Free trade for inclusive and resilient growth

The Addis Ababa Action Agenda -—
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—- acknowledges that international trade is an engine for inclusive economic growth and poverty reduction. 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. Market access conditions are an important factor for the effectiveness of trade, and tariffsTariffs “are customs duties on merchandise imports, levied either on an ad valorem basis (percentage of value) or on a specific basis (e.g. $7 per 100 kg). Tariffs can be used to create a price advantage for similar locally produced goods and for raising government revenues. Trade remedy measures and taxes are not considered to be tariffs.” -—
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—- are an important determinant of market access.

Making free trade work for sustainable development

In recent years, several empirical studies have reaffirmed that trade reforms which significantly reduce import barriers have on average a positive effect on economic growth. -—
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—- estimate that economic growth is roughly 1.7 percentage points higher after trade liberalization than a benchmark (compared to the situation without those reforms). -—
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—- finds that the positive correlation between trade liberalization and economic growth has increased since the 1990s. -—
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—- notes that free trade and economic openness are in everyone's interest. -—
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—-, taking the case of the ECOWASEconomic Community of West African States, estimate that from 15 to 26 per cent of the average annual value of net official assistance received by coastal ECOWAS members could be achieved through trade facilitation. This ratio is even higher for Nigeria, where the saving would account for around 31 to 46 per cent of net official assistance.

However, the ultimate economic gains from trade liberalization may vary considerably with domestic contexts and, as underlined by -—
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—-, developing countries need to be mindful of the potential impacts of trade and investment liberalization on the ability to mobilize domestic resources for development. Revenues accrued from tariffs may constitute a significant portion of a government’s public revenue, particularly in low-income countries, where the need for coordination of tariff liberalization with other tax policies is of particular importance.

Resilience from regional trade agreements

In 1947, major economies involved in global trade signed the GATTThe General Agreement on Tariffs and Trade (GATT) is a multilateral agreement, originally negotiated in 1947 in Geneva among 23 countries, to reduce tariffs and other trade barriers. It provides a framework for periodic multilateral negotiations on trade liberalisation -—
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—-., an agreement through which 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” -—
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—-. The conclusion of the “GATT-94” multilateral trade negotiations led to the creation of the WTOWorld Trade Organization in 1995, with a mandate to develop an integrated, more viable and durable multilateral trading system. The WTO TFAWorld Trade Organization Agreement on Trade Facilitation (WTO TFA) was the first multilateral trade agreement concluded since the establishment of the WTO. It came into force in 2017 with the aim of boosting the speed and efficiency of cross-border trade procedures while reducing cost. Full implementation of the TFAThe WTO Agreement on Trade Facilitation came into force on 22 February 2017 following its ratification by two-thirds of the WTO membership. The TFA contains provisions for expediting the movement, release and clearance of goods, including goods in transit. It also sets out measures for effective cooperation between customs and other appropriate authorities on trade facilitation and customs compliance issues. It further contains provisions for technical assistance and capacity building in this area. could cut global trade costs by 10 to 18 per cent -—
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—- and increase export gains by up to US$ 1 trillion per year, with the biggest gains in the poorest countries -—
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Article 1 of the “GATT-94” stipulates that members set their tariffs on a MFNMost-favoured-nation (MFN) is a status or level of treatment accorded by one state to another in international trade. Under the WTO agreements, countries cannot normally discriminate between their trading partners. -—
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—- . basis meaning 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 -—
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—-. Article 24 of the GATT, Article 5 of the GATSGeneral Agreement on Trade in Services and the Enabling Clause (Paragraph 2(c)) allow WTO members to conclude RTAs as a special exception, provided the agreements help trade flow more freely among the countries in the RTARegional trade agreement without barriers being raised on trade with the outside world -—
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—-. Since the inception of the GATT/WTO system, most economies across the world have negotiated bilateral or multilateral trade agreements with the objective of reducing barriers to trade and promoting exchange of goods and services among members. Nowadays, practically all countries participate in at least one RTA, with some countries forming more bilateral and regional RTAs than others. More than 50 per cent of global trade takes place between countries that are members to PTAsPreferential Trade Arrangements (PTAs) can be established under paragraphs 4 to 10 of Article XXIV of GATT -—
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—- between parties through which one party can grant more favourable trade conditions to other parties of the arrangement and not to other WTO members., one third under DTAsDeep trade agreements (DTAs) between countries that cover not just trade but additional policy areas, such as international flows of investment and labor, and the protection of intellectual property rights and the environment. Their goal is integration beyond trade, or deep integration. that go beyond traditional tariffs and existing WTO agreements -—
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—-. Only a limited number of countries, largely in East Asia, trade mostly under so-called shallow agreementsShallow Trade Agreements are reciprocal agreements between countries that cover tariffs and other border measures.. Most of the trade of African countries still occurs outside of any PTAs -—
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According to the WTO RTA Database, as of 15 March 2022, 354 RTAs were in force for both goods and services, as compared to 135 in 2005 -—
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—- (see Figure 1).

