Leveraging Nairobi for Development
by Bernard Hoekman (Director, Global Economics research area, Global Governance Programme) and Joakim Reiter
1 December 2015
At its 20th anniversary, the 10th Ministerial Conference of the WTO will take place in Nairobi. It will be the first WTO ministerial on African soil, on the continent where the materialization of the promise of trade and development is most critical.
Of course, there is much to celebrate at the WTO's 20th anniversary from a trade and development perspective. Since 1995, the share of developing countries in world trade has increased to some 50%, with South-South trade today accounting for over a quarter of global trade. The group of Least-Developed Countries (LDCs) saw trade expand more rapidly than many other countries, doubling their share of world trade, albeit still at very low levels. The WTO has also vastly expanded its membership, with no less than 33 countries acceding to the organization, even if Liberia will be the first African LDC to manage, by MC10, to complete the process.
On WTO negotiations, the Bali Agreement on Trade Facilitation is an innovative milestone from a trade and development perspective, embodying a new approach to assist developing countries to improve Customs procedures and transit regimes. Implementing that agreement, and, more important, using it to lower domestic trade costs more generally – for example, by improving infrastructural services as well as hard infrastructure – is likely to have very high development payoffs. And, on trade capacity building, the 2005 Aid for Trade initiative has mobilized substantial additional development assistance funding to address trade priorities and supply capacity weaknesses. There is also more focus on regional integration of markets, often a precondition for increasing the ability of firms and farmers in developing countries, and especially landlocked LDCs, to benefit from trade opportunities.
Today, trade is much more an integral element of national development strategies than it was at the birth of the WTO and, vice-versa; development considerations are more prominent in WTO activities.
Yet, while much has been done to make the WTO more supportive of economic development, the membership has not been able to conclude the Doha Development Round negotiations (DDA). Nairobi will not resolve the major issues of the DDA. Deep differences between the key players remain and, possibly, may have increased with the economic crisis. The absence of headway on DDA matters has a real cost. Households and firms around the world, not least in poorer countries, would benefit from reducing trade-distorting subsidies, lower barriers to trade, and less policy uncertainty. What is more, the lack of progress in addressing deep-rooted and long-standing concerns that developing countries have with the current rules governing global trade also undermines their trust in the future agenda of the organization.
Nairobi has one silver lining, however: targeted trade initiatives to assist the poorest countries in the world—the LDCs, the vast majority of which are African countries.
The key elements of these initiatives centre on implementing commitments agreed in previous Ministerials, specifically: (1) to provide LDCs with duty-free, quota-free (DFQF) access to markets; (2) to apply preferential rules of origin that are simple and transparent so that firms can utilize DFQF access; and (3) to provide LDCs with preferential access for exports of services. All of these are about fulfilling past promises: Promises that, if anything, have become all the more important and timely with the adoption of the Sustainable Development Goals.
On DFQF, the goal for Nairobi is to achieve at least 97% coverage. But DFQF is unfortunately contentious. While many countries have achieved this target, some have not. The focal point here is the US, with coverage of only 82.5% according to the WTO secretariat. The reason is that US programs target African LDCs and Haiti, some of which fear for preference erosion, preventing consensus in the LDC group and, thereby, the broader WTO membership. The zero sum nature of trade preferences is a perennial problem —a preference for one country is a tax on other countries, and giving the latter equal preference is seen as detrimental for the former.
The lack of consensus is a great pity and must be overcome. The TPP must be recognized as a potential game changer here. TPP will gradually offer Vietnamese firms DFQF access to TPP markets, both eroding AGOA preferences and giving far better treatment to Vietnam than to Asian LDCs. With TPP, there is really no compelling reason any more for discriminating against Bangladeshi, Nepalese or Cambodian textile exporters. African LDCs and Haiti will anyway have to face tough, if not tougher, competition from Vietnam. Instead of preserving the discrimination against Asian LDCs exporters, the focus should be on measures to address the losses for African LDCs and Haiti arising from TPP and full DFQF.
This can be done in different ways, including through measures in the other areas that are the focus of deliberation in Nairobi.
First, within the context of DFQF access, a concerted effort to remove all tariff-rate quotas on agricultural products in which African LDCs have a comparative advantage would generate new export opportunities. Similarly, AGOA itself is not all-encompassing, with a number of remaining exclusions (mainly agriculture), product-specific quotas or other restrictions.
Second, agreement to simplify and relax preferential rules of origin in a meaningful way will benefit African LDCs by permitting firms to connect to regional and global value chains and import the inputs they need to export. Since these countries often do not have domestic industries that produce needed inputs, liberal rules of origin could help offset disadvantages they have vis-à-vis Asian LDCs, making their products more competitive. There are good ideas by LDCs already on the table: to base preferential rules of origin on the notion of a “single transformation” and to permit adequate value of materials to be sourced from third countries. Bottom-line: rules of origin for LDCs should encourage – not discourage, as the case in many instances today – use of international value chains. Operationalizing this core principle will entail serious technical work, and requires concrete benchmarks to be established that properly take into account the realities and needs of exporters in African LDCs so as to permit them to utilize and benefit from DFQF access to markets.
Third, action is needed to implement and enhance, as well as to improve the capacity to utilize, the market access preferences that have been identified under the services waiver. This should support the process of diversification of exports in African LDCs. UNCTAD research has shown that since 2009 Africa's services sector grew twice as fast as the world average and was the most important driver of growth in 30 out of 54 African countries. So there are reasons for optimism. But much more concerted efforts are needed to unleash LDCs services export potential. This should include a serious effort to monitor the use that is made of the preferences that importing countries make available, and to identify and resolve factors that may preclude the effective utilization of preferential market access opportunities, including through targeted technical assistance and capacity-building.
All of the LDC-priorities should be doable at Nairobi. While the three trade policy initiatives that are on the table are no panacea, they are important for LDCs and for the credibility of the WTO membership. They all constitute elements of the universally agreed targets of Goal 17 of the Sustainable Development Goals. And they play a role in tackling the broader, and more intransigent, issue of persistent high trade and operating costs in LDCs. These costs, for which there are many causes, are substantially higher in low-income countries than they are in other nations.
High trade costs prevent LDCs from effectively participating in international supply chains and production networks, and the dynamic regional cross-border trade and investment flows that have driven income and employment growth in Asia and other parts of the world. This makes the rapid implementation of the Trade Facilitation Agreement particularly important. While it appears that the required threshold for ratification of the agreement (three-quarters of the membership) will not be attained in Nairobi, this does not preclude LDCs from making trade facilitation a development priority and working with development partners to reduce trade costs for their firms at home. Action on this front should include a focus on integrating regional markets so as to support intra-regional trade and specialization. Lowering trade costs is a critical necessary condition for making LDC exports more competitive and enhancing the ability of firms and farmers to benefit from the LDC market access initiatives that are on the table in Nairobi.
It is long overdue for LDCs to properly leverage trade for development. At the very least, Nairobi should deliver on past market access promises for LDCs – complementing what was achieved on trade facilitation in Bali.
Posted also on Ecipe.