Nordic Journal of Political Economy · potential gains from duty-free, quota-free access to the QUAD. In the final section, we summarise our arguments and results. Gains from preferential

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Nordic Journal of Political Economy

Volume 29 2003 Pages 3-24

Assessing the Economic Gains of Free Market Access for the Least Developed Countries

in the QUAD

Rune Jansen Hagen Ottar Mæstad

Arne Wiig

49 countries of the world are currentlydesignated as “least developed” by theGeneral Assembly of the United Nations.The combined population of the LeastDeveloped Countries (LDCs) is 637.4million. This amounts to 13.4% of the total

population of all developing countries. Theiraverage GDP per capita is 288 USD, or lessthan a dollar a day (UNCTAD 2002). TheLDCs’ share of world trade has declinedfrom 0.8% in 1980 to less than 0.5% today(WTO 1997). They have also had much

Rune Jansen Hagen*, Ottar Mæstad* and Arne Wiig**

Assessing the Economic Gains of Free Market Access for theLeast Developed Countries

in the QUAD***

* Institute for Research in Economics and Business Administration, Breiviksveien 40, N-5045 Bergen, Norway.Address of correspondence: Ottar Mæstad, SNF/SIØS, Helleveien 30, N-5045 Bergen, Norway. Tel.: +47 5595 96 22. E-mail: [email protected].

** Chr. Michelsen Institute, P.O. Box 6033 Postterminalen, N-5892 Bergen, Norway. *** We thank an anynomous referee as well as participants at a seminar arranged by the Norwegian Ministry of

Foreign Affairs and the conference “Globalisation and Marginalisation” arranged by the Research Council ofNorway and the Nordic Journal of Political Economy for their comments. This paper is based on a report pre-pared for the Norwegian Ministry of Foreign Affairs. Responsibility for the contents rests with the authors, andthe opinions expressed do not necessarily correspond with the views of the Ministry of Foreign Affairs.

The Least Developed Countries (LDCs) are the poorest countries in the world. Theirshare of world trade has declined from 0.8% in 1980 to less than 0.5% today. The purposeof this study is to evaluate the impact on the LDCs of getting duty- and quota-free accessto their main export markets. Our conclusion is that the aggregate benefits are likely to bemodest. The main reasons are (1) that most LDCs presently enjoy quite liberal marketaccess in important export markets, and (2) that the ability of LDCs to take advantage oftrade preferences is limited, due to supply constraints and restrictive rules of origin. JEL-codes: F13, O5

01 NOPEC 29 (1) Jansen Hagen 19.09.03 14:40 Side 3

slower economic growth than other develop-ing countries. The average growth in realGDP per capita over 1990–99 was 1.1% inthe LDCs compared to 3.0% in all develop-ing countries. Thus, the LDCs are laggingbehind. Policies that prevent further margi-nalisation of these countries are thereforemost welcome.

Several initiatives have been taken inrecent years in order to reduce trade barriersfor exports from LDCs. Some of theseinitiatives can be traced back to the WTOMinisterial Conference in Singapore in1996, where the WTO members agreed to aplan of action to favour LDCs, “…includingprovisions for taking positive measures, forexample duty-free access on an autonomousbasis”. The EU recently decided to grant freemarket access for all products except armswithin 2009. Two other OECD countries,Norway and New Zealand, have alsodecided to grant duty-free and quota-freeaccess to all LDCs. The General Director ofthe WTO and the Least DevelopedCountries themselves have proposed to bindall tariffs on their products at zero rates inthe WTO.

The purpose of this study is to evaluatethe economic impact on the LDCs of gettingduty- and quota-free access to their mainexport markets. We concentrate on marketsin the QUAD-countries (the EU, the USA,Canada, and Japan), which represent65–75% of LDC exports. Potential benefitsof duty- and quota-free access to the QUADinclude: (1) Higher prices on existing exportsto the QUAD,1 (2) Price gains from

diverting sales from other markets (otherexport markets or domestic markets) to theQUAD countries, (3) Increased value addedthrough expansion of production.

Our conclusion is that the aggregatebenefits of duty- and quota-free access for theLDCs are likely to be modest, even whenmeasured relative to their present low levelsof income. The main reasons are (1) thatmost LDCs presently enjoy quite liberal marketaccess in important export markets, and (2)that the ability of LDCs to take advantage oftrade preferences is limited, due to supplyconstraints and restrictive rules of origin.2

The benefits for LDCs of improvedmarket access have also been estimated byIanchovichina et al. 2000, Hoekman et al.2001, and UNCTAD 2000b. Of these, onlythe first study uses welfare as the measuringrod. Ianchovichina et al. 2000 find welfareincreases that are larger than ours, but not solarge as to change the conclusion that thebenefits are relatively modest. A majorproblem with this study is that it does not takeinto account existing preferential margins,implying that the welfare gains may beoverestimated. Hoekman et al. 2001 andUNCTAD 2000b measure increases in exportrevenues. Since part of the increase in exportrevenues comes from increased LDCproduction, which entails costs, these studiesoverestimate the change in welfare. Inaddition, they each in their own wayexaggerate the possibilities for expandingexports. The UNCTAD study assumes thatthere are no supply constraints3; Hoekman etal. 2001 ignore the problems caused by

4 Rune Jansen Hagen, Ottar Mæstad and Arne Wiig

1. As we discuss below, consumer welfare in the LDCs might also be affected by price changes. Consumer pricesmay rise or fall depending on domestic policies in the LDCs.

2. All preferential trade agreements need some mechanism to prevent countries other than the intended bene-ficiaries from gaining access at reduced rates of duty. Rules of origin aim at securing that imported products areproduced in a country that is party to such an agreement, and not, for example, simply exported through sucha country.

3. Formally, LDC supply curves are assumed to be infinitely price elastic.


restrictive rules of origin. On the other hand,none of these studies take into account thepotential gains to LDCs from using import-export swaps, that is, satisfying domesticconsumer demand through imports fromcountries not enjoying preferences while at thesame time exporting their own production inorder to take advantage of the preferentialmargins in the QUAD. In this study, we showthat import-export swaps may play a key rolein determining the size of the gains.

The rest of the paper is organised asfollows. In the next section, we outline atheoretical approach to measuring the gainsfrom increased market access on a preferen-tial basis. Based on this approach we provideestimates of the benefits that LDCs mightreap. We then interpret the results andqualify them through an assessment ofvarious other types of barriers that mightprevent these countries from capturing thepotential gains from duty-free, quota-freeaccess to the QUAD. In the final section, wesummarise our arguments and results.

Gains from preferential marketaccess – a theoretical approachWe develop a static partial equilibriummodel in order to assess the potential gainsfrom preferential market access for the LeastDeveloped Countries in the QUAD.

Supply and demandIn the LDCs, a representative consumerconsumes and produces two goods, x and g.4

Only x is internationally traded. We use aquasi-linear utility function u (x, g )=u (x )+g,implying that the demand for x is notaffected by changes in income.5 Normalise

the price of g to one and let pL denote theconsumer price of x in the LDCs.Furthermore, let v (pL) denote the indirectutility function, representing the maximalutility obtainable when the price is pL. ByRoy’s Identity, the demand for x in the LDCsis defined by d (pL)≡ –v’ (pL). Good x isproduced by firms that maximise theirprofits taking prices as given. Let π(qL)denote the maximum profit for arepresentative LDCs producer as a functionof the producer price qL. By Hotelling’sLemma, the supply of x in the LDCs isdefined by s (qL)≡ π’ (qL).

Good x is internationally traded. Inaddition to the LDCs, there are two tradingregions: the QUAD (Q) and the rest of theworld (R). Let mi=mi (pi,qi ) be the net importdemand in region i (i=L,Q,R), defined as afunction of the producer and consumerprices in the respective regions. mi may beeither positive (for a net importer) ornegative (for a net exporter). Let tij denotethe import tariff levied by region i on itsimports from region j. Preferential treatmentof the LDCs in the QUAD implies thattQL<tQR. Without loss of generality, weassume that there are no tariffs in region R(i.e., tRj=0). We also assume that the LDCsdo not implement preferential tariff regimes(i.e., tLQ= tLR ≡tL).

The price level in rest of the world willhenceforth be denoted by p and will bereferred to as the “world market price” ofgood x. In the QUAD, which is assumed tobe a net importer of x, the price of x willexceed the world market price by the importtariff tQR. Hence, pQ =p+tQR . Both in theQUAD and in the rest of the world producerprices equal consumer prices. The respective

Assessing the Economic Gains of Free Market Access… 5

4. Hence, issues of income distribution are ignored.5. This is reasonable in a partial equilibrium model when the good that we study accounts for only a small frac-

tion of total consumption.


import demand functions can then bewritten as mR =mR (p) and mQ=mQ(p +tQR ).

In the LDCs, preferential treatment maycreate a wedge between producer prices andconsumer prices. LDC exporters mustchoose between exporting to the rest of theworld and receive the world market price p orexport to the QUAD and receive the pricepQ –tQL. In general, the producer price in theLDCs is given as qL= max(p,pQ –tQL). Anytrade preferences in the QUAD will make itprofitable to export everything to thatregion: pQ –tQL =p+tQR –tQL>p when tQL <tQR .6

The producer price in the LDCs thenexceeds the world market price by thepreferential margin, i.e., qL =p+tQR –tQL.

Any preferential trade agreement mustinclude some kind of rules of origin in orderto prevent third countries from takingadvantage of the preferential margin. Sincethere are rules of origin, it is possible tomaintain a consumer price below theproducer price in the LDCs. LDCconsumers may import good x at the worldmarket price p plus any import tariffsimposed by the LDC countries tL .Alternatively, they may buy the good fromdomestic producers at price qL . Theconsumer price in LDCs is then pL =min(p+tL, p+tQR –tQL).

EquilibriumTwo different types of equilibria may arise:(1) When the LDC import tariff is largerthan the preferential margin tL >tQR –tQL,LDC consumers will find domesticallyproduced goods cheaper than importedgoods. LDC production will then first satisfydomestic demand and any surplus will beexported to the QUAD. (2) When the LDC

import tariff is smaller than the preferentialmargin tL <tQR –tQL, LDC consumers will findimported goods cheaper than domesticallyproduced goods. The LDCs will then exportall their production to the QUAD andimport what they need for domestic con-sumption from the world market. This isknown as an “import-export swap”.

In equilibrium, world net imports mustbe zero. The equilibrium conditions for thetwo different types of equilibria can be statedas follows:

(I) Without import-export swap:

mQ(p+tQR)+mR(p)+d (p+tQR – tQL)

–s(p+tQR – tQL)=0

(II) With import-export swap:

mQ(p+tQR)+mR(p)+d (p+tL)–s(p+tQR – tQL)=0

These conditions define the world marketprice of good x as a function of trade policyparameters. For later reference, it will beuseful to derive the effect on the worldmarket price of preferential trade provisionstowards LDCs in the QUAD. Implicitdifferentiation yields:

dp –d ′+s′(I): ––– = ––––––––––– ∈ (0,1)

dtQL mQ+m′R+d ′–s′

dp s′(II): ––– = –––––––––––– ∈ (0,1)

dtQL m′Q+m′R+d ′–s′

where derivatives are denoted by primes (e.g.s’=∂s(qL)⁄∂qL

). The signs of the derivatives onthe right-hand side of these expressions are


6. We assume that the whole of the preferential margin can be captured by LDC producers. As discussed below,this might not be an accurate description of reality, but unfortunately not much is known about the marketpower of QUAD importers in the relevant markets.


the conventional ones. Hence, with demandfalling and supply rising in consumer andproducer prices, respectively, net importdemand in the QUAD and the rest of theworld are declining functions of the marketprices in those locations. It follows thatpreferential treatment (a fall in tQL) reducesthe world market price of good x. Tradepreferences causes a rise in the producer pricein the LDCs (and in case 1 also a rise in theconsumer price). The effect is to increase netexports from the LDCs on the world market,which brings the world market price down.

WelfareWelfare in the LDCs is the sum of utilitiesand profits.7 In addition, there may begovernment income from import tariffs.However, in equilibrium tariff revenues arezero. The reason is the following: Assuming,as is reasonable, that LDC countries are pricetakers on the international import markets,an import tariff will be inefficient in ourmodel. The reason why this policy instru-ment still is included in the model is thatconsiderations about security of supply ofcertain essential goods (e.g., food) may leadLDCs to put up import controls in order toavoid extensive import/export swaps. In ourmodel, this can be achieved by raising tL

above the preferential margin. Domesticproducers will then satisfy domestic demandbefore any surplus is exported. But in thiscase, as long as the LDCs are net exporters ofthe relevant good, the equilibrium tariffrevenue will be zero. In other words, wecontend that the tax revenue is zero eitherbecause tL is zero in order to achieveefficiency (in the model sense) or because thetariff is raised to a prohibitive level in order

to discourage import/export swaps for someother reason. Welfare is then

W = v(pL)+π(qL).

We now want to investigate the welfare effectof preferential tariffs for the LDCs in theQUAD. For convenience of notation, weanalyse the case where tariffs on LDC exportsto the QUAD are completely removed, i.e.,∆tQL= –tQL. Let superscripts 0 and 1 refer tothe initial and the new equilibrium,respectively. The welfare effect of the reformis then

∆W=W 1–W 0= v (pL1)+π(qL

1)–v (pL0)–π(qL

0)

In order to simplify the analysis, we willassume that demand and supply functions inthe LDCs are linear (i.e., v′′′=π′′′=0). Byusing a Taylor series expansion, the generalexpression for the welfare change can beapproximated as

∆W=W 1–W 0

1= v (pL0)+v′(pL

0)∆pL+ – v′′(pL0)(∆pL)

2

21+π(qL

0)+π′(qL0)∆qL+ – π′′(qL

0)(∆qL)2

2–v(pL

0)–π(qL0)

1 = – d (pL0) ∆pL– – d ′(pL

0)(∆pL)2+s (qL

0)∆qL2 1 + – s′(qL

0)(∆qL)2

2

Here we have used the facts that v ′=-d ′, v′′=-d ′,π′=s, and π′′=s′. Hence, with information oninitial levels of production and consumptionin LDCs, changes in consumer and producer


7. We assume that firms are fully owned by LDC citizens. If some of the increase in profits accrues to foreigners,this will of course reduce the total welfare gains to the LDCs from preferential treatment. Unfortunately, thereare no readily available measures of the extent to which this is the case.


prices, and the slopes of demand and supplyfunctions, the change in welfare can bemeasured.

Welfare effect without import/export swapsConsider first the case where the importtariff in the LDCs is raised sufficiently toprevent import/export swaps. Then, pL =qL

and ∆pL=∆qL=∆p –∆tQL=∆p+tQL. The welfarechange is

∆WI = [s (qL0)–d(pL

0)](∆p+tQL)

1 1– – d ′(pL0)(∆p+tQL)

2+ – s ′(qL0)(∆p+tQL)

2

2 2

The first term is the terms of trade effect,which is positive as long as the LDC is a netexporter. The first order effect of the removalof tariffs is to improve terms of trade by tQL.However, in equilibrium some of this gain islost through the fall in the world marketprice of x (∆p<0). Still, from the resultsderived above we know that ∆qL >0 since thefall in the world market price is only afraction of the decline in the tariff. Thesecond term refers to the gain from replacingdomestic consumption with exports as theexport price rises; with a higher export price,the marginal willingness to pay in the LDCswill fall short of the price that can beobtained on the international market.Hence, a gain can be reaped by reducingdomestic consumption somewhat and exportthese units instead. The third term refers toincreased value added through higherproduction. A higher producer price stimu-lates LDC production, and the increase inthe value added is part of the gain frompreferential market access.

These welfare effects are illustrated inFigure 1. The figure shows demand andsupply functions in the LDCs and decom-poses the welfare effect of given free market

access to products from the LDCs on apreferential basis. The initial equilibriumprice is p0. The granting of trade preferencesto LDCs reduces the world market price top1

and increases the LDC producer price to qL1.

The consumer price in the LDCs is equal toqL

1 when an import tariff is used in the LDCsin order to prevent import/export swaps andp1 if import/export swaps are allowed and theimport tariff is set to zero.

The terms of trade effect corresponds tothe area C in the figure. The “export forconsumption”-effect is represented by B,while the value added from increased pro-duction is reflected by area D. The total gainfor the LDCs without import/export swaps isthus the area B+C+D.

Welfare effect with import/export swapsConsider next the case where the LDCs keeptheir import tariff at zero, implying thatpreferential access will induce an import/export swap. Then, pL =p, ∆pL =∆p and ∆qL

=∆p +tQL. The welfare change is

1∆WII = –d (pL0)∆p – – d ′(pL

0)(∆p)2

21+ s(qL

0)(∆p+tQL)+ – s ′(qL0)(∆p+tQL)

2

2

The two first terms represent the gain inconsumer surplus as the world market priceof imported goods decreases (areas E and F inFigure 1). The third term is the gain fromhigher prices on existing exports (the areaA+B+C), and the last term is the increasedvalue added in production as the higherproducer price induces a higher level ofoutput (area D). The total welfare gain whenimport and export swaps are used is thusA+B+C+D+E+F, which exceeds the gainwithout swaps by A+E+F. The higher level ofwelfare is wholly due to the fact that LDCconsumers in this case are allowed to benefit



from the new, lower world market price of x. Full utilisation of import-export swaps is

probably not realistic in practice, for tworeasons. First of all, LDC governments mightbe concerned about the reliability of supplyof goods deemed to be of special importance,such as food. Secondly, transactions costsmight limit the extent to which LDC pro-ducers are able to sell their production to theQUAD. For example, they would in alllikelihood need to expend resources to certifythe quality of their goods before they are ableto penetrate the QUAD market. For thesereasons, we limit the empirical analysis to a10% import-export swap.

Measuring the gains of preferentialmarket accessThe methodologyIn order to arrive at empirical estimates ofthe theoretical measures of the total gains for

LDCs of duty- and quota-free access in theQUAD, we need information about:

• The price responsiveness of demand andsupply in the LDCs, import demand inthe QUAD countries, and export supplyin other countries;

• The quantities produced and consumedin the LDCs;

• The preference margin for goodsexported by the LDCs to the QUAD(measured in absolute values).

Data are scarce in many of these areas, inparticular concerning price responsiveness. Ithas therefore not been possible to undertakea comprehensive numerical assessment of thegains and losses for LDCs. Our approach is apragmatic one, using available data to shedlight on the potential magnitudes involved.We provide three different types of measuresof the potential gains of duty-free access. Thefirst two are approximations of our two


0s

1Lq

B

0d

D

I

H

1p

000LL qpp ==

Price

Quantity

F

Supply, s(qL)

C

G

Demand, d(pL)

E

Preferential margin (tQR)

J

A

Figure 1.LDC gains and losses


theoretical measures, ∆WI and ∆WII. Neitherof these includes a satisfactory estimate of thevalue added from increased production.Unfortunately, no such estimate is readilyavailable. However, Hoekman et al. (2001)provide an estimate of the potential increasein export revenue from freer market access inthe QUAD that we use as the basis for ourthird measure, despite the shortcomingsdiscussed below.

Measure I: Approximating ∆WI

Recall that

∆WI = [s(qL0)– d (pL

0))](∆p+tQL)

1 1– – d ′(pL0)(∆p+tQL)

2+ – s ′(qL0)(∆p+tQL)

2

2 2

We have data on the quantities involved aswell as tQL. We lack information about thechange in the world market price thatpreferential market access for LDCs wouldinduce and the responsiveness of supply anddemand in LDCs to price changes. Ourapproach is therefore to estimate [s(qL

0)–d (pL

0)](tQL), which corresponds to the areasC+F+G in figure 1. This might be a usefulapproximation of B+C+D; in any case, it isnot possible to state with certainty that ourmeasure over- or underestimates the theore-tical measure.

To arrive at an estimate of C+F+G, weproceed as follows. First, we derive anestimate of the potential gains from higherprices on existing exports to QUAD. This isa measure of the pure price effect of higherprices on existing exports to the QUAD. Itdoes not take into account the benefits ofredirecting existing sales in non-QUADmarkets or the value added from increasedproduction. We use data on existing customsduties on LDC imports in the QUAD in

order to arrive at this measure. The value ofexisting customs duties is in fact a very goodestimate of the short-term gains of duty-freeaccess. The reason is that most of thecustoms duties collected by the QUAD onLDC imports are related to the clothingsector. Under the Multifibre Agreement,imports of clothing to the USA and Canadaare restricted by quotas until 2005. Theexporters administer these quotas so that thevalue of the quotas – the so-called quota-rent– accrues to them. Import tariffs in the USand Canada reduce the market value of thequotas. By removing the tariffs, the marketvalue of quotas would increase by the valueof the existing customs duties. That is, thequota-rent increases. Hence, these revenuesare good indicators of the short-term gains ofduty-free access.

Secondly, we derive an indicator of thegains from redirecting existing exports tomarkets outside the QUAD to the QUAD.Redirecting exports that currently go to otherdestinations will be the easiest way ofincreasing exports to the QUAD markets inthe short run. The existence of exports mustimply that an export infrastructure has beenestablished in the home country. Therefore,redirection of exports only requires thatmarketing channels are established in theQUAD markets (if they are not therealready) and that the products satisfyconsumer preferences and legal standards inthe QUAD. Unfortunately, a completemeasure of the potential gains from reroutingexisting exports to the QUAD requiresdetailed data on preferential margins andquantities by product category. In theabsence of the requisite information, we havecalculated the potential benefits of redirec-ting exports from non-QUAD markets to theEU for a selected group of products con-taining the most important agriculturalexports of the LDCs.



The QUAD countries collect about 220million USD annually in customs duties ontheir imports from LDCs. As shown inFigure 2, more than 80% of these duties iscollected by the USA. Canada also collects adisproportionally high share of the duties.The EU, while representing almost 60% ofthe total QUAD imports, collects less than4% of the customs duties. The customsduties collected by all the QUAD countrieson the imports from LDCs amount to 1.1%of total LDC exports and 0.13% of totalGDP in the LDCs (UNCTAD 2000a).Hence, the removal of import tariffs will notraise incomes in the LDCs significantlyunless there is a change in export volumes tothe QUAD.

Removal of tariffs will mean more forsome LDCs than for others. In Canada, 92%of the customs duties are collected fromAsian LDCs and Bangladesh aloneaccounted for 77%. We would expect asimilar pattern in the USA as well, becausethe customs duties in the USA are relatedexclusively to the imports of clothing, andexports of these products from Africa are very

low. Therefore, if some of the current tariffrevenues are transferred to the LDCs, themain beneficiary will be Bangladesh. Buteven for Bangladesh, the values at stake arenot sufficiently large to make a majordifference. If we assume, for the sake ofillustration, that 80% of the reduced tariffincome accrues to Bangladesh, this wouldmean an increase in GDP of 0.4%. Althoughsuch an increase in income certainly wouldbe welcome, it would not mean a big leapforward for this country, which hasexperienced annual grow rates in real GDPof 4–5% during the period 1990-98(UNCTAD 2000a). For a country likeBangladesh, which has demonstrated itsability to develop a thriving export industry,the main benefits of reduced tariffs will inthe long run be more related to thepossibilities of expanding production andexport volumes as competitiveness isimproved.

In sum, the overall benefits that can bereaped by LDCs from higher prices onexisting exports to the QUAD are quitelimited. Would rerouting exports to the


Figure 2.QUAD customs duties and imports from LDCs

0

1 0

2 0

3 0

4 0

5 0

6 0

7 0

8 0

9 0

Canada EU Japan USA

Share of customs duties (%) Share of imports (%)


QUAD from the rest of the world createsizeable benefits, then? The figures in table 1suggest that the answer is no. All theproducts included in table 1 face high tariffsin the EU at present. Most of them are highlyprotected in the Japanese market as well, butnot in the USA and Canada. The higherprices in the EU-markets mean that there ismore to gain by redirecting non-QUADexports to the EU than to the NorthAmerican QUAD-countries. Hence, the EUwould be the most likely destination if theLDCs switch export markets to gain frompreferential access in the QUAD. Asmentioned previously, we calculate thepotential benefit to the LDCs under theassumption that LDC producers capture thewhole preferential margin. We approximate

the preferential margin in the EU by thedifferential between the prices on the worldmarket and in the EU, shown in columnstwo and three. Multiplying the result withthe volume of exports going to destinationsoutside the QUAD (column four timescolumn five) yields a measure of the potentialgain from switching export sales to the EUby product category, stated in millions ofUSD in the rightmost column. The totalacross all products is slightly more than afourth of the value of existing custom duties.It is thus clear that adding these gains to thevalue of current customs revenues in theQUAD does not change our previousconclusion that the benefits to the LDCsappear to be modest. Of course, the total ofabout 278 million USD annually does not


Table 1.The potential gains from redirecting exports

Non-QUAD Value ofEU price World price share of LDC Total LDC redirecting existing(USD/t) (USD/t) exports exports (1000t) exports (mill. USD

CerealsWheat 123 109 1 124.5 1.7Maize 129 85 0.75 183.5 6.1Rice 554 277 0.97 110.7 29.7

Sugar 600 231 0.1 280.1 10.3Fruits/vegetablesBananas 609 332 0.32 20.6 1.8Tomatoes 727 584 0.32 1.6 0.1

MeatBeef 2566 1640 0.18 5.1 0.9Poultry 1232 902 0.39 0.1 0.0Sheep 3077 1363 0.18 14.0 4.3

Dairy productsButter 2727 1207 1 1.932 2.9Cheese 3231 1989 1 0.019 0.0

Total these products 58.0

Sources: FAO on production and exports, European Commission (2001a) on prices, and GTAP version 4 on export shares to non-QUAD countries.


include potential gains from expandingproduction. These are discussed later. Firstwe shall see that import-export swaps offerpotentially much greater benefits to theLDCs.

Measure II: Approximating ∆WII

With full utilisation of import-export swaps,we know from the theoretical analysis that thepotential gain for the LDCs corresponds tothe areas A+B+C+D+E+F in figure 1. In thiscase, we could approximate the gains byA+B+C+E+F+G. That is, we could take theproduct of the preferential margin andexisting sales, which might be greater orsmaller than the theoretically appropriatemeasure. Once again, though, data limitationspreclude us from producing a comprehensive

estimate. We have to limit ourselves to theproducts considered in the analysis of marketswitching for existing exports, and usepreferential margins for the EU market.

However, it should be noted that theLDCs will have much greater difficultiesdiverting sales from their domestic marketsto the QUAD countries. It appears that suchtrade swaps are most likely for agriculturalfood products, for which only a few LDCshave established an adequate exportinfrastructure. In addition to building physi-cal infrastructure, the LDCs must createmechanisms to ensure compliance withsanitary and phytosanitary regulations in theimporting countries. They will also have todevelop import infrastructure and internaldistribution networks that can adequately


Table 2.The potential gains from import-export swaps

Value of 10%EU price World price LDC production import/export swap(USD/t) (USD/t) (1000t) (mill. USD)

CerealsWheat 123 109 7217 10.0Maize 129 85 16335 72.4Rice 554 277 40807 1130.2

Sugar 600 231 2056 75.9Fruits/vegetablesBananas 609 332 5694 157.7Tomatoes 727 584 1176 16.7

MeatBeef meat 2566 1640 2235 207.2Poultry meat 1232 902 886 29.3Sheep meat 3077 1363 1159 198.7

Dairy productsButter 2727 1207 109 16.6Cheese 3231 1989 197 24.5

Total these products 1939.1

Sources: FAO on production and exports, European Commission (2001a) on prices, and GTAP version 4 on export shares to non-QUAD countries.


serve domestic consumers. Finally,considerations about food supply securitymay make some countries reluctant toengage in import-export swaps in foodproducts on a large scale. We therefore limitour calculations to the effects of a 10% swap.

The exercise in table 2 exemplifies thebenefits to the LDCs from diverting 10% oftheir existing production (which presently byand large is used to serve domestic needs).We emphasise that these numbers are notbased on an assessment of the actual exportpotential. That would require detailedanalysis at the product and country level.These figures should therefore be interpretedwith great caution. There is however, a cleartendency wherein the potential gains from a10% import-export swap are significantlygreater than the potential gains fromredirecting existing exports. This is due tothe fact that LDC exports of these productspresently are very low relative to theirproduction levels. The potential gains fromimport-export swaps also seem relativelylarge compared to the value of higher priceson existing exports to the QUAD. In total,our estimate of ∆WII is more than seventimes our estimate of ∆WI.

The potential gains from redirectingexports of textiles and clothing are probablylimited, in part because the QUAD share ofexisting exports of clothing is very large andpartly because consumer preferences differgreatly between markets. The probability ofimport-export swaps is greater for cereals andsugar than for meat and dairy products dueto more stringent sanitary and phytosanitarymeasures for the latter categories. Thus, thepotential for substantial gains from import-export swaps seems to be greatest in such

products as sugar and rice. However, thereare a number of reasons why we may haveexaggerated the gains in the rice sector. First,Myanmar, which is excluded from pre-ferential treatment both in the EU and theUSA for political reasons, is the main LDCexporter of rice (90% of the total) and alsoan important producer (25% of the total).Moreover, the EU market for rice is too smallto accommodate a 10% import-export swap;the export increase is almost twice the size ofthe EU market. If large quantities of rice areadmitted into the EU market, the price islikely to fall dramatically, as will the potentialgains for the LDCs. On the other hand, ifsome of the exports is accommodated by theJapanese market, which is four times largerthan the EU market and where current pricesexceed the world market prices by a factor offive, substantial gains could still be attainedin this sector.8

Measure III: The value added of increasedproductionWe have yet to take into account the fact thatthe removal of tariffs and quotas mayincrease the level of production in the LDCs.This would create additional gains. Note,however, that a dollar increase in exportrevenues generated by increased productionhas a smaller impact on GDP than one extradollar received on existing exports. Thereason is that the gain on existing exports is apure price effect, implying that GDPincreases in step with the export revenues,while gains arising from a productionincrease come at a cost, since additionalinputs must be used in order to increaseproduction. A meaningful comparisonbetween the two requires that only the value-


8. For other products than rice, LDCs would still have a minor market share in the EU (less than 4% in most cat-egories, except bananas (16%) and mutton (8%)).


added component (i.e., the extra exportrevenue minus the additional costs of inputs)is counted in the case of export revenuesgenerated by increased production. Only ifthe expansion of output is generated byemploying resources that are presently idlewill the increase in export revenues beidentical to the increase in valued added.Hence, the extra revenues are an upperbound on the value added from increasingproduction.

A few studies of the potential increase inLDC export revenue from improved marketaccess in the QUAD are available(Ianchovichina et al. 2000, Hoekman et al.2001, UNCTAD 2000b). The study byHoekman et al. comes closest to our needs,and we will therefore report some of itsresults.9 Hoekman et al. investigate theconsequences of removing all tariff peaks(defined as tariffs above 15%) in the QUADon imports from LDCs on the exportrevenues of the latter. With reference tofigure 1, the measure provided by Hoekmanet al. corresponds to the area C+D+H+I+J,which surely may differ considerably fromthe “ideal” measure of higher value addedfrom expanding production, D. In theextreme case where the social opportunitycost of increasing export supply is zero,though, the total increase in value added isD+H+I+J. Then we would only need tosubtract C, the extra revenues on existingexports, in order for the measure ofHoekman et al. 2001 to be correct.

However, their study also have someother important shortcomings: 1) In caseswith tariff-quotas, they use out-of-quota

tariff rates. Since LDCs in many cases enjoyduty-free access within quotas (e.g. forseveral agricultural products in the US andthe EU), this will lead to an overestimationof the gains. 2) If current exports are zero,the simulated export level will also be zerowhen tariffs are reduced. Moreover, themodel does not capture potential gains fromimport-export swaps. This suggests that gainsmay be underestimated. 3) The assumptionsabout supply capacity in LDCs arearbitrary.10 4) The model does not take intoaccount that rules of origin may preventLDCs from taking advantage of preferentialaccess. The latter point is a crucial one,because most of the gains come in theclothing sector, where rules of origin are asignificant trade barrier for LDCs (see thenext section).

Hoekman et al. find that if the QUADcountries eliminate all tariff peakssimultaneously, LDC export revenue wouldincrease by 11% (i.e., 2.5 billion USD). Thisis more than ten times the current customsduties collected by the QUAD countries onLDC imports. It is also higher than ourestimates of ∆WI and ∆WII. To obtain anupper bound for the increase in value addedfrom an expansion of production, wesubtract the gain from higher prices onexisting exports. This is the figure we arrivedat for ∆WI: 278 million USD. Hence, weconclude that the gains from increasingproduction in response to preferentialtreatment in the QUAD are no higher thanabout 2.2 billion USD annually.

The study also shows that the gains forLDCs would be much larger if the tariff


9. The main problem with Ianchovichina et al. is that not all LDCs are included, and among the countries whichare included, there are several non-LDCs. Our main problem with the UNCTAD study is that it does not takeinto account the supply constraints in the LDCs.

10. A one percent increase in the export price is assumed to generate a 0.5 percent increase in export volumes forall products and countries.


peaks were eliminated in the US and Canadathan in Japan and the EU. Indeed, the gainsfrom an EU reform are quite modest. Figure3 demonstrates the impact on LDC exportrevenue of removing tariff peaks in each ofthe QUAD countries (while trade policies arekept constant in the three other regions). Thepotential increase in export revenue isconcentrated in a few product categories;apparel, sugar and tobacco. In the US andCanada, where the main benefits are to bereaped, the share of apparel in the totalrevenue increase is 66% and 94%,respectively. In the US, another 30% of therevenue increase comes in the tobacco sector.In the EU and Japan, most of the increase inexport revenues comes in the sugar sector,the shares being 64% and 91%.

The gains will also be very unevenlydistributed across LDCs. Exporters ofapparel in Asia (e.g. Bangladesh, Laos, andCambodia) are the main beneficiaries. Webelieve that the gains in the clothing sectormay be overestimated because exporters ofapparel in Asia, particularly Bangladesh, have

difficulties in satisfying rules of origin in anumber of product categories. On the otherhand, the gains for certain agriculturalproducts may be underestimated becausecurrent exports are low or absent due toexisting trade barriers.

DiscussionOur results indicate that the potential gainsfor the LDCs of free market access are quitemodest. In this section we seek to explainwhy this is so. We firstly point out that LDCsalready enjoy quite liberal market access inthe QUAD. Secondly, we argue that theexport supply of these countries for a varietyof reasons is likely to be fairly price inelasticin the short to medium run. Thirdly, wediscuss how restrictive rules of origin in thepreference schemes of the importingcountries are likely to prevent some of theLDCs which potentially have the most togain, the Asian producers of clothing, fromrealising the full benefits of improved marketaccess. Finally, we point out that due to


Figure 3.Increase in LDC export revenue with unilateral liberalisation (mill. USD)

0

2 0 0

4 0 0

6 0 0

8 0 0

1 0 0 0

1 2 0 0

1 4 0 0

1 6 0 0

1 8 0 0

EU USA Canada Japan

Clothing Sugar Tobacco Other

r

cco

r

hing


policy responses in importing countries, anLDC success in utilising preferential accessmay erode the preference margins over time.

Relatively low trade barriers towards LDCsat presentAll QUAD countries presently providepreferential market access for LDCs undertheir respective Generalised System of Pre-ferences (GSP). Moreover, all LDCs but theAsian ones, benefit from the Cotonou Agree-ment with the EU, and Sub-Saharan LDCsbenefit from special arrangements in theUSA under the African Growth and Oppor-tunity Act. This means that duty- and quota-free access typically will be of less value forthe LDCs than for other developingcountries.

The scope and depth of the preferentialtrade agreements vary greatly among theQUAD countries. The broad pattern is asfollows:

The EU market has been quite open for theLDCs for a long time. All industrial productshave been liberalised, along with a number ofagricultural products. However, there havebeen import restrictions on products thatcome under the Common AgriculturalPolicy, notably for rice, sugar, bananas,maize, meat, and dairy products. After therecent approval of the (revised) “everything-but-arms” initiative, only rice, sugar, andbananas are not fully liberalised.

The USA has a restrictive import policyfor textiles and clothing. But most agri-cultural products that have been restricted inthe EU have enjoyed duty-free access in theUS. However, there are import quotas formeat, dairy products, peanuts, sugar, andtobacco. Japan has a quite liberal trade policytowards LDCs in the industrial sector. Thereare restrictions on imports of leatherproducts and a tax on petroleum. Textile

imports from LDCs are subject toconstraints as well, although these barrierswill be removed shortly. The agriculturalsector in Japan is heavily protected, and onlya few product categories are granted duty-and quota-free access.

Canada’s import regime is similar to theAmerican one, but it is considerably morerestrictive. There are tariffs and tariff quotason a number of agricultural products (e.g.dairy products, poultry, eggs, margarine,wheat, barley, beef, and a number ofvegetables). Out-of-quota tariffs areextremely high for meat and dairy products.Although most industrial products areliberalised, there are severe import barriers onproducts that are of great importance forLDCs, such as textiles, clothing, andfootwear.

We draw the following conclusions: forindustrial products, LDCs do not face dutiesor import quotas in the QUAD in sectorsother than textiles, clothing, and footwear.Moreover, most non-Asian LDCs haveenjoyed free market access for these productsin the EU for decades without being able totake advantage of it. Hence, there is noreason to believe that duty-free access in theNorth American markets will make a bigdifference for these countries. Therefore, themain beneficiaries of free market access inthese products are likely to be the AsianLDCs.

Similarly, most agricultural productsfrom LDCs that currently face importrestrictions in one of the QUAD countries,enjoy free market access in one or more ofthe other countries. The inability of LDCexports to penetrate QUAD markets even inthe absence of restrictions is a strongindication of lack of competitiveness.Admittedly, preferential access to marketsthat presently are protected might inducesome exports due to higher prices in these



markets than on the world market. But tostake a lot on products in which one is notcompetitive on the world market is riskybusiness; unless the LDCs are able to becomecompetitive through “learning by doing”type effects, it is unlikely that the LDCs willbe able to obtain long-term gains by ex-panding their exports in such commodities.

Inelastic SupplyIn the long run, increasing the production ofexport commodities is probably the mostimportant potential source of benefits frompreferential trade liberalisation. The size ofthe gains depends on the price elasticity ofsupply, which will vary across products andcountries. Within the confines of this article,it is not possible to be specific with respect toproducts and countries. Instead, we look atthe aggregate supply capacity of “the averageLDC”. The conclusion is that export supplyin LDCs is likely to be fairly inelastic in theshort to medium term.11 In other words, weconcur with Hoekman et al. (2001) that thesupply elasticity is fairly low, and argue thatthis is at least partly due to costs being sohigh that exporting is not profitable evenwhen preferential access is granted.

First of all, note that if there is to be achange in export patterns or supply, thebenefits of increased prices in the QUADmust obviously be passed on to producers.That is, LDC governments must refrain fromtaxing away all gains.12 If they do, it is likelythat there are unemployed or underutilised

resources in the LDCs. However, while thismight allow them to increase export supplyrapidly at a fairly low cost, it is clearly thecase that the average worker in LDCs issignificantly less productive than his counter-parts elsewhere. This holds both in theaggregate and with respect to the importantagricultural sector. For example, calculationsbased on data from World Bank (2000) showthat over 1995–98 labour productivity inLDCs was only 61% of the productivity levelin the entire group of low-income countries.The data in Hall and Jones (1999), whomeasure labour productivity relative to theUS for 126 other countries in 1988,indicates that the low level of productivity inLDCs is attributable to low levels of fixedand human capital, as well as to low levels oftotal factor productivity (TFP).13 The majorcause of the productivity gap was the latter.In this sense, the supply capacity of LDCsseems limited, since it will take either largeamounts of inputs or sizeable increases inTFP to produce extra output.

According to the best available cross-country data on educational achievement(Barro and Lee 2000), in 1995 the averageadult in an LDC had only 2.37 years ofschooling. Equally as bad is the fact that overhalf of the population in LDCs aged fifteenyears or above had no schooling. Since ittakes time to accumulate educational capital,rapid increases in education levels are not tobe expected. Thus, in the near future levels ofhuman capital will continue to be low when


11. The arguments that lead to this conclusion are spelled out in more detail in appendix 3 of Hagen, Mæstad, andWiig (2001).

12. The benefits can be taxed away directly or indirectly through the operations of state trading enterprises (STEs).STEs are major actors in many markets for agricultural goods in LDCs, but unfortunately not much is knownabout the nature of their operations (c.f. Ingco and Ng 1998).

