Carving out a DFQF deal in Nairobi

11 November 2015

The offer of a comprehensive DFQF scheme for all LDCs requires more than political will on the part of the US. African countries that have long resisted the move need to be assured that their interests will be safeguarded while the protagonists must be willing to settle for a less-than-perfect deal. Is a US DFQF scheme within reach at Nairobi?

 

Duty-free quota-free (DFQF) market access for the least developed countries (LDCs) can be traced back to the Millennium Development Goals (MDGs) of 2000. MDG 8, specifically, called for a global partnership for development, including through a trade system that provided “tariff- and quota-free access for LDC exports”. This intention was officially endorsed by the Doha Development Agenda of 2001. At the WTO ministerial conference in Bali in 2013, Ministers decided that: “Developed-country Members that do not yet provide duty-free and quota-free market access for at least 97% of products originating from LDCs… shall seek to improve their existing coverage for such products… prior to the next ministerial conference.” Bali also reiterated the original Hong Kong declaration, calling on developing countries “in a position to do so” to provide DFQF market access to LDCs.

97 percent is not 100 percent

Since then, the debate has focused on two issues: (a) the potential gains under a 97 percent DFQF scheme versus full product coverage; and (b) the reluctance of the United States to provide meaningful trade preferences to all LDCs. Whereas the first issue is now largely resolved, with available evidence showing that gains under a 97 percent DFQF scheme would be rather limited since the 3 percent of excluded tariff lines could cover virtually all of LDC exports (Laborde, 2008), the second has created deep divisions in the LDC group, pitting those who currently benefit from certain US trade preferences against those who do not.

The US  the big absentee

Most developed countries are already implementing DFQF schemes of various levels of ambition. Following the Hong Kong Declaration, a few emerging economies joined the league – notably, India in 2008 and China in 2010. The US has since 1976 implemented a GSP scheme for developing countries that is now set to expire in December 2017. It also has in place two regional duty-free schemes. The African Growth and Opportunity Act (AGOA) provides designated African countries (including 26 LDCs) duty-free treatment on some 1,835 products in addition to the GSP pool. AGOA was renewed for an additional 10 years in June 2015. The Caribbean Basin Trade Partnership Act (CBTPA) offers 17 beneficiary countries from Central America and the Caribbean (including one LDC  Haiti) duty-free access to the US market for most products, including textiles and apparel. Haiti enjoys additional trade preferences under special programs such as Haiti HOPE, HOPE II and HELP.

The US GSP scheme offers tariff preferences to over 5000 products. However, it excludes textiles and apparel, which are subject to an average 15 percent tariff, putting major apparel exporters like Bangladesh and Cambodia at a competitive disadvantage relative to African exporters, such as Lesotho, Kenya and Mauritius (the last 2 being non-LDCs), and Haiti.  AGOA also excludes a number of products in which African countries are known to be competitive. Agricultural products are subject to tariff-rate quotas (TRQs), with products like sugar, peanuts and tobacco facing exorbitant tariffs. Furthermore, restrictions on sugar and dairy content limit eligible exports to raw materials and primary products, effectively robbing poor countries of opportunities for higher value-added agro-processing.

DFQF works

Research confirms that existing DFQF schemes are highly beneficial to LDCs. It is estimated that full implementation of DFQF by OECD countries would boost LDC exports by about US$2 billion (or 17 percent) without affecting preference-granting countries in any major way (Bouet et al., 2010). A more recent study  commissioned by ICTSD  uses a partial equilibrium model to examine the impact of providing 100 percent duty-free treatment to LDCs’ exports by a selected group of trade partners, including three emerging economies (China, India and Korea). The results show that LDC exports would expand by 2.9 percent, with the biggest impacts coming from India (21.7 percent increase in imports from LDCs), Korea (12.9 percent) and the United States (11.8 percent) (Laird, 2012). Impacts on the rest of the world would however be negligible (Figure 1).

 Figure 1: Percentage change in imports from LDCs from implementation of a full DFQF scheme

Figure 1: Percentage change in imports from LDCs from implementation of a full DFQF scheme

 Source: Adapted from Laird (2012)

Country-wise, Haiti, Uganda, Malawi, Cambodia, Bangladesh and Nepal are among the biggest gainers. At the other extreme, Lesotho appears as the only country to lose in a rather significant way. Even so, its loss is a mere 1 percent of imports, or about US$5 million. To put the figure in perspective, consider that Lesotho received US$20 million as aid for trade in 2014. The loss derives from the erosion of Lesotho’s preference margins mainly on apparel exports to the US to the benefit of competing LDCs, such as Bangladesh and Cambodia.

DFQF tariff carve-outs

Lesotho’s loss should not be a barrier to a DFQF deal in Nairobi. Unfortunately, negotiations in the LDC group are hung over by the intransigent positions taken by Haiti and Lesotho. Their fears are well understood and may be justified. For example, in Lesotho, where the clothing industry has enabled an entire value chain of activities, including a number of service providers, the estimated US$5 million loss may be just the tip of the iceberg. Any deal on DFQF must therefore protect the interests of small LDCs that cannot expect to compete against clothing giants like Bangladesh and Cambodia.

