Generalized system of preferences

What Is Generalized System of Preferences?

The Generalized System of Preferences (GSP) is a trade program designed to promote economic growth in developing countries by providing preferential duty-free entry or reduced tariffs for eligible products. This initiative falls under the broader umbrella of international trade policy, aiming to support the integration of less developed nations into the global economy. The Generalized System of Preferences allows certain products from designated beneficiary countries to enter the markets of developed countries at lower or zero import duties, giving their exports a competitive advantage.

History and Origin

The concept of the Generalized System of Preferences originated in the late 1960s. Following a resolution adopted at the second session of the United Nations Conference on Trade and Development (UNCTAD) in New Delhi in 1968, the GSP was formally instituted in 1971 under UNCTAD's aegis.²⁷, ²⁸ This marked a significant shift in global trade policy, as it allowed developed countries to offer preferential treatment to developing countries without requiring reciprocal concessions, a departure from the "Most Favored Nation" principle of the General Agreement on Tariffs and Trade (GATT).²⁶ The GSP was intended to accelerate economic development, promote industrialization, and increase the export earnings of beneficiary nations.²⁴, ²⁵

Key Takeaways

• The Generalized System of Preferences (GSP) offers preferential tariff treatment to products from designated developing countries.
• Its primary goal is to foster economic growth, industrialization, and increased export earnings in beneficiary nations.
• GSP programs are unilateral and non-reciprocal, meaning developed countries grant benefits without demanding equivalent concessions.
• Each preference-giving country (e.g., the United States, European Union, Japan) maintains its own specific GSP scheme with varying product coverage and eligibility criteria.
• While offering benefits, GSP schemes face criticisms regarding their effectiveness, rules of origin, and impact on long-term economic development.

Formula and Calculation

The Generalized System of Preferences does not involve a specific financial formula or calculation in the traditional sense. Instead, its "calculation" pertains to the difference in import duties applied to a product from a GSP beneficiary country versus the standard Most Favored Nation (MFN) tariff rate applied to the same product from a non-GSP country.

For example, if the standard MFN tariff for a product is T% and the GSP tariff for the same product is G%, then the preferential margin (savings for the importer) is (T - G). In many cases, GSP offers duty-free access, meaning G% is 0%, resulting in a full tariff saving. This preferential margin aims to make goods from GSP-eligible countries more competitive, thereby increasing their market access.

Interpreting the Generalized System of Preferences

Understanding the Generalized System of Preferences involves recognizing its non-reciprocal nature and its objective: to provide a unilateral trade advantage to eligible developing countries. When a product is imported under GSP, it signifies that the exporting country is a designated beneficiary and the product meets specific rules of origin and other program requirements. The lower or zero tariffs mean that goods from GSP countries are cheaper for importers in the preference-giving country, theoretically stimulating demand for these products and supporting the exporting nation's industries. This mechanism aims to integrate beneficiary countries more deeply into international supply chains and boost their competitiveness.

Hypothetical Example

Consider "Country A," a developing nation, that produces hand-woven textiles. "Country B" is a developed nation with a GSP program.

1. Standard Tariff: If Country A's textiles were imported into Country B without GSP, they might face a standard customs tariff of 10%.
2. GSP Eligibility: Country B designates Country A as a GSP beneficiary. Under Country B's GSP scheme, hand-woven textiles are eligible for duty-free entry (0% tariff).
3. Impact: An importer in Country B can now import textiles from Country A at a 0% tariff, instead of 10%. This 10% saving allows the importer to either sell the textiles at a lower price, making them more attractive to consumers, or enjoy a higher profit margin. For Country A, this preferential access makes its textiles more competitive in Country B's market compared to those from non-GSP countries, thereby encouraging increased production and export.

