8:54 AM Oct 20, 1995


Geneva 20 Oct (Chakravarthi Raghavan) -- The need for strengthening and revitalizing the tariff and trade preferences favouring developing countries, the Generalized System of Preferences (GSP), to achieve the vastly unfulfilled objective of helping beneficiary countries to develop a strong and diversified manufacturing base is advocated by the secretariat of the UN Conference on Trade and Development.

GSP, the secretariat says, through the stimulus it provides to the expansion and diversification of exports, is still regarded as "an effective trade policy instrument" favouring developing countries.

The secretariat view and recommendation is in its report to the 22nd session (23-27 October) of the UNCTAD Special Committee on Preferences which is due to undertake a comprehensive policy review of the system, a pioneering concept and instrument to further the industrialization of the developing countries set up under UNCTAD auspices over two decades ago. There are now 14 GSP schemes in operation in 29 preference-giving countries, including the 15-member European Union.

Earlier reviews of the GSP were conducted in UNCTAD in 1979 and in 1990. Due to the Uruguay Round trade negotiations then in process, any major review and revisions were put off until the end of the Round.

The main aim of the GSP was to create a trade mechanism to enable developing countries to export without any tariff or other barriers to the developed countries and enable these products to compete on those markets with local production, and thus spur industrialization and investment in manufactures in the developing countries.

The GSP, "generalized, non-reciprocal, nondiscriminatory system of preferences in favour of developing countries", was a major international development policy concept initiated at UNCTAD at its inception, and was discussed and agreed to in 1968 at the second session of the Conference in New Delhi. Individual GSP schemes were then formulated and put in place from about 1970 by various preference-giving industrialized countries, initially through a GATT waiver.

Subsequently, in 1979 at the conclusion of the GATT's Tokyo Round, the GSP was given a legal status in the GATT trading system through the 'Enabling Clause', allowing the industrialized countries to give such tariff and other concessions favouring the developing countries under their GSP schemes without having to extend it to other developed countries.

In a report reviewing the implementation of various schemes, UNCTAD says that in 1993, GSP imports into the OECD preference-giving countries amounted to $79 billion - a sevenfold increase over the levels in 1976.

The total imports of the OECD preference-giving countries from the beneficiaries of their GSP schemes amounted in 1993 to a total of $435 billion of which $301.2 billion or 69.2%, were dutiable at the MFN rates and thus within the purview of the GSP. Of this $301.2 billion worth of dutiable imports, only $168.3 billion or 55.9% were imports of products covered by the GSP schemes. Of these $168.3 billion of imports, only $79 billion or 49.9% of products actually received preferential treatment. Within this total, the three major importing areas -- the EU, Japan and the USA -- accounted for more than 90%.

The ratio of preferential imports (those that actually received preferential treatment) to the covered imports or "utilization rate" in the OECD countries decreased from 49.5% in 1992 to 46.5% in 1993.

While it varied from scheme to scheme, the utilization rate under the EU's schemes decreased from 48 to 44.3 percent, while that in the US has remained practically constant for last three years - 50% in 1991 and 51% in 1992 and 1993. The utilization rate in Japan decreased from 46.1% in 1992 to 45.9% in 1993 -- with much of the decrease attributed to further liberalization of trade by Japan, with several MFN tariff rates reduced to zero.

But despite the decline in utilization rates in the 1990s, the value of imports from beneficiary countries that actually benefited from the preferences increased -- with total imports from beneficiary developing countries actually receiving preferences increasing from $64.1 billion in 1991 to $79.0 billion in 1993.

In another report, "Policy Review: Towards Revitalization of GSP", the secretariat notes that while the Punta del Este Declaration and, with some exceptions, the Uruguay Round agreements, provide for differential and more favourable treatment for developing countries, there was no special provision in the agreements addressing the role of GSP in international trade and more specifically, the role for which the GSP was designed since inception.

If the GSP is to remain an effective policy instrument in the post-Uruguay Round era, the whole system has to be strengthened and restructured in order to respond to the needs of those beneficiary countries lagging behind in their participation in world trade.

