WORLD TRADE
ORGANIZATIONWT/TF/COH/14
14 February 2003
(03-0964)
COMMUNICATION FROM THE INTERNATIONAL MONETARY FUND
The following contribution has been received from the staff of the International Monetary
Fund.  It has been prepared in response to consultations between the WTO Director-General and the
Deputy Managing Director of the IMF on how the IMF can provide support to the WTO Secretariatand Members in areas of its expertise.
_______________
FINANCING OF LOSSES FROM PREFERENCE EROSION
Note on Issues raised by Developing Countries in the Doha Round
1
EXECUTIVE SUMMARY
Losses from preference erosion, for LDCs as a wh ole, as a result of MFN tariff reductions by
the Quad countries, will probably be very small, likely less than two per cent of exports. Only a few
countries will face losses that are not insignificant. But here too the magnitudes are small in absolute
value and in relation to exports. Only one country is expected to face losses exceeding ten per cent of
exports.
Three key distinguishing features of losses from preference erosion are that they represent a
permanent shock, they can be anticipated ex ante, and that their actual impact is spread out over time.
Given the limited number of countries that will be seriously affected and the distinguishing features of
losses from preference erosion, any financing is best done in the context of existing medium-termadjustment and program financing facilities. In any assessment of the balance of payments need in the
context of program discussions, Fund staff shou ld take into account the potential losses from
preference erosion as one of the elements that affect the external environment facing a country’s
exports.
I. INTRODUCTION
1. A number of proposals have been made in the Committee on Trade and Development aimed
at strengthening the special and differential treatment of developing countries, particularly the least
developed countries (LDCs), in the WTO. One such proposal relates to the provision of temporary
financing to the least developed countries for the loss of preferences that would result from anyreduction in MFN tariffs under the Doha Round:
"Least developed countries should be provided temporary financial compensation for
a fall in export earnings resulting from a reduction of MFN tariff rates in the case of
                                                     
1 This Note was prepared by Arvind Subramanian, Research Department, International Monetary Fund.WT/TF/COH/14
Page 2
products whose share in the total export earnings of an LDC exceeds 50 per cent."
(TN/CTD/W/4/Add. 1, p.3)
2. This note has two objectives.  First, it provides upper bound estimates of the loss in exports
that individual least developed countries might suffer as a result of MFN tariff reductions by
preference-granting industrial countries. These estimates are based on detailed country-specificinformation on the exports of the least developed countries, their product composition, their main
markets, and the MFN tariffs on these items in the markets of the Quad countries (United States
(U.S.), European Union (EU), Japan, and Canada).
3. Second, this note looks at whether and how the international community might respond by
way of providing financial assistance to countries that experience a decline in exports due to
preference erosion. In view of the proposal made in the WTO, this note focuses only on the least
developed countries and not on all countries that potentially face preference erosion.
4. This note does not aim to assess the benefits and costs of preferential schemes in general.  A
large body of literature (Langhammer and Sapir, 1987; Tangermann, 2002) has explored these
questions in great detail. On the one hand, preferences confer terms-of-trade gains, resulting in
increased exports which allow countries to le arn-by-doing and obtain l ong-term benefits (as
illustrated, for example, by the experience of Mauritius (Subramanian and Roy, 2002)).
5. On the other hand, not only are the benefits of such schemes overstated, but they can also
impose costs. The benefits from preferences do not accrue fully to producers in exporting countries,
but also to importers in preference-granting countries; preferences are often encumbered by onerous
rules of origin (Krueger, 1993; Krishna and Krueger, 1995) and tariff rate quotas that further limit
their value. On the cost side, preferences may encourage specialization that is at variance with long-term comparative advantage (the banana exporting countries in the Caribbean being examples); the
grant of preferences is often linked to the adoption of labor and intellectual property standards that
can be costly (Bhagwati, 2002); they create an  incentive against liberalization in the preference-
receiving country (Ozden and Reinhardt, 2002); and the vested interests created by preferences can
conspire to impede multilateral liberalization (t he dismantling of the MFA is opposed not only by
protectionist interests in importing countries, but also by producers and governments in a number of
exporting countries).
6. It should be emphasized that the estimates of losses from preference erosion provided in this
note are sensitive to the specific assumptions made in the analysis. These estimates, particularly for
individual countries, will obviously need to be refined when more information becomes available as
the Round unfolds. The main purpose of these estimates is to serve as the basis for examining whether
special financing schemes would need to be instituted to address losses from preference erosion.  Itshould also be emphasized that the assumptions made below are deliberately biased in favor of
overstating  the losses from preference erosion to minimize the risk of overlooking countries that
might face significant financing needs as a result of the Doha Round.
II. BACKGROUND INFORMATION
7. According to the United Nations (UN) definition, there are 49 least developed countries, 34 in
Africa, 12 in the Asia-Pacific region, and one each in Central Asia, the Middle East, and the Western
Hemisphere. The average per capita PPP GDP of these countries is US$ 1377.  All the LDCs are Fund
members, but 18 of them are not members of the WTO (Table 1).WT/TF/COH/14
Page 3
Table 1
LDCs:  Selected Information
Country Per Capita PPP GDP
(1995)WTO
MemberFund
MemberRank by PPP
GDP
Afghanistan, I.S. of n.a. NO YES 42
Angola 2052 YES YES 6
Bangladesh 1292 YES YES 17
Benin 849 YES YES 25
Bhutan 1155 NO YES 20
Burkina Faso 807 YES YES 28
Burundi 647 YES YES 36
Cambodia 1291 NO YES 18
Cape Verde 3894 NO YES 3
Central African Rep. 1118 YES YES 22
Chad 831 YES YES 26
Comoros 1638 NO YES 8
Congo, Dem. Rep. of 902 YES YES 24
Djibouti n.a. YES YES 42
Equatorial Guinea 1476 NO YES 11
Eritrea 789 NO YES 30
Ethiopia 565 NO YES 39
Gambia, The 1455 YES YES 12
Guinea 1754 YES YES 7
Guinea-Bissau 823 YES YES 27
Haiti 1416 YES YES 14
Kiribati n.a. NO YES 42
Lao People's Dem.Rep 1236 NO YES 19
Lesotho 1583 YES YES 9
Liberia n.a. NO YES 42
Madagascar 802 YES YES 29
Malawi 547 YES YES n.a.
