New protectionism versus inclusive trade


SDG indicators
SDG target 17.10: Promote a universal, rules-based, open, non-discriminatory and equitable multilateral trading system under the World Trade Organization, including through the conclusion of negotiations under its Doha Development Agenda.
SDG indicator 17.10.1: Worldwide weighted tariff-average (Tier I)


SDG target 17.12: Realize timely implementation of duty-free and quota-free market access on a lasting basis for all least developed countries, consistent with World Trade Organization decisions, including by ensuring that preferential rules of origin applicable to imports from least developed countries are transparent and simple, and contribute to facilitating market access.
SDG indicator 17.12.1: Average tariffs faced by developing countries, LDCs and SIDS (Tier I)


SDG target 10.a: Implement the principle of special and differential treatment for developing countries, in particular least developed countries, in accordance with World Trade Organization agreements
SDG indicator 10.a.1: Proportion of tariff lines applied to imports from LDCs and developing countries with zero-tariff (Tier I)

Trade plays a key role in achieving the ambitious targets of the 2030 Agenda. Target 17.10 is of paramount importance to advancing economic growth and fostering global competitiveness as it promotes a universal, rules-based, open, non-discriminatory and equitable multilateral trading system.

The argument for free trade…

In general, trade theory argues that trade plays an important effect on restructuring economies (De Zwart and Zanden, 2018) as a result of division of labour and specialization. It also argues that gains arising from trade for one country do not imply losses for another. Those gains are mutual (Easterly, 2013). In other words, free trade is not a ‘beggar-thy-neighbour’ policy (Stiglitz, 2002). As Piketty (Piketty, 2014) has noted ‘protectionism does not produce wealth, and free trade and economic openness are ultimately in everyone’s interest. The interdependence between trade and peace is also recognised (Polanyi, 1944).

…but only when countries are ready

Economic nationalism and tariff protection can be appropriate policies when there is a need to protect infant industries or sectors that can become competitive quickly (Radelet, 2015). (Landes, 1999) has also made this point, noting that ‘history’s strongest advocates of free trade…were strongly protectionist during their own growing stage.’ Piketty (Piketty, 2014) too supports the argument that ‘Trade liberalization is not necessarily a bad thing, but only if it is not peremptorily imposed and only if the lost revenue can gradually be replaced by a strong tax authority capable of collecting new taxes and other substitute sources of revenue. Today’s developed countries reduced their tariffs over the course of the nineteenth and twentieth centuries at a pace they judge to be reasonable and with clear alternatives in mind. They were fortunate enough not to have anyone tell them what they ought to be doing instead. This illustrates a more general phenomena: the tendency of the rich countries to use the less developed world as a field of experimentation, without really seeking to capitalize on the lessons of their own historical experience.’

Market access conditions are an important factor for the effectiveness of trade, and the scale of tariffs are an important determinant of market access. Revenues accrued from tariffs may constitute a significant portion of a government’s public revenue, particularly in low-income countries. In most cases, tariff rates are set with a view to optimizing a country’s welfare gains (Amador and Bagwell, 2012).

Trade agreements

In 1947, the major economies involved in international trade signed the General Agreement on Tariffs and Trade (GATT). With GATT, countries entered into reciprocal and mutually advantageous arrangements aimed at the substantial reduction of tariffs and other barriers to trade and to the elimination of discriminatory treatment in international commerce (WTO, 2019a).

Article 1 of the GATT-94 stipulates that members set their tariffs on a most favoured nation (MFN) basis in such a way that any advantage, favour, privilege or immunity granted to any product originated in and destined for other countries becomes immediately and unconditionally applicable to all contracting parties.

The conclusion of the GATT-94 multilateral trade negotiations led to the creation the World Trade Organization (WTO) with a clear mandate to develop an integrated, more viable and durable multilateral trading system. The WTO members set a maximum limit for tariffs levied on all agricultural goods and the majority of non-agricultural goods.1

Since then, most economies across the world have negotiated bilateral or multilateral trade agreements with the objective of reducing barriers to trade and promoting exchanges among members. Most recently, in September 30, 2018, on the initiative of the United States of America, the United States, Mexico, and Canada renegotiated the terms of North American Free Trade Agreement (NAFTA) which governed trade relations between member countries since 1994. The new deal is called the United States-Mexico-Canada Agreement, which must now be ratified by each country’s legislature.

The United States has also initiated a review of China’s policies and practices that may impact trade between the two countries. While the review of existing trade agreements could potentially benefit all parties, for example by improving regulatory transparency, and addressing labour and environmental issues, there is a risk that a strong focus on bilateral trade balances may result in rising protectionist measures.

