Part 2—it’s time to take Developing countries’ trade Vulnerabilities into account

Part 2—it’s time to take Developing countries’ trade Vulnerabilities into account

In the previous installment of the Business Perspective column, we had started a discussion on the need for trade vulnerabilities to be weighed more heavily in the international trade scene. The conversation in this area had definitely received a boost due to the Trump administration’s call for a four-point ‘objective criteria’ to be established as it pertains to countries being able to wear the “developing” label.

Of course, it is possible to say that only one of the four conditions is directly linked to trade: That is, the requirement that the country ought not to have exports amounting to more than 0.5% of global exports. The others, such as income classification and membership, are a bit more of a stretch as far as trade talks are concerned.

Now, with the Electoral College having made Biden’s “election sure”, it is somewhat fair to expect that the Trump era ambitions in this area will fade away. However, should that mean that developing world ought to allow the proverbial genie to completely return to the bottle? The short answer is “No”. The fundamental reality is this: broad country groupings have a way of making it seem that all “developing” countries “look alike”, a sentiment that is as misguided at the country level as it is when applied to racial matters.

It is for this reason, the position taken in a recent working 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” is timely. The authors wrote:

“This paper proposes a Trade Vulnerability Index (TVI) designed to quantify the vulnerability of countries and thereby provide a means for the WTO to identify vulnerable states, and on that basis, propose S&DT [Special and Differential Treatment] that is responsive to those needs.”

The authors would go on to explain that the TVI is intended to discourage the use of “broad country groupings such as developed and developing” in favor of an approach that emphasizes “structural characteristics of an economy which can impact its development outcomes.” This is pivotal because as has been discussed in this column earlier in the year, developing states like Belize may have vulnerabilities, many of which may exist outside the reach of policy and policymakers. For instance, which policy or policymaker can make Belize invulnerable to hurricanes, or can suddenly make the country’s private sector less reliant on strategic (input) imports needed in the production process?

The concept of the TVI, as pointed out by the trio, does build upon previous works that have acknowledged the needs of small and vulnerable economies (SVEs). However, unlike SVEs, the authors make the point that the proposed TVI would go “one step further as it seeks to provide objective evidence of sector and issue-specific criteria that can be used as part of trade negotiations to substantiate a country’s claims of vulnerability. In this regard, it provides flexibility in the approach for specific S&DT provisions.”

Trade Vulnerabilities in ‘COVIDIOUS’ times

But let’s take a bit closer look at these vulnerabilities and how they play out on the ground. One key variable to consider under the proposed TVI framework would be an economy’s susceptibility to natural disasters. Undoubtedly, this factor is possibly the clearest cut of them all: A country regularly ravaged by natural phenomena such as droughts, hurricanes or floods will have its fair share of developmental setbacks. Belizeans wouldn’t have to look too far for case-in-point examples as within the last two years we’ve gone from drought to flood conditions, with both adversely affecting the agricultural production and, by extension, the ability to earn foreign dollars via exports.

Speaking of exports, a country with goods sold to only a few trading partners is also considered susceptible external swings and shocks. Let’s take Belize’s sugar, for instance. Everyone knows that this is one of the country’s chief merchandise exports, but it is a commodity with a high import-market concentration ratio due to the fact that roughly 90% of Belize’s sugar is sold to just two partners: The United States and the United Kingdom (UK). While Belize with the rest of the region became a little anxious in the wake of ‘Brexit’ and its potential impact on our UK trade, we are fortunate that there have not been any major disruptions or shocks in trading with these markets but it cannot be lost on anyone as to why these levels of dependency can be viewed as a risk under any vulnerability index.

Connected to all this is the matter of limited diversification. Let’s take tourism, for example. Here’s a sector that, as far as foreign exchange (FOREX) earnings go, accounts for more than 40% of FOREX inflows. Then, enter the likes of the “Great Lockdown Recession”—as the IMF has so dubbed it—and we see the effects of the pause button being pressed on this industry. Even in pre-COVID times the famed import-coverage ratio hovered around its three-month prescribed benchmark; therefore, there is little mystery as to why importers are finding it more challenging to access FOREX these days. There is a type of understandable rationing occurring, with the banks reminding importers that “there’s a priority list”. Even the government wasn’t spared, as it had to skip interest payments on the US-dollar bond, which likewise required precious foreign dollars that are also needed to import essentials such as medicine, energy, and more.

