some time to conclude, and the US and other rich countries should move as quickly as possible to further open their markets to the world’s poorest countries. The eighth of the Millennium Development Goals adopted at a UN summit in 2000 calls on the rich countries to provide duty-free-quota-free market access for the least-developed countries (LDCs). This goal was reiterated at the WTO’s 2005 Hong Kong ministerial meeting, but US negotiators would only commit to provide access for 97% of products and only in conjunction with the conclusion of the Doha Round.
Importantly, the pledge to provide duty-free-quota-free access is not part of the round’s “single undertaking,” and the LDCs are not being asked to undertake liberalisation commitments. So President Obama would lose nothing and could gain a great deal of good will, as well as providing an economic boost to struggling developing countries, by asking Congress to act now and provide access on 100% of products, as the European Union already does, rather than just 97% as promised in Hong Kong. Three percent may not sound like much, but such liberalisation would unblock a number of items that that are of the most interest to poor countries.
Providing full market access will not reverse the decline in trade flows, but it would open opportunities for some of the poorest countries in the world. It would also address a fundamental unfairness created by the fact that US trade policy, like that of other rich countries, discriminates against poor countries and poor people. The highest US tariffs fall on agricultural products and labour-intensive light manufactures, where many developing countries have a comparative advantage.
Figure 1. Average US tariff by sector
Figure 1 masks the impact on agricultural exports from poor countries because the average across all goods obscures the prohibitively high tariffs on a few products, notably sugar, peanuts, tobacco, and dairy products (see Elliott 2008).
The US offsets the impact of trade barriers on developing countries to some degree through programs that provide preferential access. But the same “sensitive” sectors are typically excluded from the Generalised System of Preferences available to most countries. Regional programs provide better access for countries in the Caribbean, Andean, and sub-Saharan Africa, but they still restrict agricultural and a few other products and include strict rules of origin for gaining access that make the programs difficult to fully exploit.
Moreover, there are more than a dozen least-developed countries that do not benefit from these regional programs and a handful that, because of the concentration of their exports in high-tariff sectors, are especially hard-hit. Figure 2 shows average tariffs for various countries and groups of countries. Bangladesh and Cambodia, for example, are LDCs with average annual per capita incomes of around $500, yet the dollar value of duties paid on their exports, almost $1 billion in 2006 for the two combined, is as much as that paid on much larger exports from the much richer countries of France and the UK. The duties collected were also six times higher than the value of the aid that Bangladesh and Cambodia received from the US in that year.
Figure 2. Average tariff rates by source country
In addition to the gaps in US treatment of UN-designated “least-developed countries,” there are a number of small and poor countries that are not quite vulnerable enough to meet the UN definition for LDCs. Several current legislative proposals would use trade to promote US interests in political stability and security in some of these countries, including Pakistan, Afghanistan (an LDC), and Georgia. Rather than adding further complexity to US trade programs by creating new ones, however, Congress should expand eligibility for duty-free-quota-free access to countries that (1) have incomes below the World Bank’s low middle-income threshold and (2) have total national incomes of less than $50 billion, a category that includes Pakistan and Georgia. In 2007, LDCs accounted for 0.5% of total non-oil US imports; adding the roughly two dozen countries that fall into the expanded small and poor category doubles the share to 1% – hardly a major threat to American producers.2
The economic crisis is hitting the world’s poorest countries through falling trade and commodity prices; trade policy needs to be part of the US response. These countries had nothing to do with causing the crisis, and they are the least able to cope with its impact, especially on their most vulnerable citizens. Macroeconomic stimulus to restore demand and rigorous monitoring to stem the spread of trade protectionism are vital to recovery. But furthering opening the US market to the most vulnerable and poorest countries would not only provide an additional stimulus to those economies, it would also strengthen US global leadership, give a boost to the Doha Round, and serve broader US national interests by helping to promote political stability in some very shaky parts of the world.
Bown, Chad P. 2009, Protectionism is on the rise: antidumping import investigations up to 31% in 2008, in The collapse of global trade, murky protectionism, and the crisis: Recommendations for the G20, edited by Richard Baldwin and Simon J. Evenett, a VoxEU.org publication; update available here.
Elliott, Kimberly Ann, 2008, US Trade Policy and Global Development, in The White House and the World: A Global Development Agenda for the Next U.S. President, edited by Nancy Birdsall, Center for Global Development.
Hufbauer, Gary Clyde and Sherry Stephenson, 2009, Trade Policy in a Time of Crisis: Suggestions for Developing Countries, CEPR Policy Insight No. 33, Centre for Economic Policy Research.
1 See the contributions by Richard Baldwin, Simon Evenett, Jeffrey Schott, and others gathered under the Open Markets theme of the Global Crisis Debate section.
2 This proposal will be fleshed out in detail in a forthcoming Center for Global Development working paper. A similar proposal with the list of countries potentially eligible may be found on the Center’s website here.