A Comparative Analysis of Generalised Systems of Preferences: Challenges, Constraints and Opportunities for Improvement

A Comparative Analysis of Generalised Systems of Preferences: Challenges, Constraints and Opportunities for Improvement

Memorandum to The European Parliament, Committee on International Trade by Alice Adami, Brian McGarry, Pamela Ugaz.

Executive Summary

To address this challenge, donors first divide their GSP schemes into various beneficiary categories. The EU, like the other major donors studied (the United States, Canada, Australia and Japan), grants greater market access to Least Developed Countries (LDCs) through a separate category in its preferential system, Everything But Arms (EBA). However, the EU additionally administers an intermediate tariff preference category (GSP Plus) that ventures further than EBA into conditionality. Like the U.S., the EU uses conditionality to induce strategic improvements in developing states, though the EU uniquely ties elevated preferences to sustainable development.Since its inception in 1964, the Generalised System of Preferences (GSP) has served developed countries to foster trade with poorer countries. In both the design and implementation of GSP programs, the EU—like other major GSP donors—must balance the development needs of poorer countries with domestic political pressures. Further, donors must tailor their GSPs to address diversity among developing countries, which now include states with significantly different levels of economic development.

The effectiveness of these mechanisms is currently under review because the EU GSP requires reauthorization every three years. Compared to the 10-year GSP duration of donors such as Canada, this marks a high frequency of legislative reaction. Canada also simplifies another aspect of domestic GSP review by maintaining no graduation mechanism for stripping newly developed countries of preferences, whereas the EU annually performs such review for each beneficiary, including unique calculations of product-based competitiveness. 

However, such focus on individual articles is common to all donors that limit GSP product coverage for specific imported articles. The EU is thus not unique in  reducing domestically sensitive products such as textiles from duty-free to MFN- reduced tariff preferences, and in fact restricts coverage less than donors such as Australia, which removes all preferences from a variety of products. Australia also differs notably on how otherwise qualifying products must originate from beneficiary countries.  Whereas  its  rules  of  origin  permit  a  certain  degree  of  cumulation  of product components from other beneficiaries, the EU restricts such contributions to partner states in any of a few regional economic organizations.

Exporters in beneficiary countries may face onerous standards to demonstrate compliance with such rules, particularly in situations of “reasonable doubt” under the current EU model. However, Japan’s scheme flips this presumption on its head, offering relatively laxed compliance standards when “origins are evident.” Yet Japan’s relaxed approach creates difficulties in other aspects of trade practice, such as its proliferation of non-GSP trade agreements. While such agreements offer donors legitimate discrimination and reciprocity, their proliferation—coupled with reductions in MFN rates—threaten the erosion of GSP’s attractiveness for beneficiaries and effectiveness for donors.

From the economic perspective, GSP programs have contributed to the growth of developing countries. As trade flow has increased among GSP beneficiaries, it is unsurprising that FDI in these countries has undergone a corresponding and proportionately larger boom. It is noteworthy that GSP’s positive outcomes have been greater for LDCs, which enjoy more preferential treatment (duty-free-quota-free for almost 100% of their exports).

Nevertheless, GSP programs have not met their potential. Indeed, economic assessments have found that they create additional drawbacks for developing countries. For example, GSP programs offer no incentive for liberalization in developing countries, because unilateral guaranteed preferences diminish export lobbies’ interest in pressuring their governments to eliminate domestic trade barriers. Additionally, GSPs may contain highly complex rules of origin, which limit compliance among developing countries, thus reducing their market access to preferences. As these preferences cover specific goods, GSP may also encourage perverse specializations in such goods (which are entirely reliant on  such preferences), preventing export diversification in developing countries. Furthermore, the uncertain length and unpredictable regulatory framework of GSP programs may create extra risks for investment in beneficiary sectors.

These beneficiaries are further discouraged from becoming competitive, insofar as their exports will be deprived of the preference when reaching an import share or value in the donor country (i.e., graduation). GSP’s weaknesses also encourage the negotiation of RTAs under a reciprocal basis. Finally, GSP margins of preference are eroding, as multilateral, bilateral and regional liberalization increase.

The legal requirements that the WTO regime imposes on GSP permit some degree  of discrimination among beneficiary countries, in so far as preferential tariff treatment is offered to improve a “development, financial and trade” need shared by those countries. At the same time, the preferential tariff treatment must be made available to all countries that share the need the GSP program addresses. There are exceptions to the requirement of non-discrimination, namely the special category of LDCs to whom donors can offer additional preferential treatment and the product coverage carve-outs identified during the UNCTAD negotiations that established the GSP framework.

A number of grey areas surrounding the interpretation of these legal criteria make it difficult to define clear-cut parameters for the design and implementation of GSP programs. The main areas of uncertainty concern the extent to which preferential  tariff treatment must be ‘generalized’ and ‘non-reciprocal’, and the criteria according to which “development, financial and trade” needs of beneficiaries should be selected. A further grey area is the extent to which the preferential tariff treatment must improve or alleviate the identified “development, financial and trade” needs. The requirement is for a ‘sufficient’ link between the preferential tariff treatment and the improvement of the identified development needs; the WTO has provided no further guidance to illustrate what practical degree of  improvement would meet this requirement.

The main challenge, as emphasized throughout this Memorandum, lies in striking a balance between achieving GSP objectives through unilateral concessions to developing countries and paying appropriate attention to domestic political pressures. This is illustrated by this Memorandum’s analysis of a hypothetical condition granting preferential tariff treatment to countries that do not impose export restrictions, and in particular those restrictions relating to raw materials. As explained, this type of conditionality would be unlikely to meet the non-reciprocity and non- discrimination requirements for GSP, and may be best developed outside the context of   GSP   (for   example,   through   a   bilateral   or   plurilateral   trade    agreement).

This Memorandum also concludes that key to the effectiveness of GSP as a development tool is the need to increase utilization among those states that most benefit from preferential access and simplify implementation procedures. This may be achieved as follows:

  • extending the EU’s GSP to a longer term than 3 years would likely encourage broader participation among beneficiaries and increase predictability, as well as conserve EU legislative resources.
  • expanding product coverage to a greater share of exports from all LDCs, including currently ‘sensitive’ textiles, if Parliament determines this to be politically feasible.
  • encouraging LDC partnerships and compliance with rules of origin by globalizing permissible cumulation.
  • making standards of graduation transparent through country-specific graduation based on overall competitiveness, and not complex product- specific graduation schemes.
  • avoiding conditionality with only tangential links to development. Any increase in conditionality should take into account the compliance burdens imposed on beneficiaries. Consideration should be given to whether compliance with conditionality creates costs (especially for poorer countries) that outweigh the benefits of preferential treatment. A balance should be struck, so as not to dissuade participation.


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