Margin of preferences and LDC export performance

Margin of preferences in 2014/13 for LDCs

Source: CDP Secretariat based on UNCTAD/TRAINS and UNSD/COMTRADE. Margins of preference for Republic of Korea, Turkey and the European Union refer to 2013, for the other six countries to 2014.

by Matthias Bruckner*

Preferential market access is a major support measure available to LDCs. By lowering or eliminating tariffs on LDC imports, preferential market access contributes to offset higher production costs LDCs have due to structural handicaps such as remoteness from major markets, landlockedness, unskilled labour force, etc. However, the value of preferential market access schemes is often questioned due to on-going liberalization and the proliferation of regional trade agreements that imply in de facto low preferential margins.

However, such general conclusion does not take into account the wide range of tariff levels applied to products of export interest of LDCs. Thus, it is worth to consider recent trade and tariff data to look at the relation between margins of preferences and export performance of LDCs. We find that margins of preference remain sizeable for a number of agricultural and manufacturing products in 9 major markets (Australia, Canada, China, European Union, Japan, Switzerland, Turkey and United States), but these margins vary across importing countries. For low-skill manufactures such as garments, margins of preferences are positively associated with export performance. The higher the margin, the higher the market shares of LDCs in preference granting countries. However, no clear relation exists for agricultural products as well as for fuels and mineral products. For these products, export performance by LDCs seems to be driven more by endowments than by market access conditions.

The table above shows effective margin of preferences for six select products categories (at the two-digit HS level) in 9 major markets. Effective margins of preferences are the difference between tariffs faced by non-LDC developing countries and the preferential tariff granted to LDCs, based on the UNCTAD’s TRAINS database available through WITS. Preferential margins can be negative (as in the case for apparel in the United States) if product groups are included in bilateral or regional preference schemes available to certain non-LDCs, while they are excluded from LDC preference schemes.

Figures 1 to 3 show margins of preferences and the share of LDCs in exports of developing countries to these markets. They include the six products group from the table as well as all other 17 product groups for which LDC exports in 2014 were larger than $700 million. We see that for all low-skill manufactures there is a positive correlation between margins of preferences and market shares. However, due to other factors at play, the impact is not uniform across products and countries: there seems to be non-linear relationship between margins of preferences and market shares. For example, whereas the margin of preference for LDCs in garments (HS 61 and 62) in Japan is slightly higher than in the EU, the LDC market share in Japan is much lower than in the EU. More stringent rules of origin could be an explanation, but that would warrant further analysis. At the same time, the market share of LDCs in Turkey’s apparel market is with 37 and 38 per cent (HS 61 and HS 62, respectively) very high given the margin of preference. In the United States, LDC market shares are 9 and 13 per cent (HS 61 and HS 62, respectively) despite negative margin of preferences, though the market share is far lower than in Canada or Europe. This could indicate that LDCs have partially overcome their structural handicaps in this sector. Interestingly, preferential market access in electronics (HS 85, which are considered as medium skilled manufactures) has not enabled LDCs to gain significant market shares. However, the margins of preference in this sector are lower than for low skill manufactures and close to zero in developed country markets.

Source: CDP Secretariat based on UNCTAD/TRAINS, downloaded on 28/12/2015.

Source: CDP Secretariat based on UNCTAD/TRAINS, downloaded on 28/12/2015.

Source: CDP Secretariat based on UNCTAD/TRAINS, downloaded on 28/12/2015.

Margins of preference seem to play a less important role for agricultural products export performance, with the possible exception of products such as fish or raw hides, even though margins of preferences can be quite high. Non-tariff barriers in the agricultural sector could be a possible explanation. For minerals and fuels, margins of preferences are generally low (below 5 per cent) and uncorrelated to market shares.

Overall, the data lends some support to the view that preferential market access can play a positive role for LDC exports. Current levels of margins of preferences are substantial in key product groups and are correlated with LDC market shares. However, the effectiveness of preferential market access is strongest in low-skill manufactures such as clothing. Full implementation of duty-free-quota-free commitments and reduction of non-tariff barriers (such as  restrictive rules of origin, SPS and TBT requirements) could further improve the usefulness of preferential market access for harnessing trade as an engine for development.

*The content, findings, interpretations, and conclusions as expressed in this article reflect the views of its author and do not necessarily represent the views of the United Nations.