Chapter

4 Harnessing Trade for Inclusive and Sustainable Growth

Author(s):
International Monetary Fund
Published Date:
April 2008
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World trade has been expanding rapidly, and trends in trade policy have continued to be in the direction of fewer barriers to trade.1 Progress in the multilateral trade negotiations has proved to be elusive, however, reflecting in large part the inability of World Trade Organization (WTO) members to agree on agricultural trade liberalization. Organisation for Economic Co-operation and Development (OECD) countries continue to impose highly distorting agricultural support policies to the detriment of their consumers and producers in developing countries. Developing countries have higher average levels of trade restrictiveness, but the policy of taxing agriculture in many developing countries has become much less prevalent.

A successful Doha Round is important for inclusive and sustainable growth. The current high prices for food provide a window of opportunity that WTO members should use to break the impasse on reforming agricultural trade policies in high-income countries. Doha also offers an opportunity to developing countries to lock in the prevailing, relatively neutral cross-sectoral policy stance for trade in merchandise, and to reap the efficiency gains of lowering further the applied levels of protection.

Access to export markets is important for developing countries, but what matter most are the trade policies and complementary measures that countries themselves adopt. A neutral and liberal trade regime, accompanied by policies and public investments that help communities and firms capture trade opportunities, will largely determine the role that trade will play in achieving the Millennium Development Goal (MDG) poverty targets. “Behind the border” policies are of particular importance in enhancing competitiveness of firms, including policies that affect the quality and costs of services inputs. Many countries are relatively open to trade and investment in services, but restrictions continue to affect the performance of many services sectors in numerous countries. Countries that have undertaken unilateral policy reforms have an opportunity to lock these in via the WTO in the context of the Doha Round. But there is also great scope to do more to use the WTO as a mechanism to commit to future liberalization of trade in services. Not only will this generate gains for the countries that do so, it may help move the overall Doha negotiations forward.

Progress is being made on aid for trade, as illustrated by the initiative to enhance the Integrated Framework for Trade-Related Technical Assistance for Least Developed Countries and the willingness of donors to make commitments to the associated trust fund to support its operations. The regional and global WTO-facilitated meetings on aid for trade in 2007 have helped raise awareness of the importance of complementing trade policy reform with assistance to help firms and farmers benefit more from trade opportunities. What matters now is delivery. This should target competitiveness-related areas—such as trade logistics—as well as help improve the ability of poor households and disadvantaged communities in rural areas to harness trade opportunities to raise their incomes.

Trade policy and aid for trade have a role to play in fighting and adjusting to global warming by increasing incentives to use the most energy efficient environmental goods and services. Trade barriers confronting more climate-friendly technologies tend to be highest in low-income countries, paralleling the overall pattern of trade restrictiveness. Removing policies that restrain trade in energy-efficient environmental goods and services—ensuring that production of inefficient technologies is not supported and assisting producers in developing countries to benefit rather than lose from initiatives such as carbon labeling—can help both in harnessing the potential of trade to enhance inclusive and sustainable growth and in improving environmental outcomes.

Recent Developments in International Trade

World trade in 2007 continued its strong growth trend of recent years. Worldwide exports of merchandise reached $13.7 trillion in 2007, growing 14 percent in value, well above the average growth of 9 percent recorded in 1997–2006. At 17 percent, developing-country export growth was down slightly from the 2006 rate of 22 percent but continued to outpace industrial countries, which grew 13 percent.

Turning to individual regions, higher energy prices contributed to export growth of 10 percent in Middle Eastern and North African countries. Asian exports expanded by 21 percent, with China and India accounting for the bulk of the increase, with a 27 percent and 18 percent increase in 2007, respectively. Buoyed by higher commodity prices and demand, exports from Sub-Saharan Africa and Latin American and Caribbean countries continued to benefit from the healthy global economy, both recording a 12 percent increase. Least-developed countries, as a group, experienced a remarkable 17 percent growth.2

The Doha Round Negotiations

Central to the task of promoting inclusive globalization is bringing down barriers to the products that poor people produce. A successful Doha Round is one of the most important steps nations, acting collectively, could take to enhance inclusive and sustainable growth.

Considerable progress in the complex WTO negotiations, especially in agriculture, has been made. While efforts continue across the broad range of areas covered by the negotiations—including but not limited to agriculture, non-agricultural market access (NAMA), services, rules, regional trade arrangements, special and differential treatment for developing countries, trade and environment, trade-related intellectual property rights, and trade facilitation—the gateway to completing the negotiations is agreement on negotiating modalities in agriculture and NAMA. Draft texts issued on February 8, 2008, by the chairpersons of the agriculture and NAMA negotiating groups as a basis for further discussion lay out the most specific and comprehensive blueprint for global liberalization since the negotiations began in 2001, albeit with bracketed ranges for key numeric parameters.

Agricultural modalities relate to the three core elements of the negotiation—market access, domestic support, and export competition. Progress has been made in recent consultations on export competition, and efforts are ongoing to obtain agreement on market access and domestic support, including the specific targets and approaches for tariff cuts, permitted tariff rate quotas, overall domestic support levels, flexibilities for “special” and “sensitive” products, and a special safeguard mechanism. In the discussions on NAMA modalities, progress has been made on tabling ranges for the coefficients to be applied in a nonlinear tariff-cutting formula, the extent of the application of the formula by different members, and the nature of exceptions and flexibilities that will be permitted for certain members. As with agriculture, agreement is still elusive and many details remain to be worked out.

In services, a plurilateral request-and-offer process has been under way for some time, whereby subsets of members are working toward a set of scheduled market access and national treatment commitments. More recently, attention has also focused on the mandate of the chairman of the negotiating group to consult on a possible services text. On the rule-making front—notably domestic regulation—discussions are proceeding on the basis of a chairman’s text issued in April 2007. As with other areas, negotiations are influenced to a degree by what is happening in agriculture and NAMA.

With respect to WTO rules, in early December the chairman of the negotiating group issued a consolidated draft text on antidumping, subsidies (including fisheries subsidies), and countervailing measures. Implicit in this text is a range of trade-offs that members are invited to consider. No member has rejected the text as a basis for further discussion. A revised text will depend on how the negotiations proceed and also on progress in other areas. The work on regional trade arrangements has already produced a concrete result in the form of the decision on a transparency mechanism for the multilateral examination of agreements.

In the area of special and differential treatment for developing countries, discussions are continuing in relation to a number of agreement-specific proposals for improved special and differential treatment provisions. At the same time, work is proceeding on the establishment of a mechanism to monitor the implementation of special and differential treatment provisions in WTO agreements. On trade and environment, constructive engagement has been continuing on all aspects of the mandate, although further discussion is required on the approach to environmental services and goods in terms of the mandate. An aspect of this issue is the degree of willingness among some members to identify products qualifying as environmental goods prior to the establishment of modalities in agriculture and NAMA. As regards trade facilitation, consensus is being pursued through a text-drafting exercise and is far along. Progress has been made in addressing special and differential treatment, technical assistance, and capacity-building issues.

For the first time in the history of the trading system, a comprehensive set of binding disciplines on international trade in agricultural products is within reach. Only a WTO agreement can address the global trade-distorting impacts of agricultural subsidies, reduce peak tariffs on labor-intensive goods that discriminate against the poor, reduce barriers in key emerging markets to help stimulate South-South trade, and secure the rules-based trading system. A failure to produce concrete results in the near future will undermine certainty and predictability in trade relations, thus diminishing the scope for trade to play its part in fostering economic progress and reducing poverty. The cost of a deal not done would be paid by those who can least afford it. Negotiators do seem to agree on one issue: the window in time for agreeing on modalities will not stay open indefinitely.

Preferential Trade Agreements

Preferential trade agreements (PTAs) continued to proliferate in 2007, both among developing countries and between developed and developing countries. Approximately 194 still-active PTAs have been notified to the WTO. However, given that many agreements have not been notified, the actual number of agreements in effect is estimated at over 300. Despite the high number of agreements, the amount of trade that actually takes place under PTAs is often limited by the exclusion of sensitive products, complicated and costly rules-of-origin requirements (the cost of which can be as high as the equivalent of a 4 percent tariff),3 and low preference margins.