13. Production per worker in LDCs was on average only about 4.5% of the US level. Note that there are two out-liers among the LDCs, Yemen and Bangladesh, which at relative levels of production per worker of 21.2% and12.7%, respectively, are head and shoulders above the rest of the group. If they are excluded, the average dropsto 4.1%.


measured by this indicator. The situation isunfortunately not much better with respectto health. There is certainly an enormousneed for expanding and upgrading healthand education systems in LDCs. In light ofthese observations, it is doubtful whether thecurrent spending levels will make muchdifference. This conclusion is strengthened ifwe take into account the fact that severalstudies show that public spending indeveloping countries has little effect, if any,on outcomes in the social sectors (e.g., infantmortality).14

Rates of net domestic fixed investment inLDCs are comparable to those of both low-income and middle-income countries.However, one should bear in mind that theefficiency of the investment might be low.The astonishing conclusion of Devarajan,Easterly, and Pack (2000) - that in Africa,where most of the LDCs are located, neitherprivate nor public investment is productive –indicates that this problem is for real.Moreover, public infrastructure of vitalimportance to the export sectors is in a sorrystate. For example, in 1988 25% of the mainpaved roads and 51% of the main unpavedroads were in poor condition.15 As mostLDCs are located far from the QUADmarkets and sixteen of them are furtherhampered by being landlocked16, it seemsreasonable to conclude that higher prices dueto increased market access will not lead to asignificant supply response in the short tomedium term.

In the 1990s, the average rate of netdomestic savings was negative in LDCs,implying that they did not manage to reducetheir rate of indebtedness during this periodand that sustaining the investment effortdepends on financial flows from abroad.High levels of debt are currently a majorproblem for the LDCs. More than half ofthem (twenty-six) are classified as heavilyindebted by the World Bank. In presentvalue terms, they owed almost 90% of theirGNP in 1998. Although the HIPC (HighlyIndebted Poor Countries) initiative holds thepromise of reducing the debt to manageablelevels for many LDCs, they would still haveto adjust in order to qualify for debt relief.17

This means that the timing and magnitudeof any reduction are uncertain. Moreover,what is not forgiven must be repaid at somepoint in time. Hence, there is uncertaintyabout future tax rates. This might deterinvestment in physical capital, which is oftenirreversible, making investors reluctant tocommit themselves in the face of uncertaintyabout future returns, of which taxes are oneimportant determinant.

Macroeconomic policy uncertainty andvolatility, which have repeatedly been shownto be detrimental to investment and growth,is strongly present in LDCs. The situation ismost problematic with respect to exchangerates. A third of the countries for which thereis data had black market premiums exceeding20% on average in 1996–98, which must beconsidered high. Exchange rate overvaluation


14. See e.g. Filmer, Hammer, and Pritchett (1997), Filmer and Pritchett (1999), and Gupta, Verhoeven and Tiong-son (1999), as well as the references cited therein. This might be due to corruption or mismanagement, or simplyreflect an inoptimal composition of spending.

15. The scale of this problem in the year in question in countries like Guinea (50% and 100%, respectively), Guinea-Bissau (35% and 88%) and Chad (90% and 100%) is simply mind-boggling. These numbers are taken fromthe largest database on infrastructure indicators assembled so far (see Canning 1998).

16. Limao and Venables (1999), for instance, find that the median landlocked country in their sample had trans-port costs which were 58% higher than the median coastal country.

17. At the end of 2000, thirty of the forty-one HIPCs were LDCs.


penalises the export sectors by reducing theirrevenues measured in terms of the nationalcurrency. Thus, if sustained over time, suchpolicies discourage investment in thesesectors. Furthermore, the real effective ex-change rate is extremely volatile in somecountries. This makes it difficult forexporters to predict their returns, and nega-tively affects their willingness to invest.18 It istherefore doubtful whether higher prices inthe QUAD, which, when viewed in isola-tion, obviously will strengthen investmentincentives, are sufficient to create a positiveinvestment response in the export sectors.19

Foreign aid is the only really importantsource of external financing for LDCs. In the1990s aid flows have been several orders ofmagnitude larger than inflows of foreigndirect investment (FDI), and FDI is thesecond most important source of foreignfunds for LDCs. There are of course manyreasons for the extreme dependency of LDCson foreign aid. They are not creditworthy inprivate international capital markets. Theirfinancial markets are underdeveloped. Thus,neither private bank lending nor portfolioflows are important to these countries.Although there has been some improvementduring the 1990s, FDI bypasses LDCs to alarge extent. Given that foreign aid flows havedeclined sharply in the latter half of the 1990sand cannot be expected to make a majorrecovery in the near term, it is doubtfulwhether the levels of investment necessary tosupport a major export drive can be generated.

Restrictive rules of origin As was pointed out in the section “Measuringthe gains of preferential market access”, rules

of origin may severely limit the benefits thatLDCs can reap from duty-and quota-freeaccess. Importing countries may use rules oforigin as a trade barrier by making the rulesunduly complex or restrictive. The LDCsclaim that the industrialised countries arealready doing this by employing regulationsthat are unreasonably restrictive and by notharmonising the rules across product groupsand across countries. When Hoekman et al.(2001) showed that most of the potentialgains from duty-free access accrue in theclothing sector, they did not take intoaccount that a considerable share of thispotential cannot be realised under thepresent rules of origin.

Harmonisation of rules of origin in theGSP systems would reduce the informationrequirements and therefore the costs ofutilising the GSP system. A reduction in costswould probably increase the utilisation rates(see below). The importance of harmonisationis further underscored by the lack ofharmonisation between non-preferential andpreferential rules of origin and the fact that acountry may face different sets of regulationsin different preferential arrangements.

Rules of origin are not a problem for themajority of LDCs since their exports arerestricted to agricultural products and rawmaterials. These products are generally whollyproduced within one country. Though,problems arise with respect to industrialisedproducts, in particular textiles and clothing.Several Asian LDCs have a considerablecapacity to produce apparel if they areallowed to freely import the intermediates.Their ability to do so is, however, limited bythe rules of origin in the QUAD.


18. See e.g. Elbadawi (1998) for an empirical analysis which documents the importance for non-traditional exportsfrom developing countries of keeping the real exchange rate stable at its equilibrium level.

19. This conclusion is supported by the fact that other sources of investment risk, such as volatility of the terms oftrade and political risk, are also highly significant in LDCs.


By comparing the imports that would beeligible for GSP treatment if formalrequirements were fulfilled with the importsthat actually receive preferences, we get anindication of the significance of rules oforigin. As shown in table 3, a substantialshare of the imports that are covered by theGSP – i.e., eligible for preferential treatment– does not receive it, c.f. the low rates ofutilisation of preferences. One possibleexplanation is that the preferential marginsmay be too low to warrant the efforts neededin order to receive GSP treatment. A lowutilisation rate for Angola in the US mightfor instance be explained by the fact that thepreference margin on oil imports is only afew cents per barrel.

