Duty- and quota-free access for exports to global markets is something developing country trade negotiators have demanded for years. Few other “stroke-of-the-pen” measures could boost employment and reduce poverty in low income countries in such large numbers. For instance if the US removed tariffs on Bangladeshi garments – which average around 13%, but for some items are as high as 33% – then exports to the US could rise by $1.5 billion from the FY13 level of $5 billion, in turn generating employment for at least an additional half a million, primarily female, workers. Examples of other countries facing US tariffs include Cambodia (12.8% average tariff rate on its exports to the US), India (4.01%), Indonesia (5.73%), and Vietnam (7.41%). Progress in trade facilitation would likely have even greater pay-offs to growth and employment, but these require structural reforms and investments, while the decision to remove tariffs is a simpler, “stroke-of-the-pen” measure.
In practice, various domestic political considerations in OECD countries, primarily spurred by protectionist lobby groups, act as a barrier to duty-free or quota-free access. In addition, concerns about labor, safety, and environmental standards are often cited to justify trade barriers. Yet few are willing to pay for the factory upgrading or relocation that may be required to improve these standards. Bangladesh is a case in point. Following the tragic collapse in April 2013 of a building that hosted garments factories, leading to many lives being lost, two associations were formed, one largely representing European buyers and the other representing US buyers. These two groups were originally intended to conduct inspections of factories and help share the costs of improvements that need to be made, in the spirit that the problems the industry faced were the joint responsibility of both producers and buyers/retailers. However, while inspections are being carried out and suggestions for improvements being made, there is considerable doubt within the industry as to whether the buyers associations will ultimately share in the costs of paying for these improvements.
Let us assume that for various reasons the current level of tariffs and quotas are retained. With the tariff revenue generated from low-income country manufacturing exports, a new fund could be set up whose resources finance the improvement of working conditions in these countries. For instance the $850 million or so of tariffs that US consumers pay on Bangladeshi exports, if it remains, could be placed by the US in a fund to finance factory upgrading and general improvement in working standards in Bangladesh. This “Tariffs for Standards” fund could be administered globally by a third party, such as the World Bank, collecting contributions not only from the US but from other OECD tariff-imposing countries.
This type of fund has been set up for different initiatives in the past. Fifteen years ago, developed countries and multilateral lending agencies contributed to a fund – the Heavily Indebted Poor Countries fund, or HIPC – managed by the World Bank, which reduced the external debt levels of highly indebted low-income countries if they implemented various poverty-reducing reforms. The issue of labor and factory standards is arguably now as important as debt relief was back then. The one key difference between HIPC and this “Tariffs for Standards” fund is that the proposed fund is intended to finance private entities, while HIPC reduced sovereign debt. There are precedents for this too, and therefore governance structures need to be fully in place to manage some sort of competitive challenge fund whereby individual companies could access the fund and implement worker safety and welfare improvements, which in turn can have demonstration effects to other entrepreneurs.