TABLE OF CONTENTS

1..... Introduction....................................................................................................... 4

2..... Review of literature........................................................................................ 4

2.1. A changing world economy.................................................................................. 4

2.2. Developing countries’ integration into the world economy..................................... 6

2.3. Multiplication of preferential trade agreements...................................................... 7

2.4. Trade and inclusive growth................................................................................... 8

2.5. Complementary policies and reforms to promote development............................ 10

2.6. Services ........................................................................................................... 11

2.7. Investment......................................................................................................... 12

2.8. Competition....................................................................................................... 13

3..... The position of developing countries in the world economy 13

3.1. Per capita income has increased......................................................................... 14

3.2. Developing countries, including the LDCs, are trading more................................ 17

3.3. South-South trade has outstripped North-South trade since 2007....................... 19

3.4. Growing importance of trade in services............................................................. 21

3.5. Worldwide investment has increased with almost half going to the developing world 22

3.6. A mixed picture................................................................................................. 24

4..... The EU's Generalised System of Preferences (GSP)........................... 25

4.1. The EU's current GSP – since 2006................................................................... 25

4.2. The next GSP – as of 2013................................................................................ 26

5..... The EU's new preferential rules of origin.......................................... 27

6..... The EU's Export Helpdesk.............................................................................. 29

7..... Aid for Trade...................................................................................................... 29

7.1. EU Aid for Trade Strategy................................................................................. 30

7.2. Significant progress has been made in terms of aid flows..................................... 31

7.3. Only a limited share of Aid for Trade is channelled to LDCs............................... 35

7.4. Quality has improved but there is room for further progress................................. 36

7.5. The Enhanced Integrated Framework................................................................. 38

8..... The Economic Partnership Agreements (EPAs)................................... 40

8.1. Origins of the EPAs........................................................................................... 40

8.2. Situation at the end of 2007............................................................................... 40

8.3. State of play in 2011.......................................................................................... 42

9..... Bilateral and regional trade cooperation outside the ACP region 43

9.1. The Mediterranean............................................................................................ 43

9.2. Eastern Neighbourhood Countries...................................................................... 45

9.3. China ........................................................................................................... 46

9.4. South Asia......................................................................................................... 48

9.5. ASEAN ........................................................................................................... 48

9.6. Central America................................................................................................ 49

9.7. MERCOSUR.................................................................................................... 50

9.8. Andean Community........................................................................................... 50

10... Key instruments for better policy making: Impact Assessments, Sustainability Impact Assessments and Ex-post Evaluations. 51

10.1. Impact assessments........................................................................................... 51

10.2. Ex post evaluations........................................................................................... 52

11... Investment and development................................................................... 53

11.1. International rules on investments in EU trade agreements................................... 53

11.2. New comprehensive EU international investment policy...................................... 53

11.3. EU policy on Corporate Social Responsibility..................................................... 54

12... EU support for investment......................................................................... 55

12.1. EU Regional Blending Mechanisms.................................................................... 55

12.2. Other EU blending mechanisms.......................................................................... 56

12.3. The role of the EIB in investments in developing countries................................... 56

13... EU support to improving developing countries' resilience and response to crises...................................................................................................................... 57

13.1. Forest Law Enforcement, Governance and Trade (FLEGT)................................ 58

13.2. European Commission proposal on mandatory disclosure requirements for the extractive and logging industry 59

13.3. The Kimberley Process...................................................................................... 59

13.4. The Vulnerability Flex Mechanism (V-FLEX)..................................................... 60

14... Sustainability-bound schemes................................................................. 61

14.1. Fair and ethical trade......................................................................................... 61

14.2. Organic production............................................................................................ 63

14.3. Other schemes................................................................................................... 64

15... Multilateral aspects.................................................................................... 64

15.1. WTO accession................................................................................................. 64

15.2. Taking development into account in mainstream WTO work............................... 65

15.3. Intellectual Property Rights and development...................................................... 66

15.4. Effective participation of developing countries..................................................... 68

15.5. The Doha Development Agenda........................................................................ 68

16... Conclusion......................................................................................................... 69

1. Introduction

The present document is a Staff Working Paper by the European Commission and is for information purposes only. It does not represent an official position of the Commission on the subjects it addresses, nor does it anticipate such a position. It supports the European Commission's Communication entitled "Trade, growth and development – Tailoring trade policy for those countries most in need".

Its first aim is to provide supplementary information and analysis on the issue of trade and investment for development. This is based on the one hand on a review of the existing literature in this area and, on the other, on an analysis of developing countries' position in the world economy and global trading systems.

Its second goal is to provide detailed background on the EU's instruments and initiatives to support developing countries' integration into the world economy and the global trading system; notably the EU's Generalised System of Preferences (GSP) – particularly the Everything but Arms (EBA) scheme, the GSP+ and the Commission's proposal for a revamped GSP; the EU's new rules of origin; the EU's Export Helpdesk; Aid for Trade; the Economic Partnership Agreements (EPAs) with African, Caribbean and Pacific (ACP) countries; an overview of bilateral trade cooperation with other parts of the world; an overview of the EU's approach to investment and EU investment-support mechanisms; and an overview of multilateral aspects.

2. Review of literature

The following analysis of trade and investment for development is entirely based on excerpts from a study entitled "Aspects of trade" commissioned by the European Commission, Directorate-General for Development and Cooperation, to review the existing literature in this area. The present section therefore reflects the views, conclusions and suggestions expressed in the study, which do not necessarily correspond to those of the Commission. The section focuses on the following key issues: it first presents the main trends of the changing world economic situation and focuses particularly on developing countries’ integration into the world economy and the proliferation of preferential trade agreements; it goes on to exploring the link between trade and development; finally, it looks into complementary policies with special emphasis on services, investment and competition.

2.1. A changing world economy

The study describes the most significant changes the world has undergone during the last decade:

· A great expansion in global trade flows has taken place over the last decades. Global exports of goods and services grew at a real average rate of 6.3% in the period 1980 to 2008, while GDP growth averaged 2.9% during the same period[1]. Although developed economies continue to dominate world markets, developing countries are now new drivers of global trade: between 2000 and 2009 their exports rose by 80%, compared to 40% for the world as a whole[2].

· One of the most important developments in world trade in the last few years is the fragmentation of production of both goods and services and the associated development of foreign outsourcing and off-shoring[3]. Agricultural and industrial production is increasingly taking place through largely unregulated global value chains dominated by multinationals. Two thirds of world imports concern intermediate inputs. Another factor behind the observed expansion of world trade has been the increase in international outsourcing and off-shoring of services. Trade in services rose from $0.5 billion in the 1980s to an average of $2.5 billion in the 2000s. The participation of developing countries in global services trade rose from 19 to 24% during the same period. In summary, trade patterns have moved from a country specialisation based on goods (primary commodities for the South and manufactures for the North) to intra-firm/network specialisation in terms of tasks, giving the South considerable advantage in the production of manufactures[4].

· The rise of the emerging economies – such as Brazil, Russia, India, China, and South Africa (BRICS) – as both economic and political actors, as for instance illustrated by their role in the G20, is having significant and far-reaching impact on the world economy. Together, they account for over 40% of the world population and approximately 17% of the value of world GDP[5]. The BRICS' trade performance has been well above the world average in the last decade, in terms of both exports and imports. Their specialisation can in some cases generate complementary effects; in other cases competitive effects may well create conflicts of interest among trade partners. BRICS can be a driving force for those economies that have complementary production and trade structures, because producers can benefit from the demand for their output from BRICS and they can be included in regional value chains.

· The most dramatic event in this decade is the deep recession that hit the world economy during the 2008-2009 period. The financial and economic crisis hit trade hard. The fall was sudden and sharp: global trade fell by 23%.

· The erosion of preferences due to multilateral tariff reductions is a long-standing concern for many developing countries and has become one of the key issues in the Doha Development Agenda (DDA) negotiations. Developing countries benefiting from trade preferences are concerned that reductions of most-favoured nation (MFN) tariffs by preference-granting countries may decrease their advantages with respect to non-preferred competitors and result in significant export losses. Yet studies show that losses due to preference erosion for developing countries are, on the whole, relatively small: firstly, because preference margins are rather small and secondly, because preferences are often underused by developing countries. However, the literature also emphasizes that there are groups of countries and/or products for which this may not be the case, e.g. certain agricultural products and LDCs.

· Slow progress in the DDA negotiations has spurred developed countries, in particular, to pursue bilateral and regional trade agreements. The proliferation of preferential trade agreements (PTAs) –at both regional and bilateral level – in the last ten years has taken place at an unprecedented rate. It also involves a growing number of developing countries. These developments have considerable repercussions on multilateral governance, and could represent a menace to the functioning of the WTO system. Some trade experts take a pessimistic view of the latest explosion of PTAs, arguing that there is a link between the surge of bilateral and regional deals and the slow pace of the DDA. Other experts are more optimistic, suggesting that the proliferation of PTAs will eventually force the pace of the DDA negotiations.

