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Uncertainties abound for the United States’ developing country trade partners in the wake of Donald Trump’s election as president. As I chronicled previously, the US presidential campaign featured plenty of tough rhetoric on trade. At the end of the day, I do not expect President-elect Donald Trump to follow through on some of his harshest campaign trail threats. As I explain here, I think it is unlikely that we’ll see new tariffs of 35-45 percent on imports, or fundamental changes in trade agreements like NAFTA. In fact, it is unclear whether the president has the legal authority to deliver on some of Trump’s trade policy promises. In other cases, the economic and political costs would be daunting for the United States itself.
Still, developing countries have reason for concern. Candidate Trump directed most of his trade threats against developing countries, notably China and Mexico. Most other developing countries were not explicit targets, but they are unlikely to escape unscathed if US trade policy turns more protectionist. These countries could be sideswiped by more aggressive implementation of contingent trade remedies. The “escape clause,” for example, permits increased import tariffs if a domestic industry, such as steel, can show injury due to trade. And without congressional action, and presidential support, the Generalized System of Preferences could lapseagain at the end of the year, leaving developing countries facing tariffs on a broad range of goods. There is some good news for Africa, though, in that the African Growth and Opportunity Act was extended for a full ten years in June 2015.
Even if the worst threats remain just that, they create an atmosphere of uncertainty about the future of US trade policy. That ambiguity alone could deter foreign investors and undermine opportunities for economic growth in developing countries. Trump and the economic officials that he has appointed thus far have also expressed a preference for bilateral trade negotiations. But that approach is likely to have limited economic benefits for either party. Larger trade partners will not accept deals that disproportionately benefit the United States. While smaller partners are more vulnerable to asymmetric demands, big “wins” in those cases would have minimal effects on the US economy.
A narrower US focus on bilateral negotiations, to the exclusion of any progress at the World Trade Organization (WTO), could also further weaken that organization as a bulwark against creeping protectionism. The greatest risks would arise if the incoming Trump administration ignores any WTO panel rulings against its trade policies that may emerge. A turn away from the multilateral system would raise costs for US exporters, since other countries could retaliate, but it would leave smaller, poorer developing countries without any protection against bullying and discrimination.
The focus of this year’s Birdsall House Conference on Women was “beyond aid approaches to promoting gender equality.” Arancha Gonzalez, the Executive Director of the International Trade Center (ITC), was there to talk about the role of trade in that quest. Her argument, with which I agree, is that trade negotiators do have a role in promoting gender equality, but it is “not about having trade rules specifically crafted for women [such as rules of origin]… What we want are trade policies that are sensitive to where the women are in your economy” (at about the 5 hour, 10 minute mark of the webcast).
Knowing in which sectors women-owned businesses cluster can help policymakers identify where their offensive and defensive interests lie so that trade negotiations do not disadvantage women. It would also help in designing capacity-building and other programs to ensure that female-owned businesses can take advantage of new trade opportunities. At the CGD conference, and in an earlier speech in Canada, Gonzalez focused on problems arising from smallness, which is a general problem because of the high fixed costs of international trade. But it is a particular problem for women-owned businesses because they are disproportionately small, and not by choice. The ITC niche among international organizations is to help developing countries promote the inclusion of SMEs in international trade, and it puts particular emphasis on women and trade.
For Gonzalez, the recent Chile-Uruguay bilateral trade agreement is the “gold standard” in addressing gender issues—mainly because it is the first trade agreement to do so explicitly and in a separate chapter. I could not find an official English translation and my grad school Spanish is pretty rusty. But from what Gonzalez said about it, and what I could glean from the original text, Chapter 14 on Gender and Trade does not require a whole lot from the parties. Chile and Uruguay reserve the right to set their own policies on gender matters and to finance them subject to their own priorities and budget constraints. The parties also excluded the trade and gender chapter from the dispute settlement provisions that apply to other parts of the trade agreement, and most of the language is hortatory rather than legally binding.
Nevertheless, the chapter underscores the importance of gender equality, and of preventing discrimination on any basis, in ensuring that trade and growth are inclusive and sustainable. It encourages the parties to undertake cooperative activities to promote female participation in their national economies, as well as in international trade. And it creates a Gender Committee to oversee those activities, as well as to promote dialogue and information exchange.