The coverage of PTAs has also expanded. While the average PTA in the 1970s covered less than ten policy areas, since the 2000s most new PTAs included between 10 and 20 policy areas (see Figure 2). Such agreements with larger scope tend to include not only traditional trade policy, such as tariff liberalization, but also trade-related regulations like subsidies or technical barriers to tradeTechnical barriers to trade (TBT) are measures referring to technical regulations, and procedures for assessment of conformity with technical regulations and standards., as well as areas not related to trade, for example, labour, environment, and migration -—
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Trade within RTAs demonstrates greater resilience in response to global shocks, compared to trade outside those -agreements. A recent case study by UNCTAD on intra RTA trade resilience during the COVID-19COVID-19 is an infectious disease caused by the strain of coronavirus SARS-CoV-2 discovered in December 2019. Coronaviruses are a large family of viruses which may cause illness in animals or humans. In humans, several coronaviruses are known to cause respiratory infections ranging from the common cold to more severe diseases such as Middle East Respiratory Syndrome (MERS) and Severe Acute Respiratory Syndrome (SARS). The most recently discovered coronavirus causes coronavirus disease COVID-19 -—
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—-. downturn -—
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—- reveals that trade within trade agreements declined significantly less than other trade, and that RTAs with deep provisions, or deep RTAs, have provided relatively better stability against the global trade collapse of 2020 than shallow RTAs. The results also reveal some heterogeneity across developing and developed countries, as well as across developing countries’ regions. Figure 3 shows that, while a decline in bilateral trade for an average country was around 14 per cent, the decrease under an RTA amounted to about 11 per cent. In addition trade between members of a deep RTA fell by about 6 percentage points less than trade between members of a shallow RTA.

Trade, peace and security

Most-favoured-nation (MFN) is a cornerstone of the multilateral trading system. The exception to this rule is an issue of “essential security interests” of the Article XXI of the GATT-94The GATT 1994 is contained in Annex 1A of the WTO Agreement. It incorporates by reference the provisions of the GATT 1947, a legally distinct international treaty applied provisionally from 1948 to 1995 -—
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—-, the provisions of which allow countries to suspend concessions for reasons of national security. In fact, Article XXI states that the GATT will not prevent a WTO member from lifting the MFN rule when “considered necessary for the protection of its interests, taken in time of war or other emergency relations”. Both the WTO’s agreement on trade in servicesIn the international trade in services context, services are understood as the result of a production activity that changes the conditions of the consuming units or facilitates the exchange of products or financial assets -—
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—-. Following the balance-of-payments classification, trade in services refers to manufacturing services, repair services, transport, travel, construction, telecommunications, computer services, financial services, insurance, intellectual-property related and other business services, as well as personal and cultural services, and government services. (GATS) and its agreement on intellectual property (TRIPSTrade Related Aspects of Intellectual Property Rights (TRIPS)) contain similar exceptions.

