Economic Policy Responses to Preference Erosion: From Trade as Aid to Aid for Trade

31 Pages Posted: 14 Oct 2005  

Bernard Hoekman

Robert Schuman Centre for Advanced Studies; European University Institute - Robert Schuman Centre for Advanced Studies (RSCAS); Centre for Economic Policy Research (CEPR)

Susan Prowse

Government of the United Kingdom - Department for International Development (DFID); International Monetary Fund (IMF)

Date Written: September 2005

Abstract

Trade preferences are a central issue in ongoing efforts to negotiate further multilateral trade liberalization. Less preferred countries are increasingly concerned about the discrimination they confront, while more preferred developing countries worry that WTO-based liberalization of trade will erode the value of current preferential access regimes. This tension suggests there is a political economy case for preference-granting countries to explicitly address erosion fears. The authors argue that the appropriate instrument for this is development assistance. The alternative of addressing erosion concerns through the trading system will generate additional discrimination and trade distortions, rather than moving the WTO toward a more liberal, non-discriminatory regime. They further argue that prospective losses generated by most-favored-nation liberalization should be quantified on a bilateral basis, using methods that estimate what the associated transfer should have been and ignoring the various factors that reduce their value in practice (such as compliance costs or the fact that part of the rents created by preference programs accrue to importers in OECD countries). Given that many poor countries have not been able to benefit much from preference programs, a case is also made that preference erosion should be considered as part of a broader response by OECD countries to calls to make the trading system more supportive of economic development. The focus should be on identifying actions and policy measures that will improve the ability of developing countries to use trade for development.

Suggested Citation

Hoekman, Bernard and Prowse, Susan, Economic Policy Responses to Preference Erosion: From Trade as Aid to Aid for Trade (September 2005). World Bank Policy Research Working Paper No. 3721. Available at SSRN: https://ssrn.com/abstract=821427

Bernard Hoekman (Contact Author)

Robert Schuman Centre for Advanced Studies ( email )

Fiesole, Tuscany
Italy

European University Institute - Robert Schuman Centre for Advanced Studies (RSCAS) ( email )

Villa La Fonte, via delle Fontanelle 18
50016 San Domenico di Fiesole
Florence, Florence 50014
Italy

Centre for Economic Policy Research (CEPR)

London
United Kingdom

Susan Prowse

Government of the United Kingdom - Department for International Development (DFID)

1 Palace Street
Warwick CV34 4RA
United Kingdom

International Monetary Fund (IMF)

700 19th Street NW
Washington, DC 20431
United States

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