American trade agreements since 2000 have all included chapters aiming to protect worker rights, but nondiscrimination in employment and remuneration was added only in 2007. (See my chapter on labor in this World Bank handbook for the full history.) And that is usually the only reference to gender issues. Though it now looks unlikely to pass anytime soon, if ever, it useful to compare the Chile-Uruguay agreement to the Trans-Pacific Partnership, which President Obama touted as the model for 21st Century trade agreements. The TPP has a separate (3-page) chapter on cooperation and capacity building that mentions gender equality as an example of a possible area of interest, but that is all I could find in a quick text search. There is also a nonbinding chapter on development that briefly mentions women and economic growth. References to women’s rights are even rarer in the most recent EU trade agreement text (with Vietnam).
With trade policy in both the United States and European Union facing a backlash, momentum could well move in a southerly direction. Hopefully the Chile-Uruguay agreement is an example that others will follow to ensure that trade and growth are inclusive, and that women workers and business owners have equal opportunities to benefit.
The American economy is 44 times larger than that of the average country with which it has a free trade agreement. And it is more than 200 times larger than half of them. US trade negotiators have always had the edge in setting the terms of these agreements. As a result, these deals, by and large, reflect US priorities and preferences. Our trade partners sign because—even where not completely balanced—the net benefits are still positive. In fact, to make these trade agreements more fair from an international perspective, in many cases, would require rebalancing in favor of our trading partners, especially smaller developing countries.
But from a domestic standpoint, it is not enough that the overall net benefits are positive. There are losers from trade and the losses for those individuals and their families can be serious and long-lasting. The fact that technology is at least as much to blame as international trade is cold comfort. The argument that trade liberalization is good policy for everyone is premised on some of the gains being used to compensate the losers. For the most part, that hasn’t happened. Americans who have watched the effects on their hometowns as manufacturing has moved overseas, those who have experienced layoffs, and many more who are anxious about the potential future effects of globalization, voted overwhelmingly for Trump. We witnessed a similar backlash against trade and globalization in the United Kingdom during the Brexit referendum.
Still, in all likelihood, trying to renegotiate trade agreements already tilted in favor of the United States would yield little in the way of new gains. Repudiating them would be even worse, raising prices for US consumers and driving US firms that increasingly depend on global supply chains to offshore more of their activities. It is many of Trump’s core supporters who would pay the highest price under that approach.
If President-elect Trump wants to provide meaningful relief to these supporters, he should work with Congress to strengthen the safety net for dislocated workers and pursue active labor market policies that help workers adapt to rapid economic change associated with globalization and new technologies—something I recommended for the next president, eight years ago. And, yes, we need to make sure that China is complying with international trade rules, though we don’t have a free trade agreement with China.
Presidents Barack Obama and Bill Clinton paid lip service to the need to do more for the losers from globalization. But in the face of opposition from congressional Republicans on fiscal and other grounds, they did not push for it. Nor was the business community willing to pay a little more in taxes to help deal with the downsides of trade agreements they strongly supported. President-elect Trump has a unique opportunity to, finally, make US trade policy more inclusive and fair. But he should start by getting our own house in order.
If the UK leaves the EU (as unfortunately seems most likely), the single market, and customs union, it will need to decide on a new schedule of tariffs for imported goods from both Europe and other countries. One of the options being touted is the unilateral removal of tariffs on all goods, as Hong Kong and Singapore do.
There are three main possible objections to this approach based on UK interests, and one for developing countries, none of which are entirely convincing.
The first is that some tariff lines provide important protection to British industries. This may be true, and deserves further attention, but it doesn’t provide a strong ‘economic’ case for continued protection.
We’ve known since at least the days of David Ricardo that the benefits to consumers from removing tariffs on imports is greater than the benefit to British producers of the protection: the question is whether or not government chooses to compensate those hurt by the change (which it could, by taxing some of the gains made by consumers). Certainly the new government in the UK has explicitly stated its ambition to increase free trade.
Second, there is the argument that the UK would be throwing away its negotiating capital that could help it sign trade deals with other countries in which they would reciprocally reduce import tariffs on British exports.
I’m not sure that this argument really stacks up though. In a paper published in March 2016, the LSE looked at whether unilateral liberalisation would help mitigate the negative effects of Brexit on living standards in the UK. They found that “unilateral liberalisation reduces the costs of Brexit by 0.3 percentage points [increases the level of GDP by 0.3 percent] … The reason that the benefits of such a radical move are small is simple. WTO tariffs are already low, so further reductions do not make much difference. In today’s world, integration is not a matter of lowering tariff rates.”
