Preferential Trade Agreements: How Much Do They Benefit Developing Economies?

Preferential Trade Agreements

Preferential Trade Agreements

HOW MUCH DO THEY BENEFIT DEVELOPING ECONOMIES? This report aims to answer two major questions: 1) How beneficial are the trade preferences provided to developing countries; and 2) what are the implications of possible erosion of these benefits under multilateral trade liberalisation? The report focuses on trade preferences provided by the so-called Quad countries (Canada, the European Union, Japan and the United States) because they have some of the world’s highest tariffs on agricultural commodities.

Finally, it is observed that problems due to preference erosion can be mitigated when a significant share of agricultural imports enters each Quad country with a Most Favoured Nation rate of 0%, and when developing countries participate in a fair share of this trade. Currently, the value of preferential access is provided mostly by the EU and concentrated on a few developing countries and commodities, primarily bananas and sugar. For those few countries that still rely on preferences, benefit erosion can entail considerable adjustments.

Peter S. Liapis H

Preferential Trade Agreements

Findings from this study suggest that although preferential margins will be eroded with multilateral liberalisation, this may be a problem only for certain countries and within specific sectors, and that factors not related to preferential trade schemes may be limiting the exports of the Least-Developed Countries (LDC). The study also finds that the Generalised System of Preferences provides lessgenerous preferential margins and is more limited in product coverage than other programmes. What provides the biggest preferential margins and widest product coverage? For the LDC, the answer is duty-free access.

HOW MUCH DO THEY BENEFIT DEVELOPING ECONOMIES?

HOW MUCH DO THEY BENEFIT DEVELOPING ECONOMIES?

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Preferential Trade Agreements HOW MUCH DO THEY BENEFIT DEVELOPING ECONOMIES?

ORGANISATION FOR ECONOMIC CO-OPERATION AND DEVELOPMENT

ORGANISATION FOR ECONOMIC CO-OPERATION AND DEVELOPMENT The OECD is a unique forum where the governments of 30 democracies work together to address the economic, social and environmental challenges of globalisation. The OECD is also at the forefront of efforts to understand and to help governments respond to new developments and concerns, such as corporate governance, the information economy and the challenges of an ageing population. The Organisation provides a setting where governments can compare policy experiences, seek answers to common problems, identify good practice and work to co-ordinate domestic and international policies. The OECD member countries are: Australia, Austria, Belgium, Canada, the Czech Republic, Denmark, Finland, France, Germany, Greece, Hungary, Iceland, Ireland, Italy, Japan, Korea, Luxembourg, Mexico, the Netherlands, New Zealand, Norway, Poland, Portugal, the Slovak Republic, Spain, Sweden, Switzerland, Turkey, the United Kingdom and the United States. The Commission of the European Communities takes part in the work of the OECD. OECD Publishing disseminates widely the results of the Organisation’s statistics gathering and research on economic, social and environmental issues, as well as the conventions, guidelines and standards agreed by its members.

This work is published on the responsibility of the Secretary-General of the OECD. The opinions expressed and arguments employed herein do not necessarily reflect the official views of the Organisation or of the governments of its member countries.

Also available in French under the title:

L’accès préférentiel aux marchés QUEL BÉNÉFICE POUR LES PAYS EN DÉVELOPPEMENT ?

© OECD 2007 No reproduction, copy, transmission or translation of this publication may be made without written permission. Applications should be sent to OECD Publishing [email protected] or by fax 33 1 45 24 99 30. Permission to photocopy a portion of this work should be addressed to the Centre français d’exploitation du droit de copie (CFC), 20, rue des Grands-Augustins, 75006 Paris, France, fax 33 1 46 34 67 19, [email protected] or (for US only) to Copyright Clearance Center (CCC), 222 Rosewood Drive Danvers, MA 01923, USA, fax 1 978 646 8600, [email protected].

Foreword – 3

Foreword This report is part of OECD’s on-going effort to examine preferential market access. Earlier work by the Directorate for Trade and Agriculture focused on both the use of nonreciprocal preference agreements as well on the implications multilateral liberalisation would have on preferential access. Part I of this report focuses on calculating the preference margins for selected non-reciprocal preference arrangements at the detailed tariff-line level provided by each Quad country (Canada, European Union, Japan, and the United States) and how these margins will change under alternative Most Favoured Nation (MFN) tariff reduction formulas. Part II combines the preference margin information with the trade data from Part I, once again at the tariff-line level, to assess the value of the apparent preferential receipts provided by the Quad countries to those that are eligible to the various non-reciprocal agreements. This report identifies both countries that make the largest gains as well as the agricultural commodities that generate the largest benefits. It also identifies those countries which are the most reliant on preferential market access and which may be, as a result, more vulnerable to preference erosion. Parts I and II were declassified separately by the Joint Working Party on Agriculture and Trade. Acknowledgements The author, Peter S. Liapis, would like to acknowledge the statistical assistance provided by David Dowey for Part I and by Alexis Fournier for Part II. Tariff data for the European Union were provided by Jacques Gallezot, who also contributed to the European Union section in Part I. John Wainio, from the United States Department of Agriculture, Economic Research Service, provided tariff and trade data for the United States. Colleagues in the OECD Secretariat and delegates from Member countries provided useful comments to earlier drafts of the individual reports. Michèle Patterson provided editorial assistance and coordinated the publication process.

PREFERENTIAL TRADE AGREEMENTS: HOW MUCH DO THEY BENEFIT DEVELOPING ECONOMIES– ISBN-9789264033689 © OECD 2007

Table of contents – 5

Table of contents

List of Abbreviations .............................................................................................................................7 Executive summary ...............................................................................................................................9 Part I. Preferential margins in the agricultural sector of quad countries for selected non-reciprocal agreements.....................................................................................................13 Introduction......................................................................................................................................15 United States ....................................................................................................................................17 Japan ................................................................................................................................................29 Canada..............................................................................................................................................36 European Union ...............................................................................................................................43 Summary and conclusions ...............................................................................................................51 Annex I.1. Data and methodology.......................................................................................................57 Annex I.2. Average tariff rates by product aggregate (HS2) United States ........................................67 Annex I.3. Eligible countries to various non-reciprocal arrangements ...............................................71 References ...........................................................................................................................................89 Part II. The value of agricultural preferential access ...........................................................................91 Introduction......................................................................................................................................93 Agricultural imports by the Quad countries.....................................................................................93 The value of preferential access for the Quad countries ................................................................130 Conclusions....................................................................................................................................138 Annex II.1 Methodology and data for preferential rents ...................................................................145 Annex II.2 Background information on the value of imported goods by the Quad countries...........151 References .................................................................................................. 165

PREFERENTIAL TRADE AGREEMENTS: HOW MUCH DO THEY BENEFIT DEVELOPING ECONOMIES– ISBN-9789264033689 © OECD 2007

List of abbreviations – 7

List of Abbreviations ACP

African Caribbean and Pacific countries

AGOA

African Growth and Opportunity Act

ATPA

Andean Trade Preference Act

AVE

Ad valorem equivalent

CBERA

Caribbean Basin Economic Recovery Act

CCCT

Commonwealth Caribbean Countries Tax

DDA

Doha Development Agenda

EBA

Everything but Arms (EU’s GSP-LDC scheme reserved for Least Developed Countries)

GPT

General Preferential Tariff

GSP

Generalized System of Preferences

GSP-LDC

Generalized System of Preferences for Least Developed Countries

LDC

Less Developed Countries

LDCT

Less Developed Countries Tariff

MFN

Most Favoured Nation

Quad Countries

Canada, European Union, Japan, United States

TRQ

Tariff Rate Quota

UNCTAD

United Nations Conference on Trade and Development

VPM

Value Preference Margin

WUV

World Unit Values

PREFERENTIAL TRADE AGREEMENTS: HOW MUCH DO THEY BENEFIT DEVELOPING ECONOMIES– ISBN-9789264033689 © OECD 2007

Executive summary – 9

Executive summary

The present analysis is part of the OECD’s ongoing effort to examine the implications of non-reciprocal tariff preferences provided by developed countries to developing and least developed countries in agricultural trade. The first part of this two-part report focuses on calculating the preference margins for selected non-reciprocal preference arrangements at the detailed tariff-line level provided by each Quad country (Canada, European Union, Japan, and the United States) and how these margins will change under alternative MFN tariff reduction formulas. Part II combines the preference margin information from Part I with trade data, again at the tariff-line level, to assess the value of the apparent preferential receipts provided by the Quad to the countries eligible to the various non-reciprocal agreements. The report identifies the countries that garner the largest gains and the agricultural commodities that generate the largest benefits, while also identifying countries that are more reliant on preferential market access and that may be more vulnerable to preference erosion.

Preferential margins and their erosion Tariff preferences are provided in order to foster development through trade. In recent years, though, they have come under increased scrutiny. Among the many questions that animate the debate on tariff preferences, Part I of this report focuses on the size of the preference margins provided in agricultural trade, the erosion of these margins implied by alternative tariff reduction formulas, and on the extra value these margins generate for eligible exporting countries Canada, the European Union, Japan, and the United States (the Quad countries covered here), are the largest providers of non-reciprocal preferences that grant developing countries market access at tariff rates below MFN rates. Each of the Quad countries has a number of different preferential schemes for different groups of developing countries, and the nature of these schemes is rather variable across the Quad countries. In the preference regimes of all Quad countries, while the Generalised System of Preference (GSP) programme has the largest number of eligible countries, the group of Least Developed Countries (LDCs) benefits from duty-free access, giving them the largest preferential margins and the broadest commodity coverage. Given existing levels of MFN tariffs, there is considerable scope for tariff preferences by Quad countries: when based on dutiable tariff lines (i.e. excluding lines with zero tariffs that provide no scope for preferences), the average rate of MFN tariffs on all agricultural products ranges from 18% in the US to 29%, 30%, and 56% in the EU, Canada, and Japan respectively. Average tariffs as high as 28% can be found for in-quota items while out-of-quota tariff rates can be considered prohibitive in many instances. As important as the granting of preferential rates on eligible lines by the Quad is the exclusion of selected tariffs from the programmes. All Quad countries have preferential

PREFERENTIAL TRADE AGREEMENTS: HOW MUCH DO THEY BENEFIT DEVELOPING ECONOMIES– ISBN-9789264033689 © OECD 2007

10 – Executive summary tariff programmes that exclude more tariff lines than they include, and the excluded items tend to have tariff rates that are above the national average. In all Quad countries, preferential arrangements for the LDCs have a wider coverage of tariff lines than the GSP regimes, and in the EU their coverage is nearly comprehensive. For products with TRQs, preferential margins on out-of-quota tariffs are almost nil in all cases. The preferential margins for the GSP programmes, the ones with the largest number of eligible countries, are less generous and product coverage is less inclusive than those for other programmes. The largest average preferential margin on dutiable items in the GSP regime is given by Japan (average preferential tariffs 17 percentage points below average MFN rates) while the average preferential margin is between 2 and 4 percentage points for the other Quad countries. Preference margins will fall with MFN tariff reductions, depending on the tariff cutting formula used. As more products are declared sensitive and thus exempted from reductions applied to all other products, the fall in average MFN bound tariffs will be lower and the remaining preference margins higher. This will be more the case when the sensitivity criterion is the product’s TRQ status than when it is the highest 50 tariff lines in each of the Quad countries. Average tariff rates following tariff reductions based on the Swiss formula depend on the coefficient chosen. The higher the coefficient the smaller the resulting tariff reductions and the larger the remaining preferential margin. When a coefficient of 25 is used, average preferential margins fall anywhere from 40% to 51% in the US, 50% to 65% in Japan, 35% to 51% in Canada, and 46% to 62% in the EU, depending upon the program.

The value of preferential access The potentially deleterious effect on developing countries from the erosion of their preferential access has received considerable attention during the discussion of the DDA. The Quad countries have received notoriety because their tariff schedules contain some of the highest tariffs on agricultural commodities and the results from Part I suggest that preference erosion can be substantial. What is less well recognised, or at least less well discussed, is that the tariff schedule of each Quad country also contains a sizeable share of duty-free access on an MFN basis. And, these duty-free tariff lines are not scheduled on trivial items. Rather, a sizeable portion of Quad country agricultural imports enter free of duty. During the three year period, 2001 to 2003, 30% of Japan’s agricultural imports of USD 33.5 billion on average entered free of duty; 41% of US’s USD 45.1 billion entered duty-free; 42% of the EU’s USD 56.4 billion, and 46% of Canada’s USD 13.3 billion entered free of duty. Developing countries participate in a fair share of this trade. Since the focus of the paper is on the value of the preferential access given by the Quad countries, their duty-free imports do not play a role and are not much discussed. This is not to suggest that this trade is not valuable to the participants. Exporting produce whether dutiable or not, generates export earnings, creates jobs and improves the welfare of the participants. Nevertheless, the majority of Quad country agricultural imports enter with positive MFN tariff rates, and it is within those products that preferential access matters. The results presented in this report suggest that preferential access to Quad agricultural markets generated, on average, an additional USD 1.4 billion a year to the countries with

PREFERENTIAL TRADE AGREEMENTS: HOW MUCH DO THEY BENEFIT DEVELOPING ECONOMIES– ISBN-9789264033689 © OECD 2007

Executive summary – 11

preferential access. Not a trivial sum, but not very large compared to almost USD 90 billion of dutiable agricultural produce imported each year The findings in this report are similar to others, namely, most of the value of preferential access generated in the Quad countries is provided by the EU. Of the USD 1.4 billion in preferential receipts, 80% are generated by exploiting the EU’s nonreciprocal preferential schemes, while the US schemes provided an additional 15% of the total. Obviously, preferential receipts from Japan and Canada contribute little to the total. The findings reported here regarding the concentration of preferential receipts with respect to recipient countries and products is also consistent with those from other studies. Preferential receipts provided by the Quad countries are concentrated into a few developing countries. The preferential scheme receiving most of the value of preference margin (VPM) is the EU’s scheme for ACP countries. This group of countries obtained 67% of total EU VPM of USD 1.1 billion a year. Even within the ACP scheme, only a few countries account for the majority of the preferential receipts. The top five ACP recipients obtained 35% of the ACP VPM. Furthermore, preferential receipts are concentrated in a few commodities. Exports of sugar and bananas by the ACP countries account for 73% of their preferential receipts. From the exporting countries perspective, there seems to be specialisation in their export destinations with regard to preferences used. There are only two countries, Brazil and Thailand that receive meaningful preferential receipts (more than USD 1 million a year), from each of the Quad countries, and a handful of others — China, Argentina, Indonesia, Malaysia, Colombia, Peru and Guatemala — that are able to do this in three out of the four markets. A number of countries, however, are reliant on preferences as their exports tend to be concentrated in a few commodities that are receiving substantial preferences. For 37 countries the VPM is more than 0.5% of their agricultural value added (AVA) while for 11 of them it is more than 10%. Two countries, Mauritius and St. Kitts and Nevis, the share of the VPM to AVA is around half. In one country, Guyana, the VPM is almost 9% of its GDP. There are 20 countries receiving at least USD 1 million in preferential receipts per annum, where the VPM is more than 10% of the value of their total agricultural exports to the Quad, and for two — Mauritius and St. Kitts and Nevis — the ratio is 50% or more, that is, the VPM is approximately half the value of their agricultural exports. Furthermore, there are seven countries where the VPM is greater than 10% of the value of their total merchandise exports to the Quad. Clearly, for this group of countries, preference erosion may entail considerable adjustments. As shown in Part I, the preferential scheme for LDCs in each of the Quad countries is at least as favourable as any other scheme in terms of product coverage and the size of preferential margins. Nevertheless, LDCs do not capture a significant amount of preferential receipts. None of the top 30 countries in terms of VPM is an LDC. As the trade data shows, LDCs as a group do not export significant quantities of agricultural produce and thus do not seem to take advantage of the preferences provided. Clearly more emphasis is needed in the future to ascertain what problems are preventing these countries from utilising the preferences provided. Calculating the VPM is not an exact science. Several assumptions were made for their calculations. The VPM calculated for this exercise are based on the assumption that compliance costs to meet entry requirements under any of the preferential schemes are zero. Studies suggest that such costs can be as high as 5%. Furthermore, the calculations PREFERENTIAL TRADE AGREEMENTS: HOW MUCH DO THEY BENEFIT DEVELOPING ECONOMIES– ISBN-9789264033689 © OECD 2007

12 – Executive summary are based on 100% utilisation. Data from the US and Canada and for the EU from OECD (2005) and Candau and Jean (2005), suggest that utilisation rates, although high, are not 100%. Furthermore, the data for Canada and the US suggest that at times, countries apparently forsake the opportunity to gain preferential receipts by exporting preferenceeligible products through the MFN regime. This is circumstantial evidence that compliance costs are positive and that there may be other issues in the architecture of the various schemes that dissuade their full use. Some information is lost when the trade and tariff data are merged and in the case of the EU, a little more information is lost when the tariff data are aggregated in order to merge them with the trade data. Finally, the assumption is that the VPM are “captured” or accrue to the exporting countries, an assumption that is most likely not true in many cases. On balance, the bias of the assumptions was to over rather than under-estimate the VPM. Therefore, given that the value of preferential receipts are most likely overstated and that not all accrue to the exporting countries, analysis of the effects of preference erosion will likely overestimate the costs. The results further indicate that the question of preferences and their erosion may not be a general issue but one that is of a more pressing issue for a handful of countries only, mostly in the ACP scheme and mostly exporting sugar and bananas. For those countries, it’s obvious that reduction of preferential receipts in the future as MFN tariffs on all products are reduced and as the EU is reforming its sugar and banana policies may create economic adjustment problems. And, in any case, the ACP scheme is destined to be replaced through the Economic Partnership Agreements. Part I identifies the countries receiving the largest VPM in total and in each of the Quad countries and the commodities that are generating those receipts. This overview, however, does not allow a complete response to the question for which countries and commodities preference erosion may cause problems. This is because the VPM may be large in absolute value but represent a minor part of a country’s agricultural sector. On the other hand, the VPM may be small from the perspective of Quad country imports, but may be high when compared to the value of production in the beneficiary country. In such cases, preference erosion may have stronger consequences for the country concerned and may require adjustments beyond the agricultural sector. In addition, the broader question concerning the impacts of preference regimes and of the erosion of preferences on the welfare of beneficiary countries has not been evaluated as it is beyond the scope of the present study and could only be addressed in further work to evaluate the importance of preferences at the disaggregated product level for each of the beneficiary countries. The VPM calculated in this study represent an upper bound on the possible costs of totally eliminating non-reciprocal preferences. Although preferential margins will erode with multilateral liberalisation, they will not be eliminated in the foreseeable future. The erosion of the preferential margins will depend upon the agreed modalities. Moreover, tariffs will fall gradually over time, giving countries the time to adjust. Finally, although the focus of the paper is on the potential costs, many studies have shown that multilateral liberalisation leads to overall welfare gains. Even among countries where preferences are eroded, benefits through expanded exports in other sectors can lead to overall gains. For LDCs that are not meaningfully engaged in trade, however, preferences have not yet given them many benefits. Therefore, erosion may not be an issue for these countries and programmes that address their supply constraints may provide more meaningful assistance.

PREFERENTIAL TRADE AGREEMENTS: HOW MUCH DO THEY BENEFIT DEVELOPING ECONOMIES– ISBN-9789264033689 © OECD 2007

Part I. Preferential margins in the agricultural sector of Quad countries for selected non-reciprocal agreements – 13

PART I. PREFERENTIAL MARGINS IN THE AGRICULTURAL SECTOR OF QUAD COUNTRIES FOR SELECTED NON-RECIPROCAL AGREEMENTS

Abstract Tariff preferences are provided as a means to foster development through trade, but these have come under increasing scrutiny in recent years. Part I focuses on the size of the preference margins in agricultural trade and the possible implications of any erosion of these margins that could occur under multilateral liberalisation. Each of the Quad countries (Canada, the European Union, Japan, and the United States) implements their own preferential schemes for different groups of developing countries, with the nature of these schemes being variable across the Quad countries. In the preference regimes of all Quad countries, the Generalized System of Preferences (GSP) program has the largest number of eligible countries, but the preferential margins here are less generous and the product coverage is less inclusive than those for other programs. The group of Least Developed Countries (LDCs) benefit from duty-free access, giving them the largest preferential margins and the broadest commodity coverage. Preference margins will fall when there are Most Favoured Nation (MFN) tariff reductions as may occur under multilateral liberalisation. As more products are declared sensitive, and thus exempted from reductions applied to all other products, the fall in the average MFN bound tariffs will be lower and the remaining preference margins higher.

PREFERENTIAL TRADE AGREEMENTS: HOW MUCH DO THEY BENEFIT DEVELOPING ECONOMIES– ISBN-9789264033689 © OECD 2007

Part I. Preferential margins in the agricultural sector of Quad countries for selected non-reciprocal agreements – 15

Introduction Many OECD countries provide market access to developing countries at tariff rates that are below the rates provided under the most favoured nation (MFN) principle of the WTO, in order to facilitate and promote exports from those countries to encourage development and prosperity. The idea is to provide these countries with a competitive advantage through granting them lower tariff rates, but because the MFN principle essentially precludes such preferential arrangements, a special waiver was implemented in 1971 establishing the General System of Preferences (GSP) within the GATT/WTO framework. Countries identified as least developed countries (LDCs) may be granted more favourable treatment and some developed countries have established additional preferential programmes to various groups of developing countries called non-reciprocal because a granting country provides preferential tariff rates without demanding or expecting reciprocity. The nature of these programmes tends to be semi-permanent in the sense that every so many years the grantor of the beneficial rates enacts legislation to continue the programme or change its parameters. Moreover, they are unilateral and “voluntary” in the sense that the industrialised countries granting them have no legal obligation to continue to do so. Among developed countries, the Quad countries (Canada, Japan, the European Union, and the United States of America) are the largest providers of these schemes in terms of granting preferential access to their markets. These programmes, in recent years, have come under increased scrutiny. Have they resulted in increased exports from recipient countries to granting countries? Are developing countries becoming reliant on these programmes for their exports to the developed world? How large are the preferential margins and what are the implications of possible preference erosion under multilateral trade liberalisation as currently discussed? What are the impediments to their use? What are the costs and benefits to recipient countries and excluded countries? Are these programmes trade creating or trade diverting? These, among other questions, have been raised in the literature, and the findings are often inconclusive. For example, Alexandraki and Lankes (2004) find that the problem of preference erosion is likely to be small and concentrated in a few beneficiary countries and on even a fewer number of products (sugar and bananas) while Bouët Fontagné and Jean (2005) although generally agreeing with this assessment suggest that the magnitude of the difficulties for poor countries may have been understated. The OECD (2004) finds that because donor countries differentiate among beneficiaries and products for their various preference schemes, multilateral liberalisation may help offset potential losses in any one beneficiary country. A similar conclusion is reached by the European Commission in a report to the European Parliament (EC 2006) stating that most developing countries have more to gain than to lose from an ambitious round (pg 9); and in its 2004 Trade Report, the WTO concludes that while non-reciprocal preferences may have benefits for some suppliers at certain times, they often offer limited additional real market access and may not promote the long-term economic development of beneficiary countries (page XVII). In the current discussion under the Doha Development Agenda, a contentious issue in the area of market access is the concern by developing countries that tariff reductions through multilateral negotiations will erode their tariff preferences thereby reducing their welfare and their ability to compete with other countries. They interpret this as going against the objectives of the Doha Development Round, claiming that such an occurrence if not somehow taken into account will be against development. Preference erosion is not PREFERENTIAL TRADE AGREEMENTS: HOW MUCH DO THEY BENEFIT DEVELOPING ECONOMIES– ISBN-9789264033689 © OECD 2007

16 – Part I. Preferential margins in the agricultural sector of Quad countries for selected non-reciprocal agreements a problem if beneficiary countries do not use the programmes. The utilisation rate, (the share of exports receiving preference to total exports), and the value of trade benefiting from the schemes have been examined to determine the potential scope of the problem. Studies have tried to assess to what extent recipient countries export take place under the preferential schemes. Brenton (2003), focusing on the EU’s Everything But Arms program concludes that the utilisation rate is low. Recent studies such as Bouët Fontagné and Jean (2005), Candau, Fontagné and Jean (2004), European Commission (2006), OECD (2005), and, Wainio et al. (2005) have found that the utilisation rate is quite high when taking into account all eligible programs. Even though utilisation is high, these studies find that only a few economically large developing countries dominate their use, that utilisation is concentrated in a few products and, that the volume and value of trade is rather low. While overall the use of preferences may be dominated by relatively few product/country combinations, a large number of countries and products are in principle covered by preferential agreements and there may be cases where erosion may cause hardships for an exporting country relying on those preferences to generate exports. All Quad countries provide preferential treatment to a wide group of developing and least developed countries through the Generalised System of Preferences (GSP)1 and the Generalised System of Preferences for Least Developed Countries (GSP-LDC).2 These programmes are included in the present analysis. The GSP and GSP-LDC are the only preferential programmes in Japan. The other Quad countries provide additional preferential access to developing countries through a variety of other programmes, none of which are mutually exclusive. A recipient country can be eligible for more than a single preferential scheme in any one of the Quad countries. The additional selected preferential programmes for the US are the African Growth and Opportunity Act (AGOA), the Andean Trade Preference Act (ATPA) and the Caribbean Basin Economic Recovery Act (CBERA). The additional programme for Canada is the Commonwealth Caribbean Countries Tax (CCCT), and for the EU, the additional programmes are the African, Caribbean and Pacific countries (ACP or the Cotonou agreements) and the GSPDrugs scheme. The list of eligible countries in each of the selected preferential schemes for each of the Quad countries is provided in Annex II.1. It is not the purpose of Part I to discuss the merits of non-reciprocal tariff arrangements or the rational of their existence which is often questioned since these programmes, by selecting the participating countries, by their nature discriminate against others. Rather, the objective is to inform the debate by examining the extent and degree of the preferences granted by the Quad countries in some of their non-reciprocal programmes. What is the preference margin granted, for which produce are the preferential rates meaningful and how will these preference margins change following some hypothetical tariff reduction formulas? Part I will focus on the tariff rates and the preference margin. Preferential margin as calculated for this report is the difference between the MFN and the preferential rate. The margin does not take into account compliance costs, if any, to qualify and receive the preferential rate. These costs, such as complying with rules of origin, among others, may act to effectively lower the preferential margins reported below.1 Thus, the margins reported should be interpreted as the maximum possible that can be granted, given costless eligibility requirements. One should also bear in mind the role of graduation rules which may exclude access for products in cases where exporting

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Part I. Preferential margins in the agricultural sector of Quad countries for selected non-reciprocal agreements – 17

countries meet or exceed a competitiveness threshold. The graduation mechanism is designed to ensure that preferences accrue to those countries that need them most, even if to achieve this competitive countries are prevented from supplying the import market. This could in certain cases reduce the value of preferences. It is not necessarily the case that the economic benefits resulting from the preference margins accrue to the exporting country. Administrative arrangements and market structure may well be such that all or part of the benefits flow to intermediaries in the importing countries, thereby lowering the value of preferential access for the intended beneficiaries. The section begins with an examination of the MFN tariff profile for the Quad countries for agricultural products as defined at the WTO and compares these rates to the preferential rates to determine preference margins. The data sources and methodology are provided in Annex I.1. The analysis pays special attention to the tariff rate quota (TRQ) regime in each country and then examines the impact of various tariff cutting formulas on the preferential margins, assuming that preferential rates remain constant.

United States The US agricultural tariff schedule used for this analysis consists of 1821 tariff lines. Among these are tariff lines with specific tariffs and they are converted to their ad valorem equivalent (AVE). For this analysis, AVEs are calculated using world unit values (WUV) from 2002 data. However, the choice of WUVs is controversial. Consequently, AVEs are also calculated based on the average 1999 to 2001 WUVs to assess the sensitivity of the results. Annex I.1 contains key results from this exercise. The simple average tariff of the 1821 tariff lines is 14.4%.3 The data show that the majority of the tariff rates are between 0 and 5%. As a matter of fact, there are many tariff lines with zero tariff rates (388 lines, 21% of the schedule). Figure I.A1 in Annex I.1 shows the MFN tariff distribution for the US based on three different choices for calculating the AVEs of specific rates. The calculation of AVE is important because specific tariffs are a significant part of the US tariff schedule (as they are for the other Quad countries). How important are specific tariffs? How many tariff lines are affected? The schedule shows that there are 762 lines that contain a specific tariff rate. This is 42% of all tariff lines. When tariff lines with zero MFN rates are excluded, the share of the 762 lines with specific tariffs jumps to 53% of the dutiable tariff lines. This shows that specific tariffs are a very important component of the US’s agricultural tariff schedule and should not be ignored as is sometimes done in calculating and reporting average tariff rates. Table I.1 provides several summary statistics for the US schedule. The top part of the table shows the average tariff rate based on all 1821 lines, for the MFN as well as the non-reciprocal programmes, the average absolute preferential margin defined as the average MFN rate minus the average rate for any one programme as well as the relative preference margin or the percent discount4 relative to the MFN rate.

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18 – Part I. Preferential margins in the agricultural sector of Quad countries for selected non-reciprocal agreements Table I.1. Overall statistics for the United States

MFN

GSP

GSP-LDC

AGOA including GSP

ATPA

CBERA

Number of tariff lines Average tariff rate (%) Preference margin (percentage points) Percentage discount relative to MFN (%) Maximum tariff rate (%) Coefficient of variation

1 821 14.40 N.A. N.A. 405.50 2.59

12.40 2.00 -13.89 402.90 2.90

8.20 6.20 -43.06 350.00 3.90

8.10 6.30 -43.75 350.00 3.94

8.10 6.30 -43.75 350.00 3.98

8.00 6.40 -44.44 350.00 3.99

Number of Dutiable tariff lines Average tariff rate (%) Preference margin (percentage points) Percentage discount relative to MFN (%) Coefficient of variation

1 433 18.30 N.A. N.A. 2.26

15.80 2.50 -13.66 2.53

10.50 7.80 -42.62 3.43

10.40 7.90 -43.17 3.47

10.20 8.10 -44.26 3.51

10.20 8.10 -44.26 3.50

762.00 22.70 N.A. N.A. 405.50 1.95

20.50 2.20 -9.69 402.85 2.04

14.80 7.90 -34.80 242.42 2.29

14.60 8.10 -35.68 242.40 2.32

14.60 8.10 -35.68 242.42 2.32

14.50 8.20 -36.12 242.42 2.33

Number of tariff lines with specific tariffs Average tariff rate (%) Preference margin (percentage points) Percentage discount relative to MFN (%) Maximum tariff rate (%) Coefficient of variation

The table shows that the preference margin provided to countries under the GSP scheme is the smallest. The average tariff faced by countries in the GSP scheme is 12.4% or 2 percentage points less than the average MFN rate. This represents a 14% reduction relative to MFN rates. At the other extreme, the largest preferential margin is provided to countries in the AGOA5, ATPA and CBERA programmes, with preferential margins that result in an average rate that is 44% below the MFN rates. For the US therefore, at this level of aggregation, one can see that preferential margins provided by the US are significant for countries that qualify for the nonreciprocal programmes other than the GSP (the programme with the largest number of eligible countries). The calculations shown in the top part of Table I.1 are based on all tariff lines. As mentioned, a large number of tariff lines are scheduled with zero MFN rates. Preferential margins for these tariff lines are not relevant. What does the preferential margin look like when these zero tariff lines are dropped from the calculations? These are shown in the second part of Table I.1. The table shows the average tariff on all dutiable items (1433 lines). For countries exporting under MFN, the average tariff on dutiable lines jumps to 18.3% from 14.4%. The average tariff for each non-reciprocal programme is also higher as expected. But, the preferential margin is little changed in this case. Countries exporting under the GSP still have the smallest margin (2.5 percentage points); with an average tariff rate that on average is 14% less than the MFN rate. Countries eligible for the ATPA and CBERA schemes are provided with the largest margin, about 44% below MFN rates. Note, however, that programme-eligible countries also face peak tariffs as shown by the maximum tariff rate reported in the table. The bottom part of Table 1 shows the calculations of the average tariff for the tariff lines with specific component. The average MFN rate for the tariff lines with a specific component is 22.7%. For these tariff lines, not only is the average tariff higher, the PREFERENTIAL TRADE AGREEMENTS: HOW MUCH DO THEY BENEFIT DEVELOPING ECONOMIES– ISBN-9789264033689 © OECD 2007

Part I. Preferential margins in the agricultural sector of Quad countries for selected non-reciprocal agreements – 19

preference margin is lower than for the entire schedule. In this case, the tariff for the GSP programme is 10% below the MFN rate, while the average tariff rate for AGOA, ATPA and CBERA countries is 36% below the MFN rate. As will be shown below, specific tariffs are heavily used for TRQ products, a major reason for the lower preference margin. The tariff schedule of the US as for the other Quad countries contains tariff lines for products with tariff rate quotas. These are products with two-tiered tariffs depending on the volume of imports. If the imports are less than the quota, then the tariff is the in-quota tariff which is usually much lower than the out-of-quota rate which is the rate imposed on imports exceeding the quota. It is important therefore to distinguish the tariff lines that contain in-quota rates from the others. Do preference margins differ between TRQ products and others? Do they differ between in-quota tariff rates (usually low tariff rates but within a quota constraint) and out-of-quota (usually higher tariff rates but unrestricted imports)? The AMAD database combined with the data from ITC allows us to calculate average tariff rates and preferential margins taking into account the TRQ regime. Table I.2 examines the US schedule with the focus on the TRQ regime. The AMAD database contains 41 TRQs the US scheduled with the WTO. These are represented by 190 lines for tariffs within the quota (185 of which are dutiable) and 188 lines (all of which are dutiable) for tariffs outside the quota. Obviously, the rest of the schedule consists of tariffs for products that are outside the TRQ regime, referred to here as no-quota. There are 1060 of these lines with an MFN tariff greater than zero. The 373 tariff lines used for the TRQ products therefore represent 26% of the dutiable schedule. Table I.2 shows that the average MFN tariff rate for in-quota tariff lines is 10.7% which is below the average for all dutiable lines (14.4%), but higher than the average rate on no-quota products. The table also shows the average in-quota tariff rate for the nonreciprocal programmes. Except for the GSP scheme, the average tariffs are well below MFN rates, some 90% for ATPA and CBERA, and 89% for AGOA and GSP-LDC, resulting in preferential margins for imports within the quota that are very large. The importance of this large margin may be questioned however as imports that can benefit from these large margins are restricted by quotas, some of which may be allocated to specific countries. The U.S notifications to the WTO indicate that many of the quotas are not fully filled,6 suggesting that countries with access to large preferential margins are not filling these quotas and that there may be other reasons besides the average tariff rate that hinders full utilisation of the quotas. It is not the purpose of this paper to discuss possible reasons for quota under-fill, but the data here suggest that it is probably not due to the absence of preferential margins for the non-reciprocal programmes. It also suggests that strictly looking at the preferential margin may be insufficient and that some of the constraining factors mentioned in other studies, such as rules of origin, export capacity, and quality considerations may also play a part. Furthermore, since some of the quotas are allocated to specific countries the existence of large preferential margins does not necessarily imply that every eligible country in the preferential scheme has the same right to export and take advantage of the margin. Furthermore, quota administration methods may also constrain imports within the quota.

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20 – Part I. Preferential margins in the agricultural sector of Quad countries for selected non-reciprocal agreements Table I.2. Tariff statistics by TRQ regime United States

MFN

GSP

GSP-LDC

AGOA including GSP

In-Quota Number of MFN dutiable tariff lines Average tariff rate (%) Preference margin (percentage points) Percentage discount relative to MFN (%)

185 10.7 N.A. N.A.

185 9.4 1.3 -12

185 1.2 9.5 -89

185 1.2 9.5 -89

185 1.1 9.6 -90

185 1.1 9.6 -90

Out-of-Quota Number of MFN dutiable tariff lines Average tariff rate (%) Preference margin (percentage points) Percentage discount relative to MFN (%)

188 74.2 N.A. N.A.

188 74.2 0 0

188 74.2 0 0

188 74.2 0 0

188 74.2 0 0

188 74.2 0 0

No-Quota Number of MFN dutiable tariff lines Average tariff rate (%) Preference margin (percentage points) Percentage discount relative to MFN (%)

1 060 9.7 N.A. N.A.

1 060 6.5 3.2 -33

1 060 0.8 8.9 -92

1 060 0.6 9.1 -94

1 060 0.5 9.2 -95

1 060 0.4 9.3 -96

ATPA

CBERA

Also shown in Table I.2 is the average MFN tariff rate for the 188 out-of-quota tariff lines. As can be seen, the average tariff rate for these products is considerably higher than for the same product when imported within the quota and for the entire dutiable schedule. At 74%, the out-of-quota tariff rate is some seven times greater than the in-quota rate and almost four times greater than the average for all dutiable lines. The out-of-quota rates are heavily populated with specific tariffs as 171 of the 188 lines have a specific component which, as we’ve seen above have higher than average tariff rates. The table also shows that the US does not grant preferential tariffs to these products, therefore the preferential margin is zero. The bottom part of Table I.2 shows the average tariff rate for the no-quota products. These 1060 lines have an MFN rate that is lower than the average tariff for in-quota products and provide very substantial preference margins. On average, the rate for ATPA and CBERA is some 95% below the average MFN rate for these products. It is in these products also that the largest margin exists for countries in the GSP scheme with a preference margin of 3 percentage points leading to an average tariff that is 33% below the MFN rates. The calculations in Table I.1 treated all tariff lines as being included in each preferential programme. In reality, there are items that are excluded from these programmes and eligible countries face MFN rates. Preferential tariffs in the US programmes are duty-free. The preferential margin therefore is the average MFN tariff rate for these lines. Starting with the most general programme in terms of the number of eligible countries, the GSP scheme, Table 3 shows that there are 551 lines for which the MFN rate is non-zero whereas the GSP rate is zero. The average MFN rate for these lines is 6.4% generating a preferential margin to the countries in the GSP programme of equal value. But, the average MFN rate for these products is below the average for all dutiable MFN lines suggesting that the US excludes from the GSP programme items with relatively high tariff rates. Of these 551 lines in the GSP scheme, 29 are for tariff lines within the TRQ regime at the in-quota rate while the rest are in products without a TRQ PREFERENTIAL TRADE AGREEMENTS: HOW MUCH DO THEY BENEFIT DEVELOPING ECONOMIES– ISBN-9789264033689 © OECD 2007

Part I. Preferential margins in the agricultural sector of Quad countries for selected non-reciprocal agreements – 21

regime, i.e. no-quota. For the other 882 dutiable lines countries in the GSP scheme face MFN rates, that is preferential margin in these products is not granted. The bottom part of Table I.3 shows the average tariff rate for these excluded lines. The average MFN tariff (and hence GSP tariff) for these excluded lines is 26%. Table I.3. Tariff preference under non-reciprocal arrangements United States

GSP

AGOA including GSP GSP-LDC

In the Program Number of tariff lines Percent of dutiable lines Average tariff rate (for program) (%) Average tariff rate MFN (%) Preference margin (percentage points)

551 38% 0 6.4 6.4

1 159 81% 0 9.7 9.7

Excluded from Program Number of tariff lines Percent of dutiable lines Average tariff rate (outside the program) (%) Average tariff rate MFN (%) Preference margin (percentage points)

882 62% 25.7 25.7 0

274 19% 54.7 54.7 0

ATPA

CBERA

1 181 82% 0 9.6 9.6

1 199 84% 0 9.6 9.6

1 203 84% 0 9.6 9.6

252 18% 58.9 58.9 0

234 16% 62.7 62.7 0

230 16% 63.7 63.7 0

For the other selected preferential programmes, Table 3 indicates larger preferential margins and more included lines. Countries in the AGOA programme have 636 lines (44% of dutiable lines) that are tariff free while countries in the MFN regime face an average tariff on those lines of over 12%. This programme, less restrictive than the GSP scheme, (in terms of eligible tariff lines), has the largest preference margin of over 12 percentage points. But, as stated previously, the AGOA program is an extension of the GSP program. When duty-free tariff lines from the GSP program are included in the AGOA program, the number of eligible tariff lines jumps to 1181 (82% of dutiable lines). However, the average MFN tariff on those lines is 9.6%, that is, the preference margin is lower. The other programmes are even more generous in the number of included lines and the preferential margin is almost 1à percentage points. But, the average tariff rate on the tariff lines that are excluded from the programmes is very hefty. As shown at the bottom of Table I.3, the average tariff rates on the tariff lines that are excluded from the preferential programmes ranges from almost 26% for GSP countries to almost 64% for CBERA countries. Accounting for the TRQ regime, as mentioned above, all 188 out-of-quota tariff lines are excluded from all the preferential schemes examined leaving all countries to face the average MFN rate of 74%. These US preferential schemes also exclude from the programme tariff lines for in-quota products. For example, the GSP programme excludes 156 tariff lines (84% of in-quota tariffs) and the average tariff rate for these items is 11% which is higher than the overall average in-quota rate reported in Table I.2. Smaller shares of in-quota tariffs are excluded from the other programmes (14%-16%) and the average tariff (around 8%) is also below the overall average in-quota rate.

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22 – Part I. Preferential margins in the agricultural sector of Quad countries for selected non-reciprocal agreements

Commodity coverage of the US preferential programmes How are the preferences distributed across the various agricultural products? Annex Table II.1 reports the average MFN rate as well as the average tariff rate for the various preferential programmes and the number of dutiable (MFN) tariff lines for the various broad commodity groups. The difference between the MFN and programme rates reported in the table represents the average preferential margin. This is an accurate representation of the average margin for many products for some programmes. But, as stated above, some tariff lines are excluded from the various preferential programmes, and for these items, preferences are not existent. Focusing on the tariff rates that are explicitly included in the various programmes, the average preferential margin for the relevant lines is reported in Table I.4. This table reports the average preferential margin for the various non-reciprocal programmes and broad commodity groups along with the average MFN tariff rate and the number of MFN tariff lines for each broad product group. The calculated preferential margins shown in Table I.4 are based on the difference between the average MFN rates for the relevant tariff lines (i.e. tariff lines that are explicitly included in the specific programme), and the relevant programme lines. For example, the average MFN tariff rate for products in Chapter 1 is 4.5% based on 14 tariff lines. Of these 14 tariff lines, three are included in the GSP programme each at a zero tariff rate while the rest are excluded. The average MFN rate for these three duty-free lines in the GSP programme is 1.8%, leading to a preferential margin of the same value as reported in the table. In contrast, all 14 tariff lines are included in the GSP-LDC, AGOAGSP, CBERA and ATPA programmes duty-free. The preferential margin for these products as reported in the table is equivalent to the average MFN rate (4.5%). For the products for which the non-reciprocal programmes provide explicit preferential margins (tariff lines with MNF >0 and the tariff rate within a preferential programme = 0) we note the following (Table I.4). The US provides a fairly wide spectrum of preferential tariffs across the agricultural sector. Most of the preferential tariff lines in the GSP-LDC (14%), ATPA (14%) and AGOA (13%) are in Chapter 4 — Dairy. A large share of preferential rates is also provided to vegetable products (Chapter 7) and Preparations of Fruits and Vegetables (Chapter 20). For the GSP scheme, most of the preferential tariff lines, with 18% of eligible lines, are in Chapter 7— Vegetables with the second largest share devoted to items in Chapter 20, Preparations of fruits and vegetables. Interestingly, preferential rates for cotton are only provided to countries in the ATPA and CBERA programmes. Additionally, the preferential margins vary considerably within a scheme and among the schemes. Among the largest margins are found in beverages, tobacco and oilseeds (Chapters 22, 24 and 12). In addition to the preferential margins, Table I.4 also reproduces the average MFN rate and the number of dutiable tariff lines by sector from Annex Table I.1. This calculation is independent of the preferential programme and represents the average MFN for the sector based on all dutiable tariffs and thus is indicative of the magnitude of the MFN tariff for each chapter. The number of tariff lines is provided as an indicator of the specificity of the schedule for the various broad categories. For the GSP scheme the lowest margin is provided for items in Chapter 1—Live Animals—with a margin of a little under 2 percentage points (for 3 out of 14 lines in the chapter). Similar margins are found in Chapter 5, Other Animal Products, Chapter 2, Meat and edible meat offal, and Chapter 23, Feeds and residues and waste of food industry. Among the largest margins are found in Chapter 4, Dairy, with 16 percentage points, Tobacco and Beverages, Chapters 22 and 24 with 25 percentage points margin and PREFERENTIAL TRADE AGREEMENTS: HOW MUCH DO THEY BENEFIT DEVELOPING ECONOMIES– ISBN-9789264033689 © OECD 2007

Part I. Preferential margins in the agricultural sector of Quad countries for selected non-reciprocal agreements – 23

Chapter 12 which includes oilseeds and oleaginous fruits, miscellaneous grains, seeds and fruit Industrial or Medicinal Plants; straw and fodder with a 42 percentage point margin but for only ten out of a total of 30 lines. As stated above, the number of tariff lines in the GSP-LDC programme is more than double the qualifying lines in the GSP scheme. In this case, the largest margins are in beverages, tobacco, and oilseeds while the smallest margins from 2 to 3 percentage points are in Chapter 5, 6, 9, 10 and 16. As can be seen in Table I.4, countries in the AGOA, CBERA and ATPA programmes experience similar preferential margins as countries in the GSP-LDC scheme for most broad categories of products. The notable exception as mentioned above is cotton where the CBERA and ATPA programmes provide a preferential margin of almost 4 percentage points whereas the other programmes do not include cotton. What may be equally revealing is the average tariff rate for the various products faced by countries in the various preferential schemes for lines that are excluded from the programmes. As stated above, these lines include tariffs on all out-of-quota rates for TRQ products. There are additional excluded lines that vary by programme as described above. Table I.5 shows the average tariff rate assessed on the lines excluded from preferential schemes thereby facing MFN rates for each of the programmes across the various Chapter headings.7 This shows the selection bias in providing preferences among the different commodities and across the various programmes. Cotton is excluded from all but the ATPA and CBERA schemes, but even for these schemes, 40% of the cotton tariffs are excluded. A significant share of the tariffs in the dairy chapter are also excluded especially for countries in the GSP scheme, while almost 54% of the tariffs in the cocoa chapter and 38% of the tariffs in the sugar chapter are excluded for African countries in AGOA. Table I.5 also shows that for countries in the GSP scheme, there are excluded lines for all of the broad product categories shown. For the other programmes, preferential rates are provided for all tariff lines in several products. For example, in addition to live animals (Chapter 1) already mentioned, AGOA, CBERA, and ATPA programmes provide preferential (duty free) access to all tariff lines of Coffee, tea and spices (Chapter 9), cereals, (Chapter 10), products of the milling industry (Chapter 11), meat preparations (Chapter 16) and chapters 5 and 6.

