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GSP reform: a longer-term strategy (with special reference to the ACP)
Dr Christopher Stevens and Jane Kennan
Institute of Development Studies
February 2005
SARPN acknowledges permission from Helena McLeod, trade advisor, DFID(SA), for permission to post this report.
It was commissioned by DFID.
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Executive Summary
Scope of the report
What role can the Generalised System of Preferences (GSP) play over the medium term in rationalising the EU's multi-layered and partly conflicting trade policies? What contribution can it make to the development of the 'alternative arrangements' that the EU has promised to make available to those African, Caribbean and Pacific (ACP) countries unwilling to enter into Economic Partnership Agreements (EPAs)? These are the questions raised in this report.1
The EU has literally dozens of agreements with developing countries, which often overlap. This differentiation has been a source of controversy in the WTO, most recently with the dispute over the anti-narcotics tranche of the GSP brought by India. The Appellate Body ruling has confirmed that differentiation within the GSP is possible provided that it is related to objective and internationally accepted differences in circumstance. The effective integration of the ACP countries in the GSP would represent the largest possible additional step in the direction of creating a single, coherent framework for trade preferences.
The new GSP
Now over 30 years old, the GSP has been reviewed and adapted several times, most recently in 2001. Although described as a mid-term review of the ten-year regime 1994-2005, it made radical changes. The proposals made by the European Commission in its July 2004 Communication (CEC 2004a) and its draft Regulation (CEC 2004b) continue the process. Like its predecessor, the GSP regime it proposes will last for ten years (from 2006 to 2015) but with a mid-term review. The Commission's draft Regulation covers the first period to 2008. The only two significant innovations in this initial period are a new formula for graduation and a new superior tranche - GSP+ - to replace three existing regimes.
The graduation formula in the new GSP will replace that in the old. So there will be winners (countries that are reintegrated into the GSP) as well as losers (countries that are graduated anew). In the period to 2008 there are significantly more 'winners'. They include three of the countries most affected by the tsunami - India, Indonesia and Thailand. The revenue these countries will gain as a result of paying GSP rather than MFN tariffs is equivalent to between one-fifth and one-third of one percent of their exports to the EU. All three, though, are excluded from GSP+.
Under the proposed GSP+ simple ad valorem or specific duties will be suspended on all products covered by the GSP. For items subject to an ad valorem and a specific duty, the ad valorem element will be suspended. Duty suspensions will not apply to sections from which any given country has been graduated.
In order to benefit from these additional preferences, a country must have ratified and effectively implemented 16 core human and labour rights UN/ILO Conventions and at least seven (of 11) conventions related to environment and governance principles. They must also satisfy additional criteria related to the value of their exports set out in Article 9.2(a) and (b) of the draft Regulation. These specify that a country is vulnerable only if it meets both of two criteria2: a diversification criterion and a smallness criterion.
We calculate that 21 states fail the vulnerability tests. Three of the excluded states - India, Pakistan and Vietnam - are classified by the World Bank as low-income. And all of the tsunami-affected states other than Sri Lanka are excluded.
The impact of GSP+ could be very substantial, but only if a high proportion of the countries are accepted. There could be three types of effect.
- Trade creation. The number of countries and products facing no tariff barriers in the EU would increase, resulting in more trade.
- Trade diversion. Countries elevated from the 'middle' to the 'most preferred' group would find that they have a competitive advantage over those that remain in the middle group and that they no longer face a competitive disadvantage compared with those that are already in the 'most preferred' group.
- Rules of origin. If take-up were widespread, the origin rules would become a less important determinant of trade.
If large numbers of states are accepted the trade creation effects will be enhanced. If few states are accepted trade diversion is more likely.
Providing Cotonou equivalence
A first, basic requirement for a GSP providing treatment equal to Cotonou is that it cover all of the products that the ACP currently export and that receive preference under Cotonou. Although a necessary condition, it is not sufficient. But it is an obvious first place to start.
The end of the Cotonou Agreement would leave unchanged the tariff treatment of some 75 percent of ACP exports because they are in items that either enter duty free under the MFN or would do so under the Standard GSP. The report considers the position of the remaining 25 percent, referred to as 'GSP-relevant' items.