Notable PTAs that came into effect in 2007 include the expansion of the European Union to include Bulgaria and Romania; the addition of Albania, Bosnia and Herzegovina, Croatia, Kosovo, the former Yugoslav Republic of Macedonia, Moldova, Montenegro, and Serbia to the Central European Free Trade Agreement (CEFTA); a free trade agreement between the Republic of Korea and the Association of Southeast Asian Nations (ASEAN); and bilateral agreements between the Syrian Arab Republic and Turkey, Chile and China, and the United States and Peru.

EU ACP Economic Partnership Agreements

Since 2000 the European Union (EU) has extended favorable preferential access to the exports of 78 African, Caribbean, and Pacific (ACP) developing countries under a system known as the Cotonou Agreement. Because the trade preferences were unilateral (the EU received no reciprocal preferential access), the Cotonou Agreement was not compatible with WTO requirements for trade agreements and operated under a temporary waiver with an expiration date of December 31, 2007. Anticipating this deadline, the EU began in 2002 to negotiate Economic Partnership Agreements (EPAs) with six regional clusters of countries with the goal of producing WTO-compatible agreements.

Negotiations were difficult and progressed slowly. Only one full EPA—covering goods, services, rules of origin, and development support—was agreed upon before the end-of-year deadline, with the cluster of Caribbean countries. Partial interim agreements were initialed with the East African Community and Southern Africa clusters, and individually with an additional 10 countries—Botswana, Cameroon, Côte d’Ivoire, Fiji, Ghana, Lesotho, Mozambique, Namibia, Papua New Guinea, and Swaziland. Umbrella (framework) agreements on trade and development cooperation were signed with the East African Community (EAC), the Common Market for Eastern and Southern Africa (COMESA), and the Southern Africa Development Community (SADC). As of January 1, 2008, countries with EPAs will have tariff- and quota-free access to EU markets, with a short transition for sugar and rice. Liberalization in the ACP countries to EU exports varies by region and country but will be implemented gradually, with provisions to protect sensitive sectors. Those countries that did not reach agreement on an EPA include 32 least-developed countries (LDCs), which will continue to have duty- and quota-free market access under the EU’s “Everything But Arms” initiative for LDCs, and an additional 10 non-LDCs, which will revert to preferences under the EU’s Generalized System of Preferences.4

Developments in National Trade Policies: Merchandise Trade

Governments use numerous instruments to regulate trade, including import tariffs, specific duties, quotas, technical product regulations, antidumping duties, and discretionary licensing. The commonly used indicators of trade policy, such as average tariffs and frequency measures, only capture partially the impact of trade policies on trade flows. It is preferable to use summary measures that take into account the effect of all policies affecting trade.

Measures of Trade Restrictiveness

What follows uses two measures of the restrictiveness of trade policies affecting merchandise trade: the Overall Trade Restrictiveness Index (OTRI) and the Tariff Trade Restrictiveness Index (TTRI).5 Both provide a measure of the uniform tariff equivalent of observed policies on a country’s imports: they represent the “tariff” that would be needed to generate the observed level of trade for a country. The level of restrictiveness confronting exporters is captured by two similarly constructed indicators: the Market Access OTRI (MA-OTRI) and the Market Access TTRI (MA-TTRI).

BOX 4.1Trade data and trade restrictiveness indicators

The accuracy of the summary measures of trade restrictiveness is largely a function of the underlying data. While the indicators used in this report are based on sound theoretical foundations and are an advance over standard summary indicators such as (weighted) average tariffs, their accuracy inevitably depends on the quality of information on prevailing policies.

Prior to the calculation of these indicators, tariff and nontariff data are collected, validated, and standardized. Tariff data collection is undertaken by UNCTAD and the International Trade Centre (Geneva), working with the WTO. These trade and tariff data are published in a global database and software system (the World Integrated Trade Solution—WITS). In recent years the underlying data have been improved by incorporating more extensive information on tariff preferences and specific duties. Although ad valorem tariff data are generally comprehensive and up-to-date, the database may not have comprehensive coverage of so-called para-tariffs and surcharges, which are usually applied on a temporary basis, leading to underestimation of trade restrictiveness in a given year. Conversely, some measures may continue to be registered in the database even though they have subsequently been removed.

Excise taxes may also affect estimates of the indexes. As long as excise taxes are imposed on both imports and domestic production, they should not be classified as a trade tax. However, some countries report excises in their tariff schedule (as they are collected on imports at the border), and these may therefore be included in the estimate of trade restrictiveness. Several instances where this was the case have been identified, and the underlying data corrected.6 Specific duties—taxes imposed on the basis of quantities imported rather than values—raise additional issues, as these taxes need to be converted into ad valorem tariff equivalents. Different methodologies can be used to do this. For the indexes of this report, the methodology used by UNCTAD has been used.

The major factor affecting the accuracy of the indexes is the coverage of nontariff measures (NTMs). Comprehensive data on such measures are unfortunately lacking. Resource constraints have impeded the collection of data on NTMs by the organization that historically has taken the lead in this area—UNCTAD. Existing data are therefore not necessarily up-to-date and may not be fully comparable across countries. Given the increasing importance of NTMs in global trade—in part as a result of the steady decline in tariffs in many countries—it is important that a concerted effort be made to mobilize the political attention and resources needed to improve information on NTMs, including to better distinguish between regulatory policies such as product standards and other policies that have as a primary motive the restriction of trade.

The limitations of the data on NTMs are one reason for reporting both the OTRI and the TTRI in this report. Although a downward-biased measure of trade restrictiveness, the advantage of the TTRI is that it is more comparable across countries, and more countries can be included in the calculation of the index.

The OTRI captures all policies on which information is reported to and by Geneva-based organizations (the International Trade Centre, the United Nations Conference on Trade and Development [UNCTAD], and WTO). These comprise ad valorem tariffs, specific duties, and nontariff measures (NTMs) such as price control measures, quantitative restrictions, monopolistic measures, and technical regulations (box 4.1). The TTRI is narrower in scope; it takes into account only tariffs (both ad valorem and specific).7

As many NTMs are not necessarily protectionist in intent (or effect), the OTRI reflects net (overall) restrictiveness; it is not a measure of the level of protection that a government seeks to provide domestic industry. Some NTMs comprise border restrictions, such as quotas or bans, and are motivated by protectionist objectives. Others, such as standards for mercury content or fecal matter, are aimed at safeguarding human, animal, or plant health. Unfortunately the measures do not permit us to distinguish between objectives. Thus, protection is better measured by the TTRI, although, because of its limited coverage of trade policy instruments, it is best seen as providing a lower-bound estimate of the extent of protection prevailing in a market.

Levels of Trade Restrictiveness

Although trade flows are now subject to lower barriers than was the case a decade ago, trade barriers still exert a large impact on world trade. Trade policies are generally more restrictive in developing countries than in the high-income economies (table 4.1). This is due in part to lower tariffs in the latter but also to the higher percentage of trade in manufactured products in the trade of these countries (manufactures generally face much lower trade restrictions than agricultural products, which are relatively more important in the export basket of developing countries). Trade restrictions on agriculture are on average highest in high-income countries. In general, the higher the level of development of countries, the lower the overall trade restrictiveness, and the higher the level of trade restrictiveness in agriculture.

Table 4.1OTRI and TTRI by income group, 2006percent
Total tradeAgricultureManufacturing
High-income countries7.043.14.3
2.112.41.4
QUAD7.144.54.0
1.911.11.3
Upper-middle-

income countries
13.0

4.6
29.3

6.6
11.8

4.5
Lower-middle-

income countries
11.8

6.5
26.5

11.5
10.6

6.0
Low-income countries17.726.616.7
10.815.310.4
Source: World Bank staff estimates.Note: TTRI in italics; OTRI in boldface. QUAD comprises Canada, the EU, Japan, and the United States.

The impact of NTMs on overall restrictiveness can be assessed by the difference between the OTRI and the TTRI. Nontariff measures are an important component of overall trade restrictiveness, especially for agricultural products. Nontariff measures tend to be more prevalent in high-income and upper-middle-income countries. For higher-income countries, NTMs account for about two-thirds of total restrictiveness. NTMs appear to play a less important role in lower-middle-income and low-income countries. Although NTMs in agriculture tend to be significant, agricultural products also confront much higher tariffs than manufactures do. The TTRI of high-income countries is approximately 12.4 percent for agriculture compared to only 1.4 percent for manufactured products.