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Live Animals (Ch. 1) Meat and edible meat offal (Ch. 2) Dairy, birds' eggs … (Ch. 4) Products animal origin N.E.S. (Ch. 5) Live trees and flowers (Ch 6) Vegetables (Ch 7) Edible fruits and nuts (Ch. 8) Coffee, tea and spices (Ch.9) Cereals (Ch. 10) Products of the milling industry (Ch. 11) Oilseeds and oleaginous fruits (Ch. 12) Animal and vegetable fats and oils (Ch 15) Meat preparations (Ch. 16) Sugar and Confectionary (Ch. 17) Cocoa and cocoa preparations (Ch. 18) Preparations of cereals … (Ch. 19) Preparations of fruits and vegetables (Ch. 20) Beverages (Ch. 22) Animal feed and residues (Ch. 23) Tobacco (Ch 24) Cotton (Ch 52) Other

1.80 2.45 16.10 2.01 2.96 4.82 4.40 3.28 3.15 4.00 42.02 4.62 3.59 6.06 5.67 7.86 5.28 25.23 2.35 24.61 0.00 4.28

GSP 4.47 4.76 11.07 2.17 2.73 7.16 7.71 3.17 3.42 4.06 22.07 9.17 3.35 6.69 6.28 10.57 6.99 41.11 3.10 29.65 0.00 8.50

4.47 4.76 11.07 2.17 2.73 7.16 7.71 3.17 3.42 4.06 22.07 9.17 3.35 6.69 6.28 10.57 6.99 46.12 3.10 29.65 0.00 8.50

ATPA 4.47 4.76 11.06 2.17 2.73 7.31 7.79 3.17 3.42 4.06 22.07 9.21 3.35 6.69 6.28 10.57 7.29 46.12 3.10 29.65 3.80 7.52

CBERA

4.47 6.40 31.91 2.17 2.73 7.30 7.79 3.17 3.42 4.06 30.45 11.48 3.35 27.55 16.51 23.30 9.39 50.91 19.11 91.94 14.62 11.71

MFN rate

14 79 249 6 22 151 94 14 17 33 30 50 27 64 71 60 169 41 25 36 15 166 1 433

MFN LINES

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4.47 4.76 11.06 2.17 2.53 6.79 8.03 3.17 3.42 4.06 22.07 9.21 3.35 6.69 6.28 10.57 7.16 46.12 3.10 29.65 0.00 7.65

GSP-LDC

AGOA including GSP

Table I.4. Average margin for selected preferential programmes by product aggregate United States

24 – Part I. Preferential margins in the agricultural sector of Quad countries for selected non-reciprocal agreements

11 66 242 1 5 50 54 3 12 11 20 30 6 32 43 41 90 22 14 30 15 84 882

5.19 7.18 32.36 3.00 1.94 12.30 10.29 2.78 3.53 4.19 24.67 16.13 2.48 49.04 23.57 30.45 13.00 73.09 32.28 105.41 14.62 19.00

0 6 82 0 1 11 5 0 0 0 2 1 0 24 38 18 18 1 2 7 15 43 274

N.A. 26.40 74.36 N.A. 6.80 13.71 3.44 N.A. N.A. N.A. 147.80 125.08 N.A. 62.31 25.39 52.98 28.11 242.42 203.19 350.00 14.62 20.90

GSP-LDC Average Number of tariff (%) lines 0 6 82 0 0 2 1 0 0 0 2 1 0 24 38 18 10 1 2 7 15 43 252

N.A. 26.40 74.36 N.A. N.A. 17.80 14.50 N.A. N.A. N.A. 147.80 125.08 N.A. 62.31 25.39 52.98 47.55 242.42 203.19 350.00 14.62 20.90

AGOA including GSP Number of Average tariff (%) lines

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Live Animals (Ch. 1) Meat and edible meat offal (Ch. 2) Dairy, birds' eggs … (Ch. 4) Products animal origin N.E.S. (Ch. 5) Live trees and flowers (Ch 6) Vegetables (Ch 7) Edible fruits and nuts (Ch. 8) Coffee, tea and spices (Ch.9) Cereals (Ch. 10) Products of the milling industry (Ch. 11) Oilseeds and oleaginous fruits (Ch. 12) Animal and vegetable fats and oils (Ch 15) Meat preparations (Ch. 16) Sugar and Confectionary (Ch. 17) Cocoa and cocoa preparations (Ch. 18) Preparations of cereals … (Ch. 19) Preparations of fruits and vegetables (Ch. 20) Beverages (Ch. 22) Animal feed and residues (Ch. 23) Tobacco (Ch 24) Cotton (Ch 52) Other Total number of excluded tariff lines

GSP Average Number of tariff (%) lines 0 6 82 0 0 1 0 0 0 0 2 1 0 24 38 18 8 5 2 7 6 34 234

N.A. 26.40 74.36 N.A. N.A. 5.80 N.A. N.A. N.A. N.A. 147.80 125.08 N.A. 62.31 25.39 52.98 51.77 55.15 203.19 350.00 30.85 24.99

CBERA Average Number of tariff (%) lines

Table I.5. Number of excluded lines and average tariff for the various preference schemes for broad commodity categories

0 6 82 0 0 1 0 0 0 0 2 1 0 24 38 18 8 1 2 7 6 34 230

N.A. 26.40 74.36 N.A. N.A. 5.80 N.A. N.A. N.A. N.A. 147.80 125.08 N.A. 62.31 25.39 52.98 51.77 242.42 203.19 350.00 30.85 24.99

ATPA Average Number of tariff (%) lines

Part I. Preferential margins in the agricultural sector of Quad countries for selected non-reciprocal agreements – 25

26 – Part I. Preferential margins in the agricultural sector of Quad countries for selected non-reciprocal agreements

How will the margins change under alternative tariff cutting formulae? The formulas used to reduce tariffs are discussed in Annex I.1. Three linear and a harmonisation formula are used to examine the effects of reducing bound MFN tariffs on preferential margins—none of which are associated with any particular proposal in Geneva. One of the linear formulas reduces each of the MFN tariffs by 36% is referred to as MFN-36. TOP50 refers to the linear formula which cuts all MFN tariffs by 36% except the highest 50 tariffs which are cut by 15%. The linear formula that cuts all tariffs, including in-quota tariffs by 36% while the out-of-quota tariffs are only cut by 15% is referred to as TRQ, while SWISS-25 refers to the harmonising formula which cuts each tariff, irrespective of how large it is or whether it is a TRQ product, using the SWISS formula with a coefficient of 25. The data above provide the necessary background for determining the impact on the preferential margins from various tariff-cutting formulas as explained in Annex I.I. In the case of the US, since preferential access is granted duty free, lowering the MFN rates will reduce the preferential margins by an equivalent amount, with the degree depending on the selected formula. As we have seen, however, there are also tariff lines that are excluded from the various preferential programmes. Thus, lowering tariffs will not affect preferential margins since there are not any, but since MFN rates are lower, preference receiving countries may benefit. Since the lower rates are on an MFN basis, they cannot be unilaterally increased or suspended by the granting country, nor are they subject to additional compliance costs such as meeting rules of origin requirements or facing the possibility of graduation. The average US agricultural tariff rate following the selected tariff-cutting formulas are shown in Table I.6. The top part of the table is based on all tariff lines, but since our interest is on preference erosion, we focus on the results for the 1433 dutiable lines in the bottom part of the table. This shows the average MFN rates, along with the maximum rate and coefficient of variation. As can be seen, the largest average reduction among the formulas chosen is an across the board application of the SWISS-25 formula. This leads to about a 64% reduction in the average tariff rate and a 94% reduction in the maximum tariff rate. For the US, whether the definition of sensitive products depends on the TOP50 rates or on the TRQ status makes little difference to the results as far as the average rate is concerned. The finding that the TOP50 formula leads to a slightly lower average tariff (larger reduction in the average tariff rate) compared to the TRQ formulation should not be surprising given that out-of-quota tariffs on TRQ products tend to be high and the number of tariff lines subject to the lower reduction rate under the TRQ formulation is more than three times greater than under the TOP50 formulation. The fact that the difference between the two methods is not sizeable suggests that relatively large tariffs are also assessed on non-TRQ products.

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Part I. Preferential margins in the agricultural sector of Quad countries for selected non-reciprocal agreements – 27

Table I.6. Average MFN tariff rates following selected tariff cutting formulae United States Pre Cut Average rate (%) Coefficient of variation

14.4 2.59

Average rate (%) Maximum (%) Coefficient of variation

18.3 405.5 2.26

MFN36

TOP_50 All Tariff Lines 9.2 10.3 2.59 2.98 Dutiable Tariff Lines 11.7 13.13 259.5 344.7 2.26 2.60

TRQ

SWISS-25

10.8 2.71

5.2 1.06

13.75 297.50 2.26

6.7 23.6 0.82

Broadly speaking, for the tariff lines that are not excluded from the preferential schemes, a 36% reduction across the board implies a comparable reduction in the preferential margins. The average preferential margin will decline by more or by less for other tariff cutting formulas. The first line in Table I.7 reproduces the prevailing preferential margins prior to any cuts based on the dutiable lines from Table I.1. Margin erosion is represented by the difference between the pre-cut margin and the margin following the tariff cuts. These are calculated by examining the preferential margin for each tariff line and computing the average. The margin for items that are in a programme fall equivalently to the tariff cut since the programme rate is zero. For lines excluded from the programme the preference margin does not change as a result of tariff reductions. For these lines, the programme rate is the MFN rate before and after the cut therefore, the preferential margin was zero before the cut and it is zero after the cut. The results depend on the programme and which items are included as well as on the tariff-cutting formula. Formulas that cut tariffs the most result in lower margins and hence larger preference erosion. For example, preferential margins for countries in the GSP programme fall by 36% (to 1.6 percentage points) with the linear 36% tariff cut but fall by 32% (to 1.7 percentage points) for the TOP50 formula and by 40% (to 1.5 percentage points) under the SWISS-25 formula. However, because of a different constellation of eligible and excluded tariffs for countries in the AGOA programme their average preference margin falls from 7.9 percentage points to 5.1 percentage points under any of the linear formulas (a 36% drop) while the SWISS-25 formula reduces their average margin to 4.2 percentage points, a 47% reduction. Table I.7. Average preferential margins for selected schemes due to alternative tariff cutting formulae United States

Pre-Cut MFN-36 TOP_50 TRQ SWISS-25

GSP 2.5 1.6 1.7 1.6 1.5

GSP-LDC 7.8 5.0 5.4 5.0 4.1

AGOA 7.9 4.6 4.8 4.9 3.6

ATPA 8.1 5.1 5.6 5.1 4.3

CBERA 8.1 5.2 5.6 5.2 4.3

The results in Table I.7 represent the average preferential margin taking into account programme and non-programme lines. As we have seen, however, not all tariffs are eligible for preferential treatment. What happens to preferential margins when only programme lines are taken into account? This may be a more accurate reflection of

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28 – Part I. Preferential margins in the agricultural sector of Quad countries for selected non-reciprocal agreements preference erosion for those countries that only export under preferences. The results are presented in Table I.8. Table I.8. Average tariff on items included in preferential programmes following tariff cuts — United States (%)

Pre-Cut MFN-36 TOP_50 TRQ SWISS-25

GSP 6.4 4.1 4.7 4.1 3.9

GSP-LDC 9.7 6.2 6.9 6.2 5.1

AGOA 9.6 6.2 7.9 6.2 5.1

ATPA 9.6 6.1 6.9 6.1 5.1

CBERA 9.6 6.1 6.9 6.1 5.1

Since tariffs eligible for any preferential programme are duty free, the preferential margin is the average MFN rate following the reductions. The top row in Table I.8 reproduces from Table I.3 the average margin before tariffs are lowered followed by preferential margins as a result of the various formulae. The MFN36 formula reduces tariffs by 36% and hence lowers the preferential margin by the same rate. In the US case, the TRQ formula leads to similar preference erosion for all programs while the TOP50 formula reduces tariffs slightly less thereby leaving slightly higher margins. As expected, the SWISS25 formula results in lower average tariffs and therefore lower margins. However, preference receiving countries should counterbalance the declining preferential margins on the included products against the potential decline in the average tariff on the excluded lines. It should be kept in mind that the average tariff rates on the excluded lines are 4 to 6 times greater than for included lines. Lower tariffs on excluded lines do not bestow any special advantages to preference receiving countries. However, lower tariffs can open the possibility of additional exports on products from which they were excluded and this could provide greater benefits than maintaining preferential access. This is an empirical question that is beyond the mandate of the current study. Table I.9 shows the average tariff that eligible countries would face on their items that are currently excluded from the selected US preferential schemes. Table I.9. Average tariff on items excluded from preferential programmes following tariff cuts United States (%)

Pre-Cut MFN36 TOP_50 TRQ SWISS-25

GSP 25.7 16.5 18.7 19.8 8.4

GSP-LDC 54.7 35.0 41.3 45.7 13.4

AGOA 58.9 37.7 37.7 49.3 14.1

ATPA 62.7 40.1 47.5 52.7 14.7

CBERA 63.7 40.7 48.2 53.5 14.9

Table I.9 shows that the average tariff rate of the tariff lines excluded from the GSP scheme would fall to almost 17% from almost 26% when the tariff cuts are based on the linear 36% across the board reduction method. The average falls by a lesser amount under the other linear alternatives. The large influence of the TRQ regime in excluded items is illustrated by the fact that this approach leads to the smallest reductions in average tariff across all of the programmes. As discussed in the previous paragraph, however, without further empirical work, no conclusions can be drawn concerning the relative trade effects PREFERENTIAL TRADE AGREEMENTS: HOW MUCH DO THEY BENEFIT DEVELOPING ECONOMIES– ISBN-9789264033689 © OECD 2007

Part I. Preferential margins in the agricultural sector of Quad countries for selected non-reciprocal agreements – 29

that result from declining preferential margins on products included in preferential agreements on the one hand and from the potential decline in the average tariff on the excluded lines on the other hand.

Japan Of Japan’s tariff schedule, 1849 tariff lines are used in the analysis. These include specific tariffs that were identified and converted into ad valorem equivalent. As was the case for the other countries, the specific tariffs were converted into ad valorem equivalent using world unit values for 2002. In Annex I.1, the implications of calculating AVEs for a different reference period for the WUV is explored. The average MFN bound tariff for these lines is 43.7% (Table I.10). The distribution of these rates for the two reference periods for WUVs is shown in Annex Figure I.2. As the US (and the other Quad countries) Japan provides duty-free access as shown in the figure. More than 30% of Japan’s tariff rates are between 0 and 5% and that most are less than 20%. But, almost 10% of Japan’s tariff schedule contains mega-tariffs, rates above 100% and these rates contribute to the relatively high overall average tariff rate. Table I.10. Overall statistics for Japan MFN

MFN-APL

GSP

GSP-LDC

1 849

1849

1849

1849

43.65 N.A. N.A. N.A. 1 052.12 2.64

31.49 12.16 -27.86 N.A. 864.27 2.85

30.71 12.94 -29.64 -2.48 864.27 2.92

29.55 14.1 -32.3 -6.16 864.27 3.03

Number of dutiable tariff lines

1 429

1 429

1 429

1 429

Average tariff rate (%) Preference margin (percentage points) Percentage discount relative to MFN boun (%) Percentage discount relative to MFN apllied (%) Coefficient of variation

56.47 N.A. N.A. 2.28

40.9 15.57 -27.57 N.A. 2.45

39.73 16.74 -29.64 -2.86 2.52

38.23 18.24 -32.3 -6.53 2.62

265

265

265

265

232.83

151.18 81.65 -35.07 N.A. 864.27 1.3

148.72 84.11 -36.13 -1.63 864.27 1.33

147.1 85.73 -36.82 -2.7 864.27 1.35

Number of tariff lines Average tariff rate (%) Preference margin (percentage points) Percentage discount relative to MFN boun (%) Percentage discount relative to MFN apllied (%) Maximum tariff rate (%) Coefficient of variation

Number of tariff lines with specific tariffs Average tariff rate (%) Preference margin (percentage points) Percentage discount relative to MFN boun (%) Percentage discount relative to MFN apllied (%) Maximum tariff rate (%) Coefficient of variation

N.A. N.A. 1 052.12 0.96

Japan’s preferential tariffs are provided for the GSP and the GSP-LDC programmes. There are 117 countries eligible for the GSP and 46 for the GSP-LDC. Japan’s preferential schedule is based on a positive list. For the GSP-LDC programme, eligible tariff lines are provided duty-free. For the GSP programme, some lines are provided duty free while others are discounted relative to MFN bound rates. A large share of the tariff PREFERENTIAL TRADE AGREEMENTS: HOW MUCH DO THEY BENEFIT DEVELOPING ECONOMIES– ISBN-9789264033689 © OECD 2007

30 – Part I. Preferential margins in the agricultural sector of Quad countries for selected non-reciprocal agreements schedule is excluded from the preferential programmes and face MFN rates. Japan also applies MFN rates below bound on some products. The top part of Table I.10 shows Japan’s average tariff rates. The average MFN bound rate on the1849 lines is almost 44%. But, Japan’s average applied rate of 31% is some 28% below the MFN rate. The average rate faced by preference eligible countries is even lower with countries in the LDC programme facing an average tariff rate some 32% below the MFN bound rate. The preferential discount relative to the average applied rate is much smaller. As is the case for the other Quad countries, Japan offers duty free access on some agricultural tariff lines. There are 420 lines or 23% of the schedule which are duty free. For these lines, there is no scope for preferential tariff hence they are excluded from the calculations provided below. The 1 429 dutiable tariff lines result in an average tariff of 56% (middle of Table I.10). The average tariff rate is also higher for the preferential programmes when only dutiable tariffs are used for the calculation. Although the preferential margin is somewhat higher, the relative discount to the bound rate is similar as when all tariffs are used in the calculation. Of these 1 429 dutiable lines, 265 or about 19% contain a specific component. These lines contain some of the highest tariffs in the case of Japan and to exclude them as is sometimes done would greatly bias the calculated average tariff rate. For example, the average tariff rate for these 265 tariff lines with specific tariff component is 233% (bottom part of Table I.10). If these lines are excluded from the calculations, the average tariff for the resulting 1 164 dutiable tariff lines is 16.3% instead of 56.5%. Most specific tariffs are excluded from the preferential schemes. The GSP eligible countries are provided with preferential rates on only eight out of the 265 lines while preferential rates are provided to countries in the GSP-LDC regime on only nine additional lines. MFN applied rates however are provided on 118 of these lines with an average tariff rate of 76.7%. For the remaining specific tariffs, the applied and MFN bound rates are the same. Since Japan, as the other Quad countries, does not include its entire tariff schedule in its preferential schemes, it is informative to examine the data for included and excluded tariffs. The information is provided in Table I.11. For countries in the GSP scheme 197 tariff lines (14% of the dutiable schedule) are included in the programme. Most of these (100 lines) are duty free and the remaining are provided at a discount to the MFN bound rates. The data suggest that Japan includes in its GSP scheme items with relatively low tariffs. The average MFN bound rate on the lines included in the programme is a little less than 12% (compared to average rate of 56%). The average tariff rate on the same items for countries in the GSP scheme is 4% providing a margin of 7 percentage points (63% below MFN rate). The GSP-LDC programme contains more lines (19% of dutiable schedule) and these are provided duty free. The average MFN bound rate of these lines is a little above 13% providing a margin of equal magnitude. Although the margin is substantial, the programme is geared toward non-sensitive items as the average tariff rate for the programme is much lower than the average on the dutiable schedule. Finally, Table I.11 also contains information on Japan’s MFN applied schedule. Our information is that 335 lines (23% of dutiable schedule) contain applied rates that are different from the bound rates. Although this does not provide programme eligible countries any additional preference, it does suggest that tariffs applied on a significant share of the schedule are much less than the bound (66 percentage points less).

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Part I. Preferential margins in the agricultural sector of Quad countries for selected non-reciprocal agreements – 31

Table I.11. Tariff preference under non-reciprocal arrangements Japan GSP

GSP-LDC

MFN Applied

197 14 4.31 11.54 7.23

271 19 0 13.19 13.19

335 23 40.9 107.3 66.4

1 232 86 63.66 63.66 0

1 158 81 66.6 66.6 0

1 094 77 40.87 40.87 0

In the programme Number of tariff lines Per cent of duitable lines Average tariff rate (for programme) % Average tarif rate MFN (%) Preference margin (percentage points) Excluded from programme Number of tariff lines Per cent of dutiable lines Average tariff rate (for programme) % Average tarif rate MFN (%) Preference margin (percentage points)

Japan, as the other Quad countries, has TRQs. In Japan’s case, there are 20 TRQs.8 The original schedule consisted of 189 tariff lines at the 9-digit level describing the inquota tariff rates. Japan, although not explicitly identifying in-quota and out-of-quota tariff rates, uses a unique tariff line for each of these tariff rates. The out-of-quota tariff rates, however, are not easily identifiable. Although changing naming convention for the HSC lines at the 9-digit level is fairly common from year to year, because of the notifications, it was possible to identify 165 in-quota tariff lines for the year 2002. However, Japan scheduled its out-of-quota and non-quota lines at the 6-digit level while the actual implementation is at the 9-digit level. Given changing nomenclature over time, 109 tariff lines could be identified as out-of-quota rates (which is probably an underestimate of the actual number of lines). Better information from Japanese sources could improve estimates of the out-of-quota lines. As it is, some of the lines classified as nonquota are probably for TRQ products, but it is impossible to know which ones these should be. This could be important in the calculation of the preferential margins keeping the TRQ regime in mind. At any rate, the 165 in-quota tariff lines have an average tariff of 25.3% while the 109 out-of-quota tariff lines average 310.9% and the 1575 no-quota lines average 27.1%. Looking now at the dutiable lines, the number of in-quota rates with a positive tariff is 147 and the average tariff for these lines is 28.4% (Table I.12). All out-of-quota tariffs are dutiable with an average rate of 310%, while the number of dutiable non-quota rates falls to 1 173 and the average rate increases to 36.2%. Table I.12 also shows that Japan applies MFN rates that are below the bound rates. The average in-quota applied rate, at 23% is 19% below the MFN bound rate. Countries in the GSP and GSP-LDC schemes have access to these rates and hence receive the same discount. Note, however. that additional preferential access is not granted for these items. Consequently, the preferential margin relative to the applied rates is zero. Similarly MFN applied rates below the bound rates are used on products with the out-of-quota tariffs, and the discount is larger than for the in-quota rates. Additional preferential access to countries in the GSP and GSP-LDC schemes is not, however, available. It is only for items outside the TRQ regime that preferential margins are provided as shown at the bottom of Table I.12.

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32 – Part I. Preferential margins in the agricultural sector of Quad countries for selected non-reciprocal agreements Table I.12. Tariff statistics by TRQ regime -- Japan MFN

MFN_APL

GSP

GSP_LDC

In-Quota Number of tariff lines

147

147

147

147

Average tariff rate (%)

28.40

22.99

22.99

22.99

Preference margin (percentage points)

n.a.

5.41

5.41

5.41

Percentage discount relative to MFN Applied (%)

n.a.

n.a.

0.00

0.00

Number of tariff lines

109

109

109

109

Average tariff rate (%)

Out of Quota 310.30

209.20

209.20

209.20

Preference margin (percentage points)

n.a.

101.10

101.10

101.10

Percentage discount relative to MFN Applied (%)

n.a.

n.a.

0.00

0.00

Number of dutiable lines

1 173

1 173

1 173

1 173

Average tariff rate (%)

36.23

27.13

25.96

24.15

n.a.

9.10

10.27

12.08

Percentage discount relative to MFN Bound (%)

n.a.

-25.12

-28.35

-33.34

Percentage discount relative to MFN Applied (%)

n.a.

n.a.

-4.31

-10.98

No Quota

Preference margin (percentage points)

Results from Table I.11 show relatively hefty preferential margins suggesting that there may be reasons for concern regarding preference erosion (aside from whether these preferences are actually utilised). Table I.12 shows, however, that none of the TRQ products (products containing among the highest rates) are explicitly included in Japan’s GSP or GSP-LDC programmes. Eligible countries therefore face the same MFN (bound or applied) rates as any other country. Thus, the issue of preference erosion is a non-issue with regard to TRQ products. As shown above, the average MFN rates for the tariff lines explicitly included in the preference scheme are much lower than the average MFN rate for all products. To the extent that MFN reductions lower MFN bound rates, these would help preference recipient countries.

Commodity coverage of the Japanese preferential programmes Annex Table II.2 shows the average MFN bound rates and the number of dutiable tariff lines for the various broad commodity groups as background. Focusing on only those lines that are explicitly included in the preference programmes, how are the tariff lines in the programmes distributed across the various commodities? What are the preferential margins? Table I.13 shows the average preferential margin and the number of tariff lines for the items included in the GSP and GSP-LDC programmes along with the total number of MFN lines. For all of the tariffs used to calculate the margins reported in Table I.13, the applied rate is the MFN bound rate. The preference margin is the difference between the MFN and the programme rate. This table shows that several broad categories of commodities — live animals, edible meats, cereals, cotton and tobacco — are excluded from both programmes, and meat preparations are excluded from the GSP scheme while in dairy and sugar, only one tariff line has a preferential rate. The table further shows that preferential access is concentrated in a few product groups, namely fruits, vegetables and their preparations (Chapters 7, 8 and 20) and coffee tea and spices (Chapter 9). Furthermore, even within the aggregate groups, preferential access is targeted to items with relatively low tariffs providing relatively small margins, even as PREFERENTIAL TRADE AGREEMENTS: HOW MUCH DO THEY BENEFIT DEVELOPING ECONOMIES– ISBN-9789264033689 © OECD 2007

Part I. Preferential margins in the agricultural sector of Quad countries for selected non-reciprocal agreements – 33

most of the tariff lines (all of them for the GSP-LDC programme) are duty free. All of these tariff lines, as stated above, are not part of the TRQ regime. The largest margin between the MFN and the preferential rates is for beverages (Chapter 22) where preferential rates are more than 80 percentage points lower than the MFN rate. Table I.13. Average preferential margin by HS Chapter Japan

Live Animals (Ch. 1) Meat and edible meat offal (Ch. 2) Dairy, birds' eggs … (Ch. 4) Products animal origin N.E.S. (Ch. 5) Live trees and flowers (Ch 6) Vegetables (Ch 7) Edible fruits and nuts (Ch. 8) Coffee, tea and spices (Ch.9) Cereals (Ch. 10) Products of the milling industry (Ch. 11) Oilseeds and oleaginous fruits (Ch. 12) Animal and vegetable fats and oils (Ch 15) Meat preparations (Ch. 16) Sugar and Confectionary (Ch. 17) Cocoa and cocoa preparations (Ch. 18) Preparations of cereals … (Ch. 19) Preparations of fruits and vegetables (Ch. 20) Beverages (Ch. 22) Animal feed and residues (Ch. 23) Tobacco (Ch 24) Cotton (Ch 52) Other

GSP

GSP-LDC

NA NA 1.5 2.1 3.0 2.5 3.7 4.0 NA 2.0 4.3 3.6 NA 9.0 5.1 6.2 3.9 83.5 3.0 NA NA 7.6

NA NA 1.5 2.1 3.0 8.3 6.5 5.0 NA 12.0 5.7 4.5 6.0 9.0 15.3 15.9 11.7 88.1 3.0 NA NA 11.7

Number of lines GSP

Number of lines LDC

Number of line MFN

NA NA 1 3 3 4 21 29 NA 4 6 13 NA 1 7 6 42 6 2 NA NA 49 197

NA NA 1 3 3 12 28 30 NA 4 6 14 6 1 7 9 71 13 2 NA NA 61 271

2 85 136 3 3 107 89 37 24 91 29 62 45 46 27 142 256 53 7 6 NA 179 1 429

How will the margins change under alternative tariff cutting formulae? The data for Japan provide the necessary background for determining the impact on the preferential margins from the various tariff-cutting formulas described previously. For Japan, as for other countries, lowering the MFN rates will reduce the preferential margin. As shown however, preferential access is limited in scope and magnitude as it is primarily provided on items with relatively low MFN rates. Furthermore, since most items are excluded from the preference schemes, lowering the MFN rates will have relatively little impact on preferential margins for most items, as preferential access is not granted. Consequently, in Japan’s case, developing countries most likely will be better served by advocating lower MFN rates rather than trying to maintain preferential access. The average bound MFN tariff following the various tariff-cutting formulas is reported in Table I.14. The top part of the table shows the results for the entire schedule, but since our interest is on preference erosion, we focus on the results for dutiable lines in the bottom part of the table. It is not surprising that the largest reduction in average tariff is through the use of the Swiss formula which leads to an average tariff of around 11%, PREFERENTIAL TRADE AGREEMENTS: HOW MUCH DO THEY BENEFIT DEVELOPING ECONOMIES– ISBN-9789264033689 © OECD 2007

34 – Part I. Preferential margins in the agricultural sector of Quad countries for selected non-reciprocal agreements an 81% reduction while the maximum rate is reduced some 98% to 24%. Note that the variation in the schedule also drops dramatically. As for the US, there is little difference in the resulting average tariff whether “sensitive” products are defined as the highest 50 tariff lines or based on their TRQ status. As in the case for the US, average tariff is slightly lower following the TOP50 reduction formula. Table I.14. Average MFN tariff rates following selected tariff-cutting formulae Japan Pre-cut

MFN36

TOP50

TRQ

SWISS-25

All tariff lines Average rate (%)

43.6

27.9

31.5

31.8

8.3

Coefficient of variation

2.6

2.6

3.0

2.8

0.8

Average rate (%)

56.5

36.1

734.6

41.1

10.8

1 052.1

673.4

2.3

734.6

24.4

2.3

2.3

1.3

2.4

0.5

40.7 Maximum (%) Coefficient of variation

What is the implication on the preferential margins? Focusing on the lines that are included in the programme, since the GSP-LDC programme is duty-free, the preferential margins fall concomitant with the fall in the MFN rates. For the GSP programme, preference erosion will also depend on whether the programme lines that are dutiable also fall. We assume that these rates are not altered in order to examine the implications absent any adjustments to the programme.9 The results are presented in Table I.15. Table I.15. Average preferential margins for tariffs included in the programmes from various MFN reduction formulae Japan GSP

GSP_LDC

Pre-cut

7.2

13.2

MFN36

3.7

8.4

TOP50

4.9

10.0

TRQ

3.7

8.4

SWISS-25

2.5

6.6

The results indicate that the formula that leads to larger tariff cuts results in lower margins. For countries in the GSP programme, their preferential margin falls the least when MFN bound tariffs are reduced according to the TOP50 formula while the Swiss formula reduces their preferential margin some 65%. A similar result is found for countries in the GSP-LDC scheme. Here too, the margin is the highest with the TOP50 formula (margins fall 27%) while the Swiss formula leads to a 50% drop. This result highlights that preferential access is granted on items with relatively low tariff rates. Whether it is economically rational for developing countries to argue for the retention of preference margins will be addressed in a subsequent study. Needless to say, there are instances where individual countries for specific products could be hurt by preference erosion. As shown for Japan, the product coverage for preferences is limited and the preferential margins are relatively small because they are provided to tariff rates that are PREFERENTIAL TRADE AGREEMENTS: HOW MUCH DO THEY BENEFIT DEVELOPING ECONOMIES– ISBN-9789264033689 © OECD 2007

Part I. Preferential margins in the agricultural sector of Quad countries for selected non-reciprocal agreements – 35

already relatively low. When problems with rules of origin and other compliance costs are taken into account these costs may be greater than the preferential margins which may impact the utilisation rate of these preferences. In Japan’s case, one could argue for an expansion of product coverage as a way to reduce the impact of preference erosion and improve market access opportunities for developing countries. But one must remember that the granting of preference is discriminatory and excluded developing countries may suffer losses greater than the benefits that are bestowed upon the recipients. Furthermore, developing countries could be better served by lower MFN rates, as that could expand their export possibilities. However, these questions require further empirical work that goes beyond the scope of the present study. No conclusions in this regard can be drawn therefore at this stage. This is illustrated by looking at the average tariff rate on the dutiable lines that are excluded from the preference programmes and how these rates may change following tariff reductions. Table I.16 reports these results. There are 1 232 dutiable lines that are excluded from the GSP programme and the pre-cut average rate for these lines is 63.7%. There are 1158 lines excluded from the GSP-LDC programme with an average pre-cut rate of 66.6%. These data once again illustrate how skewed preferential access is toward items with low tariffs. Cutting the tariff rates 36% across the board leads to an equivalent reduction in the average rate for the excluded lines. Developing countries do not have any preferential access to these tariff lines and thus would not suffer preference erosion but the average tariff that they face on these lines would fall 36%. With the more aggressive Swiss formula, average tariff rates would fall about 82%. These examples illustrate that although preferential margins for included items fall; tariff on the excluded items (a much larger share of the schedule) also fall, perhaps providing additional opportunities to expand exports for developing countries. Table I.16. Average tariff for tariffs excluded from preferential programme resulting from various MFN reduction formulae Japan GSP

GSP_LDC

Pre-cut

63.7

66.6

MFN36

40.7

42.6

TOP50

46.0

48.2

TRQ

46.5

48.8

SWISS-25

11.5

11.7

The calculations of average tariffs and preferential margins are based on MFN bound rates although as mentioned, Japan also uses applied rates that can be below the bound rates. The presence of applied rates does not materially affect the calculated preferential margins or the average tariff rate on excluded items because preferential access to the applied rate is generally not granted. It may be of interest to examine what would happen to the difference between applied and bound rates, the binding overhang, when bound rates are reduced as per the formulas discussed above. As shown in Table I.11, the average applied rate for the 335 lines is 40.9% compared to 107% on the comparable bound rates. All of the linear reduction formulas result in bound rates that are above the applied indicating the scope of the overhang. Only the Swiss formula leads to the result that the average bound rate falls below the applied.

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36 – Part I. Preferential margins in the agricultural sector of Quad countries for selected non-reciprocal agreements

Canada In the case of Canada, 1596 tariff lines are included in the analysis including the ad valorem equivalent of specific tariffs. As for the other Quad countries, AVEs are calculated from WUV for 2002, but in Annex I.1 the effects of using alternative WUVs are explored. The distribution of Canada’s tariff rates is shown in Annex Figure I.3. The majority of Canada’s tariffs are below 5% and almost 85% of the tariffs are below 10%. Canada uses peak tariffs, however, as about 6% of its schedule is 100% or greater. Table 17 reports several summary statistics of Canada’s tariff schedule. The simple average tariff rate for these lines is 20.8%. The relatively high average tariff rate, even as most of Canada’s tariffs are below 10% is a reflection of the peak tariffs. Canada’s schedule includes 434 tariff lines that contain specific rates or compound rates, representing 27% of all duty lines. The average value reported here includes these tariffs that were converted to AVE. These lines contain among the highest rates in Canada’s schedule and as will be seen below, they are mostly used for the out-of-quota rates on TRQ products for which the relative preferential margin is almost nil. The average MFN AVE rate for the specific tariffs is 63.5% (Table I.17). The average tariff rate, excluding the AVE of the specific tariffs is 4.9% illustrating the relatively high rates contained within these 433 lines. And, for these rates, the relative preferential margin is almost about one-half the average margin from all dutiable lines. Canada provides preferential access through many different programmes. For this exercise, the focus is on Canada’s Generalized Preferential Tariff (GPT), the Least Developed Country Tariff (LDCT) and the Commonwealth Caribbean Countries Tariff (CCCT) programmes. Table I.17 shows the average tariff rate for each of these programmes and their margin relative to the MFN rate. As shown in the table, the lowest average tariff rate, at 16% is provided to the LDC and Caribbean countries, giving them a preferential margin averaging almost 5 percentage points which represents a 22% reduction from the MFN rate. Canada provides duty free access to all countries on an MFN bases for 496 tariff lines (31% of schedule). The scope for preference margins on these lines is nil. Focusing on the dutiable lines, the middle part of Table I.17 shows the average MFN and preferential rates. As expected, the average MFN tariff is higher. The average MFN rate jumps to 30% and the average preferential rates also increase. The resulting preference margin is greater in absolute value but the discount relative to the MFN rate remains the same. As is the case for the other Quad countries, much of Canada’s preferential access is provided duty free. Canada provides duty free access on 934 lines for countries eligible for the LDCT programme, 948 for countries eligible for the CCCT programme and on 371 tariff lines for countries eligible for the GPT programme (Table I.18). The average MFN tariff rate on the duty free programme lines is; for GSP countries 4.8% while the average MFN tariff rate for the duty free lines for the CCCT and LDCT programmes is around 7% (Table I.18). The data indicate that preferential duty free access is provided on products with relatively low protection as the average MFN rate on these products is substantially below the overall average MFN rate.

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Part I. Preferential margins in the agricultural sector of Quad countries for selected non-reciprocal agreements – 37

Table I.17. Overall statistics for Canada MFN

GPT

LDCT

CCCT

Number of tariff lines

1 596

1 596

1 596

1 596

Average tariff rate (%)

20.8

18.6

16.2

15.8

Preference margin (percentage points)

n.a.

2.2

4.6

5.0

Percentage discount relative to MFN (%)

n.a.

-10.6

-22.1

-24.0

Maximum tariff rate (%)

879.4

765.5

765.5

765.5

Coefficient of variation

3.26

3.46

3.98

4.01

Number of dutiable MFN tariff lines

1 100

Average tariff rate (%)

30.2

26.6

23.7

23.5

Preference margin (percentage points)

n.a.

3.5

6.4

6.6

Percentage discount relative to MFN (%)

n.a.

11.70

-21.37

-21.96

Coefficient of variation

2.65

2.82

3.26

3.29

Number of specific MFN tariff lines

434

Average tariff rate (%)

63.4

60.1

56.6

55.8

Preference margin (percentage points)

n.a.

3.3

6.8

7.6

Percentage discount relative to MFN (%)

n.a.

-5.21

-10.73

-11.99

Maximum tariff rate (%)

879.4

765.5

765.5

765.5

Coefficient of variation

1.86

1.86

1.99

1.98

In addition to providing duty free access as shown above, Canada also provides some preferential access with discounts from the MFN rates. Focusing on the dutiable lines in the preferential programmes, bottom half of Table I.18 provides the average MFN rate and the relevant preferential programme rates along with the margins. There are 729 lines for which the tariff rate is positive for both the eligible GPT countries and MFN. The average MFN tariff for these lines is 43.1%, more than double the average for all lines and more than 40% greater than the average on all dutiable lines. For these tariff lines, countries eligible for the GPT programme face an average tariff rate that is a little more than 40% resulting in a lower margin representing a discount of around 7% relative to the MFN rate. There are 166 dutiable lines in the LDCT programme and as shown in Table I.18, these face among the highest tariffs. The average MFN tariff on these lines is more than 160%. Canada provides preferential rates for these lines and the average tariff faced by countries eligible for the LDCT programme is 155.7% leading to a preferential margin of almost 7 percentage points. Although the margin is comparable to the margin provided on the duty-free rates, it represents only a 4% discount to the MFN rate. The 152 dutiable tariff lines in the CCCT programme also face very high tariff rates. Even though the magnitude of the preferential margins provided to recipient countries is greater in this case, the magnitude of the tariffs is so much greater resulting in the relative discount rate that is fairly small.

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38 – Part I. Preferential margins in the agricultural sector of Quad countries for selected non-reciprocal agreements Table I.18. Average tariff rates and preferential margins -- Canada GPT

LDCT

CCCT

Duty free Number of tariff lines

371

934

948

Percent of dutiable lines (%)

34.0

85.0

86.0

Average tariff rate for program (%)

0.0

0.0

0.0

Average tariff rate MFN (%)

4.8

6.7

6.8

Preference margin (percentage points)

4.8

6.7

6.8

Number of tariff lines

729

166

152

Percent of dutiable lines (%)

66.0

15.0

14.0

Average tariff rate for program (%)

40.2

155.7

168.8

Average tariff rate MFN (%)

43.1

162.4

175.7

Dutiable lines

Preference margin (percentage points)

2.9

6.7

6.9

Discount relative to the MFN rate (%)

-6.6

-4.1

-3.9

Canada has scheduled 21 TRQs.10 As is the case for the US and Japan, Canada’s tariff schedule consists of unique coding (at the 8-digit level). Unlike Japan, Canada’s tariff schedule clearly identifies the tariff lines and the tariff rates that are assessed on imports within the quota and the rates that can be assessed on out-of-quota imports. The specificity of the schedule for these lines is illustrated by the fact that 351 lines or 22% of Canada’s tariff schedule is devoted to these 21 TRQ products. There are 161 tariff lines with rates within the quota. Of these, 144 are dutiable, that is they contain an MFN rate greater than zero. There are 190 lines with out-of-quota rates, 187 of which are dutiable. Table I.19 reports the average tariff rates for dutiable tariffs, discriminating among the inquota out-of-quota and the rest. The table illustrates the sensitivity of the TRQ products in terms of the share of dutiable tariff lines (30%) and the value of the average tariff rate for these products. The average MFN rate on the 144 tariff lines with in-quota rates is 4%. For most of these products, within-quota duty free access is provided to countries eligible for the LDCT and CCCT programmes. Countries in the GPT programme face an average tariff of about 3%. For the TRQ products, therefore, the average tariff rate is relatively low as are the preferential margins even though in relative terms, the discount rate is substantial. Since the notifications indicate that the quotas are pretty full, the scope for additional exports from the recipient (or any other country) is limited. The quota may be more of a binding instrument than the tariff level. The 190 out-of-quota tariff lines have an average rate of more than 143% (145% for the 187 dutiable lines). The preferential rates for these products is somewhat lower than the MFN rate, but the preferential margins, 7 to 8 percentage points depending on the programme, are relatively small compared to the absolute value of the tariffs. As is the case for the other Quad countries, preferential margins on the out-of-quota tariff rates are less frequently granted. The average discount to the MFN rates of around 5% pales in comparison to the more generous discounts provided for the no-quota and in-quota rates.

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Part I. Preferential margins in the agricultural sector of Quad countries for selected non-reciprocal agreements – 39

Table I.19. Tariff statistics by TRQ regime, dutiable lines Canada MFN

GPT

LDCT

CCCT

3.3

0

0

In-Quota Number of tariff lines

144

Average tariff rate (%)

4.0

Preference margin (percentage points)

n.a.

0.7

4

4

Maximum tariff rate (%)

11.2

8.7

2

1

Percentage discount relative to MFN (%)

n.a.

-17.5

-100

-100

Coefficient of variation

0.63

0.77

138

137

Out of Quota Number of tariff lines

187

Average tariff rate (%)

145.4

Preference margin (percentage points) Maximum tariff rate (%)

138.6

n.a.

6.8

7.1

8.1

879.4

765.5

765.5

765.5

Percentage discount relative to MFN (%)

n.a.

-4.7

-4.9

-5.6

Coefficient of variation

1.01

1.00

0.99

1.00

No Quota Number of tariff lines

769

Average tariff rate (%)

7.0

3.8

0.3

0.3

Preference margin (percentage points)

n.a.

3.2

6.7

6.7

Maximum tariff rate (%)

55.8

53.0

18.4

18.4

Percentage discount relative to MFN (%)

n.a.

-45.71

-95.71

-95.71

Coefficient of variation

0.61

1.22

How are the preferential margins distributed across the broad categories of agricultural products? Table I.20 shows the average margin (the difference between the average MFN rate and the preferential rate) as well as the average MFN rate and the number of dutiable lines for each of the product categories. This table shows that the lowest average MFN tariff rate in Canada is for products in Chapter 9 Coffee, Tea and Spices with an average rate of about 3% for 22 tariff lines. For these items, Canada provides duty free access to the countries eligible for any of the three programmes, providing a preferential margin of almost 3 percentage points. All eligible countries also enjoy duty-free access on items in Chapter 5, (Products of Animal Origin not otherwise specified) receiving preferential margin of 7 percentage points. Duty free access is also provided to countries eligible for the LDCT and CCCT programmes for oilseed (Chapter 12), and beverages (Chapter 22) while almost duty free access for these countries is also provided for sugar and confectionary (Chapter 17), tobacco (Chapter 24), trees and flowers (Chapter 6) and fruits and vegetable preparations (Chapter 20). The average MFN tariff rate for these products is between 7% and 8%. The preferential margin for these products is less generous for the larger group of countries eligible for the GPT programme.

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40 – Part I. Preferential margins in the agricultural sector of Quad countries for selected non-reciprocal agreements Table I.20. Average MFN tariff and margins for selected programmes by aggregate commodities Canada

Live Animals (Ch. 1) Meat and edible meat offal (Ch. 2) Dairy, birds' eggs … (Ch. 4) Products animal origin N.E.S. (Ch. 5) Live trees and flowers (Ch 6) Vegetables (Ch 7) Edible fruits and nuts (Ch. 8) Coffee, tea and spices (Ch.9) Cereals (Ch. 10) Products of the milling industry (Ch. 11) Oilseeds and oleaginous fruits (Ch. 12) Animal and vegetable fats and oils (Ch 15) Meat preparations (Ch. 16) Sugar and Confectionary (Ch. 17) Cocoa and cocoa preparations (Ch. 18) Preparations of cereals … (Ch. 19) Preparations of fruits and vegetables (Ch. 20) Beverages (Ch. 22) Animal feed and residues (Ch. 23) Tobacco (Ch 24) Cotton (Ch 52) Other Total

GPT

LDCT

CCCT

MFN

MFN lines

1.13 4.99 7.59 7.25 4.87 2.64 2.75 2.84 0.84 2.13 6.04 3.85 1.30 2.74 1.99 3.47 1.66 3.19 2.00 3.07 3.90 4.12

1.41 6.42 9.95 7.25 7.46 9.05 7.71 2.84 0.99 3.48 6.95 7.37 4.97 6.38 5.45 5.48 7.61 8.05 3.73 7.01 3.90 5.91

1.50 6.42 9.95 7.25 7.46 9.05 7.71 2.84 0.99 3.62 6.95 7.37 4.97 6.38 5.45 6.68 7.61 8.05 3.73 7.01 3.90 5.91

42.95 106.55 122.63 7.25 7.75 9.69 8.63 2.84 14.38 15.18 6.95 16.09 57.47 7.09 46.22 18.10 8.31 8.05 29.38 7.64 8.90 12.33

21 71 87 6 28 96 41 22 18 57 11 57 49 44 13 154 79 26 17 15 1 187 1 100

At the other end of the spectrum, the highest MFN average tariffs are given to items in meat preparations (Chapter 16), meat (Chapter 2) and dairy (Chapter 4). The average tariff rates for these items for countries eligible to the selected preferential schemes are also high and although the absolute preferential margin is among the highest, the relative discount is rather low. Further discriminating the preferential margins based on the TRQ status of the items, almost 60% of in-quota tariff rates are allocated to two product aggregates, Preparations of Cereals (Chapter 19) and Dairy (Chapter 4). When preferential access is provided for items with in-quota tariff rates, it is provided duty-free for countries in the LDCT and CCCT programmes, except for items in the category Live Animals (Chapter 1) But, preference is not provided to countries in the GPT programme as the average in-quota tariff rate is comparable to the MFN rate. The sensitivity of the TRQ regime is manifested by the relatively high average out-of-quota rates for a variety of items. Most of the out-ofquota tariffs (58%) are allocated to products in Chapters 4 and 19. The average preferential margin in this case is relatively small or practically zero for many other items for each of the preferential programmes.

