Checking the system: a review of trade preferences

24 July 2008

GSP wrongly in the shade of EPAs?

In recent months public discussion has focused on negotiation of Economic Partnership Agreements (EPAs) between African, Caribbean and Pacific countries (ACP) and the EU, leaving other preferential trade options as notes in the margin. This is somewhat surprising, given that since the summer of 2007 it appeared obvious that the conclusion of these full agreements with all ACP regions was very unlikely to happen by the end of that year. Yet EPAs were deemed necessary after the specific preferential treatment to ACP countries provided under the Cotonou Agreement had been ruled as non WTO-compliant. But article 37 of the Cotonou Agreement, explicitly stipulates that the EU will examine all alternative possibilities in order to provide non-least developed countries (LDCs), that are not in the position to enter into EPAs, with a new framework for trade that is equivalent to their existing situation and conforms to
WTO rules.

One could presume that the European Commission, the single negotiator on behalf of EU member states, actually did not want to consider alternatives. Europe already has instruments that can provide a basis for such options: more than 35 years ago the Generalised System of Preferences (GSP) for developing countries was implemented and has regularly been advanced and adjusted since. Today, the EU's non-reciprocal preferential access scheme is the most used of all such developed country systems and grants a number of products imported from beneficiary countries either duty-free access or tariff reductions, depending on which of the GSP arrangements a country enjoys.2 

For 2006-2008, there are three types of general preferential trade regimes in force:

a) The standard preferential regime (GSP) benefits all recipient countries and grants duty-free market access (for non-sensitive products) or tariff reductions on the most favoured nation rate (for sensitive products).

b) The special incentive arrangement for sustainable development and good governance (GSP+) provides additional benefits for countries implementing certain international standards in human and labour rights, environmental protection, the fight against drugs and good governance.3 It also allows duty-free market access for products classified as ‘sensitive' imported into the EU.

c) The special arrangement for the countries included in the United Nation's list of least developed countries, which is known as the ‘Everything but Arms' initiative (EBA), provides the most favourable treatment of all. It grants LDCs duty-free and quota-free access to the EU markets 
for products excluding arms and ammunition with transition periods until 2008 and 2009 for rice and sugar.

Mini-reform of GSP

It is expected that the new European Commission regulation for GSP envisaged for the period 2009-2011 will maintain this structure. The revision proposed by the Commission includes: removal of certain products for specific countries based on the value of the imports from these countries; a three-month postponement of the tariff reduction scheme for sugar under EBA; required completion of the ratification and implementation of international conventions before the application for GSP+ (the 2005 regulation included a three year transitional period); and prolongation of the time that the Council will have - from one month to two - for the assessment of a preference withdrawal proposal by the Commission.

While the Commission saw the revision as a basic technical adjustment, the European Parliament added some substance that it had already proposed for the GSP guidelines for 2006-2015 that was not taken into consideration by the Council at the time. These proposals aimed at incorporating greater transparency, clarity and legal certainty.

Above all, the Parliament stressed that the GSP scheme is designed with the aim of supporting the Millennium Development Goals and particularly the reduction of poverty in developing countries. It therefore needs comprehensive impact analysis that includes opinions from civil society; broader distribution of information to the public; the prevention of preference erosion by transferring products currently classified as sensitive to the non-sensitive category; and a possibility for countries to apply for GSP+ on a yearly basis (instead of only every three years). The latter might be a compromise solution since, as of 2008, there is no longer any transition period that allows a country that has almost, but not fully, completed implementation of all 27 international conventions mentioned in the annex of the specific incentive arrangement to be included into the GSP+ system.  

One of the Parliament's most pressing requests was the reform of overly complex rules of origin which were hampering the uptake and use of preferential trade schemes such as GSP. Some argue that rules of origin should take into account inter-regional and global ‘cumulation'  when calculating the possibility of a country benefiting from preferential treatment. Such an approach would facilitate regional integration, especially among small countries that have fewer real opportunities to diversify their export economies.

A low level of diversification of exports to the EU is itself an eligibility criterion for the GSP+ scheme. Currently, the threshold is that the share of the five top GSP imports into the EU by one country must be below 75% of all the EU's GSP imports from that country. This criterion is used to indicate the ‘vulnerability' of a country's economy. Yet, while the diversification of exports might be an indicator for the industrial development level, there are certainly other criteria, such as gross domestic product (GDP) at purchasing power parity (PPP) per capita or the human development index (HDI), that would display a broader idea of the level of development of an economy.

GSP a possible alternative to EPAs?