Trade restrictiveness levels differ across geographic regions. The level of trade restrictiveness on average is higher for countries in South Asia, the Middle East, and North Africa and lower for countries in East Asia, Eastern Europe, and Central Asia. Sub-Saharan Africa and Latin America have overall restrictiveness levels in between these two extremes (table 4.2). The EU, United States, Japan, and China account for about 60 percent of world trade. All have policies that are more restrictive of trade in agricultural products than manufactures (table 4.3), with Japan and the EU imposing significantly higher restrictions. Manufacturing trade is relatively less restricted: the TTRI is less than 5 percent in China and around 1 percent in the EU, Japan, and United States.

Table 4.2OTRI and TTRI, by developing country region, 2006percent
Total tradeAgricultureManufacturing
East Asia & Pacific11.326.610.4
5.08.74.8
Europe &

Central Asia
10.1

4.5
25.9

10.3
9.0

4.0
Latin America

& the Caribbean
15.0

5.4
28.1

6.6
13.8

5.3
Middle East

& North Africa
21.6

11.9
32.3

12.1
19.4

11.8
South Asia19.546.418.2
14.031.413.2
Sub-Saharan Africa14.424.912.9
8.413.87.6
Source: World Bank staff estimates.Note: TTRI in italics; OTRI in boldface font.
Table 4.3OTRI and TTRI for the four largest traders, 2006percent
All tradeAgricultureManufacturing
United States6.418.45.7
1.63.81.5
European

Union
6.6

1.4
48.7

5.9
2.9

1.1
Japan11.455.85.7
4.531.11.1
China9.917.19.5
5.18.84.9
Source: World Bank staff estimates.Note: TTRI in italics; OTRI in boldface font.

Changes in Trade Restrictiveness

Trade barriers have fallen in many countries, resulting in lower trade restrictiveness. Reductions have mostly been the result of unilateral reforms but are also the result of trade negotiations and agreements. Between 2000 and 2006 the OTRI declined in all country and income groups (figure 4.1). Developing economies, especially middle-income countries, saw the largest declines, including in agriculture. By region, countries in East Asia and Latin America reduced overall trade restrictiveness the most during this period, while Sub-Saharan African countries experienced the least reduction. However, it should be noted that Sub-Saharan Africa’s OTRI is below that of South Asia and the Middle East and North Africa. With the exception of South Asia and Sub-Saharan Africa, where policy reforms have mainly targeted trade in manufactures and the overall level of agricultural trade restrictiveness increased slightly, trade restrictiveness has fallen for both agriculture and manufacturing.

figure 4.1Change in OTRI, 2000–06

Source: World Bank staff estimates.

New Estimates of Distortions to Agricultural Incentives

Trade restrictiveness across products and countries tends to show a clear pattern: richer countries tend to have higher barriers to trade in agricultural products. This is a phenomenon that initially emerged in the late 19th century8 and has been a persistent feature of global trade policy ever since. For 20 years the OECD Secretariat has been publishing annual estimates of producer support to farmers in OECD member countries.9 These Producer Support Estimates (PSEs) provide a transparent set of numbers that allow monitoring over time of the extent to which farmers are being assisted by governments through myriad direct payments and agricultural market price support policies. Although PSEs have fallen in some OECD countries since 1999–2001—for example, in Japan and the United States—they have increased in the EU, the Republic of Korea, and a number of other countries (figure 4.2).

figure 4.2Producer support estimates for OECD members, 1999–2006

Source: OECD (2007).

The policies included in the PSE are captured in the OTRIs and TTRIs reported above for agriculture. As the membership of the OECD is composed mostly of high-income countries, the type of detailed data used to calculate PSEs is not available for developing countries. As a result agriculture OTRIs are less comparable across developed and developing countries. A recent World Bank research project has sought to fill this gap by compiling annual time series estimates of rates and values of assistance/taxation over the past half century for around 75 countries that together account for 90 percent of global population, GDP, and agricultural production. For each country, nominal rates of assistance (NRAs)10 are calculated for key products, which make up an average of 70 percent of the value of total farm production, and are estimated for the residual set of commodities.11

An aggregated summary of the NRAs is provided in figure 4.3. This reveals that the growth of agricultural support in high-income countries began to reverse only in the 1990s. If farm income support that is said to be decoupled from production incentives is considered, there is very little decline in the rate of support. Figure 4.3 also supports the widely held view that developing-country governments put in place agricultural policies that effectively taxed their farmers. The extent of taxation was of the order of 20 percent from the mid-1950s to the mid-1980s. Since then not only has it diminished but, on average, developing countries have moved from taxing to subsidizing their agricultural sector.

figure 4.3Nominal rate of assistance to farmers in high-income and developing countries, 1960 to 2004

Source: Anderson (2008).

Note: Averaged using weights based on the gross value of agricultural production at undistorted prices. High-income countries include the Republic of Korea and Taiwan, China.

Figure 4.4 shows the trends in NRAs by developing-country region. African countries have shown the least tendency to reduce the taxing of farmers—the average NRA has been negative in all five-year periods except in the mid-1980s, when international prices of farm products reached an all-time low in real terms. By contrast, for both Asia and Latin America, NRAs crossed over from negative to positive after the 1980s. In European transition economies, in the initial years of reform, nominal assistance to farmers was slightly negative, but thereafter it has trended upward. As of 2004, however, it still averaged only about half the average rate of Western Europe.

figure 4.4Nominal rate of assistance to farmers in developing countries, 1960 to 2004

Source: Anderson (2008).

The U.S. dollar values of the gross subsidy equivalents of the NRAs (or taxation) are shown in table 4.4. These estimates suggest that, from the mid-1950s through the mid-1970s, assistance to farmers in high-income countries almost exactly offset taxation of farmers in developing countries. Until the late 1980s, farmers in developing countries were at a double disadvantage in terms of competitiveness: farmers in OECD countries benefited from significant levels of support, whereas agricultural production in developing countries tended to be taxed. Since the early 1980s, the gradual decline in taxation of farmers in developing countries and the growth in assistance to high-income country farmers have combined to see the net global transfer to farmers increase to more than $250 billion per year (figure 4.5). Regionally, outside the high-income group, it is Asia where the payments are largest in aggregate. On a per farmer basis, however, payments are now largest in Europe’s transition economies. In Africa, meanwhile, farmers still confront discrimination relative to other forms of economic activity.

Table 4.4Gross subsidy equivalents of assistance to farmers, by region, 1960 to 2004current US$ billions per year
1960–641965–691970–741975–791980–841985–891990–941995–992000–04
High-income countriesa30.343.149.096.4133.0174.1216.3200.2190.9
Developing countries-18.7-21.9-46.7-69.0-92.0-35.80.847.965.2
Africa-0.6-1.3-3.3-5.9-4.01.5-6.3-6.0-7.9
Asia-17.5-19.0-37.8-55.1-70.8-28.9-1.827.148.0
Latin America-0.3-0.7-4.9-6.7-10.4-9.34.76.55.3
European transition-0.2-0.9-0.6-1.3-6.80.84.220.319.7
economies
Source: Anderson (2008).Note: These values have been scaled up to account for the fact that each region is less than fully covered, the assumption being that NRA in the nonstudied group of countries in each region was the same as the regional average for the studied countries.

figure 4.5Gross subsidy equivalents of assistance to farmers in developing and high-income countries, 1960–2004

Source: Anderson (2008).

The data on gross subsidy equivalents of support to farmers show that the overall level of assistance in high-income countries has been virtually constant for the last 15 years and has been rising in developing countries, perhaps in part as a response to the example set by high-income nations. The high level of production support in high-income countries distorts domestic and world market prices and is detrimental to producers in developing countries and consumers in the high-income countries themselves. Historical policies in many developing countries of taxing agriculture have also been detrimental to farmers, and the more recent trend toward a more neutral policy stance for agriculture relative to other sectors of activity is to be welcomed. However, going beyond this and emulating OECD members by starting to subsidize agriculture is not desirable.