How will the margins change under alternative tariff cutting formulas? How would the various tariff cutting formulas affect the preferential margins provided by Canada? Table I.21 provides the results based on all tariff lines and on the dutiable lines that we have identified. A linear 36% across the board reduction would lower the average tariff rate (for dutiable lines) from 30.2% to 19.3% and the maximum PREFERENTIAL TRADE AGREEMENTS: HOW MUCH DO THEY BENEFIT DEVELOPING ECONOMIES– ISBN-9789264033689 © OECD 2007

Part I. Preferential margins in the agricultural sector of Quad countries for selected non-reciprocal agreements – 41

tariff rate would fall from 879% to 563% (Table 21) When the linear reduction formula differentiates between sensitive products as defined earlier the average tariff rate falls by a lesser amount resulting in average tariff cuts of less than 36%. In Canada, as in the US and Japan, the TOP50 formulation leads to a lower average tariff. In Canada’s case, the difference between the two methods is more substantial. Clearly, the harmonising Swiss formula leads to the largest decline in the average rate (minus 77%) and maximum rate (minus 97%), and lowers the tariff dispersion as measured by the coefficient of variation. Table I.21. Average MFN tariff rates following selected tariff-cutting formulae Canada Pre-cut

MFN-36

Top 50

TRQ

Swiss-25

All tariff lines Average rate (%) Coefficient of variation

20.8

13.3

15.7

16.9

4.7

3.3

3.3

3.5

3.4

1.2

Dutiable lines Average rate (%) Maximum (%) Coefficient of variation

30.2

19.3

22.8

24.5

6.8

879.4

562.8

747.5

747.5

24.3

2.7

2.7

2.9

2.8

0.8

What is the implication on the preferential margins? Table I.22 shows the results based on the dutiable tariff lines the ones that matter in providing preferences.11 Countries in the GPT programme would face the largest erosion in their preferential margins compared to the countries in the other two programmes. And, because of the relatively low tariff rates for which positive preferences remain after the tariff cuts, the preferences for these countries are equally eroded by an across the board 36% cut or the Swiss formula. In both cases, more than half of the prevailing margin is eroded. The formulae that take into account the sensitivity of some products, results in lower tariff cuts and higher preferential margins. For the countries in the LDCT and CCCT schemes, their preferences are eroded by a lesser amount. Interestingly, in Canada’s case because preferences are provided for items with relatively low tariff rates, preferences are eroded by a lesser amount when the Swiss formula is used compared to the linear 36% across the board cut. Table I.22. Canada’s average preferential margin resulting from various MFN reduction formulae GPT

LDCT

CCCT

Pre-cut

3.5

6.5

6.6

MFN-36

1.7

4.0

4.0

TOP-50

2.0

4.3

4.3

TRQ

2.0

4.4

4.4

SWISS-25

1.7

4.2

4.2

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42 – Part I. Preferential margins in the agricultural sector of Quad countries for selected non-reciprocal agreements The results in Table I.22 are based on all dutiable MFN lines. How do the preference margins change when the data are differentiated between the items that are provided to the preference programmes duty-free from the rest? The results are provided in Table I.23. The top half of the table reports on the items that are provided duty-free to the three preferential programmes. The results show that preferential margins are eroded as expected, but contrary to expectations the largest margins remain when tariffs are cut following the Swiss formula. As discussed above, this is because duty-free access is provided on items with relatively low MFN tariffs which are reduced relatively less with the Swiss formula. The bottom half of Table I.23 reports the preferential margins for items for which eligible countries face a positive duty. Except for the CCCT programme, the average preferential margin on these items is less, and the margin is eroded to a larger extent. In this case, the Swiss formula results in almost total elimination of the preferential margin. At this level of aggregation for Canada therefore, it appears that there may be a legitimate concern regarding preference erosion. Unless the preferential rates are also lowered concomitant with the MFN rates, in many of the cases examined preferences are completely eroded. Table I.23. Canada’s average preferential margin for dutiable and non-dutiable lines resulting from various MFN reduction formulae GPT

LDCT

CCCT

Duty Free Number of lines

371

934

948

Pre-cut

4.8

6.7

6.8

MFN36

3.1

4.3

4.4

TOP50

3.4

4.6

4.6

TRQ

3.1

4.4

4.5

SWISS-25

3.8

4.9

5.0

Dutiable Number of lines

729

166

152

Pre-cut

2.9

6.7

6.9

MFN36

0.9

2.6

2.6

TOP50

1.4

4.5

4.7

TRQ

1.5

4.7

4.8

SWISS-25

0.6

0.0

0.0

Looking at the preferential margins for the TRQ products, since the preferential margins were relatively low, cutting these tariffs eliminates the margin. Yet, because the resulting average MFN tariff rates are lower, all countries benefit. Countries in the GPT programme are granted slight preferential access on in-quota tariff rates. These are eliminated when the linear formulas include reducing these rates by 36%. On the out-ofquota tariff rates however, the relatively small preferential margins are eliminated regardless of the tariff cutting formula used. The counterbalance to this is the reduction in the average MFN out-of-quota rates benefiting all countries, which are significantly larger than the loss of preferential margins.

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Part I. Preferential margins in the agricultural sector of Quad countries for selected non-reciprocal agreements – 43

Similar results are found for the countries eligible for the LDCT and CCCT programmes. Preferential margins are eliminated on out-of-quota tariff rates because they were limited in value while they remain in place for the in-quota and no-quota products because countries in these programmes face mostly duty free access. Although the margins are reduced since MFN rates are lower, they are not eliminated because the MFN rates remain positive. The impact of the tariff cuts on the preferential margins of countries in the GPT programme, for the various broad product groups, depends on the initial margins and the tariff-cutting formula. Preferential margins, although lower, remain positive for items in sugar and confectionary (Chapter 17), beverages (Chapter 22), tobacco (Chapter 24), cotton (Chapter 52), coffee and tea (Chapter 9), trees and flowers (Chapter 6) oilseeds (Chapter 2) and other animal products (Chapter 5) when tariffs are reduced 36%. Preferential margins are eliminated for all other products. The largest margins following the tariff cuts are those that provided duty free access, other animal products and oilseeds (4.6 and 3.5 percentage points respectively).

European Union Just as for the other Quad countries, the EU’s tariff schedule consists of specific tariffs that require calculating AVEs. In this case, three different unit values (2002 WUV, 1999 to 2001 average WUV and import unit values based on the EU’s own import data (Eurostat COMEXT database) are used to calculate AVEs. The difference between these approaches is discussed in Annex I.I. The data on customs duties have been taken from the Integrated Tariff of the European Communities (TARIC, DG Taxation and Customs Union). Although the EU provides many different preference schemes, the ones examined in this analysis are the general GSP scheme, the GSP scheme given to countries that fight illegal drugs (GSP drug regime), the GSP scheme reserved for Least Developed Countries (EBA), and the preferences given to African, Caribbean and Pacific countries (ACP or the Cotonou Agreements).12 In addition, the EU has put in place different instruments that aim at facilitating the use of preferences by reducing the costs of related administrative regulations (e.g. help desks). Whether or not these instruments are effective is an issue that has not been addressed. For the EU, the estimation of MFN duty rates is based on 3 034 agricultural and agrofood product lines. The simple average tariff, as an arithmetic mean, amounts to 25% based on 2002 WUV in the conversion to ad valorem equivalents. The distribution of the EU’s tariff rates for each of the three ways of calculating AVEs is shown in Annex Figure I.4. The data show that a substantial portion of EU’s tariffs are below 5% and that more than 60% of the tariff lines are below 20%. Table I.24 provides several summary statistics for the EU schedule. The top part of the table shows the results for all tariff lines. The simple average MFN tariff is 25%. At this level of aggregation, the results suggest that the EU provides substantial preferential margins for countries that qualify for the non-reciprocal programmes other than the GSP.

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44 – – Part I. Preferential margins in the agricultural sector of Quad countries for selected non-reciprocal agreements Table I.24. Overall statistics for the EU based on world unit values GSP-EBA

GSP-Drug

Cotonou

Number of tariff lines

MFN 3 034

3 034

3 034

3 034

3 034

Average tariff rate (%)

25.0

23.0

1.5

18.5

15.2

Preference margin (percentage points)

n.a.

2.0

23.6

6.5

9.8

Percentage discount relative to MFN (%)

n.a.

-8.0

-94.2

-26.0

-39.1

234.5

234.5

151.1

234.5

197.9

1.3

1.4

8.5

1.9

1.9

Maximum tariff rate (%) Coefficient of variation Number of dutiable tariff lines

GSP

2 588

2 588

2 588

2 588

2 588

Average tariff rate (%)

29.3

27.0

1.7

21.7

17.9

Preference margin (percentage points)

n.a.

2.4

27.6

7.6

11.5

Percentage discount relative to MFN (%)

n.a.

-8.0

-94.2

-26.0

-39.1

Coefficient of variation

1.1

1.3

7.8

1.7

1.7

Number of tariff lines with specific tariffs

1 375

1 336

43

1284

1 205

Average tariff rate (%)

43.9

42.9

100.8

42.7

37.6

Preference margin (percentage points)

n.a.

1.0

0.7

3.3

8.4

Percentage discount relative to MFN (%)

n.a.

-1.8

-0.7

-7.1

-18.3

234.5

234.5

151.1

234.5

197.9

0.9

0.9

0.2

1.0

1.0

Maximum tariff rate (%) Coefficient of variation

n.a. Not available Source: TARIC database (DG Taxation and Customs Union).

As mentioned above, a sizeable portion of MFN tariffs are duty-free. Preferential margins for these lines are meaningless. Focusing on the MFN lines with duties greater than zero, the average MFN tariff rate jumps, as expected, as does the average tariff rate for each of the preferential schemes. However, the discount relative to the MFN rate is little changed. The largest margin is provided to the EBA scheme (almost 28 percentage points) while the lowest is given to the GSP scheme (about 2 percentage points). Expressed as a rate of reduction in the MFN duty rate,13 the preference margin under the various schemes provides a discount of 8% on the GSP rate, 26% on GSP drug regime rate, 39.1% on the Cotonou Agreements rate and 94.2% on the EBA rate. The large number of specific duties that exist in the agricultural and agro-food sector is shown at the bottom part of Table I.24.14 In this respect, Table I.24 shows that products covered by a specific duty account for 45% of all lines and indeed over 53% if solely products with MFN duties greater than 0% are taken into account. It is clear to see the extent to which the decision sometimes made in the literature to exclude these lines can introduce a major bias into the statistics given that, as shown by Table I.24, it is precisely these lines which have the highest duties (43.9% MFN in an ad valorem conversion) and the lowest preferential margins. The results in the table also highlight the importance of specific tariffs for the preferential programmes as well. It is in this context that the assumptions made with regard to the estimation of ad valorem duties become important. Besides tariff preferences, the schemes also provide for the introduction of preferential quotas. In such cases, the tariff for the quota opened only applies to a given volume. Although it is not easy to compare these quota measures due to the difference between the volumes taken into account and the products concerned, it is possible to estimate the margins afforded by the use of a quota by considering solely the products covered by these measures. Table I.25 shows that there are three quota measures in place: MFN quotas (or WTO quotas) applicable to 386 products, EBA quotas applicable to PREFERENTIAL TRADE AGREEMENTS: HOW MUCH DO THEY BENEFIT DEVELOPING ECONOMIES– ISBN-9789264033689 © OECD 2007

Part I. Preferential margins in the agricultural sector of Quad countries for selected non-reciprocal agreements – 45

385 products. It should be noted that in 2002 there were no quotas under the GSP scheme and GSP drug regime. The preference margin on duties on quota products that is measured in relation to the MFN duty rates on matching products is 95.9% under the EBA scheme and 21.8% under the Cotonou Agreements. Table I.25. Tariff statistics by TRQ regime European Union TRQ Regime MFN

MFN

GSP-EBA

Cotonou

In-Quota Number of tariff lines

386

386

40

385

Average tariff rate - MFN (%)

58.3

16.4

-

-

Cotonou

32.0

-

-

10.2

GSP-EBA

95.9

-

0.0

-

Preference margin (percentage points) with same MFN lines

n.a.

n.a.

95.9

21.8

Percentage discount relative to MFN (%)

n.a.

n.a.

-100.0

-68.2

386

386

40

385 30.8

Average tariff rate with same MFN lines

Out of Quota Number of tariff lines Average tariff rate with same MFN lines Cotonou

32.0

-

-

GSP-EBA

95.9

-

95.9

-

Preference margin (%) with same lines

n.a.

n.a.

0.0

1.2

Percentage discount relative to MFN (%)

n.a.

n.a.

0.0

-3.7

Number of tariff lines

2 646

2 646

2 994

2 649

Average tariff rate - MFN (%)

20.2

-

-

13.0

No Quota

Average tariff rate with same MFN lines Cotonou

24.0

-

-

GSP-EBA

24.1

-

0.2

-

Preference margin (%)

n.a.

n.a.

23.9

11.0

Percentage discount relative to MFN (%)

n.a.

n.a.

-99.2

-45.9

Source: TARIC database (DG Taxation and Customs Union).

The management of import licences in this context and the fact that certain programmes allocate quotas to certain countries by product (the Agreement on Special Preferential Sugar (SPS) in the case of the Cotonou Agreements, for example) may reveal situations where tariff quotas are under-utilised. Another reason for this lack of take-up of quota allocations may be the incentive provided by the margin. While the latter may seem relatively large in Table I.25 in relation to the MFN duty rate, in cases where there is a trade-off with the existence of a preferential right it may well be smaller. In the case of the EBA, the question does not arise because there are no preferential tariffs for products subject to quota duties. In contrast, in the case of the Cotonou Agreements, this issue may well arise at some point. Tariffs on products not covered by Cotonou Agreements quotas offer no advantages over the MFN duty rate (1% margin). However, for some products this measure is relatively biased in that, for the purposes of comparative analysis, the tariffs on products that are not covered by preference schemes have been replaced by MFN duty rates. The calculations in Table I.24 treated all tariff lines as being included in each preferential programme. In reality, there are items that are excluded from these PREFERENTIAL TRADE AGREEMENTS: HOW MUCH DO THEY BENEFIT DEVELOPING ECONOMIES– ISBN-9789264033689 © OECD 2007

46 – Part I. Preferential margins in the agricultural sector of Quad countries for selected non-reciprocal agreements programmes and eligible countries face MFN rates. Table I.26 provides information on the preferential margins taking into account whether or not tariffs are included or excluded from the schemes (but ignoring their TRQ status). The data reveal that product coverage is very extensive for the EBA scheme (and will become more so after 2009) as 98.3% of dutiable lines (MFN >0%) are included in this scheme. The product coverage under the Cotonou Agreements is also fairly extensive (80.6% coverage), while product coverage drops for the other two schemes, 61.7% under the GSP drug regime and 53.9% under the GSP scheme. Naturally, the margins here are larger than those shown in Table I.24 because they apply solely to products covered by the various programmes. The size of the preference margins and the number of lines covered reflect the size of the preferential advantage afforded by the EBA, the Cotonou Agreements and GSP drug regime. In contrast, the general GSP scheme, with a margin of 4.4%, offers few incentives as a preference option if consideration is given to the constraints arising from compliance with the rules of origin in such schemes. Table I.26, by examining all products excluded from the various schemes, makes it possible to consider tariff preferences from an opposing standpoint. While the tariff averages cannot readily be compared with the figures in Table I.24 because the number of products is different, it is nonetheless clear that, apart from the EBA where the exclusion only concerns arms and the Cotonou Agreements where duties on excluded products are fairly close to MFN tariffs on all products, the products excluded from the GSP scheme and GSP drug regime are subject to high levels of duty (43.7% under the GSP scheme, 47% under the GSP drug regime). Table I.26. Tariff preference under non-reciprocal arrangements European Union GSP

GSP-EBA

GSP-Drug

Cotonou

Number of tariff lines

1 396

2 545

1 596

2 086

Percent of dutiable lines

53.9

98.3

61.7

80.6

Average tariff rate (for program) (%)

12.7

0.0

6.0

15.6

Average tariff rate MFN (%)

17.0

28.1

18.4

29.8

Preference margin (percentage points)

4.4

28.1

12.4

14.3

1 192

43

992

502

In the program

Excluded from program Number of tariff lines Percent of dutiable lines

46.1

1.7

38.3

19.4

Average tariff rate (for program) (%)

43.7

98.3

47.0

27.4

Average tariff rate MFN (%)

43.7

98.3

47.0

27.4

Preference margin (percentage points)

0.0

0.0

0.0

0.0

Source: TARIC database (DG Taxation and Customs Union).

Commodity coverage of EU preferential schemes Besides the averages relating to agricultural and agro-food products as a whole, it is interesting to consider the range of these averages by scheme at a more detailed level of the product nomenclature (Table I.27). Complete exemptions from MFN duty rates (0%) apply to several entire chapters: “Vegetable plaiting material” (Chapter 14), “Raw hides and skins” (Chapter 41), “Fur skins and artificial Fur” (Chapter 43), “Silk” (Chapter 50), “Wool; fine or coarse animal hair” (Chapter 51), “Cotton” (Chapter 52), “Other vegetable textile fibres (Chapter 53). The most highly protected Chapters such as “Live animals”

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Part I. Preferential margins in the agricultural sector of Quad countries for selected non-reciprocal agreements – 47

(Chapter 1), “Meat” (Chapter 2) or “Dairy products” (Chapter 4) do not exhibit large preference margins (margins between 4% and 7%), except, of course, under the EBA scheme which has the highest margins and “Cereals” under the Cotonou Agreements (margin of 43.4). After the EBA, the largest margins are to be found in the Cotonou Agreements, notably in “Preparations of vegetables, fruit, nuts or other parts of plants” (Chapter 20, margin of 19.5%) or “Tobacco” (Chapter 24 and “Preparations of cereals, flour or milk” (Chapter 19) where margins average 17%. Table I.27. Average margin for selected preferential programmes by products aggregate (HS2) European Union Dutiable lines (MFN >0) Live animals Meat and edible meat offal Dairy, birds’ eggs Products of animal origin Live trees and other plants Edible vegetables and certain roots Edible fruits and nuts Coffee, tea, mat and spices Cereals Products of the milling industry; malt Oilseeds and oleaginous fruits Lac, gums, resins Animal and vegetable fats and oils Preparations of meat Sugars and sugar confectionary Cocoa and cocoa preparations Preparations of cereals, flours Preparations of vegetables, fruits, nuts Miscellaneous edible preparations Beverages, spirits and vinegar Residues and wastes Tobacco Organic chemicals Essential oils and resinoids, perfumery Albuminoidal substances Miscellaneous chemical products Total

GSP

GSP-EBA GSP-DRUG Cotonou

0.41 0.29 0.46 3.50 3.36 3.07 4.21 5.14 0.00 0.29 2.85 3.96 3.43 0.29 0.63 1.05 3.14 3.62 3.62 1.08 1.12 8.93 0.63 5.07 2.73 2.27

44.37 49.21 66.97 5.10 7.44 15.42 12.56 8.01 5.93 35.84 9.58 11.91 12.97 22.07 26.53 22.89 34.61 21.75 17.05 12.57 40.87 19.66 45.19 5.31 12.08 15.33

0.57 0.45 0.57 5.10 7.44 8.15 8.95 7.70 0.08 0.73 3.80 11.91 6.84 4.73 1.66 2.29 6.55 18.33 8.99 2.85 1.53 19.66 0.63 5.07 3.28 2.27

7.55 6.04 6.42 5.10 7.44 10.22 9.18 8.01 43.28 4.41 4.74 11.91 6.97 5.82 7.85 14.96 16.85 19.54 9.98 3.30 7.50 19.66 7.80 5.07 5.68 5.30

MFN

Lines

44.37 49.21 66.97 5.10 7.44 15.42 13.12 8.01 68.80 35.84 9.58 11.91 12.97 22.07 37.19 22.89 34.61 21.75 17.05 12.57 40.87 19.66 45.19 5.31 12.08 15.33

Number 68 291 241 1 44 151 208 16 61 87 24 11 123 61 46 36 90 626 72 167 47 40 6 25 24 22 2 588

Source: TARIC database (DG Taxation and Customs Union).

As before, we need to recall the fact that the various schemes have been harmonised here by replacing the lines excluded from different schemes with MFN duty rates. Table I.28 provides details, by Nomenclature Chapter, of products not covered by preference schemes. Apart from the EBA, it is chiefly “Meats” (Chapter 2), “Dairy products” (Chapter 4) and “Beverages” (Chapter 22) that have the highest number of excluded products. This number is higher in these chapters under the GSP scheme and GSP drug regime than it is under the Cotonou Agreements. Products excluded from the “Meat” and “Dairy products” chapters have relatively high MFN duty rates (67%). The EBA scheme stands in stark contrast to this set of preference options with only a few products in the Sugar and cereals (rice) chapter excluded from tariff preferences but, as we have seen above, included in preferential quota measures.15 In contrast, the GSP scheme is the one most affected by the number of lines excluded from its programme (1 192).

PREFERENTIAL TRADE AGREEMENTS: HOW MUCH DO THEY BENEFIT DEVELOPING ECONOMIES– ISBN-9789264033689 © OECD 2007

60 269 210 24 33 61 80 3 1 9 58 27 3 149 7 138 36 5 11 8 1 192

Lines

Source: TARIC database (DG Taxation and Customs Union).

Live animals Meat and edible meat offal Dairy, birds’ eggs Edible vegetables and certain roots Edible fruits and nuts Cereals Products of the milling industry; malt Oilseeds and oleaginous fruits Lac, gums, resins Animal and vegetable fats and oils Preparations of meat Sugars and sugar confectionary Preparations of cereals, flours Preparations of vegetables, fruits, nuts Miscellaneous edible preparations Beverages, spirits and vinegar Residues and wastes Organic chemicals Albuminoidal substances Miscellaneous chemical products Total number of exluded tariff lines

Dutiable lines (MFN >0) 49.31 52.55 67.49 32.84 22.26 68.80 37.99 46.23 3.00 76.14 22.46 46.28 23.47 28.52 16.76 12.26 51.36 53.47 19.20 35.92

0 0 0 0 0 39 0 0 0 0 0 4 0 0 0 0 0 0 0 0 43

na na na na na 98.33 na na na na na 98.08 na na na na na na na na

Average

GSP-EBA Lines 60 269 209 17 22 60 80 3 0 9 39 26 0 0 4 134 36 5 11 8 992

Lines

4.41 9.79 51.36 53.47 19.2 35.92

76.14 26.58 46.28

49.31 52.55 67.73 32.51 24.33 69.86 37.99 46.23

Average

GSP-Drug

3 149 123 15 19 15 5 0 0 7 20 4 0 2 1 131 4 0 4 0 502

35.10 22.94 50.35 12.57 16.48 17.73 44.33 na na 91.05 27.01 82.41 na 16.00 8.01 9.72 11.84 na 16.31 na

Average

Cotonou Lines

Total 68 291 241 151 208 61 87 24 11 123 61 46 90 626 72 167 47 6 24 22 2 426

Lines

PREFERENTIAL TRADE AGREEMENTS: HOW MUCH DO THEY BENEFIT DEVELOPING ECONOMIES– ISBN-9789264033689 © OECD 2007

Average

GSP

Table I.28. Number of excluded lines and average tariff for the various preference schemes for broad commodity categories

48 – Part I. Preferential margins in the agricultural sector of Quad countries for selected non-reciprocal agreements

Part I. Preferential margins in the agricultural sector of Quad countries for selected non-reciprocal agreements – 49

How will EU margins change under alternative tariff-cutting formulas? On the basis of the European tariff data for 2002 presented above, it is possible to simulate the impact of the various tariff-cutting formulas considered here on preference margins and duty rates. This impact is naturally sensitive to the assumptions made with regard to the conversion of specific and complex rates and whether preferential rates are also lowered, an option not considered in this study. The results of these simulations can be interpreted for all agricultural and agro-food products (including those with 0% MFN duty rates) or, on the contrary, for only some of the products subject to rates greater than 0%. Table I.29 shows from this standpoint the results of the various scenarios compared with the prevailing situation (Table I.24). Table I.29. Average MFN tariff rates following selected tariff cutting formula European Union Pre-cut

MFN36

TOP50

TRQ

SWISS-25

Average rate (%)

25.0

16.0

17.2

17.6

9.3

Coefficient of variation

1.3

1.3

1.5

1.4

0.7

Average rate (%)

29.3

18.8

20.1

20.6

10.9

Maximum (%)

234.5

150.1

199.3

179.1

22.6

1.1

1.1

1.3

1.2

0.5

All tariff lines

Dutiable lines

Coefficient of variation

Source: TARIC database (DG Taxation and Customs Union).

Not surprisingly, the effects of the Swiss formula are fairly drastic and produce tariff reductions of 63% in terms of ad valorem equivalents. The level of average rates for dutiable products in this case is below 11%. The other formulae result in reductions of 30% (TRQ) to 31% (TOP50) and 36% for MFN-36. The question that now arises is how these simulations impact the various preferential schemes. This issue can initially be approached from the standpoint of the countries implementing the preference schemes. From this perspective, we should consider all products and in particular should also include those products that are not covered by these schemes. There will be no preferential advantage (margin) for such products, but on the other hand countries will benefit from the reduction in multilateral rates. The existence of a preference is only conceivable in relation to MFN rates greater than 0%. In the case of the products covered by schemes, the initial preference margin is assigned in accordance with the simulated tariff-cutting formulas. Table 30 shows the impact of the tariff-cutting formulae on the preferential margins. The Swiss and TOP50 formulas have the greatest impacts in lowering preference margins. While these two formulae have a more marked effect on the trimming of tariff peaks, the initial tariff preferences were highest in this area. It may also be noted that these tariff-cutting scenarios reduce the GSP scheme margin to a very low average level (between 1.1% and 1.5%, depending on the formula), which may well deprive it of its preferential virtues vis-à-vis developing countries, particularly in view of the constraints regarding compliance with rules of origin. It should be borne in mind, however, that this approach to tariff programmes embraces both the products that are covered by the PREFERENTIAL TRADE AGREEMENTS: HOW MUCH DO THEY BENEFIT DEVELOPING ECONOMIES– ISBN-9789264033689 © OECD 2007

50 – Part I. Preferential margins in the agricultural sector of Quad countries for selected non-reciprocal agreements schemes and those that are excluded. Tables I.31 and 32 provide an overview of the situation when discriminating among lines included in the schemes (Table I.31) from those excluded (Table I.32). Table I.30. Average preferential margins for selected schemes due to alternative tariff cutting formulae European Union GSP

GSP-EBA

GSP-Drug

Cotonou

Pre-cut

2.4

27.6

7.6

11.5

MFN36

1.5

17.7

4.9

7.3

TOP50

1.6

14.8

5.1

6.7

TRQ

1.5

19.3

4.9

7.8

SWISS-25

1.1

10.5

4.1

4.8

Source: TARIC database (DG Taxation and Customs Union). Table I.31. Average preferential margin following tariff cuts for lines included in preferential programmes European Union GSP

GSP-EBA

GSP-Drug

Cotonou

Pre-cut

4.4

28.1

12.4

14.3

MFN36

2.8

18.0

7.9

9.1

TOP50

2.8

15.0

7.9

8.4

TRQ

2.8

19.6

8.0

9.6

SWISS-25

2.1

10.7

6.7

6.0

Source: TARIC database (DG Taxation and Customs Union).

For items included in the various preferential schemes, margins, although eroded, remain. The results indicate that the formulas that cut the tariffs the most lead to lower margins (higher erosion). And, as was the case for the other Quad countries, countries eligible only for the GSP scheme end up with the lowest margins. As is the case for the other Quad countries, the counterweight to the falling preferential margins is the fall in the MFN tariffs on the excluded lines. As shown in Table I.32, the fall in the average tariff rate for the excluded lines is sizeable especially with the Swiss formula. This is important for countries that are only eligible for the GSP and GSP-drugs schemes because these are the programmes with the largest number of excluded items. Table I.32. Average tariff rates following tariff cuts for lines excluded from preferential programme European Union GSP

GSP-EBA

GSP-Drug

Cotonou

Pre-cut

43.7

98.3

47.0

27.4

MFN36

28.0

62.9

30.0

17.5

TOP50

30.6

73.0

33.1

18.0

TRQ

31.8

77.1

34.5

20.1

SWISS-25

13.2

19.5

13.4

10.8

Source: TARIC database (DG Taxation and Customs Union). PREFERENTIAL TRADE AGREEMENTS: HOW MUCH DO THEY BENEFIT DEVELOPING ECONOMIES– ISBN-9789264033689 © OECD 2007

Part I. Preferential margins in the agricultural sector of Quad countries for selected non-reciprocal agreements – 51

Summary and conclusions Many developed countries, in an effort to help developing countries penetrate their protected markets provide preferential tariff rates at a discount to their comparable MFN rates. These non-reciprocal trading arrangements are in addition to other forms of aid that countries provide in order to facilitate and encourage development and prosperity. The nature of these programmes (with the exception of EU’s EBA and the US’ CBERA programmes) tends to be semi-permanent since granting countries enact specific legislation to renew and change the programme(s). Among developed countries, the Quad countries, Canada, the European Union, Japan, and the United States, are the largest participants in these schemes in terms of granting preferential access to their markets. These programmes, in recent years, have come under increased scrutiny. Have they resulted in increased exports from recipient countries to granting countries? Are developing countries becoming reliant on these programmes for their exports to the developed world? What are the implications of possible preference erosion under multilateral trade liberalization as currently discussed? What are the impediments to their use? What are the costs and benefits to recipient countries and excluded countries? Are these programmes trade creating or trade diverting? These, among other questions, have been raised in the literature, and the findings are inconclusive. Part I of this report examines only one of the issues posed, the question of preference erosion, by looking at the average tariff rates and preferential margins for the Quad countries. It addresses the issue of what are the current margins and how might these change under alternative scenarios regarding tariff reducing formulas. It looks at the overall programmes and not to any individual country within any programme. Part I does not examine the trade flows occurring under the various regimes and does not assess any causality, or the absence thereof, between the level of preference margins and access to markets. It merely seeks to examine the impact of tariff reductions on the margin of preference. Assessments of the effects on utilisation, market impacts, and welfare effects are beyond the scope of the present study. The agricultural tariff schedule of each Quad country is complex, populated with a relatively large proportion of tariff lines containing specific or compound tariffs. These need to be converted to AVE in order to compute and compare preference margins at any meaningful level beyond the individual tariff line. Agreement on the ideal method for doing this at the WTO negotiations has not been reached. Lacking an agreement, calculations of average tariff rates in some earlier studies have tended to either exclude lines with specific tariffs or convert them into AVE using a variety of approaches. Consequently, computed average rates are not comparable. For this paper, in order to standardize the approach, specific tariffs are converted to AVEs using world unit values for 2002. However, examples of the extent to which the choice of WUV influence the calculated AVEs are also provided. The examples show that the biggest effect of alternative AVE calculations is on the tariffs at the high end of the spectrum while the average tariff rate is less affected. Another complexity to the agricultural tariff schedule of the Quad is the use of TRQs. Clearly, any preferential margin given to a product that is constrained by a quota can not generate the same level of trade as one given to a product that is unconstrained. Furthermore, some quotas are allocated to specific countries and this means that the magnitude of the preferential margin for any one program is meaningless for other PREFERENTIAL TRADE AGREEMENTS: HOW MUCH DO THEY BENEFIT DEVELOPING ECONOMIES– ISBN-9789264033689 © OECD 2007

52 – Part I. Preferential margins in the agricultural sector of Quad countries for selected non-reciprocal agreements countries within the program. Preferential margins on out-of-quota tariff rates on the other hand are seldom provided, and when granted, the margins tend to be relatively small in comparison to the MFN tariff rate. Although the Quad countries provide duty-free access on a sizeable portion of their tariff schedule, based on the computed average tariff rates, there is considerable scope for preferential margins as the average tariff rates remain relatively high. When based on dutiable tariffs, the US, with an average tariff rate of 18%, is the lowest among the Quad. Average tariffs as high as 28% can be found for in-quota items while out-of-quota tariff rates can be considered prohibitive in many instances. Since most of the preferential access to LDCs is provided duty-free, this group of countries benefits from the largest preferential margins and the broadest commodity coverage from the Quad countries. On the other hand, preferential margins for the GSP programme, the one with the largest number of eligible countries and the grouping that includes many competitive developing countries, are less generous. For TRQ products, the discrimination between the preference-margins provided to the GSP programme compared to the other selected programmes is also evident. Preferential margins for GSP recipients are less than for the others. However, preferential margins on tariffs for out-of-quota products is almost nil in all cases. As important as the granting of preferential rates on eligible lines by the Quad is the exclusion of selected tariffs from the programmes. For example, the US excludes from its GSP preference scheme more tariffs than it includes. And the average tariff on these excluded lines is considerably greater than the average tariff on the included lines. Similarly, even though excluded tariff lines are fewer for the US’s other preferential schemes, the average tariff rate on the excluded lines is large. Japan’s GSP scheme is provided to about 14% of the tariff schedule while the GSPLDC has a somewhat greater coverage with about 19% of the tariff schedule. For the other tariff lines, preferential rates are not provided as eligible countries face either MFN bound or MFN applied rates. The data suggests that preferences are granted on tariff lines with below average tariff rates. Thus, even though preferential margins are relatively generous on the eligible lines, these are granted to a minor share of Japan’s tariffs and margins could be higher if eligibility is granted to lines with higher tariff rates. Canada, too, provides less generous coverage in terms of eligible tariff lines to countries in its GPT scheme. Duty-free access for these countries is provided on 34% of Canada’s dutiable tariff schedule in contrast to almost 85% for countries in either its LDCT or CCCT schemes. As for the other Quad countries, duty-free access is provided on tariff lines with relatively low tariff rates. The EU’s EBA scheme is the most inclusive of the preferential programmes examined. As for the other Quad countries, however, product coverage for the GSP scheme is much less complete, and, as for the other Quad countries, the preferential margins for the GSP scheme are much reduced. The data thus shows that preferential margins in the Quad, especially for LDCs are rather generous. The data also shows that preferential rates are mostly targeted on items with tariff rates below the national average. It is also the case that many items are excluded from the various preferential programs and these items tend to have tariff rates that are above the national average.

PREFERENTIAL TRADE AGREEMENTS: HOW MUCH DO THEY BENEFIT DEVELOPING ECONOMIES– ISBN-9789264033689 © OECD 2007

Part I. Preferential margins in the agricultural sector of Quad countries for selected non-reciprocal agreements – 53

Clearly, the effect of MFN tariff reductions on the preferential margins (assuming preferential tariffs do not change) depends on which tariff-cutting formula is selected. The lower the resulting tariff rates, the smaller the preferential margin. In this context, a linear formula that reduces all tariff rates 36% leads to a lower average tariff rate compared to linear formulas that reduce sensitive products by a lesser amount. When the sensitivity of the product depends upon its TRQ status, average MFN rates fall by less than when the criterion is the highest 50 tariff lines in each of the Quad countries. Average tariff rates following tariff reductions based on the Swiss formula depend on the coefficient chosen. The higher the coefficient the smaller the resulting tariff reductions and the larger the remaining preferential margin. The harmonisation power of the Swiss formulas leads to greater reductions in high tariffs and to lower variability in the overall schedule. Preferential margins will be eroded under any tariff cutting formulation even if the preferential rates are also reduced. This is because a large share of preferential access is provided duty-free. However, it should also be kept in mind that in many cases, current preferential margins are zero because items are excluded. The margins reported here represent the maximum possible margins, assuming zero compliance costs and under the implicit assumptions that the benefits accrue to the exporting country and that products are not excluded from any preference arrangement; all very strong assumptions. Actual margins therefore are smaller than indicated. In contrast, when all tariff lines fall under multilateral reforms recipient countries, although not receiving an explicit preference, may benefit from lower overall tariffs. This is particularly true for countries that are only eligible for the GSP scheme, the scheme with the most excluded lines. However, without further empirical work, no conclusions can be drawn concerning the relative trade effects of declining preferential margins on the one hand and lower average tariffs on products excluded from preferential agreements on the other hand in the case of MFN tariff reductions. Another issue is the size of the preferential margins and the value of trade that flows under various programs, on the one hand, and the potential impacts on these trade values of a fall in the margin on the other hand. Although information on trade flows utilising different regimes is difficult to obtain in most cases, a few studies have examined the utilisation rates of the various schemes. Earlier studies suggested relatively low utilisation rates, but, more recent literature find high utilisation rates. In agriculture, therefore, eligible countries use the preferences provided to them. Studies including OECD (2005) as well as Part II of this report find that the flow of trade through these schemes is relatively minor mostly because a large share of Quad imports is duty-free under the MFN regime. Of the trade that does occur within preferential schemes, it is centred on few products and is captured by a relatively small number of countries; and these may not necessarily be the LDC’s that developed countries have in mind when assessing countries that require development assistance. However, there may be cases where even though the trade flow is relatively small compared to the import needs of a granting country, erosion may cause hardships for an exporting country relying on those preferences to generate export receipts. Part II alludes to these concerns. If the non-reciprocal trade agreements are to remain and truly serve as an engine for growth in developing countries, they may need to become broader in their coverage. The current exclusion of selected products from preferential schemes may be leading countries to produce products for which they may not have a comparative advantage in order to take advantage of preferential margins. This is an empirical question that needs PREFERENTIAL TRADE AGREEMENTS: HOW MUCH DO THEY BENEFIT DEVELOPING ECONOMIES– ISBN-9789264033689 © OECD 2007

54 – Part I. Preferential margins in the agricultural sector of Quad countries for selected non-reciprocal agreements further examination. Expanding product coverage and providing similar preferential margins across the entire agricultural tariff schedule may mitigate this problem. The desirability of maintaining preferences and the trade creating effects for some developing countries may have to be balanced against a number of other facts such as the following: (a) many items are excluded especially in the GSP scheme, the scheme with the largest number of eligible countries; (b) by their nature, these programs are discriminatory and thus may lead to undesirable trade diversion; (c) there is uncertainty whether the beneficiary country or the granting country obtain all or part of the preferential rents; (d) compliance costs may not be not trivial, knowing, however, that measures have been put in place to facilitate compliance. The efficiency of such measures has not been assessed in this study; (e) certain products and/or countries may be graduated out of the programs based on an evaluation by the preference granting country. For the receiving country this adds an additional element of uncertainty even though the graduation system helps to assure that preferences accrue to the countries most in need; (f) there are uncertainties about the duration and permanency of the various programs, even though most of them are of a quasi permanent nature. The costs and benefits for any one beneficiary country from preference erosion relative to overall lower MFN rates is an empirical question beyond the scope of the present study. Exports under MFN are not subject to rules of origin or other compliance costs that add to the cost of doing business and reduce the apparent preferential margins. To the extent that trade creation or trade diversion has occurred as a result of preferential programs, lower MFN rates enhance the trade creating effects from liberalisation while mitigating the trade diverting and discriminatory nature of these schemes. Targeted assistance to solve specific problems could be a policy option that can mitigate the costs of preference erosion.

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Part I. Preferential margins in the agricultural sector of Quad countries for selected non-reciprocal agreements – 55

Notes 1.

These costs are estimated to be up to 3% to 5% (Candau, Fantagné and Jean).

2.

For the EU, this programme is referred to as Everything But Arms (EBA).

3.

These averages are calculated based on all 1 821 tariff lines regardless of the TRQ status using 2002 world unit values. Results reported here may differ from others because of differences in calculating AVE

4.

This is defined as the rate under a non-reciprocal agreement minus the MFN rate divided by the MFN rate that is (PROGRAM/MFN-1) multiplied by 100 to put it in percentage terms.

5.

AGOA is an extension of the US GSP program. Therefore, calculations for the AGOA program include, in addition to the tariff lines that are explicitly in the AGOA scheme, selected, duty-free tariff lines under the GSP scheme in cases where AGOA rates are positive.

6.

In 2002, the US notifications indicate that 17 of the 41 TRQs had fill rates below 80%.

7.

By comparing the total number of tariff lines for each chapter from Table 4 to the number of excluded lines in Table I.5, one can determine the number of lines included in the preferential schemes for each programme by chapter.

8.

Based on notifications to the WTO, the average fill rate for the 1999 to 2001 period is below 75%.

9.

Negative preferential margins have no meaning. Preferential margins are calculated as the maximum of the difference between the new MFN rate and the preferential rate or zero.

10.

Based on Canada’s notifications to the WTO, the average fill rate for these products in 1998 (the latest year available) is fairly high, at more than 90%.

11.

Negative preferential margins have no meaning. Preferential margins are calculated as the maximum of the difference between the new MFN rate and the preferential rate or zero.

12.

ACP Agreements will be referred to hereafter as the Cotonou Agreements, although the latter only officially entered into force in 2003.

13.

It is worth noting here that this estimated discount rate -(MFN-Pref)/MFN has the benefit of directly expressing the size of the margin accorded with respect to the MFN duty rate. However, this arithmetic simplification does not correspond to the actual discount for exporters in developing countries. This would tend to express price as p*: -[p*(1+MFN)-p*(1+Preference)]/p*(1+MFN)=-(MFN-Preference)/(1+MFN)

14.

It should be noted here that the fruit and vegetable sector, which is subject to seasonal protection (tomatoes, cucumbers, etc.) and which is regulated by entry prices and relatively short intra-annual periods, has been simplified for the purposes of this

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56 – Part I. Preferential margins in the agricultural sector of Quad countries for selected non-reciprocal agreements study. This is done by aggregating all these elements for 2002 into a simple arithmetic mean. This simplification does not detract from the importance of our hypothesis, however, in that, because of the considerations mentioned earlier and notably the availability of world prices, it would have been pointless to discuss specific duties on these products. This sector nonetheless accounts for almost 1 300 additional tariff lines (due to the (dozen or so) steps introduced by entry prices and the 7 to 8 periods. 15.

By 2009, the customs duty reduction programme for sugar and rice under the EBA scheme should lead to the complete suspension of MFN duty rates for those products.

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Annex I.1. Data and methodology – 57

Annex I.1. Data and methodology

The focus of Part I has been on the MFN bound and preferential tariffs of selected non-reciprocal trading arrangements for the Quad countries for the agricultural sector. Essentially, this means all tariff lines in Chapters 1-24 of the Harmonised Classification System (HS), plus selected sections in Chapters 29 to 52 (fertilizers, skins and hides, cotton, among others) except Chapter 3 (fish) and prepared fish products (sections 1604 and 1605). The sources for the data are Agricultural Market Access Database (AMAD), the World Integrated Trade Solution (WITS), the United Nations Conference on Trade and Development Trade Analysis Information System (UNCTAD-TRAINS), and government sources. US agricultural preferential tariff data were provided by ERS from the U.S. International Trade Commission’s database. These were combined with information from AMAD. Information for Canada’s preferential tariffs was obtained from UNCTAD TRAINS and the WTO as provided through WITS and AMAD. For Japan, data was taken from AMAD and WITS. EU tariff data were provided by Mr. Gallezot who obtained them from the Integrated Tariff of the European Communities (TARIC, DG Taxation and Customs Union). The use of the TARIC database is justified here on two grounds. First, it is the official EU tariff database on which Official Journals are based, and second, and more importantly, it contains all the data relating to the regulation of preferential agreements. More precisely, the TARIC database contains the tariffs currently in use (specified at the 10 digit level) whereas the consolidated tariffs of the EU’s MFN commitments to the WTO (found in AMAD) is at the 8-digit level. All of the tariff data are for the year 2002. The tariff schedules for the Quad countries tend to be rather complex, with a relatively large usage of specific tariffs and compound tariffs (ad valorem and specific), often with an operator stipulating whether the specific rate is added to the ad valorem rate or whether the relevant rate is the maximum of the two rates, etc. In some instances, because of their complexity, analysts choose to ignore these rates by dropping them from the calculations. This was done by the WTO in their World Trade Report 2003 and by the Trade Directorate in Trade Preference Erosion: Potential Economic Impacts. The calculated average tariff rates from these two reports are therefore, not directly comparable to those presented below because in this report, specific and complex rates are retained whenever possible.1 When specific rates are retained in the calculations, the usual approach is to convert these specific and complex rates into ad valorem equivalent (AVE). The question then becomes how to calculate the AVE? The profession has not agreed upon a single best method for this task. The approach is to convert the specific tariff into AVE by dividing the specific rate by a relevant price. The issue of a relevant price can be contentious and PREFERENTIAL TRADE AGREEMENTS: HOW MUCH DO THEY BENEFIT DEVELOPING ECONOMIES– ISBN-9789264033689 © OECD 2007

58 – Annex I.1. Data and methodology is currently debated in the WTO. World reference prices for products at the very detailed tariff line used by many countries are not available. Some advocate using the unit values that are derived from an importing country’s trade (either total or bilateral). That is one takes the value of imports for that tariff line and divide it by the volume. Other rules need to be devised for cases when the tariff is so high that it is prohibitive and imports do not occur or in cases where imports are influenced by a TRQ regime. A second problem with this approach is that there tends to be a selection bias. For tariff lines with very high tariffs, if there are imports, these would most probably be high-valued varieties that may lead to a downward bias in the calculated AVE. Also, where preferential imports play a large role, import unit values may include preference margins, and this could also result in a downward bias in the AVE. The question is what is the best representation of the scarcity value of the product on world markets? Recognizing potential problems with relying on individual country’s imports, some advocate establishing reference groups of countries to generate unit values (Bouët et al). For this analysis, it was decided in most cases to use the unit values from world trade (WUV)2 found in the AMAD database. This was mostly done for reasons of data availability and is in no way an indication that this may be the “best” or “preferred” method. The results presented in the main body of the report are based on WUV for the year 2002 which is the same year as the tariff information. Additionally, AVEs were calculated based on average WUV for the years 1999 to 2001. For the US and the EU results based on yet another alternative calculation of AVEs is presented. For the US, the database provided by ERS contains AVEs calculated by the USITC, while for the EU, WUV were calculated from EU’s own 2002 trade data. These alternative AVE calculations are provided in order to examine the sensitivity of the computed average MFN tariff rate and tariff distribution given different choices for WUV. The results below show that the effect is more on tariffs at the high end of the spectrum while the average rate is little affected. It is apparent that the decision on how to handle specific rates influences the resulting tariff calculations as shown below. Another example indicating the effect on summary statistics from dropping specific tariffs can be found by comparing the results in this paper with those published by the WTO in their World Trade Report 2003. It is not clear whether it is better to ignore specific tariffs and avoid problems when choosing the appropriate “price” or go ahead and calculate AVEs knowing that there may be questions on the appropriateness of the selection. When there are few specific rates the issue may not be relevant. When specific rates are a substantial share of a country’s tariff schedule, as is the case for the agricultural sectors of the Quad countries, it is a different matter. And when specific rates are combined with ad valorem rates and only the ad valorem component of the tariff rate is used, this clearly biases the results. Another potential issue is the methodology used to aggregate tariff rates. The analysis is based on individual tariff lines in each country’s schedule. Preferential margins are calculated as the difference between the MFN bound and the preferential rate at the individual tariff line.3 aggregation is needed, however, in order to compute preferential margins at comparable and manageable levels for the various commodities and countries. Here, reported tariff averages are simple un-weighted averages of each tariff line. This is the method used at the WTO and the method best suited for our purposes especially for calculating preferential margins following the various tariff cutting formulas. The calculations are based on each country’s tariff schedule and do not take into account the use, if any, of special safeguard measures whether on an MFN basis or for any of the preferential programmes.

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Annex I.1. Data and methodology – 59

For the most part, the preferential programmes examined provide duty-free (zero tariff) access for the products and to the countries in the programme. There are exceptions where discounts to the MFN rate are provided. Not all tariff lines are included in every preferential programme and preference-eligible countries face MFN rates on some tariff lines. Keeping this distinction in mind, the preferential margins are provided for different levels of aggregation. Starting at the most aggregate level, average preferential margins for any one programme are computed based on all tariff lines, whether or not explicitly included in the programme. This provides an overall indication of the average margin provided to any eligible country exporting the whole gamut of produce. Average preference margins are also reported based on calculations that only include those tariff lines that are explicitly included in the programme. The average tariff rate for these lines (usually zero) is compared to the average MFN tariff rate for the same set of items. This provides an indication of the average margin for any eligible country exporting eligible produce. This also enables an assessment of the differences in programme coverage and how the margins differ across programmes. Finally, the tariff lines excluded from the preferential programmes are also examined. For these tariffs, preferential margins are meaningless since all programme-eligible countries face MFN rates. Nonetheless, the average tariff rates for these items are reported as an indication of the average tariff that any country that exports those products would face. This also provides an indication of the sensitivities in the Quad countries, which products are excluded from preferential schemes and what are the average tariffs on those products. Preferential margins are also computed accounting for the TRQ regime and they are reported for broad commodity aggregates.

