Analyzing the System of Preferential Tariffs for Least Developed Countries

Abstract

This paper analyzes the rents available from non‐reciprocal preferential tariffs for least developed countries (LDCs) on all exports to the quad countries at the tariff line level. Most of the rents come from the European Union (EU) in clothing and textiles, while the USA and Canada offer few rents and charge significant tariffs to LDCs. We develop a dual economy labor market model that generates an income distribution and simulates the distributional effects of preferences. We find that the benefits of the preferences outweigh any adverse distributional effects. Relative inequality may increase with preferences in some cases, but absolute incomes increase in every case. We conclude that in the absence of multilateral liberalization, preferences are beneficial to some LDCs and expansion of preferences is desirable. In the event of multilateral liberalization, an import subsidy scheme that maintains the rents is the most desirable outcome.