2.2. Developing countries’ integration into the world economy

According to the study, developing countries have experienced extensive and rapid trade liberalisation in the last few decades, though there is room for further liberalisation. In this context, they have significantly reduced their tariffs, opened their services sectors, and embraced foreign investment, either unilaterally or in bilateral trade agreements. The World Bank estimates that developing nations unilaterally lowered their average tariffs by 14% between 1983 and 2003 independently of GATT/WTO rounds and regional trade agreements (RTAs). The current level of tariffs in many developed countries is already relatively low, at least on industrial goods. On the contrary, high levels of protection still exist on agricultural goods and significantly affect many developing countries. Likewise, trade in services is subject to many barriers. Past research also suggests that upper middle income countries generally enjoy better market access in both developing and developed countries because their exports are skewed toward manufacturing. Conversely, low income countries face more restrictive market access because their exports have a higher content of agricultural products. Great attention is now paid to non-tariff measures (NTMs) because, as the level of tariffs has decreased, the relative importance of NTMs has increased. In addition, significant progress has been made in terms of quantifying the effects of NTMs, leading to a better understanding of the costs these barriers impose on doing business. Furthermore, there is some evidence of NTMs being used as a substitute for the now lower tariffs.

The impact of tariff reductions on employment depends on the competitiveness of domestic producers and the flexibility of domestic markets, the study says. Where domestic production is not competitive, imports will reduce domestic production and employment. Flexibility in the labour and capital markets needs to be promoted in order to respond to new opportunities, and to provide adequate safety nets to protect the poor during the process of change. Since tariffs are often an important source of government revenue in developing countries, any significant reduction may affect a government’s ability to finance pro-poor expenditure such as health and education. If revenues cannot be sustained, alternative revenue sources must be found to replace tariff revenues.

Whether this process of liberalisation has been associated with net gains, especially for developing countries, is a matter of controversy in the economic literature. While many countries have benefited greatly from global integration, it cannot be denied that the benefits are distributed unequally, both across countries and within them. Much of the trade dynamism of developing countries as a group is driven by Asian economies, which have collectively more than doubled their share of global exports since 1990. In several cases – i.e. China, India, and some other Asian countries – globalisation’s promise has been fulfilled. High-productivity employment opportunities have expanded and structural change has contributed to overall growth. Other regions – Latin America and Sub-Saharan Africa – have seen much smaller increases in market share. The very diverse outcomes observed suggest that the consequences of globalisation depend on the manner in which countries integrate into the global economy.

Empirical analyses have shown that trade liberalisation can produce different outcomes. As a consequence of this, in the last decade more attention has been paid to the need for governments to ensure that citizens are able to benefit from the opportunities created by market openness: workers must be able to acquire the necessary skills; firms need to be able to access credit to finance profitable investment opportunities; and farmers need to be connected to markets. Accordingly, the focus of reforms in the developing world has moved from “getting prices right” to “getting institutions right”. But what kind of institutions should reformers strive to build? Broadly speaking, desirable institutions should provide security of property rights, enforce contracts, stimulate entrepreneurship, foster integration in the world economy, maintain macroeconomic stability, manage risk-taking by financial intermediaries, supply social insurance and safety nets, and enhance voice and accountability. Because developing nations are different from developed countries in that they face both greater challenges and more constraints, “appropriate” institutions could differ from those in developed countries.

2.3. Multiplication of preferential trade agreements

The study points out that the number of PTAs in force in 2010 was close to 300 and WTO estimates that more than 400 free trade agreements (FTAs) will be in force globally by 2011[6]: all WTO members (except Mongolia) belong to at least one PTA. One half of PTAs currently in force are not strictly “regional” in that they include countries from other geographical areas. It is widely acknowledged that the benefits of trade liberalisation are greatest if liberalisation is undertaken multilaterally. Nevertheless, conclusion of the current round of multilateral trade negotiations has proven elusive and many countries have sought more quickly realizable outcomes through bilateral and regional FTAs. FTAs have also been seen by many as promoting broader economic integration and serving foreign policy and strategic interests.

Since average tariffs have fallen markedly in recent years, the study considers that tariff preferences are becoming a more minor motivation for entering into PTAs. In fact, PTAs are increasingly being used to promote cooperation in the areas of investment, trade facilitation, competition policy and government procurement, as well as wider social issues related to the regulation of the environment and the protection of labour and human rights. Furthermore, PTAs are becoming increasingly complex, in many cases establishing regulatory trade regimes which go beyond multilaterally agreed trade regulations. Reciprocal preferential agreements between developed and developing countries are on the increase, pointing to a decreasing reliance by some developing countries on non-reciprocal systems of preferences. Also significant is the emergence of preferential agreements amongst key developing countries which may be evidence of a strengthening of South-South trading patterns.

About one half of world trade now takes place among PTA members. According to the WTO, PTA trade in world trade has increased from 18% in 1990 to 35% in 2008. Manufactures represented 65% of merchandise trade among PTA members in 2008. However, a deeper analysis shows that only 16% of world trade is eligible for preferential tariffs, the global trade-weighted preference margin amounts to no more than 1%, and 84% of world merchandise trade still takes place on an MFN basis. Hence, while the number of PTAs has been increasing, the importance of preferential trade has not kept pace. This development reflects a substantial reduction in MFN tariffs during the past two decades, either through multilateral trade negotiations or unilateral reductions[7].

Regarding the economic impact of PTAs, the study underlines that preferential trade opening allows some domestic production to be replaced by imports from more efficient firms located in preference-receiving countries, leading to welfare gains (trade creation). At the same time, PTAs may reduce imports from more efficient non-member countries, implying a welfare loss (trade diversion). PTAs have a positive impact on welfare if trade creation exceeds trade diversion. In brief, two countries are more likely to sign an agreement if they are geographically closer, similar in size and differ in terms of factor endowment.

According to the study, developing countries have contributed to the recent rise in PTA activity: South-South agreements now represent two-thirds of all PTAs in force and North-South about one-quarter. The emergence of South-South integration may also reflect its usefulness as a policy tool for industrialisation by facilitating the inclusion of LDCs in regional production networks and the export process. South-South integration also provides a means of strengthening developing countries’ bargaining power in multilateral trade negotiations and addressing region-specific issues, such as transit, migration and water[8].

The study points out that the characteristic feature of PTAs between developed and developing countries is that they are underpinned by criteria such as reciprocity and comprehensive trade liberalisation as opposed to the non-reciprocal systems of preferences enjoyed by developing countries under schemes like the Generalized System of Preferences (GSP) and other unilateral initiatives such as Everything but Arms (EBA) under the legal cover of waivers granted by WTO members. This confronts developing countries with the challenge of transition from non-reciprocal trade preferences to trade liberalisation on a mutual basis under reciprocal PTAs with developed country partners.

The study concludes that the proliferation of PTAs has created a spaghetti bowl of criss-crossing arrangements, with little attention to coherence between agreements or to the implications of so many regimes for trade costs, efficiency, and the conditions of competition in global markets. The question of whether PTAs – and specifically RTAs - represent a WTO-plus by accelerating and extending the liberalisation process on a non-discriminatory basis, or whether they are likely to weaken the WTO by bypassing it, is still open. Although liberalisation through RTAs is generally a second-best option, it may be the only option if there is resistance to liberalisation at the multilateral level.

2.4. Trade and inclusive growth

The study recalls that poverty eradication is the central focus for development: the Millennium Development Goals (MDGs) commit the international community not only to halving poverty by 2015, but also to promoting a more open, rule-based trading system, with the latter goal viewed as reinforcing the former one. The role of international trade in relation to poverty reduction has been highlighted in many studies. However, empirical evidence is not conclusive.

According to theory, international trade helps raise and sustain growth by giving firms and households access to world markets for goods, services and knowledge, lowering prices, increasing the quality and variety of consumption goods, and fostering the specialisation of economic activity into areas where countries have a comparative advantage. Trade opportunities are important too for generating the investment and positive externalities that are associated with learning through the diffusion and absorption of technology. As a result, many developing countries have embarked on programmes of external economic liberalisation in recent decades.

The effect of greater trade openness on income growth is the topic of a large body of applied research. A first wave of studies in the 1990s was not able to demonstrate the direction of causality between the phenomena under investigation, with the result that inclusive growth and development can be the consequences of trade liberalisation and integration into the world economy, rather than a prerequisite for it. Another possibility is that both phenomena are caused by a third factor - such as the quality of institutions. A second wave of empirical studies was more cautious in quantifying the actual impacts of multilateral trade policies on growth. Yet the lack of consensus on empirical evidence on the link between openness and poverty dynamics has recently led to new case studies.

There is no simple general conclusion about the relationship between trade liberalisation and poverty, the study says. While there are, in principle, many causes for optimism in the relationship between trade liberalisation and poverty reduction, the ultimate outcome depends on many factors, such as the precise trade reform measures undertaken, the characteristics of the poor and local institutions, which determine the price effects of liberalisation, notably the transmission of border price changes to local levels and homes.

Developing countries are not a homogeneous group. A comparative analysis of the linkages between trade, development and poverty reduction in 15 African and Asian countries[9] derives the following key factors: i) economic growth remains the most significant pre-requisite for poverty reduction; ii) economic growth “per se” is not always sufficient to stimulate poverty reduction, while the character and distribution of growth plays a major role in determining the extent of poverty reduction; iii) agriculture remains a key activity for a majority of the poor; iv) poor business climates (e.g. poor infrastructure, excessive red tape, corruption, an inefficient financial sector, weak institutions, etc.) hamper growth and poverty reduction; v) the countries that have benefited the most are those that have carried out selective and gradual liberalisation and have continued to provide state support to a number of key economic sectors; vi) institutions play a key role in creating and sustaining economic growth and ensuring that benefits are spread as widely as possible; and vii) global competition, especially with developed countries, has led to the decline of many sectors.

