Economic Policy Responses to Preference Erosion: From Trade as Aid to Aid for Trade

Trade preferences are a central issue in ongoing efforts to negotiate further multilateral trade liberalization. “Less preferred” countries are increasingly concerned about the discrimination they confront, while “more preferred” developing countries worry that WTO-based liberalization of trade will erode the value of current preferential access regimes. This tension suggests there is a political economy case for preference-granting countries to explicitly address erosion fears. We argue that the appropriate instrument for this is development assistance. The alternative of addressing erosion concerns through the trading system will generate additional discrimination and trade distortions, rather than moving the WTO towards a more liberal, non-discriminatory regime. We argue that prospective losses generated by MFN liberalization should be quantified on a bilateral basis, using methods that estimate what the associated transfer should have been and ignoring the various factors that reduce their value in practice (such as compliance costs or the fact that part of the rents created by preference programs accrue to importers in OECD countries). Given that many poor countries have not been able to benefit much from preference programs, a case is also made that preference erosion should be considered as part of a broader response by OECD countries to calls to make the trading system more supportive of economic development. The focus should be on identifying actions and policy measures that will improve the ability of developing countries to use trade for development. * Presented at the international symposium "Preference Erosion: Impacts and Policy Responses," Geneva, June 13-14, 2005. The views expressed are personal and should not be attributed to the World Bank or DFID. We are very grateful to Sheila Page for detailed suggestions that improved the paper and to Werner Corrales, Joe Francois, Nuno Limão, Patrick Messerlin, Dominique Njinkeu, Marcelo Olarreaga, and participants in the symposium for helpful comments and suggestions. This paper draws on a number of background papers prepared for the DFID project “Global Trade Architecture and Development.”