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The Generalized System of Preferences examined

Author(s):
International Monetary Fund. External Relations Dept.
Published Date:
September 1975
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Zubair Iqbal

The first United Nations Conference on Trade and Development (UNCTAD) that convened in Geneva in 1964 proposed the introduction of a system of preferential tariff rates by developed countries favoring the manufactured and semimanufactured imports from less developed countries. This was one of a package of global trade measures instituted to promote the development process in less developed countries. The proposal, which came to be known as the Generalized System of Preferences (GSP), called upon developed countries to eliminate or reduce tariffs on all manufactured imports from less developed countries. All the developed countries that had agreed to provide preferential treatment to less developed countries under this proposal have by now introduced their individual GSP schemes, thus assuring either free entry or at reduced tariff rates to manufactures, semimanufactures, and a few primary and agricultural products which are exported from less developed countries. The full tariff rate continues to apply to imports from other countries. This preferential treatment is, however, subject to certain stringent quantitative limitations and is applicable only for a period of ten years from their institution by the preference granting countries. These countries are the original six members of the European Economic Community (GSP introduced from July 1971); Japan (August 1971); Norway (October 1971); Denmark, Finland, Ireland, New Zealand, Sweden, and the United Kingdom (January 1972); Switzerland (March 1972); Austria (April 1972); Canada (January 1, 1974); and the United States (proposed for implementation in 1975). Denmark, Ireland, and the United Kingdom upon joining the EEC, replaced their schemes with the EEC scheme on January 1, 1974. Some East European countries have also implemented GSP schemes.

GSP is an important element of the global development strategy and now that it is finally in operation a comprehensive evaluation of the coverage and global trade effects of GSP is of interest. Moreover, in the light of the Multilateral Trade Negotiations (MTN) currently under way that may, through global reduction in tariffs, reduce the preferential effects of the GSP schemes, an analysis of these schemes becomes all the more important in order to determine the extent of revisions that would be required in the schemes to compensate for the adverse effects of the reduction of tariffs.

GSP works in either of two ways, or in a combination of both. (1) It can increase the return on exports that are already being sold in the preference-giving countries. Such an increase in returns may be measured by the reduction in the burden of the nominal tariff in developed countries borne by the exporter from a less developed country. (2) It can reduce the price of a new product in the preference-giving country, thus giving rise to a new line of exports from the preference-receiving country. The advantage of preferences accruing to less developed countries for the export of manufactured products can be assessed in terms of the resulting expansion in export possibilities for these countries, that is, the trade effects of preferences.

This study seeks to provide an assessment of the global trade effects of all the schemes, taken individually as well as collectively, by estimating the trade creation (that is, the increase in world trade) and the trade diversion (that is, the decline in the exports of nonpreferred countries) effects. These estimates are drawn upon to determine the basic weaknesses of the schemes currently in operation and to suggest possible ways of enhancing their effectiveness.

The GSP schemes

The effectiveness of any GSP scheme is determined by a number of basic factors, such as the definition of manufactured goods, the extent of tariff cuts, the tariff quotas, the safeguard measures like escape clauses, rules of origin, definition of countries as preference-receivers, and the duration of preferences. One common intent of the schemes currently in operation is to combine these factors in such a way as to bring about an increase in exports of less developed countries benefiting from the tariff preferences without materially harming the domestic competitors in developed countries which grant these preferences. The structure of such schemes should, therefore, be analyzed in terms of these factors.

Product coverage

All the schemes cover manufactures and semimanufactures, a limited number of primary commodities, and a few agricultural and fishery products as defined by the Brussels Tariff Nomenclature (BTN). They include resource-based manufactures, fabrics, chemicals, metalic and nonmetalic manufactures, equipment, and finished consumer goods. However, textiles, leather and its products, and petroleum products are excluded from the schemes in order to protect domestic producers of these products in preference-granting countries. New Zealand extends preferential treatment only to a few primary commodities, while the EEC excludes from its scheme all primary commodities as well as base metals up to the ingot stage. The manufactures and semimanufactures that were not accorded preferential treatment in 1970 constituted 62 per cent of all such dutiable products imported by preference-giving countries from preference-receiving countries. The exclusion of such a large range of manufactures from the GSP has limited the usefulness of the schemes for promoting manufactured exports of less developed countries.