Lowering tariffs could contribute to accrued trade and economic exchange

Even though most developed countries have pushed for lower tariffs in recent years, there are still many parts of the globe where they remain high. Among major global economies, India imposes a weighted average tariff of 5.8 per cent while China’s average rate is 3.8 per cent. Some of the highest import duties can be found in Africa, where Gabon stands out with an average 16.9 per cent tariff. The country with the highest weighted average tariff worldwide is Palau at 29.9 per cent.2 The United States applies a weighted average tariff of 1.7 per cent on its imports, one of the lowest rates worldwide. The weighted average tariff, applied in the European Union, was 1.8 per cent in 2017.

Map 1. Worldwide weighted average tariff, latest available data (SDG 17.10.1)
(Percentage)
Economies

Source: World bank estimates using the World Integrated Trade Solution system, based on data from United Nations Conference on Trade and Development’s Trade Analysis and Information System (TRAINS) database and the World Trade Organization’s (WTO) Integrated Data Base (IDB) and Consolidated Tariff Schedules (CTS) database.

Since 2008, both multilateral and preferential tariffs have been trending downwards. Tariffs on agricultural and natural resources have been reduced through MFN tariffs and preferential liberalization.

According to UNCTAD (UNCTAD, 2019b), the simple average of the world MFN tariff for agricultural products in 2017 remained relatively high at around 16 per cent, although they have declined by about 2 percentage points since 2008.

The simple average of the world MFN tariffs for natural resources in 2017 continued to decline and was below 3 per cent. For manufacturing products, liberalization occurred largely through preferential access, resulting in a decline of about 1 percentage point (see figure 1).

Figure 1. Multilateral and preferential tariff liberalization
(Percentage)

Multilateral liberalization

Preferential liberalization

Source: UNCTAD Secretariat calculations based on COMTRADE data and UNCTAD TRAINS data.

MFN rates are always higher than preferential tariff rates. For example, in 2017, the simple average MFN rates for agricultural products were above 16 per cent, almost twice the rates of its preferential counterpart.

Tariff restrictions in international trade in agricultural products are relatively high in South Asian and East Asian countries, while they are on average much lower in developed economies. Manufacturing tariffs remain high in the South Asian region. According to the World Bank, South Asia, the world’s fastest growing region, could triple its regional trade by reducing trade barriers (Kathuria, 2018).

Tariffs applied to exports of LDCs and developing countries slowly reducing

The average level of customs tariff rates (indicator 17.12.1) faced by developing countries and LDCs illustrates the pace at which the multilateral system is advancing toward the implementation of duty-free and quota-free market access (see metadata SDGs).

The objective of the target 17.12 is to “realize timely implementation of duty-free and quota-free market access on a lasting basis for all least developed countries…”. Recognizing LDCs special economic situation, developed countries and other economies in a position to do so3, agreed to grant LDCs duty-free and quota-free preferential market access.

Figure 2. Average tariffs applied by developed countries to exports of LDCs, by sector (SDG 17.12.1)
(Percentage)

Source: UNCTAD Secretariat calculations based on COMTRADE data and UNCTAD TRAINS data.

Figure 2 shows that Import tariffs applied by developed countries to products from LDCs have been slowly reducing since 2000. Tariffs, however, were much higher for clothing, textiles and agricultural products in 2017.

Measures have been taken

Preferential market access for developing countries has been initiated by most developed countries since the early 1970s under the aegis of UNCTAD (UNCTAD, 2019c). These unilateral trade preferences are called the Generalized System of Preferences (GSP). It allows developed countries to apply different tariffs between different groups of trading partners without violating Article I of the GATT requiring non-discriminatory and equal treatment of trading partners.

Trade preferences under the GSP program are granted not only by the so-called QUAD countries, namely the European Union (EU), United States, Japan and Canada but also by Australia, New Zealand, Norway, Belarus, Iceland, Kazakhstan, Russian Federation, Switzerland, and Turkey.

In addition to the GSP scheme and LDCs preferences, many developed countries grant trade preferences to other developing countries, either within the GSP or as separate program (Klasen et al., 2016). For example, the European Commission has a ‘zero’ tariff initiative for LDCs covering all products except the arms trade. This so called “Everything but Arms” (EBA) initiative implements a slightly less preferential (GSP+) tariff for vulnerable countries, respecting international conventions on human and labour rights, environmental protection and good governance (European Commission, 2019). Canada, apart from the GPT applicable to developing nations, grants a non-reciprocal Commonwealth Caribbean Countries tariff (CCCT) to certain Caribbean nations. This applies also to the Least Developed Country Tariff (LDCT).

