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Under the MFN all countries are to have the same tariff rates for all the other members of the WTO, however in the case of the developing countries, they are granted the Generalized System of Preferences, by which, selected products originating from developing nations get a reduction in tariff rates or face zero tariff even over MFN tariff rates.
The "â€¦ the objectives of the generalized, non-reciprocal, non-discriminatory system of preferences in favour of the developing countries, including special measures in favour of the least advanced among the developing countries, should be:http://www.unctad.org/img/1px.gif
(a) to increase their export earnings;http://www.unctad.org/img/1px.gif
(b) to promote their industrialization; and http://www.unctad.org/img/1px.gif
(c) to accelerate their rates of economic growth."
(Resolution 21 (ii), UNCTAD II Conference in New Delhi in 1968)
Under the Enabling Clause (1979), countries giving the preference such as the United States, European Union, Canada, Japan and 9 others could grant permanent preferential under their respective GSP schemes.
The GSP has showed mixed results. While on one hand the GSP has benefitted the 'rich developing countries' such as Singapore, Hong Kong, Mexico, Taiwan and recently India and China, on the other hand the developed nations have implemented the GSP but not in those sectors in which the developing countries have most interest such as agriculture and textiles.
Removal of non tariff barriers such as the phasing out and expiration of the Multi- fibre Agreement or the Agreement on Textiles and Clothing (ATC) in 2005, which restricted the import of textiles and clothing from developing countries to the developed countries through quota, has helped in the increase in exports of the developing countries and especially emerging markets such as Taiwan, Hong Kong and China have taken advantage of it.
However for the emerging markets economies the tariff concessions in the previous rounds of negotiations and the GSP has helped increase their exports.
These tariff reductions are not only done by developed countries but also by developing countries and some of the emerging economies especially have slashed their tariff rates by a wide margin.
Summary of Average MFN Applied Tariff Rates of Selected Emerging Market Economies
Average Tariff (Per Cent)
Highest Rate Reported
Latest Rate Reported
Source: World Bank Database
It is interesting to note that even after tariff reductions in the emerging economies, in accord with the agreements negotiated, the tariff revenue has increased. This is mainly because of the eliminations of non tariff barriers like import quotas due to increasing demand for consumption goods and manufacturing inputs, export restrictions on agriculture goods and raw materials for domestic industries, local content requirement especially in the automobiles industry and VERs (Voluntary Export Restrictions). Although licensing has not been removed completely in agriculture imports, it has been greatly reduced. Hence there is less motivation to smuggle, raising tariff returns. Also tariff barriers tend to be more transparent compared to non tariff barriers, increasing the confidence of the international investors in the markets.
One of the basic effects of a tariff reduction has been the increase in consumption, both of consumer goods and of raw materials for industries. Domestic firms facing competition from the cheaper imports reduce the consumer prices so as not lose their market share. The reduced prices increases the purchasing power of the citizens and this is especially beneficial for the lower income groups. The emerging market economies have large populations which live below the poverty line. This increase in their purchasing power improves their standard of living. Consumers also get better variety of goods in the market and it has also been seen that there is an improvement in the quality of goods.
Also cheaper and better quality raw materials can be imported, reducing the cost of production which not only translates to reduction in consumer prices, but also increases the quantity and quality of production. In addition technology and technical assistance, financing, consultation and management expertise can be brought into the country for not only manufacturing industries but also for the primary sector. Industries such as agriculture, agribusiness, fishing, forestry and mining provide raw material to other domestic industries but the products of these industries are also exported by developing nations.
Share of Merchandise and Service Imports and Exports in World Total of Selected Emerging Market Economies (Per Cent)
Source: UNSD Statistical Database (UNdata)
Emerging Market Economies: Brazil, Chile, China, Colombia, Czech Republic, Egypt, Hungary, India, Indonesia, Mexico, Morocco, Peru, Philippines, Poland, South Korea, South Africa, Taiwan, Thailand, and Turkey
Key advancements in the world trade scenario like the completion of the Uruguay Round and establishment of the WTO, macroeconomic reforms and trade liberalization policies in many developing nations, especially India and Brazil, created an atmosphere more conducive to the swift growth in the exchange of goods and services. Chinese accession to the WTO along with the accession of other nations has further integrated the multilateral system.
Most developing nations' exports are still dominated by agriculture goods and textiles, although the emerging economies have shown a distinct increase in the export of manufactured goods. The value of mining (mostly fuels) and agriculture goods has risen but the main increase has been in manufactured goods, though the rise in value has been more due to increase in volume rather than change in price. This boost in their share of merchandise exports is mainly due to the dramatic advancement in China's role as global manufacturing centre in especially sectors which are labour intensive. In 2006, out of the top 10 exporters of manufactured goods, 9 were emerging economies.
The largest exporter of agriculture products has been Brazil followed by China and Thailand and of fuel, Saudi Arabia from the emerging market economies. The significant increase in the export of manufactured goods has is mainly lead by export of office and telecom products, followed by textiles and automobile products. Despite the prominence of China as the lead exporter of textiles and clothing, Colombia and Peru have also expanded their exports.
After the phasing out and expiration of the Multi-fibre Agreement or Agreement on Textiles and Clothing (ATC) in 2005, which employed non tariff barriers like quotas, regions such as China, Hong Kong and Taiwan saw a drop in their exports but they were able to develop other export oriented sectors.
Among the developing countries, the emerging markets are both the lead exporters and importers of fuels, agriculture products and manufactured goods.
The growth in commercial services has not been as much for the emerging markets as a whole, however India has seen an impressive expansion in the service industry as much as 2.69 % of world export of services in 2008. This is mainly due to the boom in information technology and hotel industry. China also shows 3.35 % of world exports; however it shows a much more dramatic figure of 8.91 % of world exports in merchandise. India is followed by Hong Kong with 2.37 % share, Singapore with 2.15% share and South Korea with 2.05 % share in 2008. The main export in commercial services has been of transportation services and tourism, with India being the largest exporter of tourism and South Korea being the largest exporter of transportation services.
The emerging markets experienced a disproportionate effect through their drop in service export in the early half of 2000's mainly due to the global IT crisis. China, South Korea, India and Singapore are also leading importers of commercial services among the emerging markets especially their increasing share in transportation. Commercial services can also include construction services, communication services, insurance services, financial services, royalties and other services.
During the East Asian Crisis the emerging markets saw a sizeable drop in their merchandise and service exports; however after the Subprime Crisis in 2007 - 2008 the fall in the value of emerging economies exports was smaller than exports of the industrialized nations.
The increase in imports and exports gives a boost to the domestic industries. Increase in imports gives access to better raw materials in both quantity and quality as well as at reduced cost. Seeing the competition, domestic suppliers reduce their prices of raw materials to the firms. Increase in exports can be attributed to the tariff reduction of other nations and export promotion activities by the government. Also access to international markets spurs the domestic producers to increase their production quantitatively as well as qualitatively. There is an increase in production, which in turn leads to a rise in employment within the country. The increase in employment has two effects. One there will be more consumers in the market and there will be a boost in the demand for the products. Second with increase in employment there will also be increase in productivity of the firms and the industries, whereby they will be able to supply more goods and services in the market. Seeing the profitability more firms will join in improving the competition in the industry.