The few agricultural and fishery products that are included in the schemes are processed vegetables, fruits, beverages, and fish and related products. Imports of these products accounted for only 4 per cent of the dutiable imports of preference-granting countries in 1970. Most of the agricultural products that could be profitably exported from a large number of less developed countries are excluded from the schemes.

Depth of tariff cut

The Nordic countries and the United States grant duty free treatment to agricultural and fisheries products, while other countries grant various degrees of tariff cuts. In view of the generally high tariff protection accorded to agricultural products in preference-granting countries, the preferential tariff margins would be larger for those countries that grant duty-free entry for such products. However, in the EEC—the largest import market for agricultural products—the margins amount to only about 4 per cent because most of them are excluded from its scheme.

Duty-free treatment is accorded to manufactures and semimanufactures by the EEC, the Nordic countries, and the United States. Japan also grants duty-free treatment to such products except some textile products, clothing, and footwear on which a 50 per cent reduction of the most-favored-nation (MFN) rate of tariff is applied. Austria and Switzerland apply a uniform 30 per cent reduction, while Australia and New Zealand apply varying rates of reduction, depending on the product. Canada applies a 33 per cent reduction in the Commonwealth preference rates or MFN rates (whichever is lower) on imports from preference-receiving countries.

In general, the preferential margins are relatively high on finished products covered by the schemes and relatively low on semimanufactures and raw materials (see Table 1).

