Options for Developing Countries in an Evolving Trade Landscape

A new trade policy landscape is emerging with slower trade growth and greater uncertainty. Both developed and developing countries alike are reevaluating their own trade strategies and alliances.  The WTO Trade Facilitation Agreement (TFA) and some of the key plurilateral agreements that cover trade in telecommunications, information technology, and government procurement, among others, reflect ongoing commitments to a multilateral system. However, progress toward free trade under the WTO will be piecemeal, at best, for the immediate future. 

What policy options are available for smaller and developing countries to navigate this evolving trade landscape? Access to markets, capital, and technology remain critical drivers for smaller countries to sustain their economic development and poverty reduction. There are several paths developing economies can pursue that can help them achieve scale, promote competition, and increase efficiencies.

Unilateral reforms at the national level (i.e. removal of trade barriers without reciprocal action by other countries) can enable smaller countries to reap substantial benefits and face fewer costs (in terms of welfare losses from trade diversion) than the alternatives over the long-term. But these can be a hard sell, given that domestic industries often oppose opening the market to competition without reciprocal market access. They can also trigger temporary additional costs in the short- and medium- term, in the form of reduced government revenues or displaced workers for example, that need to be mitigated with additional taxes. Reciprocal regional and bilateral agreements are, therefore, often seen as more palatable means to open protected markets.  

The regional integration track, with caveats, offers a convenient avenue for overcoming the disadvantages of smallness by pooling resources or combining markets to reap scale benefits. The reciprocal nature of regional agreements appeals to exporters, which are often incentivized by increased market access to make concessions to open domestic markets. Under the new trade landscape, regional integration must be viewed also as means of lowering negotiation costs and increasing bargaining power within the multilateral system and better positioning to deal with potential mega-regionals as they evolve. The priorities and motivations for regional integration are as varied as the underlying drivers, be it synergies to generate value chains, food security or pure security motivations, it will be critical, moving forward, that these agreements serve not as a substitute for multilateral liberalization, but as enablers of multilateral liberalization, if they are going to serve the longer-term interests of its members to build resilient economies that have the flexibility to respond to changing global dynamics and future upheavals. This will require a careful balancing of regional priorities with the fundamentals of multilateralism that will serve their longer-term interests. The existing regional trade blocs, such as MERCOSUR, COMESA/EAC, UEMOA, SADC, ASEAN/AFTA, and SAFTA, to name a few, should be accelerated and deepened.

In parallel, developing countries should seek to accede to plurilateral agreements and conventions, whether under the WTO, the Kyoto Convention or other trade-facilitating bodies. Like trade agreements, the reciprocal nature of many of these plurilateral agreements can act as a ‘carrot’ to align domestic policies with international standards. The ‘a la carte’ nature of these agreements also allows countries to pick and choose so-called WTO-plus integration options, at their own pace, while opening new avenues of market access. For example, the Information Technology Agreement now has 82 signatories and has eliminated tariffs on covering some $2.5 trillion of annual trade, benefitting both members and non-members. Developing countries can do much to achieve the benefits of policy integration unilaterally by adopting international standards and by recognizing the regulatory norms of major markets, such as the EU and the United States.

Bilateral FTAs are yet another path developing economies are increasingly pursuing. These agreements, compared to regional agreements, are generally easier to negotiate. However, they must be balanced against the administrative burden on traders and potential spaghetti bowl effect of membership in a multitude of agreements. Forging an agreement with more advanced economies is likely to yield the most gains for smaller and poorer countries, but are more difficult for them to secure if other strategic interests are not in play.  However, an agreement with larger emerging economies such as India, China or Brazil can likely generate the scale economies and efficiencies akin to a regional FTA. To realize these benefits, these larger countries need to take concerted steps to open their own economies and adhere to interational standards, particularly with respect to Technical Barriers to Trade and Sanitary and Phytosanitary Standards, that together can better promote their own trade integration and that of their smaller trade partners. Given their own size and leverage, it is in their own interests to revive multilateral negotiations that are the optimum track for promoting a development-based trade agenda that benefits them and other developing countries.

In summary, developing countries have the opportunity to leverage unilateral, regional, bilateral, and plurilateral agreements that can approximate, to some extent, the benefits of multilateral integration. It will be critical that developing countries take a more strategic and comprehensive approach to regionalism and integration—with each agreement as part of an integrated network versus one-off opportunities—with a longer-term view that enables multilateral progress in the future.