Trade can play an important role in promoting economic development, but LDCs face many challenges in their development efforts, reducing tariffs on LDC products would help.

University Degree Business and Administrative studies

Overview

In response to the Doha ministerial declaration exhorting industrialised countries to improve access for exports originating from least developed countries (LDCs), the Australian Government is considering removing all remaining tariffs on goods that originate in the 49 LDCs.

Although more than 10 per cent of the world’s population live in LDCs, these countries account for less than 0.5 per cent of world trade. LDCs account only for a small proportion of Australia’s total imports. In 2001-02, Australian imports from LDCs were valued at A$242 million (0.2 percent of all imports). The leading suppliers were Bangladesh and Burma (mainly clothing), Yemen (mainly petroleum products), and Samoa (mainly automotive components).

Trade can play an important role in promoting economic development, but LDCs face many challenges in their development efforts. These include:

a reliance on primary products and a small number of manufactured products, especially in labour-intensive textile, clothing and footwear (TCF); and
domestic supply constraints such as social, political and economic environments that are not always conducive to domestic or foreign investment.

LDCs and tariff preferences

Early in the 1970s, the Generalised System of Preferences (GSP) was introduced to improve developing countries’ access to industrialised markets. This derogation from the most favoured nation principle is granted under Part IV of the General Agreement on Tariffs and Trade (GATT) by most OECD countries and has continued to operate under the GATT ‘enabling clause’.

The Australian System of Tariff Preference (ASTP) allows goods originating in developing countries to benefit from a five percentage point reduction on the general tariff rate. The proposal to remove tariffs on imports originating from LDCs would provide LDCs with preferential access beyond that provided under the ASTP.

In addition, goods originating from South Pacific Forum Island countries which are members of SPARTECA enter Australia tariff-free. Five LDCs are members of SPARTECA — Kiribati, Samoa, Solomon Islands, Tuvalu and Vanuatu — and, consequently, will not gain additional benefits from the proposed tariff reduction.

The effectiveness of other initiatives under the GSP, such as the European Union’s Everything But Arms (EBA) initiative, is limited because they include a restrictive timetable for extending preferential treatment to some primary commodities and TCF products deemed to be ‘sensitive’. In the Australian context, rules of origin mitigate to some extent the benefits that developing countries might derive from the ASTP.

Although improved trade opportunities alone will not overcome problems faced by LDCs, they can help to promote economic development and increase incomes. This report provides an assessment of the opportunities for LDCs and effects of removing Australian tariffs preferentially on goods that originate in LDCs.

Given the low general tariff rate that applies to many imports into Australia, goods originating from LDCs enter Australia tariff-free under the ASTP or SPARTECA, with the exception of TCF products and passenger motor vehicles (PMV) products (table 1).

Table 1.1 Selected tariff rates faced by imports from ASTP beneficiariesa

Per cent

a Under the ASTP, tariff rates are 5 percentage points lower than those faced by non-beneficiary countries; Forum Island Countries face zero tariffs under SPARTECA. b Projected. c Subject to legislative changes.

Source: Productivity Commission.

Australia’s trade with LDCs

Although dutiable imports from LDCs are dominated by PMV products (table 2), most of these originate from Samoa and, subject to rules of origin, they benefit already from preferential access under SPARTECA. The proposed changes will therefore affect mainly LDCs that export TCF products to Australia.

Table 1.2 Value of Australian TCF ...

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Table 1.1 Selected tariff rates faced by imports from ASTP beneficiariesa

Per cent

Source: Productivity Commission.

Australia’s trade with LDCs

Table 1.2 Value of Australian TCF and PMV imports from LDCs, 2001-02a

a Products classified under the corresponding industry classification.

Source: ABS International Trade, Australia, Cat. No. 5465.0.

Though more than 65 per cent of Australian imports of TCF originate from developing countries, less than 0.5 per cent originate from LDCs (figure 1). The largest LDC exporters of TCF products to Australia are Bangladesh, Burma, Nepal and Cambodia (figure 2). These countries are likely to be the main beneficiaries of the proposed preferential tariff reduction.