Safeguard measures

Table 1.Generalized System of Preferences Schemes of Developed Market Economy Countries: Nature of Tariff Cuts
EEC1Japan 2NorwayFinlandNew ZealandSwedenCanadaSwitzerlandAustriaAustraliaUnited States
TariffGSPTariffGSPTariffGSPTariffGSPTariffGSPTariffGSPTariffGSPTariffGSPTariffGSPTariffGSPTariffGSP
(per cent)status(per cent)status(per cent)status(per cent)status(per cent)status 3(per cent)status(per cent)status 4(per cent)status(percent)status(per cent)status 5(per cent)status
Leather goods, semimanufactured and manufactured6.8F 615.0Pt, INC13.0PT12.4PT13.5PT. INC6.8PT16.4PT, INC4.2F9.2INC10.2EXC16.4F
Rubber and products7.3F9.1PT13.2PT12.7F29.3INC8.7PT16.6PT, INC2.8F14.0INC28.3PT9.3F
Wood and cork in rough3.9F3.8F0.0F0.0F0.0EXC0.0F13.0INC2.3F5.1INC0.0PT7.0F
Wood panels12.7INC18.0PT11.0F2.5F42.5EXC3.3F13.8INC18.7F17.0INC40.0EXC12.6F
Wood and cork, semi manufacturer5.3INC9.0PT6.6F3.7F37.3EXC2.1F10.2INC4.9F7.1INC37.5PT6.6F
Wood and cork, manufactured articles7.9EXC11.4PT6.1F5.4F47.5PT3.9F16.2INC7.0PT10.5INC35.0EXC10.4F
Paper, pulp and paper waste2.8F5.0F0.0F0.0F0.0EXC0.0F0.0INC2.4F5.2INC0.0EXC0.0F
Paper and paperboard10.6F9.2F2.5F6.0F26.4PT, INC2.5F13.5INC12.9F14.8INC24.0EXC6.2F
Pulp, paper. manufactured articles12.4INC7.9PT8.4F10.8F38.6PT, INC3.8F16.0INC11.1F19.1INC18.2PT6.7F
Wool and its fabrics11.5EXC7.0F6.1PT10.3PT30.9EXC8.0PT14.9EXC4.6F13.1INC11.6PT22.3EXC
Cotton yarn7.4INC7.8F5.0PT10.9EXC15.9F8.9PT14.2EXC5.6F11.2EXC0.0PT11.6EXC
Cotton fabrics13.0INC11.2INC16.9PT, INC24.4EXC10.5F13.8PT17.7EXC11.2INC22.8EXC49.0EXC18.4EXC
Jute yarn8.0EXC10.050%0.0PT12.6F5.0F8.0PT18.8INC8.8F16.0INC0.0INC10.4EXC
Jute fabrics19.0EXC20.050%0.0PT21.2EXC23.0F9.5PT0.0EXC9.1F28.0INC45.0INC8.5EXC
Clothing and clothing accessories11.6PT17.3PT. 50%22.8PT, INC36.7PT44.6EXC14.6PT22.9EXC10.3PT30.2EXC23.4PT22.6EXC
Glass and glass products13.4F10.0F10.0F26.4F21.5PT, INC9.0PT14.1INC6.1F14.9INC15.2INC13.4F
Precious stones, metals, and products thereof12.5F11.0INC5.7F5.2F26.7PI2.2F11.4INC1.0F8.6INC18.8INC12.5F
Iron and steel, unworked4.5PT5.5F12.8F5.4F0.0EXC3.4F12.5INC0.1F5.3INC0.0INC4.5F
Iron and steel semimanufactured products6.8F10.2F7.3PT6.4F22.8EXC5.9PT10.4INC6.5F8.9INC16.6INC7.8PT
Ferro-alloys5.6EXC7.5F0.0F11.0F0.0EXC2.3F7.2INC11.0F16.0INC0.0INC5.6F
Copper, semimanufactures7.4PT16.5F4.8F4.1F25.0PT3.1F9.3INC3.1F11.0INC15.0INC8.0F
Nickel, semimanufactures5.1F14.5F5.0F2.0F15.3F1.5F16.0INC1.7F8.7INC25.0INC8.9F
lead, semimanufactures9.2F15. 6F5.0F1.8F26.5EXC0.0F11.3INC4.2F13.0INC15.0INC7.8F
Tin, semimanufactures4.8F6.3F5.0F1.8F23.1INC1.5F12.5INC1.3F9.3INC16.3INC7.8F
Aluminum, semimanufactures10.9F14.9F11.4F3.1F20.9EXC3.2F13.2INC11.4F15.1INC6.0INC7.7F
Zinc, semimanufactures9.2INC10.4F5.5F1.0F17.8INC0.0F10.8INC1.2F13.3INC20.0INC7.9F
Household equipment7.8F14,0FE.9F9.0F42.5PT, INC5.3F17,1INC5.4INC24.4INC33.2INC10.0F
Products derived from coal. petroleum, etc.4.5PT11.5PT5.3F5.0F10.0PT, INC0.9F13.6INC2.6EXC11.2INC8.8PT9.1EXC
Plastic products11.1F12.2F15.7F16.1PT27.9INC10.0F15.6INC4.6F18.0PT22.5PT11.1F
Organic chemicals8.0F10.9F14.3PT17.1F17.9F9.0F11.9INC2.1EXC11.6PT27.5PT12.3F
Chemical elements, inorganic5.6F8.5F10.6F7.8PT5.8PT4.3F12.5INC1.7PT10.5INC2.9INC6.6F
Tanning materials6.7PT6.5F12.5F0.0F22.5EXC3.0F15.0INC0.5F10.0INC8.3INC6.5F
Coloring materials6.9F10.1F2.8F4.8F3.5F0.0F11.3INC1.5F20.6INC31.9INC10.7F
Paints, varnishes, etc.6.8F9.1F10.3F8.5F39.4PT5.8F15.2INC5.5F13.5INC39.5INC10.6F
Essential oils, perfumes, and materials5.8F8.9F6.4F0.0F27.2PT0.0F7.5INC4.7F6.8INC9.0INC8.5F
Other chemicals, semimanufactured5.2F8.3F12.1F5.4PT15.1PT, INC6.8F11.1INC1.4PT16.5PT5.4INC7.5F
Electrical machines, apparatus8.4INC10.5F7.6PT9.7PT27.1PT, INC6.2PT15.2PT, INC3.2PT13.3INC49.8INC8.4F
Nonelectrical machinery6.2F10.8PT8.7F7.9F39.8INC5.1F14.8INC2.1PT10.0INC45.8PT7.0F
Footwear11.1INC17.450%17.1EXC14.2PT38.2EXC12.1PT21.5EXC8.7F17.9INC40.0PT10.6EXC
Travel goods, handbags, etc.11.3F13.3F21.4F14.4EXC50.0EXC9.7F18.9INC8.4F19.5INC45.0INC12.8F
Furniture8.2INC12.5PT8.0F9.6F41.9EXC8.8F13.5INC8.6F14.8INC42.5INC10.9F
Toys11.3INC10.9PT8.8F10.8PT39.4PT, INC5.4F17.5INC6.5F17.3INC46.5INC11.4F
Sources: UNCTAD, Third Session. Vol. II; Annual Report, 1966/67-1970/71, Tariff Board, Australia; International Customs Journal, No. 29: New Zealand; various UNCTAD and GATT documents regarding the nature of GSP schemes currently in operation.

All imports under the EEC Scheme are subject to ceilings.

Most of the products are subject to restrictive ceiling limitations for safeguard reasons.

In general. British preferential rates are applied to imports from beneficiary countries.

GSP rates under the Canadian scheme are 33 per cent less than the British Commonwealth preferential rates or the MFN rates, whichever is lower.

All rates under the scheme are 30 per cent below the MFN rates.

F: All items within the product group are admitted free of duty.

50 per cent: All items admitted at rate 50 per cent below the general tariff rates

PT: Part of the items in the group admitted free of duty while others subject to general tariff rates.

INC: All items in the group granted preferential treatment but not at zero rate and/or subject to quantitative restrictions.

PT, INC: Preferential, nonzero tariff rate apply to only a part of the product group; rest not subject to preferences.

EXC: All items in the group excluded from the scheme.

Sources: UNCTAD, Third Session. Vol. II; Annual Report, 1966/67-1970/71, Tariff Board, Australia; International Customs Journal, No. 29: New Zealand; various UNCTAD and GATT documents regarding the nature of GSP schemes currently in operation.

All imports under the EEC Scheme are subject to ceilings.

Most of the products are subject to restrictive ceiling limitations for safeguard reasons.

In general. British preferential rates are applied to imports from beneficiary countries.

GSP rates under the Canadian scheme are 33 per cent less than the British Commonwealth preferential rates or the MFN rates, whichever is lower.

All rates under the scheme are 30 per cent below the MFN rates.

F: All items within the product group are admitted free of duty.

50 per cent: All items admitted at rate 50 per cent below the general tariff rates

PT: Part of the items in the group admitted free of duty while others subject to general tariff rates.

INC: All items in the group granted preferential treatment but not at zero rate and/or subject to quantitative restrictions.

PT, INC: Preferential, nonzero tariff rate apply to only a part of the product group; rest not subject to preferences.

EXC: All items in the group excluded from the scheme.

All schemes of preferences provide for safeguard mechanisms so that preference giving countries can retain some degree of control over the trade which might be generated by the new tariff advantages of the preference-receiving countries. Such safeguard provisions can be classified into two broad categories: a priori limitations and the application of escape clauses. The a priori limitation formula is intended to regulate preferential imports on the basis of past trade performance of beneficiaries (basic amount) plus a certain increment (supplementary amount). The current application of this formula is so restrictive that the actual expansion of preferential trade in the future might be negative, that is, it might go below the present level.

The escape clause, on the other hand, provides grounds for withdrawing the preferential treatment, in whole or in part, when the import of a product from the preference-receiving countries increases to the point where it can either cause or threaten serious injury to domestic producers of similar or directly competitive products in the preference-granting countries. Since no criteria for determining serious injury are clearly defined, the application of the escape clause is fraught with uncertainty.

The EEC and Japan apply the a priori limitation formula on manufactured and semimanufactured products and apply the escape clause for agricultural and fishery products. Other countries use the escape clause for all types of products.

In the United States, the escape clause takes the form of a “competitive need” formula, which limits imports from major beneficiary countries. The formula lays down that if a beneficiary country supplies more than 50 per cent of the total imports of a particular eligible item, or supplies to the United States a quantity of that article valued at more than US$25 million a year, then that country loses its beneficiary status. In the preference schemes of Austria, the EEC, Japan, Sweden, and the United States, action can be taken unilaterally and against specific countries under the escape clause.