Maldives 5111 YES YES 1
Mali 681 YES YES 34
Mauritania 1554 YES YES 10
Mozambique 635 YES YES 37
Myanmar n.a. YES YES 42
Nepal 1144 NO YES 21
Niger 739 YES YES 32
Rwanda 739 YES YES 32
Samoa 3925 NO YES 2
São Tomé & Príncipe n.a. NO YES 42
Senegal 1299 YES YES 16
Sierra Leone 634 YES YES 38
Solomon Islands 2258 YES YES 5
Somalia n.a. NO YES 42WT/TF/COH/14
Page 4
Country Per Capita PPP GDP
(1995)WTO
MemberFund
MemberRank by PPP
GDP
Sudan 1346 NO YES 15
Tanzania 474 YES YES 41
Togo 1434 YES YES 13
Uganda 1003 YES YES 23
Vanuatu 3113 NO YES 4
Yemen, Republic of 670 NO YES 35
Zambia 758 YES YES 31
Average 1377
Sources:  World Bank World Development Indicators (WDI) and WTO
8. Tables 2 and 3 provide some basic information on the exports of these countries.2 The total
exports of the least developed countries amounted to about US$29 billion in 2000, of which seven
countries – Angola, Bangladesh, Yemen, Cambodia, Equatorial Guinea, Congo, DRC, and Zambia –
accounted for close to 70 per cent.  Five of these seven countries are commodity exporters. The Quadcountries  accounted for about 57 per cent of the total exports of LDCs.  Within the Quad, the EU
absorbed nearly half of all LDC exports to the Quad and the United States about 45 per cent (Table 2).
9. LDC exports are indeed very concentrated.  For 24 of the 47 countries, exports of a single
product accounted for more than 50 per cent of total exports.
3 In virtually all these cases, the product
in question was an unprocessed natural resource (Appendix Table). Thus, concentration appears to be
synonymous with commodity production. For another 12 c ountries, three products accounted for more
than 50 per cent of total exports. The most diversified exporters are Madagascar, Tanzania,Bangladesh, and Senegal. There is no significant correlation between the magnitude of exports and
the degree of concentration: the simple correlation coefficient between total exports and single-
product concentration is 0.13 and that between total exports and 3-product concentration is 0.10.
4
Thus, small countries/exporters are not more likely to be commodity dependent.
Table 2
Exports of LDCs to World and Quad
(in US$ millions unless otherwise specified)
Country Total X Country % to
QuadTotal X to
Quad-est.% to
US% to
ECC15% to
Japan% to
Canada
Angola 7,860 Angola 62.4% 4901 44.6% 17.3% 0.0% 0.4%
Bangladesh 5,057 Bangladesh 87.9% 4445 39.4% 43.0% 2.4% 3.0%
Yemen Democratic 2,370 Cambodia 87.9% 1259 65.9% 20.6% 1.0% 0.4%
Cambodia 1,433 Congo, Dem. Rep. 93.4% 1096 18.5% 73.4% 1.5% 0.0%
Equatorial Guinea 1,242 Equatorial Guinea 71.0% 882 12.8% 54.7% 3.5% 0.0%
Congo, Dem. Rep. 1,174 Liberia 68.7% 508 7.1% 61.2% 0.0% 0.3%
Zambia 1,055 Guinea 78.0% 407 12.8% 61.9% 0.0% 3.3%
                                                     
2 Most of the data are from the WITS trade and the UN’s COMTRADE databases.   Disaggregated data
are only available for 47 of the 49 LDCs.  Estimates of losses from preference erosion could only be calculatedfor 46 countries. The Appendix Table presents more detailed information on the trade of the LDCs.
3 There is a bias in favor of finding concentration since commodities have been aggregated to the HS 4-
digit level.
