the United States and Japan. Its GTAP modelling results suggest that even the most generous interpretation of the United States’ Africa Growth and Opportunity Act (which they model as unrestricted access to the US for all SSA exports) would benefit SSA very little because the US economy is already very open and, in the products where it is not (e.g. textiles and clothing), SSA countries have little comparative advantage<sup>20</sup> . By contrast, the EU proposal, especially if it were to apply to all Quad countries (the EU, the US, Canada and Japan), would have a sizeable effect on SSA trade and welfare – provided agriculture is included in the deal. Just from EU access alone, SSA exports would be raised by more than US$0.5 billion and SSA economic welfare would increase by $0.3 billion per year (a 0.2 percent boost).<sup>21</sup> The results overstate the benefits of the EU proposal, however, as this World Bank study assumes all SSA countries (excluding relatively wealthy South Africa and Mauritius), not just the LDCs amongst them, would get duty- and quota-free access.

Another World Bank study, by Hoekman, Ng and Olarreaga (2002), uses a partial equilibrium approach and looks at the benefit of the EU initiative for LDCs not just in SSA but globally. It finds that trade of LDCs would increase by US$2.5 billion per year if all Quad countries provided LDCs with duty- and quota-free access on all merchandise.<sup>22</sup> However, almost half of that increase would come as a result of trade diversion from other developing countries. The authors suggest this is trivial because it represents less than 0.1 percent of other developing countries’ exports (about $1.1 billion), but precisely because the diversion will be in simple goods that can be produced in LDCs, it will mostly fall on people in other poor countries whose circumstances are hardly better than those in the LDCs.<sup>23</sup> Moreover, if the 48 LDCs are given such preferences, they will become advocates _for_ rather than _against_ the continuation of MFN tariff peaks for agriculture and textiles – diminishing considerably the number of WTO members negotiating for their reduction. It may be true that MFN reductions in agricultural and textile tariffs would help LDCs much less than it would help other developing countries, as the study by Hoekman, Ng and Olarreaga (2002) finds; but the gains to consumers in the QUAD would be more than sufficient to allow them to increase their aid to LDCs to compensate many times over for the loss of LDC income from the preference erosion that necessarily accompanies MFN reform.

Another cause for concern is that most estimates of the effects of preferences do not take into account that firms are heterogeneous. When preferences and their accompanying rules of origin (ROOs) encourage more capital-intensive production (e.g., to take advantage of volumetric import quotas), they may raise investment and exports but they also bias exports away from less capital intensive activities in which the LDCs have a comparative advantage, and in the process lower average productivity of exporters. Evidence of this in Bangladesh’s exports to the US and EU

> 20 A more recent _ex post_ study of AGOA declares it to have been a success – Frazer and van Biesebroeck (2007). It raised Africa’s exports by 0.15% of GDP. As the authors note, this is not insignificant, but, especially for an arrangement whose virtues are much proclaimed, it is a drop in the bucket.

> 21 This is very similar to the estimate by UNCTAD/Commonwealth Secretariat (2001, Ch. 3). 22 This and other estimates of gains from preferential market access provisions need to be discounted to the extent that such things as rules of origin, anti-dumping duties, and sanitary, phytosanitary and other technical barriers limit the actual trade allowed. For a detailed analysis of these types of restrictions on EU imports from Bangladesh in recent years, see UNCTAD/Commonwealth Secretariat (2001, Ch. 5). 23 The impact outside the LDC group would be far from trivial for Mauritius, however, since the vast bulk of its exports are quota-restricted sales of clothing and sugar to the EU and US. See the discussion in UNCTAD/Commonwealth Secretariat (2001, Ch. 6).

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