“Even though trade has been viewed as a vehicle for peace”, recent developments worldwide show that trade sanctions in response to hostilities in international relations are on a rise -—
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—-. Examples of a “security exceptionalism in trade” -—
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—- are numerous, and includes the United States of America, in early 2018, imposing a tariff of 25 per cent on steel and of 10 per cent on aluminum imports under Section 232 of the Trade Expansion Act of 1962; India lifting the MFN status from Pakistan in 2019, after a suicide attack by a Pakistan-based Islamist group; Bahrain, Saudi Arabia and the United Arab Emirates invoking altogether a series of sanctions against Qatar, in July 2017, over allegations of Qatari support for terrorism; Canada, the United States of America, the G-7 countries and the European Union announcing their intentions to revoke MFN treatment, in March 2022, from Russia and its ally Belarus, over the Russian war on Ukraine. As emphasized by -—
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—-, these increasing conflicts between national security interests and rules defining the multilateral trade system might have serious adverse effects on development and the overall growth of the world economy. The international community faces the challenge of finding the right balance between the nations’ rights to decide what needs to be done to protect essential security interests and the urge to safeguard global trade as a key engine for growth and sustainable development, especially in a world battered by the economic fallout of the pandemicCommonly described by the WHO as ‘the worldwide spread of a new disease’, no strict definition is provided. In 2009, they set out the basic requirements for a pandemic: • New virus emerges in humans
• Minimal or no population immunity
• Causes serious illness; high morbidity/mortality
• Spreads easily from person to person
• Global outbreak of disease.
The US Centre for Disease Control uses a similar approach, but with a reduced set of criteria. It is very difficult to gauge whether the spread of a disease should be termed an outbreak, epidemic or pandemic. In other words, when to declare a pandemic isn’t a black and white decision -—
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—-. and the war in Ukraine -—
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Making non-discriminatory tariff reforms work for development

After 2019, many countries recorded a sharp drop of weighted average tariffs on imports. Palau’s average import tariff dropped to 9.6 per cent in 2020 from a rate as high as 118.2 per cent in 2019. The United States of America, in 2020, reduced their weighted average tariff on imports from 13.8 per cent in 2019 to 1.5 per cent. India imposed a tariff of 6.2 per cent on average, while China's average rate was 2.5 per cent in 2020. The weighted average tariff applied in the EUEuropean Union was 1.5 per cent in 2020. In 2020, the country with the highest weighted average import tariff worldwide was Gambia, at 17.8 per cent, followed by Bermuda at 24.1 per cent. The lowest weighted average tariff rate, zero per cent, was recorded in Hong Kong SARSpecial Administrative Region, China, Macao SAR, China, and Sudan (see Map 1).¹

Since 2010, tariffs have been trending downwards, mostly on a preferential basis. Simple-average MFN tariffsMost Favoured Nation (MFN) tariffs are a tariff level that a member of the General Agreement on Tariffs and Trade of the WTO charges on a good to other members, i.e. a country with a most favoured nation status -—
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—- It applies to imports from trading partners-members of the World Trade Organization (WTO), unless the country has a preferential trade agreement. It is the lowest possible tariff a country can assess on another country. on agriculture, manufacturing and natural resources have remained largely constant in 2020, amounting to 16.5 per cent, 6.4 per cent, and 2.6 per cent, respectively (see Figure 4). The increase of PTA schemes has contributed to about 2 percentage points to the reduction of simple agricultural tariffs and to about 1 percentage point to manufacturing tariffs. However, preferential tariffs have increased on a trade weighted basis, indicating an increase in tariffs among some of the major trading nations. In the natural resources sector, liberalization continued both in MFN and preferential terms, leading to tariffs rates of 2.6 per cent and 1.6 per cent, respectively, on a simple average basis, in 2020 -—
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Tariffs on exports of LDCs and developing countries decreasing slowly

The average level of customs tariff rates (indicator 17.12.1) faced by developing countries and LDCsLeast developed country illustrates the pace at which the multilateral system is advancing toward the implementation of duty-freeNot subject to import tariffs. and quota-free market access -—
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—-. SDG target 17.12 calls for “timely implementation of duty-free and quota-free market access on a lasting basis for all least developed countries”. Recognizing LDCs’ special economic circumstances, developed countries and other economies² agreed to grant LDCs duty-free and quota-free preferential market access.

