Special and Differential Treatment of Developing Countries in the WTO

Abstract

In this paper, we examine the theoretical rationale for WTO rules on the special and differential treatment (SDT) of developing countries. We describe a model of bilateral trade between a small country and a large trading partner, in which the small country suffers from a domestic commitment problem in trade policy. This problem arises because investors in the import-competing sector lobby the government to enact and maintain protectionist policies. We show that a reciprocal trade agreement, in which the large country lowers its tariffs conditionally on the small country doing the same, creates a "carrot and stick" mechanisms that helps the small country to overcome its commitment problem. If capacity in the import-competing sector can only be reduced gradually, the agreement may need to allow the small country to delay the implementation of its trade liberalization commitments, in line with SDT provisions in the WTO. Our analysis suggests that, if reconciled with the principle of reciprocity, SDT can help developing countries to liberalize and improve their trading prospects.JEL classifications: D72, D78, F13.

Special and Differential Treatment for Developing Countries

“…Yet as their title stresses, the effects are "uneven," restricted to industrialized countries that have been consistently active participants of multilateral trade negotiations, and to the sectors over which they negotiate reciprocal concessions. 27 In addition, Subramanian and Wei (2007) find important differential effects between countries that joined the GATT before the UR and those that joined during or after its conclusion in 1994: whereas GATT/WTO membership does not have any discernible effect on the import levels of developing countries that joined before the UR, it has a positive and statistically significant impact for those that joined later.…”

“…Furthermore, and critically, to generate such effects WTO accession must be believed by economic actors to confer a permanent character to those reforms. In other words, using the rationale put forward by Maggi and Rodrigues-Clare (1998,2007), Tang and Wei (2009) argue that WTO 27 Eicher and Henn (2011) argue that the industrialized-country WTO effect obtained by Subramanian and Wei (2007) actually reflects the effect of PTAs among those countries. Nevertheless, Eicher and Henn also find that there are positive WTO effects for the countries that have more to gain from trade negotiations (as proxied by their import volumes at accession), in line with the predictions of the terms-of-trade theory of trade agreements.…”

“…The government would be better off, however, if it could commit to free trade. A trade agreement could be the vehicle for such a commitment.While this reasoning is well known, the main contribution ofConconi and Perroni (2015) is in showing that, when investment in the import-competing sector depreciates slowly overtime, the optimal form of such a trade agreement would requireimmediate but conditional liberalization by the large country (assumed large enough to be indifferent to what happens in the small country) in exchange for delayed liberalization by the small country. Requiring simultaneous liberalization by the large and the small economies may not be politically sustainable for the latter-in the sense that, if imposed, it may be in the interest of the small country government to simply not liberalize at all.…”

Special and Differential Treatment for Developing Countries

“…Yet as their title stresses, the effects are "uneven," restricted to industrialized countries that have been consistently active participants of multilateral trade negotiations, and to the sectors over which they negotiate reciprocal concessions. 27 In addition, Subramanian and Wei (2007) find important differential effects between countries that joined the GATT before the UR and those that joined during or after its conclusion in 1994: whereas GATT/WTO membership does not have any discernible effect on the import levels of developing countries that joined before the UR, it has a positive and statistically significant impact for those that joined later. They show that developing countries acceding to the WTO under the stricter accession rules experienced higher growth and investment rates in the five years following accession.…”

“…Furthermore, and critically, to generate such effects WTO accession must be believed by economic actors to confer a permanent character to those reforms. In other words, using the rationale put forward by Maggi and Rodrigues-Clare (1998, 2007), Tang and Wei (2009) argue that WTO 27 Eicher and Henn (2011) argue that the industrialized-country WTO effect obtained by Subramanian and Wei (2007) actually reflects the effect of PTAs among those countries. Nevertheless, Eicher and Henn also find that there are positive WTO effects for the countries that have more to gain from trade negotiations (as proxied by their import volumes at accession), in line with the predictions of the terms-of-trade theory of trade agreements.…”