And there’s the thing—if the benefits of reducing tariffs are low, then their value as negotiating capital in signing trade deals is also low. Most trade deals are now focused on harmonising regulatory standards in order to allow access for trade in services, not cutting tariffs on goods, because most of the value is now in services.
You can get an idea for why the benefits of further tariff reduction are relatively small by looking at average tariff rates. Globally, tariffs are low and falling. The average tariff rate levied by high income countries across all products (weighted by trade volume) is just 1.66 percent. The downward global trend in tariffs also suggests that the potential gains from getting other countries to cut their own tariffs is likely to diminish over time, as they will eventually decide to reduce them anyway.
Tariff rate, applied, weighted mean, all products (%)
World Bank staff estimates using the World Integrated Trade Solution system, based on data from United Nations Conference on Trade and Development's Trade Analysis and Information System (TRAINS) database and the World Trade Organization's (WTO) Integrated Data Base (IDB) and Consolidated Tariff Schedules (CTS) database.
Third, there is the fiscal revenue that tariffs earn. It might not be a huge amount, but in the context of continued fiscal deficit and an economy already weakened by the mere possibility of Brexit, the treasury may be reluctant to let any revenue go. This resistance should be tackled head-on. It could also be compensated for with a slight increase in other taxes such as VAT.
Finally, (and perhaps most importantly) for developing countries: reducing tariffs to zero on agricultural products would be great for many developing countries whose economies (unlike ours) are heavily reliant on agriculture. But there is a potential downside: reducing tariffs for all countries makes it impossible to offer preferentially lower tariffs for those developing countries that really need the support. At present the EU unilaterally offers zero tariffs for “Least Developed Countries,” and evidence suggests that preferential margins like this (the difference between tariffs for favoured countries and other countries) increases trade above and beyond a simple reduction of the overall tariff rate.
However, preferential lower tariffs were always intended as temporary measures in any case, with the full expectation that they would continue to be ‘eroded’ as all tariffs came down. And just as standards, regulations, and other “non-tariff barriers” increasingly matter for trade between high income countries, they are also critical for low income countries. The UK could compensate low income countries for the loss in preferences with additional “aid-for-trade” to help producers meet modern health and safety standards, and help governments develop the physical port infrastructure and administrative systems to allow for smoother trade.
Ryan Young, of the Competitive Enterprise Institute writes, “The logic of embracing free trade unilaterally, that is, no matter what policy any other national government adopts, is well expressed in an adage attributed to the economist Joan Robinson:
If the case against unilateral tariff reduction is to be made, it must be explained how these potential hurdles outweigh the overall gains to the UK economy, the gains to agricultural producers in developing countries, and the global leadership of taking such a bold step towards freer global trade.
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.
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.
If the UK leaves the EU customs union, it will need new trade policies for poor countries as well as with major trading partners. This post kicks off a discussion of what that policy should look like by assessing which country currently has the best trade-for-development policy in the World. Three main points stand out:
CGD’s ‘Commitment to Development Index’ (CDI) appears to be the only existing systematic attempt to rank countries by how good their trade policies are for development.
New Zealand & Australia rank highest in the 2016 CDI in this area, with the lowest tariffs for all poor countries.
The most useful specific preference schemes for the very least developed countries are the EU “Everything But Arms” scheme and, with caveats, the US “Africa Growth and Opportunity Act.”
Given the Prime Minister’s ambition of the UK being a “global leader on free trade,” this blog post looks at the countries have the best trade for development policy in the world, and the main areas the UK would need to address to achieve that status.
The Commitment to Development Index (CDI) judges countries on 3 criteria:
Tariffs & subsidies for developing countries
Red tape on imports
Restrictions on services
2. The lowest average tariffs for all developing countries
New Zealand ranks best overall on the CDI, primarily because it has the lowest tariffs & domestic agricultural subsidies. All countries have important protectionist weaknesses in their policies—so an independent UK has a golden opportunity to become a “global leader in free trade” for development.
Many developing countries are offered exemptions or reductions in these tariffs, and we return to this below.