Of course, not missing a beat, the perfect storm of circumstances outlined above “motivated” the rating agencies to further downgrade the struggling economy, thereby, auguring even higher prices to be faced if Belize was ever interested in going back to the external commercial lenders. Even the 5-year US$30 million Fixed Rate (Treasury) Note launched earlier this year reflected this, as its coupon was set at 6.5% at a time when so-called safe instruments with similar maturities have coupon rates at 0.25% (Australia), 0.10% (Japan), and 0.37% (USA). And let’s not forget the Central Bank of Belize (CBB)’s stated purpose for that Fixed Rate Note: “The US-dollar proceeds of the Fixed Rate Note will buttress the existing portfolio of official foreign reserves, bolster the import cover for the national economy, and strengthen the peg.” That’s a noble cause pursued at an unfortunate and “ignoble” price.

Those are just three of the fifteen TVI indicators being proposed by the aforementioned authors. Belize, like many of her Caribbean kin, also has additional vulnerabilities on account of its small (market) size that limits economies of scale, reliance on strategic imports, and trade openness.

Moreover, if one would take the diversification conversation a step further, it is possible to argue that product-space considerations also should be weighed. You see it is one thing to tell a small, developing country to “diversify”; but as works by economists such as Ricardo Hausman and others would remind us, countries move into “new” products that are closely “related” to goods they currently produce and (hopefully) in which they enjoy some comparative advantage. In the simplest since, this concept of “relatedness” suggests that a natural-resource-based economy wouldn’t (and maybe cannot) suddenly jump to producing upscale, more sophisticated technological products “overnight”. To use a crude analogy, someone wouldn’t normally expect to see a farmer rapidly shift his available factors of production towards manufacturing airplanes, as the inputs and the skills needed are so far apart. However, it is a bit easier to visualize that farmer, with the appropriate technical support and capital investment, expanding into some form of food processing, which is more “related” to his current operations.

‘Results may vary’

Now, the discussion above was largely focused on Belize, but a similar discussion could be had with any small, developing Caribbean state. Interestingly, it might not be surprising to find that—as the good old disclaimer admonishes—“results may vary”. Therefore, there is a valid argument to be made as it pertains to shifting from a “broad country groupings” methodology to an approach that emphasizes “structural characteristics of an economy which can impact its development outcomes,” and in so doing satisfy the WTO’s mandate of making application of Special and Differential Treatment (SDT) more “precise”.

For instance, at article 15 of the WTO’s Agreement on Agriculture (AoA), the international community rightfully acknowledges that SDTs should be afforded to developing countries, but then goes on to prescribe an across-the-board 10-year “grace period” for developing states to comply with the AoA’s commitments.

One such commitment is found at article 9 of the AoA which calls for reductions in “direct subsidies, including payments-in-kind, to a firm, to an industry, to producers of an agricultural product, to a cooperative or other association of such producers, or to a marketing board, contingent on export performance”. The operative thinking here was likely that a decade must be sufficient time for developing states to get their “act together”. Maybe in a perfect world, ten years would be enough, but does that timeline still abide in the face of the types of vulnerabilities already outlined above (not even to mention cultural and social challenges)?

Beyond the natural-disaster vulnerabilities, for a country that relies on FOREX so as to preserve its foreign exchange rate peg—a peg which helps to safeguard its monetary stability—there is an added need for export earnings to remain as high as possible. But how is that goal possible in the face of constraints that diminish its competiveness in an industry that is beset by volatile world market prices? The natural inclination is, of course, to want to subsidize before we are promptly reminded of the WTO commitments.

Now, how would this story play out under the proposed TVI framework that speaks to a more “personalized” approach to SDTs? One could imagine the ten-year “grace period” being treated as a ‘baseline’, however, with the understanding that countries would be assessed on their degree of trade vulnerabilities to determine if more time (or support) is needed.