One solution being considered at the LDC group level is a tariff carve-out that would safeguard the ‘acquis’ of Lesotho and Haiti by excluding their key exports from duty-free treatment in a future US DFQF scheme. This would ensure that Lesotho and Haiti face no direct competition from Bangladesh and Cambodia while providing additional preferences to these countries over and above GSP preferences. The idea has a simple logic; yet its implementation has generated some controversy. Analysts disagree over which countries to assign in the safeguard group  should Kenya and Mauritius be included in addition to Haiti and Lesotho?  what level of tariff disaggregation to use  HST 10, the level at which the US reports its tariff preferences, or HST 8, the tariff classification most commonly used?  and what critical thresholds to apply to imports in determining safeguard tariff lines?

In my initial analysis, I include Kenya and Mauritius in the safeguard group for the simple reason that these countries could lobby against any proposal put forward by the LDC group, which they deem prejudicial to their national interest. I use a lower safeguard threshold of US$5 million across all countries. This is an extension of the prudence concept that provides a higher degree of protection to existing beneficiaries than a threshold of US$10 million would.[1] The analysis is conducted at the HST 8-digit level and concentrates on two apparel sectors that constitute the bulk of clothing exports into the US: knitted or crocheted garments (such as T-shirts, pullovers, men’s or boys’ trousers and shorts, women’s or girls’ blouses and skirts, etc.) and woven garments (such as jeans, shirts, trousers, etc.).

The carve-out approach consists of sorting imports by tariff line and identifying products with import values greater than US$5 million. Selected tariff lines that occur in more than one country are counted only once. The analysis shows that excluding 27 tariff lines at the 8-digit level (see Table 1) in a future US DFQF scheme would shelter the bulk of apparel exports to the US by Haiti and AGOA beneficiaries. These tariff lines ‘protect’ 95 percent each of Lesotho’s and Haiti’s apparel exports, and about 87 percent of Mauritius’s and Kenya’s exports.

However, the 27 tariff lines would exclude 76 percent and 57 percent, respectively, of Bangladesh’s and Cambodia’s imports into the US from duty-free treatment. The higher share for Bangladesh suggests that the Asian LDC competes directly with AGOA exporters in most apparel categories. Indeed, the top 10 of the 27 tariff lines represented 72 percent of Bangladesh’s exports to the US in 2014. Cambodia would still benefit from additional duty-free coverage on 43 percent of its apparel exports to the US; but at 24 percent additional coverage, gains to Bangladesh would be much smaller, though not insignificant.[2] Finally, it matters little whether the non-LDCs (Kenya and Mauritius) are included in the safeguard group since there are only three tariff lines specific to them.

Table 1: ‘Safeguard’ tariff lines under a carved-out DFQF scheme

Table 1: ‘Safeguard’ tariff lines under a carved-out DFQF scheme

Source: Author’s calculations.
*Nesoi: Not Elsewhere Specified or Indicated

Looking beyond apparel…and the US

By focusing almost exclusively on apparel, LDCs may miss a unique opportunity to obtain concessions on a range of other products in which they may have a competitive advantage, or could develop one in the future. Agro-processing offers the best chances for industrial development in many LDCs; yet many such products are subject to TRQs or otherwise subject to near-prohibitive tariffs. LDCs should not lose sight of such potential catalysts. As their own experiences with apparel exports suggest, trade preferences can help unlock export potential in sectors that would not otherwise be contemplated.

And then again, why focus on the US only? Why not urge emerging countries that are deemed to be in a position to provide commercially meaningful trade preferences for LDCs to do so while encouraging those with existing schemes to revisit them with a view to improving their coverage and effectiveness? As the evidence cited earlier suggests, some of these schemes  and India’s in particular  can make a significant impact on LDC exports.

A done deal?

Any learned negotiator knows that positive framing is the right attitude to adopt in negotiations where stakes are high and chances for a dream deal dim. Bangladesh, which has been tirelessly lobbying the US for DFQF market access, surely understands the risks of asking for too much. Duty-free treatment on a mere 24 percent of its apparel imports into the US is not as appealing an option as complete coverage under the proverbial 100 percent DFQF scheme. But it is still better than nothing. Lesotho, on the other hand, should see in a US DFQF scheme the potential of a permanent agreement lodged under the Enabling Clause rather than the disruptive uncertainty associated with AGOA, which, in any case, may not exist beyond 2025.

In the end, the key protagonists will surely realise that their common enemy is outside the room. With the conclusion of the Trans-Pacific Partnership (TPP), they must brace themselves for competition from a mightier rival  Vietnam.

 

Author: Vinaye Ancharaz, Senior Development Economist at the ICTSD.

Views expressed in this article are the authors’ own and do not represent the views of the ICTSD.

 


[1] Some analysts have applied the higher threshold of US$10 million consistently across beneficiaries (e.g. South Centre, 2015) while others have used differential thresholds – US$5 million for Lesotho, Kenya and Mauritius, and US$10 million for Haiti (e.g. Elliott, 2013).

[2] These numbers are not markedly different from other estimates (for example, Elliott, 2013).

 

This article is published under
11 November 2015
In order to facilitate market access for imports from LDCs, WTO members’ DFQF schemes for LDCs have to rely on simple and transparent preferential RoO . For this to be achieved across the board,...
Share: 
11 November 2015
S&D provisions must effectively address the needs of developing and least developed countries. How can we rethink them for that purpose? Special and differential treatment (S&D) has been an...
Share: