Trade preferences, where certain countries receive preferential tariff rates, have long been a tool for promoting export diversification and development, particularly for developing and least developed countries (LDCs). The United Nations Trade and Development (UNCTAD)’s Trade Preferences Outlook 2024 report examines the current state of trade preferences and their potential future.

A Historical Overview

The report divides the history of trade preferences into two phases:

• Initial Phase (1964-1994): This period saw the establishment of the Generalized System of Preferences (GSP) and other schemes aimed at providing developing countries with better access to developed markets.
• Second Phase (1995-Present): Characterized by the rise of regional trade agreements (RTAs) and a more complex global trade landscape.

Trade Preferences and Export Diversification

The report investigates the link between trade preferences and export diversification, finding that while preferences can play a role, their impact is influenced by various factors. Diversification is crucial for economic development, reducing reliance on a limited number of products and making economies more resilient. The report’s analysis suggests that:

• Preference margins under schemes like the Quad (Canada, EU, Japan, US) can positively influence export diversification.
• Non-tariff measures (NTMs) can hinder diversification efforts.
• Creative products can play a role in diversification.

The Reality of Trade Preferences Today

The report offers a “reality check” on the current state of trade preferences, highlighting several key issues:

• Preference-Granting Markets: Preference-granting markets are significant export destinations for beneficiary countries.
• Scope for Tariff Advantages: While “nominal” preference margins (the difference between MFN and preferential rates) exist, “effective” preference margins (actual tariffs paid) can be lower.
• Utilization of Preferential Tariffs: Not all eligible exporters take advantage of preferential tariffs, with utilization rates varying across countries and schemes.
• Concentration of Benefits: The benefits of trade preferences tend to be concentrated among a relatively small number of countries and products.
• Global Value Chains (GVCs): Trade preferences can influence participation in GVCs, but rules of origin can be a barrier.
• Non-Tariff Measures: NTMs are a major trade cost and can offset the advantages of tariff preferences.

The Future of Trade Preferences

The report explores the future of trade preferences, considering design, operation, and the broader context of global trade. Key considerations include:

• Design and Operation: Tailoring schemes to LDCs and other developing countries, considering their specific needs and challenges.
• Domestic and International Coordination: Effective coordination is essential for maximizing the benefits of trade preferences.
• Trade Preferences for GVCs: Optimizing preferences to facilitate participation in global value chains.
• Beyond Tariffs: Addressing non-tariff measures, promoting services exports, encouraging foreign direct investment, and facilitating access to technology.
• Development Cooperation: Integrating trade preferences with broader development cooperation efforts.

In conclusion, the Trade Preferences Outlook 2024 provides a comprehensive analysis of the current state and future potential of trade preferences. While preferences can be a valuable tool for promoting export diversification and development, their effectiveness depends on careful design, effective implementation, and a supportive global trade environment. Addressing non-tariff barriers and promoting broader development cooperation is crucial for maximizing the benefits of trade preferences for developing and least developed countries.

Download the Full Report here