2.5. Complementary policies and reforms to promote development

When trade reform has been implemented in an unstable macroeconomic framework or without any effort being made to strengthen trade-related domestic institutions or without appropriate complementary policies, it has often either been reversed or has failed to stimulate growth, the study says. Determining the appropriate trade policy stance and the associated complementary policies for a country should consequently be part of designing growth policy and development and poverty-reduction strategies:

· Institutions: On the government side, an effective and non-corrupt authority is critical to the success of reforms.

· Macroeconomic and exchange rate policies: A stable macroeconomic environment and a truly competitive exchange rate are crucial in order that trade liberalisation is sustained and can contribute to an efficient allocation of resources.

· Competition policies: By lowering external barriers to international competition and by reducing government-imposed barriers to entry by domestic firms, it is possible to increase the competitiveness of markets. Competition among private firms is also important.

· Infrastructure: Improving the quality of infrastructure is of primary importance for developing countries. Infrastructure plays a key role in LDCs' performance, e.g. road density, the telecommunication infrastructure, electricity infrastructure, etc.

· Safety nets: One of the most important complementary policies for the poor is an efficient social safety net. All trade policy reforms need to consider the potential hardships faced by the poor in activities that are opened up to foreign competition. It is preferable to employ general, country-wide safety nets to deal with problems linked to trade reform, rather than to establish distinct trade-related safety nets.

· Foreign direct investment (FDI) and intellectual property protection: FDI is an important channel of technology transfer across national boundaries. Hence, it is important that FDI involves labour-intensive production and the transfer of skills through training. Improvements in communications, transport, and information technology, together with trade liberalisation, have led companies to locate the labour-intensive parts of production in developing countries. Effective intellectual property regimes can promote FDI and technology transfer in sectors that substantially rely on intellectual property rights (IPRs).

· Establishing business: If trade liberalisation opens up business opportunities in new areas, new businesses are likely to be required. Regulations for establishing these activities should thus not be restrictive.

The type and speed of reforms to accompany trade liberalisation process is also an important issue. According to the study, two main strands of literature are available, opposing proponents of “shock therapy” and those of “gradualism”, particularly in the 1990s. Shock therapists argued that rapid liberalisation avoids painful and costly periods, when the old centrally planned economy was no longer working and the new market one was not yet working. They advocated a policy package consisting of rapid and extensive privatisation of state-owned enterprise, liberalisation of prices and trade, and adoption of fiscal austerity policies. Gradualists called instead for a more cautious approach to reforms, and objected to the elimination of the old regulations and institutions before the new ones are created, warning that the institutional vacuum could have a devastating impact on output.

The study adds that the success of trade reform policies is also dependent on timing. Determining the appropriate pace of reform can have both political and financial implications. For example, rapid implementation removes distortions quickly, providing clear price signals to facilitate further adjustment, but at higher short term cost than a gradualist approach. A gradual approach gives the government more time to explain the reforms to its citizens, as reforms can be perceived as threatening.

Trade liberalisation policies in developing countries often occur in conjunction with other macroeconomic reforms, the study says. The sequencing of reforms refers to the order in which these macroeconomic reforms are introduced, both across sectors and within them. While most observers believe that there are substantial welfare gains to be reaped by giving freer play to market forces, many have concluded that there are problems inherent to the transition process itself that argue against liberalizing all markets simultaneously.

2.6. Services

The study emphasises that modern economies are increasingly dominated by services, and that with growth and development, services form an increasing share of overall production and employment. Over the last three decades, services have grown from roughly 58% of GDP to almost 75% across the OECD[10] . But the sector is also important for developing countries. In Latin America, for example, services accounted for 66% of value added in 2007, up from 49% in 1977. Similar trends can be seen in other regions. Even in sub-Saharan Africa, there has been a marked shift in value added toward the service sectors.

Increasing evidence suggest that services play a crucial role in productivity growth in general and that services liberalisation is a major potential source of gains in economic performance. At the same time, trade in services may lead to off-shoring and may place pressure on wages in high-income countries, though the empirical research has not yet produced unequivocal conclusions on off-shoring of labour.

Empirical research also point to positive linkages in developing countries between service sector openness and growth. Research into the impact of changes in services policy on economic performance over the period 1990-2004 for a sample of 20 transition economies found that changes in policies towards financial and infrastructure services, including telecommunications, energy and transport, are highly correlated with inward FDI. They conclude that services policy reform explains the post-1990 economic performance of transition economies. Given that developing countries tend to have more restrictions on foreign competition, there is a significant potential growth bonus for developing countries that move from closed regimes toward open regimes.

According to the study, liberalisation of the services sector entails the reduction or elimination of prohibitions, quantitative restrictions, and regulations that prohibit FDI, limiting the share of ownership of foreign firms, limiting the number of expatriates that can be employed, or restricting imports of a particular service. The potential implications of trade liberalisation in services are closely tied to the mode of liberalisation and to underlying market structures. In fact, while both privatisation and more competition lead to significant improvements in performance, a comprehensive reform programme produces the largest gains. The sequence of reform also matters. Consequently, opening services markets involves a broad and complex set of policies, regulatory instruments, institutions and constituencies, domestic and foreign, public and private.

Experience demonstrates that the nature, pace and sequencing of regulatory reform and liberalisation undertakings must be carefully assessed. Some specific regulatory tools might be useful in this regard. Prior consultation can contribute to the development of better regulation, providing more information on all the available options. Insights gained through prior investigation of the experiences of other countries could also be useful in designing and sequencing domestic reforms. However, such regulatory tools also imply significant administrative costs. The study also points out that trade agreements may deprive regulators of the ability to achieve social objectives. The challenge would be to achieve a balance between greater competition and preserving desirable regulatory freedom.

The complexity of service sector reform, and the critical need for liberalisation efforts to be not only rooted but also accompanied, and in some instances preceded, by sound regulation (including enforcement capacity) can present formidable challenges to developing countries, the study concludes. This points to the need for services liberalisation to be progressive, and to be accompanied by regulatory capacity building.

2.7. Investment

The study notes that neoclassical theory predicts a positive relationship between capital inflows and growth. Therefore, the theory generally favours open or liberalised capital markets, with the expectation of more efficient allocation of savings, increased possibilities for diversification of investment risk, faster growth and the dampening of business cycles. The new structural economics approach considers that FDI is a more favourable source of foreign capital for developing countries than other capital flows because it is usually targeted toward industries consistent with a country’s comparative advantage. It is less prone to sudden reversals during economic crises. In addition, FDI generally brings technology, management, access to markets, and social networking, which are often lacking in developing countries and are crucial for industrial upgrading. Thus, liberalising FDI investment is considered an attractive component of a broader development strategy.

According to the study, while there is little evidence of a clear relationship between capital inflows and growth, FDI is believed to be one of the most important channels through which financial globalisation benefits the economy. Since the mid-1980s, most developing countries have opened their markets to FDI, trying to benefit from the development input that these investments can generate for host countries. The process of opening up to FDI and establishing enabling frameworks for FDI vastly accelerated during the 1990s and continues today.

FDI flows into host countries are determined by a variety of factors, the study says. Firms choose the investment site that minimizes the cost of production. Determinants include the physical and technological infrastructure of the host country, and the cost and quality of resources, together with inputs and business facilitation measures, such as FDI promotion, including incentives to foreign investors. The riskiness of investment in terms of the economic and political environment also affects investment decisions. In this respect, greater macroeconomic and political stability of the host country could attract more foreign investment. Host country institutions also influence investment decisions because they directly affect the conditions in which businesses operate.

The OECD identified ten broad policy areas where host country policies affect investment decisions: investment policy, investment promotion and facilitation, trade policy, competition policy, tax policy, corporate governance, policies for promoting responsible business conduct, human resource development policy, policies related to infrastructure and financial sector development, and public governance[11].

The study concludes that one primary condition for attracting FDI is the adoption of an investment liberalisation policy. A key challenge for governments consists in identifying and eliminating unwanted barriers to entry. However, FDI liberalisation is a necessary but not a sufficient host country determinant of investment, and other determinants have to come into play if investment is to flow into a country. If a host country does not have some basic economic determinants in place it is unlikely that promotional efforts or incentives will be successful in attracting significant FDI.

2.8. Competition

The study points out that competition policy is the combined effect of all government policies that influence the level of competition as a positive tool regulating the market economy, including measures against restrictive business practices and unfair business practices. An important objective of competition policy is to enhance consumer welfare by promoting competition. Economic efficiency is generally enhanced by encouraging competition.

According to the study, one of the key links between competition policy and growth has been the role that competition policy plays in increasing economic efficiency: the main static effects of competition are to reduce the ability of firms to raise price above marginal cost and to ensure that firms produce at the lowest costs; the dynamic consequences of competition can include incentives to innovate, to imitate, and to invest in the development of new technologies and know-how. However, a key aspect of achieving a successful reform process is the promotion of consistency and coherence between competition, industrial, trade, and investment policy regimes. Thus, policies to promote and protect competition are now prominent on the national policy agendas of a number of emerging economies, e.g. China, Vietnam and India.