Tariff Distribution in each Quad country based on AVEs calculated using alternative WUVs United States As stated above, the AMAD database was supplemented by data from the USITC provided by the USDA Economic Research Service.4 These data contain information on the MFN rates, along with the rates for the non-reciprocal programmes, GSP, GSP-LDC, AGOA, CBERA and ATPA. The data includes the ad valorem rate and the specific rate when relevant along with a calculated (by USITC) AVE of the specific. The AVE calculation is described in the ITC web site and in OECD (2005). The effect of the different choices for computing AVEs on the MFN tariff distribution for the US are presented below. The simple average tariff for the 1821 US tariff lines is 9.7% when based on the AVE provided in the database, 14.4% when AVEs are calculated from world unit values for 2002 and 13.1% when AVEs are calculated from 1999 to 2001 average WUVs.5 The results show that the AVEs generated in the ITC database are different from AVEs calculated from WUVs. But, there does not appear to be a big difference whether the 2002 or the average 1999 to 2001 WUVs are used. The average tariff rate based on the 2002 world unit values is about 5 percentage points higher compared to the rates found in the database but only 1.3 percentage points higher compared to the average 1999 to 2001 WUV. Even though the average tariff rate is higher when 2002 WUV are used, the coefficient of variation6 (2.6) which indicates the degree of tariff dispersion is lower compared to the other two methods (2.67 for 1999-2001 average WUV and 2.72 based on ITC values).

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60 – Annex I.1. Data and methodology The distribution of the MFN tariff rates for the US based on the three ways to calculate AVEs is shown in Annex Figure I.1.1. The diagram shows that the US tariff schedule contains specific components throughout while tariffs in the 50% to 100% range only consist of specific tariffs. The data show that the majority of the tariff rates are between 0 and 5%. As a matter of fact, there are many tariff lines with zero tariff rates (388 lines, 21% of the schedule). Obviously, the choice for converting specific tariffs into AVEs does not affect the lines with a zero tariff rate or those lines with only an ad valorem rate. For the US, the biggest impact of the various AVE calculations is on the extremes of the tariff distribution—the very low and the very high rates. The share of tariffs in the 0% to 5% range is higher based on ITC calculations of AVE compared to the other two methods, while at the other extreme the share of tariffs above 100% is lower. None of the AVEs computed by the ITC are greater than 100%, while the share of tariffs greater than 50% is about double when AVEs are calculated from WUV (regardless of the year chosen). In contrast, the choice of the year for the calculation of WUVs has a smaller affect on the tariff distribution. The biggest difference is at the high end of the tariff spectrum (above 100%) where the 2002 WUVs generate a larger share of tariffs in this range. Annex Figure I.1.1. Distribution of MFN agricultural tariffs – United States 60%

56.6% 52.3%

Proportion of tariffs

53.2%

of which, specific tariffs

50%

40%

30%

18.2%

20% 15.2%

17.0% 17.2%

16.7% 16.5%

10%

7.1% 7.5% 7.4% 2.0%

3.4% 3.3%

3.1% 2.4% 0.9%

0% Tariff Range (in percentage)

0 to 5

5 to 10

10 to 20

20 to 50

50 to 100

100 plus

Left-hand column: AVEs calculated using US ITC Unit Values. Centre column: AVEs calculated using 2002 World Unit Values. Right hand column: AVEs calculated using the 1999-2001 average World Unit Values.

Japan Japan’s tariff schedule for the analysis consists of 1849 tariff lines. As for the other Quad countries, Japan’s, AVEs were calculated based on WUV for 2002 and the average WUV for the three-year period 1999 to 2001. The average MFN bound tariff is 43.7% when AVEs are based on 2002 WUV and 41.5% when AVEs are based on the average WUV for the three-year period 1999 to 2001. The results show that the choice for WUVs matters, but the difference in the calculated average rate is not very large. The choice also PREFERENTIAL TRADE AGREEMENTS: HOW MUCH DO THEY BENEFIT DEVELOPING ECONOMIES– ISBN-9789264033689 © OECD 2007

Annex I.1. Data and methodology – 61

has a slight effect on the tariff distribution. The coefficient of variation (2.64) is slightly lower when AVEs are calculated from the three-year average WUVs compared to 2.66 when the calculation is based on the WUV for 2002. Japan’s tariff distribution based on the two choices of WUVs is shown in Annex Figure I.I.2. The figure shows that specific tariffs populate the entire schedule, but are primarily found in the ranges with the highest tariffs. All of the tariffs greater than 100% contain a specific element. The choice of WUVs matters little for tariffs below 10%, and obviously, it does not matter at all in the case of duty free tariffs (23% of the schedule). As shown in the figure, the biggest effect on the choice is on the share of tariffs found in the range above 100%. This is not surprising as specific tariffs populate items that are above the national average. The share of Japan’s tariffs that are above 100% is 8.6% based on the three-year average compared to 9.3% based on values for 2002. Annex Figure I.I.2. Distribution of MFN agricultural tariffs Japan

35%

32.9%

32.9%

Proportion of tariffs of which, specific tariffs

30% 25%

23.9%

20%

17.5%

15%

13.1%

24.2%

17.9%

13.1%

9.3%

10% 5%

3.2%

8.6%

3.3%

0% Tariff Range (in percentage) 0 to 5

5 to 10

10 to 20

20 to 50

50 to 100

100 plus

Left-hand column: AVEs calculated using 2002 World Unit Values Right hand column: AVEs calculated using the 1999-2001 average World Unit Values

Canada For Canada, the analysis consists of 1596 tariff lines. The average tariff rate is 20.8% when the AVEs are calculated from the 2002 WUV and 19.5% when the AVEs are calculated based on the three–year average for the period 1999 to 2001. The results show that in Canada’s case, the calculated average tariff rate is little affected by the choice for WUVs. The results also indicate that not only is the average slightly lower when the three-year average WUVs are used, but the coefficient of variation is also slightly lower. Canada’s tariff distribution is shown in Annex Figure I.I.3. The figure shows that the majority of Canada’s tariffs are below 5% and that almost 90% of the tariffs are below 20%. The figure also shows that specific tariffs populate the entire schedule, but as for the other Quad countries, they are more prevalent in the ranges with the higher tariffs. Whereas for the other Quad countries, the biggest difference between the two measures of WUVs was on the very high end of the tariff spectrum, for Canada, the biggest difference PREFERENTIAL TRADE AGREEMENTS: HOW MUCH DO THEY BENEFIT DEVELOPING ECONOMIES– ISBN-9789264033689 © OECD 2007

62 – Annex I.1. Data and methodology is at the low end of the spectrum. Note that the share of tariffs greater than 100% is the same regardless of the choice, whereas the three-year average WUVs generate slightly more tariffs below the 5% rate. Annex Figure I.I.3. Distribution of MFN agricultural tariffs Canada 60% 51.6%

Proportion of tariffs of which, specific tariffs

52.7%

50%

40%

30%

27.4%

26.6%

20% 12.5%

12.3%

10%

5.8% 2.1%

1.9%

0.8%

5.8%

0.7%

0% Tariff Range (in percentage)

0 to 5

5 to 10

10 to 20

20 to 50

50 to 100

100 plus

Left-hand column: AVEs calculated using 2002 World Unit Values Right hand column: AVEs calculated using the 1999-2001 average World Unit Values

European Union For the EU, 3 034 tariff lines are used in the analysis. In addition to the two different periods for calculating WUVs (2002 and average for 1999-2001), the database used for the analysis also contained AVEs based on import unit values for 2002 from EU’s import data (Eurostat COMEXT database). The simple average tariff rate based on 2002 WUV is 25%, 28.5% % based on the 1999 to 2001 average WUV, and 21% based on EU’s own import unit values. Interestingly for the EU, 2002 unit values, whether from world trade or EU’s own imports, generate a lower average tariff rate compared to the average WUVs for the three-year period 1999 to 2001. However, the variability of the tariff schedule, as measured by the coefficient of variation, is smaller when AVEs are calculated based on the three-year average WUVs. The distribution of the EU’s tariff rates for each of the three ways of calculating AVEs is shown in Annex Figure I.I.4. The data show that specific tariffs populate the entire tariff schedule but they also that a substantial portion of EU’s tariffs are below 5% and that more than 60% of the tariff lines are below 20%. As a matter of fact, there are many tariff lines (16% of the schedule) with zero tariff rates. Obviously, the choice for converting specific tariffs into AVEs does not affect the lines with a zero tariff rate or those lines with only ad valorem rates. The prevalence of specific tariffs especially at the higher end of the spectrum is shown in the figure. As is the case for the other Quad countries, the biggest difference in the methods appears in the higher end of the spectrum, the share of tariffs greater than 50%. When AVEs are calculated using the average 1999 to 2001 WUV, the share of tariffs greater than 50% is more than 18% of the schedule. PREFERENTIAL TRADE AGREEMENTS: HOW MUCH DO THEY BENEFIT DEVELOPING ECONOMIES– ISBN-9789264033689 © OECD 2007

Annex I.1. Data and methodology – 63

When AVEs are calculated from 2002 WUV the share of tariffs greater than 50% is almost 14% compared to 10.5% when WUV are based on EU’s own trade. Annex Figure I.I.4. Distribution of MFN agricultural tariffs European Union 35%

35% 30%

30%

25%

25% 24.2%

29.6%

29.6% 28.3%

28.3%

24.2%

22.6% 22.5%

22.6% 22.5%

21.7%

21.7%

20%

20%

Proportion of tariffs Proportion of tariffs of which, specific tariffs of which, specific tariffs

30.9%

30.9%

20.9%

19.8% 20.9%

2002

19.8%

1999-2001 average

EU

15%

15%

13.5% 12.3%

13.5% 12.3%

12.5%

11.7%

12.5%

11.7%

9.7%

10%

8.1% 9.7%

10%

8.1% 5.2% 4.2%

5%

5.2%

2.4%4.2%

5%

2.4%

0%

0%

Tariff

0 to 5

0 to 5 5 to 10

5 to 10 Tariff Range 10 to(in 20 percentage) 20 to 50 10 to 20 20 to 50

50 to 100 50 to 100

100 plus 100 plus

Left-hand column: AVEs calculated using Eurostat Comext Unit Values Centre column: AVEs calculated using 2002 World Unit Values Right hand column: AVEs calculated using the 1999-2001 average World Unit Values

Tariff reduction formulas Once the preferential margins are identified and quantified, potential preference erosion depends upon the formula(s) used to reduce the MFN rates in any agreement and whether preferential rates also change. Most of the preferential rates provided by the Quad countries, especially for LDCs are duty-free. In these cases, preferential margins are reduced concomitant with the reductions in the MFN rates. In some cases, preferential tariffs are defined as a fraction of the MFN tariff, or as the MFN tariff minus a margin. In these cases, the preferential tariffs decrease in line with MFN reductions, thus mitigating the erosion. This is not included in the analysis. So as not to prejudge the outcome of the negotiations currently underway in Geneva, a variety of tariff reduction formulas are used, none of which are associated with any particular proposal. These include linear as well as harmonisation formulas. The linear formulas examined start with the simple proposition to reduce each tariff rate by a given percentage. That is: (1)

t1 = t0 * (1-r),

while the harmonisation formulas are based on the Swiss formula7 (2)

t1 = (a * t0 ) / (a + t0)

where t0 is the initial rate and t1 final rate, r is the agreed tariff reduction rate and a is a coefficient. The linear cut in (1) is independent from the initial tariff rate. The rate of PREFERENTIAL TRADE AGREEMENTS: HOW MUCH DO THEY BENEFIT DEVELOPING ECONOMIES– ISBN-9789264033689 © OECD 2007

64 – Annex I.1. Data and methodology tariff reduction in the Swiss formula depends on the initial rate and on the value of a. The larger the value of a, the smaller the reduction in the tariff rate. The coefficient a also represents the maximum tariff following the reduction. For this exercise several alternative formulas are utilised. For the linear cuts, one approach is to reduce each tariff line uniformly by a given percentage, which in this case is 36% (MFN36). In the current discussions at the WTO, some countries expressed the desire to shield some products and reduce these tariffs by a lesser amount than for other products. Neither the number nor the criteria for selecting these “sensitive” products nor the magnitude of the difference in the reduction rates has been agreed. Here two different criteria are used to determine the set of “sensitive” products for each country. In the first instance, account is taken of the TRQ regime and it is assumed that products with TRQs represent the set of “sensitive” products and reduce the out of quota tariff rate by a lesser amount. This means that the reduction rate r takes different values depending upon the TRQ status of the tariff line. For TRQ products, the out-of-quota tariff rates are reduced by 15% while the in-quota and no-quota rates are reduced by 36% (TRQ). The second approach assumes that only the highest 50 tariff lines irrespective of their TRQ status represent “sensitive” products and only these lines are lowered by 15% while all other tariffs are reduced by 36% (TOP-50). When the Swiss formula is used to cut tariffs, the value for a utilised is 25. The choice of this parameter implies that following the tariff reductions, none of the tariff rates in any of the Quad countries can be greater than 25%. For this formula, a differential approach for “sensitive” products is not taken into account. The formula is applied uniformly across the tariff schedule. An interesting comparison from this exercise is the relative impact of the choice of a or r on the resulting average tariff rate, the percent reduction from the pre-cut rate, the maximum tariff and the variation in the tariff schedule across the tariff regimes of the Quad countries. Again, the chosen values of a and r are arbitrary and are not indicative of any preferred or expected outcome of the current WTO negotiations.

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Annex I.1. Data and methodology – 65

Notes 1.

An AVE of a specific tariff could not always be calculated and these lines are excluded from this analysis. This happened in cases where the specific tariff rate depends upon the attribute of the imported product, such as, for example, its alcohol content. This information is not readily available.

2.

WUV are calculated by dividing total value of imports by all countries by total volume each at the HS-6 digit level. When necessary, these are converted into local currencies using average annual exchange rates.

3.

For the Quad, the MFN bound rate is the relevant rate. The exception is a subset of tariff lines in Japan where the applied rate is below the bound rate

4.

We would like to thank John Wainio for providing the data.

5.

These averages are calculated based on all 1 821 tariff lines regardless of the TRQ status.

6.

The standard deviation divided by the mean.

7.

A Swiss formula was used in earlier multilateral trade negotiations to reduce tariff rates in the non-agricultural sectors. Proponents of this approach point to the ability of these formulas to reduce tariff peaks by a larger percentage than other tariffs, thereby lowering the variability of a tariff schedule.

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Annex I.2. Average tariff rates by product aggregate (HS2) United States – 67

Annex I.2. Average tariff rates by product aggregate (HS2) United States

Annex Table I.2.1 reports the average dutiable MFN tariff rate and the number of dutiable MFN tariff lines for the various commodities at a broad aggregate level. The number of dutiable tariff lines included in any broad commodity grouping may be an indication of the importance of the commodity aggregate to US agriculture. For example, almost 250 dutiable tariff lines (17% of schedule) are devoted to Chapter 4, Dairy, whereas only 14 lines are needed for Chapter 1, Live Animals. The table also shows the large range of average tariffs. On the low end of the spectrum, average tariff for live animals, products of animal origins not elsewhere specified, live trees and flowers, coffee, tea, and spices, cereals, products of the milling industry, and meat preparations all have average tariffs below 5%. At the other end of the spectrum, tobacco products are the most protected, with an average tariff of more than 90%. Beverages are the second most protected segment, followed by dairy, oilseeds and oleaginous fruits and sugar and confectionary. The table also reports the average tariff rate for the various preferential programmes based on all tariff lines whether explicitly included in the programme or not. Comparing the programme average to the average MFN rate provides an indication of potential preferential margin. It also provides an indication for which commodities preferences tend to be provided. Since preferential access is granted duty-free, the table indicates that for countries in the GSP-LDC scheme, all of the tariff lines for the following aggregate commodities (Live Animals, Products of Animal Origin NES, Coffee, tea and spices, Cereals, Products of the Milling industry, and Meat preparations) are included in the scheme since the average tariff rate for these products is zero. In addition to these, all of the tariffs on Live trees and flowers and Vegetables are included in the AGOA, ATPA and CBERA schemes. The table also suggests that preferences are not only provided to bulk commodities, but that higher-valued products are also included. Furthermore, eligible countries in these three schemes face average tariff rates less than 4% on other high-valued products such as Meat and edible offal, and Preparations of fruits and vegetables.

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68 – Annex I.2. Average tariff rates by product aggregate (HS2) United States Annex Table I.2.1. Number of tariff lines and average tariff rates: MFN and selected preferential programmes by product aggregate (HS2) United States

Live animals (Ch. 1) Meat and edible meat offal (Ch. 2) Dairy, birds' eggs … (Ch. 4) Products animal origin N.E.S. (Ch. 5) Live trees and flowers 5Ch 6) Vegetables (Ch 7) Edible fruits and nuts (Ch. 8) Coffee, tea and spices (Ch.9) Cereals (Ch. 10) Products of the milling industry (Ch. 11) Oilseeds and oleaginous fruits (Ch. 12) Animal and vegetable fats and oils (Ch 15) Meat preparations (Ch. 16) Sugar and Confectionary (Ch. 17) Cocoa and cocoa preparations (Ch. 18) Preparations of cereals … (Ch. 19) Preparations of fruits and vegetables (Ch. 20) Beverages (Ch. 22) Animal feed and residues (Ch. 23) Tobacco (Ch. 24) Cotton (Ch. 52) Other

MFN Lines Number 14 79 249 6 22 151 94 14 17 33 30 50 27 64 71 60 169 41 25 36 15 166 1433

MFN

GSP

4.47 6.40 31.91 2.17 2.73 7.30 7.79 3.17 3.42 4.06 30.45 11.53 3.35 27.55 16.51 23.30 9.39 50.91 19.11 91.94 14.62 11.71

4.08 6.00 31.45 0.50 0.44 4.07 5.91 0.60 2.49 1.40 16.45 9.68 0.55 24.52 14.27 20.81 6.92 39.22 18.08 87.84 14.62 9.60

AGOA includes GSP GSP-LDC Percent 0.00 0.00 2.01 2.01 24.49 24.94 0.00 0.00 0.31 0.00 1.00 0.02 0.18 0.15 0.00 0.00 0.00 0.00 0.00 0.00 9.85 9.85 2.50 2.50 0.00 0.00 23.37 23.37 13.59 13.59 15.90 15.90 2.99 2.81 5.91 5.91 16.26 16.26 68.06 68.06 14.62 14.62 5.41 5.41

ATPA

CBERA

0.00 2.01 24.49 0.00 0.00 0.04 0.00 0.00 0.00 0.00 9.85 2.50 0.00 23.37 13.59 15.90 2.45 6.73 16.26 68.06 12.34 5.12

0.00 2.01 24.49 0.00 0.00 0.04 0.00 0.00 0.00 0.00 9.85 2.50 0.00 23.37 13.59 15.90 2.45 5.91 16.26 68.06 12.34 5.12

For countries in the GSP schemes, all of the product categories reported in the table exclude some lines. And, the potential preference margins appear to be shallower as the average tariff is not much lower than the MFN rate.

Commodity coverage of the Japanese preferential programmes The table below (Annex Table I.2.2) indicates the average MFN bound tariff rate for the broad commodity aggregates along with the number of tariff lines. The number of tariff lines devoted to each chapter is one indication of the specificity of the tariff schedule and the sensitivity of the items. This shows that most of the tariff lines (about 32%) are devoted to fruits, vegetables and their preparations (Chapters 7, 8 and 20), but the highest tariff rates are assessed on cereals, dairy and products of the milling industry.

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Annex I.2. Average tariff rates by product aggregate (HS2) United States – 69

Annex Table I.2.2. Average MFN bound rates and number of dutiable tariffs for product aggregates (HS2) Japan

Live animals (Ch. 1) Meat and edible meat offal (Ch. 2) Dairy, birds' eggs … (Ch. 4) Products animal origin N.E.S. (Ch. 5) Live trees and flowers 5Ch 6) Vegetables (Ch 7) Edible fruits and nuts (Ch. 8) Coffee, tea and spices (Ch.9) Cereals (Ch. 10) Products of the milling industry (Ch. 11) Oilseeds and oleaginous fruits (Ch. 12) Animal and vegetable fats and oils (Ch 15) Meat preparations (Ch. 16) Sugar and confectionary (Ch. 17) Cocoa and cocoa preparations (Ch. 18) Preparations of cereals … (Ch. 19) Preparations of fruits and vegetables (Ch. 20) Beverages (Ch. 22) Animal feed and residues (Ch. 23) Tobacco (Ch. 24) Cotton (Ch. 52) Other

MFN

Number of lines

8.5 92.1 113.9 2.1 3.0 50.4 9.6 6.7 231.6 110.8 86.9 10.2 47.5 82.0 42.9 56.2 17.1 69.8 39.8 29.1 na 47.4

2 85 136 3 3 107 89 37 24 91 29 62 45 46 27 142 256 53 7 6 na 179 1 429

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Annex I.3. Eligible countries to various non-reciprocal arrangements – 71

Annex I.3. Eligible countries to various non-reciprocal arrangements Annex Table I.3.1. EU Preferential agreements (2002) Countries Afghanistan Albania Algeria American Samoa Andorra Angola Anguilla Antarctica Antigua and Barbuda Argentina Armenia Aruba Australia Azerbaijan Bahamas Bahrain Bangladesh Barbados Belarus Belize Benin Bermuda Bhutan Bolivia Bosnia et Herzegovina Botswana Bouvet Island Brazil Brit. Virgin Is. and Montserrat British Indian Ocean Territory Brunei Bulgaria Burkina Faso

ACP

GSPA x

GSPL

GSPE

x x x

x x x x x x x

x

x x x

x x x x x

x x x x x x x

x

x

x x x x x x x

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72 – Annex I.3. Eligible countries to various non reciprocal arrangements

Countries Burundi Cambodia (Kmpuchea) Cameroon Canada Cape Verde Cayman Islands Central African Republic Chad Chile China Christmas Island Cocos Islands (or Keeling Island) Colombia Comoros Congo (Republic of) Cook Islands Costa Rica Croatia Cuba Cyprus Czech Republic Djibouti Dominica Dominican Republic East Timor Ecuador Egypt El Salvador Equatorial Guinea Eritrea Estonia Ethiopia Falkland Islands Faroe Islands Federated States of Micronesia Fiji French Polynesia French Southern Territories Gabon Gambia Georgie Ghana Gibraltar Greenland Grenada Guam

ACP x

GSPA x x

x

GSPL

GSPE

x

x

x

x x

x x

x

x x x x x x x x

x x x x x x

x x x

x x x x x x

x x

x x

x

x x

x x

x x x

x

x x x x x x x x x x x x

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Annex I.3. Eligible countries to various non-reciprocal arrangements – 73

Countries Guatemala Guinea Guinea Bissau Guyana Haiti Heard Island and McDonald Island Honduras Hong Kong Hungary Iceland India Indonesia Iran Iraq Israel Ivory Coast Jamaica Japan Jordan Kazakhstan Kenya Kiribati Kuwait Kyrgyzstan Laos Latvia Lebanon Lesotho Liberia Libya Liechtenstein Lithuania Macao Madagascar Malawi Malaysia Maldives Mali Malta Mauritania Mauritius Mexico Moldova Mongolia Montserrat Morocco

ACP

GSPA

x x x x

x x

GSPL

GSPE X

x x x x

x x x x x x

x x

x x x x x x x x x x

x x

x x x

x x x

x x x

x x x

x x x x x x x x x

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74 – Annex I.3. Eligible countries to various non reciprocal arrangements

Countries Mozambique Myanmar Namibia Nauru Nepal Netherlands Antilles New Caledonia and Dependencies New Zealand Nicaragua Niger Nigeria Norfolk Island North Korea Northern Mariana Islands Norway Occupied Palestinian Territory Oman Pakistan Panama Papua New Guinea Paraguay Peru Philippines Pitcairn Poland Qatar Republic of the Marshall Islands Romania Russian Federation Rwanda San Marino Saudi Arabia Senegal Seychelles and Dependencies Sierra Leone Singapore Slovakia Slovenia Solomon Islands Somalia South Africa South Georgia and South Sandwich South Korea Sri Lanka St Helena and Dependencies St Pierre and Miquelon

ACP x

GSPA x

x x

GSPL

GSPE

x x x x x x

x x

x x x

x x x x

x x x x x x x

x

x x

x

x x x

x x

x x

x x

x x

x x x x x

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Annex I.3. Eligible countries to various non-reciprocal arrangements – 75

Countries St Vincent St. Christopher and Nevis St. Lucia Sudan Surinam Swaziland Switzerland and Liechtenstein Syria Sao Tomé and Principe Taiwan Tajikistan Tanzania Thailand Togo Tokelau Tonga Trinidad and Tobago Tunisia Turkey Turkmenistan Turks and Caicos Islands Uganda Ukraine United Arab Emirates United States of America Uruguay Uzbekistan Vanuatu Vatican City State Venezuela Vietnam Virgin Islands of US Wallis and Futuna Islands Western Samoa Yemen Yugoslavia Zaire Zambia Zimbabwe Total

ACP x x x x x x

GSPA

x

x

GSPL x x x

GSPE

x x x x

x x

x

x

x

x x x x x

x x

x x x

x x x x x

x

x x x x x

x

x x

x x x

x x

73

47

x 112

12

Source : Exploitation TARIC data base 2002, Regulation (EC) N°2501/2001 (Application 2002, definition of PMA of the EU).

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76 – Annex I.3. Eligible countries to various non reciprocal arrangements

Annex Table I.3.2. US Eligibility of countries’ trade preferences (2002)

Country Afghanistan Albania Algeria Andorra Angola Anguilla Antigua Barbuda Argentina Armenia Aruba Australia Austria Azerbaijan Bahamas Bahrain Bangladesh Barbados Belarus Belgium Belize Benin Bermuda Bhutan Bolivia Bosnia-Herzegovina Botswana Br Virgin Island British Indian Overseas Territories Brazil Brunei Bulgaria Burkina Faso Burma (Myanmar) Burundi Cambodia Cameroon Canada Cape Verde Cayman Island Central African Republic Chad Chile China Christmas Island Cocos (Keelin) Islands Colombia Comoros Congo (DROC) Congo (ROC)

US GSP

AGOA

ATPA

CBI / CBERA

US LDC treatment

x

x x x x x

x x

x

x x x x

x x x x x x x x x

x x

x x

x x x

x x

x x

x

x x x

x

x

x

x

x x x

x x

x x

x x x x x x

x x

x x x x

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Annex I.3. Eligible countries to various non-reciprocal arrangements – 77

Country Cook Island Costa Rica Croatia Cuba Cyprus Czech Republic Denmark Djibouti Dominica Island Dominican Republic Ecuador Egypt El Salvador Equatorial Guinea Eritrea Estonia Ethiopia French St Micronesia Falkland Island Faroe Islands Fiji Finland French Polynesia French S and Antilles land France French Guyana Gabon Gambia Georgia Germany Ghana Gibraltar Greece Greenland Grenada Island Guadeloupe Guatemala Guinea Guinea-Bissau Guyana Haiti Heard and McDonald Islands Honduras Hong Kong Hungary Iceland India Indonesia Iran Ireland Israel Italy Ivory Coast Jamaica Japan Jordan

US GSP

AGOA

ATPA

CBI / CBERA

x x x

US LDC treatment

x

x x x x x x x x x x x

x

x x x x x x

x x

x

x x

x x x

x

x x

x

x

x x x x x x x x

x x x x

x x x x x

x x x

x x

x

x

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x

x

78 – Annex I.3. Eligible countries to various non reciprocal arrangements

Country Kazakhstan Kenya Kiribati Korea Korea (North) Kuwait Kyrgystan Laos Latvia Lebanon Lesotho Liberia Liechtenstein Lithuania Luxembourg Libya Macao Macedonia Madagascar Malawi Malaysia Maldive Islands Mali Malta and Gozo Marshall Islands Martinique Mauritania Mauritius Mexico Moldova Monaco Mongolia Montserrat Island Morocco Mozambique Namibia Nauru Nepal Netherlands Netherlands Antilles New Caledonia New Zealand Nicaragua Niger Nigeria Niue Niue Norfolk Island Norway Oman Pakistan Palau Palestinian Territories Panama Papua New Guinea

US GSP

AGOA

x x x

x

ATPA

CBI / CBERA

US LDC treatment

x

x x x x

x

x

x x x

x x

x x

x

x

x

x x

x x

x

x

x x x x x x

x x x

x

x

x x

x x x

x x

x

x x

x x x x

x

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Annex I.3. Eligible countries to various non-reciprocal arrangements – 79

Country Paraguay Peru Philippines Pitcairn Poland Portugal Reunion Romania Russia Rwanda Samoa Sao Tome and Principe Saudi Arabia Senegal Seychelles Sierra Leone Singapore Slovakia Slovenia Solomon Island Somalia South Africa Spain Sri Lanka St Helena St Kitts-Nevis St Lucia Is St Pierre and Miquelon St Vincent and Grenadines Sudan Suriname Swaziland Sweden Switzerland Syria Taiwan Tajikistan Tanzania Thailand Togo Tokelau Is Tonga Trinidad and Tobago Tunisia Turkey Turkmenistan Turks and Caico Islands Tuvalu Uganda Ukraine United Arab Emirates United Kingdom Uruguay

US GSP

AGOA

x x x x x

ATPA

CBI / CBERA

US LDC treatment

x

x x x x x

x x

x x x

x x x

x x x

x

x x x x

x x

x x x x

x x

x

x

x x

x x x x x x x x x x x

x

x

x x

x

x

x

PREFERENTIAL TRADE AGREEMENTS: HOW MUCH DO THEY BENEFIT DEVELOPING ECONOMIES– ISBN-9789264033689 © OECD 2007

x x

80 – Annex I.3. Eligible countries to various non reciprocal arrangements

Country

US GSP

Uzbekistan

x

Vanuatu

x

Venezuela

x

AGOA

ATPA

CBI / CBERA

US LDC treatment

x

Vietnam Wallis and Futuna

x

Western Sahara

x

Yemen

x

x

Yugoslavia Zambia

x

Zimbabwe

x

Total

141

x 36

x 4

24

40

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Annex I.3. Eligible countries to various non-reciprocal arrangements – 81

Annex Table I.3.3. Canada: Eligibility of countries’ trade preferences (2001)

Country Afghanistan Algeria Andorra Angola Anguilla Antigua Barbuda Antilles, Netherlands Argentina Armenia Ascension Australia Austria Azerbaijan Bahamas Bahrain Bangladesh Barbados Belarus Belgium Belize Benin Bermuda Bhutan Bolivia Bosnia-Herzegovina Botswana Brazil British Indian Overseas Territories Brunei Darussalam Bulgaria Burkina Faso Burma (Myanmar) Burundi Cambodia Cameroon Cape Verde Caroline Is Cayman Is Central African Republic Chad Channel Islands Chile China Christmas Island Cocos (Keelin) Islands Colombia Comoros Congo Cook Island Costa Rica Cote d’Ivoire Croatia

GSP

GSP-LDC

x x

x

x x x x x x x

x

x x x x x x x x x x x x x x x x x x x x x x x x x x x x x x x x x x x x x

CCC (Caribbean)

x x

x x x

x x x x

x x x x x x x

x

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82 – Annex I.3. Eligible countries to various non reciprocal arrangements

Country Cuba Cyprus Czech Republic Congo (DRC) Denmark Djibouti Dominica Island Dominican Republic Ecuador Egypt El Salvador Equatorial Guinea Eritrea Estonia Ethiopia Falkland Islands Fiji Finland France Gabon Gambia Georgia Germany Ghana Gibraltar Greece Grenada Island Guam Guatemala Guinea Guinea-Bissau Guyana Haiti Honduras Hong Kong Hungary Iceland India Indonesia Iran Iraq Ireland Isle of Man Israel Italy Jamaica Japan Jordan Kazakhstan Kenya Kiribati Korea, Republic Kuwait Kyrgyzstan Laos

GSP

GSP-LDC

x x x x

x

x x x x x x x x x x x x

x x x

CCC (Caribbean)

x x

x x x

x

x x x x x x x x x x x x

x

x x x x

x x x x

x x x x x x x x x x

x

x

x

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Annex I.3. Eligible countries to various non-reciprocal arrangements – 83

Country Latvia Lebanon Lesotho Liberia Liechtenstein Lithuania Luxembourg Macao Macedonia Madagascar Malawi Malaysia Maldive Is Mali Malta Mariana Island Marshall Islands Mauritania Mauritius Mexico Moldova Monaco Mongolia Montserrat Island Morocco Mozambique Namibia Nauru Nepal Netherlands New Caledonia New Zealand Nicaragua Niger Nigeria Niue Norfolk Island North Africa, Spanish Norway Pakistan Panama Papua New Guinea Paraguay Peru Philippines Pitcairn Poland Polynesia, French Portugal Portuguese Adjacent Is Portuguese Overseas Provinces Puerto Rico Qatar Romania Russia Rwanda

GSP

GSP-LDC

x x x x

x x

CCC (Caribbean)

x x x x x x x x x x x x x x x

x x x x x x

x x x x

x

x x

x

x x x x x x x

x

x x x x x x x x x

x x x x

x

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84 – Annex I.3. Eligible countries to various non reciprocal arrangements

Country

GSP

St Christopher (Kitts)-Nevis St Helena St Lucia Island St. Vincent and the Grenadines Samoa, American Samoa, Western San Marino Sao Tome and Principe Saudi Arabia Senegal Seychelles Sierra Leone Singapore Slovakia Slovenia Solomon Islands Somalia South Africa Southern and Antarctic territories French Spain Sri Lanka Sudan Suriname Swaziland Sweden Switzerland Syria Tajikistan Taiwan Tanzania Thailand Togo Tokelau Is Tonga Trinidad and Tobago Tristan Da Cunha Tunisia Turkey Turkmenistan Turks and Caicos Islands Tuvalu Uganda Ukraine United Arab Emirates United Kingdom and Northern Ireland United States of America Uruguay Uzbekistan Vanuatu Vatican City (The Holy See) Venezuela Vietnam Virgin Islands, British Virgin Islands, US West Indies, French

x x x x x x

x

x

x

x x x x x x x x x x x x x x

GSP-LDC

CCC (Caribbean) x x x

x

x x

x

x x x x x x x x x x x x x x x x x

x x x x x x x

x x

x

x x x

x

x

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Annex I.3. Eligible countries to various non-reciprocal arrangements – 85

Country Yemen Yugoslavia Zambia Zimbabwe Total

GSP

GSP-LDC

x

x

x x 184

x 47

Source: UNCTAD.

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CCC (Caribbean)

18

86 – Annex I.3. Eligible countries to various non reciprocal arrangements

Annex Table I.3.4. Beneficiaries of the Japanese GSP scheme for fiscal year 2002/2003

Country Afghanistan Albania Algeria American Samoa Angola Antigua Barbuda Argentina Armenia Azerbaijan Bahrain Bangladesh Barbados Belarus Belize Benin Bhutan Bolivia Bosnia-Herzegovina Botswana Brazil British Anguilla British Virgin Islands Bulgaria Burkina Faso Burundi Cambodia Cameroon Canary Islands Cape Verde Central African Republic Ceuta and Melilla Chad China (excluding Hong Kong and Macao) Chile Colombia Congo Cook Islands Costa Rica Cote d’Ivoire Croatia Cuba Czech Republic Dominica Is Dominican Republic Ecuador Egypt El Salvador Equatorial Guinea Eritrea Estonia Ethiopia

GSP

GSP-LDC x

x x x x x x x x x x x x x x x x x x x x x x x x x x x x x x x x x x x x x x x x x x x x x x x x x x

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Annex I.3. Eligible countries to various non-reciprocal arrangements – 87

Country Falkland Is Fiji French Polynesia Gabon Gambia Georgia Ghana Gibraltar Grenada Island Guatemala Guinea Guinea-Bissau Guyana Haiti Honduras Hungary India Indonesia Iran Iraq Jamaica Jordan Kazakhstan Kenya Kiribati Kyrgyzstan Laos Latvia Lebanon Lesotho Liberia Libyan Arab Jamahiriya Lithuania Madagascar Malawi Malaysia Maldive Island Mali Malta Marshall Is Mauritania Mauritius Mexico Micronesia (Federated States of) Mongolia Montserrat Island Morocco Mozambique Myanmar Namibia Nepal Nicaragua Niger Nigeria Niue Oman

GSP

GSP-LDC

x x x x x x x x x x x x x x x x x x x x x x x x x x x x x x x x x x x x x x x x x x x x x x x x x x x x x x x x

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88 – Annex I.3. Eligible countries to various non reciprocal arrangements

Country Pakistan Palau Panama Papua New Guinea Paraguay Peru Philippines Poland Republic of Moldova Romania Rwanda St Christopher (Kitts)-Nevis St Helena St Lucia Island St. Vincent and the Grenadines Samoa Sao Tome and Principe Saudi Arabia Senegal Seychelles Sierra Leone Slovakia Slovenia Solomon Island Somalia South Africa Sri Lanka Sudan Suriname Swaziland Syria Tajikistan Thailand The Former Yugoslav Republic of Macedonia Togo Tokelau Island Tonga Trinidad and Tobago Tunisia Turkey Turkmenistan Turks and Caicos Islands Tuvalu Uganda Ukraine United Republic of Tanzania Uruguay Uzbekistan Vanuatu Venezuela Vietnam West Bank and Gaza Strip Yemen Yugoslavia Zambia Zimbabwe Total

GSP

GSP-LDC

x x x x x x x x x x x x x x x x x x x x x x x x x x x x x x x x x x x x x x x x x x x x x x x x x x x x x x x x 117

46

Source: UNCTAD. PREFERENTIAL TRADE AGREEMENTS: HOW MUCH DO THEY BENEFIT DEVELOPING ECONOMIES– ISBN-9789264033689 © OECD 2007

Part I. References – 89

References Alexandraki, Katerina and Hans Peter Lankes (2004), “The Impact of Preferences Erosion on Middle-Income Developing Countries”, IMF Working Paper, WP/04169, September. BACI (Analytical Database of International Trade), Guillaume Gaulier and Soledad Zignago, CEPII, 03/03/2004 http://www.cepii.fr/anglaisgraph/bdd/baci/baci.pdf Bouët, Antoine, L. Fontagné and S. Jean (2005), “Is Erosion of Tariff Preferences a Serious Concern?”, in Agricultural Trade Reform and the Doha Development Agenda, Anderson and Martin Eds. Bouët, Antoine, Yvan Decreux, Lionel Fontagné, Sébastian Jean, and David Labode (2004), “Computing an exhaustive and consistent, ad valorem equivalent measure of applied protection : a detailed description of MAcMap=HS6 methodology”, Working Paper, Centre d’Etudes Prospectives et d’Informations Internationales, Paris, August, http://www.cepii.fr. Candau, Fabian, L. Fontagné, and S. Jean (2004), “The Utilisation Rate of Preferences in the EU”, 7th Global Economic Analysis Conference, Washington, DC, 17-19 June. OECD (2005), Preferential Trading Arrangements in Agricultural and Food Markets: The Case of the European Union and the United States. Paris. UNCTAD (2003), Trade preferences for LDCs: an early assessment of benefits and possible improvements. United Nations, NY. UNCTAD (2001), Generalized system of preferences: handbook on the scheme of Canada. UNCTAD/ITCD/TSB/MISC.66, December. UNCTAD (2002), Generalized system of preferences: handbook on the scheme of Japan 2002/2003, UNCTAD/ITCD/TSB/MISC.42/Rev.2 November. UNCTAD (2000) Generalized system of preferences: handbook on the scheme of the United States of America, UNCTAD/ITCD/TSB/Misc.58 June. UNCTAD (2002) Generalized system of preferences: handbook on the scheme of the European Community, UNCTAD/ITCD/TSB/Misc.25/Rev.2, December. WTO (2004) World Trade Report, Geneva. WTO (2003) World Trade Report, Geneva. Wainio, J., S. Shapouri, M. Trueblood, and P. Gibson (2005), Agricultural Trade Preferences and the Developing Countries, USDA, Economic Research Service, Economic Research Report No. 6

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Part II. The value of agricultural preferential access – 91

PART II. THE VALUE OF AGRICULTURAL PREFERENTIAL ACCESS

Abstract The preference margins calculated in Part I, along with the import data, are used to calculate the value of the preferences provided by each Quad country (Canada, European Union, Japan, and the United States). Preferential access to Quad agricultural markets generated, on average, an additional USD 1.4 billion a year from 2001 to 2003 to countries with preferential access, compared to almost USD 90 billion of dutiable agricultural produce imported each year. The value of preference margins (VPM) is generated primarily by exploiting the European Union’s non-reciprocal preferential schemes, with the United States a distant second. The scheme with the largest preferential receipts is the European Union’s scheme for Africa, Caribbean, and Pacific countries (ACP), which have an average VPM of USD 766 million. Preferential receipts provided by the Quad countries are concentrated in a few developing countries and for a few commodities. The top five ACP recipients obtained 35% of the ACP VPM, while exports of sugar and bananas by the ACP countries accounted for 73% of their preferential receipts. Least Developed Countries (LDC) do not capture a significant amount of preferential receipts. Indeed, none of the top 30 countries in terms of VPM is an LDC. Although the VPM is relatively small compared to dutiable trade and only a handful of countries receive the bulk of the proceeds, a number of countries are reliant on preference schemes as their exports tend to be concentrated on a few commodities that benefit from substantial preference margins. For 37 countries, the VPM is more than 0.5% of their agricultural value added, while for 11 it is more than 10%.

PREFERENTIAL TRADE AGREEMENTS: HOW MUCH DO THEY BENEFIT DEVELOPING ECONOMIES– ISBN-9789264033689 © OECD 2007

Part II. The value of agricultural preferential access – 93

Introduction Part II combines both trade and tariff data to examine the following questions; what is the value of the preferential access that the Quad countries provide to developing countries through a selected set of non-reciprocal arrangements? Which programmes generate the largest remuneration, which countries are the largest benefactors, and what products generate these benefits? Among recipient countries, which ones are more reliant on preferences for their agricultural exports and which ones may be more susceptible to preference erosion in an eventual multilateral trade liberalisation? Part II goes beyond examining the preferential margins as they appear on the tariff schedule as in Part I. Rather, it combines tariff and trade data to compute the value of the preferential margins based on actual trade flows by individual countries in each of the non-reciprocal programs described in Part I. Thus, it looks at what each of the Quad countries actually imports, from whom, and calculates the value of the preferential access for these trade flows. As stated in OECD 2005, data on actual utilisation of the various preferential schemes are difficult to find for the Quad countries, with the exception of the US. Therefore, like other studies (OECD, 2004; Alexandraki and Lankes; Low et al), the analysis is based on the assumption that eligible countries fully utilise their preferences. For agricultural products, when all preferential programmes are taken into account, utilisation rates are very high (OECD, 2005) but not 100%. The 100% utilisation assumption, therefore, overestimates the value of preferences and, as noted by Amiti and Romalis, likely overestimates the costs of preference erosion. There are other assumptions that underpin the analysis that also may tend to overstate the value of preferential access. These assumptions are deliberately chosen to provide an upward bias to the calculations in this report, thus providing the maximum potential value of preferential access in order to provide an upper limit on their value and potential magnitude of preference erosion for affected recipients. However, for the EU, the tariff and trade data are not at the same HS level. The aggregation of the tariff data to the same level as the trade data, affects the calculated VPM for the EU. The study does not make a judgement on the welfare implications of the current preferential schemes for the participants, or on the welfare implications of their reduction or elimination. As indicated in Annex II.2, the value of preferential margin (VPM)1 depends upon the preferential margins and imports. The next section provides an overview of the agricultural imports during the 2001 to 20032 period by each of the Quad countries. The sections that follow discuss, for each Quad country, their agricultural imports under each preferential regime and the VPM for those trade flows. These sections are followed by a section describing the relative contribution each Quad country makes to overall preferential receipts and the importance of those receipts to the beneficiaries, and the last section draws conclusions.

Agricultural imports by the Quad countries In this section, a brief overview is given of the agricultural imports by each of the Quad countries; the value that each of these countries imports, whether they are dutiable or not and where they come from. This information is provided to give a frame of reference for the preferential access discussion to follow. Annual import data over the 2001 to 2003 period is used to smooth out some of the yearly aberrations. Any period suffers from some shortcomings since in a dynamic world, things change and no one PREFERENTIAL TRADE AGREEMENTS: HOW MUCH DO THEY BENEFIT DEVELOPING ECONOMIES– ISBN-9789264033689 © OECD 2007

94 – Part II. The value of agricultural preferential access period is “typical”. For example, during the period covered by the analysis, the recent EU enlargement had not yet taken place and the US ended the ATPA scheme in 2001 but renewed it in August 2002. In 2003, the EU’s EBA programme was still relatively young and countries were adjusting to its use. Its utilisation and the VPM may increase in the future as countries become more familiar with the requirements. Furthermore, some of the information is lost when the import data at the tariff-line level are merged with the tariff data. Countries often change the nomenclature at the tariff-line level as there is not always a one to one mapping between the tariff and the import data. Consequently, the trade data used to compute the VPM is somewhat lower than that from reported trade statistics. Agricultural (as defined at the WTO) imports by Canada in 2001 totalled USD 12.3 billion3 rising to USD 14.5 billion in 2003. Following the merge between the trade and tariff data, the value of imports used for the analysis is USD 11.2 billion in 2001 increasing to USD 13.6 billion in 2003. The reported value of imports for the other Quad countries is also that resulting after the merger of trade and tariff data. As reported in OECD 2005b, a large share (31%) of Canada’s tariff schedule is dutyfree, that is MFN tariffs are zero, and these are provided to products with meaningful trade flows. In 2001, USD 5.2 billion worth of goods entered Canada duty free and their value increased to USD 6.3 billion in 2003. Over the three year period, duty-free imports averaged USD 5.7 billion or 46% of Canada’s imports (Figure II.1). These goods are commercially exchanged and participants capture normal returns. But, for these imports, preferential access is meaningless. In terms of Figure II.2.1 in Annex II, for 46% of Canada’s imports, areas D and E do not exist. Figure II.1. Agricultural imports: Quad countries average 2001 - 2003

60 000.00

Millions USD

50 000.00 40 000.00 30 000.00 20 000.00 10 000.00 0.00 Canada

Japan

MFN Duty-free

United States

European Union

MFN Dutiable

Preferential access represents about 54% of Canada’s imports or USD 6.7 billion a year (Figure II.1). Their value rose from USD 6 billion in 2001 to USD 7.3 billion in 2003. It is among these imports where area D in Annex Figure A.1 is positive, and below we report on the value of that area. Japan’s imports for the analysis totalled USD 32.6 billion in 2001, increasing to USD 34.6 billion in 2003. Japan’s tariff schedule contains a sizeable share of duty free tariff lines (OECD 2005b). The combined tariff and trade data suggest that Japan PREFERENTIAL TRADE AGREEMENTS: HOW MUCH DO THEY BENEFIT DEVELOPING ECONOMIES– ISBN-9789264033689 © OECD 2007

Part II. The value of agricultural preferential access – 95

provides considerable access to its agricultural market duty-free. In 2001 duty-free imports totalled USD 9.6 billion almost 30% of total. In 2002 the year with the highest share of trade with tariff information, duty free imports totalled USD 10.6 billion (32% of total). Over the three year period, an average of USD 10.2 billion, (30% of Japan’s agricultural imports), were duty free. Dutiable imports averaged USD 23.3 billion over the three year period. It is within this group of traded commodities where preferential receipts potentially reside (Figure II.1). US imported USD 40 billion in agricultural goods which grew to USD 49.9 billion in 2003. The US, as the other Quad countries, provides duty-free access, on an MFN basis, to its agricultural markets for a sizeable share of its tariff schedule (OECD 2005b), and MFN duty-free access is given to products with substantial trade flows. How important is trade in duty-free products? In 2001, duty free imports totalled USD 16.4 billion, 41% of total imports. In 2003 total agricultural imports increased as did the value of duty-free imports, totalling USD 20.1 billion (40% of total). During the three year period, duty-free imports averaged USD 18.3 billion per year (Figure II.1), about 41% of imports. Dutiable imports, imports where preferential access can provide preferential receipts, averaged USD 26.8 billion per year (Figure II.1). The EU is the largest importer of agricultural products. In 2001, agricultural imports totalled USD 47.5 billion which grew to USD 66.2 billion in 2003.4 As reported in OECD 2005b, the EU also provides duty-free access, on MFN basis, on a sizeable portion of its agricultural tariff schedule. The data suggest that a sizeable portion of EU imports take place duty-free. In 2001, imports of products facing zero duty rates totalled USD 20.6 billion, or 43% of total imports. By 2003, imports in products with zero rates totalled almost USD 27 billion dollars (40% of imports). During the three year period, duty-free imports were USD 23.5 billion a year (Figure II.1), 42% of imports. Obviously, the other 58% of imports, an average of USD 32.9 billion per year, faced positive MFN tariff rates (Figure II.1). The focus of the study is on this data set as it represents the group of traded commodities where erosion of preferential receipts can occur. This brief overview suggests that preferential access, concerns only a portion of Quad country agricultural imports. A sizeable share (30% to 46%) of imports are duty-free on an MFN basis and therefore, not subject to erosion. This is not to imply that duty-free trade is not important. Exports, whether dutiable or not, provide employment and contribute to growth and development. However, because duty-free exports do not provide any extra benefits to the exporting country compared to preferential exports, they are not the focus of this study. Similarly, even though a large part of agricultural imports enter duty-free, there may be countries whose agricultural exports to the Quad are particularly reliant on preferences. In such cases, preference erosion may have detrimental effects on their agricultural sector. The following sections identify from which country and non-reciprocal programmes each Quad country sources its imports and computes the VPM for each programme.