The trends in agricultural trade policies illustrate the importance of using the opportunity offered by the Doha Round to agree to far-reaching reductions in overall production support to farmers in high-income countries, and of complementing this by agreeing to cap the extent of such support provided in developing countries and to lock in the relatively neutral sectoral trade policy stance that now prevails in many developing economies. Current high global price levels for food provide a window that may facilitate agreement—lower tariffs will benefit poor households by reducing domestic prices, while farmers will be less affected given robust global demand for food and biofuel feedstocks. An important challenge in this connection has been the recent recourse by some major exporters to export taxes and other controls. These increase the instability of world market prices, have adverse effects on the poor (including net sellers in poor countries), and do systemic damage by eroding the confidence of importing countries in the reliability of world markets as a source of food supply.

The trend toward higher protection of agriculture is driven in part by equity objectives as well as by a desire to shelter farmers from competition from subsidized farmers in OECD countries. Trade policy is not the appropriate instrument to pursue equity objectives or to attain goals such as food security and rural development. This is not just because trade policy distorts consumption and production decisions; it is also because the distributional consequences of protecting agriculture may be harmful to many poor households, especially those that are net consumers and do not derive income from agriculture. Other policy instruments that are aimed at increasing productivity or linking rural communities to markets are much superior to trade policy in helping the poor benefit from trade opportunities. Liberalization therefore needs to be complemented by assistance to developing governments to help put in place such productivity and income-enhancing policies—aid for trade.

Market Access

The effect of trade policies on exporters’ access to markets is different across trading partners and geographic regions. This is due both to the discriminatory use of trade policies (i.e., trade preferences) and to the composition of trade. Table 4.5 reports the MA-OTRI and MA-TTRI faced by exporters in each geographic region and country income group. The MA-OTRI measures the overall restrictiveness (including nontariff measures) faced by exports; the MA-TTRI measures restrictiveness faced by exports due to tariffs alone.

Table 4.5MA-OTRI and MA-TTRI by income group, 2006
Importing CountriesHigh income countriesUpper middle income countriesLower middle income countriesLow income countriesEast Asia & PacificEurope & Central AsiaLatin America & CaribbeanMiddle East & N. AfricaSouth AsiaSub-Saharan Africa
High-income6.35.77.99.18.35.17.04.310.44.4
countries2.41.22.52.42.61.11.50.83.10.7
QUAD6.35.28.610.68.95.26.94.413.64.5
2.10.92.52.52.70.81.20.53.30.5
Upper-middle-15.611.815.814.719.210.213.66.014.35.9
income countries5.63.85.65.77.24.42.62.56.63.5
Lower-middle-12.411.112.99.413.611.212.66.79.94.0
income countries7.14.86.75.16.66.25.12.86.22.7
Low-income18.214.319.525.422.217.715.916.316.216.3
countries10.98.112.212.913.86.29.010.010.412.2
Source: World Bank staff estimates.Note: MA-TTRI in italics; MA-OTRI in boldface font.

Sub-Saharan Africa countries benefit from relatively liberal market access as a result of preferential access to the major economies and because of the relatively larger share of exports of commodities for which tariffs are low. Conversely, Sub-Saharan Africa’s market access to other low-income countries is restricted by relatively high tariffs. Among other regions, East European and Central Asian market access to high-income countries is facilitated by preferences in the EU, while the low TTRI confronting the Middle East and North Africa is largely due to the composition of exports—oil products are generally subject to low import tariffs.

Changes in Market Access

Market access has improved in recent years, with high- and upper-middle-income countries benefiting relatively more (figure 4.6). This is largely due to export composition, as high-income countries’ exports consist mainly of manufactures, for which restrictiveness has declined relatively more. Exports of lower-income countries are more oriented toward agriculture, which faces more restrictive barriers and for which liberalization has been more muted.

figure 4.6Change in the average MA-OTRI for all exports, 2000–06

Source: World Bank staff estimates.

Trade Policy, Growth, and Poverty: The Behind-the-Border Agenda

The relationship between trade expansion and economic growth is well documented. Growth in turn is a primary driver for poverty reduction. Developing countries that have registered the largest declines in poverty are generally those that have also expanded their trade faster. Even in instances where economic growth may directly affect the poor only modestly, growth that increases the national wealth as a whole permits government to allocate more resources to measures aimed at alleviating poverty and other social programs.

The level of trade restrictiveness across countries is generally negatively correlated with the level of development. High-income countries tend to have less-restrictive trade regimes than developing countries, and among developing countries, low-income countries are generally more restrictive than middle-income countries. Figure 4.7 plots the correlation between changes in per capita GDP with changes in the OTRI for developing countries in the period 2000 to 2006. Countries for which per capita GDP has grown more have tended to have liberalized their trade more.

figure 4.7Higher growth is associated with lower trade restrictiveness

Source: World Bank staff estimates.

In principle, trade liberalization should enhance national welfare, although there will always be some groups that lose, as the removal of trade policies generates redistributive effects. Trade policies have diverse effects across economic sectors and geographic areas, and gains and losses depend on how individuals are positioned relative to the preexisting structure of protection. If the transitional costs of trade liberalization fall disproportionately on the poor, complementary reforms are needed to mitigate such costs.

The existing literature is virtually unanimous in finding that trade reforms increase the incomes of the poor as a group. More-over, the transitional adjustment costs are found to be generally small relative to the overall benefits. Hertel and Winters12 for example, collect a series of studies that estimate that the effect of complete tariff liberalization on poverty (as measured by the threshold of US$1 per day) in developing countries would be to reduce the poverty headcount index by 5.0 to 6.5 percentage points over a 10-year period. These studies also indicate that effects can be diverse across countries, with poverty potentially increasing in some countries as a result of preference erosion and trade diversion. Another set of recent studies that focuses on a sample of small, low-income countries points to small but generally positive effects of multilateral trade liberalization on poverty.13 The studies collected in Harrison14 also find positive effects of trade liberalization on poverty. Besides pointing to a positive correlation between trade liberalization and poverty reduction, these studies highlight the importance of complementary policies in realizing the full benefits of trade reforms for growth and poverty reduction.

Behind-the-Border Policies Matter

The magnitude of the gains to poor countries from global trade reforms depends on actions to create new and more remunerative jobs and move producers out of subsistence agriculture. Trade reform by itself will not ensure these outcomes. Domestic supply constraints are a major reason for the lack of trade growth and diversification in many of the poorest developing countries. Without action to improve supply capacity, reduce transport costs for remote areas, increase farm productivity, and improve the investment climate, trade opportunities cannot be fully exploited and the potential gains from trade will not be maximized. The reforms that may be called for span several areas, mostly “behind the border.”

Research in this area identifies in particular actions to move households out of subsistence production and to improve productivity. Given that poverty is concentrated in rural areas that depend heavily on agriculture, trade opportunities can raise incomes, but only if products are produced for the market. This may require active intervention to help households make the switch—through extension services, access to credit, and investments in infrastructure. Poor roads and ports, poorly performing customs, weaknesses in regulatory capacity, and limited access to finance and business services are all factors determining trade performance.

A major dimension of facilitating trade is action to reduce the burden of administrative hurdles—such as customs and tax procedures, clearance requirements, and cargo inspections. Djankov, Freund, and Cong15 conclude that each day of delay caused by such hurdles reduces export volumes by 1 percent on average. A recent World Bank initiative provides comparable cross-country data measuring the quality of logistics performance implied by such regulatory policies and related infrastructure in a country (box 4.2). A database compiled as a result of this initiative documents that good trade logistics are critical for developing countries to improve their competitiveness, reap the benefits of globalization, and fight poverty more effectively in an increasingly integrated world.16 Success in integrating into global supply chains starts with the ability of firms to connect to international markets and to move goods across borders rapidly, reliably, and cheaply. Countries with better performance on logistics experience higher growth in their openness (trade-to-GDP ratio; figure 4.8).

figure 4.8Countries with better trade logistics have higher trade-to-GDP growth

Source: World Bank staff estimates.

Services Policies

Many of the behind-the-border policies affecting the competitiveness of firms and farmers in a country are services-related. To be able to compete, firms in open economies need access to low-cost and high-quality producer services—telecommunications, transport and distribution services, financial intermediation, and so forth. Global outsourcing, production sharing, and offshoring depend on access to, and the cost and quality of, services.

