Role of Market Access in Trade and Development

The issue of market access to high-income countries is a thorny but crucial one. The issues fall into three main groups: first, those relating to deliberately imposed barriers to trade, such as tariffs, quotas, and tariff escalation. Second, barriers to trade resulting from domestic and external producer support, primarily in the form of subsidies, but also including, for example, export credits. Third, those relating to indirect barriers to trade resulting from developing countries’ lack of institutional capacity to engage in the global economy and in multilateral institutions (e.g., the World Trade Organization) on equal terms.

Barriers to trade

  • High tariffs are imposed on agriculture: in high-income countries, the average tariff rate on agriculture is almost double the tariff for manufactures. And more than one third of the European Union's agricultural tariff lines, for instance, carry duties above 15% . Tariff peaks within agriculture occur most frequently on processed products and temperate commodities, rather than the major export crops of least developed countries (unprocessed fruits and vegetables and tropical commodities). However, many developing countries in temperate zones have the potential of competing as lower-cost producers in temperate commodities. Thus liberalization could open up new development-through-trade possibilities.
  • Strong tariff escalation is typically imposed on agricultural and food products by high-income countries. This strongly discourages the development of high value added exports, and hinders diversification in particular as well as development in general. In high-income countries, tariffs on agricultural products escalate steeply, especially in the EU and Japan.
  • Complex tariffs make it more difficult for developing country exporters to access industrialised-country markets because of the disadvantages developing countries face in accessing, and in their capacity to process, information. Not only are price signals distorted, they are often unclear, subject to change (for example seasonally) and difficult to interpret. 
  • Tariff-rate quotas (TRQs), introduced by the Uruguay Round with the aim of securing a minimum level of market access, have performed poorly. Average fill rates have been low and declining, from 67% in 1995 to 63% in 1998, with about a quarter of TRQs filled to less than 20%. The low fill rate may reflect high in-quota rates. Overall, the UR tariffication process which produced them has not resulted in the increased market access developing countries hoped for.

Producer support

  • Support to agricultural producers remains sizable, at about five times the level of international development assistance - $245 billion in 2000. Total support to agriculture, as defined by the OECD, reaches $327 billion - 1.3% of OECD countries’ GDP. To some extent these can be justified by “multifunctionality” arguments, but it remains a priority to find means of support which effectively meet the primary objectives without the negative developmental and environmental consequences that have been seen in the past.
  • The dumping of unwanted production surpluses onto the world market through export subsidies has depressed prices for many temperate agricultural commodities, with EU surpluses of exportable wheat a prime example. (Despite several Common Agricultural Policy reforms, domestic support for wheat - as measured by OECD producer support estimates - declined only marginally from an average 52% of gross farm receipts in 1986-88, to around 48% in 1998-2000.) The URAA has been relatively unsuccessful in disciplining export subsidies, with the proportion of subsidised exports in total exports increasing in many products of export interest for developing countries: for example for wheat, from 7% in 1995 to 25% in 1998. The cost to developing country production and exports is considerable, and only partially offset by the lower food prices available to NFIDC consumers. This form of transfer from high-income country taxpayers to low-income consumers is in any case rather inefficient, and the lower prices may harm production for local consumption even in NFIDCs. Agricultural reform as a whole, including the removal of export subsidies, would only result in quite small price rises for developing-country consumers.
  • The counter-cyclical nature of producer support is also harmful to developing-country producers. High-income farmers are insulated from changes in world prices, making production less responsive to swings in demand. As a result, world commodity prices are more volatile, and the burden of adjustment falls disproportionately on developing-country producers.

Lack of capacity

This includes non-tariff barriers such as food regulations and standards, which developing countries are often not (or not effectively) involved in setting, and which may be deliberately used to reduce competition from developing countries. In any case, the lack of capacity to meet implement regulations and ensure compliance with standards constitutes a barrier to trade, and must be met by increasing that capacity.
Researchers at the Overseas Development Institute have identified many capacity related issues that developing economies face aside from tariff barriers:
  1. Traders and potential traders must know about an agreement and its details, however, the interests and skills of good producers lie in production and not in legal rules, only the largest firms can afford policy advisers.
  2. Markets and suppliers must share information - producer associations, industrial organisations, and chambers of commerce exchange information among their members and this information exchange must then take place across borders (as seen between Brazil and Argentina after Mercosur).
  3. A successful agreement must be flexible and governments need to accept that it will need to evolve.
  4. Trade agreements must generate relevant reforms in areas such as customs documentation, but also more fundamentally in relaxing rules for cross-border transportation.
  5. Selling to new markets requires adequate finance.
  6. Poor or wrong infrastructure can restrict trade
  7. Governments can support producers or traders in other ways.
The benefits of trade agreements for developing countries are not automatic, especially for SMEs whether or not they are already exporting as the costs of entering a new market are greater for them than for large companies when compared to their potential revenue.

Market access to developing countries

  • Average applied tariffs in agriculture are higher in developing countries (although most of the very high rates, over 100%, are found in developed countries). With an increasing share of agricultural exports directed toward other developing countries, high levels of tariff protection in the South may impede prospects for export-led growth. This may be particularly true for the export opportunities of low-income countries, which have increased export market share in agriculture .
  • "Open regionalism" holds the potential to stimulate global trade and improve the efficiency of regional producers. But regional arrangements can also become a vehicle for protection, trade diversion, and unintended inefficiency. Agreements in particular between richer and poorer developing countries risk generating trade losses for the poorer ones when their imports are diverted toward the richer members whose firms are not internationally competitive. However, where regional arrangements lead to the reduction of non-tariff barriers, trade creation is likely, and the dynamic benefits of effective regional integration in terms of improved governance and regional stability are likely to outweigh diversion concerns. The World Bank suggests that key conditions to benefit from expanded trade and investment include lowering common external trade barriers, stimulating competition, reducing transaction costs, and reinforcing nondiscriminatory investment and services policies. It should be noted that the greater structural differences between North and South economies mean that North-South arrangements hold the greatest promise for economic convergence and trade creation, including in agricultural products, underlining the importance of links between South-South arrangements and northern economies.
  • Trade liberalization. According to the World Bank, “most analyses suggest that unilateral reduction in barriers can produce the greatest and the quickest gains.”  Some countries, such as Chile, China and Costa Rica, have undertaken domestic policy reforms. Caution must however be employed: as the case of Haiti shows, liberalization when institutions and the economy are not strong enough to face risks and opportunities can be harmful (Rodrik 2001). And while reforms may be beneficial in the long run, for example by reducing possibilities for customs corruption, in the short run they create both winners and losers. Low-income consumers, unskilled workers in sheltered industries, and previously-shielded producers may suffer in the transition period as the economy adapts to changed incentive structures. Temporary safety nets can help cushion the blow and ensure trade-led growth is pro-poor. Specific assistance to meet costs of adaptation – for example of switching to a different crop – may be appropriate.