Canada The previous section gave a brief overview of Canada’s agricultural imports, but, in order to put the value of preferential access in perspective, it is necessary to indicate which group of countries are supplying Canada’s imports. Countries are classified into broad groups indicating participation in Canada’s preferential schemes based on eligibility as reported in OECD (2005b) (reproduced in Annex II.1). Thus, all imports from countries that are eligible for Canada’s Generalised Preferential Tariff are classified PREFERENTIAL TRADE AGREEMENTS: HOW MUCH DO THEY BENEFIT DEVELOPING ECONOMIES– ISBN-9789264033689 © OECD 2007

96 – Part II. The value of agricultural preferential access as entering under that scheme; countries belonging to the other non-reciprocal schemes are also classified similarly. As stated previously, this assumption implies full utilisation for eligible products.5 Imports from Mexico and the US are assumed to enter under NAFTA and are reported here to complete the trade data. No attempt is made to determine the value of preferential receipts under this programme. Countries that are not eligible for any of Canada’s non-reciprocal schemes or NAFTA are classified as MFN and MFN tariffs are assumed to apply to imports from these countries. Table II.1 shows Canada’s duty free and dutiable imports by preferential scheme. The data suggest that on average, 60% of Canada’s duty free imports are supplied by the US and Mexico, her NAFTA partners. About 23% of Canada’s imports are supplied by the more developed developing countries belonging to the GPT programme and another 17% is provided by countries not eligible for any non-reciprocal programmes classified as MFN. Countries eligible for Canada’s LDC and Commonwealth Caribbean Countries Tax (CCCT) provide less than 1% of Canada’s duty-free imports, suggesting that these countries may not have a comparative advantage in the production of these items. Table II.1. Duty-free and dutiable imports by preferential scheme: Canada 2001-2003 2001

2002 Million USD

2003

Average

Duty Free GPT LDC CCCT MFN NAFTA Total Duty Free

1 165 13 11 860 3 116 5 164

1 224 13 11 975 3 419 5 642

1 499 35 13 991 3 758 6 296

1 296 20 12 942 3 431 5 701

Dutiable GPT LDC CCCT MFN NAFTA Total Dutiable

564 1 21 873 4 590 6 049

647 2 21 922 5 075 6 667

761 1 25 1 096 5 375 7 257

657 1 22 964 5 013 6 658

Perhaps imports from non-reciprocal preferential partners are more concentrated on goods with positive MFN rates where they may be able to take advantage of preferential access? The data do not support such a hypothesis. Looking at Canada’s imports when the MFN duty is positive (bottom half of Table II.1) a similar but even starker picture in terms of LDC and CCCT countries share of Canada’s imports emerges. In this case, about 75% of Canada’s imports when the MFN duty is positive come from either Mexico or the US, while another 14% comes from MFN countries, leaving about 10% for countries with preferential access. Thus, at this level of aggregation, area B in Annex figure II.2.1 is very small in the case of Canada, suggesting that the VPM (area D) is also relatively small. It is also revealing to examine which are the primary products imported by Canada and how this may differ whether looking at all imports or only dutiable imports. What products are imported by Canada? At the HS-2 digit level, the largest import sector averaging about USD 1.6 billion or 13% of imports is Fruits (Chapter 8) followed by Vegetables (Chapter 7) with USD 1.2 billion (10% of imports) and Preparations of PREFERENTIAL TRADE AGREEMENTS: HOW MUCH DO THEY BENEFIT DEVELOPING ECONOMIES– ISBN-9789264033689 © OECD 2007

Part II. The value of agricultural preferential access – 97

cereals (Chapter 19) with almost USD 1 billion (8% of total imports). These three broad product aggregates accounted for 31% of Canada’s average imports during the 2001 to 2003 period. When the focus is on dutiable imports, the import composition changes somewhat. The top three imported agricultural sectors are; Preparations of cereals (Chapter 19) with an average of USD 911 million per year (14% of dutiable imports), Miscellaneous edible preparations (Chapter 21) with USD 707 million a year and Preparations of vegetables and fruit (Chapter 20) with USD 572 million a year (Annex Table II.2.2). Products in these three aggregate groups comprised a third of all dutiable imports. NAFTA countries are the dominant suppliers for most products, while countries belonging to the CCCT and LDC regimes provide a very small share of Canada’s dutiable imports. Thus, there is not much scope for large preferential receipts for countries in these two schemes. Even countries in the Canada’s GPT scheme which includes most of the major exporting countries among the developing world, do not have a large presence in most sectors. They supply 10% or more of Canada’s import needs in only eight of the 23 broad sectors. This group of countries supply about 43% of Canada’s imports of Live trees and flowers (Chapter 6), but as the table shows, the total pie is not very big as Canada’s dutiable imports in this sector are only about USD 134 million per year. Sugar and Confectionary, (Chapter 17) is the second largest export sector for countries in the GPT scheme supplying about 35% of Canada’s imports of this sector. And, here, the pie is larger as Canada imported on average some USD 550 million per year. It should be kept in mind that the value of preferential access depends not only on the value of imports but also on the size of the preferential margin. The trade results however suggest that preferential margins must be very large for the relatively small share of trade by the preference receiving countries to generate substantial VPM. The next section looks at the value of preferential access in Canada.

The value of Canada’s preferential access The product composition of imports suggests that most of Canada’s imports are dutyfree for many products where developing countries, especially the least developed countries may have a comparative advantage such as fruits and vegetables. In contrast, dutiable items tend to be more processed products that probably require branding and marketing, areas where developing countries may not have a comparative advantage. In this section, the value that Canada’s preferential programmes generate for the various countries in the different schemes is provided. Canada, through its various non-reciprocal programmes, generated more than USD 20 million in preferential receipts in 2001 and these increased to more than USD 29 million in 2003 (Table II.2). The lion’s share of those receipts was captured by the more developed of the developing countries in the GPT scheme. These are the developing countries with the largest share of trade and the table shows that they capture the largest share of VPM. Over the three year period, the average VPM captured by countries in the GPT scheme was USD 23 million per year. Preferential receipts are a relatively small share of the value of Canada’s dutiable imports from this group of countries, averaging almost 4% a year. The ratio of VPM to the value of all of Canada’s agricultural imports from this group of countries is even lower, averaging 1.2% per annum. This suggests that even though these countries take advantage of the preferences provided, they are not overly dependent upon them as they export a broad set of commodities.

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98 – Part II. The value of agricultural preferential access Table II.2. The value of Canada’s preferential access: 2001–2003 and value of preference margin (VPM) as a share of average imports

2001

2002

2003

Average VPM as a share of dutiable agricultural Average imports from eligible countries

Average VPM as a share of agricultural imports from eligible countries

GSP LDC CCCT

19 506 50 927

In thousand USD 22 564 28 039 58 24 935 1 155

23 370 44 1 006

3.6% 3.4% 4.5%

1.2% 0.2% 3.0%

Total

20 483

23 556

24 419

3.6%

1.2%

29 218

By far the largest recipient of Canada’s GPT preferential receipts was Brazil with an average of USD 7.2 million per year (Figure II.2). These receipts represent 31% of the VPM captured by GPT countries but only 5% of Brazil’s dutiable exports to Canada. The second largest recipient is China, averaging some USD 2.2 million per year, (9% of VPM) but only 3% of Canada’s dutiable imports from China. The country with the largest dependence measured by the share of VPM in dutiable exports to Canada is Malaysia. Malaysia’s average VPM of USD 1.1 million represents 8% of the value of dutiable exports to Canada. The data suggest that the preferential receipts are captured by a relatively few countries. The top ten countries in terms of average VPM during this period captured 77% of the preferential receipts whereas the remaining 99 trading partners captured only 23%. Countries in Canada’s LDC scheme, presumably the countries with the greatest need, obtained the least preferential receipts, reflecting the small share of their dutiable exports to Canada. As shown in Table II.1, most of Canada’s imports from LDCs are duty-free. As already stated, LDCs capture normal returns from engaging in commercial exchange for these goods, but as there are no (meaningful) preferences for these duty-free imports they do not have the possibility to obtain additional preferential receipts, returns above those obtained in normal exchange. The countries in this scheme captured preferential receipts worth no more than USD 50 000 in 2001 but unlike countries in the other schemes, the VPM for these countries fell in 2003 to USD 24 000. Average VPM were USD 43 691 representing 3.6% of the value of their dutiable exports to Canada. As was the case for the GPT scheme, the VPM is captured by a relatively few countries. The country with the highest VPM from this scheme over the three year period was Tanzania with an average of USD 9 839 per year representing almost 23% of preferential receipts from this group of countries (Figure II.3). Madagascar with less than USD 8 000 per year representing 18% of LDC country VPM was second. The top five countries received 75% of the VPM under this scheme. Although the value of preferential receipts as a share of dutiable imports is relatively low for the LDC countries, the VPM represent a relatively large share of exports to Canada for several countries. For Equatorial Guinea and Eritrea (not shown in the figure), VPM represent almost 11% of the value of Canada’s dutiable imports from these countries, while for, Mauritania and Togo, VPM represent about 9% of the value of imports, the same as for Cambodia, Cape Verde, and Maldives (not shown in the figure). The CCCT programme generated preferential receipts of USD 927 000 in 2001 which increased to more than USD 1.1 million in 2003 reflecting the higher imports in that year (Table II.2). The three year average VPM of a little more than USD 1 million per year, is PREFERENTIAL TRADE AGREEMENTS: HOW MUCH DO THEY BENEFIT DEVELOPING ECONOMIES– ISBN-9789264033689 © OECD 2007

Part II. The value of agricultural preferential access – 99

considerably lower than the preferential receipts captured by the countries in the GPT scheme. Although preferential receipts are much smaller, they represent a slightly larger share of dutiable imports from these countries, as the VPM average almost 5% of the value of dutiable imports. The largest recipient country in this scheme is Jamaica, capturing on average USD 528 000 per year which represents more than half of the preferential receipts captured by the countries eligible for this scheme (Figure II.4). Jamaica does not appear to be dependent upon Canadian preferences however as the VPM as a share of Jamaica’s dutiable exports to Canada are about 4% per year. The second largest beneficiary country is Barbados with an average of USD 152 000 per year representing about 15% of preferential receipts from this regime. As is the case for the GPT scheme, only a few countries capture the bulk of the preferential receipts. The top five countries capture almost 98% of the VPM. As indicated above, as a group, these countries are not overly dependent on Canadian preferences as the VPM represents about 5% of the value of dutiable imports from them. For some countries, however, the VPM represents a relatively more important component of their dutiable exports to Canada. Preferential receipts for Anguilla represent an average of about 10% of the value of Canada’s dutiable imports from this country, while for Trinidad and Tobago the share is about 9%. Figure II.2. The top ten beneficiary countries of Canada’s GPT scheme and the value of preference margin as a share of dutiable imports (2001-2003)

25000

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8%

20000

7% 0.82

0.76

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6%

5%

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1.15 23.37

1.19

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PREFERENTIAL TRADE AGREEMENTS: HOW MUCH DO THEY BENEFIT DEVELOPING ECONOMIES– ISBN-9789264033689 © OECD 2007

100 – Part II. The value of agricultural preferential access Figure II.3. The top ten beneficiary countries of Canada’s LDC scheme and the value of preference margin as a share of dutiable imports (2001 – 2003) 50

10% 2.64

45 1.47

40 7%

35 Thousand USD

9% 0.99

8% 0.96

2.23

7%

9%

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2.76 3.91

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4.69

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Figure II.4. The top ten beneficiary countries of Canada’s CCCT scheme and the value of preference margin as a share of dutiable imports (2001 – 2003) 1200

10% 9%

1000

10.08

1.67

2.12

52.78 125.58

800 Thousand USD

4.21

2.03

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1.19

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126.40

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Part II. The value of agricultural preferential access – 101

Which agricultural products contain preferential margins and generate preferential receipts? Table II3 shows average VPM for the 2001 to 2003 period at the HS-2 level. Sugar and confectionary (Chapter 17) is by far the largest sector with a VPM of almost USD 11 million a year, 44% of the total. The value of preferential access drops dramatically for the other sectors. The second and third largest sectors, Preparations of cereals (Chapter 19) and Animal and vegetable fats and oils (Chapter 15), each generate about USD 2.3 million a year. For countries in the GPT scheme, Sugar and confectionary (Chapter 17), is by far the sector with the most preferential receipts, averaging USD 10.7 million a year (46% of total), followed by Animal and vegetable fats and oils (Chapter 15) with USD 2.5 million a year (10% of total), and Preparations of cereals (Chapter 19) with USD 2.4 million a year (10% of total). The countries in the LDC scheme obtain most of their preferential receipts from Tobacco (Chapter 24) with an average of USD 16 000 a year (36% of total), with Vegetables (Chapter 7) with an average of about USD 5 000 a year a distant second. Countries in the CCCT scheme on the other hand obtain most of their preferential receipts from Beverages (Chapter 22) with an average of USD 593 000 a year (59% of total), with Preparations of cereals (Chapter 19) with an average of almost USD 85 000 a year, a distant second. Tariff rate quotas (TRQs) are a feature of Canada’s agricultural import regime. However, the vast majority of agricultural imports are in products without TRQs. During the three year period 2001 to 2003, imports for products with TRQs averaged about 11% of imports. In 2001, imports of products with TRQs totalled USD 1.2 billion mostly trade within the quota (72% of the total). TRQ imports increased to USD 1.5 billion in 2001 with imports within the quota representing 65% of the total. During the three year period, in-quota imports averaged 68% of the USD 1.3 billion imports of TRQ products. Preferential receipts generated by the TRQ products are relatively meagre as preferential margins are not very prevalent. For countries in the GPT scheme, the countries with the most preferential receipts, TRQ products represent about 4% of their total, while for the countries in the CCCT scheme the share of preferential receipts from TRQ products is even smaller (about 1% of the VPM). For the LDC scheme, the scheme with the lowest preferential receipts, TRQ products provide about 4% of the VPM in the last two years. As indicated above, in addition to the data just described, import data were received for Canada from Finance Canada courtesy of the OECD’s Trade Directorate. The data contains imports from developing countries for 2002 and 2003 along with information on which preferential programme was demanded. For more information see Kowalski (2005). From these data, agricultural products as defined at the WTO were collected to ascertain the value of preferential access based on programmes as requested by the exporting country. This provides a better indication of the VPM (assuming the request was granted) and enables one to determine to what extent the methodology adopted for this analysis (full utilisation) over or under-states the value of preferential access compared to utilisation based on programme request.

PREFERENTIAL TRADE AGREEMENTS: HOW MUCH DO THEY BENEFIT DEVELOPING ECONOMIES– ISBN-9789264033689 © OECD 2007

102 – Part II. The value of agricultural preferential access Table II.3. Average value of preference margin by sector: Canada 2001 - 2003 GSP

Chapter 17 Sugars and sugar Chapter 19 Cereal, flour, starch, milk preparations and products Chapter 15 Animal,vegetable fats and oils, cleavage products, etc Chapter 23 Residues, wastes of food industry, animal fodder Chapter 24 Tobacco and manufactured tobacco substitutes Chapter 20 Vegetable, fruit, nut, etc food preparations Chapter 22 Beverages, spirits and Chapter 06 Live trees, plants, bulbs, roots, cut flowers etc Chapter 21 Miscellaneous edible Chapter 18 Cocoa and cocoa Chapter 04 Dairy products, eggs, honey, edible animal product nes OTHER * Chapter 07 Edible vegetables and certain roots and tubers Chapter 09 Coffee, tea, mate and Chapter 10 Cereals Chapter 11 Milling products, malt, starches, inulin, wheat gluten Chapter 16 Meat, fish and seafood food preparations nes Chapter 08 Edible fruit, nuts, peel of citrus fruit, melons Chapter 12 Oil seed, oleagic fruits, grain, seed, fruit, etc, nes Chapter 02 Meat and edible meat Chapter 05 Products of animal Header 52 - Cotton. Chapter 01 Live animals Total *

LDC Thousand USD 10 741.9 0.3

CCCT

Total

71.7

10 814

2 234.3

1.2

84.8

2 320

2 288.5

1.3

1.4

2 291

1 228.4

0.0

0.3

1 229

1 206.7

15.9

0.8

1 223

1 042.2 404.2

0.7 4.3

73.1 593.0

1 116 1 001

729.2 686.0 649.7

1.4 2.0 2.4

49.2 77.9 0.2

780 766 652

462.5 455.4

0.4 4.0

2.0 5.1

465 465

342.8 324.6 338.2

4.9 4.0 0.3

35.1 10.7 0.0

383 339 339

119.2

0.5

0.1

120

0.0

51

51.3 43.1

0.0

0.2

43

13.2 6.1 1.6 0.4 0.0

0.2

0.0 0.0

13 6 2 0 0

23 370

44

1 006

24 419

Agricultural products other than cotton located in chapters above Chapter 24

The value of preferential access based on the programmes actually requested is provided in Table II.4. Although derived from different data, this table shows a similar pattern to the results presented above. Countries in the GPT scheme get by far the lions’ share of the VPM with least developed countries receiving relatively small amounts. When comparing the data in Table II.4 with that of Table II.2, the results also demonstrate that our assumption of full utilisation of available preferential schemes, overstates the value of preferences. For example, average VPM for the two year (20022003) based on programme request (Table II.4) is some USD 4.6 million less than the two year average from Table II.2. This is especially apparent for least developed countries where Table II.4 shows average VPM of USD 3 000 compared to USD 41 000 over the PREFERENTIAL TRADE AGREEMENTS: HOW MUCH DO THEY BENEFIT DEVELOPING ECONOMIES– ISBN-9789264033689 © OECD 2007

Part II. The value of agricultural preferential access – 103

same period in Table II.2. Thus, at least for Canada, preferential receipts calculated based on the methodology of this paper are overestimated, providing an upper bound of their worth. The implication is that potential losses from preference erosion will also be exaggerated. Table II.4. The value Canada’s preferential access based on programme requested 2002 - 2003 2002

2003

Average

In thousand USD GPT

19 253

23 004

21 129

LDC

2

3

3

575

685

630

19 830

23 692

21 761

CCCT Total

Japan As for the other Quad countries, Japan’s various suppliers were aggregated into GSP or LDC schemes, based on OECD (2005b). Countries outside of these two groups were classified as belonging to the MFN group without preferential access. Which group was the principle supplier during this time? Most of Japan’s agricultural imports are supplied by countries that are classified as belonging to the MFN group, the group of countries without access to preferential tariff rates (Table II.5). In 2001, this group of countries provided USD 23.8 billion (73% of total duty-free and dutiable imports) while countries in the GSP scheme provided USD 8.7 billion (27% of total). Least developed countries belonging to the LDC scheme provided USD 163 million (about 0.5% of total). Although the magnitudes increased over time reflecting the increase in Japan’s imports, the relative share did not change. Table II.5. Duty-free and dutiable imports by preferential scheme: Japan 2001 - 2003 2001 Duty Free GSP LDC MFN Total Duty free Dutiable GSP LDC MFN Total Dutiable

2002 Million USD

2003

Average

2 330.32 154.05 7 155.46 9 639.83

2 432.81 133.17 8 058.43 10 624.41

2 474.62 165.28 7 599.11 10 239.01

2 412.58 150.83 7 604.33 10 167.75

6 348.86 8.78 16 602.55 22 960.18

6 574.64 9.45 15 915.24 22 499.34

6 805.75 12.16 17 580.01 24 397.91

6 576.42 10.13 16 699.27 23 285.81

Focusing on Japan’s duty free imports alone, a similar pattern emerges. Countries in the MFN group are by far the largest suppliers to Japan averaging USD 7.6 billion (about 75% of duty-free imports), while countries in the GSP scheme provide USD 2.4 billion (about 24%). Averaging about USD 151 million per year, countries in the LDC group PREFERENTIAL TRADE AGREEMENTS: HOW MUCH DO THEY BENEFIT DEVELOPING ECONOMIES– ISBN-9789264033689 © OECD 2007

104 – Part II. The value of agricultural preferential access have a somewhat greater share of duty free imports compared to total imports as they provide about 1.5% of Japan’s duty free imports. For dutiable imports, the imports with the potential to generate preferential receipts, the pattern is only slightly modified. Countries in the GSP scheme provide an average of USD 6.6 billion per year representing about 28% of dutiable imports, 4 percentage points greater compared to their share of duty-free imports. The opposite is true for countries in the LDC scheme as they provide on average less than half of one per cent of dutiable imports. Since Japan’s LDC scheme is duty-free and includes more tariff lines than the GSP scheme, their lack of presence in Japan’s dutiable import sectors suggests that the preferential access may not be provided to products of export interest to LDC’s. Thus, although countries in the GSP scheme appear to have the potential to garner preferential receipts, countries in the LDC scheme have very little possibilities based on the historical volume of exports to Japan. What are the major agricultural products imported by Japan? Looking at the HS2 digit level, Japan’s largest imports are in Chapter 2, (Meat and edible meat offal). Over the three year period, imports in this chapter averaged more than USD 7.2 billion per year, 22% of total imports. Cereals (Chapter 10) were the second most imported sector averaging almost USD 4 billion per year (12% of total). Tobacco (Chapter 24), Oilseeds (Chapter 12) and Beverages (Chapter 22) round out the top five imported sectors. These five sectors account for about 55% of imports. Differentiating between dutiable and duty-free products, Cereals (Chapter 10) with average imports of more than USD 3 billion per year is the largest duty-free sector (32% of total duty-free imports). Duty-free cereal imports represent about 83% of total cereal imports. At first glance, this may seem surprising given that cereals includes wheat and rice, two products that are considered to have relatively high protection in Japan and for which Japan has scheduled TRQs. The data show that most of Japan’s imports of these products occur within the quota facing an MFN tariff rate which is zero. Thus, preferential rents for in-quota imports are not feasible. With an average of USD 2.2 billion per year of duty-free imports, Oilseed products (Chapter 12) are the second largest sector (22% of total duty-free imports). As a matter of fact, duty-free imports of oilseeds represent 88% of total oilseed imports. All cotton imports are duty free while 99% of Live animals (Chapter 1) imports are duty-free. In contrast, all of Japan’s imports in three sectors, Cereal preparations (Chapter 19), Preparation of fruit and vegetables (Chapter 20), and Miscellaneous edible preparations (Chapter 21) face a positive MFN duty. Even though there are also duty-free imports, the largest import sector with positive duties is Chapter 2, Meat and edible meat offal with an average USD 7.1 billion per year (31% of all dutiable imports), followed by Beverages (Chapter 22) with average dutiable imports of USD 2.1 billion (9% of dutiable imports). Annex Table II.2.4 shows the three year average imports by HS-2 level and the group of countries that provided those imports. As already stated above, most of dutiable imports are supplied by countries that belong in the MFN category. Interestingly, countries in the GSP scheme supply more than 50% of Japan’s imports in nine sectors, providing almost 80% of Japan’s imports in fpir sectors. But, the imported value of these sectors represent only about a quarter of Japan’s dutiable imports, which again suggests that the scope of preferential receipts is not large. This is especially true for countries in the LDC scheme where their share of dutiable imports in any sector is less than 1%.

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Part II. The value of agricultural preferential access – 105

The value of Japan’s preferential access The trade data described above suggest that the scope of preferential receipts for LDCs is rather limited since much of Japan’s imports from these countries occurs free of MFN duties. Furthermore, these countries export very few dutiable products where they can take advantage of the preferential duty-free access provided. The scope for preferential receipts for GSP countries on the other hand appears more promising. During 2001 to 2003, the VPM for Japan’s GSP and GSP-LDC non-reciprocal programmes was about USD 45 million per year (Table II.6). These preferential receipts represent less than 1% of the value of dutiable imports during this time. The countries in the LDC scheme garnered an average of USD 326 000 per year, less than 1% of total VPM. Although not very large, VPM represent 3.2% of the value of dutiable imports over the period, a much larger share than that for countries in the GSP scheme. Obviously the bulk of the VPM, USD 44.5 million per annum (more than 99%) was obtained by the more developed developing countries belonging to the GSP scheme. The VPM for these countries represents, however, less than 1% of the value of dutiable imports from them. Thus, even though Japan’s LDC scheme provides larger preferential margins and includes more items than the GSP scheme, (OECD, 2005b), the results suggest that these countries are not able to take advantage of this. Table II.6. The value of Japan’s preferential access: 2001 – 2003 and the value of preference margin (VPM) as a share of average imports

2001

2002

2003

Average

Average VPM as a share of Average VPM as a share dutiable agricultural of agricultural imports from eligible countries imports from eligible

Million USD GSP LDC Total

43.8 0.3 44.0

43.7 0.3 44.1

46.1 0.4 46.5

44.5 0.3 44.9

0.7% 3.2% 0.7%

0.5% 0.2% 0.5%

Given the high concentration of Japan’s imports supplied by a relatively few countries, it is not surprising that the bulk of preferential receipts are also collected by a relatively few countries. This is true for both the LDC and the GSP schemes. China was the largest beneficiary from the GSP scheme, averaging more than USD 11.5 million per year (26% of total VPM from the GSP scheme) (Figure II.5). Another of Japan’s Asian neighbour, Thailand, captured the second highest amount of preferential receipts, averaging almost USD 11 million per year (24% of total). The top five suppliers captured 84% of total VPM (USD 39 million). Overall, six countries captured more than USD 1 million in preferential receipts per year. The other USD 5.5 million is distributed among the remaining 93 trading partners that are eligible for the GSP scheme. However, 30 counties within this scheme do not receive any preferential receipts as all of their dutiable exports (an average of USD 15 million per year) are excluded from the scheme. In general, even though the countries in the GSP scheme capture the bulk of the VPM, it represents a relatively small share of the value of their dutiable exports to Japan (less than 1%), suggesting little reliance on exporting preferential products. Alternatively, one could argue that Japan’s preferential scheme is limited in its product coverage reducing the scope for garnishing preferential receipts. However, for one country, Argentina, the VPM represents about 7% of Japan’s dutiable imports from that country. PREFERENTIAL TRADE AGREEMENTS: HOW MUCH DO THEY BENEFIT DEVELOPING ECONOMIES– ISBN-9789264033689 © OECD 2007

106 – Part II. The value of agricultural preferential access Figure II.5. The top ten beneficiary countries of Japan’s GSP scheme and the value of preference margin as a share of dutiable imports (2001 – 2003) 50000

8% 2.55

7%

45000

0.61

1.56

6%

3.30

35000 Million USD

7%

0.69

0.79 0.81

40000

4.59

30000

5%

7.29

25000

4%

4% 44.53

20000

3%

10.81

15000

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11.53

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Figure II.6. The top ten beneficiary countries of Japan’s LDC scheme and the value of preference margin as a share of dutiable imports (2001 – 2003) 3.21

350 3.12

14%

1.48

13% 10.81

300

3.99

4.75

0.97

12%

13.09 11%

11%

54.38

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250

10%

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200 86.21 325.61

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Part II. The value of agricultural preferential access – 107

Among the LDCs, Malawi captures most of the VPM averaging almost USD 144 000 per year (44% of total LDC VPM) (Figure II.6). Tanzania, with an average of USD 86 000 per year is the second largest recipient (26% of total). Overall, the top five countries capture 95% of the VPM (USD 308 000) provided by Japan to LDCs through this scheme. The other 23 LDC countries that provided Japan with dutiable goods captured the 5% of preferential receipts not captured by the top five. As a matter of fact, nine countries, with dutiable exports averaging USD 1.4 million per year (14% of dutiable imports) exported goods that were excluded from this scheme and did not capture any preferential receipts. Chief among these countries is Vanuatu which exported an average of USD 1.1 million per year (third largest supplier) but did not capture any preferential receipts. Although the VPM as a share of total dutiable imports from LDCs is relatively low, for some countries, they represent a more significant share of their dutiable imports. For example, the almost USD 5 000 in annual preferential receipts collected by Bangladesh represents 13% of her dutiable exports to Japan. For another three countries, Tanzania, Yemen and Ethiopia, the VPM represent at least 10% of dutiable imports. What are the sectors that are generating the VPM? For countries in the LDC scheme, most of the preferential receipts are generated through exports of primary agricultural products that require little if any processing. This has one advantage; rules of origin requirements should be fairly easy to ascertain and meet. Most of the VPM for LDCs are generated through Japan’s imports of Fruits (Chapter 8) with an average of USD 136 000 per year, and Animal and vegetable fats and oils (Chapter 15) primarily Beeswax, with an average of USD 116 000 per year (Table II.7). Japan’s imports of these two sectors provided 77% of annual VPM for the countries in this scheme. There are many sectors however that appear to be excluded from Japan’s preferential scheme for LDCs. These sectors include among others, Meat (Chapter 2), Dairy (Chapter 4), and Cereals (Chapter 10). In most cases, Japan’s imports from LDCs in the excluded sectors are relatively small, perhaps reflecting the lack of preferential access in these markets. But, Japan imported about USD 1 million a year of items in the Meat sector (Chapter 2) from these countries, one of only four sectors with imports averaging more than USD 1 million per year, but the only one without preferential receipts. For countries in the GSP scheme, most of the VPM are generated through Japan’s imports of Other (products with HS numbers greater than Chapter 24 other than Cotton) with an average of USD 10.6 million per year (Table 7) and Beverages (Chapter 22) with an average of almost USD 8 million per year (18% of total). Excluding the Other category, the top sectors in addition to Beverages (Chapter 22) for the GSP countries are processed agricultural products such as Animal or vegetable fats and oils (Chapter 15) Miscellaneous edible preparations (Chapter 21), Preparations of cereals (Chapter 19) and Preparations of vegetables, fruits, etc. (Chapter 20) sectors where the LDC countries (with the exception of Chapter 15) generated little if any preferential receipts. Since the LDC scheme contains at least as good and often larger preferential margins, the data suggest that their ability to compete with countries in the GSP scheme is limited. This seems to extend to those products where trade by LDCs does generate preferential receipts. For example, the top sector for generating preferential receipts for the LDC scheme is Fruits (Chapter 8) with an average of USD 136 000 per year. In contrast, the VPM in this sector averages USD 1.4 million per year for countries in the GSP scheme.

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108 – Part II. The value of agricultural preferential access Table II.7. Average value of preference margin by sector: Japan 2001 - 2003 GSP

OTHER * Chapter 22 Chapter 15 Chapter 21 Chapter 19 Chapter 20 Chapter 12 Chapter 07 Chapter 08 Chapter 09 Chapter 06 Chapter 14 Chapter 05 Chapter 18 Chapter 23 Chapter 13 Chapter 04 Chapter 24 Chapter 17 Chapter 16 Chapter 11 Chapter 02 Chapter 10 Total *

Beverages, spirits and vinegar Animal,vegetable fats and oils, cleavage products, etc Miscellaneous edible preparations Cereal, flour, starch, milk preparations and products Vegetable, fruit, nut, etc food preparations Oil seed, oleagic fruits, grain, seed, fruit, etc, nes Edible vegetables and certain roots and tubers Edible fruit, nuts, peel of citrus fruit, melons Coffee, tea, mate and spices Live trees, plants, bulbs, roots, cut flowers etc Vegetable plaiting materials, vegetable products nes Products of animal origin, nes Cocoa and cocoa preparations Residues, wastes of food industry, animal fodder Lac, gums, resins, vegetable saps and extracts Dairy products, eggs, honey, edible animal product nes Tobacco and manufactured tobacco substitutes Sugars and sugar confectionery Meat, fish and seafood food preparations nes Milling products, malt, starches, inulin, wheat gluten Meat and edible meat offal Cereals

LDC Thousand USD 10 613 1 7 971 0 6 040 116 4 531 0 3 406 4 2 603 0 1 955 25 1 971 1 1 446 136 1 513 37 946 0 620 0 521 1 203 4 112 78 0 1 0 0 0 0 0 0 0 0 0 0 0 44532 326

Total 10 614 7 972 6 157 4 531 3 410 2 604 1 980 1 972 1 582 1 549 947 620 522 207 112 78 1 0 0 0 0 0 0 44858

Agricultural products other than cotton located in chapters above Chapter 24

TRQs are a feature of Japan’s agricultural import regime. But, the vast majority of trade is in products without TRQs. During the three year period 2001 to 2003 imports for products with TRQs averaged about 6% of total imports, almost exclusively imports within the quota. In 2001, within quota imports from all sources totalled USD 1.88 billion and these increased to a little above USD 2 billion in 2003. Within TRQs, Japan does not provide preferential access to the countries in the GSP or LDC scheme above and beyond what is provided to any other partner. That is, all countries face the MFN rates. Thus countries have to compete with all suppliers to obtain quota rents that may be provided by the difference between the in-quota and out-of-quota tariff rates (assuming the in-quota rate is not the binding instrument). Since the focus of the study is on non-reciprocal arrangements, calculating the value of quota rents for the TRQ scheme is beyond the scope of this paper. Erosion, the difference between the inquota and out-of-quota rates, if it occurs in the case of Japan’s TRQ products will affect all suppliers and not just the beneficiary countries of Japan’s non-reciprocal schemes. Interested readers are referred to OECD 2002 for an estimation of those rents and how liberalisation may alter them. But, as an illustration of potential quota rents for TRQ products (as distinguished from the VPM for non-reciprocal agreements) and the potential beneficiary countries, we focus on Japan’s biggest (in term of quota volume) TRQs, wheat and rice. These quota rents are calculated as the difference between the in-quota tariff rate and the out-of-quota tariff rate (which assumes that the out-of-quota rate is

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Part II. The value of agricultural preferential access – 109

binding). These quota rents are available to all countries that are able to export within the TRQ regime and are not reserved for countries in the non-reciprocal arrangements. LDC countries did not supply any of Japan’s needs of these two products. Several GSP countries, however, (China and Ukraine for wheat, China, India, Pakistan, Thailand and Vietnam for rice) participated in supplying Japan with some of its needs and the rest was provided by developed countries such as Australia, Canada, the US and some EU member countries. In 2002, Japan’s wheat imports potentially provided some USD 655.5 million in quota rents, almost all of it captured by developed countries.6 The two countries in the GSP scheme captured only USD 555 000, less than one-tenth of a per cent. Rice imports are somewhat different in that more GSP countries are engaged in exporting to Japan and the quota rents they capture are much larger than the quota rents in wheat and they represent a bigger share of total quota rents. But, it is still the case that developed countries get a much bigger share. In 2002, the potential quota rents for rice imports into Japan were USD 261.4 million. The five GSP countries captured USD 78 million (30% of the total) with the three developed countries, Australia, Italy, and the US capturing the rest (USD 183.4 million). To put this in perspective, potential preferential receipts generated by Japan’s nonreciprocal arrangements were about USD 45 million for all schemes and all countries. Japan’s TRQ scheme for rice generates potential quota rents for five GSP countries of USD 78 million, about 70% larger than non-reciprocal VPM. The quota rents generated by either one of these two commodities by far dwarf the VPM generated by Japan’s nonreciprocal preferential arrangements, and the bulk of the quota rents appear to be available to developed countries. The wheat and rice examples should not be compared with the Canadian VPM from its TRQ products as the calculations are different. In Canada’s case, only the VPM generated through non-reciprocal preferential access were computed and not potential quota rents of the TRQ products. That is, in Canada’s case, the results for the TRQ products indicate the additional VPM that preferential access provides and not the total value embedded in the TRQ regime.

United States As mentioned above, the US data are from a different source than data for the other Quad countries and contain information on programme request by each trading partner. Thus, for the US, the data indicate the programme requested (not necessarily granted) which is a truer indication of potential preferential receipts generated (it is still the case that information on who actually gets the preferential receipts is not indicated). However, to preserve consistency with the results for the other Quad countries, the same methodology is used to generate apparent recipients, that is, it is assumed that all preference programmes are fully used. These results are presented first. However, VPM based on programme claimed are also provided since they are a better indicator, and as in Canada’s case, provide an indication to the extent the methodology biases the results. For the US, as for the other Quad countries, trading partners were grouped based on eligibility for the various non-reciprocal agreements as indicated in OECD (2005b) (reproduced in Annex II.A), (as well as a group called MFN containing countries that are not part of any non-reciprocal agreement and for the US, another group representing her NAFTA partners) for completeness. Based on these aggregate groups, where did the various products come from?

PREFERENTIAL TRADE AGREEMENTS: HOW MUCH DO THEY BENEFIT DEVELOPING ECONOMIES– ISBN-9789264033689 © OECD 2007

110 – Part II. The value of agricultural preferential access With an average of a little more than USD 33 billion per year, MFN and NAFTA countries supplied almost three-quarters of the agricultural products imported by the US (Table II.8). With an average of about USD 6.7 billion per year, countries in the GSP group provided another 15% of imports, leaving about 11% to be supplied by the countries in the other non-reciprocal agreements. Countries in the AGOA scheme supplied an average of USD 0.5 billion per year, about 1% of total imports, while countries in the LDC scheme provided around USD 20 million per year, less than half of one per cent. Table II.8. Duty-free and dutiable imports by preferential scheme: United States 2001 - 2003 2001

2002 Million USD

2003

Average

Duty Free GSP LDC AGOA ATPA CBERA MFN NAFTA Total Duty free

3 000 18 200 900 1 300 4 700 6 200 16 318

3 200 8 300 1 000 1 200 5 700 7 000 18 408

3 600 18 400 1 000 1 300 7 300 6 400 20 018

3 200 18 300 1 000 1 200 5 900 6 600 18 218

Dutiable GSP LDC AGOA ATPA CBERA MFN NAFTA Total Dutiable

2 800 2 200 700 1 300 9 900 8 700 23 602

3 500 2 200 700 1 500 11 200 9 900 27 002

4 100 2 200 900 1 600 11 700 11 300 29 802

3 500 2 200 800 1 500 10 900 9 900 26 802

Focusing on imports of goods facing positive MFN duties, the portion of trade with the potential to generate preferential receipts, again, most of the imports are provided by countries in the MFN or NAFTA blocks. Imports from MFN countries facing positive MFN rates averaged USD 10.9 billion (41% of dutiable imports) while those from NAFTA average USD 9.9 billion per year (37% of total). Among the non-reciprocal programmes, countries within the GSP group supply the most products facing positive MFN rates, averaging USD 3.5 billion per year (13% of total dutiable imports), while countries in the AGOA and LDC schemes average less than 1% of dutiable imports. Thus, as was the case for Canada and Japan, a relatively small share of US’s agricultural imports are sourced from countries eligible to non-reciprocal preferential access restricting the scope for preferential receipts. In contrast, based on programme actually claimed, (Annex Table II.C.6) the MFN scheme, with an average of USD 30.5 billion was by far the most dominant import scheme, representing a little more than 2/3 of imports. The NAFTA scheme, with an average of USD 11.2 billion represented another 25% of imports. Countries belonging to the non-reciprocal programmes of interest for this study provided an average of USD 3.3 PREFERENTIAL TRADE AGREEMENTS: HOW MUCH DO THEY BENEFIT DEVELOPING ECONOMIES– ISBN-9789264033689 © OECD 2007

Part II. The value of agricultural preferential access – 111

billion per year (7% of the total). The largest scheme was CBERA with an average of USD 1.4 billion per year followed by the GSP scheme (which includes imports from LDC’s) with an average of USD 1.2 billion per year. About USD 97 million per year entered through the AGOA scheme representing 0.2% of imports. A major reason for the large discrepancy between imports based on country groupings versus those under programmes actually claimed for the MFN scheme is that all duty-free imports into the US (which as we have seen are sizeable) are classified as entering under the MFN scheme regardless of the source. In contrast, in our definition duty-free imports are classified by source. By the reckoning in this analysis, most of the imports when the MFN rate is zero come from NAFTA countries with an average of 36% of the total while MFN countries provide 32% of the duty free imports. GSP countries also provide a sizeable share of duty-free imports, averaging almost 18% of the total per year. What are the major agricultural products imported by the US? When the focus is on total (dutiable and non-dutiable imports), based on the HS-2 digit level, Beverages, (Chapter 22) is the most important imported sector averaging USD 9.5 billion per year (21% of total) followed by Fruits (Chapter 8) with an average of USD 4.2 billion per year (9%) and Meat (Chapter 2) at USD 3.8 billion a year (8% of total). However, when focusing on dutiable imports where potential rents reside, Beverages (Chapter 22) is the largest import sector, averaging USD 3.8 billion per year (Annex Table II.2.7) followed by Vegetables (Chapter 7) with USD 3.1 billion per year and Meats (Chapter 2) with an average of USD 2.9 billion per year. These three sectors represent 37% of dutiable imports. Which sectors are supplied by which group of countries? The largest dutiable sector imported from the countries in the AGOA scheme is Fruits (Chapter 8), averaging USD 47.6 million per year followed by Tobacco (Chapter 24) with an average of USD 41.9 million per year (Annex Table II.2.7). These represent only 2.4% and 4.6% respectively of US dutiable imports of these products. AGOA countries have the largest presence in the Planting material sector (Chapter 14), providing about 10% of US import needs, but with an average import bill of USD 6 million per year, this sector is the least important of the items shown in the table. Furthermore, there are two sectors, Meats (Chapter 2) and Preparation of Meats (Chapter 16), representing an average of import bill of USD 3.4 billion per year where AGOA countries have no presence. Least developed countries not in the AGOA scheme (the LDC group), have an even smaller presence in the US dutiable import sector. In most sectors, these countries provide less than one-tenth of a percent and they are totally absent in six of the sectors shown in Table 13. The largest export sector for this group of countries is Lac gums, and resins (Chapter13) with an average of USD 430 000 per year followed by Tobacco (Chapter 24) with an average of USD 351 000 per year. Countries in the other three non-reciprocal schemes under consideration are more successful exporters to the US and thus capture a larger share of the import market. Countries in the ATPA scheme are the largest providers of Live Trees and other Plants (Chapter 6) with an average of USD 412 million per year (39% of total). Vegetables (Chapter 7) are the second most exported sector for the countries in this scheme, averaging USD 112 million per year about 4% of the total import bill of this sector. The largest export sector to the US for the countries in the CBERA scheme is Fruits (Chapter 8) with an average of USD 381 million per year, followed by Tobacco PREFERENTIAL TRADE AGREEMENTS: HOW MUCH DO THEY BENEFIT DEVELOPING ECONOMIES– ISBN-9789264033689 © OECD 2007

112 – Part II. The value of agricultural preferential access (Chapter 24) which averages USD 286 million per year. Fruits (Chapter 8) are also the largest export sector for the countries in the GSP scheme, averaging some USD 679 million per year followed closely by exports of Preparations of Vegetables and Fruits (Chapter 20) with an average of USD 644 million per year.

