How Not to Use Trade Preferences

By Patrick Costello

The report on trade preference programs recently released by the Center for Global Development, while making a number of sound recommendations for reforming and harmonizing the myriad of preference programs extended to the developing world from “rich countries,” contains several points that would be harmful to nations benefiting from the African Growth and Opportunity Act (AGOA).

The report puts forth five policy recommendations that the developed world should adopt to enhance their preference programs. Of those five, four are laudable and should be enacted in order to improve the various preference programs extended by the United States, the European Union, Canada, Japan and South Korea. Those policies – relaxing the rules of origin and adopting a technique of extended cumulation, making preference programs permanent and predicable, coordinating and targeting capacity building efforts, and encouraging advanced developing countries (i.e. Brazil and India) to implement their own preference programs – will have measurable effects on the poorest of the poor and increase South-South trade. However, the recommendation that trade preferences be extended to all least developed countries rests on the flawed assumption that it is countries that are competitive. In discussion over reforms to preference programs, we must recognize that industries are competitive, not countries.

The recommendation that trade preferences should be extended to all exports from all least developed countries (LDCs) misses the mark. Industries should only take advantage of the preferential trade treatment until they reach a certain level of competitiveness, at which point preferential treatment would become unnecessary. This is most clearly illustrated in the apparel sector, with Bangladesh exporting nearly $3.4 billion in apparel to the US and Cambodia exporting $1.9 billion in 2009.  By contrast, all AGOA beneficiaries exported slightly over $900 million in apparel—approximately 17% of Bangladesh and Cambodia’s total.

I also disagree with the report’s finding that “there is there is no evidence in this analysis to suggest that Africa will lose out overall if the United States extends DFQF market access to other LDCs.” Overall, Africa may not lose out due to the degree of energy related products being exported under AGOA. But what of Lesotho, whose apparel industry supports approximately 40,000 workers, 85% of whom are women?  Lesotho’s emerging apparel sector won’t be able to compete with hypercompetitive industries that are granted trade preferences.  And what of Kenya, which exported only $244 million in apparel in 2009, less than six percent of Bangladesh and Cambodia’s total?  Kenya would also stand to lose its benefits entirely because it does not fit into the United Nations definition of an LDC. Given the unique challenges faced by industry in Africa, it is necessary for regional anchor economies, such as Kenya, to participate in AGOA in order to foster the efficient exchange of goods and services. Current proposals to remove trade benefits for non-LDCs would have devastating effects on trade in Africa as the cost of doing business would rise dramatically.

While the Center for Global Development’s policy prescriptions seek to provide a framework for global harmonization of preference programs for LDCs, Congress must be aware of the far-reaching impacts of these recommendations and the strong possibility of preference erosion for AGOA beneficiaries when considering broader reforms to US programs. This proposal, like the legislation introduced by Representative Jim McDermott last November, is harmful for Africa and, if enacted, would allow Asian giants to push nascent African industries out of US markets entirely.

2 thoughts on “How Not to Use Trade Preferences

  1. Hi,
    Just met your team here in Mwingi, Kenya accompanying Hand in Hand group.

    You are surely doing a wonderful job for the society!!

    Edward, Mwingi-Kenya

  2. Pingback: Tweets that mention How Not to Use Trade Preferences : The Whitaker Group -- Topsy.com

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