3. The position of developing countries in the world economy

While Least Developed Countries (LDCs) as a category are distinctly defined by the United Nations (UN)[12], there is no established convention for the designation of "developed" and "developing" countries. In common practice, Japan in Asia, Canada and the USA in Northern America, Australia and New Zealand in Oceania, and Europe are considered "developed" regions or areas. The World Bank classifies low income countries ($1,005 per capita or less) and lower-middle-income countries ($1,006 - $3,975 per capita) as developing countries (calculated using the World Bank Atlas method), but acknowledges that this does not imply that all economies in these groups are experiencing similar levels of development[13].

The present analysis is based on the EU's definition of developing countries in the current Generalised System of Preferences (GSP) regulation and defines the group of 176 countries eligible for the GSP as "developing"[14]. In this group, a further differentiation is established between G20 developing countries[15] and the LDCs.[16] The need for differentiation was highlighted in the Commission's on-line public consultation on trade and development carried out between June and September 2011[17]. Respondents agreed that emerging economies are no longer developing countries, though also noting that they may still face particular constraints that need to be taken into account.

The rest of the section briefly describes the evolution of developing countries over the past decade in terms of changes in per capita income and poverty; their trade performance, including trade in services and changes in flows and stocks of foreign direct investment.

3.1. Per capita income has increased

Figure 1 shows the change in developing countries' gross domestic product (GDP) per capita over the past decade. Most of the increase in per capita income is driven by the G20 developing countries. The cumulative increase in their GDP per capita over the period stands at 115%. The relative increase in GDP per capita was largest for China at 223% and Russia at 310%. This positive trend seems to continue. In its twice-yearly update,[18] the World Bank forecasts that developing economies would grow by 6.3% in 2011, down from 7.3% in 2010, and maintain 2011 growth levels for the next two years.

LDCs have benefited somewhat less. The increase in per capita income of the LDCs reached 88% over the period. The gap between developing countries and LDCs has thus further increased. However, some LDCs have seen a more positive development than others especially due to a boom in exports of oil and minerals. Between the beginning of the decade and mid-2008, the total volume of exports from the LDCs almost doubled, with African LDCs leading this expansion. Hence, while GDP per capita for African LDCs grew from $357 to $640 between 2000 and 2008, the increase was limited to $280 to $436 for non-oil exporters but soared from $806 to $1,854 for oil exporters (Angola, Chad, Equatorial Guinea, Sudan)[19]. This compares to an increase of $327 to $624 for all LDCs over the period and $1,288 to $3,165 for all developing countries.

Figure 1: Developing countries' evolution of GDP per capita (€ thousand, current prices)

Source: IMF

Poverty has decreased, but unevenly across countries and regions

The increase in GDP per capita has been accompanied by a reduction in absolute poverty between 1990 and 2005.[20] The number of people living on less than $1.25 a day dropped from about 1.8 billion in 1990 to 1.4 billion in 2005. The corresponding poverty rate dropped from 46 % to 27 %. Despite the economic and financial crisis in 2008/2009, exacerbated by the food and energy crisis, sustained growth in developing countries, particularly in Asia, is keeping the world on track to reach the poverty-reduction MDG target of halving the proportion of people living in extreme poverty.[21]

Using the $1.25 a day poverty line reveals a reduction in absolute poverty for a set of selected countries and country groups (Figure 2), including remarkable reductions in absolute poverty in Asia, notably in China and Indonesia where poverty was cut by more than half between 1990 and 2005. In relative terms, poverty has also fallen markedly in Argentina and Brazil, while in sub-Saharan Africa absolute poverty did not decrease to the same extent.[22]

Figure 2: Headcount poverty ratio, $1.25 poverty line (%)

Source: World Bank, POVCAL and the OECD Development Centre. Note: Data is not available for 2000 or for later than 2005 for a cross country comparison. Data for India is note available for 2002.

However, the $1.25 poverty line is a very crude measure of poverty and does not necessarily reflect human development. Poverty is a multidimensional phenomenon and is characterised not only by income, but also by access to health services, education etc. A poverty indicator that seeks to take into account several dimensions of poverty is the Human Development Index (HDI). This indicator (Figure 3) points to a significant increase in development for all selected countries over the past 20 years. The only exception is Sub-Saharan-Africa which saw its HDI decline between 1990 and 2000 before increasing to a higher level in 2010. In this respect, it is significant that the African LDCs that experienced the highest GDP per capita growth over the last decade remain at the lower end of the HDI with a respective ranking out of 169 countries of 119 for Equatorial Guinea, 146 for Angola, 156 for Sudan and 163 for Chad[23].

Trade policy reform has both direct and indirect effects on the poor. In terms of direct effects, trade policy reform may affect the demand for poor people's labour and other assets they own and thus have an impact on their income. It also changes the price of what they consume. The indirect effects are more long-term and operate through changes in incentives to invest and innovate which will improve the prospects for higher economic growth in the future.

Figure 3: Change in human development index (1 is developed)

Source: UNDP, POVCAL and the OECD Development Centre.

But the poverty impacts of a trade policy change will vary significantly across countries. The poor in different countries consume and produce different goods and are not subject to the same set of regulatory regimes, infrastructure, market structure, etc. Therefore, the impact of trade reform will be channelled through different transmission mechanisms in each country and influence individuals and households differently. Hence, the answer to whether the poor will benefit or not from global reforms is specific to countries and individuals.

3.2. Developing countries, including the LDCs, are trading more

Figure 4 shows that developing countries' trade steadily increased from the beginning of the period until it dipped in 2009 due to the financial crisis. Developing countries were particularly affected by the crisis because of falling commodity prices, reduced exports and tourism earnings and declining capital flows and remittances. The crisis caused a drop in the value and volume of trade for almost all developing countries.

Trade of the ten developing G20 countries makes up a significant share of the developing world's exports (about a third). Among the G20 countries, the largest increases in exports are accounted for by China and India (increasing exports by 307% and 214% respectively). In contrast, Mexico's exports increased by a mere 37%.

The relative increase in LDCs' exports between 2002 and 2010 (not clearly discernable in Figure 4) is larger (198%) than the increase in exports of the developing world as a whole, which reaches 150%. However, in contrast to the rest of the developing world, the LDCs remain net-importers.

Figure 4: Developing countries' trade performance (€ billion, current prices)

Source: IMF

A fair share of the increase in developing countries' exports is made up of mineral fuels which have experienced a boom in prices. This has benefited in particular Kuwait, Russia, the United Arab Emirates, and Saudi Arabia[24]. The surge in commodity prices over the period is therefore one reason for the successful trade performance of developing countries. On the other hand, the growth in Chinese exports comes from manufactures, more specifically machinery and transport equipment.

Other main exports of developing countries are electrical machinery (HS85) and machinery and mechanical appliances (HS84) making up 18% and 11% of developing countries total exports, respectively. But the largest increases in exports concern products traded in relatively small quantities such as copper (HS74), which increased by 352% over the period.

Reflecting the above, developing countries have increased their share of world exports over the period examined. The figure for developing countries as a whole points to an increase in the share of world exports from 41.0% to 51.5%, while the share of world exports of the developing G20 countries increased from 20% to 30%. The LDCs increased their share of world exports from 0.8% to 1.3% (Table 1).

Table 1: Share in world exports (%):

|| 2002 || 2010

Developing countries || 41.0 || 51.5

G20 developing countries || 20.5 || 29.7

LDCs || 0.8 || 1.3

EU27 || 17.4 || 15.3

USA || 15.6 || 10.6

Japan || 9.1 || 6.6

Rest of the World || 16.9 || 16.0

Source: IMF

The developing countries' increasing share of world exports is also reflected in a larger share of exports of manufactured goods exported, in particular from China. Exports of manufactured goods might have increased even more and export diversification might have progressed even further had the prices of mineral fuels not surged so substantially.

However, in case of the LDCs, dependence on a few export products, particularly primary commodities, increased during the past decade. In fact, the increase in LDC exports is concentrated in a subset of countries and one may note that LDCs' dependence on a few export products, particularly primary commodities, has increased during the past decade. Chad increased its exports by 2980%[25], while Zambia, Angola, and Equatorial Guinea increased their exports by 429%, 378% and 238% respectively. This increase is mainly due to the increase in the global demand for oil (Chad, Angola and Equatorial Guinea) and raw materials (copper in the case of Zambia) and high commodity prices.

On average, three main export products make up more than 75% of all their exports, while in eight LDCs this proportion is higher than 95%. The overall increase in export concentration has been essentially due to trends in African LDCs, particularly the oil exporters among them. At the same time, the share of manufacturing in GDP has been stagnant thereby making it difficult to talk about a structural transformation in LDCs. Still, some progress has been recorded by Asian LDCs, driven by their specialisation in low technology manufactures, primarily textiles, for instance Bangladesh and Cambodia.

3.3. South-South trade has outstripped North-South trade since 2007

Trade between developing countries (South-South trade) is growing in importance. In 2007, South-South trade was for the first time more important than trade between advanced and developing economies (Figure 5). G20 developing countries account for most of this increase, as trade between the developing world and G20 developing countries (including trade among the G20 developing countries themselves) increased by 265%.