Though New Zealand and Australia perform best overall, there are important differences by type of product. Like many others, both have high tariffs on textiles, which has been an important route to industrialisation for many poor countries.
Import tariffs on goods from developing countries
Overall Protection (Tariff Equivalent)
Agricultural Subsidies (Tariff Equivalent)
Total Agricultural Protection (Tariff Equivalent)
Textile and Clothing Tariffs
Source: Roodman, CDI (2013), based on CEPII 2007 data.
3. Red tape: non-tariff barriers & restrictions on services
There are many other important barriers beside tariffs. The CDI makes use of the WB ‘Doing Business’ indicators that measure the cost and time of getting a container through customs. Denmark ranks best: there is no cash cost for border or documentary compliance, and procedures takes less than an hour. The Netherlands rank best on the OECD Services Trade Restrictions Index—providing opportunities for the provision of services by non-nationals.
4. Preferential lower tariffs for the least developed countries
Most rich countries also offer special preferential (duty-free, quota-free) access to specific groups of countries. Perhaps the best of these schemes are the EU scheme for least developed countries (EBA), since it eased its rule of origin a few years ago, and Canada’s scheme.
Summary of Key Preferential Access Programmes for LDCs
Source: Elliott (2015), Trade Preferences for the Least Developed Countries: Opportunities Not Panaceas, & Laird (2012), A Review of Trade Preference Schemes for the World's Poorest Countries.
The EU EBA excludes the fewest products (only arms), has relatively flexible ‘rules of origin’ for supply chain inputs, and is a permanent scheme with no time limit. Canada’s preference scheme excludes a few more agricultural items (everything but chickens, eggs, and cheese), but has more flexible ‘rules of origin’ that allow zero tariffs on products that have substantial imported inputs, so long as those inputs come from other beneficiary developing countries.
The US AGOA scheme also offers coverage for 99 percent of products (with some important exceptions) and liberal rules of origin, and is important due to the size of the US market. The scheme also offers preferences to a different set of countries—providing opportunities for lower-middle income countries in Africa such as Kenya and Ghana that are not LDCs, but at the expense of access for Asian LDCs.
Best trade for development policy
So to sum up, who is the best trading partner for developing countries?
Australia and New Zealand offer the lowest tariffs and agricultural subsidies. Canada and the EU offer generous preferential access for the poorest countries, while the US provides duty-free access for most products from a broader range of poor African countries. Still, all of these approaches have flaws that the UK could improve upon to better drive development and mutually beneficial trade. This analysis also hasn’t considered “aid for trade” (or trade facilitation), which is important for helping low income countries take advantage of market access opportunities.
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.
Whatever you think about Brexit, it doesn’t make sense to secure Britain’s economic future by adding red tape. Theresa May’s government wants to tamp down net migration. That’s has opened space for some new self-defeating proposals. During the UK’s recent Conservative Party conference, Home Secretary Amber Rudd outlined a plan to tackle immigration by enforcing a new visa system for international students.
Clamping down on international students threatens a surprisingly important export sector. It damages Britain’s brand and limits an important instrument of soft power. And it would needlessly constrain opportunities for intellectual and professional achievement for foreign-born students, undermining a valuable and often-unrecognised contribution that the UK makes to shared, global prosperity. Migration is a contentious topic, but on this issue the numbers are clear: most voters don’t think of short-term students as immigrants.
A simple, one-line change avoids this false dilemma: redefine the way the Office of National Statistics calculates Long Term International Migration to exclude short-term and temporary non-EU students.
These students arrive in the UK to study and then leave. There are already strict rules in place requiring those who want to stay to re-apply to transition to other visa classes. And according to a year’s worth of data from exit checks, only around 1 percent of foreign students actually overstay. Whether or not you think net migration is a problem, it's bad policy to target the softest part of a badly-defined indicator—rather like “losing weight” by taking off a heavy coat before getting on the scale.
We don’t think of teaching as an export, but it is. In the jargon, education sold to foreign students is a ‘mode 2’ services export. That shows up as a credit in the UK’s balance of trade. International students contribute directly to University finances and the cities and towns in which they study. Figures collected by accountancy firm Grant Thornton for the non-partisan Times Higher Education indicate that international students paid UK universities more than £4 billion in fees in 2014-15.