However, being unable to satisfy rules oforigin is also a major reason why preferentialtreatment is not received. Looking atdisaggregated data for the EU one observesthat some Asian countries that typically havelarge exports of textiles and clothing havevery low utilisation rates even thoughpreferential margins are significant. Forinstance, only 27% of the imports fromBangladesh to the EU, most of which isapparel, are granted preferential access. Theexplanation is that Bangladesh is not able tosatisfy rules of origin in the EU for apparelbased on woven fabrics (although they

qualify for knitted products). Bangladesh hasto rely on imported fabrics (only 15% ofwoven fabrics are produced domestically, ascompared to 60% of knitted fabrics).Without building up a domestic textileindustry, Bangladesh is likely to face similarproblems in the US and Canada if textiles orclothing products receive larger preferencesin these markets. In this case, more liberalrules of origin would be far more importantthan simply a harmonisation. It isnoteworthy that the utilisation rate for LCDbeneficiaries in the EU, the US, and Canadais lower than the utilisation rate for allbeneficiaries, even though LDCs typicallyreceive a higher preference margin. Thisindicates that the question of rules of originis more important for LDC’s than for otherdeveloping countries.

The general rule when inputs areimported is that products must undergo asubstantial transformation in order to conferorigin. Two different principles or tests arecurrently applied to define a substantialtransformation. The EU rules are based on achange of tariff heading (at the four digitlevel). The change in heading is referred to asa tariff jump. When the change-of-tariff-heading approach is used, LDCs will benefitif the required number of tariff jumps issmall. In the EU and Japan, textiles and


Table 3.Utilisation rate of GSP preferences in the QUAD, 1997

LDCs AllImports GSP Imports GSP beneficiaries

covered (1000 USD) received (1000 USD) Utilisation rate (%) Utilisation rate (%)

Canada 8 537 4 656 54.5 65.9EU 2 888 780 770 768 26.7 55.9Japan 313 753 228 913 73.0 42.5USA 2 719 570 790 655 29.1 61.1

Source: UNCTAD (1999b).

LDC


clothing must satisfy a “double jump” inorder to confer origin. LDCs such asBangladesh, which do not produce wovenfabrics domestically, are unable to fulfil thisrequirement. If only a single jump wasrequired, the potential gain for LDCs ofduty-free and quota-free access would besubstantially enhanced. The alternativeprinciple is a percentage criterion, either amaximum percentage of imported inter-mediates or a minimum percentage ofdomestic content (typically more than 35%).If the percentage criterion is used, LDCsneed the requirements for domestic contentor value added to be below 20–25% in orderto take full advantage of preferential marketaccess in the clothing sector. For instance, thevalue added (as a share of product price) of atypical product in Bangladesh, say a wovenpair of trousers, produced on the basis ofimported fabrics is 27% (Rahman andBhattacharya 2000). The percentage in-creases when grey fabrics are imported orwhen accessories are produced domestically,but only when production is based onimported yarn, does the value added exceed50%.20 Without reducing the requirednumber of tariff jumps or percentagedomestic content, it is unlikely that LDCswill achieve the level of gains as suggested byHoekman et.al. (2001).

Market and policy responses in importingcountriesAs mentioned in the section “Measuring thegains of preferential market access”, all of ourempirical measures of the gains to LDCsfrom greater market access in the QUAD are

based on the assumption that there is nomarket power in the importing countries,whether at the retail or the wholesale level.This is probably unrealistic. We know thatmultinational companies (MNCs) are majoroperators in international markets foragricultural commodities, and the five largestsupermarket chains have a market share ofmore than 50% in most European countries(UNCTAD 1999a). Unfortunately, a lack ofdata prevents us from estimating the extentto which the gains from improved marketaccess might be captured by market actorsoutside LDCs.21

However, even if the leakage of benefitsthrough these channels is small, gains forLDCs might be limited by policy changes inthe importing countries. Hoekman et.al(2001) show that the benefits to LDCs fromthe elimination of tariff peaks will be smallerwith multilateral trade liberalisation. That is,for these countries, it is essential thatpreferences are maintained. There is noguarantee, though, that their competitiveposition will not be eroded during futurerounds in the WTO.

Moreover, LDC success in utilising pre-ferential access may undermine the pre-ference margins. The rationale for main-taining high import protection against non-LDCs in importing countries mightdisappear if LDCs capture large marketshares from domestic producers. Likewise,other policies which sustain high pricemargins in the QUAD could lose politicalsupport in such an event. The purpose ofredirecting existing sales is to take advantageof high domestic prices in protected QUAD


20. This implies that clothing exporters in Bangladesh will not be able to take advantage of the rules on regionalcumulation in the Everything-But-Arms regulation in the EU. Under the cumulation rule, more than 50% ofthe product value must stem from domestic sources.

21. The same problem applies to the analysis of the extent to which export producers in the LDCs are owned byforeigners.


markets relative to the world market. There-fore, beneficial trade swaps are not likely tobe sustainable in the long run unless importsfrom the LDCs continue to be of marginalimportance in the QUAD.

ConclusionIn this paper, we have discussed potentialgains to the LDCs from improved marketaccess in the QUAD. In principle, theeconomic benefits of extending the LDCtrade preferences can be divided into threecomponents: (1) the value of higher prices onexisting production and exports; (2) thevalue-added from expanding production;and (3) the benefits created for (or divertedfrom) consumers in LDCs. Based onmeasures of the gains that approximate thetheoretical measures, we conclude that theaggregate benefits of duty- and quota-free accessfor the LDCs are likely to be modest, evencompared to their present low levels ofincome. The main reasons are (1) that mostLDCs presently enjoy quite liberal market accessin important export markets, and (2) that theability of LDCs to take advantage of tradepreferences is limited, due to constraints onsupply capacity and restrictive requirementsfor rules of origin. Moreover, their gainscould be eroded either by further multilateraltariff liberalisation in the context of theWTO or by unilateral policy changes in theQUAD in the event that LDC exporterscapture significant market shares fromdomestic producers.

Of course, our empirical measures sufferfrom several shortcomings. The most criticalone is perhaps the lack of an explicit linkbetween higher export prices and futuresupply capacities in the LDCs. For example,it has been argued that binding preferencesin the WTO would ensure that theinvestment needed for a significant supply

response would be forthcoming. However,while binding would be beneficial for LDCswhen viewed in isolation, it would notremove the uncertainty surrounding pre-ference margins. In addition, producers inLDCs face a host of other risks that may verywell swamp the benefits from improvedmarket access. Their debt-burdened govern-ments might not be able to commit topassing the gains on to producers, and even ifthey do, it is unlikely that they will be able toprovide the infrastructure necessary for amajor export drive. This holds not only withrespect to transport and communicationinfrastructure, but also to the institutionsnecessary to provide exporters with marketinformation and help with satisfyingpackaging, labelling, and sanitary andphytosanitary standards in importingcountries. Here donors might make a contri-bution by aiding the LDC governments thatare making an effort at supporting theirexporters. Whether such beneficial partner-ships will be established remains to be seen.Even if they are, we are unfortunatelydoubtful that this will radically alter ourconclusions over the short to medium term.The burden of the past as manifested in lowlevels of labour productivity, inadequateinfrastructure, and high levels of fertility isnot shed overnight; nor is a Rome ofeconomic and political stability built in aday.

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Documents

Nordic Journal of Political Economy · potential gains from duty-free, quota-free access to the QUAD. In the final section, we summarise our arguments and results. Gains from preferential