Rich Countries Should Show the Way on Trade

WASHINGTON, Sept. 27, 2002 -- Rich countries should support developing countries' efforts to reduce poverty and build more prosperous and stable societies by removing obstacles that hinder poor countries' participation in world trade, World Bank Chief Economist Nicholas Stern said today during a press briefing ahead of this weekend's World Bank/IMF Annual Meetings.

"Improving market access for developing countries is one of the most important steps that the rich countries could take to help fight global poverty," said Stern, who is also the Bank's senior vice president for development economics. "It is hypocrisy to encourage poor countries to open their markets while imposing protectionist measures that cater to powerful special interests. Rich countries should lead by example."

Barriers to developing countries' exports to high-income countries include tariff peaks and quotas, massive agricultural subsidies, anti-dumping actions, restrictive rules of origin, and product standards that are applied arbitrarily and bureaucratically, sometimes as disguised protectionism. Developing countries also pursue protectionist polices that impede their own growth and poverty reduction, as well as hurting their developing country trading partners.

Stern said that trade reform, like reform more generally, should result in resources moving from lower productivity uses to higher productivity uses. This creates new opportunities but also, inevitably, some dislocation "These transitions take time and need to be managed carefully. People must be supported in finding the new opportunities that the reform creates," he says. This is true in all countries, but rich countries are better able to afford the transition costs, he added.

Many policy makers in high-income countries understand these issues and have proposed measures to further open their markets. But progress has been too slow. "Now is the time for action," Stern said.

Uri Dadush, director of the new World Bank Trade Department, said that the high income countries have taken important steps in opening their markets, especially to the poorest countries. "But there also have been setbacks and some important problems have yet to be addressed," he said. The department was established recently to integrate the Bank's stepped up activities in support of developing countries' efforts to boost trade.

Dadush said that Europe's Everything But Arms initiative, the U.S. Africa and Growth and Opportunity Act, and other initiatives by Japan, Canada, New Zealand and Norway, have significantly improved market access for some of the poorest countries, but important problems remain. The Bank is encouraging rich countries to address these problems now, without waiting for the outcome of protracted negotiations through the World Trade Organization (WTO).

Gobind Nankani, vice president for the Bank's Poverty Reduction and Economic Management Network, said that action now by the high-income countries would encourage trade liberalization in the developing countries. "Developing countries find it difficult to understand why they should further open their markets when high-income countries persist with protectionism," he said.

Some of the problems that developing country exporters face in accessing markets in high-income countries are described in a new joint World Bank-IMF study, Market Access for Developing Country Exports—Selected Issues. The report says that despite recent initiatives in the major industrialized countries to offer preferential market access for the poorest countries "large pockets of protection remain in products of particular interest to developing countries."

Restrictive measures are often aimed at precisely those products that developing countries are best able to produce. For example, in the U.S. and Canada tariff peaks (tariffs much higher than the average) are concentrated in textiles and clothing; Europe and Japan have tariff peaks in agriculture products, food and shoes. "This pattern of protection creates hurdles for countries taking first steps up the technology ladder," the report says.

The report says that tariffs and quotas for textile exports to developed countries cost developing countries an estimated 27 million jobs. Every textile job in an industrialized country saved by these barriers costs about 35 jobs in these industries in low-income countries. Meanwhile, in the high income countries, tariffs on food and clothing raise prices for these goods, straining the household budgets of low-income families.
Escalating tariffs -- duties that are lowest on unprocessed raw materials and rise sharply with each step of processing and value added -- undermine manufacturing and employment in industries where developing countries would otherwise be competitive. These include many tropical crops, such as cocoa, coffee, and cotton.

The report says that agricultural subsidies in rich countries amounted to $311 billion in 2001. These subsidies, which go mainly to large agribusiness corporations, undercut poor farmers in developing countries. "Much of this support increases with the level of output, contributing to excess production that competes with developing country farmers for markets," the report says.

For example, African farmers are the lowest-cost cotton producers in the world but cannot compete with international competitors who receive $4.8 billion annually in subsidies. Sugar prices in the U.S. and Europe are three times higher than in the world market due to protection and subsidies for sugar beet production, to the detriment of Brazil and other tropical producers of cane sugar.

Meanwhile, regulations governing product standards and production processes "are becoming increasingly complex and burdensome" according to the report. For example, to meet EU standards, mango pulp processors in India not only must prove that their product meets quality standards, they must also keep detailed records of each delivery from the small farmers who grow the fruit.

Anti-dumping actions hit especially hard at small countries and small firms, who lack the means to prove in court that they are not selling at less than the cost of production. Worries about when these actions might be initiated, the high legal fees, and the uncertainty of the outcome discourage investment in otherwise promising industries in developing countries.

Trade barriers in developing themselves countries also pose a significant problem. Tariffs erected by developing countries cost developing country exporters about $57 billion per year, three times the duties paid to rich countries. And tariff peaks and anti-dumping actions are even more common in developing countries than in rich countries.

"Developing countries have done much to open their markets. Further liberalization will bring them additional benefits, regardless of whether the rich countries act. But the benefits will be much larger if rich countries lead by example, and the larger benefits would help poor countries to cope with the significant transition costs," Stern says.

The World Bank and other organizations are supporting developing countries in their efforts to liberalize their trade regimes and to remove infrastructure bottlenecks, for example, by improving internal transport, ports, and customs administration.

As part of this effort, the Bank has created a new Trade Department to integrate research and analysis, training programs and capacity building, and direct support to developing countries in reforming their trade regimes, meeting product standards, and addressing so-called behind-the-border issues, such as transport and telecommunications.