• Rules of origin

To qualify for preferential treatment, goods must at present satisfy the direct consignment rule and comply with the “origin criteria” specified by the preference-giving countries. In general, goods are considered to have originated in a preference-receiving country if they have been produced in that country either wholly or by substantial transformation from materials or components that are either imported or are of undetermined origin. Austria, the EEC, Japan, the Nordic countries, and Switzerland follow the “process criterion,” which implies that transformation of the raw materials or components must be enough to lead to the classification of the exported goods under a BTN heading other than that of the materials or components used in their production. In order to apply the process criterion, qualifying and nonqualifying processes are listed and these are often applied very stringently, thereby preventing the beneficiaries from obtaining full advantage of the GSP schemes. Australia, Canada, New Zealand, and the United States base their criteria of origin on value-added. Under this a transformation is considered substantial and eligible for preferential treatment by Australia, Canada, and New Zealand if the value-added exceeds 50 per cent in the beneficiary country. In the United States, the preferential treatment is granted only if the value-added percentage is at least 35 per cent for individual countries, or if it is 50 per cent for two or more countries that opt to be treated as one beneficiary.

The other main condition for satisfying the origin requirements relates to direct consignment. Preferred goods must be consigned directly to the preference-giving country from the exporting (preference-receiving) country without passing through the territory of any other country. All preference-giving countries apply this condition, while Japan requires, in addition, that at the time the goods leave the country it must be the intention of the exporter to ship them to Japan.

Beneficiary countries

The preferences are, in general, extended to all less developed countries that belong to the so-called Group of 77 (which now has over 100 members) and the dependent territories of developed countries. However, each preference-granting country reserves the right to exclude any country from its list of beneficiaries. For example, the U. S. scheme excludes communist countries unless they are members of the International Monetary Fund and are a contracting party to the General Agreement on Tariffs and Trade (GATT). The United States also excludes members of the Organization of Petroleum Exporting Countries (OPEC), countries which are a party to any action that results in the withholding of supplies of vital commodity sources for international trade or in the raising of prices of such commodities to an unreasonable level, and countries granting reverse preferences to developed countries other than the United States unless such arrangements are to be eliminated before January 1, 1976. Additionally, a country that has appropriated U. S. property without adequate compensation loses its beneficiary status. Specifically, 24 countries and territories are excluded by the U. S. scheme at present, including all members of OPEC; Somalia, Uganda, and the People’s Democratic Republic of Yemen because of financial disputes with the United States; Romania, Hong Kong, Israel, Spain, Portugal, Cyprus, Greece, and Turkey are excluded because of their trade agreements with EEC granting reverse preferences to EEC members. Other preference-granting schemes are, however, not as restrictive as the U. S. scheme. The exclusion of countries from preferential treatment for reasons other than their level of economic development tends to limit the usefulness of the GSP as an approach to export promotion for less developed countries. In addition, it creates uncertainty about preferential treatment of a country. Uninterrupted preferential treatment over an extended period is necessary in order to ensure effective implementation of investment plans prompted by them.

Table 2.Trade Effects of Tariff Cuts and Quantitative Limitations Under the GSP Schemes Based on 1971 Data(In thousand U. S. dollars)
Tariff Cuts OnlyTariff Cuts and Quantitative Limitations
TradeIncrease inTrade
Decline InIncrease increationDecline inexports ofcreationTrade
exports ofexports ofas per-exports oflessaa per-creation
developedless developedcentagedevelopeddevelopedcentagein the first
countriescountriesof donorcountriescountrleaof donoryear of
to donorto donorTradecountry’sto donorto donorTradecountry’aoperation of
Donor Countrleecountriescountriescreationimportscountriescountrl eacreationIm portathe schemes 1
Australia4,0339,8215,7880.782,0704,9102,8400.383,144
(1974)
Austria2,1504,0841,9340.271,0681,6455770.08725
(1972)
Canada12,78529,26216,4770.853,4216,3962,9750.153,628
(1974)
European Economic
Community111,805331,685219,8803.0438,44659,17720,7310.291,548
(1972)
Japan17,52869,38751,8595.299,69011,3411,6510,17−1,787
(1972)
New Zealand3,0758,6855,6102.832,9498,3885,4392.754,714
(1972)
Nordic countries24,09445,55721,4630.9714,60725,87911,2720.5111,600
(1972)
Switzerland4,4699,1944,7250.364,0848,4304,3460.334,963
(1972)
United States200,296878,928678,6327.9471,329254,366183.0372.14297,794
(1975)
Total380,2351,386,6031,006,3684.22147,664380,532232,8680.98
Sources: UNCTAD documents on Individual country schemes; UN Statistical Office, World Trade Annual and Supplement, 1971.