They also contribute a further multiple to local economies—£3.5 billion a year in 2011-12 according to analysis by Universities UK, an education industry group. (The British Beer & Pub Association, another industry that also profits handsomely from students, has been curiously silent.) And non-EU students subsidise their peers by paying much more for the same courses, much as the pinstriped bankers who instinctively turn left when boarding the plane help pay for those of us at the back. British undergraduates at Oxford next year, for example, will pay £9,250. Their non-EU peers pay up to £23,190.
Giving international students access to the hallowed halls of British institutions is also an important instrument of the UK’s soft power. A remarkable paper published in the American Economic Review—our field’s most prestigious and competitive journal—shows that being educated in democratic countries catalyses the promotion of democracy at home. Students, in short, bring Britain home with them.
And there’s the well-established fact that studying abroad is good for the students themselves. It increases earnings by upgrading skills. It improves employment by conferring a recognised qualification. It expands their social and professional networks. And it enables them to work in a globalised world. Research shows that English-language skills can create a wage premium of up to 20 percent. Surprisingly, most of these important benefits flow to relatively poorer countries– data from the OECD show that in 2012 (the most recent year for which figures are available) more than half the foreign students in the UK were from countries that receive foreign aid.
As for the politics of this problem, most people inherently recognise that students are not migrants at all. Polling from 2014 commissioned by Universities UK found that nearly 6 in 10 respondents would not reduce the number of international students even if that made it harder to reduce immigration numbers.
Students can’t just transition to the labour market: non-EU students who want to remain in the UK to work still need to apply under other visa categories; permanent settlement still requires a successful application for Indefinite Leave to Remain (ILR). And there are already policies in place targeting institutions that might facilitate visas for people to work under the guise of studying. If the Home Office rejects just 1 in 10 or more visa applications associated a particular institution, it loses its designation as a trusted sponsor and faces a higher compliance burden, making it much harder to accept international students in the future.
Early last year, we (along with our colleague Michael Clemens) introduced a list of 13 shovel-ready improvements that would support British employers, grow the economy, provide better services to British consumes, and support development overseas. Revising the definition of migration to exclude international students was on our list then. Now it seems this one-line fix is more urgent and important than ever.
South Asia is home to just under 2 billion people and almost a third of the world’s poorest. As China’s growth slowed in recent years, India surpassed it to become one of the world’s fastest growing economies. But can India sustain the pace, and will the rest of the region follow?
During the World Bank-International Monetary Fund annual meetings last week, I had the pleasure of participating in an excellent panel discussion on how to improve South Asian competitiveness—and how to ensure that the process is pro-poor. In a new report titled “South Asia’s Turn,” World Bank researchers explore what it would take for the countries of the region to exploit today’s globalization opportunities more effectively.
Starting roughly four decades ago, China harnessed globalization in support of economic reforms that contributed to rapid growth and a massive reduction in poverty. But the new report argues that India and others in the region are still not realizing their vast potential, in part because the region is less integrated in the global economy. The goal of becoming more competitive is not to increase trade for its own sake, but to improve the lives of people, especially the poor. Trade creates jobs and, if it contributes to higher growth, drives job creation throughout the economy.
One key conclusion in the report is that South Asia is not taking advantage of its abundant supply of labor. Given prevailing wage rates and productivity levels, the authors conclude that the region’s firms should be using three times as much labor (relative to capital). The report points to management behavior as one explanation, but also to labor market regulations that make it difficult to hire and fire people.
Many developing countries, including some in South Asia, need to undertake legal reforms to make labor markets more flexible. But reform should not ignore the needs of vulnerable workers. Safety nets must be in place to cushion the blow for workers losing their jobs and ensure they do not fall back into poverty. And strong enforcement of the core labor standards, especially freedom of association and the right to collective bargaining, would help workers feel more in control. Upholding decent working conditions would also help attract and retain, reputation-conscious, brand-name buyers in the apparel and electronics industries, as would programs to upgrade workers’ skills.
Including complementary policies to protect people as part of a reform package to make labor markets more flexible would make reform more politically palatable. As Richard Freeman and I wrote in our book on the topic, globalization and higher labor standards should be promoted together because they reinforce one another in positive ways, both politically and economically. The new World Bank report provides important recommendations for governments and firms in South Asia to become more competitive. But let’s not forget that people want not just jobs, but decent jobs that help them rise out of poverty without endangering their lives or threatening their health.