Low-cost and high-quality telecommunications will generate economy-wide benefits, as the communications network is a transport mechanism for information services and other products that can be digitized. Telecommunications are crucial to the dissemination and diffusion of knowledge—the spread of the Internet and the dynamism it has lent to economies around the world are telling testimony to the importance of telecommunications services. Similarly, transport services affect the cost of shipping goods and movement of workers within and between countries. Business services such as accounting, engineering, consulting, and legal services reduce transaction costs associated with the operation of financial markets and the enforcement of contracts, and are a channel through which business process innovations are transmitted across firms in an industry or across industries. Retail and wholesale distribution services are a vital link between producers and consumers. Health and education services are key inputs into—and determinants of—the stock and growth of human capital.

BOX 4.2The World Bank Logistics Performance Index

Launched in November 2007, the Logistics Performance Index (LPI) is an interactive benchmarking tool created to help countries identify the challenges and opportunities they face in improving trade logistics. The LPI and its indicators provide the first in-depth assessment of the logistics gap among countries across several areas of performance.

Based on a worldwide survey of global freight forwarders and express carriers, the LPI develops measures of the logistics friendliness of the countries surveyed. Feedback from the survey is supplemented with objective data on the performance of key components of the logistics chain. The LPI provides a comprehensive picture of countries’ supply chain performance. It is built on the following seven areas of performance:

  • Efficiency of the clearance process by customs and other border agencies

  • Quality of transport and information technology infrastructure for logistics

  • Ease and affordability of arranging international shipments

  • Competence of the local logistics industry

  • Ability to track and trace international shipments

  • Domestic logistics costs

  • Timeliness of shipments in reaching destination

The LPI and its indicators point to significant differences in logistics performance across countries and regions. Among developing countries, the best logistics performers are also those experiencing economic growth led by manufactured exports. A key insight from the survey of logistics professionals is that, while costs and timeliness are of paramount importance, traders are primarily concerned with the overall reliability of the supply chain. Costs related to hedging against uncertainty have become a significant part of logistics costs in many developing countries. Country performance can be greatly influenced by the weakest link in the supply chain: poor performance in just one or two areas can have serious repercussions on overall competitiveness.

The LPI also suggests that policy makers should look beyond the traditional “trade facilitation” agenda that focuses on road infrastructure and information technology in customs to also focus on improving the operation of logistics services markets and the public agencies active in border control. This demands a more integrated, comprehensive approach to reforms all along the supply chain. International companies can bring global knowledge, but the support of local exporters, operators, and public agencies is crucial.

Source: World Bank (2007a) and http://www.worldbank.org/lpi.

Permitting foreign firms to compete in services markets is a powerful potential channel for technology diffusion as well as a mechanism to reduce costs and/or raise the quality of services. A research project by the World Bank is seeking to compile data on the extent to which policies discriminate against foreign services providers, thereby providing a complement to the OTRI and related measures of trade restrictiveness pertaining to trade in goods. To date, surveys have been conducted in 32 developing countries and comparable information obtained for 24 OECD countries, covering five key sectors: financial services (banking and insurance), telecommunications, retail distribution, transportation, and professional services.17 In each sector, the survey covered the most relevant modes of supplying that service: cross-border trade in services (mode 1 in WTO parlance) in financial, transportation, and professional services; commercial presence or foreign direct investment (FDI; mode 3) in each services sector; and the presence of service-supplying individuals (mode 4) in professional services. Survey results to date are summarized in figure 4.9.18

figure 4.9Restrictiveness of services trade policies, 2007

Source: World Bank staff estimates.

The survey reveals that developing countries have significantly liberalized a range of service sectors over the last couple of decades, but in some areas protection persists. In fact, the overall pattern of policies across sectors is increasingly similar in developing and industrial countries. In telecommunications, public monopolies seem in most countries a relic of history, with at least some measure of competition introduced in both mobile and fixed services. In banking too, domination by state-owned banks has given way to increased openness to the presence of foreign and private banks. Very few countries restrict foreign investment in retail. However, even though the markets for these services are now more competitive, they are in most countries some distance from being truly contestable. In telecommunications, governments continue to limit the number of providers and, particularly in Asia, the extent of foreign ownership. In both banking and insurance, the allocation of new licenses often remains opaque and highly discretionary. In retail, a range of domestic regulations, such as zoning laws, frequently impedes entry in both developing and industrial countries.

Transport and professional services remain a bastion of protectionism in high-income countries and are also subject to high barriers in developing countries (figure 4.10). In maritime transport, even though international shipping is today quite open, entry into cabotage and auxiliary services such as cargo handling is in many countries restricted. In air transport, restrictions on foreign investment coexist with limitations on cabotage and cross-border trade—though conditions for freight transport are much more liberal than those for passenger transport. In professional services, even though there is increased scope for international trade through electronic means, in which many developing countries are also beginning to participate, there remain restrictions on foreign presence. In general, accounting and the practice of international law tend to be more open than auditing and the practice of domestic law. The restrictions on foreign investment are far less stringent than the restrictions on the presence of foreign professionals.

figure 4.10Services trade restrictiveness indices, by sector

Source: World Bank staff estimates.

The available evidence suggests that increased openness in telecommunications, in combination with dramatic technological progress, has led to striking improvements in access, variety, and quality of services.19 In retail distribution and transport too, liberalization has generally produced significant benefits for both upstream producers and downstream consumers. Outsourcing of professional and other business services is producing significant cost savings for importing countries and generating new employment opportunities in exporting countries, though the former must also contend with the costs of adjustment. In financial services, while greater openness has eventually improved the efficiency of services, in some cases premature liberalization has had adverse economic effects both on financial stability and on access to services for the poor and small enterprises.20 This points to the need for liberalization to be accompanied by complementary reforms, ranging from improved prudential and pro-competitive regulation to the implementation of policies to widen access to services along the lines of universal access mechanisms in telecommunications.

While most services liberalization has so far been undertaken unilaterally, services are also the subject of multilateral and regional trade negotiations. These negotiations have led to greater certainty of policy by inducing countries to begin to lock in unilateral liberalization, but the negotiations have so far produced little additional market opening. Bringing services on to center stage in the WTO’s Doha negotiations could contribute to deeper reform. These negotiations offer WTO members a key opportunity to secure access to foreign markets and to spur domestic reforms. A negotiated outcome that is balanced, is commercially relevant, and supports development would have four elements: a promise not to impose new restrictions on trade in services, thereby dispelling the specter of protectionism that hangs over outsourcing of business services; a commitment to eliminate barriers to FDI, either immediately or gradually where regulatory inadequacies need to be remedied; a credible promise of international assistance where needed for complementary reforms; and an agreement to allow greater freedom of international movement for individual service providers in order to fulfill specific services contracts.

Aid for Trade

In the 2005 WTO Hong Kong ministerial declaration, trade ministers called on bilateral and multilateral donors to increase the resources for aid for trade, endorsed the enhancement of the Integrated Framework for LDCs, and established a Task Force on Aid for Trade. The task force highlighted the centrality of recipient-country ownership and political leadership, with governments incorporating trade more centrally into their development and poverty reduction strategies. It provided a definition of aid for trade and recommended, among other things, monitoring and evaluation to ensure that pledges on aid for trade were fulfilled through a body in the WTO, which was to undertake a periodic global review of aid-for-trade delivery.21

Several regional meetings were held in the fall of 2007 to encourage information exchange about best practices and to facilitate collective action to maximize the benefits of aid for trade. The regional meetings were followed by the first WTO global aid-for-trade review in November 2007. This global review highlighted the need for improvements in aid for trade and the importance of improving data on aid flows and performance indicators (outcomes) for both donors and recipients, as well as increasing country, regional, and sector focus. Follow-up events planned for 2008/09 will shift from awareness raising and mobilization to monitoring of aid for trade and assessments of progress in implementation.

Progress has been made in trade-related technical assistance for the LDCs with the establishment of the Enhanced Integrated Framework (EIF) in May 2007, with a new executive secretariat to support its operations.22 Operational decisions are to be made by a new EIF board, comprising voting representatives of three bilateral donors and three LDCs, with a view to making the mechanism more country-driven. To date, over US$100 million has been pledged by bilateral donors to the EIF trust fund. Several challenges remain, including providing adequate in-country support to the IF process, linking the WTO-based EIF secretariat to in-country processes, selecting a manager for the EIF trust fund, and establishing clear lines of responsibility for financial management, monitoring, and evaluation.