4 Neither of these correlations is statistically significant.WT/TF/COH/14
Page 5
Country Total X Country % to
QuadTotal X to
Quad-est.% to
US% to
ECC15% to
Japan% to
Canada
Liberia 739 Nepal 51.8% 367 27.1% 22.7% 1.4% 0.6%
Nepal 709 Zambia 34.8% 367 6.1% 13.2% 15.5% 0.0%
Senegal 693 Mauritania 75.7% 347 0.1% 60.4% 15.2% 0.0%
Tanzania 642 Tanzania 48.8% 313 2.4% 39.1% 7.1% 0.1%
Guinea 522 Malawi 67.7% 285 13.5% 48.8% 5.2% 0.2%
Sudan 501 Ethiopia(excludes
Eritrea)54.6% 263 3.6% 38.9% 11.7% 0.4%
Ethiopia(excludes
Eritrea)482 Yemen
Democratic9.4% 224 6.2% 1.2% 2.1% 0.0%
Lao PDR 464 Sudan 35.6% 179 0.0% 32.8% 2.8% 0.0%
Mauritania 458 Senegal 48.3% 179 0.5% 46.4% 1.2% 0.1%
Myanmar 439 Madagascar 64.2% 149 5.4% 56.8% 1.4% 0.7%
Malawi 421 Lao PDR 30.7% 142 2.2% 25.3% 2.8% 0.4%
Uganda 402 Uganda 29.1% 117 2.1% 24.9% 2.0% 0.0%
Mali 297 Central African
Republic95.2% 110 0.0% 95.1% 0.0% 0.0%
Mozambique 271 Mozambique 36.2% 98 4.7% 27.1% 4.2% 0.1%
Madagascar 233 Sierra Leone 93.8% 76 3.0% 88.7% 0.4% 1.7%
Benin 197 Haiti 98.7% 60 86.4% 11.5% 0.1% 0.7%
Togo 192 Chad 65.7% 58 5.9% 58.6% 1.1% 0.0%
Burkina Faso 178 Maldives 67.2% 51 44.2% 18.6% 4.2% 0.2%
Bhutan 116 Benin 24.4% 48 1.2% 22.7% 0.2% 0.2%
Central African
Republic115 Togo 17.8% 34 0.3% 17.5% 0.0% 0.0%
Chad 88 Afghanistan 39.2% 31 2.0% 36.6% 0.3% 0.3%
Solomon Islands 88 Solomon Islands 33.8% 30 0.8% 11.1% 21.9% 0.0%
Sierra Leone 81 Rwanda 40.2% 21 5.2% 34.6% 0.4% 0.0%
Afghanistan 80 Burundi 44.2% 19 0.9% 43.0% 0.3% 0.0%
Maldives 76 Gambia, The 86.2% 18 0.4% 85.7% 0.1% 0.0%
Somalia 75 Burkina Faso 9.9% 18 0.1% 9.8% 0.0% 0.0%
Guinea-Bissau 67 Sao Tome and
Principe79.4% 17 2.6% 69.5% 2.7% 4.7%
Haiti 61 Cape Verde 99.6% 14 4.8% 94.8% 0.0% 0.0%
Samoa 55 Niger 6.3% 12 0.0% 6.3% 0.0% 0.0%
Rwanda 53 Samoa 14.6% 8 11.1% 3.1% 0.3% 0.1%
Burundi 43 Vanuatu 32.4% 8 2.1% 18.3% 12.0% 0.0%
Vanuatu 23 Mali 2.5% 7 0.0% 2.4% 0.0% 0.0%
Sao Tome and
Principe21 Comoros 79.6% 5 16.5% 59.0% 0.0% 4.1%
Gambia, The 21 Guinea-Bissau 5.1% 3 0.5% 4.6% 0.0% 0.0%
Cape Verde 14 Kiribati 25.0% 2 14.5% 8.8% 1.7% 0.0%
Djibouti 11 Somalia 1.9% 1 0.6% 1.1% 0.3% 0.0%
Eritrea 11 Djibouti 8.8% 1 0.3% 8.5% 0.0% 0.0%
Kiribati 8 Bhutan 0.7% 1 0.5% 0.1% 0.1% 0.0%
Comoros 7 Lesotho n.a. n.a. n.a. n.a. n.a. n.a.
Lesotho n.a. Eritrea n.a. n.a. n.a. n.a. n.a. n.a.
TOTAL 29,343
Sources: UN COMTRADE, International Trade Center (ITC), and staff estimates.WT/TF/COH/14
Page 6
Table 3
Product Concentration of LDCs' Exports
Country Top 1 in % of
exports to
worldTop 3 in % of
exports to
worldNo. of
ProductsTop 1 % of
exports to
QuadTop 3 in % of
exports to
Quad
Angola 88.4% 98.6% n.a. n.a. n.a.
Mali 85.7% 93.9% 31 92.1% 95.1%
Guinea-Bissau 85.1% 94.0% n.a. n.a. n.a.
Equatorial Guinea 81.4% 93.3% n.a. n.a. n.a.
Zambia 81.1% 86.4% 202 85.0% 93.4%
Yemen Democratic 80.5% 94.8% n.a. n.a. n.a.
Chad 78.4% 94.3% n.a. n.a. n.a.
Benin 78.1% 89.5% 86 53.1% 85.1%
Samoa 74.5% 89.1% n.a. n.a. n.a.
Burundi 73.3% 87.0% 26 68.6% 96.6%
Malawi 69.7% 80.6% 75 79.2% 90.2%
Kiribati 69.0% 91.1% 7 54.4% 93.7%
Burkina Faso 68.5% 85.9% 123 80.2% 89.3%
Comoros 67.7% 94.3% 18 84.9% 94.9%
Niger 67.0% 85.0% 63 96.0% 98.0%
Gambia, The 63.2% 76.1% 128 68.1% 82.8%
Somalia 62.7% 78.7% n.a. n.a. n.a.
Solomon Islands 62.5% 80.7% n.a. n.a. n.a.
Rwanda 62.3% 84.9% n.a. n.a. n.a.
Congo, Dem. Rep. 62.2% 84.4% n.a. n.a. n.a.
Central African Republic 60.1% 85.4% 55 62.8% 87.8%
Liberia 54.8% 82.5% n.a. n.a. n.a.
Ethiopia(excludes Eritrea) 53.0% 73.9% 62 79.8% 88.9%
Guinea 51.7% 81.9% 127 64.0% 93.0%
Afghanistan 45.0% 71.3% n.a. n.a. n.a.
Sao Tome and Principe 42.9% 71.4% n.a. n.a. n.a.
Bhutan 40.5% 62.0% 18 39.0% 69.6%
Cape Verde 36.9% 68.2% 25 37.1% 68.5%
Sierra Leone 35.8% 58.0% n.a. n.a. n.a.
