Trade and international development

READING TIME 15 mins
Trade and international development

Overview: trade needs to support international development goals

We believe that everyone has the right to feed their families, make a decent living and protect their environment. The Sustainable Development Goals (SDGs) recognise the importance of ensuring trade works to support those aims. But the rich and powerful are pursuing trade policies that put profits before the needs of people and the planet. Communities in developing countries often feel the worst effects of poorly-designed trade policy, from declining labour standards to the collapse of local industries. TJM is calling for trade policy to be designed to explicitly support the development goals of communities in the world’s poorest countries.

The recent UK vote to leave the EU presents an opportunity for the UK to fundamentally rethink its trade and investment policy to support development goals. The government’s decision to opt for ‘hard Brexit’ means that it will need to renegotiate trade relations with all countries, including developing countries. Whilst formal negotiations can’t start until full competence is returned to the UK – probably in April 2019 – the government is already engaged in informal discussions with key trade partners.  The UK will also need to re-establish its position within the World Trade Organisation (WTO).

Securing a beneficial arrangement with the EU and key partners like the US will be the priority for the UK. This means that there is a risk that developing country interests are deprioritised or ignored. However the UK could choose to offer developing countries a better deal than they currently have in EU arrangements.

In depth: what's at stake for developing countries?

In the context of trade negotiations developing countries continue to prioritise: boosting regional trade and value-added production, ending trade-distorting agricultural subsidies, improved market access, a special safeguard mechanism to guard against dumping, a specific agreement on cotton, WTO waivers on intellectual property provisions and public stockholding for food security to allow developing countries to protect against volatile food prices. These issues are explained in more detail below.

  • Boosting regional trade: improving trade links between countries in the same region has for a long time been a priority for developing countries, particularly African countries. Negotiations around the African Continental Free Trade Area (CFTA) and customs union are ongoing. Aims include deeper economic integration, agricultural development and food security. There is growing evidence that good regional trade links are crucial for achieving development goals.
  • Boosting value-added production: developing countries have long recognised that if they are to open up their markets and compete at a global level, they need to be able to diversify their economies and retain more of the value of production in-country.
  • Ending trade-distorting agricultural subsidies: as of early 2016 developed countries are supposed to have eliminated remaining scheduled agricultural export subsidies. So that, for example, the EU binds export subsidies at zero with significant potential benefits for LDC cotton producers. However the gains from this are undermined as many subsidies have in fact simply been transferred to the WTO ‘Green box’ (schedule of permitted subsidies).
  • Duty-Free, Quota-Free market access: on paper there has been significant progress in getting preferential access for developing countries to rich-country markets. Only a small number of tariffs remain (mainly in the US). However tariff levels globally have fallen considerably, reducing the value of these measures for developing countries – this is referred to as ‘preference erosion’.
  • Special Safeguard Mechanism this measure would allow developing countries to protect their economies from import surges which can damage their local economies. Getting such a mechanism incorporated into the WTO is  a long-time priority for developing countries: the G33 submitted a number of proposals to the 2015 WTO ministerial to get progress but nothing was agreed.
  • Cotton: the ‘C4’ group of cotton-producing LDCs (Benin, Burkina Faso, Chad and Mali) have long demanded improvements in market access, reductions in rich-country trade-distorting subsidies and domestic subsidies, and increased development assistance. However progress in this area has been extremely slow.
  • TRIPS permanent waiver: the Agreement on Trade-Related Aspects of Intellectual Property Rights (TRIPS) is a WTO agreement that aims to offer strong intellectual property protections on things like medicines and food, to international companies. A permanent waiver would exempt LDCs from implementation of this agreement, preventing any related hikes in the cost of food or medicines. LDCs have for 20 years been offered only temporary waivers, which means significant negotiating capacity is expended in defending the waiver.
  • Public stockholding for food security – this provision would allow developing countries to maintain stocks of basic foods to protect against volatile global food prices. Countries were hoping for a permanent solution in 2015 but this has yet to be achieved. Successive ministerial meetings have also failed to address the issue of the monetization of food aid  - this is a particular issue for the US and entails the sale of food commodities purchased in and shipped from the United States and sold for local currency in a recipient country by "cooperating sponsors", which are typically U.S.-based non-governmental organizations (NGOs) or recipient governments.

UK trade relationships with developing countries

Developing countries currently benefit from preferential market access to the EU, either under the Generalised Scheme of Preferences (GSP): standard GSP, GSP plus, Everything But Arms (EBA – LDCs only); or Economic Partnership Agreements (EPAs). Immediately following the referendum vote, there were significant concerns regarding the likely impact of Brexit on developing country markets. Uncertainty remains, however it is now clear that the UK’s current intention is to translate EU provisions for developing countries into UK law in the short term. We therefore know that the UK will try to translate GSP and EPA provisions into its own law in the first instance and, at some future point, negotiate new trade arrangements with developing countries. It is unclear whether this is legally feasible or straightforward, or whether developing countries will accept this arrangement.

