Apr 15, 1986


GENEVE, APRIL (IFDA/CHAKRAVARTHI RAGHAVAN) – "Graduation" policies of preference-giving countries in their schemes of Generalised System of Preferences (GSP) do not achieve the intended objective of spreading the benefits to other small suppliers and Least Developed Countries (LDCS).

While penalising the graduated country, which loses its market share and does not fully regain it even when its rights are restored later, the "graduation" seems to benefit mainly suppliers from other industrial countries or other major GSP beneficiaries.

This is the broad conclusion of an UNCTAD study of the GSP schemes of the U.S., and the effect, in terms of market shares, when the U.S. "graduates" beneficiaries – withdrawing GSP benefits on the basis of competitive need limitations.

The study itself, made for UNCTAD by Prof. Craig R. Mcphee of the Nebraska University, has not been made public, but in a report to the Special Committee on Preferences, the UNCTAD Secretariat has provided some broad conclusions and their policy implications.

The Mcphee study of the U.S. market is however expected to be made available to committee members, as a working paper, when it meets here from may 26 to June 3.

UNCTAD is also planning similar studies in respect of the European Community and Japan, the other two major import markets.

Of the about 32 billion dollars worth of GSP imports in 1984 into the preference giving OECD countries, imports into the U.S. accounted for about 13 billion, into the EEC nearly nine billion, and into Japan a little over six billion.

Under the U.S. scheme, duty free entry is given to about 3.000 products from qualifying third world countries but a beneficiary must satisfy "competitive need limit" to receive benefits.

Under this test, a beneficiary will be denied GSP benefits if imports from that country in a previous calendar year of that particular product is equal to at least 50 percent of the total value of U.S. imports of that item or exceeds a certain dollar value, which is adjusted annually depending on U.S. GNP and stood at 63.8 million in 1984.

If imports fall below the limits in the next year, the GSP privileges could be restored by the President.

While exclusion on competititve need limit criterion, and exemptions from it, are according to objective standards, the restoration is a subjective decision of the U.S. administration.

On April 2, in the application of these procedures, the U.S. administration removed some 839 million dollars worth of goods from GSP benefits, but 2.4 billion dollars worth of imports eligible to be restored were denied that benefit by President Reagan.

According to UNCTAD, three policy conclusions could be drawn from the U.S. study:

Firstly, preferential treatment is necessary for major beneficiaries if they are to maintain their competitiveness in the U.S. market.

Secondly, if the GSP is to have any meaningful effect on export earnings of third world countries, there must be more certainty of preferential treatment.

Thirdly, competitive need exclusions of countries have not spread the GSP benefits to the LDCS and other relatively small beneficiaries.

In an effort to isolate the effects of changes in preferential treatment from all other influences, the study has sought to observe changes that are product and country specific.

Of the 340 products affected by competitive need exclusions in one or more years (between 1976 and 1983), the import market shares declined in 242 cases of changes, according to the study.

In 406 cases of re-designations in one or more subsequent years, market shares through GSP benefit increased only in 174 cases.

A similar result also came through country-specific studies.

For almost two-thirds of the 19 countries experiencing four or more re-designations for products, the market shares declined in the years of re-designation.

"These numbers suggest", UNCTAD says, "that loss of preferences decrease the market shares of beneficiaries, and that once lost, the market shares are not restored by renewed preferential treatment".

As to the stated objective of graduation, namely spreading benefits of GSP to LDCS and other small suppliers, the study brings out that only in respect of four of the 40 affected beneficiaries were the LDCS able to increase their mean market shares.

In three of these four cases, the LDCS captured only part of the market lost by the affected beneficiaries, the balance going to the benefit of other suppliers.

Smaller GSP suppliers, other than LDCS, increased their mean market shares in 17 out of 40 cases.

In contrast, 25 affected beneficiaries lost their market shares to major GSP beneficiaries, and 26 to suppliers from industrial countries.

In the case of 16 beneficiaries affected by the exclusions and losing market shares, the largest gains went to suppliers from industrialised countries.

In the case of another 13, the biggest gains went to major GSP beneficiaries.

Other GSP beneficiaries gained the most in only five cases, and the LDCS in none.

The LDCS and other relatively small beneficiaries, UNCTAD concludes, did not benefit from the competitive need exclusions.

In his study, Mcphee underlines that if GSP is to have any meaningful effect on export earnings of the third world countries, there must be more certainty of preferential treatment.

Limitations on preferential treatment, he adds, should be applied only on an exceptional basis as envisioned in the agreed conclusions of the special committee on preferences.

As for LDCS, Mcphee underlines that these countries need more assistance than tariff preferences to enable them to expand their exports.

"The fallacious idea that the Least Developed Countries are helped by GSP limitations on other beneficiaries should no longer be used as justification for neglect of their desperate problems", Mcphee adds.

In an evaluation of the GSP, UNCTAD notes that in 1984 the total imports by the preference-giving OECD countries from beneficiaries of their GSP schemes amounted to over 225 billion dollars.

More than half of these imports, 124 billion, were subject to Most-Favoured-Nation (MFN) duties, and thus within the scope of the GSP.

But only 64 billion dollars worth or half the dutiable imports consisted of products eligible for preferential treatment, and of these, the imports that actually received preferential treatment was only 32.3 billion dollars.

Among the six socialist countries giving preferences, preferential imports into Hungary, Poland and the USSR accounted in 1984 for over four billion dollars.

The preferential import from the LDCS continue to remain very small, "mostly because of narrow product coverage of agricultural products" (in the GSP schemes), UNCTAD notes.

Analysing the various individual schemes, UNCTAD concludes that the trade effects of the GSP continue to be constrained by the large exclusions of key products from the schemes, by the various limitations to preferential imports, and by the difficulties in complying with origin rules.

Also, since GSP covers mostly industrial products, beneficiaries with a broader industrial base and diversified industrial exports have naturally benefited more than those relying heavily on exports of agricultural and industrial raw materials, UNCTAD observers.

A number of beneficiaries, UNCTAD adds, seldom avail themselves of preferences on products subject to very low rates or having a low margin of preferences.

There are also other beneficiaries who have "unwittingly disqualified" themselves by failing to comply with the notification requirements of the rules of origin – which require notification of names and addresses of government authorities in beneficiary countries empowered to issue the certificates of origin, as also the impressions of stamps used by such authorities.