Vanuatu 34.1% 61.6% 34 38.9% 68.5%
Uganda 31.2% 51.2% 105 32.7% 61.6%
Myanmar 28.9% 62.4% 62 25.1% 62.5%
Togo 25.1% 52.8% 145 29.2% 58.2%
Mozambique 25.0% 60.4% 199 59.6% 73.1%
Cambodia 24.0% 53.8% n.a. n.a. n.a.
Nepal 22.6% 48.8% 143 37.9% 58.5%
Haiti 22.0% 38.0% 173 22.3% 38.5%
Sudan 21.1% 52.9% 80 22.9% 54.6%
Eritrea 18.2% 36.4% n.a. n.a. n.a.
Bangladesh 17.8% 41.7% 208 19.9% 46.6%
Maldives 17.2% 47.9% 19 24.3% 63.6%
Tanzania 16.9% 43.7% 448 31.0% 59.8%WT/TF/COH/14
Page 7
Country Top 1 in % of
exports to
worldTop 3 in % of
exports to
worldNo. of
ProductsTop 1 % of
exports to
QuadTop 3 in % of
exports to
Quad
Senegal 14.5% 35.6% 297 n.a. n.a.
Lao PDR 13.4% 25.4% n.a. n.a. n.a.
Madagascar 11.0% 25.9% 481 8.3% 22.1%
Djibouti 9.1% 27.3% n.a. n.a. n.a.
Mauritania 8.5% 19.2% n.a. n.a. n.a.
Sources:  UN COMTRADE, ITC, and staff estimates.
III. PREFERENTIAL SCHEMES
10. Least developed countries enjoy preferential access to industrial country markets under a
variety of schemes, including the Generalized Sche me of Preferences (GSP) and special preferences
for LDCs granted by the Quad countries such as the Everything But Arms (EBA) initiative granted by
the European Union, and the Africa Growth and Opportunity Act (AGOA) extended by the U.S. to
sub-Saharan African countries.5 Table 4 illustrates the country coverage of the various schemes.6
11. Ignoring the impact of rules of origin and other requirements, the preference schemes are, on
average, generous. In terms of product coverage, the EU’s EBA is the most comprehensive of the
Quad countries, extending duty and quota free access to all products,7 followed by the AGOA, which
potentially covers all but one per cent of the exports of African LDCs,8 and finally the GSP. For
example, the US GSP does not extend to the textiles and clothing sector and to a number of
agricultural products.
12. From Table 4 it can be seen that the margin of preference (the difference between the most-
favoured-nation (MFN) tariff and the rate applicable to LDCs) varies across the Quad countries.  In
general, this margin is smaller for the products with high tariffs ("tariff peaks" defined as tariffsgreater than 15 per cent) than for all products. In Canada, Japan, and the U.S., the margin of
preference for all products is relatively small – between 3 and 4 per centage points – whereas, it is
substantially higher in the EU at about 6.5 per centage points.
13. For tariff peak products, however, the situation varies across export markets because of the
two new schemes (EBA and AGOA) put in place by the EU and the U.S.  In Canada and Japan, themargin of preference in relation to tariff peak products is about 7-9 per centage points, relative to an
average MFN tariff of close to 30 per cent. In the EU, this margin is substantially higher – close to the
MFN tariff itself – for all LDCs, because of the enactment of the EBA.
9 In the US, the average MFN
peak tariff is about 21 per cent and the margin of preference for LDCs in Africa is close to 20 per cent
thanks to AGOA.  Non-AGOA LDCs, however, receive a preference margin of about 6.5 per centagepoints, very similar to the situation in Canada and Japan.
                                                     
5 Thirty-seven sub-Saharan African countries have qualified for the general benefits offered by AGOA,
with only nine of these eligible for the special benefits in the clothing sector.
6 Canada has recently also announced a generous pr eferential scheme for LDC exports. While the focus
in this note is on the preference schemes granted by the Quad, a number of other industrial countries, including
Norway, New Zealand, and Switzerland, have establishe d generous preference schemes that are comparable to
the EU’s Everything But Arms initiative.
7 Restrictions will remain on sugar, rice, and bananas for a transitional period.
8 The actual coverage is lower because a number of African countries that are eligible for the benefits
have not met all the required conditions for gaining eligibility.
9 This would be particularly true at the end of the transition period when the restrictions on sugar, rice,
and bananas are eliminated.WT/TF/COH/14
Page 8
Table 4
Tariffs under Preferential Schemes
Preferential Agreement Average tariff rate
(all HS-6 products)Average tariff rate
(tariff peak products)
Canada
       GSP
       LDCs 1/
      MFN4.3
4.4
8.328.2
22.8
30.5
European Union
      GSP
      LDC ACP 2/
      Non-LDC ACP 2/
      MFN3.6
0.8 (0)
0.9 (0)
7.419.8
11.9 (~0)
12.4 (~0)
40.3
Japan
      GSP
       LDCs       MFN2.3
1.74.322.7
19.027.8
United States
       GSP
        AGOA LDCs 3/        Non-AGOA LDCs        MFN2.4
0.01.85.016
n.a.14.420.8
Sources: Hoekman, Ng, and Olarreaga (2002) and Fund staff estimates.
1/ Does not reflect the recent Canadian initiative with regard to LDCs’ exports.2/ Estimates in brackets for the European Union’s preference schemes for LDCs are for the post-EBA regime.They assume that the EBA will provide unrestricted access at the end of the transitional period.
3/ Estimates for AGOA are based on Mattoo, Roy, and Subramanian (2002).
