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South African exports under AGOA

The Preference Margin

The number at the centre of every argument about trade preferences, and the one most often left unstated.

A trade preference means your goods enter a market at a lower tariff than somebody else’s. The preference margin is the size of that gap, expressed as a percentage.

If everyone else pays 12 per cent to enter a market and you pay nothing, your margin is 12 points, and that is the value of the preference to you. If the standard tariff is already zero, your preference is worth nothing at all, however loudly it is celebrated.

Working this out line by line is tedious. It is also the only way to know what a preference scheme is actually worth rather than what it is assumed to be worth, and the two are frequently very different.

What it cannot do

A margin is an opportunity and not a receipt. It tells you what the preference is worth to a firm that uses it. Whether firms actually claim it, and whether the rules of origin let them, are separate questions with separate answers.

The equation

margin = tMFN − tpreferential

tMFN
the tariff a competitor pays, the ordinary most-favoured-nation rate
tpreferential
the tariff you pay under the preference, often zero
the margin
the gap, in percentage points, and the whole value of the preference

It is subtraction, which is why it is so easily left undone. If tMFN is already 0, the margin is 0 and the preference is worth nothing on that line, however it is described.

Further reading

  • Brenton, P. and Hoppe, M. (2006). "The African Growth and Opportunity Act, Exports, and Development in Sub-Saharan Africa", World Bank Policy Research Working Paper 3996. free Read it.Directly on this subject, and cited in the dissertation.
  • WTO and UNCTAD (2012). A Practical Guide to Trade Policy Analysis. free Read it.The tariff analysis chapter.

From An analysis of South Africa exports to the United States under the African Growth Opportunity Act, MCom in Management Practice (Trade Law and Policy), University of Cape Town, 2015. Read it in OpenUCT.