Beyond Brexit: Which Country Has the Best Trade-for-Development Policy in the World?

This post is part of CGD’s work looking at the UK’s role in delivering shared prosperity beyond Brexit. We’ll be looking into further ideas in the coming weeks.

If the UK leaves the EU customs union, it will need new trade policies for poor countries as well as with major trading partners. This post kicks off a discussion of what that policy should look like by assessing which country currently has the best trade-for-development policy in the World. Three main points stand out:

1. CGD’s ‘Commitment to Development Index’ (CDI) appears to be the only existing systematic attempt to rank countries by how good their trade policies are for development.
2. New Zealand & Australia rank highest in the 2016 CDI in this area, with the lowest tariffs for all poor countries.
3. The most useful specific preference schemes for the very least developed countries are the EU “Everything But Arms” scheme and, with caveats, the US “Africa Growth and Opportunity Act.”

Given the Prime Minister’s ambition of the UK being a “global leader on free trade,” this blog post looks at the countries have the best trade for development policy in the world, and the main areas the UK would need to address to achieve that status.

1. Ranking countries

CGD’s ‘Commitment to Development Index’ (CDI) seems to be the only systematic attempt to determine which rich country’s trade policies are best for development. Various rankings and indices focus on different aspects of trade policy, but few of these are development-focused (e.g. the WEF ranks countries on competitiveness, and the OECD has indicators on trade facilitation and barriers to trade in services).

The Commitment to Development Index (CDI) judges countries on 3 criteria:

• Tariffs & subsidies for developing countries
• Red tape on imports
• Restrictions on services

2. The lowest average tariffs for all developing countries

New Zealand ranks best overall on the CDI, primarily because it has the lowest tariffs & domestic agricultural subsidies. All countries have important protectionist weaknesses in their policies—so an independent UK has a golden opportunity to become a “global leader in free trade” for development.

Many developing countries are offered exemptions or reductions in these tariffs, and we return to this below.

Though New Zealand and Australia perform best overall, there are important differences by type of product. Like many others, both have high tariffs on textiles, which has been an important route to industrialisation for many poor countries.

3. Red tape: non-tariff barriers & restrictions on services

There are many other important barriers beside tariffs. The CDI makes use of the WB ‘Doing Business’ indicators that measure the cost and time of getting a container through customs. Denmark ranks best: there is no cash cost for border or documentary compliance, and procedures takes less than an hour. The Netherlands rank best on the OECD Services Trade Restrictions Index—providing opportunities for the provision of services by non-nationals.

4. Preferential lower tariffs for the least developed countries

Most rich countries also offer special preferential (duty-free, quota-free) access to specific groups of countries. Perhaps the best of these schemes are the EU scheme for least developed countries (EBA), since it eased its rule of origin a few years ago, and Canada’s scheme.

The EU EBA excludes the fewest products (only arms), has relatively flexible ‘rules of origin’ for supply chain inputs, and is a permanent scheme with no time limit. Canada’s preference scheme excludes a few more agricultural items (everything but chickens, eggs, and cheese), but has more flexible ‘rules of origin’ that allow zero tariffs on products that have substantial imported inputs, so long as those inputs come from other beneficiary developing countries.

The US AGOA scheme also offers coverage for 99 percent of products (with some important exceptions) and liberal rules of origin, and is important due to the size of the US market. The scheme also offers preferences to a different set of countries—providing opportunities for lower-middle income countries in Africa such as Kenya and Ghana that are not LDCs, but at the expense of access for Asian LDCs.

Best trade for development policy

So to sum up, who is the best trading partner for developing countries?

Australia and New Zealand offer the lowest tariffs and agricultural subsidies. Canada and the EU offer generous preferential access for the poorest countries, while the US provides duty-free access for most products from a broader range of poor African countries. Still, all of these approaches have flaws that the UK could improve upon to better drive development and mutually beneficial trade. This analysis also hasn’t considered “aid for trade” (or trade facilitation), which is important for helping low income countries take advantage of market access opportunities.