14. Table 5 presents data on the MFN tariffs in each of the Quad country markets levied on
products exported by the LDCs. For each LDC, th e weighted average tariff in the Quad markets is
computed. The tariff figures in Table 5 reflect the preference margin that each LDC enjoys in the
Quad markets on the assumption that LDCs themselves enjoy duty- and quota-free access to the Quad
markets.10
15. Table 5 shows that this preference margin is about 11 per cent in the Quad markets. Of the 47
LDCs, 24 benefit from a preference margin of less than 5 per cent, mainly reflecting the fact that
Quad countries generally levy low tariffs on commodities. A further 13 countries have margins ofbetween 5 and 10 per cent, while the remaining 10 countries face enjoy preference margins exceeding
10 per cent.  Tobacco, which is Malawi’s main export, has a tariff in the Quad of 37.5 per cent. Fish
and fish products, the main export of the Solomon Islands, face a tariff of 19.4 per cent.
                                                     
10 The tariff numbers in Table 5 are different from and not comparable to those in Table 4 because the
latter take account of the preferential schemes and hence reflect the tariffs actually faced by LDCs.  The data in
Table 5 provide the basis for the calculation of losses from preferential erosion in Section IV.WT/TF/COH/14
Page 9
Table 5
Likely Preference Margin Enjoyed by LDCs in Quad Markets
Country Ave. % Tariff
– QuadAve. % Tariff
– USAve. % Tariff
– ECC15Ave. % Tariff
– JapanAve. % Tariff
– Canada
Malawi 32.0 50.4 30.4 0.0 0.5
Mauritania 18.8 n.a. n.a. n.a. n.a.
Maldives 14.9 14.6 17.6 5.8 11.9
Tanzania 14.0 9.4 15.7 6.6 2.4
Cambodia 13.4 n.a. n.a. n.a. n.a.
Bangladesh 12.4 12.1 12.3 7.3 21.7
Solomon Islands 12.4 n.a. n.a. n.a. n.a.
Uganda 11.5 0.6 13.1 2.7 8.8
Vanuatu 11.1 3.5 3.9 23.3 0.0
Senegal 10.2 1.4 10.4 8.6 4.2
Nepal 9.5 11.1 7.4 7.7 18.7
Sao Tome and Principe 9.3 n.a. n.a. n.a. n.a.
Haiti 9.2 9.4 8.1 8.6 4.3
Cape Verde 8.9 5.4 9.1 n.a. n.a.
Ethiopia(excludesEritrea)8.2 0.2 9.0 8.4 0.4
Mozambique 8.1 4.2 9.4 4.3 0.1
Madagascar 8.1 4.7 8.7 0.6 0.9
Burundi 7.4 0.0 7.5 8.7 0.0
Guinea-Bissau 7.2 n.a. n.a. n.a. n.a.
Comoros 6.7 0.0 9.1 0.0 0.0
Bhutan 6.0 6.8 3.5 4.4 n.a.
Kiribati 5.7 0.1 14.7 7.1 n.a.
Sudan 5.2 n.a. 5.6 0.3 0.0
Togo 4.9 2.1 5.0 1.2 21.5
Myanmar 4.7 12.1 6.1 1.1 19.5
Sierra Leone 4.4 n.a. n.a. n.a. n.a.
Burkina Faso 2.1 2.7 2.1 7.2 11.2
Gambia, The 2.0 2.2 2.0 0.0 n.a.
Zambia 1.4 1.1 3.1 0.0 12.7
Mali 0.9 0.9 0.9 3.5 1.1
Benin 0.9 0.9 0.9 0.1 0.9
Central African Republic 0.9 1.7 0.9 n.a. n.a.
Liberia 0.8 n.a. n.a. n.a. n.a.
Angola 0.5 n.a. n.a. n.a. n.a.
Guinea 0.5 0.0 0.6 n.a. 0.1
Samoa 0.4 n.a. n.a. n.a. n.a.
Equatorial Guinea 0.2 n.a. n.a. n.a. n.a.
Chad 0.1 n.a. n.a. n.a. n.a.
Niger 0.1 5.3 0.1 0.0 1.8
Congo, Dem. Rep. 0.1 n.a. n.a. n.a. n.a.
Afghanistan 0.0 n.a. n.a. n.a. n.a.
Djibouti 0.0 n.a. n.a. n.a. n.a.
Eritrea 0.0 n.a. n.a. n.a. n.a.WT/TF/COH/14
Page 10
Country Ave. % Tariff
– QuadAve. % Tariff
– USAve. % Tariff
– ECC15Ave. % Tariff
– JapanAve. % Tariff
– Canada
Lao PDR 0.0 n.a. n.a. n.a. n.a.
Rwanda 0.0 n.a. n.a. n.a. n.a.
Somalia 0.0 n.a. n.a. n.a. n.a.
Yemen Democratic 0.0 n.a. n.a. n.a. n.a.
TOTAL 10.9
Sources: UN COMTRADE,ITC, and staff estimates.
IV. ESTIMATES OF LOSSES FROM  PREFERENCE EROSION
A. AGGREGATE EFFECTS
16. The losses from preference erosion can be estimated for LDCs as a whole and for individual
LDCs.  Two recent studies provide estimates of the broad magnitudes for the possible losses in the
aggregate.11 Ianchovichina, Mattoo, and Olarreaga (2001) calculate the impact of a 25 per cent
reduction in MFN tariffs by all Quad countries on the exports of 37 sub-Saharan African countries.They find that overall exports will decline by 0.2 per cent of base-level exports. This may be on the
high side because the study overestimates the benefits of preferential access by assuming that rules of
origin will not be binding. 