EU27 trade with developing economies increased more (97%) than total North-South trade (69%), while the increase in United States' trade with developing countries was lower at 36%. Trade between Africa, excluding intra-African trade, and the developing world as a whole, increased by 234% (not displayed in the graph). However, with 3.5% of the total, Africa still makes up only a small share of trade among developing economies.

The EU accounts for about 16% of the LDCs' trade and is their second most important trading partner after China with a share of close to 22% of LDC trade. In 2009, the EU was the world's leading importer of LDCs' agricultural products with 32% of the total (compared to 15.6% for India and 11.6% for China) and of LDCs' textile and clothing products with 51% of the total (compared to 32% for the USA). However, with 13% of fuel exports from LDCs, the EU comes after China (34%) and the USA (23%).

Figure 5: Overview of developing countries' trade (import and export) by main partners (€ billion, current prices)

Source: IMF. Note: South-South trade denotes trade between developing countries.

Trade barriers between developing countries are still much higher than barriers between developed and developing countries. Kowalski and Sheperd (2006)[26] found that tariff barriers facing South-South trade are almost three times higher than North-South or North-North trade barriers. Hence, there is potentially more scope to further increase South-South trade through tariff liberalisation compared to North-South Trade. Regional integration can be decisive in this respect, but one should note that the form regional integration takes may differ from one region to another.

The relative importance of non-tariff barriers (NTBs) is increasing as regular tariff barriers are gradually being lowered. Some developing countries have made significant progress in reducing these barriers, which hinders not only trade but business activity more generally. According to the World Bank's and the International Finance Corporation's "Doing Business Indicators", reforms making it easier to do business were implemented in 36 of 46 in Sub-Saharan African economies in 2010/2011. In terms of the overall ranking of 183 countries, Mauritius is in 23rd place ahead of several EU member states. Rwanda, an LDC which is in 45th place, has made significant progress over the past five years in terms of complying with export formalities (time halved) and streamlining the time required to register a company (time reduced by 83%). Also neighbouring Burundi and Uganda show progress in this respect.

3.4. Growing importance of trade in services

Trade in services has become more important over the last decade, partly because technological progress in information and communication technology has allowed a rising share of intermediate services in total trade. Consequently, worldwide trade in services now makes up nearly 12% of GDP (Figure 6). The worldwide share of services trade in GDP grew by 48% between 1980 and 2009. This especially concerned India whose share of services in GDP increased from some 3% to more than 12% over the period. Low- and middle income countries as well as LDCs also increased their share of services trade in GDP, albeit less dramatically than India. The same holds true for the EU and other high-income OECD countries. In contrast, the relative importance of trade in services of the Latin American and Caribbean countries (not shown in the graph) declined.

Figure 6: Trade in services (% share of GDP)

Source: IMF

Disaggregated data on trade in services is still patchy, but it is more recent and comprehensive than the poverty data. The data indicates that LDCs[27] on average import more commercial services than they export (not shown in Figure 6). They mostly import transportation services and export travel services (53.3%), transportation services (23.5%) and other commercial services, which include transactions such as construction, computer and information, and other business services (23.2%)[28]. However, these figures mask great heterogeneity amongst LDCs. While the share of commercial services is insignificant in oil-exporting African LDCs, it is important in other LDCs (e.g. 49% in Ethiopia, where the bulk of services is related to transportation), or even prominent in many small island developing countries that have an important tourism sector (e.g. 90% for Samoa).

Liberalisation of trade in services can be an important part of a developing country's growth strategy and could especially benefit those low-income and LDCs which have so far not succeeded in reaping the full benefits of trade. The potential development impact of service liberalisation is significant and estimated welfare benefits for service liberalisation are higher than for goods and agriculture liberalisation.[29]

To a certain extent, however, the effects of trade liberalisation in services can be achieved through internal liberalisation of services. This conclusion may be drawn from a study carried out by the World Bank (WB) of four major road transport corridors in Africa that cut across borders and ship goods to the ports. In all the four transport corridors, the pure vehicle operating costs along these major corridors were no higher than in France. Profit margins were by contrast exceptionally high, particularly in Central and West Africa, where they reach 60 to 160%.[30] The underlying cause is limited competition combined with a highly regulated market. Competition in the trucking industry could thus lower costs dramatically. Rwanda deregulated the trucking industry and transport prices fell 75%.[31]

3.5. Worldwide investment has increased with almost half going to the developing world

Worldwide foreign direct investment (FDI) inflows decreased over the last decade in Euro terms (while it increased in dollar terms) and suffered a further blow in 2009 due to the financial crisis (Figure 7). On the other hand, FDI flows into developing countries increased by 54% between 2000 and 2008. Moreover, FDI inflows into developing countries suffered less from the financial crisis, indicating more stable investment prospects. Worldwide FDI flows decreased by 44% between 2008 and 2009 while FDI inflows into developing countries decreased by a mere 36%.

FDI inflows into developing countries are now nearly as large as inflows into the EU, USA, and Japan together. In 2009, FDI inflows into developing countries equalled €343 billion, while FDI inflows into the EU, USA and Japan equalled €361 billion. While developed countries on average invest more abroad than they receive, the contrary holds true for developing countries.

Figure 7: FDI inflows by destination (€ billion, current prices)

Source: UNCTAD

FDI inflows into G20 developing countries increased by 118% between 2000 and 2009, largely due to growth in Saudi-Arabia, Russia, and Turkey. However, the increase of FDI into the South-American countries (Argentina, Brazil and Mexico) was below average. FDI inflows in LDCs witnessed an exponential growth from €5 billion in 2000 to €21 billion in 2009 (390% growth). Most of the inflows were directed to natural resource-rich African LDCs, though a number of island LDCs also received growing inflows of FDI.

FDI from emerging economies in LDCs, especially from China and India, is now growing faster than from traditional partners. There has, for instance, been a significant increase in infrastructure investments from Asian countries in Sub-Saharan Africa. Intra-African FDI, 70% of which originates from South Africa, is smaller in scale and is directed more to services and manufactures, rather than to natural resources[32].

The trend in FDI flows is reflected in FDI stocks with the total amount of foreign investment increasing. This development is to a large extent attributable to an increase in the FDI stock of developing countries as the world stock of FDI increased by 31% and reached some €12,500 billion in 2009 (not shown in Figure 8), while the stock of FDI in developing countries increased by 53% to about €3,500 billion.

In the group of developing countries, the developing G20 countries experienced a growth in FDI stocks of 75% attaining a level of foreign investment of €3,000 billion. The least developed countries also increased their FDI stocks above average growing from €42 billion to €94 billion (82% growth).

Figure 8: FDI stocks by destination (€ billion, current prices)

Source: UNCTAD

3.6. A mixed picture

To conclude the above analysis, it is clear that the benefits of growth and trade remain unequally spread across developing countries. Developing G20 countries remain the main beneficiaries of globalisation. Some of them managed to capitalise on high export-led growth so as to achieve significant poverty reduction.

However, despite apparently impressive figures overall, the situation of LDCs has not improved significantly in the last decade. Where GDP per capita and trade has grown significantly, this has been in most cases led by a surge in oil and commodities exports in a very limited number of countries, and the benefits have overall not resulted in lifting people out of poverty. This is largely due to structural factors, such as an insufficiently diversified economies and export bases, poor infrastructure and the lack of productive capacity, but also political factors linked to lack of good governance, poor administrative capacity and lack of security and stability. This is particularly the case in Sub-Saharan Africa, which is home to most LDCs, while some more positive trends can however be witnessed in Asia and the Pacific.

Nevertheless, some non-oil/commodity exporting Sub-Saharan African countries have done well over the past decade. Partly as a result of a coordinated government programme to stimulate and improve exports of agricultural products, such as coffee, and to attract tourism, Rwanda has experienced an average annual increase in exports of 19% over the last decade[33]. This performance is also reflected in high rates of economic growth and a steady improvement in its human development index. Another example is Cape Verde which reached middle-income country status in 2007, the success of which can primarily be explained by good macroeconomic management and governance including progressive trade openness and integration into the world economy.

4. The EU's Generalised System of Preferences (GSP)

In 1968, the United Nations Conference on Trade and Development (UNCTAD) recommended the creation of a 'Generalised System of Tariff Preferences' under which developed countries would grant trade preferences to all developing countries. The EU was the first to implement a Generalised System of Preferences (GSP) scheme in 1971 in order to extend preferential access to its markets to developing countries.

4.1. The EU's current GSP – since 2006

The EU's GSP is the most widely used of all developed-country GSP systems. In 2009, EU imports under the GSP totalled € 59.6 billion. The GSP scheme is implemented in 10-year cycles so that it can adjust to the changing environment of the multilateral trading system. For this purpose the Commission adopts guidelines on the role of the GSP for a 10-year period.

The 1994 guidelines[34] for the 10-year period 1994-2005 and their implementing regulations introduced a number of important changes in the GSP such as tariff modulation according to product sensitivity, graduation and special incentive schemes. In 2001, a special arrangement for LDCs was introduced, for an unlimited period of time: the Everything but Arms (EBA) arrangement, which provides duty-free, quota-free access for all products from all LDCs except arms.