Practical Applications

The Generalized System of Preferences is applied in various ways across different economies:

• United States GSP Program: Established by the Trade Act of 1974, the U.S. GSP program provides duty-free treatment for thousands of products from designated beneficiary countries. The U.S. Trade Representative (USTR) oversees the program, which is subject to periodic reauthorization by Congress.²², ²³ This program is designed to support economic development and diversified trade with the United States.²¹
• European Union GSP: The EU's Generalised Scheme of Preferences is considered one of the most comprehensive, comprising three main arrangements: standard GSP (partial or full duty removal), GSP+ (zero duties for vulnerable countries committed to human rights and good governance conventions), and "Everything But Arms" (EBA) which grants duty-free, quota-free access for almost all products from Least Developed Countries (LDCs).¹⁸, ¹⁹, ²⁰ The European Commission manages these preferential trade schemes.¹⁷
• Other Granting Countries: Other developed nations, including Canada, Japan, Norway, and Switzerland, also maintain their own GSP schemes, reflecting their individual trade agreements and foreign policy objectives.¹⁶

These programs impact importers by reducing costs, benefit exporters in developing countries by enhancing market access, and serve as tools of foreign policy and development aid for the granting nations.

Limitations and Criticisms

Despite its intentions, the Generalized System of Preferences has faced several limitations and criticisms:

• Erosion of Benefits: As global tariffs have generally declined due to multilateral and bilateral agreements, the preferential margin offered by GSP has diminished over time.¹⁴, ¹⁵ This makes GSP less impactful in a world moving towards broader free trade areas.
• Rules of Origin (RoO): Complying with complex rules of origin requirements can be challenging and administratively burdensome for developing countries. If a product does not meet the specified percentage of local content or processing, it cannot benefit from GSP, even if it originates from a beneficiary country.¹², ¹³
• Conditionality and Graduation: Many GSP schemes include conditions related to labor rights, human rights, and environmental protection. Non-compliance can lead to the suspension or withdrawal of benefits. Additionally, countries may "graduate" out of GSP eligibility once their economic development reaches a certain threshold, which can be disruptive for their industries.¹⁰, ¹¹
• Limited Impact and Concentration: Some studies suggest that the program's overall impact on the economic development of developing countries has been limited, and benefits tend to be concentrated in a few countries and products rather than broadly distributed.⁸, ⁹ There are arguments that GSP may foster short-term export growth but could potentially hamper long-term economic structural development in some instances.⁷

Generalized System of Preferences vs. Most Favored Nation (MFN)

The Generalized System of Preferences (GSP) and Most Favored Nation (MFN) status are both fundamental concepts in international trade policy, but they differ significantly in their application and intent.

The primary confusion between the two arises because MFN status dictates that any trade concession granted to one country must be extended to all other WTO members. GSP is an explicit exception to this rule, allowing developed countries to provide preferential (better than MFN) tariffs solely to developing nations, without extending those same benefits to other developed countries. This exception was formalized through the "Enabling Clause" in the GATT framework.⁵, ⁶

FAQs

What is the main goal of the Generalized System of Preferences?

The main goal of the Generalized System of Preferences is to foster economic development and industrialization in developing countries by giving their exports a competitive edge in developed markets through reduced or eliminated import duties.

Which countries offer GSP benefits?

Several developed countries and economic blocs offer GSP benefits, including the United States, the European Union, Canada, Japan, Norway, and Switzerland. Each of these has its own specific GSP scheme and list of eligible beneficiary countries.⁴

Are GSP benefits permanent?

No, GSP benefits are not necessarily permanent. They are typically subject to periodic review and reauthorization by the preference-giving country. Additionally, a beneficiary country can be "graduated" from the program if its economic development reaches a certain level, or its benefits can be suspended due to non-compliance with program criteria like human rights or labor standards.

Does the GSP cover all products?

No, the Generalized System of Preferences does not cover all products. Each GSP scheme has a specific list of eligible products. Certain "import-sensitive" goods, such as many textile and apparel products, or those that could significantly harm domestic industries in the preference-giving country, are often excluded.², ³

How does GSP help developing countries?

GSP helps developing countries by making their export products more competitive in the markets of preference-giving countries due to lower tariffs. This increased market access can lead to higher export volumes, stimulate industrialization, attract investment, create jobs, and ultimately contribute to their overall economic growth.¹