Loss of LDC-Specific S&D Treatment: How Concerned Should Graduating LDCs Be?

A number of Least Developed Countries (LDCs) are slated for graduation out of the LDC group over the next few years. To recall, as of now only six LDCs have graduated since the time the group was first identified by the UN in 1971 as a separate category among the developing countries.

In contrast, before the pandemic had struck in 2020, 12 LDCs had become eligible for graduation by either meeting at least two of the three graduation criteria, or thanks to having crossed the threshold of double the per capita GNI. Eligibility of such a large number of LDCs for graduation has put an important debate over the risks following loss of LDC-specific special and differential (S&D) treatment at the centre of attention of policy makers, development thinkers and practitioners.

S&D treatment is extended to the LDCs in various forms including preferential, mostly duty-free and quota-free market access, extended periods for implementation of obligations, flexibilities in pursuing trade-related policies, relaxed disciplines as regards subsidies, bound and operative tariffs, trade-related technical and financial support and voluntary notification requirements. Such LDC-specific preferences will no longer be available to the graduated LDCs, and this is likely to have significant implications for their participation in global markets and in pursuing domestic trade-related policies. While there are also S&D provisions in the WTO for developing members, which LDCs will be eligible to enjoy on graduation, these are not as extensive as those in place for the LDCs.

There is no doubt that LDCs have benefitted from S&D provisions. Duty-free, quota-free market access to most of the developed countries, and also to many developing countries as part of LDC-specific Generalized System of Preference schemes, have provided LDCs with significant competitive advantages vis-à-vis their developed and developing country competitors in the global market. This is particularly true for export of items such as apparels and agricultural products where tariff rates tend to be high (e.g., in the EU and Canada import tariffs on many apparel items exported by the LDCs tend to vary between 12-25 per cent for non-LDC exporters). The rules of origin (RoO) for LDCs also tend to be more flexible - for example, in the case of apparels this entails only one stage conversion in the EU and a flat 25 per cent value addition in Canada. That Bangladesh is now the world’s second largest apparels exporter, following China, owes much to the favourable RoO and the duty-free market access enjoyed in many markets as an LDC.

The range of preference erosion, originating from loss of market access, consequent to graduation, will be significant. Average operative tariff rates facing the graduated LDCs will rise significantly; the extent of rise will depend on export structure and the applicable operative tariff on specific items.  This is likely to result in a weakening of export competitiveness and possible loss in terms of export earnings and market share. According to a study by the WTO Secretariat, Bangladesh’s export loss due to preference erosion was likely to be in the range of about 14 per cent of its global export earnings. A number of LDCs have been able to gain significantly thanks to the TRIPS waiver decision for the LDCs, which allows these countries a waiver from patenting and licensing requirements. While the waiver has been extended till December, 2032, when an LDC graduates before this timeline it is no longer eligible to enjoy the benefits.

While the three LDC graduation criteria are important measures of a country’s progress in terms of a number of key socio-economic indicators, it should be recognised that they do not capture many of the underlying causes of vulnerability and structural and institutional weaknesses that persist in the LDCs. Not surprisingly, many of the candidate LDCs which have met graduation eligibility requirements, continue to suffer from embedded structural deficits which could potentially undermine the cause of smooth and sustainable LDC graduation. Also, to be noted, at the CDP review of 2014, the thresholds for graduation for human resource index and economic vulnerability index were fixed at the level of 2012 (at 66 and above and 32 and below respectively). Previously these were moving numbers. The idea was that the two thresholds should reflect the changes and improvements in reference to a set of countries which included all LDCs and other low-income countries. These changes in the graduation thresholds resulted in many LDCs becoming eligible for graduation in very recent years.   

It needs to be mentioned also that the ongoing Covid pandemic is adversely affecting LDC economies through deepening of poverty, loss of income and employment opportunities and debt distress, not to speak of the increasing health risks. At the recent review by the United Nations Committee for Development Policy (UN-CDP) a number of LDCs slated for graduation have requested for deferment of graduation, while others were not found to be eligible for graduation by the CDP. For example, the CDP has recommended Bangladesh’s graduation to take place in 2026, instead of the earlier scheduled 2024, as per Bangladesh’s request. Timor Leste, another candidate for graduation, was not recommended in view of the impact of Covid on its economy.

LDCs are urging for more time for adjustment following graduation. It is not that LDCs are not willing to graduate. They understand that they will be required to graduate at some point in time and will need to be competitive based on skills and productivity rather than preferential market access. What they are calling for is support for a time bound period, towards graduation which is taking place in the shadow of the pandemic. Successive UN resolutions have called upon member countries to design initiatives in support of graduating LDCs. As an UNCTAD report has stated, ‘graduation is a milestone, not the winning post’. LDCs themselves have put up a proposal at the WTO General Council Meeting of December 2020 for extending LDC-specific S&Ts, for an additional 12 years after an LDC had graduated. Some of these issues are expected to be discussed at the upcoming WTO Ministerial Conference scheduled to be held in November 2021 in Geneva. LDCs are urging that concrete mechanisms be put in place to monitor the implications of the Covid pandemic on the graduating LDCs and to examine the impact of loss of preferential treatment on their economies. It is crucially important that at MC12 Ministers agree on a Graduation Support Package to help these countries move towards sustainable graduation.

Measures in support of graduated LDCs will mitigate the apprehension of the LDCs about adverse impacts of graduation, encourage these countries not to ask for repeated deferment of graduation and incentivise LDCs to consider graduation as an important and welcome milestone in their development journey.

Professor Mustafizur Rahman, Distinguished Fellow, Centre for Policy Dialogue (CPD), Dhaka, Bangladesh

The views expressed here are the authors, and do not represent the views of the Institute for International Trade.

Photo credit: Baudouin Nach / UNDP