12
17. Hoekman, Ng, and Olarreaga (2001) estimate the impact on LDCs of reductions to five per
cent in all peak tariffs of the OECD countries. This  results in a decline in LDC exports of 0.3 per cent.
Although the coverage and the nature of the experi ment are different between these two studies, they
tend to suggest that in aggregate the losses – in terms of reduced exports – from preference erosion
are likely to be very small.
18. A recent UNCTAD study (Bora, Cernat, and Turrini, 2002), using more recent data, finds that
if all the Quad countries were to adopt the EBA scheme, the net effect would be to increase exports of
a group of sub-Saharan African countries by 2.2 per cent. Individual African countries, such as
Malawi and Tanzania and Bangladesh, would experience larger increases, but for most others, theeffect is relatively small.
B. C
OUNTRY EFFECTS
19. While the aggregate impact from preference erosion does not appear to be large, it is
nevertheless possible that individual countries could face substantial losses. It is therefore important
to understand the extent to which these aggregate effects reflect the impact on individual countries. Asmentioned in footnote 11, the GTAP model is not amenable to the estimation of country effects for
most of the LDCs. As an alternative, trade and tariff data for individual LDCs were compiled and
individual country effects estimated.
20. A number of caveats need to be made about these estimates. They should be regarded only as
illustrative, suggesting orders of magnitude, rather th an exact.  They are sensitive to data quality and
to some of the simplifying assumptions made. As  explained below, the assumptions are, however,
deliberately biased in favor of finding larger rather than smaller losses. This is done with a view to
                                                     
11 The GTAP general equilibrium model on which these simulations are based is not able to estimate
the impact on individual LDCs.
12 Indeed, Mattoo, Roy, and Subramanian (2002), based on an analysis of AGOA, show that rules of
origin requirements can reduce the impact of preferential arrangements by as much as 75 per cent.WT/TF/COH/14
Page 11
minimizing the risk of overlooking individual LDCs that might face significant financing needs as a
result of the Doha Round.  Further, these estimates cover a broader group of LDCs than suggested in
the WTO proposal, which focused on  those LDCs whose top export accounted for more than 50 per
cent of total exports.
21. It should be noted that the experiment involves a decline in the average MFN tariff.  In
practice, the manner in which this average reduction is achieved would matter. If high tariffs are
reduced proportionately more – as is implicit in some of the negotiating proposals currently being
discussed in the WTO – the losses from preference erosion would be correspondingly greater.
22. The estimates are based on a simple, partial equilibrium model of preferential access
illustrated in the Appendix.  In order to assess the es timates, it is essential to have a clear idea of the
assumptions. They are:
• The baseline is the post-Uruguay Round world (beginning 2005) where all quotas in agriculture,
textiles and clothing (except as noted below) have been eliminated. In this situation, LDCs are
assumed to face unrestricted (duty and quota-free) access in the Quad markets and that rules of
origin do not have a restrictive impact.  Hence the margin of preference is equal to the post-
Uruguay Round MFN tariff itself. The only except ions are non-African LDCs exporting clothing
and agricultural products in the U.S. market, which are assumed to face MFN tariffs (i.e. theyreceive no preference on these sensitive products).
• For illustrative purposes, the estimates are based on the assumption that Quad countries will
reduce the MFN tariffs on products exported by the LDCs by 40 per cent on average in
manufacturing and agriculture. This is an assumption and not a prediction about what tariff cutswill actually be implemented. In the Uruguay Round, agricultural tariffs were reduced by 36 per
cent and industrial tariffs by about one-third by the industrial countries.  The assumption of a 40
per cent cut is at the upper end of the experience of the Uruguay Round.
• There are no terms of trade gains to LDCs on account of the MFN tariff reduction by the Quad
countries.
• The elasticity of export supply from LDCs is 1.13
23. These assumptions bias the results in favor of  overstating losses. First, the assumption that
LDCs enjoy unrestricted preferential access (including  liberal rules of origin) under the status quo will
overstate the margin of preference and hence the erosion when MFN tariffs are reduced by the Quadcountries. Second, terms of trade changes from the MFN tariff cuts could be large, especially for
countries such as Bangladesh that have large exports. Ignoring them essentially excludes the potential
gains which could offset losses from preference erosion. Third, the assumption that all rents
(differences between the world price and domestic price) accrue to the exporter overstates the gains
from preferences and hence the losses from its erosion. Fourth, using gross rather than net exports asthe base overstates the losses from erosion.  Fifth, the experiment simulated here also ignores the
positive impact on LDCs’ exports of any MFN tariff reductions by other developing countries in the
Doha Round.  Since developing countries do not gr ant significant preferences to LDCs, MFN tariff
reductions by them will increase market access for LDCs and prove unambiguously beneficial.
24. Table 6 computes for each country the total losses from preference erosion under the
simplifying assumptions made above. In the first panel, LDCs are ranked in descending order of
                                                     
13 Faini (1994) reports an elasticity of 3 for Turkey. For LDCs, which are heavily commodity-
dependent and which face a number of structural bottlenecks, a lower elasticity seems more appropriate.WT/TF/COH/14
Page 12
losses specified in terms of the per cent of total.  In the second panel they are ranked in descending
order of the dollar value of losses. A number of features are worth noting about these estimates.
25. First, if individual country losses are aggregated, they amount to about US$0.53 billion or
1.7 per cent of the exports of LDCs as a whole. This is higher than the aggregate losses of 0.23 per
cent and 0.3 per cent, respectively, reported in the two recent World Bank studies, although thecountry coverage of the latter is somewhat different from that in this note.