It is sometimes argued that the GSP system, especially GSP+, could be developed as an alternative to the proposed Economic Partnership Agreements. As the few points highlighted here already suggest, a careful reform would first be necessary. And since there is little in-depth quantitative and qualitative information on the functioning of the GSP it is rather difficult to give detailed proposals.   Still, there is reason not to dismiss such an option.

On the one hand, GSP is generally accepted as being compliant with WTO rules that explicitly allow for derogations from Most Favoured Nation (non-discriminatory) treatment for developing countries. On the other hand, the fundamental difference in comparison to the EPAs is that it follows a
non-reciprocal approach instead of facilitating mutual market opening.

As previously stated, least developed countries would enjoy almost unlimited market access under the EBA initiative even without a new trade agreement. But an ACP country not listed as an LDC would most certainly lose a good part of its preferential access to EU markets, although to different degrees. In this case, only something like GSP+ would be an option. The Commission itself has prepared an overview of which eligibility criteria the 37 countries concerned currently fulfil: none would reach more than 0.3% of GSP imports into the EU, and 24 do not reach more than 0.1% (the maximum threshold being 1%). The Dominican Republic with ‘only' 81.87% share of its five top GSP exports holds the highest level of diversification and only two more countries  (Antigua and Barbuda and the Bahamas) reach less than 90% (threshold is 75%). Only Antigua and Barbuda and the Bahamas are considered high income countries.

Looking at the implementation of the relevant international conventions, the situation becomes more complicated: not one of the 37 non-LDC countries have ratified all conventions. Therefore, after the expiry of the transition period in 2008, they do not fulfil the criterion that is actually at the heart of GSP+. Still, 12 have ratified at least 24 conventions so theoretically there would be the possibility of granting them preferential treatment under GSP+ if another transition period was accepted for new applicant countries. In the case of Africa, the relevant countries are Seychelles, Mauritius, Kenya, Namibia, Ghana, Cameroon and Nigeria.

While this looks encouraging for at least some countries, the serious questions highlighted above remain. For example, the coverage of products by GSP in general, especially products listed as sensitive, as well as the rules of origin.

Another argument that has been used against GSP+ as an alternative to the EPAs is that ACP countries would face direct and equal competition with those countries that already or will soon benefit from it (see endnote 2).

The European Parliament has been eager to be involved in the reform of the GSP. But it must be noted that under the current European Commission treaty, the Council is not bound by the European Parliament's recommendations to date, even if the so-called consultation procedure is used. This would change fundamentally if the new terms of decision-making as proposed in the [draft] Lisbon Treaty would enter into force. If this happens, the Parliament will have full co-decision power on internal legislation in the field of trade policy, including the GSP framework.

Overcome the errors in the system

GSP in its current state neither seems to be a perfect system for serving the needs of developing countries in general, nor is it appropriately designed for the specific situation of ACP countries. But in comparison to the European Commission's attempts to promote reciprocal market access it is at least an alternative that should be used as a model. Reciprocity in trade agreements only makes sense among partners with at least similar economic power.

Moreover, the fact that EPAs - or the interim agreements that have been concluded so far - foresee transition periods is a false argument: who could claim that the countries concerned will be able to equal the EU's economic capacity even in the next 50 years?

One could say that ‘the error is in the system'. Trade policy could be designed in a way that promotes fair trade relations and sustainable development, but so far the EU appears to be advancing a foreign trade support and market access programme for its own companies. It is understandable that more and more countries are not willing to accept such treatment and claim a right to self-determination as regards the pace and organisation of economic development. Indeed, it is no surprise that so far only one ACP region is ready to sign a comprehensive EPA and negotiations on other free trade agreements have halted, notwithstanding the years of stagnant WTO negotiations. If Europe wants to be recognised as a trustworthy partner in development, it would be well advised to reconsider its trade agenda.


1  Helmuth Markov is a German politician and member of the European Parliament with the Party of the Democratic Socialism, Treasurer of the European United Left - Nordic Green Left and sits on the European Parliament's Committee on International Trade. 

2  There are 177 beneficiaries of the EU's GSP. Other preference giving countries are Australia, Belarus, Canada, Japan, New Zealand, Norway, the Russian Federation, Switzerland, Turkey and the United States.

3  Current beneficiaries are Bolivia, Ecuador, Columbia, Peru and Venezuela (Andean),  Costa Rica, El Salvador, Guatemala, Honduras, Nicaragua and Panama (Central America), Moldova, Georgia, Mongolia and Sri Lanka.

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