In terms of its approach to negotiating new trade relationships with developing countries, it is likely that the UK will seek to cover more areas than have traditionally been included in EU negotiations. This includes investment, services, government procurement, regulatory cooperation and a number of other issues which are often referred to as ‘21st century issues’. In the short-term, UK civil servants have indicated that the government’s intention is to transfer EU provisions for developing countries into UK law. However there has been no ministerial statement to this effect, there are also questions about whether this is in fact legally possible and developing countries will agree to it.

The UK’s work on international development via the Department for International Development (DFID) will be reoriented towards a greater focus on trade. DFID already work with the Department for International Trade (DIT) and other departments to look at the development impacts of trade deals.

A long-term strategic assessment is required, including the consideration to replace DfID with a Department for International Trade and Development in order to enable the UK to focus on enhancing trade with the developing world and seek out new investment opportunities in the global race

Priti Patel, Secretary of State for International Development
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The UK is likely to maintain a strong focus on trade facilitation for developing countries, in particular on border administration and infrastructure such as roads and electricity grids. Whilst this can reduce the cost of cross-border trading, there are potentially greater wins for internatinal business than for the poorest communities in developing countries.  The UK has also in the past been committed to a simpler, more flexible system for rules of origin for least developed countries and have been supportive of demands on cotton. However the UK has been less supportive of the proposals on public stockholding for food security and the special safeguard mechanism.

The UK accounts for around two percent of exports of goods from developing countries and four percent of exports from least developed countries. Existing EU preferences save LDC exporters into the UK €385 million per year, non-LDC ACP exporters €205 million and Commonwealth exporters €715 million. For most developing countries, the changes in trade arrangements will have an impact, but a much bigger effect of Brexit will be the fall in value of the pound, which will reduce the value of trade, investment, aid flows and remittances from the UK.

However, there are a group of developing countries for whom the UK represents a significant share of exports: for example Belize: 25% of exports, Mauritius: 20%, Fiji: 15%, Gambia: 14%, Sri Lanka:11%, Bangladesh: 10%, and St Lucia:9%.  

This context means two things: first, the majority of developing countries will feel in a much stronger position when it comes to trade negotiations with the UK (as compared with negotiations with the EU), and it will be much harder for the UK to insist on the inclusion of issues such as servcies or investment or elements, like those in the GSP system, regarding things like governance and human rights. Countries less reliant on the UK may not agree to transition to a UK GSP or EPA as an interim measure because the system has been considered problematic. At the same time, there are a number of countries and sectors for whom it will be important to ensure no loss of and ideally improvements in trade with the UK. These countries will be in a much weaker negotiating position and will need to develop a strategy as soon as possible to ensure they can defend their interests.

UK trade deals with other countries will impact developing countries

UK arrangements with other countries will have an impact on developing countries, for example by reducing the value of preferential arrangements where similar preferences are offered to countries with substitutable products.

Achieving a deal with the EU will be high on the UK’s list of priorities. However this deal will impact on developing countries and as such should be assessed for its development impact. Some of the major issues that could arise include:

  • Diverging rules and standards (rules of origin, product standards, labelling) between the EU and UK, probably over a number of years following formal Brexit, that would create an additional burden of bureaucracy for developing country exporters.
  • Changes in tariffs that might impact on developing country exports passing through one market into another (e.g. Kenyan flowers passing through Dutch flower trading markets).
  • Arrangements between the UK and the EU on issues such as mutual recognition (accepting that standards set in the EU and UK are equivalent in order to reduce border bureaucracy) will also be important – if they are not extended to developing countries they could create further hurdles to exports.

The UK needs to work to ensure these rules are designed to achieve minimum disruption and maximum benefits for developing countries.

UK deals with other partner countries will have implications for developing countries. This is particularly the case for larger developing countries producing highly substitutable or the same products but also applies to advanced economies. Smaller developing countries may experience significant preference erosion and trade diversion if the UK lowers its tariffs with more advanced developing countries. As with the deal with the EU, issues such as mutual recognition will also have significant implications.

The UK will need to undertake impact assessments on all of its deals to minimise negative and maximise positive impacts for developing countries.

These countries typically export a narrow range of products that would not be competitive on the UK market in the absence of preferences. Alternatively put, were the UK to exit the EU without a mechanism in place to safeguard existing preferences, garments and textiles factories in Bangladesh, cane sugar producers in Mauritius, Fiji, and Belize, and smallholder banana farmers in St Lucia could go out of business overnight. As these economies are heavily reliant on external trade, the economic impact of any disruption could be substantial

Emily Jones, University of Oxford
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What is TJM calling for?

TJM will be working with members to ensure that the issues around trade and development are kept on the government’s agenda as it begins the process of renegotiating its trade relations with other countries. This includes engaging with a number of parliamentary processes and raising the issue with MPs.

  • The UK already has competence for investment treaties and could reform them now as the first step towards a more socially just trade and investment strategy.
  • Developing countries should take advantage of the opportunity presented by Brexit to negotiate more beneficial arrangements with the UK than they currently have.

Further information