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Arvind Panagariya The global trade in goods is largely governed by the General Agreement on Tariffs and Trade (GATT), which is itself an integral part of WTO. At the heart of this agreement is the Most Favored Nation principle, which requires each WTO member to treat all other members as favorably as its most favored nation. If a member lowers a tariff against one member nation, it must do so against all other member nations. In effect, the principle prohibits discrimination in trade policy. Over time, WTO members have accommodated several exceptions to this principle, however. One such exception is the so-called Generalized System of Preferences (GSP) under which developed countries are encouraged to discriminate in favor of developing countries by granting them one-way tariff reductions not applicable to developed countries. The exception was introduced through a ten-year waiver in 1971 and given a legal status through the so-called “Enabling Clause” in 1979. Developing countries originally pushed for GSP during 1960s as a part of their overall quest for the Special and Differential treatment within the multilateral trading system. Since then, they have viewed the provision as an important instrument of seeking improved access to developed country markets. On the surface, this seems a sensible strategy: other things being the same, the ability of developing countries to compete in a developed country market is enhanced if they face lower custom duties than developed country exporters. Nonetheless, upon closer examination, the experience with trade preferences appears no more encouraging than that with aid. Under the original conception, GSP preferences were to cover all products (“generalized”), be non-discriminatory across developing countries except if the discrimination was in favor of the least developed countries, and preclude reciprocal concessions by developing countries. But given the “permissive” rather than “mandatory” nature of the Enabling Clause, developed countries have often been able to violate this conception along all three dimensions without risk of a challenge in the WTO Dispute Settlement Body. Thus, they frequently exclude precisely those products in which developing countries have comparative advantage, “graduate” a country out of the preference for a product just as it begins to achieve significant success as an exporter, and attach side conditions that amount to reciprocal concessions from developing countries. Not only does the U.S. exclude such critical items as textiles and clothing and footwear from its GSP program, it also subject them to very high MFN trade barriers. In addition, it imposes a $100 million limit on exports per tariff line, per year, per country. Exceeding this limit results in the loss of the preference, discouraging countries from export expansion in the first place. In addition, the exporting countries are required to satisfy certain “rules of origin” to substantiate the claim that they indeed produced the good rather than import it from a country excluded from GSP privileges. The commonest such rule makes the preference contingent on a minimum valued addition to the product within the exporting country. This requirement can be a major deterrent since many small and poor countries are able to perform only simple assembly operations. And even if the requirement is not prohibitive initially, developed countries have been known to raise it after a country successfully penetrates their markets. The rules of origin often require beneficiaries to use inputs produced in the preference-granting country in their exports. For example, under the recent Africa Growth and Opportunity Act (AGOA) introduced by the United States, shirts assembled by the more successful African exporters must be made from fabrics formed and cut in the United States. In addition, the fabric must be made from U.S. yarns. Given the U.S. is unlikely to be the cheapest source of these inputs, this raises the production costs of exporters with the preference on shirts effectively protecting the U.S. producers of fabric and yarn. Often the preferences also end up benefiting one set of developing countries at the expense of others. The U.S. preferences under AGOA apply only to the countries in Africa and, thus, carry the potential to displace exporters in other parts of the world. More subtly, to the extent that more advanced and larger developing countries are more likely to be able to satisfy the minimum value-added requirements, perversely, the preferences may divert exports from smaller, poorer countries from among the beneficiary nations.
The worst aspect of the preferences, however, is their use by
developed countries as instruments of extracting concessions from
developing countries in non-trade areas.
After a point, the EU explicitly links the grant of its GSP
preferences to meeting labor and environmental standards.
Likewise, the U.S. trade laws allow the President to use GSP to
promote labor standards and intellectual property (IP) rights.
In April 1992, the U.S. terminated
India’s GSP privileges on $60 million worth of exports of
pharmaceuticals and chemicals on the pretext that the country did not have
adequate IP protection.
At Doha, the preferences also became an instrument of breaking the
united front presented by a group of developing countries against the
Singapore issues. The U.S.
decision to go along with the waiver sought by the African countries to
preserve their preferences in the EU market substantially muted their
opposition to the Singapore issues. In
the future, preferences can also become the instruments of breaking the
generally unified position of a large majority of developing countries
against the inclusion of labor standards into WTO agreements.
Therefore, on balance, GSP may have done more harm than good.
According to empirical studies, they had at most marginal impact on
country economic performance. Above
all, they have given developed countries an easy escape from genuine
liberalization in products of interest to developing countries. Developing countries must rethink their negotiating
strategy. As with aid, the
experience with GSP points to the conclusion that free meals that are also
worth having are rare. Genuine
expansion of market access will come only through reciprocal bargains. Economic
Times, June 19, 2002 |
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