The GSP was the result of a consensus reached at multilateral level, and its role in the new trading environment, including in non-traditional areas like services and investment, should be reaffirmed according to its original objectives and principles, the secretariat says in the report.

In an assessment of the GSP, the secretariat says that the original objectives of the GSP -- to accelerate economic growth, promote industrialization and increase export earnings -- were conceived as an interim goal on the way to a broader goal of promoting development and integration of the developing countries into the global economy.

"While the GSP has produced unmistakable benefits in terms of export growth in beneficiary countries, various restrictive measures have been subsequently introduced which have affected its potential. Limited product coverage, insufficient tariff cuts, graduation measures and excessive stringency in rules of origin continue to hamper the GSP from becoming an effective tool for development."

According to UNCTAD, though there has been a 12.7 annual growth rate (8.7% when adjusted for inflation), an analysis of the preferential imports and the change in composition of developing country exports, suggests the continued existence of a mismatch between export structure of the GSP beneficiaries and the product coverage of OECD schemes.

Only a limited number of beneficiary countries account for the greater part of the covered and preferential imports. The growth rates of preferential imports from the Least Developed Countries (LDCs) has also on average been lower during 1976-1993 than for all beneficiaries taken together.

The share of imports into OECD preference-giving countries from GSP beneficiaries fell from 20.2% of their imports from all sources in 1976 to 17.1% in 1993 -- an outcome that has been interpreted by some as a setback for the GSP concept since preferential treatment has not contributed to increase in exports from beneficiaries.

This, UNCTAD points out, must however be seen in the light of the fact that almost half of dutiable imports from beneficiaries are not covered by the GSP schemes and more than half of covered imports don't receive preferences.

"Thus the degree to which exporters in beneficiary countries were unable to make use of the GSP because of limited product coverage or a priori restrictions cannot be taken as a measure of ability of GSP to meet goals of export promotion, industrialization and growth," the report says.

An UNCTAD report in the late 1980s, summarizing various studies about GSP, had suggested that the increase in the value of beneficiary trade due to the GSP, including both trade creation and diversion, might be within a range of 7 to 22 percent of preferential exports and that the enhanced export earnings had permitted increased investment.

The studies had also found that product graduation (tariff quotas and ceilings under the EU schemes) of exports of four beneficiary economies (Singapore, Hong Kong, South Korea and Taiwan) had led to a loss of market share for them, without its leading to higher imports from the less competitive beneficiaries.

The conclusion of the Uruguay Round justifies a comprehensive review now -- given both the benefits and obligations of the new agreements and the erosion of preferential margins that the developing countries had enjoyed under the GSP. As a result of the Uruguay Round and the accelerating formation of large regional groupings, the new world trade order has changed radically. The developing countries had participated actively in the Round and the agreements leading to the establishment of the WTO. They have also undertaken new commitments in areas such as TRIMs and TRIPs, which are supposed to lead to further foreign direct investment (FDI).

"But the new opportunities crated can be fully exploited by developing countries only if appropriate measures are taken both at national and international levels to enable them to overcome the remaining economic and institutional obstacles standing in the way of their adjusting to the new global trading environment."

Unlike in the Tokyo Round, when developing countries acceded to some but not all the accords, under the Uruguay Round and its 'single undertaking concept', they have had to accept all the agreements. It would be a considerable burden, particularly to the LDCs, to adjust to this new trading system.

And while benefits may accrue over the medium- and long-term, UNCTAD says that the special and differential principle in many of the agreements "are unlikely to compensate for all the adjustment and compliance costs of their WTO agreements". There would also be long lags in the liberalization of trade in some of the products of particular interest to the developing countries.

An analysis of the post-Uruguay Round situation in the three main preference giving areas (EU, Japan and the USA), on a trade-weighted tariff line basis, there will be an average loss in preferential margins for all GSP-receiving imports from the non-LDC beneficiaries of 2.9 percentage points in the EU, 2.6 percentage points in Japan and 2.8 percentage points in the USA. The loss of margins for LDCS would be 1.4 percentage points in the EU, 4.1 in Japan and 2.7 in the USA.

For the three schemes together, the average loss of preferences amount to 2.8 percentage points (2.1 for LDCs) and this is "a substantial loss of margin of preferences".