Table 1. Tariff restrictiveness, matrix by region, 2017
(Percentage)
 Exporting Region
Importing RegionDeveloped CountriesEast AsiaLatin AmericaSouth AsiaSub-Saharan AfricaTransition EconomiesW.Asia & N.Africa
Developed Countries1.62.61.22.70.41.70.6
-0.50.20.3-0.3-0.10.80.0
East Asia5.12.75.43.21.73.81.8
-0.7-0.6-0.2-0.9-0.21.3-0.2
Latin America3.88.41.211.52.42.13.1
-0.2-0.7-0.5-0.9-0.20.4-0.4
South Asia11.011.117.86.95.88.39.2
0.80.4-1.9-1.0-1.11.0-1.7
Sub-Saharan Africa7.511.68.98.33.18.75.5
-0.6-0.10.20.8-0.82.20.1
Transition Economies3.82.12.05.70.70.45.3
-2.4-5.5-8.3-4.4-2.10.3-2.0
W.Asia & N.Africa3.25.66.44.02.66.71.9
-0.9-0.4-0.80.40.02.8-0.1
Source: UNCTAD (2015)
Note: Changes between 2008 abd 2017 are shown in smaller font.

Import restrictiveness differs substantially across countries, and even within the same region. Preferential schemes allow LDCs to enjoy duty-free access to many developed country markets. However, developing country exports, especially those in Eastern Asia, Latin America and East Africa, still face relatively high tariffs.

Table 1 presents a matrix of the average tariff levels imposed on trade flows between regions in 2017. Intraregional trade is generally subject to lower tariff trade restrictiveness than interregional trade. However, this is not the case for exports from sub-Saharan Africa and South Asian countries, for which market access is often better for interregional trade than for intraregional trade. South Asia and Sub-Saharan Africa face the highest intraregional tariffs, with tariffs of 6.8 per cent and 3.1 per cent respectively, in 2017. A large number of South–South trade flows are still burdened by relatively high tariffs. For example, exports from Latin American countries to the South Asian region face a tariff of almost 18 per cent (UNCTAD, 2019b).

The objective to improve market access conditions for LDCs exports by giving special and differential treatment to LDCs in accordance with the WTO agreements was not only outlined in SDG Target 17.12, but also in SDG Target 10.a. The following section will cover SDG Target 10.a.

Tariffs on imports continue to fall

Most developed countries grant some degree of duty-free and quota-free (DFQF) market access to LDCs, and an increasing number of developing countries are in the process of extending similar treatment to most imports from LDCs. SDG indicator 10.a.1 shows the extent to which special and differential treatment has been applied through import tariffs.4

LDCs are granted duty-free market access on 65.6 per cent of tariff lines in 2017 (figure 3); the respective share for developing countries is 50.8 per cent. The proportion of duty-free tariff lines to LDCs’ exports has risen from 53.6 per cent in 2010, 7 showing the commitment of international community to boost exports from poorest countries.

Between 2010 and 2017, the proportion of tariff lines5 applied to LDCs that are zero-tariff increased by 9.8 percentage points. This increase is twice as big as the corresponding increase for developing countries in general (5.2 per cent). From 2015 to 2016, the increase was 0.8 per cent, which was half of the average yearly increase between 2010 and 2015 (2.0 per cent). It was on a similar level to the latest increases in all developing countries (0.7 per cent).

Figure 3. Proportion of tariff lines worldwide with zero duty applied to products from developing countries and LDCs, by product (SDG 10.a.1)
(Percentage)

Source: UNCTAD Secretariat calculations based on COMTRADE data and UNCTAD TRAINS data.

More than 50 per cent of exports from developing countries are now eligible for duty free treatment

A large increase between 2005 and 2017 was recorded by LDCs countries (see figure 4), as the coverage of duty free treatment reached 65.6 per cent of all the products exported.

At the country level, in 2017, The gains have been noticed for several countries comparing to 2005. The highest increase was recorded by Djibouti, from 20 per cent in 2005 to 74 per cent in 2017.

Few countries recorded nevertheless a decrease, such as Angola (form 55 per cent in 2005 to 46 per cent in 2017 and Kiribati (from 72 per cent in 2005 to 60 per cent in 2017).

Figure 4. Proportion of tariff lines worldwide with zero duty applied to products from LDCs, by country
(Percentage)

Source: UNCTAD Secretariat calculations based on COMTRADE data and UNCTAD TRAINS data.

