Since the establishment of the World Trade Organization (WTO) more than 20 years ago, small and vulnerable economies (SVEs)* have sought to gain special recognition and treatment within the multilateral trading system due to their unique characteristics. It is beyond question that structural and systemic constraints based on a host of internal and exogenous factors including geography, market size and structure, demography, and climate change, make SVEs distinct among WTO members.

The purpose of this issue of Commonwealth Trade Hot Topics is to contribute to the discussion on the adjustment of SVEs to the multilateral system, and present approaches to be considered on the road to the Nairobi WTO Ministerial Conference in December 2015 and beyond.

In 2001, the Doha Ministerial Declaration established a Work Programme for Small Economies, under the auspices of the General Council, ‘to frame responses to the trade related issues identified for the fuller integration of SVEs into the multilateral trading system, and not to create a sub-category of WTO members.’ The Ministerial Declaration at Hong Kong in 2005 reaffirmed the need to ‘adopt specific measures that would facilitate their [small economies’] further integration into the multilateral trading system, without creating a sub-category of WTO members.’

A number of ad hoc and discipline specific flexibilities have been negotiated and agreed in keeping with the mandate of the 4th Ministerial Conference in Doha in 2001. Notwithstanding the expansion of flexibilities, SVEs continue to face challenges in the expansion and deepening of their exports into global value chains. When considered as a group, they have been the slowest to return to trend growth in the post-crisis period and now confront a myriad of challenges, including deteriorating fiscal and current account positions as well as elevated levels of external debt. While domestic policy interventions are critical elements within the policy toolbox required to respond to these challenges, the multilateral system can play a more meaningful role in this effort by moving beyond ad hoc and issue specific responses to systemic and cross-cutting solutions for SVEs.

The 10th WTO Ministerial Conference (MC10) in Nairobi, Kenya, offers an opportunity for SVEs to present concrete suggestions on how the multilateral trading system can provide a tailored response of a systemic nature that would support the beneficial integration of SVEs into the world economy.

It is undeniable that SVEs suffer from a combination of inherited and inherent characteristics that impede their ability to integrate into the global economy. A compelling body of empirical evidence has emerged that supports the proposition that they confront peculiar structural limitations, including: high production costs; small internal markets; a narrow range of export products and services; small and highly specialised labour markets; high transportation costs; and physical isolation from external markets. Moreover, high fixed costs of private sector activities imply cost disadvantages and a more concentrated market structure that is less competitive. In the public sector, these cost structures result in higher transactional costs and reduced service volumes. While it is accepted that international trade can assist in overcoming rigidities related to scale, the ultimate impact of international trade on SVEs is limited.

Given their cost structures, SVEs have traditionally relied on exports from sectors where the export price includes market or institutional quasi rents. These have usually taken the shape of high remunerative prices for commodities benefiting from non-reciprocal preferences, particularly in the European market. Reforms to the European Union import regime for commodities, including bananas and sugar, have led to the erosion of the trade preferences enjoyed by many African, Caribbean and Pacific (ACP) SVEs. These changes in the external environment led by the enforcement of multilateral rules have resulted in severe economic displacement and painful adjustments in many SVEs – particularly those mono-crop microstates that benefited from non-reciprocal preferences. Indeed, no other group of developing countries, including least developed countries (LDCs), has been obliged to undertake such wide-ranging adjustments during the past two decades.

---

* Small, vulnerable economies (SVEs) are those WTO members that, in the period 1999 to 2004, had an average share of (a) world merchandise trade of no more than 0.16 per cent or less, (b) world trade in non-agricultural products of no more than 0.1 per cent, and (c) world trade in agricultural products of no more than 0.4 per cent. In the Commonwealth, there are 31 small states, defined as sovereign countries usually with a population of 1.5 million people or fewer.