In 2004, the Commission adopted guidelines for the following 10-year period 2006-2015[35]. One of the objectives for this period was simplification of the scheme, which has been achieved through a reduction in the number of arrangements, from five to three. Thus as of 2006 GSP schemes consist of:

i. The general arrangement, which provides autonomous preferences to all developing countries and territories;

ii. The Special Incentive Arrangement for Sustainable Development and Good Governance, known as the GSP+, which offers additional tariff preferences references to support vulnerable developing countries in their ratification and effective implementation of relevant international conventions relating to sustainable development. These include basic human rights (agreements designed to uphold political and economic and social rights, combat torture and discrimination on grounds of race and gender, and protect women’s and children’s rights) and labour rights (the ILO eight fundamental conventions related to the freedom of association and the right to collective bargaining, equal treatment, as well as elimination of forced labour and child labour). They also cover environmental protection (e.g. conventions designed to combat trafficking in endangered species and to protect the ozone layer) and the various conventions relating to the fight against illegal drugs production and trafficking);

iii. EBA, which maintains its global coverage of everything but arms. Several positive mentions of the GSP were made in the Commission's on-line public consultation, particularly on GSP+ and EBA.

The present 10-year cycle, which began in 2006, will finish in 2015. The first GSP scheme of the present cycle, established by Council Regulation (EC) No 980/2005[36], entered into force on 1 January 2006 and expired on 31 December 2008. To ensure the continuity of the GSP scheme, a new Regulation covering the period from 1 January 2009 to 31 December 2011 was adopted by the Council on 22 July 2008 (Council Regulation (EC) No 732/2008), replacing Regulation (EC) No 980/2005. It extends for a further three years the three separate arrangements of the scheme. At the same time, this regulation implemented a number of technical changes in the scheme, either to simplify the language or to take account of changes in relevant trade data over the most recent period. In addition, for countries which did not yet meet the GSP+ qualifying criteria, the new regulation provided an additional opportunity to apply for the additional preferences in mid-2010.

4.2. The next GSP – as of 2013

In view of the approaching expiry of the present 10-year GSP cycle and the preparation of the successor GSP scheme, the Commission undertook a major evaluation of the effectiveness of the GSP scheme. This was conducted for the Commission by the Centre for the Analysis of Regional Integration at Sussex (CARIS)[37]. In parallel public consultations were carried out with Member States and other stakeholders, including civil society, industry, beneficiary countries, the European Parliament and WTO members[38].

In general, the consultations underlined the importance of the scheme for its users. Almost all respondents agreed that the scheme was a valid trade instrument for developing countries. Respondents from different beneficiary countries confirmed that the scheme had played an important role in the expansion and diversification of their trade sector. However, about half of the respondents, representing different types of stakeholders, stressed the need for modifications covering: stronger control and verification of requirements to ensure that preferences go to countries in need; support for investment in developing countries; competitiveness of EU industries; and focus on abolishing restrictions in international trade and lowering custom duties and other barriers.

The analysis undertaken by CARIS concluded that the scheme has been generally successful. Imports benefiting from preferences were significant and amounted to almost €60 billion in 2009. This corresponds to over 9% of total EU imports from all beneficiaries. This percentage varies across categories of beneficiaries with preferential imports accounting for 8% of total imports from GSP countries, 20% of total imports from GSP+ countries, and 32% of total imports from EBA beneficiaries. The general attractiveness of the scheme is also underlined by a relatively high level of utilisation of the available preferences, but with room for further improvement, of 53% for GSP countries, 69% for EBA countries and 85% for GSP+ countries.

With respect to the special incentive arrangement for sustainable development and good governance, CARIS concluded that the GSP+ arrangement had had a positive impact on the ratification of GSP+ related conventions. However, the instrument was not fully equipped to clearly monitor progress in the effective implementation of the relevant conventions, although some GSP+ beneficiary countries had undertaken substantial reforms.

Based on the CARIS analysis and the results of public consultations, the Commission carried out a thorough impact assessment[39]. On 10 May 2011, the Commission adopted its proposal for the new GSP Regulation[40]. The Regulation will apply as of 1 January 2014. The Regulation, after approval by the Council and the EP, will be published six months in advance of the date of application. The main objectives of the proposed Regulation are to: (i) better focus on those countries most in need; (ii) further promote core principles of sustainable development and good governance; and (iii) enhance legal certainty, predictability and stability.

5. The EU's new preferential rules of origin

In respect of the EU's 2002 commitment to “pay particular attention to LDCs and other low income countries”, a key achievement was the adoption, at the end of 2010, of the new preferential rules of origin which have been applicable within the framework of the GSP since 1 January 2011. This adoption concluded a process of consultation initiated in 2003 and designed to address criticism regarding the previous rules, considered too stringent to allow developing countries to really benefit from the preferential market access offered by the EU. A correlation was indeed proven between the stringency of the rules of origin and the utilisation rates of the tariff preferences. In addition, product-specific rules were considered too complicated. Lastly, compliance was considered too costly and burdensome, both for exporters and administrations.

The new rules are simpler and easier to comply with. They offer extended possibilities of sourcing through flexible product specific rules and new opportunities of cumulation. Regional cumulation is maintained and enhanced. In addition, the system of derogations from the rules of origin has been made easier to apply for. Last, a procedure is introduced allowing the EU to rapidly grant derogations on its own initiative, in order to be able to respond more quickly to any special situation which may occur, such as natural disasters.

A specific effort was made to assist LDCs, which benefit from further flexibilities. For the first time, the EU has introduced differentiation for the benefit of LDCs at the level of applicable GSP rules of origin. For example, for most industrial products, the threshold of valued added requested in the LDCs is only 30% (as against 50% for non-LDC). For textile and clothing, single transformation has been granted without quotas.

Trade and natural disasters

The increasing costs of natural disasters have led to growing interest in their impact on trade. Direct potential effects include casualties but also physical damages to infrastructure and disruptions of supply chains, international trade and economic activity. The Commission has contributed to the reflection on this issue through the organisation of an internal seminar on 'Natural disasters in poor and vulnerable countries' on 25 May 2011. On this occasion, participants discussed methodologies for assessing disaster risk and impact, as well as the strengthening of vulnerability indicators by including trade-related measures, and criteria for eligibility for trade support. This was followed by a Commission in-house econometric analysis which suggests that, on average, exports of developing countries with a population of up to 20 million fall by 22% after a major natural disaster, with the negative effect on export performance lasting about three years.

This new set of rule is more operator-friendly. From 2017, for example, exporters will no longer have to go to the authorities for a certificate of origin 'Form A' for each consignment. Instead, they would register with authorities (who would remain responsible for controls) and once registered, issue statements of origin themselves directly to their customers in the EU.

This set of rules is – or will be – used as a point of reference during ongoing and future FTA negotiations.

Within the framework of EPA negotiations, the EU has proposed a far-reaching initiative, allowing greatly extended possibilities of cumulation. Under Cotonou, all ACP countries were allowed to cumulate materials with each other, but when the Cotonou agreement, ended, cumulation between EPA partners and other ACP countries was possible only when the applicable rules of origin were the same, so in practice, for some products, only within the same EPA. This condition prevents cumulation between ACP countries which have signed different EPAs, and between EPA countries and ACP countries that have not signed an EPA. With the new proposal, EPA partners would be allowed to cumulate materials coming from any country in the world, as long as these materials are entitled to enter the EU duty free quota free (DFQF), either because there is a 0% duty in the EU's conventional custom tariff or a 0% GSP preferential duty. In addition, cumulation would also be possible, upon request, for industrial products entering the EU DFQF under an FTA. It is expected that the increase of foreign sourcing allowed by these new cumulation opportunities could result in an increase of EU preferential imports from EPA countries of between 2.9% and 7.2% (with foreign sourcing increasing respectively by 10% and 25%). About 45% of the increase in EPA exports is estimated to be in agricultural products and 55% in industrial products.

6. The EU's Export Helpdesk

In 2004, the Commission launched the Export Helpdesk as a flanking measure to the preferential trade arrangements granted by the EU to developing countries[41]. It is a free online service providing information for economic operators in developing countries on the conditions of access to the EU market. This website provides detailed information product-by-product and country-by-country on EU import requirements (SPS, technical regulations, labelling rules, etc.), internal taxes, import tariffs and import measures, rules of origin, customs procedures and trade statistics.

Since its inception in 2004, the Export Helpdesk has been available in 4 languages (English, French, Spanish and Portuguese) so as to reach as many users in developing countries as possible. In order to further assist exporters in countries in the neighbourhood region, the website was extended in 2010 to include Arabic and Russian.

In 2010 the Export Helpdesk counted over 1,750,000 hits worldwide indicating its usefulness for economic operators around the world. The largest category of user countries is in Latin America, followed by Asia.

The Export Helpdesk also offers a Contact section allowing users to submit all kinds of questions related to access to the EU market. The Contact section receives an average of 60 questions per month, with more than 50% of them coming from companies.

Feedback received from users indicates that after 7 years of operation, the Export Helpdesk has clearly established itself as a unique one-stop-shop for all those who wish to know more about the conditions of access to the EU market.