Figure 5 shows that over 60 per cent of agricultural trade in 2016 was duty-free, with 20 per cent of this accounting for duty-free on the MFN basis and the rest under preferential tariffs. The remaining tariffs are fairly high, weighted tariffs averaging to over 15 per cent for agriculture, and around 7 per cent for manufacturing products. For natural resources, preferential access is less important, as trade in these goods is largely tariff-free under MFN rates. The remaining tariffs are generally very low, with weighted tariffs averaging about 4 per cent.

Figure 5. Free trade and remaining tariffs, by broad category
Duty Free Trade Average Tariff
(Percentage of total trade)

Duty Free Trade Average Tariff on Non-Free Trade
(Percentage)

Source: UNCTAD Secretariat calculations based on COMTRADE data and UNCTAD TRAINS data.

Rising trade protectionism and potential trade wars

The situation in which a country unilaterally optimizes tariffs, the beggar-thy-neighbour approach, carries an inherent risk of a “trade war”, where other countries retaliate, by raising their own tariffs, against the tariff barriers imposed by their trading partners. Trade protectionism remains an important risk for global growth.

War is war, and trade is war(Landes, 1998: 482)

In the aftermath of the global financial crisis, both developed and developing regions introduced a range of trade-restrictive measures, including new or higher tariffs, quantitative restrictions, and stricter customs regulations. According to the WTO Director-General’s 2018, mid-year report, during the review period the value of trade covered by restrictive measures rose, and the value covered by facilitating measures fell. WTO members introduced more trade-restrictive measures between mid-October 2017 and mid-May 2018 compared with the previous year, with an average of 11 new trade-restrictive measures per month. The previous report identified an average of nine measures per month (WTO, 2018).

Since January 2018, the United States imposed trade barriers on many goods. In particular, they imposed trade barriers on solar panels and washing machine imported from China, on steel and aluminium imports from the European Union, Mexico and Canada, and are threatening to impose a 25 per cent tariff on all imported cars and auto parts (see figure 6).

A tit-for-tat escalation of tariff increases could shave 0.8 per cent off global GDP by 2020 (IMF, 2018). The potential effects of rising protectionism could include the disruption of prevailing global value chains and will probably damage world trade (UNCTAD, 2018).

It is worth mentioning that substantial effects relative to the size of their exports are expected for many countries. For example, the approximately 27 billion of US$-China trade that would be captured by Mexico represents a non-negligible share of Mexico’s total exports (about 6 per cent) (UNCTAD, 2019b).

Non-tariff measures – Hidden protectionism?

Domestic trade politics have become more difficult and trade deals have become more complex because the nature of obstacles to trade has evolved. We are no longer negotiating just the reduction of tariffs, but also of non-tariffs barriers, which have gained enormous importancePascal Lamy, Former Director-General of the World Trade Organisation, 24 July, 2013

Although tariffs have declined worldwide, non-tariffs measures (NTMs) persist and shape a growing share of modern trade policy instruments.

According to the joint UNCTAD-Word Bank publication ”The Unforseen impact of non-tariff measures: Insights from a new database”, NTMs represent a total cost to trade of approximately 325 billion US$ (UNCTAD, 2019d). Today, a large number of NTMs are regulatory measures, while traditional trade policy instruments, such as quotas or trade defense measures, and also considered non-tariff barriers (NTBs), are now less frequent. Technical NTMs, such as Technical Barriers to Trade (TBT), which include standards or obligatory re-quirements on product characteristics or their related production methods, are the most used (which account for 41 per cent of all NTMs), followed by sanitary and phytosanitary measures (SPS) (35 per cent of all NTMs) (UNCTAD, 2019b). Some NTMs are also designed either to stimulate or restrict exports.

TBT are widely used to regulate the trade flows of the vast majority of products. TBT affect more than 30 per cent of product lines and almost 70 per cent of world trade (figure 7). They refer to measures, such as, labelling, standards on technical specifcations and quality requirements, as well as all conformity-assessment measures.

SPS are typically prevalent in agriculture and might include, inter alia, measures such as, restrictions to substances that ensure food safety and prevent dissemination of disease, requirements on packaging and labelling, conformity-assessment measures related to food safety, such as, certifcation, testing and quarantine. These measures affect almost 20 per cent of world trade and price control measures affect about 15 per cent of world trade. (Figures 7)

Figure 7. NTMs in World Trade
(Percentage)

Source: UNCTAD Secretariat calculations based on UNCTAD TRAINS data.
Notes: The frequency index is defined as the percentage of HS 6 digit lines covered and coverage ratio is defined as the percentage of trade affected.