Removing tariffs on goods originating from LDCs should stimulate production and exports, even if none exist currently. Anecdotal evidence indicates that new operations in the clothing sector are relatively easy to establish. For example, the establishment within a few years of a clothing industry in Fiji and Burma, and a recent reorientation of clothing production in Bangladesh, show that it is possible for other countries to develop similar industries in a favourable political, economic and social environment.

Figure 1 Origin of Australian imports of TCFa

Average shares, 1997-98 to 2001-02

a Numbers may not add up due to rounding.

Data source: ABS International Trade, Australia, Cat. No. 5465.0.

Figure 2 Australian imports of TCF from LDCsa

Average shares, 1997-98 to 2001-02

a Numbers may not add up due to rounding.

Data source: ABS International Trade, Australia, Cat. No. 5465.0.

Diversity of clothing manufacturing and trade

Although some imports of clothing compete with Australian production, others are actually complementary to other imports and to Australian production. There is a significant amount of intra-industry trade in the clothing sector and different countries specialise in different products.

Australia’s clothing industry is globally integrated: most of the design, distribution and some production for the domestic market are domestically based, but some labour-intensive parts of production are performed in developing countries. Production in Australia and Fiji tends to be concentrated in high-fashion clothing (women’s and girls’ wear), whereas imports from LDCs tend to be concentrated in non-fashion products such as sleepwear, underwear and infants’ clothing (figure 3).

Figure 1.3 Composition of Australian production and imports from Fiji and LDCs, clothing

Average shares, ANZSIC 3-digita

a Production measured by industry value added, 1997-98 to 1999-00; imports for 1997-98 to 2001-02.

Data source: ABS International Trade, Australia, Cat. No. 5465.0 and ABS Manufacturing Industry, Australia, Cat. No. 8221.0.

These product differences suggest that, in the short term, only those parts of the industries in Fiji and Australia that compete directly with LDC exports will be affected. However, because clothing operations are relatively easy to establish and modify, LDCs may become more competitive in high-fashion production in the long term.

Effects of reducing tariffs on imports from LDCs — modelling results

The effects of the proposed changes in the Australian tariff are estimated using a global trade model. The database used allows for the differential treatment of imports under the ASTP and SPARTECA.

Results are presented in two simulations. Both simulations project the effects of reducing remaining tariffs on goods originating from LDCs to zero. Under scenario S1, clothing originating from different countries is assumed to be highly substitutable. Under scenario S2, the degree of substitution is assumed to be less. Scenario S1 represents the long-term reaction of the global economy, assuming that the clothing industries in LDCs change their production capabilities to compete in higher fashion markets. Scenario S2 represents the short-term reaction, assuming that current patterns of specialisation among exporters of clothing to Australia remain.

Responsiveness of LDCs

Exports to Australia from LDCs that are not members of SPARTECA are projected to increase under both scenarios. Exports from Bangladesh increase between 2.5- and 11-fold, albeit from a relatively low base (table 3). Exports from Cambodia, Burma, and Nepal are also projected to increase. SPARTECA LDCs are not exporters of TCF to Australia, and thus would not be affected.

Among the LDCs affected by the tariff change, detailed results are only available for Bangladesh. However, the mechanisms observed in that country apply equally to other affected LDCs. Most of the effects occur in clothing exports and to some extent in increased output of clothing (table 4).

Table 31. Changes in LDC clothing exports to Australia

a Percentage changes from base, per annum.

Source: Productivity Commission estimates based on GTAP simulations.

Table 41. Changes in Bangladesh in response to modelled changes in Australian tariffs

a Percentage changes from base, per annum. .. less than 0.005 per cent.

Source: Productivity Commission estimates based on GTAP simulations.

Effects on other developing countries

Clothing exports to Australia from Fiji and China (two developing countries that will not qualify for the preferential tariff reduction) will be affected by the proposed preferential tariff change.

The pattern of Chinese exports of clothing and inputs into clothing (textiles and semi-finished clothing products) may be affected. China supplies some inputs into the clothing production of LDCs and Fiji. In addition, it accounts for a large proportion of clothing imports into Australia. Changing the pattern of tariffs is estimated to:

reduce Chinese direct exports of clothing to Australia (-0.58 per cent under S1 and -0.19 per cent under S2); and
encourage exports of textiles and semi-finished clothing to LDCs benefiting from the tariff change (for example, to Bangladesh, +0.85 per cent under S1 and +0.02 per cent under S2).

