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Each day TFO Canada publishes a sample of trade news on the Canadian import market along with any new, updated or changed regulations and legislations regarding international trade; countries in which TFO Canada offers services and on the export sectors which it promotes.


Developing Countries Close to Deal to Boost South-South Trade

Tuesday, December 01, 2009 > 14:08:36

Developing Countries Close to Deal to Boost South-South Trade
(Bridges Weekly)

A group of developing countries has tentatively agreed on a deal to cut tariffs and other barriers to each others’ exports in an attempt to boost South-South trade at a time when multilateral liberalisation efforts are languishing.

Trade officials report that negotiators from 22 nations on Wednesday reached an outline agreement on a new round of concessions under the Global System of Trade Preferences among Developing Countries (GSTP), following days of meetings at the Geneva headquarters of the UN Conference on Trade and Development (UNCTAD).

The draft agreement will be submitted to ministers from participating countries for discussion and approval at a meeting scheduled for 2 December. The ministers will be in Geneva for the WTO’s ministerial conference starting 30 November.

Countries participating in the talks range from wealthy South Korea and relatively large emerging economies such as Brazil, India, and Indonesia, to North Korea and Zimbabwe. Notably absent are China and South Africa.

Under the terms of the tentative accord, participating states would lower tariffs on exports of some 70% of each others’ agricultural and manufactured goods. These tariff cuts would not be extended to other countries. Once the deal is adopted, each country will draw up a list of products eligible for tariff cuts, and then submit them to other participants for negotiation and verification. The ‘margin of preference’ appears likely to be at least 20% below currently applied MFN tariff levels. What this would mean in practice is that if India levied a 10% duty on car parts imported from the U.S., identical parts coming from Brazil would face a tariff of 8% or lower.

This departure from the WTO’s ‘most-favoured nation’ principle – the institution’s core notion that members should bind tariffs at the lowest rate made available to any other WTO member – is sanctioned by the Enabling Clause of the General Agreement on Tariffs and Trade, which authorises such preferential trade arrangements among developing and least-developed countries.

Sources say that the basic ‘modalities’ for the GSTP expansion could subsequently be supplemented with a ‘request-offer’ process in which countries could seek additional tariff cuts for individual products or changes to non-tariff measures.

The GSTP, which has 43 members, took effect in 1989 after more than a decade of discussions within the UN’s G-77 caucus of developing countries. However, only 22 have chosen to participate in the current round of concessions, which was launched in Sao Paulo in 2004 with a call for “a package of substantial liberalisation commitments on the basis of mutuality of advantages in such a way as to benefit equitably all GSTP participants.” Neither China nor South Africa is a member of the GSTP; they thus have not been participating in the ongoing round of negotiations. The Sao Paulo declaration that launched the talks formally invited all members of the G-77 and China to join the GSTP.

South-South trade more than tripled between 1996 and 2006, reaching a total of more than US$ 2 trillion, according to UNCTAD. With growth rates in the industrialised world still anaemic, policymakers have argued that trade among developing countries can drive recovery from the global financial and economic crisis.

In the troubled Doha Round trade negotiations at the WTO, industrialised countries have stressed that deeper tariff cuts by large emerging economies would expand South-South trade, not just commercial opportunities for their own exporters. At least in theory, the GSTP provides an avenue for expanding South-South trade, albeit not among all developing country members of the WTO, without fully exposing markets to Northern competition.

Thus far, however, the GSTP’s effectiveness has been limited. Diplomatic sources say that businesses are not making much use of existing market access provisions, in part because their coverage is spotty, and in part because their value has been eroded by tariff liberalisation in the intervening years.

An analysis by international charity Oxfam in 2004 said that market access negotiated under the GSTP up to that point was “not economically significant” in comparison to autonomous liberalisation, or to tariff cuts arising from regional agreements, the WTO, or pressure from the World Bank and International Monetary Fund. “GSTP negotiations have suffered from the unwillingness of some members to make concessions in the hope that they could gain benefits for free,” it concluded. The scheme’s future effectiveness would depend on the political will of its members, and their ability to attract new participants.

A more optimistic take came from a paper published in 2005 by Masahiro Endoh, an economist then based at Yale. On the basis of trade data from 1970 to 1995, Endoh concluded that the GSTP had been successful at attaining its stated goal: expanding trade in capital goods between participating countries. The ratio of participating countries’ intra-GSTP trade to their total trade more than doubled, and the bulk of trade within the block shifted heavily to capital goods from more basic commodities. Furthermore, evidence suggested that the trade was being created, rather than simply diverted from more efficient sources. Endoh acknowledged that the growth needed to be kept in perspective: from 1.49% in 1970, the share of intra-GSTP trade grew to 3.74% in 1995, still a small fraction of the total.

Today, according to the UNCTAD, intra-GSTP trade accounts for closer to a quarter of the total, most of it in manufactures. The UN body estimates that a 50% cut in intra-GSTP tariffs could boost exports within the group as much as US$ 20 billion. A 20% cut would generate export gains of US$ 7.7 billion. However, over half the projected increases would arise from diversion.

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