The value of US’s preferential access The trade data indicate the maximum VPM that may be possible assuming that all traded products are eligible and utilisation rates are 100%. From earlier studies (OECD 2005a, 2005b) the evidence suggested that not all imported products are eligible and utilisation rates, although high, are less than 100%. The US through its various non-reciprocal arrangements provided about USD 188 million in preferential receipts in 2001 and these increase to slightly more than USD 250 million in 2003 (Table II.9). The largest group of beneficiary countries were those belonging to the CBERA scheme. Potential preferential receipts for these countries averaged almost USD 90 million per year representing some 41% of the VPM provided by the US through its non-reciprocal programmes. Countries in the ATPA scheme were the second largest beneficiaries gaining an average of a little more than USD 63 million per year, representing 29% of the total. Countries in the LDC scheme, even though they receive substantial preferential access (among the largest margins) granted by the US, because they do not supply much produce to the US, are not able to capture significant preferential receipts. During the three year period, average VPM for this group of countries was a bit more than USD 100 000 per year. Table II.9. The value of US preferential access: 2001 – 2003 and the value of preference margin (VPM) as a share of average imports

2001

GSP LDC AGOA ATPA CBERA Total

44.8 0.1 9.3 50.5 83.2 188.0

2002

2003

Million USD 53.4 64.0 0.1 0.1 13.4 13.1 60.8 78.5 91.6 94.6 219.3 250.3

Average

54.1 0.1 11.9 63.3 89.8 219.2

Average VPM as a share of dutiable agricultural imports from eligible countries

Average VPM as a share of agricultural imports from eligible countries

1.5% 5.5% 6.0% 7.9% 6.0% 3.7%

0.8% 0.5% 2.4% 3.5% 3.3% 1.9%

The VPM provided by the US for countries in the various schemes averaged almost 4% during the 2001 to 2003 period. Countries in the ATPA scheme are relatively more dependent on VPM than countries in the other schemes. During the three year period, preferential receipts represented about 8% of the value of their dutiable exports to the US. Countries in the other schemes, except for GSP, are also relatively dependent as VPM represent about 6% of their dutiable exports. In contrast, preferential receipts represent less than 2% of the value of dutiable exports for the countries in the GSP scheme. The information just presented is based on the assumption of 100% utilisation. But, as stated, the US information enables us to calculate the value of preferential receipts based on the programme actually requested. Based on this information, the US provided preferential receipts valued at USD 168 million in 2001 and these increased to USD 232 PREFERENTIAL TRADE AGREEMENTS: HOW MUCH DO THEY BENEFIT DEVELOPING ECONOMIES– ISBN-9789264033689 © OECD 2007

Part II. The value of agricultural preferential access – 113

million in 2003 (Table II.10). Note that although the value of preferential receipts is lower compared to the value based on our assumptions, the rank ordering is not changed. Countries in the CBERA scheme gain the biggest share of the preferential receipts, followed by countries in the ATPA7 scheme. Countries belonging to the AGOA and especially those in the LDC scheme receive a much smaller share of the preferential receipts when computed based upon programme request. Note further that countries that are eligible for one scheme sometimes choose to use another scheme. For example, countries eligible for the CBERA scheme requested the GSP scheme instead and received an average of USD 3 million in preferential receipts per year. Similarly, countries eligible for the ATPA scheme requested the GSP scheme and collected an average of USD 6.2 million in preferential receipts per year.8 The data suggest that for countries in the CBERA and ATPA scheme, choosing the GSP scheme did not incur penalties as the calculated VPM would have been the same had they chosen their respective schemes rather than the GSP scheme. Preferential margins were the same for the three schemes. Table II.10. The Value of preference margin based on programme requested: United States 2001 — 2003 2001 ATPA ATPA GSP AGOA AGOA GSP CBERA CBERA GSP GSP LDC Total

43.1 3.2 2.7 2.2 80.5 2.4 33.5 0.1 167.7

2002 Million USD 30.4 10.3 8.4 3.4 89.9 1.2 40.6 0.0 184.3

2003

Average

72.8 5.2 7.2 2.6 87.5 5.3 51.1 0.1 231.7

48.8 6.2 6.1 2.8 86.0 3.0 41.7 0.1 194.6

The data indicate that AGOA countries utilised the MFN scheme to export produce even though there were positive preferential margins for the AGOA programme. By making this choice for those goods, AGOA countries forfeited preferential receipts worth on average USD 2 million per year. Countries eligible to the other schemes also failed to collect preferential receipts by exporting though the MFN scheme even though the products were eligible for the various programmes and had positive preferential margins. Because they chose to utilise the MFN scheme, countries in the CBERA programme gave up potential VPM worth an average of USD 900 000 per year, ATPA countries gave up preferential receipts worth USD 8.3 million per year and countries in the GSP scheme gave up preferential receipts worth USD 12.3 million per year. These values however probably are inflated. As stated above, the ATPA and GSP programs expired temporarily in 2001 and were not renewed until August 2002. During this time, eligible countries could only export under the MFN program. Upon renewal, program benefits were made retroactive to the expiration dates and countries could have applied for a refund of duties paid on eligible products. The GSP figure may be further inflated because many countries have been graduated out of the program for selected products under the program’s competitive need limits which provides a safeguard mechanism designed to prevent the extension of preferential access to countries that are considered competitive in the production of a product. Obviously, there is something in the way individual trading companies do business or in the procedures of the various programmes that induces PREFERENTIAL TRADE AGREEMENTS: HOW MUCH DO THEY BENEFIT DEVELOPING ECONOMIES– ISBN-9789264033689 © OECD 2007

114 – Part II. The value of agricultural preferential access trading companies to utilise schemes that may not generate the highest VPM, and even choose programmes where potential preferential receipts are forsaken. It is beyond the purpose of this study to examine the reasons for these choices. Some of these reasons such as rules of origin and compliance cost, have already been discussed. However, the results do illustrate that our assumptions lead to an over-estimation of the potential preferential receipts that are collected and thus the cost of preference erosion if the margins are reduced or eliminated. For consistency with the results for the other Quad countries, the value of preferential access reported below is provided based on the same methodology as for the other Quad countries and not on the programmes requested. What countries are benefiting from the various schemes? Brazil is the largest beneficiary of the GSP scheme averaging USD 12.5 million per year, followed by Thailand with an average of USD 9 million per year and Argentina with an average of USD 5.7 million per year (Figure II.7). As is the case for the other schemes, VPM are concentrated in a few countries. The top five countries in the GSP scheme captured about 66% of the VPM while the bottom 38 countries captured a little more than 2%. Countries that participate in this scheme tend to have greater diversification in their exports to the US as VPM represent a relatively minor share of their exports. As mentioned above, on average VPM represent less than 2% of the value of these countries dutiable exports to the US. Nonetheless, seven (out of the 61) have VPM which represent more than 5% of the value of their dutiable exports. Figure II.7. Top ten beneficiaries of GSP scheme: United States average 2001 — 2003 60

3% 6.58

50 2% 2%

40

2%

2% Million USD

3.11

3%

2.07 2.50 2%

2%

0.88 2%

2%

3.21 2%

30 1%

4.20

2%

2% 2%

4.22 54.05

5.72

20

1% 9.02

10

1%

0% 12.55

0

0%

m Su

er Oth

roc Mo

ia

co

s one Ind

d

key Tur

lan Po

ile Ch

ia Ind

es pin ilip Ph

d ilan

ina ent Arg

Tha

zil Bra

The meagre preferential receipts for countries in the LDC scheme are also captured by relatively few countries. Many of these countries export only one or two items (at the HS-8 digit level) and the volume and value is scanty. Thus, even though they enjoy very good preferential access, they generate very little preferential receipts. In 2001 Cambodia exporting only one item (tobacco) captured preferential receipts valued at USD 86 183, PREFERENTIAL TRADE AGREEMENTS: HOW MUCH DO THEY BENEFIT DEVELOPING ECONOMIES– ISBN-9789264033689 © OECD 2007

Part II. The value of agricultural preferential access – 115

representing 58% of the total for the LDC scheme. Cambodia did not replicate this experience and in 2002 and 2003, Bangladesh received most of the preferential receipts. During the three year period, Bangladesh was the largest beneficiary with VPM valued at USD 44 683 per year (41% of total) (Figure II.8). The top five recipients captured 88% of the total. Even though the VPM are meagre, for some countries they represent a relatively large share of their dutiable exports to the US, suggesting over reliance on preferential access for their exports. Chief among the reliant countries is Cambodia with preferential receipts representing 31% of her dutiable exports to the US, followed by Gambia with about a 10% share. There are another five LDCs where VPM represent at least 5% of the value of their dutiable exports to the US. There are only four countries in the ATPA scheme, but even in this case, most of the preferential receipts are captured by one country. Colombia, with an average of USD 34.1 million per year captures 54% of total preferential receipts while Bolivia, with an average of USD 272 000 per year, captures less than one percent (Figure II.9). For the ATPA countries, the VPM represent a sizeable share of their dutiable exports to the US. Peru, the country with average VPM of USD 18.9 million per year, the VPM represent 11% of the value of dutiable exports to the US, while they represent 8% for Colombia. For each of the other two ATPA members, VPM as a share of exports are 6% indicating a relatively high dependency on preferential trade. Figure II.8. Top ten beneficiaries of US LDC scheme: United States average 2001 — 2003

120

35%

1.22 31%

2.33

2.88

3.25

100

1.77 30%

1.60

4.23 7.82 Thousand USD

80

25%

10.36 20%

60

29.48

109.63

15%

40 44.68

20

10%

10%

6%

6% 4%

7%

6%

6%

5% 3%

5% 3%

1%

0

0%

Sum

r Othe

tu

OC) (DR

lia

l

a Som

a Nep

ua Van

o

tan Bhu

T og

go Con

a

bia Gam

o Sam

sh

odia

lade

b Cam

g Ban

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116 – Part II. The value of agricultural preferential access Figure II.9. Average value of preference margin for the ATPA scheme: United States average 2001 — 2003

70

12% 11%

0.27

9.99

60

10%

50 Million USD

8%

8%

8%

18.91

40 6% 6%

30

6% 63.27 4%

20 34.09 2%

10 0

0%

via

m Su

li Bo

r do ua Ec

ru Pe

bia lom Co

The CBERA scheme generates the most VPM and although the country with the most preferential receipts does not dominate to the same extent as the top country of the other programmes, it’s still the case that most VPM are captured by only a small number of countries. Costa Rica and Guatemala traded places on top during the three year period. On average, Costa Rica with an average of USD 23.2 million per year edged Guatemala’s average of USD 22.1 million per year (Figure II.10). These two countries captured a little more than half the VPM in this scheme during this time, while the top five countries captured 86% of the total. In contrast, the bottom 12 countries captured a little more than 2% of the total. In terms of relying on preferential access, the leader among this group of countries is Barbados. During the three year period, the VPM for Barbados averaged of some USD 1.3 million per year. This represents some 17% of the value of dutiable exports to the US and is among the highest of the various countries in the different schemes. Other CBERA members such as Guatemala (10%) and Honduras (8%) are also relatively reliant on the preferential scheme as are the Netherlands Antilles (10%) and Antigua Barbuda (8%) which are not shown on the figure. Overall, for 14 of the 22 countries in this scheme, VPM represent more than 5% of the value of their dutiable exports to the US. In the AGOA scheme, two countries, South Africa with average VPM of USD 6.4 million per year and Malawi with an average of USD 3.6 million per year capture the lion’s share of the VPM (84% of total), leaving only USD 1.9 million per year for the other 25 countries in the AGOA scheme (Figure II.11). The degree of concentration is illustrated by the fact that the next three top earners of rents, Swaziland, Mozambique, and Mauritius capture another 8% of the VPM, while the bottom 18 countries capture 3% of AGOA preferential receipts annually.

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Part II. The value of agricultural preferential access – 117

Figure II.10. Top ten beneficiaries of CBERA scheme: United States Average 2001 — 2003 100

18%

2.04

90

1.55

1.91

16%

2.37

3.04

80

17% 1.33

14%

3.41

Million USD

70

10.46

60

12%

10%

10%

18.44

50 89.82

8%

40 30

6%

22.11 6%

6%

5%

5%

8%

6% 6%

5% 4%

4%

20

4% 2%

10 23.18

0

0%

m Su

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dos r ba Ba

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a na m Pa

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El

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a

r as ndu

p Re

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ala

ica

n ica mi n

aic J am

Ho

Do

m ate

R sta

Gu

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Figure II.11. Top ten beneficiaries of US AGOA scheme Average 2001 — 2003 14

16%

12

0.18

Million USD

0.32

0.40

10

0.14

0.17

0.24

15% 0.12

0.19

14% 0.11

12% 10%

10%

8

3.64 8% 8%

6

11.93 6% 6%

5%

6%

5%

6%

5%

4 6.40

4%

4%

3%

3%

2

2%

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118 – Part II. The value of agricultural preferential access Although annual preferential receipts are not very high and most are captured by only a few countries, the VPM as a share of dutiable exports to the US are more than 5% for 14 AGOA countries. For Ethiopia, annual preferential receipts of USD 120 000 per year represent 15% of the value of dutiable exports to the US, while in the case of Senegal, annual preferential receipts of USD 182 000 represent almost 10% of that country’s dutiable exports. Even for South Africa and Malawi, the two largest beneficiaries, preferential receipts represent an average of 5% and 8% of the value of their dutiable exports to the US, respectively. This relatively high concentration of VPM in trade suggests that these countries are relatively specialised in the export of products where preferences are important and may have to undertake larger adjustments when preferences are reduced. What are the sectors that are generating the VPM? Table II.11 reports the three year average VPM for the various sectors (based on HS-2 aggregation) for the different regimes. Fruits (Chapter 8) with an average of USD 48 million a year is the leading sector, followed by Sugar (Chapter 17) with an average of USD 34 million and Tobacco (Chapter 24) with an average of USD 30 million. These three sectors represent more than 50% of the preferential receipts. Table II.11. Average value of preference margin by sector: United States average 2001 — 2003

Chapter 08 Edible fruit, nuts, peel of citrus fruit, melons Chapter 17 Sugars and sugar confectionery Chapter 24 Tobacco and manufactured tobacco substitutes Chapter 06 Live trees, plants, bulbs, roots, cut flowers etc

GSP

GSP LDC

AGOA ATPA Thousand USD

CBERA

Total 48 000

4 875

3

2 936

5 051

35 135

15 912

1

2 031

4 353

12 086

34 382

1 423

51

3 718

11 963

13 178

30 333

604

2

207

24 720

2 934

28 467

Chapter 07 Edible vegetables and certain roots and tubers

2 690

5

251

12 974

10 068

25 988

Chapter 20 Vegetable, fruit, nut, etc food preparations

7 156

7

1 012

2 708

6 498

17 380

Chapter 21 Miscellaneous edible preparations

6 082

1

164

208

2 862

9 317

Chapter 22 Beverages, spirits and vinegar

1 917

0

889

92

4 310

7 209

OTHER

3 583

8

156

149

59

3 955

Chapter 16 Meat, fish and seafood food preparations nes

2 806

0

1

2 807

Chapter 19 Cereal, flour, starch, milk preparations and products

1 884

3

12

390

355

2 645

Chapter 18 Cocoa and cocoa preparations

1 964

19

188

46

2 217

Chapter 15 Animal,vegetable fats and oils, cleavage products, etc Chapter 09 Coffee, tea, mate and spices Chapter 02 Meat and edible meat offal

733

0

235

111

405

1 484

1 059

0

43

140

35

1 277

1

1 069

1 070

Chapter 11 Milling products, malt, starches, inulin, wheat gluten

689

8

19

116

11

843

Chapter 04 Dairy products, eggs, honey, edible animal product nes

198

0

5

78

423

704

77

8

110

8

242

444

Chapter 13 Lac, gums, resins, vegetable saps and extracts nes

206

4

3

4

65

282

Chapter 14 Vegetable plaiting materials, vegetable products nes

14

116

0

0

130

Chapter 23 Residues, wastes of food industry, animal fodder

97

1

0

0

99

Chapter 10 Cereals

68

2

16

2

95

Chapter 05 Products of animal origin, nes

17

1

0

31

49

0

0

6

63 272

1 89 817

1 219 187

Chapter 12 Oil seed, oleagic fruits, grain, seed, fruit, etc, nes

Chapter 01 Live animals Header 52

- Cotton.

Total * Agricultural products other than cotton located in chapters above Chapter 24

0

8

2

0

4

0 54 055

0 110

0 11 933

Looking at the individual schemes, two sectors Fruits (Chapter 8) and Tobacco (Chapter 24) alternate generating the largest VPM for the countries in the AGOA scheme. During the three year period, Tobacco with an average of USD 3.7 million per year (31% of total), Fruits averaging USD 2.9 million per year (25% of total), and Sugar and Confectionary (Chapter 17) with an average of USD 2 million per year (17% of total) are the most important sectors representing 73% of total VPM. In terms of less aggregate PREFERENTIAL TRADE AGREEMENTS: HOW MUCH DO THEY BENEFIT DEVELOPING ECONOMIES– ISBN-9789264033689 © OECD 2007

Part II. The value of agricultural preferential access – 119

product definitions, after tobacco, sugar with an average of USD 2 million per year, grapes, with an average VPM of USD 1.6 million per year (provided solely by South Africa), and citrus (provided solely by South Africa) at USD 970 000 per year are also important generators of preferential receipts. The VPM generated by exporting tobacco and sugar are a result of preferential access within the quota for these two TRQ products. TRQ products and preferential receipts are further discussed below. For the countries in the ATPA scheme, the sectors generating the most preferential receipts is Live Trees and other Plants (Chapter 6) producing VPM worth USD 24.7 million per annum (39% of total), Vegetables (Chapter 7) with USD 13 million per year (21%), and Tobacco (Chapter 24) producing an average of USD 12 million per year (19%). In terms of more disaggregate product definition, in addition to tobacco, sugar USD 3.4 million per year, figs and pineapples USD 2.3 million, grapes, with an average of USD 2.1 million, and onions USD 2.5 million, are important contributors to preferential receipts. For these countries, much of the VPM from sugar and tobacco are through exporting within the quota. For the CBERA countries, Fruits (Chapter 8) with an average of USD 35.1 million per year, Tobacco (Chapter 24) averaging some USD 13 million per year and Sugar and Confectionary (Chapter 17) with USD 12.1 million per year in preferential receipts, are the three most important sectors. Among the more disaggregated products, melons are the single largest contributor to preferential receipts generating almost USD 30 million a year. Note that for this scheme, as in the two previous ones, two TRQ products, tobacco and sugar feature prominently among the products that are generating large preferential receipts. For countries in the GSP scheme, the largest sector generating VPM for the countries in this scheme is Sugar and Confectionary (Chapter 17) with average VPM of almost USD 16 million per year (29% of total), more than double the next largest sector Preparations of Fruit and Vegetables (Chapter 20) with an average of USD 7.2 million per year. The third largest sector with an average of USD 6.1 million per year is Miscellaneous Edible Preparations (Chapter 21). These three sectors generate almost 54% of total preferential receipts. In terms of more disaggregate product definition, sugar imports generate preferential receipts averaging USD 9.5 million per year confectionary products generate some USD 6.0 million of VPM a year, and figs and pineapples with an average of USD 2.2 million per year provide substantial preferential receipts. As is the case for the other regimes, most of the VPM generated by sugar imports are within the TRQ. As for the other Quad countries, TRQs are a part of the import regime for the US. As discussed above, some TRQs, notably sugar and tobacco, generate substantial VPM, although most of the preferential receipts are provided through trade in products without TRQs. Nevertheless, it may be instructive to examine the role of the TRQ regime in generating preferential receipts since TRQs can be controversial. As explained above, the US does not provide preferential margins on the out-of-quota tariff rates of TRQ products. But, since trade at those rates is almost non-existent, this is not very relevant. The US does provide preferential access on TRQ products within the quota however. As explained before, preferential receipts within the quota are calculated as the difference between the preferential rate and the in-quota MFN rate. As illustrated above, this calculation might under-estimate the VPM that can be obtained for TRQ products if the MFN in-quota rate is not the appropriate rate (for example when either the quota or the out-of-quota tariff rate is binding). PREFERENTIAL TRADE AGREEMENTS: HOW MUCH DO THEY BENEFIT DEVELOPING ECONOMIES– ISBN-9789264033689 © OECD 2007

120 – Part II. The value of agricultural preferential access Preferential receipts for exports within the TRQ regime represent about 12% of total VPM. In 2001, exporting within the TRQ regime generated USD 25.8 million in preferential receipts for those countries that were able to export within the system. Preferential receipts, concomitant with increased trade, expanded to USD 28.4 million in 2003 (captured mostly by countries in the CBERA and GSP schemes). Although the VPM within the TRQ regime are a small share of overall VPM, for countries in the AGOA scheme, these preferential receipts amount to an average of USD 3.9 million per year and represent about 33% of all their VPM. Since export volumes are limited by the quota, preference erosion for these products may create more severe adjustment problems as the possibility of compensating for erosion by expanding exports to reduce rent loss may not be possible unless the quotas are enlarged. As illustrated for Japan, additional quota rents to the preferential receipts calculated above may exist for TRQ products. Those additional quota rents are a result of the TRQ regime and not due to preferential (as used in this report) access per se. If those quota rents exist, countries that export under the MFN regime can also capture them. Consequently, they are not part of the mandate of this study and are not computed. To illustrate the order of magnitude between preferential receipts provided through the nonreciprocal trading arrangements and potential quota rents generated by the TRQ regime, quota rents for sugar and tobacco were also calculated. As in the case for Japan, these quota rents are calculated as the difference between the in-quota tariff rate and the out-ofquota tariff rate.9 These quota rents are available to all the countries that are able to export within the regime and are not reserved for countries in the non-reciprocal arrangements. However, countries within the various preferential schemes may get an additional boost to their quota rents when the preferential in-quota rate for them is lower than the MFN rate. The results indicate that the quota rents generated by the tobacco TRQ grew from USD 837 million in 2001 to USD 1.2 billion in 2003 while quota rents for the sugar TRQ totalled a little more than USD 500 million each year. As in the case for Japan, the results show that the quota rents for just these two products completely swamp the value of preferential access provided for all regimes for all products. But, unlike the case for Japan, developing countries have the potential to capture a large share of these quota rents. In the case of sugar, The Dominican Republic is potentially the largest beneficiary with an average quota rent of USD 80 million per year (16% of total), followed by Brazil with an average of USD 62 million per year (12%) and the Philippines averaging USD 48 million per year (10%). In the case of the tobacco TRQ, it is once again the case that developing countries have the potential to capture a large share of the quota rent. In this case, however, the quota rents are much more concentrated for one country, Brazil. For Brazil, the tobacco TRQ has the potential to generate an average of USD 612 million a year, about 60% of the value of the tobacco quota rents. Argentina with an average of USD 86 million per year (9%) is potentially the second largest recipient followed by Thailand with USD 72 million and Malawi with USD 59 million per year.

The European Union As for the other Quad countries, the EU’s trading partners were aggregated into groups based on programme eligibility as indicated in OECD (2005a). In addition to the non-reciprocal programmes of interest, countries that do not benefit from preferential agreements were placed into the MFN group while countries with special trading arrangements with the EU were placed in a category called OTHER. This category PREFERENTIAL TRADE AGREEMENTS: HOW MUCH DO THEY BENEFIT DEVELOPING ECONOMIES– ISBN-9789264033689 © OECD 2007

Part II. The value of agricultural preferential access – 121

includes notably European countries with special trading arrangements with the EU, (some of whom have since joined the EU) and countries in the Mediterranean region under the Euro-Mediterranean agreements. Trade data for these two latter groups are provided for completeness, but the VPM for countries in the OTHER category are not computed because these arrangements are beyond the scope of the study. Within the broad group aggregates, where did EU’s imports come from? The biggest share comes from the group of countries in the GSP scheme, averaging USD 20.5 billion per year which is 36% of the total, followed by countries in OTHER group with an average of USD 13 billion per year (23% of total). As is the case for the other Quad countries, LDCs, outside the ACP scheme, are not significant contributors to EU’s imports, averaging some USD 54 million per year, less than 1% of EU imports. As indicated in Annex II.2, a substantial share of EU’s imports are duty-free. As shown in Table II.12, an average of USD 3 billion of EU’s imports from ACP countries, 45% of their total imports, are duty-free, while more than 50% of EU imports from countries in the EBA, LDCs not in EBA (this category represents only Myanmar) and GSP schemes are duty-free. Again, trade in these products generate normal returns for the participants, but they do not generate excess returns through preferential access. Focusing on dutiable imports, where preferential receipts may exist, the countries in the programmes of interest, on average provided almost 49% of the nearly USD 33 billion. Not surprisingly, countries in the GSP scheme were the largest providers among this group, averaging USD 9.4 billion per year, followed by countries in the ACP scheme with an average of USD 3.7 billion per year. LDCs provided an average of only USD 19.7 million per year in dutiable imports, suggesting that the scope of preferential receipts for these countries is limited.10 Table II.12. Duty-free and dutiable imports by preference schemes: EU 2001 – 2003 2001

2002 Million USD

2003

Average

Duty Free GSP EBA LDC not EBA* ACP GSP Drug MFN OTHER Total Duty free

10 017.14 26.30 3.03 2 400.60 1 357.42 4 580.22 2 219.27 20 603.98

10 754.01 33.19 4.72 2 879.21 1 263.68 5 132.61 3 258.74 23 326.17

12 465.29 31.79 3.22 3 865.06 1 400.05 5 362.21 3 563.40 26 691.01

11 078.81 30.43 3.66 3 048.29 1 340.38 5 025.01 3 013.80 23 540.38

Dutiable GSP EBA LDC not EBA ACP GSP Drug MFN OTHER Total Dutiable

7 029.80 9.84 3.47 3 020.37 2 434.16 6 301.81 8 037.96 26 837.41

9 651.28 13.25 3.72 3 475.61 2 760.34 6 606.85 9 742.49 32 253.53

11 456.89 27.54 1.26 4 639.91 3 431.96 7 766.11 12 231.97 39 555.64

9 379.32 16.88 2.82 3 711.96 2 875.49 6 891.59 10 004.14 32 882.19

* Myanmar is the only one country in this group

PREFERENTIAL TRADE AGREEMENTS: HOW MUCH DO THEY BENEFIT DEVELOPING ECONOMIES– ISBN-9789264033689 © OECD 2007

122 – Part II. The value of agricultural preferential access What are the major products imported by the EU? Aggregating at the HS-2 digit level and looking at the total of dutiable and duty-free imports, Fruits (Chapter 8) with an average of USD 8.7 billion per year in the largest sector, followed by Residues and Waste from the food Industry (Chapter 23), and Oilseeds (Chapter 12) with an average of USD 5.8 billion per year. These three sectors represent 36% of total EU agricultural imports. When the focus is on dutiable imports only (Annex Table II.2.9), Fruits (Chapter 8) with an average of USD 8.1 billion per year, is the largest sector facing positive MFN tariff rates, suggesting that a very small share of products in this aggregate group enter the EU duty-free. Three other sectors, Beverages (Chapter 22), Meat (Chapter 2), each with average imports of USD 2.9 billion per year, and Preparations of Vegetables and Fruit (Chapter 20) with imports averaging USD 2.7 billion a year, account for more than half of the dutiable imports. In terms of individual preferential schemes, Annex Table II.2.9 shows where countries exporting under the EBA arrangement may be able to gain preferential receipts. It appears from this table that the EU imports relatively small amounts from these countries which implies that they have a very small presence in the EU. Their largest export is Vegetables (Chapter 7) providing EU customers an average of USD 10 million a year, which is less than 1% of EU’s vegetable imports. There are three other sectors where EU imports from this group of countries averaged more than USD 1 million a year, Sugar and Confectionary (Chapter 17), Tobacco (Chapter 24), and Cereals (Chapter 10), illustrating that these countries presence in EU markets is just too small to generate big preferential receipts even if they receive very large preferential margins. The European Commission (2006), looking at EU import data over a somewhat longer time horizon (2001-2005), concluded that LDC exports did not materially increase as a result of the EBA suggesting that large preferential margins have not yet had the desired effect of expanding exports from the LDCs. Nonetheless, from the perspective of the beneficiaries, these may represent an important share of their export market as discussed below. For the countries in the GSP-Drugs scheme, Fruits (Chapter 8), with an average of USD 1.8 billion per year, 23% of EU’s dutiable imports in this sector, is their largest market, followed by Live trees and other plants (Chapter 6) with an average of USD 331 million per year. The ACP countries seem to specialize in the exportation of Sugar and confectionary (Chapter 17), supplying an average of USD 818 million per year, 55% of EU dutiable imports of this sector. Other sectors where ACP countries have a strong presence are Fruits (Chapter 8) with an average of USD 638 million per year, and Cocoa (Chapter 18) with an average of USD 462 million per year. Countries in the GSP scheme tend to have a more diversified dutiable export profile. Fruits, with an average of USD 1.5 billion per year is the largest sector, but Animal and vegetable fats (Chapter 15) with USD 1.4 billion per year, Meat (Chapter 2) and Preparations of vegetables and fruit (Chapter 20), each with USD 1.2 billion per year, and Cereals (Chapter 10) with just over a billion per year are also important sectors representing a large share of EU’s imports of these products. The data in Annex Table II.9 suggest that countries in the various schemes do not tend to compete in many sectors (at the HS-2 digit level). With a few notable exceptions (Chapters 6, 7, 8, 22, 24), the EU seems to source its various import needs through specific preferential programmes with each of these programmes supplying the bulk of dutiable imports to different sectors. However, the different aspects of looking at EU’s trade data provide an indication of the relative magnitude of preferential receipts that are PREFERENTIAL TRADE AGREEMENTS: HOW MUCH DO THEY BENEFIT DEVELOPING ECONOMIES– ISBN-9789264033689 © OECD 2007

Part II. The value of agricultural preferential access – 123

possible. Dutiable exports provide an indication of the magnitude of preferential receipts that are possible based on the assumption of 100% utilisation and no exclusions. The potential preferential receipts for the EU’s agricultural markets are calculated below.

The Value of EU’s Preferential Access The EU’s non-reciprocal programmes included in this study generated more than USD 900 million in preferential receipts in 2001 and these increased to USD 1.1 billion in 2003 (Table II.13). By far, the programme generating the most VPM is the ACP scheme, which in 2001 provided USD 659 million in VPM to the ACP countries, increasing to USD 915 million in 2003. The ACP scheme accounted for 67% of the VPM provided by the EU during the three year period 2001 to 2003. Preferential receipts for countries in the GSP scheme totalled an average of USD 288 million per year, representing 24% of the total, while countries in the GSP-DRUGS scheme captured another USD 117 million or 6% of the total. LDC countries in the EBA scheme captured an average of USD 3 million per year which is less than half of one per cent of the total11. As was the case for the other Quad countries, LDCs exports to the EU are miniscule, leading to miniscule preferential receipts. As the data in the table indicates, however, the EBA scheme generated VPM of more than USD 6 million in 2003, an almost three-fold increase over 2002 and about five times larger than in 2001. Preferential receipts for the EBA scheme grew faster than the VPM in any other scheme during this period. Perhaps this is an indication that LDCs are learning to use the programme which was started in 2001. How important are the VPM provided by the EU for countries in the various schemes? Alternatively, what is the concentration of exports in products that are generating preferential receipts? Examining the data from Tables II.12 and II.13, countries in the ACP scheme seem to concentrate their dutiable exports on products that generate preferential receipts. That is the ratio of the VPM to their dutiable exports to the EU is high (especially compared to similar ratios for other schemes within the EU and for the other Quad countries), but declining. In 2001, the VPM represented 22% of the value of dutiable exports, while by 2003 they fell to 20%. Over the three year period, the VPM on average represented more than 20% of the value of dutiable exports or 11% of the value of all EU’s agricultural imports from these countries. Countries in the EBA scheme also have a relatively high ratio of VPM to their dutiable exports to the EU, and it has been increasing from 12% in 2001 to 23% in 2003. VPM for the EBA countries as a share of EU’s total imports from these countries averaged only 7% since most of trade from these countries face MFN tariffs of zero percent. Preferential receipts as a share of the value of EU’s dutiable imports from the countries in the GSP and GSP-DRUGS schemes are much lower and of an order of magnitude similar to those found in the other Quad countries.

PREFERENTIAL TRADE AGREEMENTS: HOW MUCH DO THEY BENEFIT DEVELOPING ECONOMIES– ISBN-9789264033689 © OECD 2007

124 – Part II. The value of agricultural preferential access Table II.13. The value of preferential access: EU 2001 – 2002 and the value of preference margin (VPM)as a share of average imports Average VPM as a share of dutiable agricultural Average imports from eligible countries

2003

Average VPM as a share of agricultural imports from eligible countries

2001

2002

GSP

189.08

328.60

288.10

268.60

2.9%

EBA

1.20

2.25

6.24

3.23

19.1%

6.8%

ACP

659.34

723.94

914.81

766.03

20.6%

11.3%

GSP Drug Total

84.12 933.75

100.29 123.42 1 155.09 1 332.57

102.61 1 140.47

3.6% 7.1%

2.4% 3.6%

Million USD 1.3%

Which countries are benefiting from the various schemes? Among GSP-only countries, Brazil was the leading recipient in 2001 and again in 2003 with VPM worth USD 27.4 million and USD 49.6 million, respectively. Ukraine was the leading beneficiary in 2002 with USD 65 million in preferential receipts. During the three year period 2001 to 2003, Brazil, with an average of USD 38.3 million in VPM was the leading beneficiary, followed by Ukraine with an average of USD 31.8 million per year and Russia with an average of USD 27.6 million per year (Figure II.12). These three countries captured 36% of the VPM generated by the GSP scheme. Although the VPM is more widely distributed, it is still the case that preferential receipts are concentrated in a relatively few countries. The top ten beneficiaries of this regime captured 87% of the VPM while the last 27 participants captured only half of one per cent. Figure II.12. The top ten beneficiaries of GSP scheme: European Union average 2001 - 2003 12%

300 11%

34.05 10%

250 9% 200 Million USD

16.48 17.75

16.00

8%

8% 19.27 20.08

150

6%

21.07 26.25 4%

100

268.60

5%

4% 4%

27.63 3% 50

2%

31.76

2%

2%

2%

2%

1% 38.26 0%

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Part II. The value of agricultural preferential access – 125

Most of the countries in this scheme are not very dependent on agricultural preferential trade as the VPM to dutiable exports is relatively low in general. There are countries within the scheme that are relatively dependent on exports in sectors with high preferences. Among the top ten recipients, Cuba, with an average VPM of USD 20.1 million per year, is the country most dependent on preferential trade as the ratio of her preferential receipts to dutiable exports to the EU is 11%. Dependence ratios for Ukraine and the Russian Federation are also relatively high, (8% and 9% respectively) as are those for Kazakhstan and Gibraltar (not shown in the figure) with ratios of 12% and 9% respectively. Overall, only these five countries out of the 46 eligible for the programme have a ratio of VPM to dutiable exports that are greater than 5%. Among the EBA countries, Bangladesh was the largest recipient in 2001 capturing USD 1 million which was 85% of the total. Yemen was the leading beneficiary country in 2002 capturing almost USD 1.1 million (48% of total), while Nepal was the leading beneficiary in 2003 with almost USD 3 million 47% of the total. The evidence indicates that VPM are concentrated in a few countries. During the three year period 2001 to 2003, Bangladesh, Nepal, and Yemen on average, captured 91% of potential EBA VPM (Figure II.13). Nepal and Yemen also seem to be very dependent on exports of products generating preferential receipts. In Nepal’s case, average VPM represent almost half of the country’s dutiable exports to the EU, while for Yemen the VPM represents 36% of the value of dutiable exports. Figure II.13. Top beneficiaries of the EBA scheme: European Union average 2001 — 2003 60%

3.50

0.00

0.02

0.11

0.00

0.15

3.00

50%

49% 0.54

2.50

40%

Million USD

36% 2.00

0.99 30% 3.23

1.50

19% 1.00

15%

13% 0.50

20%

12%

1.41

6%

10%

9%

8%

0%

0.00

Su m

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Nepal’s case in this respect is very interesting. In 2001, Nepal generated preferential receipts worth about USD 8 000 from more than USD 97 000 in dutiable exports mostly from one item in Live trees and other plants (Chapter 6) and two items in Chapter 21 (Miscellaneous edible preparations). In 2002, Nepal exported some USD 154 000 in dutiable goods to the EU, generating a little over USD 14 000 in preferential receipts, and

PREFERENTIAL TRADE AGREEMENTS: HOW MUCH DO THEY BENEFIT DEVELOPING ECONOMIES– ISBN-9789264033689 © OECD 2007

126 – Part II. The value of agricultural preferential access again, most of the exports (and preferential receipts) were from exports of items in these two chapters. In each year, the share of VPM to dutiable exports was between 8% and 9%. However, in 2003 Nepal continued exporting a similar set of products, while also taking advantage of the opening of EU’s sugar market to EBA countries and exported USD 5.8 million of goods to the EU, gaining VPM valued at USD 3 million, more than half the value of Nepal’s dutiable exports. The reason is that sugar exports totalled USD 5.3 million which generated USD 2.9 million in preferential receipts. This illustrates that the EBA programme may be having the desirable effect of encouraging LDCs to enter EU markets. LDCs, like Nepal, need to be careful not to rely too heavily on producing goods with high current preferential margins as changes in EU’s domestic markets and potential preference erosion may pose problems. In the GSP-DRUGS scheme, VPM are somewhat more dispersed among the participating countries. Over the three year period, Costa Rica with average VPM of USD 24.7 million per year was the largest beneficiary followed by Peru with an average of USD 21.6 million and Ecuador with an average of USD 20 million (Figure II.14). These three countries captured almost 65% of the VPM. Although for Costa Rica and Ecuador preferential receipts as a share of dutiable exports as shown above is rather low, some countries are more dependent. Nicaragua’s VPM of USD 2.2 million per year represent some 17% of dutiable exports to the EU, as does Bolivia’s annual VPM of USD 1.3 million. Peru is another country with double digit dependence as the VPM represents 11% of the value of dutiable exports to the EU. Figure II.14. The top ten beneficiaries of GSP-DRUGS scheme: European Union average 2001 — 2003 120

18% 1.76

17% 2.22

100 3.66

16%

2.09

2.94

14%

1.40

6.92

13%

80

12% 15.40

Million USD

11%

10% 60 19.96 102.61

7% 40

8%

6% 21.57 4% 4%

20

3%

3%

4%

3%

3% 2%

24.69

2% 1% 0%

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As indicated, the ACP scheme generates the vast majority of the preferential receipts provided by the EU. As is the case for the other schemes, most of the VPM is captured by a relatively small number of participants. Mauritius was the leading beneficiary, averaging some USD 158.6 million per year, followed by the Ivory Coast, with USD 81 PREFERENTIAL TRADE AGREEMENTS: HOW MUCH DO THEY BENEFIT DEVELOPING ECONOMIES– ISBN-9789264033689 © OECD 2007

Part II. The value of agricultural preferential access – 127

million per year and Guyana with an average of USD 61.3 million per year. These three countries captured 39% of the VPM provided by the scheme. The top ten participants garnered almost 77% of the VPM while the last 51 participants captured 7% (Figure II.15). Also as indicated, preferential receipts are a significant share of the value of dutiable exports for a large number of ACP countries. The share of VPM in the value of dutiable exports is more than 50% in the case of four countries, whose exports are largely dominated by sugar. Mauritius, the leading beneficiary, Fiji (average VPM of USD 50.2 million) and St. Kitts and Nevis (average VPM of USD 5.4 million), are the most dependent with the VPM representing 54% of the value of dutiable imports. Trinidad and Tobago with average VPM of more than USD 14 million per year is another country with VPM more than 50% of the value of dutiable exports. There are an additional six countries with preferential receipts worth more than 30% of the value of their dutiable exports to the EU. For the Republic of Congo average VPM of USD 2.9 million a year represent 47% of dutiable exports to the EU while Guyana’s more than USD 61 million in VPM represents 45% of dutiable exports to the EU. For another 21 countries, the VPM represented at least 10% of the value of EU’s dutiable imports from those countries. Clearly, there are a large number of countries within this scheme that rely on exporting preferential products and preference erosion may pose problems. Figure II.15. The top ten beneficiaries of ACP scheme: European Union average 2001 — 2003 900 800

60% 54%

54% 50%

700

178.52

45% 42%

Million USD

600

23.96

38%

40%

45.70 22.56

500

47.19

30%

47.92

400

766.03

49.13 22%

50.21

300 200

21% 20%

20%

61.26

15%

81.0213% 10%

100

10% 7%

158.56

0

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What are the sectors generating the preferential receipts? Perhaps it is not surprising that Sugar and Confectionary (Chapter 17) is the leading sector generating an average of a little more than USD 462 million per year, representing about 41% of the total (Table II.14). It is also not surprising that Fruits (Chapter 8) is the second leading sector, generating on average USD 189.2 million per year, almost 17% of the total. Preferential receipts, generated by the other sectors, drop even more dramatically. The third largest sector in terms of generating preferential receipts is, Preparations of vegetables fruits and nuts (Chapter 20), generating an average of almost USD 82 million a year, only about 7% PREFERENTIAL TRADE AGREEMENTS: HOW MUCH DO THEY BENEFIT DEVELOPING ECONOMIES– ISBN-9789264033689 © OECD 2007

128 – Part II. The value of agricultural preferential access of total VPM, while Animal and Vegetable fats and oils (Chapter 15) provide some USD 69 million in VPM a year (6% of the total). In the EBA regime, Vegetables (Chapter 7) is the sector with the most VPM over the three year period, averaging USD 1.8 million per year, (56% of total). This may change in the future however. In 2003, Sugar and confectionary (Chapter 17) became the largest sector (VPM of USD 971 000) making it the second biggest sector over the three year period, even though the sector did not generate preferential receipts for the EBA countries in 2001 and 2002. These two sectors generated almost 86% of total VPM indicating a heavy reliance on a narrow set of export products. In terms of identifiable products, sugar was the single largest product over the three year period, even though it appeared in 2003, followed by onions, and several other vegetables. For the countries in the GSP-DRUGS scheme, the largest sector is Preparations of vegetables and fruit (Chapter 20) with an average of some USD 28 million per year, followed by Live trees (Chapter 6) with VPM averaging almost USD 22 million a year, and Fruits (Chapter 8) with an average of USD 20 million a year. These three sectors represent about 68% of the VPM generated by this regime. On a more disaggregated level, dates figs and pineapples (USD 10 000 per year), tobacco (USD 6 400 per year), and melons (USD 5 700 per year) are among the top VPM generating products. Table II.14. Average value of preference margins by sector and scheme: European Union average 2001 — 2003 GSP

EBA

GSP Drug ACP Thousand USD 971 216 440 425

Total

Chapter 17 Sugars and sugar confectionery

20 697

Chapter 08 Edible fruit, nuts, peel of citrus fruit, melons

35 393

9

20 486

133 292

189 180

Chapter 20 Vegetable, fruit, nut, etc food preparations

37 585

116

27 686

16 273

81 660

Chapter 15 Animal,vegetable fats and oils, cleavage products, etc

56 034

9

979

11 572

68 593

Chapter 10 Cereals

56 729

0

121

11 184

68 034

3 679

4

21 645

26 592

51 920

20 009

201

6 389

24 809

51 409

Chapter 06 Live trees, plants, bulbs, roots, cut flowers etc Chapter 24 Tobacco and manufactured tobacco substitutes

462 310

Chapter 18 Cocoa and cocoa preparations

1 763

0

1 617

39 195

42 575

Chapter 07 Edible vegetables and certain roots and tubers

7 788

1 798

8 851

20 317

38 753

Chapter 22 Beverages, spirits and vinegar

1 198

7

8 269

26 590

36 064

Chapter 21 Miscellaneous edible preparations

6 106

12

4 372

3 141

13 630

Chapter 02 Meat and edible meat offal OTHER *

4 314

3

0

5 795

10 112

9 144

0

327

148

9 619

Chapter 09 Coffee, tea, mate and spices

2 735

43

730

5 310

8 819

Chapter 19 Cereal, flour, starch, milk preparations and products

2 562

45

77

746

3 431

Chapter 12 Oil seed, oleagic fruits, grain, seed, fruit, etc, nes

1 104

0

67

51

1 222

Chapter 04 Dairy products, eggs, honey, edible animal product nes

113

6

722

158

999

Chapter 23 Residues, wastes of food industry, animal fodder

939

0

7

40

986

Chapter 13 Lac, gums, resins, vegetable saps and extracts nes

267

0

8

148

423

Chapter 11 Milling products, malt, starches, inulin, wheat gluten

189

4

39

68

299

63

1

1

174

239

182

0

3

2

187

Chapter 16 Meat, fish and seafood food preparations nes Chapter 01 Live animals Chapter 05 Products of animal origin, nes Total *

4

0

0

0

4

268 596

3 230

102 612

766 030

1 140 469

Agricultural products other than cotton located in chapters above Chapter 24

PREFERENTIAL TRADE AGREEMENTS: HOW MUCH DO THEY BENEFIT DEVELOPING ECONOMIES– ISBN-9789264033689 © OECD 2007

Part II. The value of agricultural preferential access – 129

In contrast, countries in the GSP scheme get most of their preferential receipts from Cereals (Chapter 10) with an average of USD 56.7 million a year, Animal and vegetable fats and oils (Chapter 15), average VPM of USD 56 million a year and Preparations of Vegetables and Fruits (Chapter 20) with an average of USD 37.6 million a year. The VPM for these countries are more evenly distributed across a wider range of products. The top three sectors generated 56% of total preferential receipts. On a more disaggregated level, wheat with average VPM of USD 57 000 per year, palm oil with USD 37 000 a year, and sugar with an average of USD 21 000 are among the most important products. The sector generating the most VPM for the scheme that gets the vast majority of the preferential receipts — the ACP scheme — is Sugar and confectionary (Chapter 7) with more than USD 440 million a year, followed by Fruit Chapter 8) with VPM averaging USD 133 million per year. These two sectors account for 75% of total ACP VPM. On a more disaggregated level, sugar accounts for all of the preferential receipts in Chapter 17 while bananas account for 91% of the VPM in Chapter 8. Preferential receipts drop precipitously for other products. Given the changes that the EU is implementing in its banana and sugar policies,12 the potential to generate comparable VPM in the future is greatly diminished even if preference erosion does not take place. Other important products are; tobacco with an average of USD 25 million per year, cocoa with average VPM of USD 21 million, cocoa butter and powder with average VPM of USD 15 million and rice with average VPM of USD 11 million a year. As for the other Quad countries, the EU operates a TRQ regime for the importation of several products. In addition to the TRQ schedule which is notified to the WTO, the EU also operates TRQ-like regimes for certain ACP, EBA and a few GSP countries for some products. However, unlike the other Quad countries which have tariff schedules with unique tariff lines for in-quota and out-of-quota tariff rates enabling the identification of imports within and outside the quota, the EU’s tariff schedule does not allow easy identification of trade within the quota from trade outside the quota as the same tariff line is used for both. Because of this, the VPM for the EU’s TRQ products were calculated based on the difference between the preferential rates and the MFN out-of-quota rates. This is akin to the method used to illustrate quota rents for each of the two TRQ products in Japan and the US. The reader will recall that this generated very large quota rents, order of magnitudes greater than the VPM generated through the preferential schemes. For sugar and banana imports by the EU, a similar tendency is evident. It is widely recognised that the sugar and banana VPM during the three year period of this analysis were generated by importing within the various quotas while domestic EU prices were considerably above world prices inclusive of in-quota tariff rates. Consequently, calculating the VPM for these products as if the out-of-quota tariff rate is the binding instrument (comparable to the calculations for the quota rents illustrated for the Japanese and US TRQ products) may not greatly exaggerate the VPM for these products.

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130 – Part II. The value of agricultural preferential access

The value of preferential access for the Quad countries What does it all mean? As stated earlier, the purpose of the paper is not to debate the merits or demerits of the preferential schemes. This has been studied extensively elsewhere. The potential preference erosion that multilateral liberalisation may entail is a contentious issue. The purpose of this paper is to compute the potential preferential receipts that the current regimes generate in order to provide an order of magnitude of the implications of preference erosion.13 In addition, there is an attempt to identify countries and sectors (as indicated by the ratio of the VPM to their agricultural exports) that may be more susceptible than others. The assumptions underlying the analysis are predicated towards over-estimating the VPM, and thus, also over-estimating the cost of preference erosion. In the case of the EU, however, as stated above, the tariff and trade data at our disposal were not at the same HS level necessitating the aggregation of the tariff data which has implications for the calculated VPM.14 Table II.15 summarises the average VPM generated by each of the regimes of interest in each of the Quad countries for the 2001 to 2003 period. This table shows that average preferential receipts provided by the Quad during this time totalled USD 1.4 billion per year. The reader is reminded that this value is calculated on assumptions that purposefully err on the side of overestimation. It assumes that the cost of compliance with the programme requirements is trivial under maximum utilisation. Furthermore, it is assumed that exporting countries receive all of the VPM, not sharing them with importing agents. To place this value in perspective, average agricultural imports by the Quad countries during this time totalled USD 147 billion a year, almost USD 90 billion of which were dutiable, of which USD 29 billion were imported from countries with preferential access. Table II.15. Average value of preference margin for each of the Quad and total (2001 – 2003) Canada GSP/GPT LDC/ EBA ACPRents AGOA ATPA/ GSP-drug CBERA/CCCT Total

Japan

23 370 44

US In thousand USD 44 532 54 055 326 110

1 006 24 419

11 933 63 272 89 817 219 187

44 858

EU

Total

268 596 3 230 766 030

390 552 3 709 766 030 11 933 165 884 90 823 1 428 933

102 612 1 140 469

How are the VPM distributed across the various agricultural sectors? A summary of the VPM provided by each of the Quad countries by sector (aggregated to the HS-2 digit level) is shown in Table II.16. This shows that Chapter 17 (Sugar and Confectionary) with a VPM of more than USD 500 million leads the way, followed by Chapter 8 (Fruits) with VPM of almost USD 240 million. These two sectors provide more than half of the total showing the relatively narrow focus of the preferences provided. The VPM in the other sectors drops significantly and the bottom 13 sectors (out of a total of 25) each provide 1% or less of the total. The table also illustrates the dominant role of the EU’s schemes in each sector.