Global monitoring of donor pledges for aid for trade in a consistent fashion has proved a challenging exercise. First, donors each use their own definitions of aid for trade. For example, while EU pledges are limited to trade policy and regulations and trade development, U.S. and Japanese pledges contain activities relating to infrastructure. Second, reporting total amounts for economic infrastructure projects that serve both traded and nontraded sectors presents a significant overestimation of the actual volume of aid for trade.

For consistency purposes, this section follows the WTO-OECD first Global Review of Aid for Trade and reports aid-for-trade commitments as defined in the existing centralized OECD Development Assistance Committee (DAC) Creditor Reporting System (CRS). The CRS categories capture only three of the six categories identified by the Task Force on Aid for Trade: trade policy and regulation, economic infrastructure (as a proxy for the category “trade-related infrastructure”), and productive capacity building (which includes the category “trade development”). The reported amounts are, therefore, an imperfect proxy and tend to overestimate total aid for trade-related infrastructure; at the same time budget support associated with support for trade reforms has been excluded. The CRS is being fine-tuned to better reflect the trade component of aid and to include suitable proxies for the categories “trade-related adjustment” and “other trade-related needs.”

Leaving aside the methodological limitations, aid-for-trade flows increased by some $2 billion in real terms during 2006, or 10 percent relative to the baseline for 2002–05 established by the task force (table 4.6). Total aid for trade during the 2002–06 period, on the basis of the OECD CRS definition, was roughly 33 percent of total sector-allocable ODA, below the 35 percent registered in 2002.

Table 4.6Aid for trade, 2006, and annual average, 2002–06 Official Development Assistance commitments of DAC donors and multilateral agencies US$ millions, 2005 constant prices
Annual average, 2002–06
Economic infrastructureTrade policy and regulationsProductive capacity buildingTotal aid for trade, 2006As a share of total aid for trade (%)As a share of total aid for trade received by LICs (%)As a share of donor sector allocable ODA (%)
Top 10 bilateral donors in 2006
Denmark16001822291.62.736
France42433419093.33.222
Germany608146941,8456.04.129
Japan3,738641,0074,88322.421.361
Netherlands85264228422.71.122
Norway90101503001.21.219
Spain29511426602.00.536
Sweden100171223171.11.017
United Kingdom281374106123.33.321
United States2,0872371,6904,39117.27.926
Main multilateral donors in 2006
European Communities1,3652171,0033,13311.912.036
World Bank (IDA)1,759321,2742,77514.224.046
African Development Bank280432805132.64.444
Asian Development Bank274313323733.05.445
Total aid for trade, all donors12,0357179,10623,00510010033
Source: OECD Creditor Reporting System.

Japan and the United States dominated global aid-for-trade delivery in terms of volume with $4.9 billion and $4.4 billion in 2006, respectively. In the case of the U.S. aid for trade, this represents a 25 percent increase over the 2002–05 average, much of it devoted to the reconstruction efforts in Iraq and Afghanistan. Other important bilateral donors included France, Germany, the Netherlands, Spain, and the United Kingdom. The European Communities was the largest multilateral donor in 2006, having increased its aid for trade to $3.1 billion (15 percent of total aid for trade), up from $2.5 billion on average during 2002–05. The World Bank, through the International Development Association (IDA), was the fourth largest provider of concessional aid for trade in 2006, and the largest multilateral provider of such assistance during the 2002–06 period—plus it was the largest overall donor to low-income countries, accounting for 24 percent of all aid for trade received by these countries. The Asian Development Bank and the African Development Bank were also important providers of aid for trade in their respective regions and were among the top 10 donors globally. The 10 largest bilateral donors and multilateral agencies funded 90 percent of global aid for trade activities in 2006. In general, a greater portion of multilateral aid for trade goes to low-income countries than bilateral aid for trade.

In terms of composition, aid to support the development of economic infrastructure and productive capacity building dominated overall volumes of aid for trade, at 55 percent and 42 percent, respectively, during the 2002–06 period. At 3.4 percent, aid for trade policy and regulations, usually delivered through technical assistance, accounted for the smallest share.

Iraq, India, Vietnam, Afghanistan, and Indonesia were the top five recipients of aid for trade in 2006, accounting for almost 30 percent of the total. Asian countries received almost half of all aid for trade ($10.6 billion on average during 2002–06) (figure 4.11).23 Africa followed with 30 percent ($6.5 billion). Ethiopia, with 2.4 percent of total aid for trade, was the only country from Sub-Saharan Africa in the top 10 recipients of aid for trade. The predominance of Asia largely reflects the volume of aid received for economic infrastructure—over two-thirds of total aid for trade in the region. Even when excluding large recipient countries in Asia, Africa lags behind: the average Asian country receives more than double the aid for trade of the average African country. Low-income countries, including LDCs, received only about half of the total aid-for-trade commitments in 2002–06, of which the LDCs received slightly more than half.

figure 4.11Distribution of aid for trade by income group and region, and by category, average 2002–06

Source: OECD Creditor Report System and OECD/WTO Trade Capacity Building Database

Note: Asia includes East and South.

Trade Policies, Climate Change, and Sustainable Development

International technology transfer can be a significant and cost-effective component of climate change mitigation and adaptation efforts. There already exist a number of low-carbon technologies to combat climate change. International trade can play a role in the reduction of greenhouse gases and the use of more energy-efficient production technologies by allowing firms to import environmentally friendly technology embodied in equipment, thus allowing more efficient production and consumption. Trade can also help with adaptation, by enhancing access to relevant technologies—such as genetically modified seeds and efficient irrigation methods—and by encouraging technology transfer and dissemination of knowledge and know-how on available techniques.

An important first step toward the adoption of more environmentally friendly technologies would be to reduce trade restrictions on imports of environmental goods and services. Many such products face relatively high levels of trade restrictiveness, especially in developing countries (figure 4.12).24

figure 4.12Environmental goods confront significant trade restrictiveness

Source: World Bank staff estimates.

In general, rates of trade restrictiveness confronting such products are similar to those affecting other manufactured products. However, the negative spillovers associated with policies that restrict trade in such technologies increase their welfare cost. Reducing barriers that have protection of domestic industry as their main objective will help to encourage the adoption of more efficient technologies and more environmentally friendly forms of energy.

A recent study that analyzes global trade in four technology groups—high-efficiency and clean coal technologies, efficient lighting, solar photovoltaics, and wind power—finds that tariffs and NTMs are significant impediments to the diffusion of clean energy technologies in developing countries.25 It concludes that liberalizing trade in these clean energy technologies could result in large increases in trade volumes, as illustrated in table 4.7. Liberalization of key climate-friendly technologies could be taken up as part of the ongoing WTO Doha Round negotiations on environmental goods and services (box 4.3).

Table 4.7Increase in trade volumes from liberalizing clean energy technologiespercent
Technology optionEliminating tariffs onlyEliminating tarrifs and nontariff measures
Clean coal technology3.64.6
Wind power generation12.622.6
Solar power generation6.413.5
Efficient lighting technology15.463.6
All four technologies7.213.5

Trade liberalization is just one aspect of enhancing access to cleaner technology by rapidly growing developing economies. Streamlining of intellectual property rights, investment rules, and other domestic policies will further aid in widespread assimilation of existing clean technologies and facilitate long-term investments in emerging technology areas. Trade serves as a major channel for international technology transfer to developing countries, but in many cases FDI may be more important. Weak intellectual property rights in developing countries may inhibit diffusion of specific technologies beyond the project level, and FDI in general may be subject to various restrictive regulations. Many developing countries also have weak environmental standards, low pollution charges, and weak enforcement capacity. This reduces the incentives to acquire and apply more sophisticated clean energy technologies.

Determining the set of goods or technologies that can help mitigate or adapt to climate change is complex. For example, in principle, the removal of trade taxes on imports of biofuels can help improve sustainability by reducing greenhouse gas emissions and pollutants from tailpipe emissions, but this depends very much on the feedstock used, the alternative use of the land used to produce the feedstock, and the biofuel production process.

Current first-generation biofuel technologies produce two types of fuel in significant quantities: ethanol (either from starch crops such as maize, wheat, or cassava or from sugar crops) and biodiesel (from vegetable oils or animal fats). There is a general consensus that producing ethanol from maize results at best in only a small reduction in greenhouse gas emissions and may not reduce such emissions at all, while production of ethanol from sugarcane juice or molasses will have a more beneficial impact on emissions. Production of certain biodiesels may increase emissions, with impacts a function of the feedstock used (e.g., palm oil produced on land that was previously in tropical forests).

From the perspective of greenhouse gas emissions, trade policy should be targeting the use of the most efficient biofuels. However, determining this is not that simple. In addition to the greenhouse gas emission impacts—on which research comes to different conclusions—there are other costs to be considered. These include the loss of biodiversity when cropland is expanded, the increased use of irrigation water, and the increased fertilizer runoff from crop production. The overall environmental benefit of biofuels needs to consider the full range of benefits and costs, and this has not yet been done. Such costs also include the negative impacts on the welfare of net food-importing countries, which can be important. New technologies that are currently being developed are expected to be able to convert cellulose into biofuels, resulting in net reductions in greenhouse gas emissions that approach those from the reduction in fossil fuel use. While these technologies are not expected to be commercially available for at least a decade, if they become available there is likely to be a major shift in the production of biofuels toward crops that produce large volumes of biomass, such as sugarcane, and away from grain, fats, and oils.

Suggestions have been made in some quarters that tariff policy should be used to raise the cost of imported products that are deemed to have been produced with environmentally inefficient technologies and encourage countries to participate in international agreements that they may otherwise abstain from.26 Trade policy has a role to play in instances where governments (or a group of signatories to an environmental agreement) impose carbon taxes or equivalent instruments on domestic production to reduce greenhouse gas emissions. An equivalent tax on imports of the products that are subject to the carbon tax regime will ensure that local output is treated the same as foreign products. Such border tax adjustments can, in principle, help mitigation efforts without affecting international competitiveness while encouraging participation by others. However, border tax adjustments by themselves are second-best instruments—the first-best policy is to levy an environmental tax at the origin. Determining the appropriate (equivalent) tax for a given product is not straightforward. Taxes should accurately reflect the production process used by the exporting firm, and information on this may not be available. Border tax adjustments also give rise to risks of hiding tariffs or export subsidies and may be inconsistent with WTO regulations.

BOX 4.3WTO negotiations and climate change

The 2001 Doha Ministerial Declaration (Paragraph 31 (iii)) called for negotiations on “the reduction or, as appropriate, elimination of tariff and non-tariff barriers to environmental goods and services,” with a view to enhancing the mutual supportiveness of trade, environment, and development. All WTO members agree that environmental goods liberalization should be geared toward improving the environment. However, not much progress has been made on this front because of differing views on how to define environmental goods, a precondition for determining what goods to include for liberalization. Views also differ on how to approach liberalization in a manner that addresses the interests of both developed and developing countries.

High-income countries interested in liberalizing environmental goods support a list approach: identifying and submitting specific lists of goods and then negotiating the elimination or reduction of bound tariffs (and nontariff measures) permanently and on a most-favored-nation (MFN) basis. Some developing countries prefer a “project” approach, under which liberalization would be bound temporally and only for the duration of environmental projects that would benefit from liberalized imports of goods and services on an MFN basis. Although a number of countries have submitted lists with products of interest, not much progress has been made to date.

Building on the list approach, a recent U.S.-European Union proposal suggests that WTO members could first agree to eliminate tariffs and identified nontariff barriers to trade in specific climate-friendly products. The proposal provides for special and differential treatment for developing-country members, including longer phase-in periods. The objective is to have a zero-tariff world for climate-friendly goods in the near future and no later than 2013. But there are disagreements on what should be on the list. For example, the proposal was criticized by countries that believe that ethanol should be included in any list of climate-friendly technologies. A number of developing countries are also concerned about the impact of liberalization on existing domestic industries and in some cases on tariff revenue.

Trade policy may sometimes have adverse consequences on the environment. For example, agricultural support programs have led to the use of production methods that are excessively polluting; fish subsidies have helped lead to depletion of ocean fish stocks, and by restricting imports of the most environmentally efficient biofuels and subsidizing consumption of less efficient local output, consumers are prevented from switching to less polluting types of energy that originate in parts of the world where the environmental costs of extraction are lower.

Similar considerations apply to proposals to penalize or avoid consumption of lower-cost imported food products that can be produced locally. Often this will not make any sense from an environmental perspective—in that even with the transport-related emissions and other costs, the net impact of imports on the environment will likely be less than if similar products are raised locally. As important, there is a significant danger that use of trade policy for environmental reasons will be captured by protectionist interests, result in retaliation, and further weaken the rules-based multilateral trading system. Proposals to adopt labeling systems that provide consumers with information on the carbon footprint of a product may be better solutions than the use of explicit trade sanctions, but they run the risk of arbitrariness, discrimination, and unintended consequences if not designed carefully (box 4.4).

Mitigation versus Adaptation

To date, the policy response to global warming has focused mostly on the steps that industrial and developing nations should take to mitigate greenhouse gas emissions. Far less attention has been paid to what developing countries should do to adapt to the consequences of foreseeable climate change in the coming decades. Developing countries, particularly the poorest ones, will be most vulnerable to climate change and increasing climate variability because they have the least capacity to adapt. Excessive floods, droughts, heat waves, and rising sea levels will amplify the already existing challenges posed by tropical or arid geography, a heavy dependence on rain-fed agriculture, rapid population growth, poverty, and a limited capacity to cope with an uncertain climate.

According to the recent Stern Review, “adaptation is the only response available for the impacts that will occur over the next several decades before mitigation measures can have an effect.”27 Unlike mitigation, adaptation will in most cases provide local benefits, realized without long lead times. Therefore, some adaptation will occur autonomously, as individuals respond to market signals and environmental changes. Some aspects of adaptation, such as major infrastructure decisions, will require greater foresight and planning. There are also some aspects of adaptation that require the provision of public goods delivering global benefits, including improved information about the climate system and access to more climate-resilient crops and technologies.

International trade in adaptation technologies has received far less attention than the mitigation technologies discussed previously. A United Nations Framework Convention on Climate Change subsidiary body for scientific and technological advice recently invited submissions of adaptation technologies from national governments and other relevant organizations. The objective was to compile a list of technologies for adaptation at the regional, national, and local levels in different sectors and to identify common needs, concerns, and barriers related to their dissemination and transfer. Over 170 technologies were identified as a part of this exercise, with the majority of the technologies being relevant to the agricultural sector, followed closely by those pertaining to the water resources sector.28 Other identifiable sectors were coastal zones, health, biodiversity, and infrastructure.

The technologies were classified as either hard, such as drought-resistant crop varieties, seawalls, and irrigation technologies, or soft, such as crop rotation patterns. These broad categories of hard and soft technologies were further subdivided into traditional, modern, and high technology. Traditional (indigenous) technologies that have been applied to adapt to weather hazards include methods to build floating vegetable gardens and dikes. Examples of modern technologies include techniques to produce new chemical products such as fertilizers, pesticides, and solvents; improved designs (e.g., of sanitation systems, housing, and commercial buildings); and technologies to produce new crop varieties (e.g., hybrid corn) and reduce water use (e.g., drip irrigation). High technology includes some of the more recently developed technologies resulting from scientific advances, including in information and communications technology, earth observation systems, and geographic information systems.

Many adaptation technologies are in the realm of services rather than goods. Whether they concern services or goods, liberalization of trade may be complicated by non-environmental considerations and objectives. Examples are dual-use technologies, political sensitivities regarding agricultural liberalization, as well as differences in views regarding the risks associated with the use of—and trade in—genetically modified organisms. However, many of these technologies are not affected by such considerations and can be prioritized along with the mitigation-related products and technologies for liberalization.

BOX 4.4Will carbon labeling help or hinder developing-country trade?