Preferential market access for developing countries has been granted by most developed countries since the early 1970s under the aegis of UNCTAD -—
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—-. These unilateral trade preferences, called GSPGeneralized System of Preferences, allow developed countries to apply different tariffs between different groups of trading partners without violating Article I of the GATT stipulating non-discriminatory and equal treatment of trading partners.

Trade preferences under the GSP program are granted by the EU, the United States of America, Japan, Canada, Australia, New Zealand, Norway, Belarus, Iceland, Kazakhstan, the Russian Federation, Switzerland, Turkey, etc.

Figure 5 shows that in 2020 import tariffs applied by developed countries to products from LDCs registered a slight decline since 2015 throughout all groups of products. The average tariff amounted to 1.1 per cent in 2020. Tariffs, including preferences, faced by LDCs vary across product groups. Tariffs for clothing and textiles amounted to 5.9 per cent and 2.5 cent, while tariffs for industrial products were relatively low, at 0.4 per cent.

The degree of developing countries’ export competitiveness can partly be measured by the size of the preferential tariff margin, that is the difference between the preferential and the non-preferential tariff rate, of developing countries’ exports. The higher the margin the greater the market shares of these countries in preference granting countries. Figure 6 shows that LDCs’ preferential margins are strongest in low-skill manufacturing sectors, such as clothing, leading to a tariff advantage of six percentage points in entering developed countries' markets vis-à-vis the foreign competitors, on average. Preferential margins for LDCs are also substantial for textiles and agricultural products (between three and six percentage points). For developing countries, a substantial share of exports of clothing is attributed to markets in which countries have preferences (4 percentage points). For SIDSSmall island developing states (SIDS) were recognized as a distinct group of developing countries at the Earth Summit in Rio de Janeiro in June 1992. More information on UNCTAD official page., the highest preferential margins, of more than 15 percentage points, are registered for exports of agricultural products.

To assist LDCs in the elaboration of studies on DFQFDuty-free and quota free market access, UNCTAD produced two Handbook on "Duty-Free and Quota-Free Market Access and Rules of Origin For Least Developed Countries" -—
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—- and a database on the utilization of trade preferences -—
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Import restrictivenessThe average level of tariff restrictions on imports as measured by the tariff trade restrictiveness index (TTRI). differs substantially across countries, even within the same region. Table 1 presents a matrix of the average tariff rates imposed on trade flows between and within regions in 2020. Intraregional trade (in the shaded cells of the tables) is generally subject to lower tariffs than interregional trade. However, much South-South trade is still burdened by relatively high tariffs. This is the case, for example, for the trade between Latin America and South Asia, on which an average tariff of about 10 per cent is applied. South Asia faced the highest intraregional tariffs, with tariffs of 5.4 per cent in 2020 -—
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Tariffs are particularly high for agricultural products, as well as apparel, textiles and tanning. For example, tariffs above 15 per cent are imposed on about 7 per cent of global trade in food (26 per cent of the products in this group). About 12 per cent of world trade in apparel (21 per cent of the products in this group) is subject to tariff peaks of 15 per cent or more (see Figure 7).

The objective to improve market access for LDCs’ exports by granting special and differential treatment to them in accordance with the WTO agreements was outlined not only in SDG target 17.12, but also in SDG target 10.a. -—
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More than half of merchandise exports from developing countries are duty-free

Most developed countries grant either full or almost full duty-free and quota-free, i.e. DFQF, market access for LCDs, and an increasing number of developing countries are in the process of extending similar treatment to most imports from LDCs. Australia, New Zealand, Norway and Switzerland provide full duty-free access through preferential LDCLeast developed country schemes. For Canada, Chile, the EU and Japan, more than 97 per cent of tariff linesA single item in a country’s tariff schedule -—
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—-. are free of duty for products originating from LDCs. China grants duty-free access for LDCs on about 97 per cent of its tariff lines. India, Iceland, the Republic of Korea and Montenegro have a duty-free coverage of around 90 per cent or higher -—
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However, progress on export expansion from LDCs is slow. Despite considerable growth of LDCs’ exports since 2000, their share in world trade has remained at 1 per cent over the last ten years, while their share in the world population has been increasing, reaching 13.6 per cent in 2020 -—
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Tariff barriers remain significant in some countries, notably the United States of America. In 2019, 67 per cent of LDC exports were dutiable under the United States’ GSP scheme for LDCs, in US dollar terms, with a trade-weighted average tariff of 11.4 per cent -—
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SDG indicator 10.a.1 shows the extent to which special and differential treatment has been applied through import tariffs.³