The effect on Fiji’s exports of clothing to Australia are expected to be minor. They are projected to fall about 1.3 per cent, or A$1.8 million. To put this in context, Fiji’s TCF exports to Australia reached a peak of A$273 million in 1999-00, before falling to A$132 million in 2001-02. This decrease can be attributed, in part, to recent political events that have affected economic activity. This points to the value of a stable environment to attract investment and to foster economic activity.

Effects on Australian clothing manufacturing

The effects on the Australian clothing industry are also projected to be small. Projected reductions in annual turnover are less than A$5 million for both scenarios considered, and expected to be concentrated in production activities that are in direct competition with imports from LDCs (table 5).

The largest projected change in employment in Australia’s competing industries is a reduction of fewer than 100 jobs. This reduction is likely to be concentrated among outworkers involved in the production process.

To the extent that some imports of semi-finished products are inputs into the Australian industry, the industry will benefit from slightly lower prices in its inputs.

Table 51. Effects on Australian clothing industry

a Percentage changes from base, per annum.

Source: Productivity Commission estimates based on GTAP simulations.

Effects on Australian consumers

Consumer prices of clothing are projected to decrease only slightly (0.036 per cent under S1 or 0.023 per cent under S2). The effects are small because imports from LDCs account for a small share of clothing imports and the tariff, though relatively high, accounts for a small proportion of the price ultimately paid by consumers.

Effects on government finances

The collection of duties from imports originating from LDCs is in the order of A$2.5 million (less than 0.5 per cent of total tariff revenues). This is the order of magnitude of the revenue that might be foregone by eliminating tariffs on goods originating from LDCs. However, as tariffs are scheduled to be reduced in 2005 anyway (table 1), the amount of revenue foregone after that date is even smaller.

Conclusions

The overall effects of preferentially removing tariffs on goods originating from LDCs are likely to be small because Australia’s existing trade with LDCs is small and, to a lesser extent, tariffs affecting these imports have little effect on the final prices paid by consumers.

The effects on the Australian clothing industry will be small, as the main impact of the initiative will be to switch imports sources from developing countries toward LDCs, rather than displacing Australian production.

Projected trade effects include:

A 2.5- to 11-fold increase in imports of clothing from Bangladesh. Smaller increases are projected for Cambodia, Burma and Nepal. In part, these increases will raise production in these countries. There may also be some shift in their exports from other destinations.
A decline in Fiji’s share of Australia’s clothing imports in the longer term, as production capacity in Bangladesh adapts and enables greater substitution.

Continuous changes in the Australian clothing industry make it able to play an increasing role in design and distribution, and a reduced role in production. As a result, employment is projected to fall by fewer than 100 jobs, mainly production outworkers. The Australian clothing industry would benefit from slightly reduced costs of semi-finished inputs.

The effects on the rest of the Australian economy would be negligible. Consumer prices of clothing would fall by less than 0.05 per cent.

Tariff revenues would fall by a maximum of A$2.5 million in the short term. However, planned tariff reductions in 2005 mean that foregone revenue will be smaller past that date.

The benefits to LDCs of the proposed preferential tariff reduction depend on their ability to provide an economic, social and political environment that enables the investments required for the projected supply responses to occur.

The South Pacific Regional Trade and Economic Cooperation Agreement includes Australia, New Zealand and the South Pacific Forum Island countries: the Cook Islands, the Federated States of Micronesia, Fiji, Kiribati, Marshall Islands, Nauru, Niue, Papua New Guinea, Solomon Islands, Tonga, Tuvalu, Vanuatu and Samoa.

Fiji is a developing country whose exports will be affected by the proposed tariff reduction.

The standard GTAP (Global Trade Analysis Project) framework was adapted to the needs of this analysis. The model provides projections of trade and other economic flows in response to a change in policy. Results are interpreted as changes relative to a situation in which the previous policy regime would have prevailed. Projected changes are for each year, into the future.

Detailed results include sectoral and macroeconomic results. Changes in exports from selected LDCs and from Fiji to Australia were obtained using a post-simulation procedure.