Just under two-thirds of the GSP-relevant items are included in the Standard GSP but are not accorded duty-free access. All but four are, however, given duty-free access under the proposed new GSP+. All of the remainder are items that are not covered by the Standard GSP or GSP+, and so would have to be introduced into the scheme for it to provide an adequate alternative to Cotonou.
A key advantage of Cotonou for the ACP is that they are treated more favourably than some of their developing country competitors. They are always concerned, therefore, with preference erosion. Clearly, the EU has to take a more rounded view of the development attractions of lower tariffs than do the ACP and cannot simply agree to freeze current trade policy in order to maintain this margin of preference. Even a full extension of Cotonou into EPAs would not achieve the ACP objective of freezing preference margins.
On the other hand, some account needs to be taken of the extent to which the task of improving the GSP solely for the purpose of making it Cotonou equivalent would automatically erode the gains that the ACP might hope to achieve from this process. It would not be sensible to use considerable political capital pressing for an extension of the Standard GSP if, in so doing, it meant that the ACP saw their preference entirely eroded.
The change to the GSP that would provoke the smallest amount of additional preference erosion would be the extension of GSP+ to cover all ACP GSP-relevant exports. The ACP would share their preferential access with all other GSP+ beneficiaries - but so they will regardless of what happens under Cotonou for all products that are not added to the scheme specifically to make it Cotonou equivalent.
There are only a few cases in which the extension of GSP+ would further erode ACP preferences. Bananas, rum and, the most substantial of all, sugar, are the only significant 'problem commodities'. In all three cases it is not really sensible to try to identify 'solutions' purely within the context of this report. It is evident that any fully acceptable 'solution' is very difficult to find even without the complication of considering the consequences of the end of the Cotonou Agreement. It is not even certain how sugar can be handled in EPAs.
None of the ACP states is excluded a priori from the GSP+, and so would be ineligible only if it fails to ratify and implement all of the required conventions. The only reasons, therefore, for not adopting the 'extend GSP+' route would be that some countries for which the EU wishes to continue strong preferences fail to make the ratifications or that it is considered undesirable to follow this route, perhaps because the WTO compatibility of GSP+ is by no means certain.
In that case the principal option would be to extend the Standard GSP. No new products will need to be added to the GSP over and above those already identified as required to make the GSP+ an acceptable Cotonou equivalent. But the erosion potential of including these new products in the Standard GSP is greater. The new preferences would also be available to countries that are excluded from GSP+ because they fail the vulnerability criteria. The main candidates for attention are canned tuna, fresh beans, frozen hake and monkfish, prepared beans, preserved pineapples and pineapple juice. There would be significant preference erosion on all of these.
Conclusion
The broad conclusion of this report is positive - not only is it feasible to consider the GSP as a post-Cotonou trade option, but there are economic advantages in so doing. The most obvious route for creating a Cotonou-equivalent regime under the GSP is to extend GSP+ (assuming it survives WTO challenge). The analysis in Part B suggests that this is feasible.
As explained in Part A, the economic impact of GSP+ will be heavily influenced by the number of countries that become eligible. In brief, the more the better. If many countries are accepted there are good reasons to expect significant trade creation. There will also be a lessening of the problems of the rules of origin. The additional reform of agreeing full cumulation between all GSP+ beneficiaries would clarify the situation still further. At the extreme it would mean that only inputs from the 21 states excluded a priori from GSP+ would cause potential problems with the origin rules.
Provided that the broader issues of contractuality etc. can be overcome, the conclusion to be drawn is that an extension of GSP+ to cover all ACP exports would have beneficial economic effects. Indeed, it is possible to argue that the economic effects would be superior to those likely to arise from EPAs. This is because a broad GSP+ would result in a significant and early liberalisation of the EU - a large market. EPAs, by contrast, since they will exclude some imports and delay liberalisation of others until 2020 or thereabouts, will probably result in only limited liberalisation of small markets.
Footnotes:
- The views expressed in this report are the authors’, and do not necessarily reflect those of DFID.
- The descriptive names have been coined by the authors of this paper.
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