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17 May 2018

Does the EU help or hinder farmers and manufacturers in developing countries?

by Victoria Hewson

Originally published by Brexit Central.

One of the many good things about Brexit is people talking about important issues like our constitution and trade policy. Part of this is a debate that has been sparked about trade with developing countries, whether the EU does a good job with its trade preferences and whether the UK can do better on that front from outside the customs union. The debate goes something like this:

Brexiteer, bursting with excitement at the prospect of free trade: “We need to be outside the customs union to be able to get rid of the tariffs that hold back developing countries from selling into our market.”

Remainer, shimmering with pride at newly obtained knowledge of tariff preferences: “The EU doesn’t impose tariffs on the poorest countries in the world anyway, so being outside the customs union won’t make any difference.”

So who is right? Do the import duties imposed by the Common External Tariff prejudice farmers and manufacturers in Africa, or is the EU a beacon of enlightenment supporting poor countries into its market?

Predictably enough, the answer is quite complicated.

It is true that tariffs are waived for the 50 or so so-called Least Developed Countries (LDCs) under the Everything But Arms (EBA) arrangement, and reduced for other poor countries under the Generalised System of Preferences (GSP). But this assumes that exporters in developing countries actually claim the reduced or zero tariffs that are available.

In reality, complex formalities like rules of origin and side rules on labour and human rights that exceed international standards deter businesses from using a tariff preference. The rules of origin to qualify for EBA for apparel are particularly onerous, and are an example of how tariffs can operate to prevent developing countries form moving up the value chain away from agriculture and commodities (where rules of origin are easier to meet) and into manufactured goods.

Reports on the introduction of the EBA found that it had “no observable effect” on the exports of African LDCs and “a very modest impact on export development in the poorest countries”. A 2011 paper published by the German Council of Economic Experts surveyed all preference schemes in operation (including EBA) and found that while “established to promote economic growth and development of low-income countries by fostering exports to industrialised countries… in contrast to this purpose, we find an overall negative effect… on the exports of alleged beneficiary countries”.

This was because of the economic distortions that the tariff preferences cause in beneficiary economies, as investments are made in pursuit of preferences, rather than what is best for the local economy. The uncertainty and perverse incentives of GSP and EBA are also factors – preferences can be withdrawn or amended at will if the EU changes policy. If countries become more prosperous or if their exports reach a certain level the preferences are withdrawn. This deters long-term sustainable investment.

Clearly the tariff reduction and elimination that will be possible for the UK outside the Customs Union can make a real difference, both unilaterally and by way of agreements with developing countries in more balanced ways that avoid the pitfalls of the EBA and GSP. But as we know, tariffs are only part of the picture.

Developing country exporters are not only deterred by tariff barriers. Their farmers have to compete with highly subsidised domestic production underpinned by the Common Agricultural Policy – and not just in the EU market. Overproduction of milk by subsidised farmers in the EU has led to concerns amongst African dairy farmers that they are being flooded out of their home markets as European producers look for alternative markets.

Perhaps most damaging of all, EU technical regulations such as bans on GM hold back use of innovative solutions that would increase the productivity and safety of African famers, with little scientific evidence that such restrictions are necessary.

While calling for elimination of tariffs on coffee and cotton might seem to be redundant if one accepts at face value that those countries already qualify for zero or very low tariffs, the reality of trade formalities and regulations is that the EBA and GSP in their current forms don’t really help. To do better, with less distortive rules of origin, innovation-friendly technical regulations and reformed agricultural supports, we have to be outside the Customs Union, the Single Market and the Common Agricultural Policy.

So it is not wrong to cite improving trade with developing countries as an opportunity arising out of leaving the Customs Union; but seizing the opportunity will be a complex and multi-faceted process that will test the UK’s commitment to free trade.



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