The trade impact of NTMs is significant (UNCTAD, 2019b). NTMs market restrictivenes is more than double that of existing tariffs, particularly in agriculture (UNCTAD and World Bank, 2018). Because of the importance of agricultural products to the export composition of developing countries, trade restrictiveness is generally higher in low-income countries (Africa at LSE, 2015). As NTMs vary significatly across countries and products, “ad valorem” (AVE) equivalents are calculated for NTMs in order to make the comparison. UNCTAD estimates that AVEs in the agricultural sector of low-income countries and middle-income countries stand at 22 per cent and 21 per cent, respectively. The estimated levels of ad-valorem tariffs, equivalent to NTMs in terms of trade restrictiveness (for the same product groups) are 5 per cent for low-income and 7 per cent for middle-income countries (UNCTAD, 2015) (see Figure 8).

Figure 8. Trade restrictiveness of non-tariff measures relative to tariffs

The majority of NTMs may equally apply to domestic producers and arise from non-trade objectives related to social and environmental issues, helping to achieve sustainable development goals: food security (SDG 2); nutrition and health (SDG 3); protect endangered species and the environment (SDGs 14&15); ensure sustainable production and consumption (SDG 12); energy (SDG 7); and combat climate change (SDG 13). Such linkages to sustainable development can be described as direct. On the other hand, non-tariff measures influence trade, which, in turn can restrict economic growth and create negative spillover effects on sustainability objectives. These linkages are referred to as indirect.

For instance, agricultural export subsidies could be designed in a way that restrict trade and distort world agricultural markets. Such NTMs would evidently have a negative impact on food security (Target 2.b.) – indirect linkage. At the same time, governments can design requirements for plant-growth processes, food and feed processing, or TBT regulations on production processes. These measures should increase productivity and production, and help maintain ecosystems (Target 2.4) – direct linkage (UNCTAD, 2019d).

Policy makers face the challenge of finding an optimal trade-off between trade restrictions and sustainable development. The recent joint UNCTAD-World Bank report ”The Unforseen impact of non-tariff measures: Insights from a new database” suggests that trade costs related to non-tariff measures can be reduced by 15 to 25 per cent through ”regulatory convergence and good regulatory practice.”(UNCTAD and World Bank, 2018).

Statistics for NTMs are still incomplete. As of today, the TRAINS (Trade Analysis and Information System) (UNCTAD, 2019e) (World Bank, 2019b) database developed by UNCTAD in partnership with several regional and international organisations is the most complete collection of publicly available data on non-tariff measures at the detailed product level. In 2014, to improve data coverage, UNCTAD and the World Bank launched the “Top 25 Markets” project to collect NTMs data for countries that represent a significant share of world trade. Today, the TRAINS database includes NTMs information for 109 countries and covers 90 per cent of world trade (UNCTAD and World Bank, 2018).

Notes

  1. According to WTO, for non-agricultural products the product coverage of tariff binding by developed country members was 100 per cent, while that of developing country members was around 73 per cent (WTO, 2019c).
  2. Weighted mean applied tariff is the average of effectively applied rates weighted by the product import shares corresponding to each partner country. Data are classified using the Harmonized System of trade at the six- or eight-digit level. Tariff line data were matched to Standard International Trade Classification (SITC) revision 3 codes to define commodity groups and import weights. To the extent possible, specific rates have been converted to their ad valorem equivalent rates and have been included in the calculation of weighted mean tariffs. Import weights were calculated using the United Nations Statistics Division’s Commodity Trade (Comtrade) database. Effectively applied tariff rates at the six- and eight-digit product level are averaged for products in each commodity group. When the effectively applied rate is unavailable, the most favored nation rate is used instead.
  3. Following the WTO Hong Kong Ministerial Decision in 2005 (WTO, 2015).
  4. Limitations of this indicator include the following: (i)Tariff-based measures are only a part of trade limitation factors. (ii) Inability to comply with rules of origin criteria limits the utilization of preferential treatments. (iii) Using data on zero-tariff lines assumes full utilization of benefits. (iii) Low MFN tariffs mean that duty-free treatment is not always preferential (United Nations, 2019).
  5. Proportion of total number of tariff lines applied to products imported from least developed countries and developing countries is presented in per cent corresponding to a 0 per cent tariff rate in HS chapter 01-97. This indicator allows observing on how many products developing countries and LDCs will have free access to Developed countries markets. (see SDG metadata)

References

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