Projected values. Calculated on the basis of linear-trend approximation at current prices.

Sources: UNCTAD documents on Individual country schemes; UN Statistical Office, World Trade Annual and Supplement, 1971.

Projected values. Calculated on the basis of linear-trend approximation at current prices.

Trade effects of GSP schemes

The UNCTAD secretariat has obtained some information on the actual operation of the schemes from both preference-receiving and preference-granting countries, with special emphasis on the effects of preferences on trade flows as well as the use of safeguard mechanisms in donor countries. The information collected on the trade flows of eligible commodities for Austria, New Zealand, the Nordic countries, and Switzerland for 1972 and 1973 shows that the introduction of preference schemes has resulted in a somewhat faster rate of growth of these preference-granting countries’ imports of eligible commodities in comparison with ineligible commodities. This has increased the share of eligible commodities in total imports from the preference-receiving countries. In Finland, for example, the share of imports from beneficiaries eligible for preferential treatment grew by 1.2 per cent. For Norway, this share increased by 5.1 per cent and Sweden had an even higher rate. In Switzerland, the share remained more or less unchanged for the first year of its scheme. Austria showed a significant increase in the share of preferred imports in total imports, but that was due primarily to a sharp rise in the value of fuel imports for which the preference status has since ended. No information was available to the UNCTAD secretariat on the operation of the schemes of the major donors like the EEC, Canada, Japan, and the United States.

As far as the beneficiary countries are concerned, their exact supply response to preferences is not known. David Wall undertook a study for the World Bank in 1973 to determine the reaction of producers in the leading beneficiary countries to lowered tariffs under the GSP schemes. His findings were based on interviews with producers in India and importers in the developed countries, and showed that both importers and exporters were largely unaware of the existence of the GSP schemes. He also found that when importers were aware of preferences, the impact of preferences was lessened in the short run by the inability of the exporters to meet the increased demand for preferred goods. In this particular case, not even one increased or new trade flow could be identified by importers or producers as having resulted from the GSP.

An assessment

While the schemes have not been in operation long enough to provide a clear picture of their economic effects, it is possible to estimate their likely trade effects. Estimates have been made of the decline in exports of developed countries and the increase in exports from preference-receiving countries to the preference-granting countries as a result of preferences. Thus, the global trade creation effect, that is the difference between the increase in preference-receiving countries’ exports and the decline in developed countries’ exports, can be ascertained. This estimated trade creation effect may serve as one measure of the beneficial effects of GSP schemes. Estimated export supply elasticities and import demand elasticities were used to obtain estimates of trade creation for all the GSP schemes on the basis of 1971 trade data (seeTable 2). If one disregards quantitative limitations such as exclusions and tariff quotas, then the overall reduction in exports of developed countries is estimated to be $380 million while exports of less developed countries increase by about $1,386 million, resulting in a global trade creation equal to $1,006 million, or over 4 per cent of the developed countries’ imports of products covered by their GSP schemes in 1971. However, if quantitative limitations are taken into account, the estimated trade creation declines to $233 million, or less than 1 per cent of the developed countries’ imports of preferred commodities in the same year. This amounts to less than 5 per cent of external assistance provided by developed countries to less developed countries in the same year and shows the extremely limited benefits that are likely to flow from the GSP schemes to the less developed world. These results tend to show that the GSP schemes currently in operation generate very limited incentives for encouraging manufactured exports from less developed countries. Products covered by the schemes comprise only 2 per cent of the total imports of preference-granting countries. Quantitative restrictions such as tariff quotas and exclusions negate the positive effects which might otherwise occur.

For the preference schemes to be of meaningful use to the less developed world, some basic changes will have to be effected in their structure. Among the major shortcomings are the quantitative limitations, such as exclusions of products in which less developed countries are likely to be more competitive, and the tariff quotas that are built into the schemes to regulate the flow of preferential imports into donor countries. These restrictions are motivated by domestic considerations in donor countries. The relaxation of these restrictions would be the most effective instrument in increasing the beneficial effects of the schemes for the recipient countries. Efforts in this direction should not only aim at enlarging existing quotas but should also extend the list of eligible items to include products in which less developed countries specialize. Since the Multilateral Trade Negotiations currently under way are very likely to introduce global tariff cuts, the beneficial effects of preferential tariffs on imports from less developed countries will be sharply curtailed unless offset by liberalization of quantitative restrictions made by preference-granting countries.

