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Trade Policy and Developing Countries: Where to Now?

Prepared by Andrew Stoeckel, Clare Saunders and Michael Monck

February 2007

RIRDC Publication No 06/098   RIRDC Project No CIE-24A

Executive Summary
• Developing countries have a strong interest in the restarted Doha round of trade talks progressing in a way that leads to a good outcome.
• The restarted talks must continue to emphasise that progress be made in the area of market access for agriculture. That is where most of the gains are likely to come from because that is where the bulk of agricultural protection lies among rich protecting countries. Agriculture remains a major source of income and employment in many developing countries.
• A good outcome from the Doha talks will be hard to achieve because large (over 60 per cent) cuts in tariffs are needed and the cuts must be comprehensive across all products for new trade to flow. But so far main protectionist countries have not been prepared to offer substantial cuts and they insist on leniency for some products defined as ‘sensitive’ or ‘special’. Treating just 2 per cent of tariffs lines this way could erode most of the potential benefits from liberalisation.
• The Doha talks are failing to secure trade liberalisation for exactly the same reasons that countries do not unilaterally liberalise trade. In short, countries do not believe they stand to benefit from removing their own barriers to trade which are, in effect, taxes on their own residents. Hence, countries are not willing to put substantial offers on the negotiating table, relying instead on other countries to give them better access to their markets. The multilateral case for liberalisation is being lost because the unilateral case for free trade has not been won.
• to improve the chances of the restarted Doha talks leading to a successful outcome, countries must become convinced it is in their own interests to liberalise trade. They must be convinced of the unilateral case for trade reform.
• The best way for an economy to appreciate the gains from unilateral reform is to start an independent public debate within the country about the economywide benefits and costs of trade liberalisation. Better internal processes of transparency of trade policy are required. Protection is a political problem and good processes of transparency change the politics of protection.
• Trade policy is but one major plank of a raft of domestic policy settings that must be right for a country to grow and prosper. These other domestic policy settings are all set unilaterally.
• Other trade policy options to help developing countries prosper do not withstand scrutiny. Granting preferences to some developing countries may look generous and helpful. In fact, they are a mistake because those countries receiving the trade preference do so at the expense of another country — mostly other developing countries. One country is helped at the detriment of another. On balance, the evidence shows the world is worse off and there is no overall development gain from granting preferences.
• Bilateral or preferential (free) trade agreements are not a good substitute for unilateral or multilateral reform.
• Bilateral negotiations face the same political sensitivities as do the multilateral talks. Again, the best way to address these political sensitivities is through good domestic transparency processes of trade policies.  Also, preferential (free) trade agreements suffer from the same problems as preferential trade access for some developing countries. Many such trade agreements are not welfare enhancing.
• Developing countries are partly hurt by the protectionist trade policies of rich countries. But the bulk of the burden of the protectionist policies of rich countries is, in fact, borne by the rich countries themselves. So shame and blame will not win the day. Indeed, this report argues that this strategy is making matters worse.
• The most powerful motivation for change is self-interest and all countries should realise it is in their own interests to liberalise trade. Getting to that point will require a change in thinking, rhetoric and better domestic transparency of the economywide costs and benefits of trade policy.

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