Foreign Tariffs as Catalysts for Reform ? The Potential Development Dividend

This note examines the implications of recent trade policy changes for developing countries. After the United States–China bilateral tariffs increased in 2018–19, the exports of a few third countries increased but the development benefits were less significant. The tariffs that were more widely applied starting in 2025 could hurt developing economies, especially in sectors that are more exposed and face higher tariffs. However, the costs of foreign protection would be more than offset if countries responded with comprehensive reforms of their own trade policies. So far, some countries have concluded bilateral agreements and initiated limited domestic reforms. If tariff liberalization were not selective but extended to all trading partners, the gains for developing countries would be more than three times larger than the cost of higher foreign tariffs. If reforms also addressed the significant non-tariff barriers to trade in goods and services, the development benefits would be greatly magnified.