Recently, UNCTAD released a report on the GSP which gives an overall view of the schemes in operation, their trade implications, and future trends. Here is an analysis of that report:

United Nations Conference on Trade and Development—Operation and Effects of the Generalized System of Preferences, United Nations, New York, N.Y., 1974.

The Generalized System of Preferences (GSP) was established by UNCTAD in response to the proposal of the developing countries that concessions from the developed world be centered on trade rather than aid. The report under consideration was prepared for the first review of the GSP held in April 1973 by UNCTAD’s Special Committee on Prefences. It describes the main features of the preference schemes introduced by that date and discusses the implications for the exports of preference-receiving countries to the markets of the preference givers. Individual studies in the report treat the likely effect on the benefits accruing under the GSP of the enlargement of the European Economic Community (EEC), of the conclusion of free trade agreements between the enlarged EEC and the remaining European Free Trade Association (EFTA) countries, and of the Multilateral Trade Negotiations (MTN). Other studies describe in some detail the preference schemes of the EEC, Japan, and the United Kingdom, and investigate specific aspects of the GSP such as the rules of origin requirements, the benefits of GSP to the least developed among developing countries, and the effect of the GSP on countries receiving EEC and Commonwealth preferences.

In 1970, beneficiary countries’ exports to the preference-granting market economy countries amounted to $24 billion. Of these, exports amounting to only $9 billion were subject to customs duty in the first place, and goods worth only $2.1 billion (or 23 per cent) received preferential treatment under the GSP. These GSP schemes excluded from preferential treatment up to 96 per cent of the dutiable agricultural imports from developing countries and up to 62 per cent of dutiable industrial imports, which include textiles, leather goods, and petroleum products. The report argues that even these figures tend to overstate the share of developing countries’ exports benefiting from preferences. Under the EEC’s preference scheme each exporting country can receive a preferential margin over the most-favored-nation (MFN) tariff only for exports within some quota. Other countries allow GSP treatment to be revoked under escape clauses. Rules of origin which exclude from preferential treatment clothing manufactured from imported textiles or radios assembled using imported transistors are considered too restrictive by the report. Requirement that goods must be consigned directly from the exporting to the importing country make it more difficult for landlocked countries to take advantage of the schemes.

The report expresses concern at the erosion of preferential margins during general tariff reductions that may result from the MTN. However, it goes on to suggest various ways in which compensatory concessions could be made to developing countries. It calls for cuts in the MFN tariffs and the removal of quantitative restrictions on such goods as textiles, leather, and agricultural products which are of particular interest to developing countries but are now largely excluded from the GSP. The developing countries should press for an examination of “voluntary” restraints on their exports of manufactures and for stricter criteria governing the resort to safeguards by importing countries. It also suggests that any tariff cuts agreed should be implemented in advance for imports from developing countries.

A second area of concern centers around the EEC. The enlargement of the Community means first of all the replacement of the relatively more liberal GSP schemes of Denmark, Ireland, and the United Kingdom by the Community’s scheme. Furthermore, the establishment of free trade agreements between the EEC and the remaining EFTA countries and the movement toward preferential agreements with Mediterranean countries means that trade between these countries will be placed on a more favorable basis than the EEC’s trade with developing countries.

Since the studies comprising the report were all completed between November 1972 and March 1973, the report lacks any description of the important preference schemes of the United States and Canada. Events in the EEC have also passed the report by, since it was completed before the effects of enlargement could be clearly seen and before the signing of the Lomé Convention. In addition, at the date of completion of the studies, few figures were available on the actual benefits to developing countries of the GSP. Thus, the report is obliged to deal only with the potential benefits which it identifies with the share of developing countries’ exports which receive preferential treatment under the various schemes.

The benefits of preferential tariffs have not proved as tangible as was once hoped and the GSP must be adapted if it is to remain relevant. “Should the GSP remain basically unimproved,” the report states, “it will, for practical purposes, have lost much of its value by 1977.” In this first review attention appears to be moving from the lacunae of current tariff preference schemes to those other trade barriers whose removal is of vital interest to developing countries.

MarkAllen

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