It’s time to take Developing countries’ trade Vulnerabilities into account

It has never been any secret that the international trade scene is a mixed bag of major and “minor” players, with countries like Belize clearly falling within the latter classification. Putting things into a clearer perspective, in 2019, United Nations Trade Statistics Database (UN COMTRADE) placed the value of global exports at just below US$ 19 trillion, with only five economies (China, United States, Germany, Japan, the Netherlands, France)  accounting for close to 40% of that figure.

While the United States may be the largest economy, China’s US$2.5 trillion in exports is roughly one and half times that of the USA’s US$1.65 trillion recorded last year. These two giants alone account for approximately one-fifth of world exports, while countries like Belize’s US$244 million in merchandise trade comes in well below 1.0%. As the saying goes, virtually a ‘drop in the bucket’. And, unfortunately, in the world of trade negotiations and agreements, size does matter.

In its own way, the international community has long since acknowledged that the varying sizes of our trade volumes and economies warrant “special and differential treatment” (SDTs) to be afforded to smaller, developing economies. Consequently, the General Agreement on Tariffs and Trade (GATT) and several subsequent World Trade Organization (WTO) agreements have incorporated SDT provisions. For example, the GATT itself contains 25 such provisions, which include Article XXXVI.3 that states: “There is need for positive efforts designed to ensure that less-developed contracting parties secure a share in the growth in international trade commensurate with the needs of their economic development.”

In one way, it is possible to classify those 25 GATT provisions into three broad groups. First, there are provisions that are aimed at increasing developing countries’ trade opportunities (such as Article XXXVI.2, XXXVI.3, and more).

Second, there are those provisions that provide a degree of flexibility as it pertains to developing countries meeting liberalization commitments set by the WTO—such as XXXVI.8 that reads: “The developed contracting parties do not expect reciprocity for commitments made by them in trade negotiations to reduce or remove tariffs and other barriers to the trade of less-developed contracting parties.”

And finally, there are those rules that allow for the protection of the interests of developing member states. One such provision is found at Article XXXVI.7 of the GATT: “Because of the chronic deficiency in the export proceeds and other foreign exchange earnings of less-developed contracting parties, there are important inter-relationships between trade and financial assistance to development. There is, therefore, need for close and continuing collaboration between Contracting Parties and the international lending agencies so that they can contribute most effectively to alleviating the burdens these less-developed contracting parties assume in the interest of their economic development.”

The point here is that existing provisions within the GATT and other trade rules do not reflect a lack of understanding that there’s an uneven ground between the developed and developing member states. At issue, however, is whether or not the “method” currently in use is sufficient. As it currently stands, the label between “developed” and “developing” is based on country’s self declaring themselves as either one or the other.

This system, however, was recently challenged by the United States under the Trump Administration which sought to establish an ‘objective criteria’ for a country to qualify as “developing”. Last year, the Trump Administration had proposed a four-prong criteria: (a) the country’s exports ought not be more than 0.5% of global merchandise exports, (b) the jurisdiction cannot be a member of the Organization for Economic Cooperation and Development (OECD), (c) the ‘developing-country’ ought not be a member of the Group of 20 (G20), and (d) it should not be classified as a ‘high income’ country under the World Bank classification system.

While the criteria were clearly aimed at countries like China, which, despite its ‘powerhouse’ status, is still classified as a developing economy and, by extension, benefits from SDTs. Nevertheless, like many broad nets, they can potentially catch unintended prey, as several Caribbean economies (such as Barbados, The Bahamas, and Saint. Kitts and Nevis) are “high-income” economies—a status that already disqualified several needy countries from receiving debt relief assistance during the ongoing pandemic.

SDT Benefits?

At this stage, therefore, it is useful to highlight the benefits of being the recipient of SDTs. The SDT provisions grant developing countries the following: (a) longer grace periods to implement WTO liberalization commitments and agreements, (b) access to assistance that can augment trade opportunities, (c) international support that looks after a country’s trade interests; and (d) technical support to build capacity in several areas.

Fundamentally, the SDTs were among the international community’s attempts at leveling the playing field in favor of the smaller economies. Clearly, the Trump Administration’s view was that a country with merchandise exports that make up less than 0.5% of global exports fit the bill. But is that enough? And on what basis was the cutoff of 0.5% chosen? These are among the questions raised in a recent working paper by Jason Cotton, Alicia Nicholls and Jan Yves Remy (2019), entitled “Using a trade vulnerability index to determine eligibility for developing-country status at the WTO: a conceptual response to the ongoing debate”.

Trade Vulnerability Index

It is unclear whether or not the Trump Administration’s call for an ‘objective criteria’ will continue under the Biden presidency; however, with the heightened attention given to the long-standing debate, an opportunity has appeared for Caribbean economies to “shake things up” in our favor.

The fact is, apart from being small (in population and economy), Caribbean (and other developing regions) are also beset by a far more pervasive problem: high levels of trade vulnerabilities. As highlighted by Cotton, Nicolls, and Remy (2019), the SDT provisions may indeed need to go even further than they’ve gone thus far due to the fact that small vulnerable economies (SVEs) also have to contend with “structural”, “institutional” and “environmental” challenges that may slow their rate of growth and ability to access new markets.

The most glaring example is the Caribbean region’s exposure to flooding and other natural disasters that have the ability to decimate agricultural crops, while reducing tourism activity. Speaking of tourism, countries like Belize have lost significant portions of their foreign exchange receipts as external shocks like the Coronavirus Disease (COVID 19) have virtual shutdown this sector.