Today the Export Helpdesk is increasingly seen as a template to be copied by other regions, e.g. in the context of a new trade facilitation mechanism now being developed for the Euro-Mediterranean area.

7. Aid for Trade

Many developing countries, particularly the LDCs, face difficulties in their efforts to adapt to a fast changing world where trade is becoming increasingly competitive and global, and integration into global supply and value chains is a necessity. Constraints exist at domestic level, notably in LDCs, including limited productive capacities, limited access to state of the art technologies, a weak private sector, and lack of institutional capacities (notably of national administrations). This in turn poses challenges in terms of the design or implementation of trade and accompanying policies and in trade negotiations, as well as in meeting technical and SPS requirements.

In line with the fundamental principles of national ownership and leadership, the bulk of efforts rests on developing countries themselves. However, the international community also recognises the role of Aid for Trade (AfT) in contributing to establishing the right conditions at national and regional level to help developing countries integrate into the global trading system. On this basis, the EU has been a long-standing proponent and leading provider of AfT. The Commission's on-line public consultation on trade and development confirmed the importance of AfT and highlighted the need for mainstreaming trade into developing countries' national and regional development strategies, demand-driven programmes, and ownership.

7.1. EU Aid for Trade Strategy

EU Commitments

The 2007 EU Aid for Trade Strategy pursues the following objectives:

- Increase Aid for Trade as part of the gradual increase in the EU's overall ODA.

- Implement the commitment by EU Member States and the European Commission to collectively spend €2 billion annually on Trade-Related Assistance by 2010, including €1 billion from Member States and €1 billion from the Commission. In the range of 50% of the collective increase would be available to ACP needs.

- Enhance the pro-poor focus and the quality of EU Aid for Trade.

- Increase EU-wide and Member States' capacity in line with the globally agreed aid effectiveness principles.

- Build upon, foster and support regional integration processes through Aid for Trade, including within the ACP countries.

- Support effective Aid for Trade monitoring and reporting.

AfT gained considerable momentum in the last decade in terms of both AfT volumes and the concept of AfT itself, now firmly anchored in the global trade and development landscape. The EU played a major role in stimulating the debate on AfT and its inclusion in the WTO Hong Kong Ministerial Declaration in 2005. The EU has also been a frontrunner in prioritising AfT, notably through the adoption by the EU and its Member States on 15 October 2007 of a joint AfT Strategy. Its aim was to support developing countries, particularly LDCs, to better integrate them into the rules-based world trading system and to use trade more effectively towards the overarching objective of eradicating poverty in the context of sustainable development. It provides for a dual and complementary focus on more resources to AfT and a greater impact of AfT.

The EU Strategy addresses supply side constraints related to productive capacity, economic infrastructure and trade related adjustments, so that developing countries can benefit fully from open trade. More specifically, the EU Strategy embraces the full AfT agenda, which can be divided into six categories: (1) trade policy and regulations; (2) trade development; (3) trade-related infrastructure; (4) building productive capacity; (5) trade-related adjustment; and (6) other trade-related needs, notably regional trade integration. Categories 1, 2 and 6 correspond to more narrowly focused ‘Trade-Related Assistance’ (TRA). TRA plus the remaining categories are referred to as ‘the wider Aid for Trade agenda’, designed to benefit trade in a broader sense. The OECD/DAC tracks ODA in each of the AfT categories through its Creditor Reporting System (CRS).

As with all EU aid, EU AfT is delivered in accordance with the principles of the 2005 Paris Declaration on Aid Effectiveness and the 2008 Accra Agenda for Action, which notably entails alignment, harmonisation, predictability, mutual accountability and transparency, policy dialogue, needs assessments, results-orientation, inclusion of priorities into national and regional development strategies (such as Poverty Reduction Strategy Papers), and formulation of response strategies on this basis. This is the only way to ensure national ownership, coherent programmes and sustainability. In addition to and consistent with the joint AfT Strategy, several EU Member States have adopted specific AfT strategies in line with their national development policies.

In the G20 context, the EU committed to at least maintaining, beyond 2011, AfT levels that reflect the average of the last three years (2006 to 2008), as well as to strengthening the role of South-South trade cooperation and reinforce the involvement of the private sector, while sustaining aid flows to other sectors. The EU also committed to engaging fully in the ongoing processes of relevant institutions, in particular the WTO, OECD, World Bank and other multilateral and regional development bodies, to monitoring these commitments and evaluating their impact on low income countries' capacity to trade.

7.2. Significant progress has been made in terms of aid flows

The EU and its Member States have made continued progress in AfT and have fully met their commitment to provide €2 billion annually as TRA. The 2010 EU AfT Monitoring Report showed some extraordinary collective progress, and this year's AfT Monitoring Report[42] confirms that this was not an isolated result.

· Collective EU AfT amounts are significant and continue growing, AfT reached €10.5 billion in 2009, up from €10.3 billion in 2008, €7.1 billion in 2007 and €6.5 billion in 2005 (Figure 9). The AfT concept has widened over the years to include more general support for infrastructure and productive sectors, whereas the original scope of AfT did not stretch far beyond TRA, i.e. assisting beneficiaries to formulate and implement trade policies. While the 2010 report indicated an all-time high of collective EU AfT commitments in 2008, the latest data for 2009 show that this high level was sustained. The 2009 commitments increased slightly (+3%) and reached a total of almost €10.5 billion, including €7.15 billion from EU Member States and €3.35 billion from the EU (European Commission). Collectively, the EU accounted for about 37% of total AfT from the world’s bilateral and multilateral donors in 2008-2009 and is the largest provider of AfT. This is a substantial increase compared to 2004-2005, when the EU's collective share was 30% of the total.

· AfT as a whole has remained a priority in development cooperation for the EU and its Member States. Measured as a share of total Official Development Assistance (ODA), AfT represented about a fifth of total ODA from the EU in the period 2005-2009. The share of Aft in total EU ODA increased to 22% in 2009.

Figure 9: Collective EU Aid for Trade(EU and EU Member States) in million Euro

Source: OECD CRS Database, Doha Development Database, Monterrey Questionnaire 2011

Sustainable trade project boosts exports of Uganda's organic products:

Favourable climatic conditions and an enabling business environment have made Uganda a leading African producer and exporter of organic products. A Danish-funded project has contributed to consolidating this trend. African Organic, a certified Ugandan organic and fair trade producer, and Danish wholesale company Solhjulet, have set up a partnership with a view to increasing sales of organic fruits and vegetables in Europe that meet EU organic standards. The Danida Business to Business Programme started funding the partnership in 2006, providing around €400,000 worth of support. The supply chain and the African Organic business are now self-sustaining and enjoying growth – with exports amounting to around €1.3 million a year – and a diversification of the products shipped to Solhjulet. African Organic, a farm to the north of Kampala, works with over 150 smaller farmers as suppliers. The placement of products in premium markets means that farmers and their workers are paid a higher price. They have also received training in organic farming methods.

· The EU and its Member States have fully met and even surpassed their commitment of providing €2 billion in TRA annually by 2010. The EU's collective total in these essential subcategories of overall AfT reached almost €3 billion in 2009, well above the target (Figure 10). Last year's monitoring report showed that the EU and its Member States had already met and exceeded their collective TRA target with €2.4 billion worth of support in 2008. TRA supports developing countries in designing and implementing trade policies and agreements, stimulating trade by domestic firms and encouraging investment in trade-oriented industries. The increase is mainly due to an increase in EU Member States' TRA, from €1.36 billion in 2008 to €2 billion in 2009. The strong increase of Member State support in 2009 is a result of a near doubling of contributions to Category 2 "Trade development" which represented close to 90% of total Member States' TRA commitments in 2009. In contrast, the EU's TRA was almost evenly split over the TRA categories in 2008 and 2009.

· Disbursement levels were particularly high, with almost 80% of total collective EU AfT commitments being translated into disbursements in 2009 in.

Figure 10: Collective EU Trade Related Assistance (EU and EU Member States) in million Euro

Source: OECD CRS Database, Doha Development Database and EU Monterrey Questionnaire 2011

Public-private partnership for sustainable production and trade in Côte d'Ivoire:

Cocoa is the backbone of the economy of Côte d’Ivoire, providing an income to six million people. Yet the sector is affected by low wages for many cocoa farm workers and instances of child labour and child trafficking. In addition, cocoa farmers face a number of challenges, including low productivity, pests and diseases and quality problems due to inadequate processing. In response to this situation, a public-private partnership was set up by the multinational Kraft Foods, the cocoa trader Armajaro and the German and US development agencies to introduce sustainability standards in the cocoa produced by small farmers and to bring certification into mainstream cocoa production. It did so by creating a supply line of 'Rainforest Alliance Certified' cocoa and pioneering sustainable cocoa production for the international market. Kraft Foods uses this certified cocoa in its premium chocolate brands. The private partners committed themselves in advance to purchasing all cocoa that met the required quality. This gave farmers the security to invest time and money in improved production technology. Over the project's three-year lifespan, from 2006 to 2009, some 5,600 farmers from six cooperatives were trained, thus leading to productivity gains for farmers using sustainable practices of 49.5 %. More of the cocoa marketed was of a better grade and thus received a higher price, which in turn meant a higher income for farmers. The project has been judged such a success that its model has been rolled out in Ecuador, Ghana and Nigeria.

