Canada and some least developed countries (LDCs) have enjoyed a growing trade relationship over 17 years, thanks to the liberalization of Canada’s Least Developed Country Tariff (LDCT). In 2003 Canada, following the EU’s “Everything but Arms” initiative, dropped to zero all tariffs against imports from the 47 LDCs except for supply-managed products and made the criteria for zero tariff treatment – the rules of origin – more generous.
LDC exports to Canada in 2017 represented just under $4 billion, around one per cent of total Canadian imports (or, more colloquially, about two hours of Canada-U.S. trade.) Their importance lies in their sector specificity; the majority of manufactured exports are apparel. After the 2003 liberalization, Bangladesh and Cambodia became the second and third largest suppliers of apparel to Canada after China, as much an achievement in import diversification for Canada as in export growth for Bangladesh and Cambodia.
Between 2003 and 2017, Bangladesh’s year-over-year exports to Canada grew at an average rate of 22 per cent, Cambodia’s at 58 per cent, Laos at 17 per cent and Nepal at 10 per cent. On the other hand, Canada’s exports to Bangladesh grew six-fold between 2004 and 2018. Bangladesh is now Canada’s fourth largest importer of pulses.
The 2003 market opening was enabled by of a GATT/WTO rule that facilitates preferential arrangements for countries on the United Nations’ Least Developed Countries list; effectively, the world’s poorest countries. Canada’s initiative was a near-impeccable preferential arrangement. It grew trade in both directions between Canada and some low-cost exporters without the bother of negotiations for bilateral free trade agreements, and without significant trade diversion. Together with the EU liberalization (and subsequent liberalizations in several other countries), it contributed to both export-led growth and poverty reduction in some least developed countries.
Canada’s relationship with these LDCs could change shortly. Along with six developing island countries and mineral-rich Angola, Bangladesh, Myanmar, Laos and Nepal are scheduled for graduation from the UN/WTO list of least developed countries (three were eligible as far back as 2018), and Cambodia has begun to meet the criteria for graduation. Graduation could mean the loss of the preferential tariff treatment that contributed to a rapid increase in exports in the last 17 years. Of the countries that are about to graduate, or have been graduated, the developing island countries export very little to Canada. Angola’s mineral exports enter duty free anyway, but the remaining countries – Bangladesh, Myanmar, Laos, Nepal and at some point Cambodia – are now heavily integrated into the Canadian apparel market. Apparel has become the primary manufactured export for most of these countries. Graduation therefore could have consequences for Canadian consumers, and for economic growth and poverty reduction in the countries concerned. Later, we discuss this problem specifically with reference to Bangladesh.
The earliest date for graduation is 2021; the latest date so far is 2024. Canada may agree to Bangladesh’s request for a three-year deferral from 2021, particularly in light of COVID-19’s impact on the economy, or it could follow the EU, which is reportedly considering a phased-in graduation process of three years, 2021-2024. If LDCs graduate, they will be subject to the tariffs and rules of origin of Canada’s General Preferential Tariff (GPT). Graduation is not restricted to Canada and the EU. During the World Trade Organization’s Doha round of multilateral trade negotiations, several WTO members offered similar concessions; graduation from the LDC list will require WTO members to consider whether to extend or terminate preferential treatment for the graduating LDCs.
Canada can continue duty-free treatment – to grandfather the zero tariff and maintain LDC treatment for as long as it deems desirable. It is also in Canada’s interests to do so; the relationship with the Asian LDCs has been a win-win for both sides. Graduation could cost Canadian consumers and exporters alike and if both the EU and Canada graduate these countries, it could stall economic growth and poverty reduction efforts in the LDCs.
This paper maintains that while COVID-19’s impact makes a short-term deferral likely, it makes more sense to look long term at both the trade and development implications of graduation for both Canada and the LDCs. It recommends that Canada continue preferential treatment for an extended period of time or simply leave the low tariffs in place.Dont_Graduate_Grandfather_Canada_Trade_and_the_Least_Developed_Countries
Fauzya Moore is an Ottawa-based consultant and writer. She has worked as a Senior
Economic Advisor at the various iterations of Global Affairs Canada, and also as a Senior Advisor on Governance at the Treasury Board of Canada. She is also a graduate of the Harvard Kennedy School (2009) where she held both a Fulbright scholarship and a fellowship from the Ash Centre for Governance and Innovation. She has worked in both the developed and developing world.
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