PREFERENTIAL TRADE AGREEMENTS: HOW MUCH DO THEY BENEFIT DEVELOPING ECONOMIES– ISBN-9789264033689 © OECD 2007

Part II. The value of agricultural preferential access – 131

Table II.16. The value of preference margin in the Quad by sector average — 2003

Chapter 17 Sugars and sugar confectionery

Canada

Japan

US In million USD

EU

Total 507.51

10.81

0.00

34.38

462.31

Chapter 08 Edible fruit, nuts, peel of citrus fruit, melons

0.04

1.58

48.00

189.18

238.81

Chapter 20 Vegetable, fruit, nut, etc food preparations

1.12

2.60

17.38

81.66

102.76

Chapter 24 Tobacco and manufactured tobacco substitutes

1.22

0.00

30.33

51.41

82.96

Chapter 06 Live trees, plants, bulbs, roots, cut flowers etc

0.78

0.95

28.47

51.92

82.11

Chapter 15 Animal,vegetable fats and oils, cleavage products, etc Chapter 10 Cereals

2.29 0.34

6.16 0.00

1.48 0.10

68.59 68.03

78.53 68.47

Chapter 07 Edible vegetables and certain roots and tubers

0.38

1.97

25.99

38.75

67.10

Chapter 22 Beverages, spirits and vinegar

1.00

7.97

7.21

36.06

52.25

Chapter 18 Cocoa and cocoa preparations

0.65

0.21

2.22

42.57

45.65

Chapter 21 Miscellaneous edible preparations

0.77

4.53

9.32

13.63

28.24

OTHER *

0.46

10.61

3.95

9.62

24.65

Chapter 09 Coffee, tea, mate and spices

0.34

1.55

1.28

8.82

11.98

Chapter 19 Cereal, flour, starch, milk preparations and products Chapter 02 Meat and edible meat offal

2.32 0.01

3.41 0.00

2.64 1.07

3.43 10.11

11.81 11.19

Chapter 12 Oil seed, oleagic fruits, grain, seed, fruit, etc, nes

0.01

1.98

0.44

1.22

3.66

Chapter 16 Meat, fish and seafood food preparations nes

0.05

0.00

2.81

0.24

3.10

Chapter 23 Residues, wastes of food industry, animal fodder

1.23

0.11

0.10

0.99

2.43

Chapter 04 Dairy products, eggs, honey, edible animal product nes

0.46

0.00

0.70

1.00

2.17

Chapter 11 Milling products, malt, starches, inulin, wheat gluten

0.12

0.00

0.84

0.30

1.26

0.08 0.62

0.28 0.13

0.42

0.78 0.75

Chapter 13 Lac, gums, resins, vegetable saps and extracts nes Chapter 14 Vegetable plaiting materials, vegetable products nes Chapter 05 Products of animal origin, nes

0.00

Chapter 01 Live animals

0.00

Header 52

- Cotton.

Total

0.52

0.00 24.42

0.05

0.00

0.58

0.01

0.19

0.19

1 140.47

1 428.93

0.00 44.86

219.19

0.00

* Agricultural products other than cotton located in chapters above Chapter 24

In terms of the top countries that are the potential beneficiaries of these preferential receipts, Table II.17 indicates the top 30 countries ranked in order of decreasing VPM. The top 30 countries account for USD 1.2 of the USD 1.4 billion in annual VPM (86% of the total). As is evident from the table, the top five countries account for more than USD 416 million, 29% of the total. Also evident is the dominant role the EU preferences have in determining the top beneficiaries and the relative minor role of Japan’s and especially Canada’s schemes. Four out of the top five countries, with more than USD 354 million in annual VPM, benefit almost exclusively from EU programmes. Of the top five, only Brazil receives meaningful preferential receipts from the other Quad countries; about 20% from the US and 12% from Canada. Of the top ten countries, the EU is not the primary source of preferential receipts for only one country, Columbia, for whom the US is the primary source. Furthermore, there are only two countries, Brazil and Thailand that receive meaningful preferential receipts (more than USD 1 million a year) from each of the Quad countries. A few others receive more than USD 1 million a year in preferential receipts from three out of the four countries, including Colombia, Peru, China, Indonesia, Guatemala, Malaysia, and Argentina.

PREFERENTIAL TRADE AGREEMENTS: HOW MUCH DO THEY BENEFIT DEVELOPING ECONOMIES– ISBN-9789264033689 © OECD 2007

132 – Part II. The value of agricultural preferential access Table II.17. Top recipients of preferential access in the Quad Average 2001 — 2003 EU

US

158 557.73

187.71

Canada

Japan

All Quad

0.27

158 748.56

In thousand USD Mauritius

2.85

Ivory Coast

81 022.41

133.15

61.24

8.81

81 225.61

Guyana

61 260.31

450.48

125.58

0.00

61 836.37

Brazil

38 258.78

12 546.43

7 242.33

3 296.38

61 343.92

Jamaica

49 130.14

3 412.54

528.13

4.81

53 075.62

Colombia

15 398.98

34 090.71

1 102.47

687.76

51 279.92 50 595.12

Fiji

50 213.83

377.67

3.62

0.00

Costa Rica

24 686.54

23 183.52

818.23

91.16

48 779.45

Swaziland

47 916.99

403.80

0.33

0.03

48 321.15

Kenya

47 187.26

168.10

1.98

160.42

47 517.76

Cameroon

45 696.83

1.17

0.19

0.00

45 698.20

Dominican Republic

23 964.94

18 435.55

96.11

0.04

42 496.63

Peru

21 572.44

18 914.61

1 502.28

59.80

42 049.14

Thailand

13 099.04

9 020.57

1 151.35 10 806.58

34 077.54

China Ukraine

19 266.39 31 762.53

64.73

2 164.71 11 529.74 30.19 17.31

32 960.85 31 874.76

Ecuador

19 956.02

9 994.34

Indonesia

26 254.22

Guatemala

6 919.17

373.66

79.21

2 070.74

403.83

1 560.59

30 289.37

22 107.04

1 187.93

52.47

30 266.61

1 121.38

7 291.35

Malaysia

21 072.95

Russia

27 627.37

149.75

11.07

Argentina

15 997.33

5 715.29

422.25

30 403.22

29 485.69 27 788.19

4 590.78

26 725.66

Belize

22 017.43

1 906.58

4.21

1.48

23 929.69

India

17 752.22

4 197.35

758.34

601.34

23 309.25

Bahamas, The

22 555.76

231.76

Cuba

20 080.69

Chile

16 475.71

3 212.93

Malawi

11 951.01

3 642.44

6.47

143.60

15 743.52

Zimbabwe Trinidad and Tobago

15 061.61 14 197.26

348.07 899.13

137.51 126.40

3.33 0.07

15 550.52 15 222.85

52.78 1 039.29

22 840.31 0.51

248.62

21 120.50 19 937.27

Although direct comparisons are difficult because of data, product coverage, and other differences, the results reported here are broadly similar with findings from other studies. For example, Hoekman et al. (2006) calculate the value of preferences to LDCs and all developing countries by multiplying aggregate preferential margins from various sources with the value of imports for 2003. They find that the value of preferences (for all products) provided by the Quad is USD 10.3 billion, most of this provided by the EU (51%) and that the LDC’s get a small share of the total (4.7%). They also find that the value of the preferential schemes for Japan and especially Canada contribute relatively little to the overall value. These results for all products are broadly consistent with the findings reported here for the agricultural sector although it appears that the EU’s schemes have a more dominant role in agriculture. Francois et al. find that the EU’s preference (for all sectors) to African LDCs are worth potentially USD 460 million a PREFERENTIAL TRADE AGREEMENTS: HOW MUCH DO THEY BENEFIT DEVELOPING ECONOMIES– ISBN-9789264033689 © OECD 2007

Part II. The value of agricultural preferential access – 133

year, while Brenton and Ikezuki find that EU’s trade preferences for Sub-Sahara Africa are worth 4% of those countries exports to the EU, 1.3% of their exports to the US and 0.1% of their exports to Japan. Candau and Jean (2005), assuming 100% utilisation, find that in 2001 EU trade preferences (all products) for Sub-Sahara Africa were worth EUR 703 million (USD 787 million), while the value for all developing countries of the EU’s non-reciprocal agreements totalled EUR 4.7 billion (USD 5.2 billion). In this study, the overestimation of the value of preferential access based on the assumption of 100% utilisation is also indicated as they provide results based on programmes claimed. The total value of preferential access by the EU based on programme claimed declarations is found to be EUR 3.6 billion (USD 4 billion), more than EUR 1 billion below the value based on full utilisation. Bouët, Fontagné and Jean (2006), report the value of the quota rents associated with preferential tariff rate quotas for all goods in 2001. For the 26 countries with preferential rents worth at least 0.15% of the country’s GDP (indicating susceptible countries), rents totalled USD 1.4 billion. They find that under an ambitious liberalisation scenario, rents are more than halved in many cases causing significant adjustment costs for the economies concerned. Other studies report the value of preferences under alternative erosion scenarios. The baseline value of preferential access is not provided in these studies. WTO reports that under a 40% reduction in preference margins, LDC’s export revenues (all sectors) would drop by USD 530 million a year. Alexandraki and Lankes complimented this analysis by applying the same methodology to developing countries. They report that a 40% reduction in preference margins would lead to a USD 914 million annual drop in the export earnings of the most vulnerable middle-income countries (a total of 17 countries). Another recent study focusing only on agricultural products is from the WTO (Low et al.). The primary purpose of this study was to examine the implications of preference erosion assuming the tariff cutting formula proposed by the G-20 countries using 2003 trade data. As the other two studies, they did not focus on particular schemes but grouped the countries in their sample into two categories developing and LDC’s. They report that following the tariff-cutting as proposed by the G-20, the value of preferential access for developing countries would fall by more than USD 1.1 billion. All these studies conclude that the value of preferential access is captured by a handful of countries, LDC’s capture a very small share of the total, large preferences are given to only a relatively few products, and the EU is by far the largest provider. The European Commission (2006) essentially reaches a similar conclusion, that is, they find that the problem of preference erosion is limited and only an issue for a few developing countries exporting sugar, bananas, vegetables and cut flowers. The affected countries tend to be members of the ACP regime. The results reported here are consistent with the conclusion that the question of preferential access and the potentially deleterious effect of preference erosion is a particular EU issue for only a few commodities and countries. Eighty per cent of Quad country VPM is provided by the EU. Sixty-seven per cent of EU VPM is obtained by countries in the ACP scheme. The top five ACP countries capture 52% of the VPM and sugar and bananas produce about 73% of the ACP VPM. The value of these preferential receipts will fall in the future, however, regardless of the outcome of the negotiations in Geneva, as the EU reforms its domestic sugar and banana markets.

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134 – Part II. The value of agricultural preferential access The dominant EU role in preferential access, along with the importance of the ACP scheme and how the value of this programme is concentrated on a few countries and agricultural products is illustrated in Figure II.16. The top of the figure shows the average value of the preferential access provided by the Quad countries during the 2001 to 2003 period along with the relative contribution by each of the Quad countries. From this figure, one sees that the EU provided an average of USD 1.1 billion a year which is 80% of the total provided by the Quad. Focusing on the EU schemes, the figure shows the relative contribution of each and the importance of the ACP scheme, providing an average of USD 766 million a year or 67% of EU’s total. Zooming in on the ACP scheme, the figure shows two alternative ways of disaggregating the VPM provided by this programme. The split to the right shows value of preferential access obtained by each of the top four countries, the share represented, and the dominant products responsible for the VPM. The split on the left looks at the VPM from the product side. It shows the VPM generated by each of the top three products and which are the major supplying ACP countries. In general the figure shows that the top four countries captured 47% of the ACP preferential receipts by supplying the EU with sugar, bananas and cocoa. It also shows that the top three products, sugar, bananas and tobacco are responsible for 76% of the VPM captured by the ACP countries. The question of preference erosion, has received considerable attention in the DDA discussions. The results presented here suggest that the VPM is not very high when examined within the context of dutiable agricultural imports by the Quad countries which averaged about USD 90 billion a year. Furthermore, most of it (80% of the total) is provided by the EU, and most of the value in the EU is through exports of sugar and bananas by countries in the ACP scheme. The future value of these preferences will be diminished as the ACP scheme is destined to be replaced through Economic Partnership Agreements which are being negotiated between the EU and ACP countries. Even though preferential receipts tend to be concentrated in a few products for a few countries exporting notably to the EU, on the broad measures just presented, it may still be the case that for individual countries, even if the VPM are not large, preference erosion may be a problem as the VPM represent a sizeable share of the value of their exports or their economy. Results shown above indicate that VPM represent a relatively important share of the value of dutiable exports for many countries across the various preference schemes. The measure used in this report was rather narrow, focusing on individual Quad country imports from these countries and the VPM in dutiable imports. The next section examines the VPM for several countries that indicated high dependence from the analysis above, but look at a more general picture of their overall exports and economy and how important preferential receipts are in this context.

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Part II. The value of agricultural preferential access – 135

Figure II.16. The dominance of the EU’s ACP scheme in the value of Quad preferential access and the importance of a few countries and commodities during the 2001 to 2003 period Average Value of Preferential Access: Quad 2001 – 2003 $ 1,429 M

Canada

Japan

$ 24.4 Million

$ 44.8 Million

1.7% of total VPM

3.1% of total VPM

US $ 219.2 Million 15% of total VPM

EU $ 1140.5 Million 80% of total VPM

GSP Drug GSP

EBA $102.6 Million

$ 268.6 Million

$ 3.2 Million

24% of EU VPM

0.3% of EU VPM

9% of EU VPM

Mauritius Mauritius, Guyana, Fiji, Swaziland

Sugar $ 440 Million

21% of ACP VPM

57% of ACP VPM

ACP Cameroon, Cote d’Ivoire, Dominican Republic, Belize

Bananas $ 121 Million 16% of ACP VPM

Of which Sugar 99%

$ 158 Million

Cote d’ivoire

Bananas 41%, Cocoa 21%

$ 81 Million $ 766 M 11% of ACP VPM 67% of EU VPM Guyana

Of which Sugar 85%

$ 61 Million Dominican Republic, Zimbabwe, Malawi, Tanzania

Tobacco 8% of ACP VPM $ 25 Million 3% of ACP VPM

Fiji

Of which Sugar 99%

$ 50 Million 7% of ACP VPM

Top 3 products

Top 4 countries

The importance of the value of preferential margin to selected beneficiary countries This section briefly discusses the VPM generated by the various Quad preferential schemes from the perspective of the beneficiary countries. Rather than focusing on the magnitude of the VPM or as a share of their dutiable exports to each of the Quad countries as already discussed, this section attempts to place them in a broader context of their overall economy, and export profile. The ratio of the VPM to a country’s total agricultural exports provides an indication of their importance to the agricultural sector, while the ratio of the VPM to overall GDP and total merchandise exports indicates their importance to the overall economy. These ratios indicate the diversification of a country’s economy and export sector relative to its agricultural sector. Where the VPM is a sizeable portion of a country’s agricultural sector or exports, that country may be overly dependant on agricultural preferences. Such countries may be susceptible to large adjustments if preferences are eroded. Even in cases where the VPM represents a small share of a country’s agricultural or export sectors, however, it can nevertheless provide important benefits to a particular region or commodity. Resource constraints precluded detailed examination to identify such cases, but where they exist large adjustments may

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136 – Part II. The value of agricultural preferential access be needed. Whether or not such countries are able to adjust is beyond the scope of this study. There are 188 countries with positive VPM in at least one Quad country. But, the importance of preferential access is not the same for all. As already mentioned, the bulk of the VPM accrues to a relatively small number of countries. As shown in Table II.17, the top 30 countries account for 86% of the total. Clearly these countries stand to lose the most when preferences are eroded. The absolute value of preferential receipts may not be a good indicator of country’s susceptibility to preference erosion as it includes countries with agricultural sectors of varying sizes and importance to their economies. Others that have examined the importance of preferences for recipients have used the ratio of the VPM to merchandise exports (Brenton and Ikezuki) or to GDP (Bouët, Fontagné and Jean). However, since this study only looks at agricultural preferences, the ratio of VPM to agricultural trade or to the value of agricultural and food production is more appropriate. However, the ratio of VPM to total merchandise exports and GDP is also included for completeness and as an indicator of the relative importance of agricultural to total trade and economy. Where the VPM, as a share of total agricultural exports is high, those countries are relatively more reliant on preferential exports for a large share of their exports and earnings. How important are preference receiving products relative to other agricultural exports?15 There are 34 countries where the ratio of the VPM to agricultural exports is at least 5%. These are listed in Table II.18 (Annex Table II.1.10 provides the full listing of the countries, the VPM, their agricultural and merchandise exports to the Quad, their GDP, and their agricultural value added). This list includes countries with relatively large VPM (there are 17 countries in this list that are among the top 30 countries listed in Table II.17), but also countries receiving relatively small amounts of preferential receipts. The total VPM for these 34 countries is more than USD 800 million which is 56% of the total. For 21 of these countries, the share of the VPM to agricultural exports is at least 10%. Maybe this is the list of susceptible countries? This set of countries includes some of the countries with relatively high VPM from Table II.17 such as Mauritius with VPM that is half the value of its agricultural exports and Guyana, Fiji, and Swaziland with a ratio of about 40%. The list includes countries with relatively low VPM but relatively high ratio to agricultural exports. Leading this group of countries is St. Kitts and Nevis with VPM representing 54% of the value of its agricultural exports, and it includes Barbados and Nepal with a ratio of 33%, St. Vincent and Grenadines, and St. Lucia with a 25% share. Preferences for this group seem to have a relatively important place in their agricultural exports expanding their foreign exchange earnings. The ratio of the VPM to total merchandise exports is a broader indicator of preference reliance. Although this indicator will be understated in countries that also benefit from preferences in other sectors such as fish, textile and clothing sectors, a relatively high ratio suggests countries that predominantly export agricultural goods with preferences. Looking at the third column of Table II.18, there are several countries with relatively high ratios suggesting that agricultural exports in general and preferential exports in particular, are important to their overall export sector. For seven countries, Swaziland, Fiji, Guyana, St. Lucia, Belize, Barbados, and Mauritius, the VPM as a share of the value of their total merchandise exports to the Quad is greater than 10% suggesting the importance of agriculture to their total exports in general and preferential exports (mostly sugar) in particular. For most of the countries in Table II.18, the VPM as a share of their total merchandise exports to the Quad is less than 5%. This group of countries includes PREFERENTIAL TRADE AGREEMENTS: HOW MUCH DO THEY BENEFIT DEVELOPING ECONOMIES– ISBN-9789264033689 © OECD 2007

Part II. The value of agricultural preferential access – 137

countries with relatively large VPM such as Jamaica and Trinidad and Tobago and countries with relatively small amounts of preferential receipts such as Nepal and Cambodia. This group of countries have a diverse export sector not relying on agriculture or on agricultural preferences and the VPM as a share of their merchandise exports is very small. Table II.18. Beneficiary countries with high dependence on Quad preferential access Average 2001 — 2003

Value of preferential margin (VPM)

VPM as a share of agricultural exports to the Quad countries

VPM as a share of merchanise exports to the Quad countries

VPM as a share of agricultural value added (AVA)

VPM as a share of gross domestic product (GDP)

54% 50% 42% 39% 39% 33% 33% 27% 25% 25% 23% 23% 21% 18% 18% 17% 10% 10% 10% 10% 10% 9% 8% 7% 7% 7% 6% 6% 6% 6% 5% 5% 5% 5%

8% 11% 13% 15% 19% 12% 0% 0% 5% 13% 13% 1% 7% 4% 0% 6% 0% 5% 1% 4% 2% 0% 2% 2% 1% 2% 0% 5% 0% 0% 0% 1% 0% 1%

49% 50% 28% 17% 25% 9% 0% 13% 15% 17% 16% 5% 6% 11% 2% 1% 0% 2% 0% 1% 1% 0% 1% 16% 2% 0% 2% 1% 0% 0% 0% 1% 1% 1%

2% 3% 9% 3% 3% 1% 0% 0% 1% 1% 2% 1% 1% 1% 0% 0% 0% 1% 0% 0% 0% 0% 0% 0% 0% 0% 0% 0% 0% 0% 0% 0% 0% 0%

USD 000 St. Kitts and Nevis Mauritius Guyana Fiji Swaziland Barbados Nepal Trinidad and Tobago St. Vincent and the Grenadines St. Lucia Belize Surinam Dominica Jamaica Republic of Congo Zambia Bangladesh Malawi Mozambique Cuba Cameroon Cambodia Zimbabwe The Bahamas Dominican Republic Tanzania Botswana Kenya Kazakhstan Cape Verde Russia Ukraine Namibia Peru

5 372 158 749 61 836 50 595 48 321 13 493 998 15 223 5 009 6 949 23 930 4 826 2 804 53 076 2 892 11 042 1 459 15 744 4 412 21 120 45 698 181 15 551 22 840 42 497 9 700 2 779 47 518 3 333 29 27 788 31 875 3 082 42 049

Swaziland and Barbados are examples of countries which are heavily reliant on agricultural exports of a few products and preferential receipts. Swaziland’s total merchandise exports to the Quad averaged USD 258 million a year, of which USD 125 million were agricultural products. Most of Swaziland’s agricultural exports were destined to the EU and the vast majority of those were sugar. With preferential receipts almost equalling 40% of the value of agricultural exports, while merchandise exports are only about double those of agriculture it is not surprising that Swaziland has the highest ratio of the VPM to merchandise exports (19%). Similarly in the case of Barbados, its PREFERENTIAL TRADE AGREEMENTS: HOW MUCH DO THEY BENEFIT DEVELOPING ECONOMIES– ISBN-9789264033689 © OECD 2007

138 – Part II. The value of agricultural preferential access major agricultural exports are “Undenatured ethyl alcohol…” to the US and sugar to the EU. Agricultural exports represent a sizeable share of Barbados total merchandise exports, but their value is relatively low while VPM is worth one-third of the value of agricultural exports, resulting in relatively high dependence on preferences. In contrast, countries like Trinidad and Tobago or Cameroon also generate sizeable preferential receipts, which are a hefty share of their agricultural exports. But, these countries have a more diversified merchandise export sector with agricultural goods contributing a smaller share therefore they are less reliant on agricultural preferences. Nepal, one of the LDCs, obtains preferential receipts averaging about USD 1 million a year, representing 33% of the value of its agricultural exports, suggesting high dependence on preferences. However, because merchandise exports are diversified and agriculture is a small part, VPM is a very small share of merchandise exports. An alternative indicator of potential reliance on preferences is the ratio of the VPM to the value of primary agricultural and food production. This is an indication of the value of producing preference receiving produce relative to total value of agricultural production. Unfortunately, this variable is not easily obtainable for most of the countries in the sample. Therefore, agricultural value added (AVA) is used as a proxy. The results should be interpreted cautiously as this is a net value measure (excludes costs of intermediate inputs) and excludes the value of processed food products. In contrast, the VPM is a gross value measure (includes costs of intermediate inputs) and it includes the value of traded processed products. Consequently, the reported ratio may exaggerate the importance of VPM, in particular in countries with a relatively small and undiversified agricultural sector or in countries where most of the VPM is generated through exporting processed products. With this caveat in mind, as a share of AVA, the importance of preferences for several countries stands out. There are 14 countries where the share of the VPM to their AVA is at least 5% (Table II.18). This set of countries also includes countries with VPM that places them in the top 30 while for others it is substantially less. For both Mauritius16 and St. Kitts and Nevis, the VPM represents about half of the value of their AVA, suggesting an agricultural sector with relatively narrow production structure dependant upon preferences. In two other countries, (Guyana and Swaziland), the VPM is at least one-fourth of the value of their AVA, and for another five countries, it is more than 10% of their AVA. Clearly, preference erosion implies substantial adjustments for these countries agricultural and rural sectors (assuming that the VPM is passed through).

Conclusions The potentially deleterious effect on developing countries from the erosion of their preferential access has received considerable attention during the discussion of the DDA. Because the Quad countries are very large importers of agricultural products, and because they operate a variety of non-reciprocal preferential arrangements, their preferential schemes have received increased scrutiny. The Quad countries have received notoriety because their tariff schedules contain some of the highest tariffs on agricultural commodities. What is less well recognised, or at least less well discussed, is that their tariff schedules also contain a sizeable share of duty-free access on an MFN basis. And, these duty-free tariff lines are not scheduled on trivial items. Rather, a sizeable portion of Quad country agricultural imports enter free of duty. During the three year period, 2001 to 2003, 30% of Japan’s agricultural imports of PREFERENTIAL TRADE AGREEMENTS: HOW MUCH DO THEY BENEFIT DEVELOPING ECONOMIES– ISBN-9789264033689 © OECD 2007

Part II. The value of agricultural preferential access – 139

USD 33.5 billion on average entered free of duty; 41% of US’s USD 45.1 billion entered duty-free; 42% of the EU’s USD 56.4 billion, and 46% of Canada’s USD 13.3 billion entered free of duty. Developing countries participate in a fair share of this trade. Since the focus of the paper is on the value of the preferential access given by the Quad countries, their duty-free imports do not play a role and are not much discussed. This is not to suggest that this trade is not valuable to the participants. Exporting produce whether dutiable or not, generates export earnings, creates jobs and improves the welfare of the participants. Nevertheless, the majority of Quad country agricultural imports enter with positive MFN tariff rates, and it is within those products that preferential access matters. The results presented in this report suggest that preferential access to Quad agricultural markets generated, on average, an additional USD 1.4 billion a year to the countries with preferential access. Not a trivial sum, but not very large compared to almost USD 90 billion of dutiable agricultural produce imported each year. The findings in this report are similar to others, namely, most of the VPM generated in the Quad countries are provided by the EU. Of the USD 1.4 billion in preferential receipts, 80% are generated by exploiting the EU’s non-reciprocal preferential schemes, while the US schemes provided an additional 15% of the total. Obviously, preferential receipts from Japan and Canada contribute little to the total. The findings reported here regarding the concentration of preferential receipts with respect to recipient countries and products is also consistent with those from other studies. Preferential receipts provided by the Quad countries are concentrated into a few developing countries. The preferential scheme receiving most of the VPM is the EU’s scheme for ACP countries. This group of countries obtained 67% of total EU VPM of USD 1.1 billion a year. But even within the ACP scheme, only a few countries account for the majority of the preferential receipts. The top five ACP recipients obtained 35% of the ACP VPM. Furthermore, preferential receipts are concentrated in a few countries and commodities. Exports of sugar and bananas by the ACP countries account for 73% of their preferential receipts. From the exporting countries perspective, there seems to be specialisation in their export destinations with regard to preferences used. There are only two countries, Brazil and Thailand that receive meaningful preferential receipts (more than USD 1 million a year), from each of the Quad countries, and a handful of others—China, Argentina, Indonesia, Malaysia, Colombia, Peru and Guatemala - that are able to do this in three out of the four markets. A number of countries are reliant on preferences as their exports tend to be concentrated in a few commodities that are receiving substantial preferences. For 37 countries the VPM is more than 0.5% of their agricultural value added while for 11 of them it is more than 10%. Two countries, Mauritius and St. Kitts and Nevis, the share of the VPM to AVA is around half. In one country, Guyana, the VPM is almost 9% of its GDP. There are 20 countries receiving at least USD 1 million in preferential receipts per annum, where the VPM is more than 10% of the value of their total agricultural exports to the Quad, and for two — Mauritius and St. Kitts and Nevis — the ratio is 50% or more; that is, the VPM is approximately half the value of their agricultural exports. Furthermore, there are seven countries where the VPM is greater than 10% of the value of their total merchandise exports to the Quad. Clearly, for this group of countries, preference erosion may entail considerable adjustments.

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140 – Part II. The value of agricultural preferential access The preferential scheme for LDCs in each of the Quad countries is at least as favourable as any other scheme in terms of product coverage and the size of preferential margins. Nevertheless, LDCs do not capture a significant amount of preferential receipts. None of the top 30 countries in terms of VPM is an LDC. As the trade data shows, LDCs as a group do not export significant quantities of agricultural produce and thus do not seem to take advantage of the preferences provided. Clearly more emphasis is needed in the future to ascertain what problems are preventing these countries from utilising the preferences provided. Calculating the VPM is not an exact science. Several assumptions were made for their calculations. The VPM calculated for this exercise are based on the assumption that compliance costs to meet entry requirements under any of the preferential schemes are zero. Studies suggest that such costs can be as high as 5%. Furthermore, the calculations are based on 100% utilisation. Data from the US and Canada for this study and for the EU from OECD (2005a) and Candau and Jean (2005), suggest that utilisation rates, although high, are not 100%. Furthermore, the data for Canada and the US suggest that at times, countries apparently forsake the opportunity to gain preferential receipts by exporting preference-eligible products through the MFN regime. This is circumstantial evidence that compliance costs are positive and that there may be other issues in the architecture of the various schemes that dissuade their full use. Some information is lost when the trade and tariff data are merged and in the case of the EU, a little more information is lost when the tariff data are aggregated in order to merge them with the trade data. Finally, the assumption is that the VPM are “captured” or accrue to the exporting countries, an assumption that is most likely not true in many cases. On balance, the bias of the assumptions was to over rather than under-estimate the VPM. Therefore, given that the value of preferential receipts are most likely overstated and that not all accrue to the exporting countries, analysis of the effects of preference erosion will likely overestimate the costs. The results further indicate that the question of preferences and their erosion may not be a general issue but one that is of a more pressing issue for a handful of countries only, mostly in the ACP scheme and mostly exporting sugar and bananas. For those countries, it’s obvious that reduction of preferential receipts in the future as MFN tariffs on all products are reduced and as the EU is reforming its sugar and banana policies may create economic adjustment problems. In any case, the ACP scheme is destined to be replaced through the Economic Partnership Agreements. Part II identifies the countries receiving the largest VPM in total and in each of the Quad countries and the commodities that are generating those receipts. This overview, however, does not allow a complete response to the question for which countries and commodities preference erosion may cause problems. This is because the VPM may be large in absolute value but represent a minor part of a country’s agricultural sector. On the other hand, the VPM may be small from the perspective of Quad country imports, but may be high when compared to the value of production in the beneficiary country. In such cases, preference erosion may have stronger consequences for the country concerned and may require adjustments beyond the agricultural sector. In addition, this study has not evaluated the broader question concerning the impacts of preference regimes and of the erosion of preferences on the welfare of beneficiary countries. Such questions are beyond the scope of the present study and could only be addressed in further work to evaluate the importance of preferences at the disaggregated product level for each of the beneficiary countries.

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Part II. The value of agricultural preferential access – 141

The VPM calculated in this study represent an upper bound on the possible costs of totally eliminating non-reciprocal preferences. Although preferential margins will erode with multilateral liberalisation, they will not be eliminated in the foreseeable future. The erosion of the preferential margins will depend upon the agreed modalities. Moreover, tariffs will fall gradually over time, giving countries the time to adjust. Finally, although the focus of the paper is on the potential costs, many studies have shown that multilateral liberalisation leads to overall welfare gains. Even among countries where preferences are eroded, benefits through expanded exports in other sectors can lead to overall gains. But, for LDCs that are not meaningfully engaged in trade, preferences have not yet given them many benefits. Therefore, erosion may not be an issue for these countries, and programmes that address their supply constraints may provide more meaningful assistance.

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142 – Part II. The value of agricultural preferential access

Notes 1.

The terms the value of preferential access, preferential receipts, and the value of preference margin (VPM) are used interchangeably in this report to indicate the additional revenue beneficiary countries potentially receive from their exports relative to non-beneficiaries.

2.

For the trade data, this period is chosen because it brackets the period of the tariff data and 2003 was the latest year with complete data for all countries at the time of the analysis. Incorporating earlier years risks mismatches with the tariff data as countries often change the HS nomenclature especially at the HS-8 or HS-9 digit level of this analysis.

3.

All values in the report are expressed in US dollars.

4.

EU imports exclude intra-EU trade.

5.

We also report below on the value of preferences based on a dataset provided by the OECD’s Trade Directorate. This dataset includes only imports from developing countries but contains information on which preferential programme was claimed by the exporter.

6.

The calculation is based on the margin between the in-quota and the out-of-quota tariff rates times tariff-line imports and assumes that the out-of-quota tariff rate is binding and that there is no water in the tariff. These assumptions tend to lead to an over-estimation of the quota rents. The estimation is not intended as the “true” value of the quota rent but is provided only as an indication of the order of magnitude of the difference between the value of preferential margins provided through the nonreciprocal schemes and the potential quota rents from the TRQ regime.

7.

The ATPA scheme ended in 2001 but was renewed in August 2002 (OECD, 2005a). Programme request during these two years may be skewed and the larger value for 2003 may be a truer indication of the value of this scheme.

8.

For the ATPA countries the use of the GSP or MFN scheme, especially in 2002, may be the result of the temporary suspension of the programme.

9.

As in the Japanese TRQ case, this calculation assumes that the out-of-quota tariff is the relevant instrument and that there is no water in the tariff. To the extent that this assumption does not hold, the calculated quota rents are over-estimated.

10.

In 2003 the EU’s EBA programme was still relatively young and countries were adjusting to its use.

11.

In 2003 the EU’s EBA programme was still relatively young and countries were adjusting to its use. Its utilisation and the VPM may increase in the future as countries become more familiar with the requirements.

12.

Starting 1 January 2006, the MFN tariff on bananas is EUR 176/ton compared to EUR 680/ton used for this study, while the EU domestic sugar reference prices are scheduled to fall. For white sugar, the fall is from EUR 631.9/ton in the 2006/07 PREFERENTIAL TRADE AGREEMENTS: HOW MUCH DO THEY BENEFIT DEVELOPING ECONOMIES– ISBN-9789264033689 © OECD 2007

Part II. The value of agricultural preferential access – 143

marketing year to EUR 385.5/ton in the 2009/10 marketing year. The reference price of raw sugar is scheduled to drop from EUR 496.8/ton to EUR 319.5/ton during the same time period. 13.

The study does not assess the welfare effects of preference erosion on the beneficiary countries.

14.

The EU tariff data at our disposal is at the HS-10 digit level whereas the trade data is at HS-8. To merge the trade and tariff data therefore, a simple average tariff rate for each HS-8 trade line was calculated. This procedure can lead to an over or underestimation of the VPM depending upon whether the preference margin at the HS-10 digit level for lines that are within the same HS-8 digit level are very different from each other and whether most of the imports are under the largest or smallest margin. Since the trade data are not detailed enough, it is not possible to know the overall direction of the calculated VPM. But, a cursory examination of the tariff data at the HS-10 digit level suggests that the relevant margins are usually similar suggesting that the calculated average margin is not overly distorted.

15.

Ideally, the trade information would be based on agricultural and total merchandise exports as reported by the exporting country. Unfortunately, export data for many of the developing countries that meet the dependence criteria are either not reliable or they are missing. Therefore, for the computations below, what is referred to as exports from developing countries are imports as reported by each of the Quad countries and exports to world are total imports by the Quad. Clearly, when reference is made to the ratio of the VPM to total exports (agricultural or otherwise) to the extent that these countries export significant products to non-Quad countries, this ratio will be overstated. However, since the Quad countries are large importers of agricultural and other products, the ratio may be reasonable.

16.

As indicated above, this measure may be misleading for countries with an agricultural sector that is a small share of the economy and is reliant on the production of only a few commodities. For example, for Mauritius AVA in 2003 was 6.3% of GDP while the sugar industry contributed 4.3% to the GDP.

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Annex II.1. Methodology and data for preferential rents – 145

Annex II.1 Methodology and data for preferential rents

The methodology and data used to estimate preferential rents is presented. Unfortunately, data problems that are ubiquitous in this area continue to confound an assessment based on actual utilisation. As stated in OECD (2005a), data on actual utilisation of the various preferential schemes are difficult to find for the Quad with the exception of the US. Therefore, like other studies (OECD, 2004; Alexandraki and Lankes; Low et al), the analysis is based on the assumption that eligible countries fully utilise their preferences. For agricultural products, when all preferential programmes are taken into account, utilisation rates are very high (OECD, 2005a). They are not 100%, however. The 100% utilisation assumption therefore, will over-estimate the value of preferences and as noted by Amiti and Romalis, will likely over-estimate the costs of preference erosion. There are other assumptions that underpin the analysis that also may tend to overstate the value of preferential access. These assumptions are deliberately chosen to provide an upward bias to the calculations in this report, thus providing the maximum potential value of preferential margin (VPM) in order to provide an upper limit on their value and potential magnitude of potential preference erosion for affected recipients. In reality, the degree of the problem may be less severe and in the subsequent modelling application an attempt will be made to capture the appropriate domestic incentive price. The tariff data used for this analysis are described in OECD 2005b. The sources for the data are Agricultural Market Access Database (AMAD), the World Integrated Trade Solution (WITS), the United Nations Conference on Trade and Development Trade Analysis Information System (UNCTAD-TRAINS), and government sources. US agricultural preferential tariff data were provided by ERS from the US International Trade Commission’s database. These were combined with information from AMAD. Information for Canada’s preferential tariffs was obtained from UNCTAD -TRAINS and the WTO as provided through WITS and AMAD. For Japan, data was taken from AMAD and WITS. EU tariff data were provided by Mr. Gallezot who obtained them from the Integrated Tariff of the European Communities (TARIC, DG Taxation and Customs Union). The use of the TARIC database is justified here on two grounds. First, it is the official EU tariff database on which Official Journals are based, and second, and more importantly, it contains all the data relating to the regulation of preferential agreements. The TARIC database contains the tariffs currently in use (specified at the 10-digit level) whereas EU’s import data found in WITS is at the 8-digit level. The tariff data therefore were aggregated to the 8-digit level taking a simple average of the tariffs in order to merge them with the trade data. This procedure can lead to an over or under estimation of the EU’s VPM depending upon whether the preference margin at the HS 10-digit level for lines that are within the same HS-8 digit level are very different from each other and PREFERENTIAL TRADE AGREEMENTS: HOW MUCH DO THEY BENEFIT DEVELOPING ECONOMIES– ISBN-9789264033689 © OECD 2007

146 – Annex II.1. Methodology and data for preferential rents whether most of the imports are under the largest or smallest margin. Since the trade data are not detailed enough, it’s not possible to know the overall direction of the calculated VPM. A cursory examination of the tariff data at the HS-10 digit level suggests, however, that the relevant margins are usually similar suggesting that the calculated average margin is overly distorted. As explained in OECD (2005b), specific tariffs were converted to their ad valorem equivalent using world unit values. All tariff data are for the year 2002. Trade data at the tariff line level and tariff data for each of the Quad countries are combined for this analysis. In order to minimise distortions that a one year examination of trade may provide, we use three year trade data for each of the Quad countries, centred around 2002. The last year, 2003 was selected because at the time of undertaking the analysis, it was the latest year with complete trade data. Furthermore, as described in Annex II.2, the further one goes away from the year 2002, the year of the tariff data, the greater the likelihood that trade data will be missed as countries often change their tariffline nomenclature beyond the 6-digit level. Any selected period suffers from some shortcomings since in a dynamic world, things change and no one period is “typical”. For example, during the period covered by the analysis, the US ended the ATPA scheme in 2001, but renewed it in August 2002. In 2003 the EU’s EBA programme was still relatively young and countries were adjusting to its use and its utilisation may increase in the future1, and it is before the EU enlargement. For these reasons, a three rather than a one year period was selected. The results are reported for each of the three year to enable the reader to discern yearly fluctuations, but most of the discussion is based on the three year average. Tariffs, including preferential tariffs for the three years, on the other hand are based on the data discussed in OECD (2005b), which are for 2002. Import data at the tariff line level for 2001 to 2003 are obtained from the World Integrated Trade Solution (WITS) for Canada, Japan and the EU. These are tariff line imports at either the 8 or 9-digit level by partner. Information on which programme countries use to gain entrance for their goods is difficult to obtain. The trade data for the EU and Japan at our disposal does not contain this information. Consequently, as others have done, it is assumed that if a country is eligible for a particular preferential scheme, that scheme is used. That is, as stated above, we assume 100% utilisation by each eligible country for each eligible commodity (we do not assume that all items at the tariff line level are eligible as the tariff data allow discrimination between eligible and ineligible lines). Tariff data and trade data for the US are provided by U.S. Department of Agriculture, Economic Research Service. This source is used because in addition to the tariff data, it contains information on tariff line trade flows and indicates which programme was requested by each exporting partner for each flow. In the case of Canada, we received additional data from Finance Canada courtesy of the OECD’s Trade Directorate. As in the case of the US, these data also indicate the programme requested by exporting countries. However, the Canadian data are somewhat limited as they are for the years 2002 and 2003 and include only Canada’s imports from developing countries. Because of these differences in data availability across countries, the same methodology is used in assessing preferential receipts for all Quad countries to assure consistency; that is to say, full utilisation is assumed for all eligible schemes. As discussed below, the methodology employed tends to over estimate the value of preferential receipts generated by the various scheme. However, results for the US and Canada, also report the value of preferential access based on programme requested by the exporting countries. The differences in the results between the two methods provides an indication of the extent that the value of preferential access is overstated for the US and Canada and is an indicator for the biasness of the results for the other Quad countries. PREFERENTIAL TRADE AGREEMENTS: HOW MUCH DO THEY BENEFIT DEVELOPING ECONOMIES– ISBN-9789264033689 © OECD 2007

Annex II.1. Methodology and data for preferential rents – 147

The value of preferential access2 provided by any one of the Quad countries under any one of its preferential schemes is calculated as the preferential margin (the difference between the MFN tariff rate and the preferential rate) times the value of imports at the tariff line level. (1) VPMik = (Timfn – Tik) * Piw * Mik = (Timfn – Tik) * valik Where, VPMik = the value of preferential margin for product i under preference scheme k, Timfn = MFN tariff rate for product i, Tik = preferential tariff for good i in preferential scheme k, Piw = import price for good i, Mik = imports of product i under preference scheme k valik = value of trade flow for good i for preference scheme k. The total value of each Quad country’s preferential schemes is obtained by aggregating across the commodities and schemes, (2) TV = ™k ™i VPMik For any preference regime, the value of preference can be illustrated graphically as in Annex Figure II.1.1. Annex Figure II.1.1. Illustration of preferential rents

Pw(1+ Timfn) D

E

Pw D B

C

PM

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148 – Annex II.1. Methodology and data for preferential rents Annex Figure II.1.1 represents import demand for any product in any of the Quad countries. Pw is the world price and Pw(1+ Timfn) represents the domestic price for the good given the ad valorem MFN tariff rate. In order to make the figure less cluttered, it is assumed that the importing country is a price taker and faces perfectly elastic supply at the world price. With these price conditions, total imports are represented by M. Given the world and domestic prices, the value of imports is represented by the area below the world price and total imports (B + C in the figure) and the government of this importing country collects tariff revenue equal to the area between the world and domestic price and imports (D + E). Assume that the importing country has one preferential access regime for this product which is provided to a selected group of developing countries. For ease of exposition, assume that the preferential tariff rate is zero (this is often the case in the Quad countries for eligible products especially for least developed countries). Imports from the preferential suppliers are represented by PM. The value of imports from the preferred suppliers is represented by area B, while the tariff forgone by the importing country is represented by area D. It is this area (D) that represents the potential value of the preferential access (VPM) provided by the granting country to the preferential suppliers and it is this area that is measured and reported in the report. When dealing with large number of imported products by a large number of countries over several years, it is often more convenient to utilize the value of the trade flows rather than individual price and quantity data. This is the approach taken by most researchers evaluating the value of preference margins (Brenton and Ikezuki; Candau and Jean; Hockman, Nolte et al; Low et al; Alexandraki and Lankes; WTO, 2003). This is also the approach taken for this study. The question then becomes whether the value of the trade flow included the value of the preference margin or whether it is invoiced at world prices. Most of the studies mentioned above assume that the value of the preference margin is not included in the value of the flow. It can be argues, however, that the flow does include the value of the preference, especially for some of the most important preferential flows such as sugar and bananas (Alexandraki and Lanke, Nolte et al.). In this case, the value of the trade flow must be adjusted (Nolte et al.) or use prices explicitly (Alexandraki and Lankes). For this study, it is assumed that the trade flow includes the value of the preferential margin. Consequently, the calculations are based on multiplying the preference margin (Timfn – Tik) by the value of the flow (adjusted by the MFN tariff rate). An alternatively assumption is that the value of the preference margin is not included in the reported trade statistics. With this assumption, the value of preferential access is obtained by multiplying the margin by the value of the unadjusted trade flow. Calculations based on the later assumption were also undertaken. Not surprising, the computed value of preferential access is higher under the alternative assumption. The results (not reported) indicate that for the Quad, the difference between the two assumptions is about USD 900 million a year, with the difference mostly reflected in the results of the EU and mostly for sugar. For TRQ products, preferential receipts are calculated similarly in most cases. For most products the Quad countries do not provide preferential access to the out-of-quota tariff rates. Therefore, calculated VPM are based on differences between the MFN and preferential rates for imports within the quota. For a TRQ product, in terms of Annex Figure II.1.1, Timfn represents the in-quota tariff rate while the assumption that the preferential rate is zero is maintained, generating a preferential margin. This assumes that the in-quota tariff rate is relevant for determining the domestic price. In cases where the

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Annex II.1. Methodology and data for preferential rents – 149

quota or the out-of-quota tariff rate is binding, the calculated VPM based on the difference between the MFN and preferential in-quota rates will be underestimated. An adjustment to the methodology is necessary to calculate the VPM for the EU’s TRQ products. Unlike the other Quad countries where separate tariff lines are used to distinguish the in-quota from the out-of-quota tariff rates, the EU uses the same tariff lines for both rates. Thus when the link between tariff and trade data is made, it’s not possible to identify whether the trade is within or outside the quota in order to calculate the appropriate margin. Furthermore, in some cases, the preferential in-quota tariff rate is higher than the comparable MFN rate because the preferential quota is greater. Continuing the objective to err on the side of over-estimating the value of preferences, the preferential margin is computed by taking the difference between the preferential rate and the out-of-quota tariff rate. This assumes that the EU’s out-of-quota tariff rate is always the relevant rate in determining the domestic price. This implies that the value of preferential margin for some TRQ products, such as sugar or bananas may be overestimated to the extent that there is water in the out-of-quota tariff. Once the VPM is computed, one knows the tariff revenue that the importing country is forsaking, but not where it goes. This is not easily determined and the assumption for this study (as in others such as Alexandraki and Lankes and Low et al, WTO) is that the preferential suppliers receive the foregone tariff (the VPM); an assumption that may not be realistic for all products in each Quad country. Different factors determine the allocation of the VPM between importers and exporters including the importing requirements (whether there is a license, who has the right to the licenses for example), bargaining abilities, and market structure, among others. It is probably under exceptional circumstances such as the EU’s sugar imports from ACP countries, that one can state with some certainty that the exporters receive the bulk of the preferential receipts. In the more general case the VPM are probably distributed between importers and exporters with the share depending on different factors as stated above. Thus, the VPM calculated for this report only represent the possible upper limits as such, but also may overstate the value accruing to exporters. Other assumptions may further over estimate the value of preferential access provided regardless of the beneficiary. For example, if the MFN rate is not what determines domestic price, areas D and E will be overstated. This may happen in cases where there is water in the tariff. In such cases, domestic policies such as intervention or guaranteed prices determine the domestic price while protected behind the wall of prohibitive tariffs, as for example sugar imports to the EU. The domestic price will be below the MFN tariff inclusive world price which means that areas D and E are over estimated. In addition, as noted by Low et al, for any recipient country, the relevant preferential margin may not be the difference between its preferential rate and the MFN rate, but the difference between its rate and the rates of its competitors, both MFN and preferential. Preferential margins based on rates that competitors also face will be lower than the ones based only on MFN rates. Since the preferential margins in this study do not take into account the rates competing countries pay, the value of preferential access will be overestimated. The value of preferential access also depends upon the utilisation rate. As reported, 100% utilisation is assumed. To the extent that preferences are not fully utilised, area D will be overestimated. Data for the US and Canada based on programme claimed for agricultural products reported in the main body of the report and for the EU (for all products from Candau and Jean) suggest that the VPM is over-estimated when full PREFERENTIAL TRADE AGREEMENTS: HOW MUCH DO THEY BENEFIT DEVELOPING ECONOMIES– ISBN-9789264033689 © OECD 2007

150 – Annex II.1. Methodology and data for preferential rents utilisation is assumed. The VPM is 12% higher in Canada, 13% higher in the US and 30% higher in the EU compared to the comparable value based on programme claimed. And, the consequence of preference erosion, the loss of preferential receipts will be overstated if preferential suppliers are not able to expropriate the VPM for themselves but have to share them with agents in the importing country. Finally, the illustration and the calculations presented here assume that qualification to the various schemes is costless, i.e. that there are zero compliance costs. Several studies including Francois Hoekman and Manchin, Candau Fontagnè and Jean, have estimated that compliance costs (for all sectors) may reduce preferential margins by about 3 to 5 percentage points. OECD (2005a), focusing only on agricultural and fish products, estimates that compliance costs can range from 2% to 10.9%. Including compliance costs in the analysis would therefore reduce the value of preferential access as preferential margins as high as 10% may not be utilised.

