Stephen Tokarick

Developing countries face the following quandary: how should they structure their trade policies to maximize the benefits of expanding trade? Should they join a regional trade arrangement or rely on multilateral trade agreements? Have preference schemes helped or hurt them? How would tariff reductions affect their public finances? Would they really benefit from the liberalization of agricultural trade? These are the intriguing questions that were addressed at the Trade Research Conference, sponsored by the Trade Unit in the Research Department of the IMF, on October 19, 2004.

One major theme that emerged at the conference is that preferential trade policies—whether in the form of regional trade agreements or tariff reductions on exports from developing countries—are not equivalent to trade liberalization. Both John Romalis and Çağlar Özden presented the view that preferential policies are discriminatory because they are not extended to all countries. They also pointed out that the welfare effects of regional agreements are ambiguous and depend on the relative size of the trade-diversion and trade-creation effects. With respect to preferential access schemes for exports from low-income countries, they argued that such schemes might actually reduce recipient countries’ incentives to reduce their own trade barriers. In any case, since the schemes often come with many strings attached, they are only seldom fully used, and thus it is unlikely that they benefit recipient countries as much as they could.

It was underscored in the discussion that regional trade agreements are a fact of life: they are here to stay. So, the focus should be on trying to lessen their negative effects. Several participants thought that this could be done by encouraging countries that do enter into a regional agreement to extend benefits to nonmembers over time. The IMF could play a role in this process through the surveillance function.

If developing countries decide to embark on trade liberalization, the question remains of how they will cope with adjustment issues, such as the potential loss of tax revenue from tariff reductions. Michael Keen noted that this is a critical issue for many countries, especially in Africa. He pointed out that, at least in theory, it is possible to design a system of taxation that, by substituting indirect taxes for trade taxes, would lead to both higher real income and tax revenue. In his preliminary empirical work, Keen looked at whether countries that reduced their tariffs recouped revenue from other sources. In general, he found less than full offset: only about 30–50 percent of revenue was recouped.

Another key issue for developing countries is how they will cope with the liberalization of trade in agricultural products. Some studies suggest that developing countries would reap large gains from liberalization, but this may not be true. Using a general equilibrium model of world trade, Stephen Tokarick argued that the main beneficiaries of agricultural liberalization are not the developing countries but the rich ones. Furthermore, he showed that while in aggregate developing countries would gain from such liberalization, there may be individual countries that lose—mainly the net-agricultural-importing countries. However, the issue is complicated by the possibility that the net-importing countries could become net exporters if world prices rise sufficiently in the aftermath of liberalization.

Overall, the conference made the point that preferential trade policies may not be “liberalizing” after all—and thus they may actually hurt the countries that adopt them. The program and selected papers can be found at http://www.imf.org/external/np/res/seminars/2004/101904.htm.