Carbon labeling is increasingly attracting popular attention. It offers consumers and companies the opportunity to participate in the fight against global warming by providing information on the total greenhouse gas emissions that a given product generates. While carbon labeling is mainly discussed in developed countries, it can have major impacts on developing countries. The choice of measurement methodologies and of control systems—needed to convince consumers and companies that the measurements are unbiased—can have a major bearing on the competitiveness of developing-country producers.

Some companies in high-income countries are already moving forward with carbon labeling. For example, the U.K. supermarket Tesco has announced that it will use carbon labeling on all its products. The idea is quickly spreading to continental Europe. In the United States, Wal-Mart, the world’s biggest retailer, has announced that it is measuring the emissions of selected products. Eventually, its suppliers will be rated by the use of a carbon scorecard.

Designing the appropriate scheme is no small challenge, as carbon labeling is highly technical and data-demanding. To be development-friendly, carbon labeling needs to accurately reflect developing countries’ advantages in low carbon emissions wherever they exist. For example, developing-country workers may walk to work or use communal transport, while in developed countries people often drive in their cars. Such differences have potentially large implications on both global warming and developing countries’ prospects, depending on whether or not these differences are accurately reflected in carbon labeling. Decisions about which activities in the production chain to include in the analysis are, therefore, crucial from both a scientific and a development perspective. Schemes that concentrate on only specific parts of the production chain will generally be very misleading. Carbon labeling schemes may also have differential impacts, depending on the size of firms. The more complex the schemes, the greater the difficulty small and poor producers in developing countries are likely to encounter in selling their products and benefiting from market access opportunities.

Emission efficiency will likely become a key parameter of competitiveness in a climate-constrained world. This will have differential impacts on countries, depending on their specific circumstances. In agriculture, for example, many developing countries use traditional technology and enjoy a warm climate and, therefore, use few modern inputs like nitrogen-based fertilizer (which cause emissions of one of the most harmful greenhouse gases) and little fuel (with associated emissions of carbon dioxide). However, these countries are often located far from major export markets and thus require more fuel-consuming transportation. Emission-efficient supply chains demand that the advantages of labor-intensive techniques and sunshine (as opposed to developed-country mechanization and heated greenhouses) outweigh the disadvantage of transport-related emissions. Analyses of greenhouse gas emission throughout the supply chain suggest that in many cases products coming from far away may cause lower emissions than products sourced locally.

Source: Brenton, Edwards, and Jensen (2008).
Notes

LDC exports of oil grew by 20 percent; exports of other merchandise grew by 14 percent.

Nigeria, Republic of Congo, Gabon, Cook Islands, Federated States of Micronesia, Nauru, Niue, Palau, Marshall Islands, and Tonga.

Policies affecting trade and investment in services are discussed in a subsequent section of this chapter.

In practice, identification of such problems must be done by national administrations. World Bank staff have interacted with several governments that classified excise taxes as import duties in national tariff schedules. As a result of such interactions, the data have been corrected.

The OTRI and TTRI are calculated as a weighted sum of ad valorem tariffs and ad valorem equivalents of specific duties, and non-tariff measures (for the OTRI), where weights are import volumes and import demand elasticities (Kee, Nicita, and Olarreaga 2008a, 2008b). The OTRIs by country and the data used to calculate the OTRI are posted on the DECRG Trade Research Web site under “data and statistics”; see http://go.worldbank.org/C5VQJIV3H0.

See, for example, Findlay and O’Rourke 2007, 396ff.

The NRA is similar to the PSE in that it includes the effects of both farm output and farm input price distortions, but it also includes exchange rate distortions, and it is expressed as a percentage of total farm production valued at undistorted rather than distorted prices.

The full set of results from this project will be published in the second half of 2008. A global overview volume (Anderson 2008) will be complemented by four regional volumes, one each for Africa (Anderson and Masters 2008), Asia (Anderson and Martin 2008), Latin America and the Caribbean (Anderson and Valdés 2008) and Europe’s transition economies plus Turkey (Anderson and Swinnen 2008). Details of the research project methodology and its working papers are available at http://www.worldbank.org/agdistortions.

The sectors are further disaggregated into banking (retail and merchant), insurance (life, nonlife, and reinsurance), road transport, railway shipping, maritime shipping and auxiliary services, air transport (freight and passengers), accounting, auditing, and legal services. See Gootiz and Mattoo 2008.

Results of the survey are summarized in an index of restrictiveness. For each sector and mode of supply the openness of policy toward foreign suppliers is mapped on a 5-point scale ranging from 0 (for no restrictions) to 1 (highly restricted), with three intermediate levels of restrictiveness (0.25. 0.50 and 0.75). Sectoral results are aggregated across modes of supply using weights that reflect judgments of the relative importance of the different modes for a sector. For example, mode 4 (temporary movement of suppliers) is important for professional services but not for telecommunications, whereas mode 3 is the dominant mode of contesting a market. Sectoral restrictiveness indexes are aggregated using sectoral GDP shares as weights. The country income group indexes are derived using GDP weights for the countries in the sample.

Hoekman (2006) and Hoekman and Mattoo (2008) survey the recent literature and empirical evidence; the contributions to Mattoo, Stern, and Zanini (2008) analyze the economics of trade in the various services sectors from a development perspective.

The task force identified six categories for aid for trade: (i) trade policy and regulations, (ii) trade development, (iii) trade-related infrastructure, (iv) building of productive capacity, (v) trade-related adjustment, and (vi) other trade-related needs. The task force also proposed a 2002–05 baseline on the basis of which to assess additionality and monitor the adequacy of provided funding.

The Integrated Framework is a multiagency, multidonor program to assist the LDCs in addressing national competitiveness priorities. The enhancement of the IF was recommended by a 2005 task force.

In the OECD CRS database, Asia includes Middle East Asia, South and Central Asia, and Far East Asia.

Environmental goods are products that result in less use of energy or generate energy in more environmentally efficient ways. For the list of environmental products and technologies considered in this chapter, see http://econ.worldbank.org/programs/trade.

Draft climate change legislation in the EU includes proposals to impose restrictions on imports unless an international agreement subjecting all industrialized countries to similar climate change mitigation measures is reached. According to the proposal, such a “carbon equalization system” could take the form of a requirement that foreign companies doing business in Europe obtain emissions permits alongside European competitors. Similar proposals have also been tabled in the U.S. Congress (Brewer 2008).

    Anderson,Kym,ed.Forthcoming. Distortions to Agricultural Incentives: A Global Perspective.London: Palgrave Macmillan; Washington, DC: World Bank.

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    Anderson, Kym and,JohanSwinnen,eds.Forthcoming. Distortions to Agricultural Incentives in Europe’s Transition Economics.Washington, DC: World Bank.

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    Hertel, Thomas, andAlanWinters,eds.2006. Poverty and the WTO. Impacts of the Doha Development Agenda.Washington, DC: World Bank.

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    Hoekman,Bernard, andMarceloOlarreaga,eds.2007. Global Trade and Poor Nations. The Poverty Impacts and Policy Implications of Liberalization.Washington, DC: Brookings Institution.

    Kee,Hiau Looi,AlessandroNicita, andMarceloOlarreaga.Forthcoming. “Estimating Trade Restrictiveness Indices.”The Economic Journal.

    Mattoo, Aaditya, andLucyPayton,eds.2007. Services Trade and Development: The Experience of Zambia.Washington, DC: Palgrave Macmillan/World Bank.

    Mattoo,Aaditya,Robert M.Stern, andGianniZanini,eds.2008. A Handbook on International Trade in Services.Oxford, U.K.: Oxford University Press.

    OECD (Organisation for Economic Co-operation and Development). 2007. Agricultural Policies in OECD Countries: Monitoring and Evaluation.Paris: OECD.

    Stern,Nicholas.2007. The Economics of Climate Change: The Stern Review.Cambridge, U.K.: Cambridge University Press.

    UNFCCC (United Nations Framework Convention on Climate Change) Secretariat. 2007. “Synthesis Report on Technologies for Adaptation Identified in the Submissions from Parties and Relevant Organizations.”http://www.unfccc.int. Complete link is: http://unfccc.int/resource/docs/2007/sbsta/eng/06.pdf

    World Bank. 2007a. “Connecting to Compete. Trade logistics in the global economy”World Bank, Washington, DC.

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