· ACP countries benefited from increased AfT and TRA (Figure 11). As regards AfT, collective EU commitments to ACP countries increased by 18% in 2009, reaching a new all-time high of €3.6 billion. Again, the overall increase can mainly be attributed to increasing commitments in regional programmes (more than doubling from €0.4 billion in 2008 to €0.9 billion in 2009), while commitments to bilateral programmes remained stable at €2.7 billion. Total EU TRA commitments to ACP countries reached €1.16 billion in 2009, almost triple 2008 levels.

Figure 11: EU Aid for Trade to ACP Countries (EU and EU Member States) in million Euro)

· Growing attention is being devoted to Africa, particularly Sub-Saharan Africa. Sub-Saharan Africa received the largest share of both collective EU AfT and collective EU TRA in 2009. Sub-Saharan Africa received some €2.9 billion worth of AfT in 2009, or 29% of the total, up from €2.2 billion in 2008 (Figure 12). As indicated in Figure 13, Sub-Saharan Africa is also the main recipient of collective EU TRA, which increased substantially between 2008 and 2009, from €281 million to €818 million. Sub-Saharan Africa thus took over Asia (€670 million in 2009) as the main recipient of EU TRA. The share of Sub-Saharan Africa in collective EU TRA increased from 15% to 28% between 2008 and 2009.

Figure 12: Aid for Trade by OECD Region (EU and EU Member States) in EUR million

Source: OECD CRS

Figure 13: Trade-Related Assistance by OECD Region (EU and EU Member States) in EUR million

Source: OECD CRS

7.3. Only a limited share of Aid for Trade is channelled to LDCs

· The share of EU AfT to LDCs is only about 22% of the total (Figure 14). Despite the apparent trade-related needs of LDCs, the EU and its Member States allocate relatively less of their ODA to AfT to LDCs than to other developing countries[43]. The share of collective EU AfT to LDCs as a percentage of the total remained relatively stable at 22% in 2009, slightly down from 24% in 2008. LDCs accounted for €2.3 billion in 2009, compared to €7.8 billion for non-LDCs. The LDC share of EU AfT has been continuously higher than that of EU Member States.

Figure 14: Aid for Trade to LDCs (EU and EU Member States) in EUR million

Vietnam: trading its way out of poverty:

In the five years leading up to January 2007, when Vietnam joined the WTO, the EU supported the country with two Multilateral Trade Assistance Programmes (MUTRAP I and II) worth €8.2 million. These programmes funded a variety of technical assistance studies and helped Vietnam accelerate the complex process of WTO accession. Building on these two programmes, the EU supports Vietnam's post-WTO accession phase through MUTRAP III, which helps the country implement its responsibilities in the areas of competition and trade policy, notably the implementation of its WTO accession commitments, multilateral trade negotiations, and implementation of regional integration and free trade agreements. The total cost of the four-year programme, which got underway in 2008, is estimated at €10.7 million, including a contribution of €0.7 million from Vietnam. MUTRAP I, II and III have helped to promote Vietnam as a full member of the international trade community. Largely thanks to legal and economic stability brought about by the WTO accession reforms, Vietnam is now enjoying a considerable increase in FDI. Working with the government and other stakeholders – the private sector, universities and research institutions –has been a key to the success of these projects.

7.4. Quality has improved but there is room for further progress

Some 16 EU Member States[44] and the European Commission responded to the 2011 OECD/WTO AfT Questionnaire seeking information on the progress achieved by individual donor countries with a particular focus on outcomes of AfT strategies and programmes. The main findings were the following:

· There has been improvement in the quality of the AfT provided by the EU and its Member States, bringing it increasingly in line with the Paris Declaration, notably regarding the availability of trade needs assessments, increased national coordination processes in partner countries, as well as better coordination and harmonisation with EU Member States and non-EU donors.

Leveraging the regional dimension to boost Caribbean integration in global trade:

Caribbean trade performance is constrained by a narrow production base and high infrastructure cost leading to high production costs and low levels of competitiveness. To help remedy this situation, the EU provided €6.8 million between 2008 and 2010 to the Caribbean Export Development Agency – CARIFORUM's regional export development and trade promotion agency – to provide training and technical assistance to Caribbean businesses. On this basis, Caribbean Export provided grants to 197 companies and business support organisations, 50 training and technical assistance events for companies in high potential niche sectors and support to business and trade promotion organisations. It also supported CARIFORUM in elaborating a strategy to create an enabling environment for trade and export development at regional level. A key added value of the project was its regional approach, which allowed to take advantage of economies of scale in the provision of services aimed at strengthening export capacities in the region and allowed to build regional knowledge and networks. Another element of success was the choice of a funding mechanism allowing Caribbean Export to use its own procedures to implement the project rather than those of the donor.

· However, further improvements are necessary, notably regarding developing countries' capacity to define trade related priorities in collaboration with key stakeholders. There are still countries where the EU and its Member States appear to provide AfT in the absence of a comprehensive trade needs assessment (40% of responses to the AfT Questionnaire).

· While the EU devotes a considerable amount of financial resources to regional integration, results in this area can be strengthened further. Some barriers that should be overcome include: the lack of an expressed demand for regional AfT; lack of coherence between national and regional priorities; lack of credible lending authorities at regional level; lack of effective coordination at regional level; difficulties of monitoring and evaluation at regional level; lack of credible mutual accountability mechanisms at regional level. Another problem, particularly in Sub-Saharan Africa, is the low absorption capacities of Regional Economic Communities (RECs) and low ownership of the integration process by partner countries. In many partner countries, there appears to be much room for strengthening the support to regional integration. Regional priorities for AfT were rarely considered and addressed in the national development strategies, and in many cases no programmes on regional AfT priorities are funded[45].

EU support to the International Trade Centre (ITC):

The European Commission plans to provide support to the ITC to fund a redeveloped Data and Market Analysis Tool for low income countries over the period 2011-14. A first phase would cover the launch of a re-developed Market Access Map application (MAcMap) and enable immediate free access for all LDCs and developing countries. The wider objective of this project is to increase global trade and tariff transparency. The project acknowledges the increasing recognition that trade and development are inextricably interlinked but that there are many constraints in developing countries that must be addressed before they can fully benefit from the global liberalisation of trade – one key constraint being the lack of knowledge and tools for analysing export markets both in commercial and technical terms. The project would contribute to addressing this constraint.

· The private sector is insufficiently involved in the development and evaluation of AfT projects. It can also contribute leverage finance. For instance, the EU-Africa Business Forum provides a major platform for discussion amongst the EU, the Africa Union (AU), RECs and the private sector on issues closely related to AfT. It sets an example that could be duplicated in other regions.

· In line with the principles of aid effectiveness in the EU’s own effectiveness agenda, coordination among EU donors as well as with non-EU donors requires further improvement. In particular, there is significant potential for more joint AfT between the EU and its Member States. In fact, EU Delegations responding to the AfT Questionnaire indicated that a doubling of joint activities was possible.

Sharing South-South expertise to cut red tape at customs:

Trade in Central Asia suffers from its distance from the sea and the heavy burden of bureaucracy. Until recently, a trader in Kyrgyzstan had to fill in 15 or so forms and collect up to 20 signatures to gain official permission to import and export goods. A so-called single window for pre-customs procedures is widely recognised as one of the most effective ways to reduce non-tariff barriers to trade, making it possible to fill-in the necessary documentation, pay fees and receive the necessary certificates through a single internet portal. When the Kyrgyz government began researching how to implement such a system, it found that a simple but effective system established in Senegal was the most appropriate for use in Central Asia. Consultants from Senegal subsequently visited Central Asia to share their knowledge of designing and implementing such a system. A German-funded programme, 'Three-Party South-South Cooperation', got underway in 2005 to help eliminate unnecessary administrative barriers to trade in Kazakhstan, Kyrgyzstan, Uzbekistan and Tajikistan and reduce technical barriers to trade. The €16.5 million worth programme aims to ensure that at least two-thirds of customs declarations in three of the four states can be carried out though a single window or a similar time-saving procedure by 2014. The introduction of the single window is expected to increase trade volume in the region, attract FDI, create more employment opportunities and ultimately lead to poverty reduction. Since 2007, Kyrgyzstan and Tajikistan have already reduced by 60 % the number of forms that need to be completed to carry out foreign trade and are now committed to implementing a pre-customs single window. Uzbekistan has said it will implement a window by 2015 and Kazakhstan is studying the issue. The project is a good example of three-party co-operation, involving know-how transfer from an African country.

· Further work on monitoring and evaluation with international organisations and partner countries would strengthen our knowledge and understanding of the impact of AfT. The impact of the EU’s support can be increased in a number of ways, including:

Strengthened results-based management in AfT programmes. By setting out clearly at the outset what are the objectives, it would be easier to learn lessons about what works and what doesn’t, allowing programmes to be adjusted to increase their impact even further. Aid effectiveness principles are particularly relevant here. Continued efforts to measure impacts, particularly outcomes. Attributing final impacts to a specific programme is a methodologically very challenging area – not only in the area of trade, but for ODA in general. Building more on the capacity of developing country governments to assess whether the focus and implementation of their own trade development strategies are appropriate or need to be adjusted. This is vi