of certain requirements.<sup>5</sup> A somewhat puzzling question is that if the major losses from erosion are concentrated among a few small countries and products (Subramanian [2004]) then how can they signi fi cantly affect the outcome of the Doha Round?<sup>6</sup> One explanation is that the current round was designated a “development round”, which created an expectation that it would bene fi t developing countries. A common complaint from developing countries is that most GATT rules were decided by developed countries (Srinivasan [1999]). However, as Mattoo and Subramanian (2004) argue, under the WTO developing countries have gained de jure and de facto power relative to the GATT days, which implies that a few small countries can have an impact in the outcome of the round. This impact is magni fi ed when the small set of countries that stand to lose considerably from preference erosion are joined by others that perceive such losses to be important to them as well. This points to the importance of further research and dissemination of basic facts about gains from preferences.<sup>7</sup> An additional reason, which we will focus on, why preferences to small countries can affect the MTL is that the developed countries providing them may themselves want to maintain them, as they can be used as a side payment for cooperation on other issues. Here are two brief examples. First, in 2000 the European Commission argued that a cut in the price support of about 25% in E.U. sugar was not tenable because it would cause an income loss of 250 million euros to a group of developing countries that export sugar to the E.U. under preferential treatment.<sup>8</sup> Second, the U.S. recognizes that its MFN tariff reductions hinder its ability to extract concessions in terms of enforcing labor, environmental standards, etc, from the countries that export under a preference to the U.S.<sup>9</sup>

> 5 This is what happened after the Uruguay Round with unilateral preferences such as the E.U.’s Everything but Arms and the U.S.’s African Growth Opportunity Act extending preferences to agriculture and textiles and eliminating quantity restrictions. Moreover, these are sectors where the developed countries maintain high MFN protection so duty-free access generates a large preference margin and potentially large gains to developing countries in products that they actually have a comparative advantage in.

> 6 Alexandraki and Lankes (2004) fi nd that for middle-income countries these products include bananas, sugar and textiles

> 7 There is some debate regarding the effectiveness of preferences in generating additional exports. Haveman and Shatz (2003) provide evidence, that the unilateral preferences of the Triad countries considerably increased their imports from LDCs in 2000. Sapir (1981) and Sapir and Ludenberg (1984) provide earlier estimates of the GSP scheme of the E.U. and U.S. respectively. Brown (1989) provides a CGE analysis of Japan’s GSP. UNCTAD (2003) and Hoekman, Michalopoulos and Winters (2004) and Stevens and Kennan (2004) propose several recommendations to realize the potential net bene fi ts of preferences for LDCs including ways to improve utilization rates, relax and harmonize rules of origin, increase the predictability of preferences through binding them in the WTO, etc. Many of these recommendations will also apply to our proposed alternative of import subsidies.

> 8 European Commission (2000), “Commission proposes overhaul of sugar market.” Brussels, 10/4/2000. IP/00/1109.

> 9 According to the International Trade director of the General Accounting Office in the U.S.: “Because GSP bene fi ts are limited, and would decline if the GATT Uruguay Round agreement is enacted, the program provides only a modest degree of leverage to encourage bene fi ciary country governments to change their country practices [for enforcing intellectual

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