Peter Lilley: Trade is crucial if poor countries are to leave poverty behind — here’s what we need to do to help

Trade is crucial, if poor countries are to leave poverty behind. There has been much emphasis on helping poor countries through aid and debt relief, but little attention to the role of trade. Yet almost all the development success stories are countries that have traded out of poverty. It is both hypocritical and self-defeating for rich countries to give aid to developing countries with one hand, while erecting barriers against their exports with the other.

Once Britain has control over its own trade policy, we will be able to choose to use this as an instrument for development. That means combining the best of the EU’s ‘Everything But Arms’ (EBA) arrangement and America’s African Growth and Opportunities Act (AGOA), as well as Canada’s pro-poor trading policies. Because trade is always mutually beneficial, by creating opportunities for others we will benefit ourselves. There are four main obstacles — from the deliberate, to the self-inflicted, and the natural — that have hindered poorer countries from trading out of poverty. Our trade and aid policies should target all of them.

First, we should prune from the EU tariff schedule that we initially inherit, tariffs on goods the UK does not produce — particularly food, clothing, and labour-intensive manufactures.  The EU already grants tariff-free access to all exports from the least developed countries, and preferential access on two-thirds of products from many other developing countries. But these are typically the products that the many poor people in some middle-income countries can most readily export. So, abolition will not merely help some developing countries, but mean British consumers will no longer have to pay artificially high prices to prop up uneconomic producers elsewhere in the EU.

Second, we must simplify the complex rules meaning that countries that are, in theory, entitled to tariff-free access to our market, end up paying tariffs or being excluded by bureaucracy. In particular, Rules of Origin can be unnecessarily complex, restrictive, and onerous. They can, either by accident or design, act as barriers to genuine exports from countries granted trade preferences. In some cases, Rules of Origin are so complex that exporters — particularly those new to international trade — find it more costly to prove compliance than pay the full tariffs. This is one reason why the EU’s EBA agreement has been less successful than America’s AGOA. EBA should allow all goods from the Least Developed Countries into the EU, tariff and quota free. But, since it was introduced, imports from these countries have grown very slowly. By contrast, AGOA, which was introduced at about the same time, but has far more relaxed Rules of Origin, has resulted in more rapid growth of trade. A WTO study has shown that Rules of Origin are not a serious obstacle to trade between developed countries.[1] For us, the costs of complying with rules of origin are ‘negligible’ — they do not even wipe out a 1 per cent tariff preference. Moreover, the EU’s new REX system — which the UK should adopt after Brexit — further simplifies the procedure for declaring origin. Only the initial cost of compliance is significant. But this has a disproportionate effect on trade with developing countries, because it can be difficult and costly to establish the necessary information and proof of origin of components of a product, and the resultant cost will be spread over smaller volumes.

Third, the highest tariffs and trade barriers faced by poor countries are usually those imposed by their equally poor neighbours. These tariffs repress trade, while bureaucratic barriers foster corruption. UK aid policy should offer technical and governance support to help developing countries replace customs duties by other sources of revenue. The support that the Department for International Developmemt has given Trade Mark East Africa has helped to reduce other trade barriers by, inter alia, creating one-stop border posts. This is a model that can be extended more widely. David Cameron gave a boost to African plans for a pan-African Free Trade Area, and the regional building blocks for this are gradually coming together. A post-Brexit Britain could give it a further enormous impetus by offering to negotiate the first pan-African free-trade deal.[2] That would require a geographic waiver from the WTO (which is likely to be forthcoming, as it was for AGOA), and a substantial unilateral element from the UK (which would also benefit the UK economy).

Fourth, we need a fresh emphasis within our aid policy on funding infrastructure — roads, rail, ports, and administration. The more we and other first-world countries implement the steps spelt out above, the greater the opportunities that will be opened up to Low Income Countries to trade out of poverty. But they will only be able to take advantage of those opportunities if they have the capacity to export. They will need the physical capacity to get goods to market. Equally essential are the professional skills and administrative structures that help businesses comply with the requirements of developed countries’ markets-quality assurance, traceability of origin, and so forth. Help in establishing these is essential to making all the changes spelt out above work.

 

[1] New evidence on preference utilization Alexander Keck and Andreas Lendle. World Trade Organization Economic Research and Statistics Division

[2] The Impact of UK’s Post Brexit Trade Policy on Development. Max Mendez-Parra, Dirk Willem te Velde, L Alan Winters. Overseas Development Institute & UK Trade Policy Observatory.

 

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