LDCs were granted duty-free market access on 63.9 per cent of tariff lines in 2020 (see Figure 8); the respective share for all developing countries was around 53.2 per cent. ⁴

The highest proportion of exports from LDCs relieved from customs duties excluding oil, was found in trade in agricultural products (72.3 per cent). The second highest rate was recorded for trade in industrial products (70.5 per cent). As for developing countries, 54.5 per cent of their exports of agricultural products and 55.3 per cent of industrial products entered the world markets duty free (see Figure 8).

Figure 9 shows that almost 68 per cent of international trade of agricultural products in 2020 was duty-free, with 19 per cent of this accounting for duty-free on a MFN basis and the rest under preferential tariffs. The remaining tariffs for agriculture are fairly high, averaging to 20.2 per cent. Preferential access is also important for trade in manufacturing products, for which it accounted for 33.5 per cent. The simple average tariff for manufacturing products is also high and stood, in 2020, at 9.4 per cent. 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 tariffs averaging 5.8 per cent.

The rise of non-tariff measures

NTMsNon-tariff measures (NTMs) are policy measures other than ordinary customs tariffs that can potentially have an economic effect on international trade in goods, changing quantities traded, or prices or both such as technical barriers to trade, price-control measures, etc. -—
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—- often impede international trade more than border duties. Trade costs associated with NTMs are estimated to account for as much as 1.6 per cent of global GDPGross domestic product (GDP) is an aggregate measure of production, income and expenditure of an economy. As a production measure, it represents the gross value added, i.e., the output net of intermediate consumption, achieved by all resident units engaged in production, plus any taxes less subsidies on products not included in the value of output. As an income measure, it represents the sum of primary incomes (gross wages and entrepreneurial income) distributed by resident producers, plus taxes less subsidies on production and imports. As an expenditure measure, it depicts the sum of expenditure on final consumption, gross capital formation (i.e., investment, changes in inventories, and acquisitions less disposals of valuables) and exports after deduction of imports -—
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—-., amounting to US$1.4 trillion -—
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—-, more than double the amount of ordinary customs tariffs. According to UNCTAD -—
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—- estimates, in Asia and the Pacific, NTMs affect around 58.0 per cent of trade in the region. For intra-African trade, the average import-weighted tariff is 7.0 per cent, while the ad-valorem equivalentA tariff that is not a percentage of the price of the product (e.g. dollars per ton) can be estimated as a percentage of the price — the ad valorem equivalent. -—
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—- cost of non-tariff barriers is estimated to be 14.3 per cent -—
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NTMs, as policy instruments, are both directly and indirectly linked to sustainable development. Direct linkages include NTMs' intended impact on social and environmental issues, such as their contribution to food security (SDG 2) and nutrition and health (SDG 3); protecting endangered species and the environment (SDGs 14 and 15); supporting sustainable production and consumption (SDG 12); contributing to sustainable energy (SDG 7); and combatting climate change (SDG 13). Indirect effects may arise from trade policies that influence trade which can restrict economic growth and create negative spillover effects on sustainability -—
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A considerable number of NTMs are regulatory measures, which respond to a public demand for protection against environmental and health hazards -—
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—-. Technical NTMs, such as TBTTechnical barriers to trade (TBT) are measures referring to technical regulations, and procedures for assessment of conformity with technical regulations and standards., which includes labelling, standards on technical specifications and quality requirements, as well as all conformity-assessment measures, affect 31.6 per cent of product lines and 67.1 per cent of world trade (see Figure 10). SPSs, which typically prevail in agriculture, affect 16.1 per cent of product lines and 15.7 per cent of world trade. Figure 10 shows that the agricultural sector is more often regulated than manufacturing and natural resources, where most of world agricultural trade is subject to SPSSanitary and phytosanitary measures (SPS): Any measure applied: (a) to protect animal or plant life or health within the territory of the trade partner from risks arising from the entry, establishment or spread of pests, diseases, disease-carrying organisms or disease-causing organisms; (b) to protect human or animal life or health within the territory of the trade partner from risks arising from additives, contaminants, toxins or diseases causing organisms in foods, beverages or feedstuffs; (c) to protect human life or health within the territory of the trade partner from risks arising from diseases carried by animals, plants or products thereof, or from the entry, establishment or spread of pests; or (d) to prevent or limit other damage within the territory of the trade partner from the entry, establishment or spread of pests -—
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—-. and TBT. Almost 40 per cent of all exports are subject to at least one export regulation measure -—
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In LDCs and developing countries as a whole, about 40 per cent of imports are subject to NTMs. This is less than half as much as in developed countries. NTMs in developing countries and LDCs are less diversified than in developed countries. On average, developing countries use two different NTMs on any regulated product, and LDCs one, compared to four in developed economies -—
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Statistics on NTMs are still incomplete. As of today, the TRAINSTrade Analysis and Information System -—
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—- database developed by UNCTAD in partnership with several regional and international organizations is the most complete collection of publicly available data on NTMs at the HS six-digit level. As of 2018, UNCTAD has collected comprehensive and comparable NTM data, covering 109 countries and containing more than 65 000 measures.