Notes 1.

The European Commission (2006), using trade data to 2001 to 2005, suggests that LDCs exports to the EU have not increased materially as a result of the EBA, thereby suggesting that the 2003 cut-off may not seriously bias the results of the analysis.

2.

The terms the value of preferential access, preferential receipts, and the value of preference margin (VPM) are used interchangeably here to indicate the additional revenue beneficiary countries potentially receive from their exports relative to nonbeneficiaries.

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Annex II.2. Background information on the value of imported goods by the Quad countries – 151

Annex II.2 Background information on the value of imported goods by the Quad countries

This annex provides some of the background information on the value of agricultural goods imported by each of the Quad countries, a summary of the VPM and other relevant information for the beneficiary countries, and the indicative list of products relating to long-standing preferences submitted by the ACP countries to the WTO. The emphasis of the Annex is to identify the value of goods that face positive MFN tariff rates in the Quad countries, from which non-reciprocal preferential schemes the imports originate, and which are the important sectors. This information is used to determine which preferential schemes potentially garner the VPM, and in which agricultural sectors the potential for preferential margins exist.

Canada Canada’s agricultural (as defined at the WTO) imports in 2001 totalled USD 12.3 billion1 and they rose to USD 14.5 billion in 2003 (Annex Table II.2.1). When the trade data is combined with the tariff data, however, a one-to-one concordance is not always possible as for some trade data the tariff is missing while in other instances for some tariff lines there is no trade. Since calculating the value of preference requires both tariff and trade information, lines where either one is missing are excluded. Retaining only the data with trade and tariff information reduces the sample size.2 The worst case is in 2001 when about 9% of the trade data are excluded whereas the best case is 2002 where only 5% of the trade data is excluded. The value of imports without missing information is USD 11.2 billion in 2001 increasing to USD 13.6 billion in 2003. These are the agricultural imports that constitute our trade dataset and upon which the value of preferential access is determined. Thus, even though some of the trade data is lost when the trade and tariff data are merged, what remains (93% of average trade during 2001 to 2003) is large enough to provide an accurate description of Canada’s imports for the analysis. Annex Table II.2.1. Agricultural imports: Canada, 2001-2003 2001

2002

2003

Average

Million USD Total imports

12 345

13 005

14 524

13 291

Imports without missing tariffs

11 213

12 308

13 553

12 358

Imports with MFN rate = 0

5 164

5 642

6 296

5 701

Imports with MFN rate > 0

6 049

6 667

7 257

6 658

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152 – Annex II.2. Background information on the value of imported goods by the Quad countries The trade data indicate that more than 190 different countries and territories supplied at least one product to Canada in any one of these three years, and that these different suppliers provided more than 1 100 different products (at the HS-8 level) to Canadian consumers. The data suggest, however, that even though many different partners supplied Canada with some imports, Canada’s imports are highly concentrated. The US is Canada’s largest supplier of imported goods, exporting some USD 8.1 billion per year (66% of Canada’s total imports over this period) followed by Canada’s other NAFTA partner, Mexico, a distant second at USD 333 million per year. The top five suppliers provided about 75% of Canada’s imports during the three-year period, while the top 20 partners provided about 91% of all agricultural imports. As was reported in OECD 2005b, a large share (31%) of Canada’s tariff schedule is duty-free, that is MFN tariffs are zero, and these are provided to products with meaningful trade flows. When the tariff and trade data are combined, we find that USD 5.2 billion worth of goods in 2001 entered Canada duty free and their value increased to USD 6.3 billion in 2003 (Annex Table II.2.1). Thus, over the three year period, 46% of Canada’s imports entered duty free. These goods are commercially exchanged and participants capture normal returns. For these imports, however, preferential access is meaningless. In terms of Annex Figure II.1.1, for 46% of Canada’s imports, areas D and E do not exist. It is also useful to examine which dutiable agricultural sectors are imported by Canada and under which preferential scheme. Annex Table II.2.1 shows Canada’s average dutiable agricultural imports during the three year period 2001-2003 at the HS-2 digit level. The table contains information for each of the first 24 chapters (except fish). All other items (other than cotton) above chapter 24 are grouped into an aggregate called OTHER. The first column shows the three-year average while the following columns show which group of countries were the suppliers. For dutiable commodities, Canada’s largest imports are processed agricultural commodities in Chapters 19 to 21 representing about one-third of total imports. As is evident from the table, NAFTA is the largest source of Canada’s dutiable imports in all sectors, (other than Chapter 4), with trade exceeding USD 100 million a year. Countries with non-reciprocal preferences are not very large suppliers to Canada. The largest export sector for the countries in the GPT scheme is Chapter 17 averaging less than USD 200 million a year, while Chapter 22 is the largest sector for the CCCT scheme with an average of only USD 15 million a year.

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Annex II.2. Background information on the value of imported goods by the Quad countries – 153

Annex Table II.2.2. Dutiable agricultural imports by sector and preferential programme: Canada Average 2001 – 2003 Average imports

LDC

CCCT

GPT

MFN

NAFTA

Million USD 911 Chapter 19 Cereal, flour, starch, milk preparations and products 707 Chapter 21 Miscellaneous edible preparations 572 Chapter 20 Vegetable, fruit, nut, etc food preparations 549 Chapter 17 Sugars and sugar confectionery 504 Chapter 10 Cereals 438 Chapter 02 Meat and edible meat offal 368 Chapter 22 Beverages, spirits and vinegar 362 Chapter 18 Cocoa and cocoa preparations 333 Chapter 23 Residues, wastes of food industry, animal fodder 329 Chapter 04 Dairy products, eggs, honey, edible animal product nes 260 Chapter 15 Animal,vegetable fats and oils, cleavage products, etc 248 Chapter 16 Meat, fish and seafood food preparations nes 232 OTHER * 213 Chapter 07 Edible vegetables and certain roots and tubers 166 Chapter 09 Coffee, tea, mate and spices 134 Chapter 06 Live trees, plants, bulbs, roots, cut flowers etc 89 Chapter 11 Milling products, malt, starches, inulin, wheat gluten 87 Chapter 01 Live animals 68 Chapter 24 Tobacco and manufactured tobacco substitutes 61 Chapter 08 Edible fruit, nuts, peel of citrus fruit, melons 18 Chapter 12 Oil seed, oleagic fruits, grain, seed, fruit, etc, nes 5 Chapter 05 Products of animal origin, nes 2 Header 52 - Cotton. Total 6 658 * Agricultural products other than cotton located in chapters above Chapter 24

0.0 0.0 0.0 0.0 0.0 0.1 0.0 0.0 0.0 0.2 0.2 0.4 0.0 0.0 0.2 0.0 1

1.0 1.0 1.0 1.0 15.0 0.0 0.0 0.3 0.0 0.3 1.0 0.4 0.6 0.0 0.0 0.0 0.0 22

40 27 56 191 57 1 11 26 37 26 34 11 13 20 15 58 5 0 18 12 1 0 0 659

94 64 45 106 6 56 104 133 5 202 13 2 43 10 9 39 10 2 16 4 2 0 0 965

777 615 470 251 441 381 239 203 291 100 213 235 176 182 141 37 75 85 34 46 16 5 2 5 015

Japan During the three year period of 2001 to 2003, 204 countries supplied various agricultural products to Japan providing each year about 1400 different products at the HS-9 digit level. Japan’s agricultural imports for 2001 were more than USD 35 billion and imports increased to more than USD 37 billion in 2003 (Annex Table II.2.3). But, even though Japan receives imports from many different countries, the bulk of agricultural imports are provided by a relatively small number of countries. The US is Japan’s single largest supplier of agricultural products, providing more than USD 13 billion per year (37% of total) during the three-year period. China is Japan’s second largest agricultural supplier providing an average of USD 4.2 billion per year (12% of total). The top five suppliers provided on average 67% of Japan’s agricultural imports while the top ten suppliers provided 81% of Japan’s imports. Annex Table II.2.3. Agricultural imports: Japan: 2001 - 2003 2001

2002

2003

Average

Total imports

35 352.52

34 221.33

37 318.82

35 630.89

Imports without missing tariffs

32 600.01

33 123.75

34 636.93

33 453.56

Imports with MFN rate = 0

9 639.83

10 624.41

10 239.01

10 167.75

Imports with MFN rate > 0

22 960.18

22 499.34

24 397.91

23 285.81

USD million

When the trade data are combined with the tariff data (at the HS-9 digit level), as is the case for the other Quad countries, some of the information is excluded. Some tariff PREFERENTIAL TRADE AGREEMENTS: HOW MUCH DO THEY BENEFIT DEVELOPING ECONOMIES– ISBN-9789264033689 © OECD 2007

154 – Annex II.2. Background information on the value of imported goods by the Quad countries lines are eliminated because trade data for those lines did not exist and some trade data were also eliminated as tariffs for those lines were missing. For the analysis only agricultural trade data without missing tariff information is used. Thus, as shown in Annex Table III.2.3, this data set includes agricultural imports valued at USD 32.6 billion dollars in 2001 (92% of total imports), USD 33.2 billion in 2002 (97% of total) while imports in 2003 are valued at USD 34.6 billion (93% of total). Over the three-year period 94% of Japan’s agricultural trade is represented in the study, a sample size sufficiently large to assure that it is representative. In terms of largest suppliers and concentration of supply, there is very little difference whether looking at all trade data or the data without missing tariff information. For Japan, the largest dutiable import sector is Chapter 2 (Meat and edible offal) with more than USD 7 billion a year, followed by three sectors (Chapters 22, 24, and 20) with an average of about USD 2 billion a year (Annex Table II.2.4). Countries in the GSP scheme are important providers of items in Chapters 2, 20, and 7, supplying Japan an average of about USD 1.1 billion a year. Countries in the LDC scheme provide Japan produce worth more than USD 1 million a year in only four sectors (Chapters 7, 8, 2, and 15). Annex Table II.2.4. Dutiable agricultural imports by sector and preferential programme: Japan average 2001 – 2003 Import Chapter 02 Chapter 22 Chapter 24 Chapter 20 Chapter 07 Chapter 08 Chapter 16 Chapter 21 Chapter 19 Chapter 04 Chapter 10 OTHER *

Meat and edible meat offal Beverages, spirits and vinegar Tobacco and manufactured tobacco substitutes Vegetable, fruit, nut, etc food preparations Edible vegetables and certain roots and tubers Edible fruit, nuts, peel of citrus fruit, melons Meat, fish and seafood food preparations nes Miscellaneous edible preparations Cereal, flour, starch, milk preparations and products Dairy products, eggs, honey, edible animal product nes Cereals

Chapter 17 Sugars and sugar confectionery Chapter 15 Animal,vegetable fats and oils, cleavage products, etc Chapter 18 Cocoa and cocoa preparations Chapter 11 Milling products, malt, starches, inulin, wheat gluten Chapter 12 Oil seed, oleagic fruits, grain, seed, fruit, etc, nes Chapter 09 Coffee, tea, mate and spices Chapter 23 Residues, wastes of food industry, animal fodder Chapter 13 Lac, gums, resins, vegetable saps and extracts nes Chapter 05 Products of animal origin, nes Chapter 06 Live trees, plants, bulbs, roots, cut flowers etc Chapter 14 Vegetable plaiting materials, vegetable products nes Chapter 01 Live animals Total * Agricultural products other than cotton located in chapters above Chapter 24

7 105 2 066 2 046 1 902 1 666 1 247 1 035 996 803 768 689 586 489 384 346 315 295 293 82 53 43 42 36 1 23 286

GSP

LDC Million USD 1 049 1.1 222 0.1 13 1 077 0.2 1 055 2.8 377 2.9 764 249 0.1 260 0.0 72 0.1 162 0.0 197 0.0 210 0.0 259 1.0 23 0.1 35 0.0 200 0.9 228 0.7 24 7 0.0 33 0.0 32 0.0 28 0.1

MFN

6 576

6 055 1 844 2 032 825 608 867 270 748 543 695 527 389 278 124 323 280 94 64 58 46 10 9 8 1 16 699

10

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Annex II.2. Background information on the value of imported goods by the Quad countries – 155

United States The US data are from a different source than data for the other Quad countries and contain information on programme request by each trading partner. Thus, for the US, the data indicate the programme requested (not necessarily granted) which is a truer indication of potential VPM generated (it is still the case that information on who actually gets the preferential receipts is not included). However, to preserve consistency with the results for the other Quad countries, the same methodology is used to generate apparent recipients, that is, it is assumed that all preference programmes are fully used. These results are presented first. The VPM based on programme claimed are also provided since they are a better indicator, and as in Canada’s case, provide an indication to the extent the methodology biases the results. In 2001, US imported USD 42.5 billion in agricultural goods which grew to USD 49.9 billion in 2003 (Annex Table II.2.5). During this three year period, 213 different countries or territories supplied various agricultural products to US consumers, providing some 1 800 different products (HS-8 digit level). Although the sources of US agricultural imports are less concentrated than Japan’s or Canada’s imports, it is still the case that a relatively small number of the more than 200 partners dominate trade. The US’s neighbours and NAFTA partners are the largest suppliers. On average, Canada provided USD 10.8 billion (23% of total) and Mexico provided USD 6.1 billion (13% of total) agricultural products imported by the US. The top five suppliers accounted for over half of US imports while the top 20 provided 81% of the total. Annex Table II.2.5. Agricultural imports by the US: 2001 —2003 2001 Total Imports Imports without missing tariffs Imports with MFN rate = 0 Imports with MFN rate > 0

42 540 39 956 16 402 23 553

2002 Million USD 45 474 45 474 18 482 26 993

2003

Average

49 876 49 876 20 074 29 801

45 963 45 102 18 319 26 782

When the trade data are combined with the tariff data (at the HS-8 digit level), as is the case for the other Quad countries, some information is excluded. In this case, this is relevant only for 2001 where by combining the tariff and trade data some USD 2.6 billion in trade (6%) is excluded.3 For the analysis therefore, the trade in 2001 is around USD 40 billion. All of the data for 2002 and 2003 however are retained (Annex Table II.2.5, second row). Thus, as the case for the other Quad countries, the sample size is sufficiently large and representative for the analysis. As reported in OECD (2005b), the US, as the other Quad countries, provides duty free access, on an MFN basis, to its agricultural markets for a sizeable share of its tariff schedule. MFN duty-free access is also given to products with substantial trade flows. How important is trade in duty-free products? In 2001, duty free imports totalled USD 16.4 billion, 41% of total imports. In 2003, total agricultural imports increased as did the value of duty-free imports, totalling USD 20.1 billion (40% of total). During the three year period, duty-free imports averaged USD 18.3 billion per year, about 41% of imports. Dutiable imports, imports where preferential access can provide preferential rents, averaged USD 26.8 billion per year. It is within this group of traded commodities where preferential receipts potentially reside. PREFERENTIAL TRADE AGREEMENTS: HOW MUCH DO THEY BENEFIT DEVELOPING ECONOMIES– ISBN-9789264033689 © OECD 2007

156 – Annex II.2. Background information on the value of imported goods by the Quad countries In the main body of Part II, information on which groups of countries are supplying the various US agricultural imports, based on the methodology for this study is presented. As mentioned, however, US data contains information on the programme that was requested (Annex Table II.2.6). This is a better indicator of the potential VPM, and is presented here to indicate the extent of the bias the assumption of 100% utilisation implies. Based upon the programme request information, the results indicate that the chosen methodology for this study over-estimates the value of imports eligible for the various non-reciprocal schemes. For example, imports under the MFN programme are larger compared to the figures derived from the methodology of the study while imports from programme countries are lower. Dutiable imports entering under the MFN programme average USD 12.5 billion per year, USD 1.6 billion more than computed under our methodology. In contrast, imports requesting the GSP scheme (which includes imports from LDC’s) averaged USD 1.2 billion per year, USD 2.3 billion less compared to the value calculated with the assumptions of this study. Similar differences are evident for the AGOA and ATPA schemes. The data for the CBERA scheme suggest that the differences are less important. These differences may be due to the fact that countries export goods that are excluded from the various programmes (this cause for the discrepancies is picked up below when the value of preferences is calculated) or that countries for a variety of reasons chose not to take advantage of their preferences. In any case, the chosen methodology over estimates the trade that takes place under the various schemes and thus the size of the potential VPM that may be obtained. This is discussed in the main body of the text. This upward bias is the desired outcome of the assumptions in this study which are predicated on producing the largest possible potential VPM in order to avoid the possibility of under-estimating the potential harm from preference erosion. The results for the US and Canada suggest that we have succeeded in providing an upper estimate of the potential VPM generated by the non-reciprocal arrangements. What are the major dutiable import sectors for the US and which preferential programmes are the sources? The largest dutiable import sector, averaging almost USD 4 billion a year is Chapter 22, followed by Chapters 7 and 2 with an average of about USD 3 billion a year (Annex Table II.2.7). Based on the definition of the study, the dominant suppliers of most products are the countries in the NAFTA and MFN programmes. Countries in the GSP scheme have important presence in the supply of items in Chapter 8 and 20 with an average of more than USD 600 million a year and in Chapters 24 and 17 with an average of more than USD 300 million a year.

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Annex II.2. Background information on the value of imported goods by the Quad countries – 157

Annex Table II.2.6. Imports by programme requested: United States, 2001 to 2003 Duty Free

2001

MFN NAFTA CBERA GSP ATPA Israel-US AGOA Jordan-United States Total Duty free Dutiable MFN NAFTA CBERA GSP ATPA Israel-United States AGOA Jordan-United States Total Dutiable

15 246 1 105 26 24 1 0 0 16 402

10 761 9 770 1 262 1 015 586 100 60 23 553

2002 Million USD 18 482 0 0 0 0 0 0 0 18 482

2003

Average

20 074 0 0 0 0 0 0 0 20 074

17 934 368 9 8 0 0 0 0 18 319

12 632 11 140 1 424 1 259 317 110 109 0 26 993

14 175 11 620 1 436 1 528 784 134 122 0 29 801

12 523 10 843 1 374 1 268 562 115 97 0 26 782

Annex Table II.3.7. Dutiable imports by sector and preferential scheme US average 2001 —2003 Average

GSP

GSP-LDC

AGOA

ATPA

CBERA

MFN

NAFTA

Million USD Chapter 22 Chapter 07 Chapter 02 Chapter 20 Chapter 08 Chapter 17 Chapter 21 Chapter 01 Chapter 04 Chapter 06 Chapter 18 Chapter 24 Chapter 15 Chapter 19 Chapter 29 Chapter 10 Chapter 16 Chapter 11 Chapter 12 Chapter 13 Chapter 23 Chapter 09 Chapter 05 Header 52 Chapter 14 Total *

Beverages, spirits and vinegar Edible vegetables and certain roots and tubers Meat and edible meat offal Vegetable, fruit, nut, etc food preparations Edible fruit, nuts, peel of citrus fruit, melons Sugars and sugar confectionery Miscellaneous edible preparations Live animals Dairy products, eggs, honey, edible animal product nes Live trees, plants, bulbs, roots, cut flowers etc Cocoa and cocoa preparations Tobacco and manufactured tobacco substitutes Animal,vegetable fats and oils, cleavage products, etc Cereal, flour, starch, milk preparations and products Organic chemicals. Cereals Meat, fish and seafood food preparations nes Milling products, malt, starches, inulin, wheat gluten Oil seed, oleagic fruits, grain, seed, fruit, etc, nes Lac, gums, resins, vegetable saps and extracts nes Residues, wastes of food industry, animal fodder Coffee, tea, mate and spices Products of animal origin, nes Cotton. Vegetable plaiting materials, vegetable products nes

3 829.01 3 140.04 2 935.85 2 304.96 1 961.40 1 589.24 1 381.64 1 227.56 1 066.73 1 044.47 986.83 911.90 873.94 781.34 670.49 515.05 425.48 362.05 309.30 160.10 144.62 113.49 23.90 16.87 6.07

252.36 73.77 30.89 644.17 679.20 300.09 112.74 0.09 159.86 13.54 86.88 338.86 58.89 43.75 164.16 160.86 175.39 18.82 53.73 36.80 13.47 40.62 1.63 15.49 0.99

26 782.32

3 477.04

0.01 0.08

29.94 3.08

0.18 0.13 0.01 0.02 0.00 0.02 0.05

20.47 47.58 38.95 1.99 0.22 0.04 4.41 2.41 41.89 2.92 0.27 5.82 0.13

0.35 0.01 0.07 0.17 0.15 0.09 0.09 0.43 0.01 0.00

1.87

0.45 1.65 0.27 0.09 1.94 0.10 0.00 0.59 205.21

2.11 111.82 0.01 44.33 48.07 84.20 3.26 0.01 1.76 411.90 5.42 35.99 1.84 5.02 3.27 1.03 0.01 5.45 2.28 0.19 0.03 6.18 0.07 0.00

99.94 137.73 56.70 117.58 381.29 240.95 46.31 0.02 6.01 57.41 1.74 285.96 4.25 11.01 2.21 0.06 0.02 0.52 11.02 6.53 0.01 1.40 1.33 0.02 0.02

3 015.83 308.39 1 665.56 625.91 227.24 313.29 550.50 0.85 751.86 270.52 416.20 135.38 513.50 137.12 447.19 31.53 72.63 119.19 154.27 101.40 14.53 42.93 13.46 1.29 2.00

428.82 2 505.17 1 182.70 852.33 577.90 611.74 666.83 1 226.38 147.19 286.63 474.19 73.46 292.53 584.11 47.66 321.30 177.43 217.52 86.26 14.47 116.48 20.41 7.30 0.07 2.46

774.27

1 470.04

9 932.58

10 921.32

Agricultural products other than cotton located in chapters before to Chapter 24

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158 – Annex II.2. Background information on the value of imported goods by the Quad countries

The EU The EU is the largest importer of agricultural products. In 2001, agricultural imports totalled USD 51.3 billion which grew to USD 66.3 billion in 20034 (Annex Table II.2.8). During this three-year period, 210 different countries or territories supplied various agricultural products to EU consumers, providing almost 2 200 different products (HS-8 digit level). The largest supplier of agricultural products to the EU, averaging USD 7.4 billion per annum is Brazil, representing almost 13% of total imports. The US, with an average of USD 6.8 billion per year (12% of total) and Argentina with an average of USD 3.7 billion per year (6%), follow. Although the number of countries supplying the EU’s import needs is comparable to the number of countries that supply the other Quad countries, EU’s imports are less dependent upon particular suppliers. For example, the top five suppliers provide about 38% of total import needs, and the top 20 providers supply 71% of EU’s import needs, concentration ratios that are lower than for the other Quad countries. Annex Table II.2.8. Agricultural imports European Union 2001 — 2003 2001 Total Imports Imports with out missing tariffs Imports with MFN rate = 0 Imports with MFN rate > 0

51 345 47 441 20 604 26 837

2002 Million USD 55 580 55 580 23 326 32 254

2003

Average

66 348 66 247 26 691 39 556

57 758 56 423 23 540 32 882

When the trade data is combined with the tariff data (at the HS-8 digit level), as is the case for the other Quad countries, some information gets lost. For the EU, as for the other Quad countries, the problem is most severe in 2001 when about USD 4 billion in trade (8%) is excluded from the analysis because of missing tariff information, leaving trade of USD 47.4 billion. The problem does not exist for 2002 and only USD 100 million in trade in 2003 is excluded from the analysis. Thus, over the three year period, an average of 97% of the trade is used, a sample size sufficiently large and representative for the analysis. What are the important items imported by the EU? Annex Table II.2.9 shows that the largest dutiable imports sector is Chapter 8, averaging more than USD 8 billion a year. Average imports drop substantially as average imports in the next three sectors, Chapters 22, 2, and 20, are about USD 3 billion a year. As indicated in the table, countries with non-reciprocal arrangements have a substantial presence in the import market of several produce. The countries in the GSP programme provide imports worth more than USD 1 billion a year in five sectors, and countries in the GSP-DRUGS scheme provide almost USD 2 billion a year in one sector. The largest sector for the countries in the ACP scheme is Chapter 17 with an average of a little more than USD 800 million a year. Imports drop substantially for countries in the EBA programme however. Their most important sector is Chapter 7 with an average of USD 10 million a year.

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Annex II.2. Background information on the value of imported goods by the Quad countries – 159

Annex Table II.2.9. Dutiable imports by sector and preferential scheme European Union average 2001 — 2003 Total

GSP

EBA

ACP

GSP drug

MFN

Other

Million USD 8 104 2 919

1 490 496

0 0

683 357

1 827 75

1 295 1 291

2 809 701

2 892 2 727

1 211 1 165

0 1

91 108

0 212

942 194

647 1 048

2 164 1 951

1 041 471

1 10

41 224

51 102

741 131

289 1 013

1 877 1 493 1 384

1 414 131 444

0 2 2

237 818 235

23 102 51

99 80 468

104 360 185

1 213 1 159

158 102

0 0

1 309

5 331

376 134

673 283

1 137 861 722

154 58 569

0 0 0

38 462 1

53 22 0

369 24 4

523 295 148

570 546

133 169

0 0

5 3

2 5

118 283

312 85

301 261

40 66

0 1

1 91

0 9

134 15

125 79

248 220 65

6 37 15

0 0

0 2 1

0 2 3

11 126 21

231 52 25

61 0 Chapter 05 Products of animal origin, nes Total 32 873 * Agricultural products other than cotton located in chapters above Chapter 24

9 0

5 0

0

35 0

12 0

3 712

2 875

6 892

9 998

Chapter 08 Edible fruit, nuts, peel of citrus fruit, melons Chapter 22 Beverages, spirits and vinegar Chapter 02 Meat and edible meat offal Chapter 20 Vegetable, fruit, nut, etc food preparations Chapter 10 Cereals Chapter 07 Edible vegetables and certain roots and tubers Chapter 15 Animal,vegetable fats and oils, cleavage products, etc Chapter 17 Sugars and sugar confectionery Chapter 24 Tobacco and manufactured tobacco substitutes Chapter 04 Dairy products, eggs, honey, edible animal product ne Chapter 06 Live trees, plants, bulbs, roots, cut flowers etc Chapter 21 Miscellaneous edible preparations Chapter 18 Cocoa and cocoa preparations Chapter 16 Meat, fish and seafood food preparations nes Chapter 19 Cereal, flour, starch, milk preparations and products OTHER * Chapter 23 Residues, wastes of food industry, animal fodder Chapter 09 Coffee, tea, mate and spices Chapter 01 Live animals Chapter 12 Oil seed, oleagic fruits, grain, seed, fruit, etc, nes Chapter 11 Milling products, malt, starches, inulin, wheat gluten Chapter 13 Lac, gums, resins, vegetable saps and extracts nes

9 379

17

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160 – Annex II.2. Background information on the value of imported goods by the Quad countries Annex Table II.2.10. The value of preference margin and other selected statistics for beneficiary countries Average for 2001 to 2003 Value of preference margin

Value of agricultural Value of total trade merchandise trade

Agricultural value added

Gross Domestic Product

USD thousands Mauritius Cote d’Ivoire Guyana Brazil Jamaica Colombia Fiji Costa Rica Swaziland Kenya Cameroon Dominican Republic Peru Thailand China Ukraine Ecuador Indonesia Guatemala Malaysia Russia Argentina Belize India The Bahamas Cuba Chile Malawi Zimbabwe Trinidad and Tobago Honduras Barbados Philippines Zambia Tanzania Ghana Papua New Guinea St. Lucia South Africa Madagascar St. Kitts and Nevis Nicaragua Grenadines Surinam Uganda Senegal Mozambique Pakistan Sudan Ethiopia Poland

158 749 81 226 61 836 61 344 53 076 51 280 50 595 48 779 48 321 47 518 45 698 42 497 42 049 34 078 32 961 31 875 30 403 30 289 30 267 29 486 27 788 26 726 23 930 23 309 22 840 21 120 19 937 15 744 15 551 15 223 13 758 13 493 12 370 11 042 9 700 8 799 7 217 6 949 6 919 6 893 5 372 5 266 5 009 4 826 4 691 4 680 4 412 4 103 3 683 3 607 3 445

317 523 2 042 232 145 933 9 605 639 295 836 2 204 581 129 878 1 877 910 124 979 756 412 467 589 618 435 880 165 3 127 187 6 910 434 626 859 1 341 093 1 876 738 1 055 461 1 207 812 541 454 4 454 521 103 607 1 897 100 317 184 215 644 2 558 569 157 012 185 054 56 676 530 744 41 286 934 770 66 268 145 943 579 401 275 594 27 495 2 000 157 292 894 10 011 205 556 19 777 21 437 179 869 107 386 44 948 303 950 106 977 193 085 1 743 698

1 504 639 2 994 280 474 781 38 497 212 1 199 698 9 179 517 329 615 5 669 890 258 091 1 049 125 1 853 447 4 850 169 4 151 108 39 970 836 295 613 391 4 364 650 4 028 863 37 132 369 3 410 263 52 452 625 51 587 009 10 041 082 189 734 28 604 355 961 701 602 340 11 766 672 293 504 822 336 3 893 974 3 785 771 108 841 24 868 922 199 499 389 538 1 170 423 663 985 51 481 21 749 253 890 969 63 563 839 385 103 330 332 991 269 267 419 430 719 593 5 911 973 537 587 287 125 30 511 615

314 485 2 877 514 222 076 44 642 304 500 206 9 974 931 295 646 1 468 845 192 299 3 977 768 4 538 046 2 265 436 5 805 056 12 334 941 197 506 924 6 249 735 2 070 499 31 873 757 5 189 306 8 619 766 21 289 827 14 843 248 146 164 123 132 007 139 452 2 027 000 2 961 404 707 392 2 670 608 117 485 901 417 149 783 10 837 148 870 239 4 405 879 2 284 792 857 014 41 584 4 987 365 1 431 444 10 904 783 234 34 467 97 754 1 969 338 1 042 987 1 002 320 17 943 879 6 441 786 2 803 298 6 399 486

4 769 738 11 923 400 719 780 491 655 333 8 350 692 81 251 137 1 903 096 16 909 193 1 451 676 13 762 317 10 312 178 19 913 003 56 986 810 128 444 367 1 473 199 333 43 511 733 24 178 653 200 927 233 22 992 053 95 739 723 361 048 500 166 778 067 959 083 528 614 800 5 086 667 30 858 133 * 69 734 797 1 805 187 17 214 920 9 398 783 6 592 516 2 606 440 75 485 123 3 889 628 9 836 748 6 364 324 3 060 766 671 067 131 477 100 4 800 282 356 346 4 092 845 363 580 911 604 5 926 386 5 687 984 4 191 468 75 110 420 15 595 027 6 344 216 195 702 933

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Annex II.2. Background information on the value of imported goods by the Quad countries – 161

Annex Table II.2.10. The value of preference margin and other selected statistics for beneficiary countries: average for 2001 to 2003 Value of preference margin Tonga Guinea Bosnia and Herzegovina Latvia Armenia Estonia Niger Jordan Gabon Burundi Mauritania Antigua and Barbuda Cape Verde Kyrgystan Netherlands Antilles Sierra Leone Samoa Lithuania Afghanistan Eritrea Slovakia Solomon Is Malta Sao Tome and Principe Romania Bermuda Liberia Turkmenistan Djibouti Oman Kuwait Bhutan Syria Somalia British Virgin Island Angola Congo Cyprus Macao Bahrain Equatorial Guinea Central African Republic Mongolia Guinea Bissau Albania Seychelles Qatar Tajikistan Myanmar Cook Islands Brunei Maldive Island Cayman Island Anguila

65 62 55 50 50 47 41 40 36 32 30 30 29 27 26 24 23 22 22 21 17 17 15 14 14 12 10 8 7 7 6 5 5 5 4 4 4 4 4 3 3 3 3 3 3 2 2 2 2 2 1 1 1 1

Value of agricultural Value of total trade merchandise trade 14 578 20 365 26 903 73 519 3 281 76 668 3 393 8 490 1 636 21 178 1 825 5 531 484 4 528 11 733 6 516 1 335 216 169 13 431 1 032 116 245 1 521 8 618 5 649 258 547 1 858 2 217 15 454 1 161 5 809 2 550 216 134 986 1 467 1 188 997 16 398 114 017 1 644 1 069 3 869 8 756 14 637 2 176 20 112 691 234 33 096 18 513 645 372 251 2 196 472

25 412 549 499 655 739 2 415 935 191 885 3 442 022 103 492 665 281 2 364 678 25 562 419 670 273 479 16 163 #N/A 671 897 136 355 12 208 3 196 875 49 268 6 092 10 726 084 #N/A 1 443 296 8 926 11 146 415 135 953 645 368 264 253 6 369 3 148 188 8 619 593 2 368 3 834 111 3 752 111 144 5 593 908 938 243 654 816 2 135 862 952 185 1 666 103 115 867 217 777 8 931 371 819 276 836 6 734 012 82 697 971 635 4 312 2 120 888 151 808 345 439 2 686

Agricultural value added 41 561 797 140 718 520 416 627 636 188 343 758 908 703 244 228 396 620 315 233 238 240 27 789 63 908 628 584 19 609 483 555 38 481 1 014 906 1 756 182 101 937 1 049 256 120 233 96 727 9 950 6 516 969 26 967 237 354 1 039 084 18 461 421 281 191 146 195 627 5 094 286 879 470 11 333 913 433 3 193 221 416 112 0 58 511 181 092 598 599 248 577 119 910 1 247 199 18 803 56 868 337 231 5 175 657 13 387 141 514 54 885 5 093 2 535

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Gross Domestic Product 149 445 3 293 513 5 833 722 9 497 578 2 427 270 7 403 268 2 282 408 9 565 077 5 119 885 637 608 1 184 880 729 383 654 574 1 683 256 2 928 864 910 618 273 238 14 837 813 3 698 082 684 291 25 928 893 242 747 4 177 422 52 258 47 778 363 3 721 519 512 533 4 580 825 596 838 20 617 340 36 996 050 576 561 20 344 593 1 353 030 807 333 11 198 608 5 366 306 11 045 194 6 485 789 8 692 252 2 244 947 1 069 564 1 136 092 213 756 4 773 663 673 137 19 291 483 1 298 707 8 925 066 107 412 4 386 297 652 155 1 525 810 113 706

*

*

* *

* * * * *

162 – Annex II.2. Background information on the value of imported goods by the Quad countries Annex Table II.2.10. The value of preference margin and other selected statistics for beneficiary countries: average for 2001 to 2003 Value of preference margin Algeria Kiribati Marshall Is Nauru Chad Lesotho Palau Montserrat New Caledonia Republic of Korea Andorra

Value of agricultural trade 1 0 0 0 0 0 0 0 0 0 0

24 852 11 687 250 47 860 115 24 90 3 570 4 362 3 159

Value of total merchandise trade 15 655 293 22 809 99 614 6 308 58 141 342 751 23 670 1 949 351 500 280 744 60 279

Agricultural value added 6 195 954 7 765 10 685 5 969 854 011 151 449 3 070 449 56 699 3 303 603 11 474

Gross Domestic Product 59 595 580 53 167 102 938 38 027 2 095 219 846 085 121 833 37 264 3 119 562 11 974 930 1 507 968

*

* * * *

Definitions Agriculture corresponds to ISIC divisions 1-5 and includes forestry, hunting, and fishing, as well as cultivation of crops and livestock production. Value added is the net output of a sector after adding up all outputs and subtracting intermediate inputs. It is calculated without making deductions for depreciation of fabricated assets or depletion and degradation of natural resources. The origin of value added is determined by the International Standard Industrial Classification (ISIC), revision 3. * Source : UN data Source: World Bank national accounts data, and OECD National Accounts data files.

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Annex II.2. Background information on the value of imported goods by the Quad countries – 163

Annex Table II.2.11. Provisional indicative list of products relating to long-standing preferences HS4 0201 0202 0207 0602 0603 0703 0708 0709 0710 0714 0802 0803 0804 0806 0807 0808 0810 0813 0905 1001 1002 1006 1102 1103 1508 1511 1513 1701 1703 1804 1904 2002 2005 2008 2009 2101 2103 2204 2207 2208 2309 2401 2402

HS4 Description Meat of bovine animals, fresh or chilled Meat of bovine animals, frozen Meat and edible offal, of the poultry of heading No 0105, fresh, chilled or frozen Other live plants (including their roots), cuttings and slips; mushroom spawn Cut flowers and flower buds of a kind suitable for bouquets or for ornamental purposes, fresh, dried, dyed, bleached, impregnated or otherwise prepared Onions, shallots, garlic, leeks and other alliaceous vegetables, fresh or chilled Leguminous vegetables, shelled or unshelled, fresh or chilled Other vegetables, fresh or chilled Vegetables (uncooked or cooked by steaming or boiling in water), frozen Manioc, arrowroot, salep, Jerusalem artichokes, sweet potatoes and similar roots and tubers with high starch or inulin content, fresh, chilled, frozen or dried, whether or not sliced or in the form of pellets; sago pith Other nuts, fresh or dried, whether or not shelled or peeled Bananas, including plantains, fresh or dried Dates, figs, pineapples, avocados, guavas, mangoes and mangosteens, fresh or dried Grapes, fresh or dried Melons (including watermelons) and papaws (papayas), fresh Apples, pears and quinces, fresh Other fruit, fresh Fruit, dried, other than that of headings 0801 to 0806; mixtures of nuts or dried fruits of this chapter Vanilla Wheat and meslin Rye Rice Cereal flours other than of wheat or meslin Cereal groats, meal and pellets Ground-nut oil and its fractions, whether or not refined, but not chemically modified Palm oil and its fractions, whether or not refined, but not chemically modified Coconut (copra), palm kernel or babassu oil and fractions thereof, whether or not refined, but not chemically modified Cane or beet sugar and chemically pure sucrose, in solid form Molasses resulting from the extraction or refining of sugar Cocoa butter, fat and oil Prepared foods obtained by the swelling or roasting of cereals or cereal products (for example, corn flakes); cereals (other than maize (corn)) in grain form or in the form of flakes or other worked grains (except flour, groats and meal), pre-cooked or ot Tomatoes prepared or preserved otherwise than by vinegar or acetic acid Other vegetables prepared or preserved otherwise than by vinegar or acetic acid, not frozen, other than products of heading No 2006 Fruit, nuts and other edible parts of plants, otherwise prepared or preserved, whether or not containing added sugar or other sweetening matter or spirit, not elsewhere specified or included Fruit juices (including grape must) and vegetable juices, unfermented and not containing added spirit, whether or not containing added sugar or other sweetening matter Extracts, essences and concentrates, of coffee, tea or maté and preparations with a basis of these products or with a basis of coffee, tea or maté; roasted chicory and other roasted coffee substitutes, and extracts, essences and concentrates thereof Sauces and preparations therefor; mixed condiments and mixed seasonings; mustard flour and meal and prepared mustard Wine of fresh grapes, including fortified wines; grape must other than that of heading No 2009 strength Undenatured ethyl alcohol of an alcoholic strength by volume of less than 80 % vol; spirits, liqueurs and other spirituous beverages Preparations of a kind used in animal feeding Unmanufactured tobacco; tobacco refuse Cigars, cheroots, cigarillos and cigarettes, of tobacco or of tobacco substitutes

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164 – Annex II.2. Background information on the value of imported goods by the Quad countries

NOTES 1.

All values in the report are expressed in U.S. dollars.

2.

Reasons for the discrepancies between import and tariff data is beyond the scope of the paper. A contributing factor is that often the tariff-line nomenclature changes from year to year. This partly explains why there is more trade data missing in 2001 and 2003. This is not just the case for Canada. The data for the other Quad countries exhibits a similar pattern.

3.

The year 2001 is the one most problematic because in 2002 the HS numbering convention was revised eliminating some HS lines and adding others. The tariff data used in the analysis is for 2002 using the newer HS nomenclature.

4.

EU imports exclude intra-EU trade.

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Part II. References – 165

REFERENCES Alexandraki, Katerina, and Hans Peter Lankes (2004). “The Impact of Preferences Erosion on Middle-Income Developing Countries”, IMF Working Paper, WP/04169, September. Amiti Mary, and John Romalis (2006). “Will the Doha Round Lead to Preference Erosion?”, IMP Working Paper WP/06/10, January. Bouët, Antoine, Lionel Fontagné, and Sébastien Jean (2006), “Is Erosion of Tariff Preferences a Serious Concern?” In Agricultural Trade Reform and the Doha Development Agenda, Kym Anderson and Will Martin (eds.), The World Bank. Brenton, Paul. (2003). “Integrating the Least Developed Countries into the World Trading System: The Current Impact of EU Preferences Under Everything But Arms,” Policy Research Working Paper No. 3018, Washington, World Bank. Brenton Paul and Takako Ikezuki. (2005), “The Value of Trade Preferences for Africa” The World Bank Trade Note 21. Candau, Fabian and Sébastien Jean (2005). “What are EU Trade Preferences Worth for Sub-Saharan Africa and Other Developing Countries?” CEPII Working Paper No. 2005-19, December 2005. Candau, Fabian, L. Fontagné, and S. Jean (2004). “The Utilisation Rate of Preferences in the EU”, 7th Global Economic Analysis Conference, Washington, DC, 17-19 June. European Commission (2006), “Preferential Trade in the EU - Making Trade Policy Work for Development: Report on EU Market Access for Developing Countries and the Potential for Preference Erosion. 2003 – 2005. Report from DG Trade of the European Commission to the European Parliament, May. Francois, Joseph, Bernard Hoekman, and Miriam Manchin, (2005), “Preference Erosion and Multilateral Trade Liberalization,” CEPR Discussion Paper No. 5153, London Centre for Economic Policy Research. Grethe, H., Nolte, S., and S. Tangermann (2005), “Evolution, Current State and Future of EU Trade Preferences for Agricultural Products from North-African and Near-East Countries”, Journal of International Agricultural Trade and Development, 2 (1): 109133. Hoekman, Bernard, Will Martin, Carlos A. Primo Braga (2006). “Preference Erosion: The terms of the Debate”, in Trade, Doha, and Development: A Window into the Issues, Richard Newfarmer, editor, World Bank, Washington DC.

PREFERENTIAL TRADE AGREEMENTS: HOW MUCH DO THEY BENEFIT DEVELOPING ECONOMIES– ISBN-9789264033689 © OECD 2007

166 – References Kowallski, Przemyslaw (2005). “The Canadian Preferential Tariff Regime and Potential Economic Impacts of its Erosion”, prepared for the International Symposium on Preference Erosion: Impacts and Policy Responses, Geneva, 13-14 June. Low, P., Piermartini, R. and Richtering, J. (2006). “Non-Reciprocal Preference Erosion Arising From MFN Liberalization in Agriculture: What are the Risks?” WTO Working Paper ERSD-2006-02, World Trade Organization, March, http://www.wto.org/english/res_e/reser_e/ersd200602 e.doc OECD (2002). “Alternative Liberalisation Scenarios and their Impacts on Quota Rents and Tariff Revenues in Selected OECD Agricultural Markets”, COM/AGR/TD/WP(2002)23/FINAL. OECD (2004), “Trade Preference TD/TC/WP(2004)30/FINAL.

Erosion:

Potential

Economic

Impacts”,

OECD (2005), “Preferential Trading Arrangements in Agricultural and Food Markets: The Case of the European Union and the United States”. Paris. UNCTAD. Generalized system of preferences: handbook on the scheme of Canada. UNCTAD/ITCD/TSB/MISC.66, December 2001. UNCTAD, Generalized system of preferences: handbook on the scheme of Japan 2002/2003, UNCTAD/ITCD/TSB/MISC.42/Rev.2 November, 2002. Wainio, J., S. Shapouri, M. Trueblood, and P. Gibson (2005), Agricultural Trade Preferences and the Developing Countries, USDA, Economic Research Service, Economic Research Report No. 6. WTO (2003). “Communication from the International Monetary Fund. Financing of Losses from Preference Erosion”, WT/TF/COH/14. Note prepared by Arvind Subramanian.

PREFERENTIAL TRADE AGREEMENTS: HOW MUCH DO THEY BENEFIT DEVELOPING ECONOMIES– ISBN-9789264033689 © OECD 2007

OECD PUBLICATIONS, 2, rue André-Pascal, 75775 PARIS CEDEX 16 PRINTED IN FRANCE (51 2007 08 1 P) ISBN 978-92-64-03368-9 – No. 55693 2007

Preferential Trade Agreements

Preferential Trade Agreements

HOW MUCH DO THEY BENEFIT DEVELOPING ECONOMIES? This report aims to answer two major questions: 1) How beneficial are the trade preferences provided to developing countries; and 2) what are the implications of possible erosion of these benefits under multilateral trade liberalisation? The report focuses on trade preferences provided by the so-called Quad countries (Canada, the European Union, Japan and the United States) because they have some of the world’s highest tariffs on agricultural commodities.

Finally, it is observed that problems due to preference erosion can be mitigated when a significant share of agricultural imports enters each Quad country with a Most Favoured Nation rate of 0%, and when developing countries participate in a fair share of this trade. Currently, the value of preferential access is provided mostly by the EU and concentrated on a few developing countries and commodities, primarily bananas and sugar. For those few countries that still rely on preferences, benefit erosion can entail considerable adjustments.

Peter S. Liapis H

Preferential Trade Agreements

Findings from this study suggest that although preferential margins will be eroded with multilateral liberalisation, this may be a problem only for certain countries and within specific sectors, and that factors not related to preferential trade schemes may be limiting the exports of the Least-Developed Countries (LDC). The study also finds that the Generalised System of Preferences provides lessgenerous preferential margins and is more limited in product coverage than other programmes. What provides the biggest preferential margins and widest product coverage? For the LDC, the answer is duty-free access.

HOW MUCH DO THEY BENEFIT DEVELOPING ECONOMIES?

HOW MUCH DO THEY BENEFIT DEVELOPING ECONOMIES?

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