On a sectoral basis, the highest loss for both non-LDC and LDC beneficiaries, occurs in the EU for tropical agricultural products and natural resource based products -- a loss of 4.0 and 6.3 percentage points respectively. In the US the highest loss recorded in tropical industrial products for LDCs and in agricultural products for non-LDCs -- three and 3.2 percentage points respectively. In Japan, the highest loss of 23.3 percentage points is in leather and footwear products for LDCs and a 10.8 percentage point loss in tropical agricultural products for non-LDCs.

In agricultural products, the Uruguay Round accord, has resulted in very high, and frequently prohibitive tariffs, which even after the reductions set over a 6-year period, would remain high. The immediate market access opportunities would remain limited to the opening of current access quotas. Within these quotas it remains to be seen to what extent the individual preference-receiving countries would benefit.

But the high tariffs and the quotas, provides ample scope for application of the GSP to this area, where the proportion of GSP covered imports in total imports for all three schemes is as low as 13.6%, says the report.

An expansion of GSP product coverage and substantial tariff cuts to these products would help developing countries to face the transitional cost of adjusting to the new multilateral disciplines and to the higher food prices, argues UNCTAD.

As for textiles and clothing, where most of the quota restrictions on the exports from the beneficiary developing countries would go only towards the end of the 10-year transition period, and the tariffs on these exports is higher than for those from the industrialized countries, GSP preferences and tariffs would again be of benefit.

Referring to the graduation, and the new complex development and specialization indexes introduced by the EU in its new scheme, the UNCTAD report says that the specialization index and its broad sectoral classification, could result in a country, specializing in a few products because of comparative advantage, but not all products in that sector, could still be graduated out on the ground of its competitivity. Also, the development index, though conceptually valid, would have an inherent bias against larger countries, since the higher a beneficiary's absolute export level, the higher its ranking in the development index. But there was no a priori reason why size in itself should disqualify a country from GSP.

According to UNCTAD's preliminary estimations, under these new graduation criteria, the amount of trade receiving GSP preferences from the EU would drop significantly in coming years and would create severe problems for affected countries.

Calling for a strengthening of the GSP scheme and system, UNCTAD suggests that in addition to its three major principles, transparency, stability and predictability should be added as new precepts for all schemes.

Transparency would imply a priori restrictions on availability of GSP to a country's exports of a particular good or in a particular sector should clearly differentiate the issue of whether a beneficiary has become competitive and thus no longer needs GSP from concerns over damage to a preference-giving country's domestic industry. It would also rule out discretionary decisions excluding specific products from certain countries.

Predictability would require continuity of benefits without abrupt interruption, and a sufficient warning period prior to changes.

And preference-giving countries should, on the basis of pre-Uruguay Round data, aim to stabilize, if not to increase, the total value of their GSP schemes measured in terms of customs revenue foregone and amount of trade which received GSP treatment. This would imply a continuous examination of each scheme in the preference giving country with a view to expanding coverage and increasing preference margin for remaining beneficiaries.

This would be particularly important when preference margins have been substantially eroded by the Uruguay Round tariff reductions, when more and more preference-giving countries are graduating or planning to graduate individual developing countries entirely from their schemes, and when traditional mechanisms for country-product graduation are being increasingly used or replaced by others that limit the benefits of the scheme.

There was also a need for greater consistency in applying existing principles of generality and non-discrimination.

On the non-reciprocity principle, UNCTAD cites the report of the US General Accounting Office (GAO) to show that the US schemes have become more reciprocal in nature (with US demanding some concessions or benefits from the beneficiary to extend GSP)f, and using the GSP as a leveraging tool to encourage desirable behaviour in the beneficiaries. This, the GAO noted, was seen by developing countries as inappropriate by attaching conditions to a trade assistance programme that required no reciprocal action from beneficiaries.

The EU's 1995 scheme also attached similar conditions.

"Overall," says UNCTAD, "the principles of the GSP have often been interpreted so as to serve industrial interests, protective purposes or non-economic goals. However, the principles and objectives of the GSP should be read together as they both serve the development goals agreed multilaterally within UNCTAD."