14  There are three
explanations for the differences. First, the World Bank studies take into account the terms of trade
changes from the MFN tariff reductions, which will on average be positive for exporting countries,
and hence reduce the size of losses from preference erosion. Second, the World Bank studies,
particularly Hoekman, Ng, and Olarreaga (2001) do not fully take into account the EBA and AGOA.
As a result they understate the preference margin and hence the losses from MFN tariff cuts. Indeed,
if Bangladesh is excluded, the losses amount to less than 1 per cent, which is closer to the estimates inthe World Bank studies.
15 Finally, one of the World Bank studies estimates the impact of a 25 per cent
reduction in MFN tariffs, whereas the estimates in this note are based on a 40 per cent reduction.
Moreover, in the World Bank study, the 25 per cent reduction was effected by all countries, whereas
the experiment here involves tariff reductions by the Quad countries. As noted above, tariff cuts by
developing countries are likely to have an unambiguously positive impact on LDCs’ exports.
26. Table 6 also illustrates the fact that significant losses will be confined to a few countries. For
26 out of the 46 LDCs, export losses from preference erosion are estimated to be less than two per
cent, and for another 15 countries less than five per cent. Thus, only five countries may face losses
exceeding five per cent of exports. These are Malawi (11.5 per cent), Mauritania (8.8 per cent), Haiti
(6.4 per cent), Cape Verde (6.3 per cent) and Sao Tome and Principe (5.2 per cent).  In absolute value,the largest likely losers are Bangladesh (US$ 222 million), Cambodia (US$54 million), Malawi
(US$49 million), Mauritania (US$40.4 million) and Tanzania (US$29 million).  Thus, only Malawi
and Mauritania could face a loss that is large in absolute and relative terms.
16
27. The concern on the part of LDCs, reflected in their proposal, is that countries with highly
concentrated exports will be the most vulnerable to preference erosion. But this turns out not to be the
case.  The correlations between export concentration (single-product and top three products) and
losses from preferences (relative and absolute) are all negative and statistically significant.17 Countries
that are more reliant on a few commodities are less likely to lose from preferences.  The reason is that
concentration is associated with lower MFN tariffs on average and hence there is not a lot of
preference to be eroded in the first place. Indeed, if the LDCs’ proposal were to be taken at face value,
namely, that financing should be considered for those countries with exports of a single product
exceeding 50 per cent of total exports, there would be only one country amongst all the LDCs –Malawi – that would face a loss of exports from preference erosion exceeding 4 per cent of total
exports.
                                                     
14 An earlier study by Yeats (1995) suggested that the elimination of (pre-Uruguay Round) MFN tariffs
by the EU, Japan, and the U.S. on products exported by African countries would reduce exports by about oneper cent.
15 Bangladesh accounts for close to 42 per cent of total losses and would likely gain from MFN tariff
reductions, especially in the U.S. market.
16 Malawi has a tariff rate quota for its tobacco exports  to the U.S. market.  It is not clear whether this
quota binds.  To the extent that it does, these estimates overstate the losses from MFN tariff cuts.
17 The correlation between single product concentra tion and change in exports as a per cent of total
exports is -0.35 and change in absolute value of exports is -0.26.  The correlations involving the 3-product
concentration ratio are similar.WT/TF/COH/14
Page 13
Table 6
Estimated Losses from Preference Erosion
(Decline in export values)
Country Change in
Exports
(% of Total X)Change in Exports
(% of Exports to
Quad)Country Change in
Exports
(value in
US$ mn.)
Malawi 11.5% 17.1% Bangladesh 222.4
Mauritania 8.8% 11.7% Cambodia 53.6
Haiti 6.4% 6.5% Malawi 48.6
Cape Verde 6.3% 6.3% Mauritania 40.4
Sao Tome and Principe 5.2% 6.5% Tanzania 28.9
Tanzania 4.5% 9.2% Senegal 23.6
Bangladesh 4.4% 5.0% Angola 21.1
Comoros 3.9% 4.9% Nepal 17.8
Cambodia 3.7% 4.3% Ethiopia(excludes
Eritrea)15.4
Madagascar 3.7% 5.8% Uganda 9.1
Maldives 3.7% 5.4% Madagascar 8.6
Senegal 3.4% 7.1% Sudan 6.9
Ethiopia(excludes
Eritrea)3.2% 5.9% Mozambique 5.7
Sierra Leone 3.1% 3.3% Haiti 3.9
Solomon Islands 2.8% 8.3% Liberia 3.4
Nepal 2.5% 4.8% Maldives 2.8
Vanuatu 2.5% 7.6% Sierra Leone 2.5
Burundi 2.4% 5.3% Solomon Islands 2.5
Uganda 2.3% 7.8% Myanmar 2.2
Mozambique 2.1% 5.8% Guinea 1.6
Sudan 1.4% 3.9% Equatorial Guinea 1.3
Gambia, The 1.3% 1.6% Togo 1.3
Kiribati 1.0% 4.2% Sao Tome and
Principe1.1
Togo 0.7% 3.7% Burundi 1.0
Central African Republic 0.7% 0.7% Cape Verde 0.9
Myanmar 0.5% 3.5% Congo, Dem. Rep. 0.8
Liberia 0.5% 0.7% Central African
Republic0.7
Guinea 0.3% 0.4% Vanuatu 0.6
Angola 0.3% 0.4% Benin 0.3
Guinea-Bissau 0.3% 5.2% Burkina Faso 0.3
Benin 0.2% 0.7% Gambia, The 0.3
Burkina Faso 0.2% 1.6% Comoros 0.3
Equatorial Guinea 0.1% 0.1% Guinea-Bissau 0.2
Chad 0.1% 0.1% Kiribati 0.1
Congo, Dem. Rep. 0.1% 0.1% Chad 0.1
Samoa 0.0% 0.3% Mali 0.1
Bhutan 0.0% 4.4% Bhutan 0.0
Mali 0.0% 0.7% Samoa 0.0WT/TF/COH/14
Page 14
Country Change in
Exports
(% of Total X)Change in Exports
(% of Exports to
Quad)Country Change in
Exports
(value in
US$ mn.)
