Trade Preferences, WTO Negotiations and the LDCs: the case of the "Everything But Arms" Initiative

This paper aims to estimate benefits of the recently adopted "Everything But Arms" (EBA) initiative of the EU to the Least Developed Countries (LDCs) and to show how these benefits will be eroded in the presence of possible further multilateral trade liberalization under the WTO. Simulation results indicate that total welfare impacts of the EBA are less than US$300 million for all the LDCs and that a great deal of these gains are associated with three "sensitive" products that are subject to lengthy implementation period, especially sugar. Impacts of the EBA on the EU and third countries appear to be negative but quite small. Considering its limited product coverage (mainly agricultural goods) and the existing preferences granted in the past, these results are not surprising. Multilateral trade negotiations exert pressures on the EU to reduce its protections, which may lower the high domestic prices in the EU and decrease the attractiveness of the EBA. Further results indeed show that gains for the LDCs from the EBA will be greatly reduced under a series of "plausible" WTO scenarios in which the EU cuts its protections. However, not pursuing multilateral trade liberalization for the purpose of keeping these preferences meaningful would cause much greater welfare losses to the whole world and ultimately would harm the LDCs in the long run. This study concludes that other policy options should be made available in conjunction with trade policy reforms to ease LDCs’dependency on trade preferences and to foster their supply capacities.