The Utilization Rate of Preferences in the EU

Preferential trade arrangements (PTAs) are an important aspect of protection patterns across the world, and particularly for Sub-Saharan Africa. Trade preferences granted by the major trading countries, and particularly the EU and the United States, have important impacts on the trade opportunities of poor countries, and particularly the least-developed countries. They matter not only for market access, but also for the interests of beneficiary countries in multilateral trade negotiations. Such countries are affected by multilateral negotiations not only through changes in world prices, but through erosion of their margins of preference. For many of the countries of Sub-Saharan Africa, potential erosion of preferences granted under arrangements such as the Cotonou agreement, Europe’s Everything but Arms (EBA); and the US Africa Growth and Opportunity Act (AGOA) is a particular concern. Whether these concerns are justified, and how they might be addressed can only be determined with knowledge of the details of these arrangements. Preference arrangements are almost by definition unevenly distributed, thus giving raise to possibly significant distributional impacts across regions. Analysts are used to assessing the consequences of these trade preferences on the basis of formal protection, which is of the preferential access for which exporters are eligible. However, this does not necessarily reflect the actual level of duties they face in practice. Indeed, recent studies suggest that preferences are systematically underutilized by exporters. Brenton and Manchin (2001) found that only 35% of CEECs’ exports enter the EU using the lowest tariff for which they would be eligible. Brenton (2003) reports that the EBA initiative was very poorly utilized by LDC exporters to the EU in 2001. Gallezot (2003), in contrast, find that a large proportion of the EU’s agricultural imports use a preferential rate, although approximately a third of eligible imports enters under the MFN rate. The objective of this work is to assess the extent to which preferences offered to exporters are effectively used in practice. This work will be carried out for the EU’s imports, with a method that will be also suitable for the US. In a second step, it will offer a CGE assessment of the consequences involved as far as the trade liberalization is concerned. A. Measuring the utilization rate of preferences in the EU The formal protection of the EU is reported to the WTO at the tariff line level. This is the benchmark against which the comparison is to be carried out. In order to assess how the preferences offered are utilized, custom data will be mobilized. These data describe the import regime under which imports enter the EU’s territory in practice. The exact way in which these data are treated needs to be adapted to the form in which they are available, and to the quality of the dataset. In a first step, cleaning the custom data is necessary. This requires putting the dataset in a usable form, in order to make it comparable to the data dealing with formal protection. Some treatment of the data about formal protection could also be needed. Once this is done, customs data can be merged with formal protection data. At this stage, an important work is necessary to check the consistency of the data. It is current, in this type of data, to find some inconsistent declarations, like imports from the US supposed to be entering the EU under the GSP regime. The comparison between formal protection and custom declarations should make it possible to detect these inconsistencies. If possible, rectifying these inconsistencies would be useful, in order to extend as far as possible the scope of the study. Such corrections could also be desirable in order to minimize the possible corresponding bias. The next step is the calculation of the utilization of preferences. Various methodologies are possible for doing so. The choice has to be done taking various constraints into account: (i) the methodology should make comparisons possible; (ii) the results should be available at the HS-6 digit level; (iii) the indicator(s) calculated should make it possible to use it (them) as an input in a CGE analysis of the impact of trade liberalization; (iv) the methodology should include an aggregation procedure for the indicator(s) calculated, across products as well as across partners, with special attention devoted to limiting the extent of the endogeneity bias involved. The data must be made available in a form that allows easy access and processing (including aggregation) by analysts. B. Assessing the consequences for the impact of trade liberalization The indicator(s) calculated as to the utilization rate of preferences will then be incorporated in a CGE analysis of the impact of trade liberalization, according to scenarios to be defined. This will be done using an adapted version of the MIRAGE model (Bchir et al., 2002), and the MAcMaps database (Bouet et al., 2002) for applied protection. A first stage of the work will be devoted to choosing the best-suited methodology to model the imperfect utilization of trade preferences, and its determinants. This will be done while taking into account the insights drawn from the previous part. The simulations will then be carried out, with the view of highlighting how the imperfect utilization of preferences changes the insights about trade liberalization. Special emphasis will be put on Sub-Saharan African countries, and on comparing the outcomes involved for this region under various scenarios. Sensitivity analysis will be carried out as to the modeling of preferences. If comparable data about the utilization rate of preferences in the US is available in due course, this data will be integrated in the analysis. This would be an important input in order to assess properly how the imperfect utilization of preferences alters the assessed impact of trade liberalization on Sub-Saharan African countries.