Trade measures and COVID-19

The COVID-19 pandemic emerged in the context of already increasing protectionism and faltering globalization, as reflected, for instance, by the Brexit and the trade war between China and the United States of America. It highlighted major ongoing shifts in the objectives of national governments and companies and put considerable pressure on the multilateral rule-based trading system. Axioms of free trade, free movement of capital, or freedom of energy supplies have often been questioned against a cruder metric: “What’s in it for me?” -—
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—- Governments have been challenged to find the right balance between the need to import medical supplies and personal protective equipment (PPEPersonal protective equipment), such as hand soap, sanitizer, face masks and protective spectacles, against the loss of tariff revenues associated with them.

Trade measures target both exports and imports. WTO estimated that, by mid-October 2021, the trade coverage of ongoing COVID-19 trade-facilitating measures stood at US$112.1 billion, while the coverage of trade-restrictive measures amounted to US$92.3 billion -—
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As of 15^th of March 2022, WTO members had submitted a total of 453 COVID-19 related notifications, covering a range of products, including PPE, food, live animals, medical equipment and medicines. TBT (201) and SPS measures (122) made up the bulk of them, along with quantitative restrictions aimed at ensuring domestic food and medical supplies (87) (see Figure 11). Examples of the notifications include, inter alia, member states streamlining certification and authorization for medical goods, permitting the use of scanned and electronic SPS certificates, relaxing certain aspects of technical regulations for some food products.

Notes

1. Data are classified using the Harmonized SystemThe Harmonized System (HS) is an international nomenclature developed by the World Customs Organization, which is arranged in six-digit codes allowing all participating countries to classify traded goods on a common basis. Beyond the six-digit level, countries are free to introduce national distinctions for tariffs and many other purposes. of trade at the six- or eight-digit level. Tariff lineA single item in a country’s tariff schedule -—
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   —-. data were matched to the SITCStandard International Trade Classification. The commodity groupings of SITC reflect (a) the materials used in production, (b) the processing stage, (c) market practices and uses of the products, (d) the importance of the commodities in terms of world trade, and (e) technological changes. 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 applied tariffThe average of effectively applied rates weighted by the product import shares corresponding to each partner country -—
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   —-.. Import weights were calculated using the UN Comtrade database -—
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   —-. 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 favoured nation rate is used instead.
2. Following the WTO Hong Kong Ministerial Decision in 2005 -—
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3. Limitations of this indicator include the following: tariff-based measures are only a part of trade limitation factors; inability to comply with rules of origin criteria limits the utilization of preferential treatments; using data on zero-tariff lines assumes full utilization of benefits; low MFN tariffs mean that duty-free treatment is not always preferential -—
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4. Proportion of total number of tariff lines applied to products imported from LDCs 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 how many products from developing countries and LDCs have free access to markets in developed countries.

References

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