Niger 0.0% 0.1% Niger 0.0
Afghanistan 0.0% 0.0% Afghanistan 0.0
Djibouti 0.0% 0.0% Djibouti 0.0
Eritrea 0.0% 0.0% Eritrea 0.0
Lao PDR 0.0% 0.0% Lao PDR 0.0
Rwanda 0.0% 0.0% Rwanda 0.0
Somalia 0.0% 0.0% Somalia 0.0
Yemen Democratic 0.0% 0.0% Yemen Democratic 0.0
TOTAL 530.3
Source:  Staff estimates.
V. FINANCING OF LOSSES
28. The above shows that in the aggregate, the losses from preference erosion are likely to be
small and that only for a very few countries will th e losses be noteworthy. Nonetheless, it is necessary
to consider whether the losses should be financed, and if so, how?  A number of considerations arise
in answering this question.
29. At a conceptual level, and at first blush, it could be argued that preference erosion represents
an adverse exogenous shock similar to those arising from reductions in prices of commodities. Prima
facie, a case for financing, to help the country tide over the shocks or to facilitate the adjustment tothem, could be made. The general principle that applies with respect to shocks is that the more
temporary the shock, the greater the need for financing relative to adjustment.
30. But there are at least three differences with commodity shocks that are germane to the design
of any financing arrangement.  First, shocks from preference erosion are likely to be permanent.
18 In
the case of commodity price changes, there is the question of whether price changes are meanreverting, rendering it difficult to determine whether a shock is temporary or permanent and hence to
determine the balance between financing and adjustment. Second, shocks from preference erosion can
be anticipated ex ante. Third, they are likely to be spread out over time because of the phased nature
of MFN tariff reductions.
31. The first distinguishing feature – the permanent nature of the shock--suggests that adjustment
needs to be an integral part of any response, including financing, to preference erosion. There would
therefore be a presumption that any financing of lo sses from preference erosion should be within the
context of adjustment facilities and program financing by the international financial institutions,
which ensures that appropriate adjustment actions accompany any financing.
32. In the case of commodity price shocks, the point has been made that disbursement needs to be
quick, rendering financing under a Fund arrangement, which can typically be time-consuming,
unwieldy and inappropriate. The second and third distinguishing features – the predictability and the
gradual nature of the shock – make this critique less valid. Because preference erosion can be
anticipated well in advance and the actual loss from it is spread out, a medium-term adjustment
facility might well be the most appropriate way of combining the financing and adjustment.  Since
                                                     
18 Of course, Quad countries could reverse their MFN tariff cuts, restoring preference margin,   but this
is unlikely over the medium-term.WT/TF/COH/14
Page 15
such facilities already exist, and given the limited nature of the likely losses, it would not seem
necessary to create new financing facilities.
VI. CONCLUSIONS
33. The following conclusions emerge from the analysis.
• Losses from preference erosion, for LDCs as a whole, will probably be very small,  likely less
than 2 per cent of exports.
• Only a few countries are estimated to face losses that are not insignificant. But here too the
magnitudes are small in absolute value and in relation to exports. Only two country are
estimated to face losses exceeding 10 per cent of exports.
• Three key distinguishing features of losses from preference erosion are that they represent a
permanent shock, they can be anticipated ex ante, and that their actual impact is spread out
over time.
• Given the limited number of countries that are estimated to be seriously affected and the
distinguishing features of losses from preference erosion, any financing is best done in thecontext of existing medium-term adjustment and program financing facilities. Creating a new
facility would seem unnecessary and inefficient.
• In any assessment of the balance of payments need in the context of program discussions,
Fund staff should take into account the potential losses from preference erosion as one of the
elements that affect the external environment facing a country’s exports.WT/TF/COH/14
Page 16
APPENDIX
Partial Equilibrium Model of Preference Erosion
The following simple model serves as the theoretical basis for estimating the losses from
preference erosion calculated in this note.
MM represents the import demand curve of a typical Quad country, X the export supply curve
of a typical LDC, and T 1 the MFN (ad-valorem) tariff in the import market.  In the initial equilibrium,
it is assumed that exports of the LDC face unrestricted (duty- and quota-free) access to the Quad
market.  The initial level of exports is given by X 1, because the exporter receives the price of P w
(1+T 1), the world price plus the initial tariff, which is the price in the domestic market of the
importing country at A.  The experiment being considered is one where as a result of the Doha Round,
the MFN tariff T 1 is reduced to T 2.  The new level of exports is X 2, where the export supply curve
intersects the new domestic price, P w (1+T 2), at B. The value of exports declines from P w (1+T 1) * X 1
to P w (1+T 2) * X 2
Under these assumptions, this simple model su ggests that the loss in exports in per centage
terms due to the reduction of preferences is equal to [(T 2 - T 1)/(1+ T 1)]* [1+(e/(1+ T 1)], where (T 2 - T 1)
is the MFN tariff reduction, T 1  is the initial MFN tariff, and e the export supply elasticity. In absolute
value, the loss is simply the above expression times the value of the LDC’s exports to the country
granting the preference.WT/TF/COH/14
Page 17
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