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Preferential terms of trade - developing countries

GSP: The new EU preferential terms of trade for developing countries

The EU Generalised System of Preferences

The EU Generalised System of Preferences is the system of preferential trading arrangements through which the European Union extends preferential access to its markets to developing countries.

In 1968 the United Nations Conference on Trade and Development (UNCTAD) recommended the creation of a ‘Generalised System of Tariff Preferences’ under which developed countries would grant trade preferences to all developing countries. The EU was the first to implement a GSP scheme in 1971. The EU's GSP grants products imported from the 178 GSP beneficiary countries and territories either duty-free access or a tariff reduction.

The EU GSP is the most widely used of all developed country GSP systems. The volume of imports to the EU from developing countries under the GSP is greater than the volume of imports under the US, Canadian and Japanese GSP systems combined. In 2003 EU imports under GSP totalled €52 billion. In comparison, under the equivalent American scheme – which is the world’s second most widely used GSP imports totalled €16 billion.

The Commission proposes that the EU launch its new GSP scheme, initially planned for July, from 1 April 2005 until 31 December 2008. The system will be simpler, more transparent and more stable. This renewal has been fast-tracked because the new scheme contains measures that will directly benefit countries affected by the recent Tsunami in South East Asia.

For example, Thailand and Sri Lanka will benefit from new product coverage – mainly fisheries products, but also shrimps and consumer electronics for Thailand worth more than € 3 billion in trade flows. Tariffs for Thai shrimp will fall from 12% (Most Favoured Nation rate) to 4.2%. Tariffs for Indian textiles and clothing will be set at 9.5% instead of 12% under MFN. Tariffs for shoes from Indonesia and Thailand will drop from 17% to 13.5%.

The current GSP systems

The current GSP, in place since 1995, applies to imports from developing countries that pay duty on entering the EU market, and that are not already duty-free under Most Favoured Nation agreements. .Of the approximately 11000 customs lines in the EU about 2000 are already duty-free under MFN. GSP applies to about 7000 of the remaining 9000, with the exception of arms and ammunition.

There are currently five types of EU GSP scheme. The general scheme covers roughly 7000 products, of which 3300 are classified as non-sensitive and 3700 are classified as sensitive products.

Non-sensitive products enjoy duty free access, while sensitive products benefit from a tariff reduction of 3.5 percentage points on the MFN tariff. For textiles and clothing this reduction is 20% off the MFN rate.

There are two schemes that tie additional preferences to recognition of labour rights and environmental standards. These schemes reduce the tariff for sensitive products by 8.5 percentage points on the MFN tariff. For textiles and clothing the reduction is 40% off the MFN rate.

There is a special GSP to combat drug production and trafficking. This scheme benefits all Central American countries, countries belonging to the Andean Community as well as Pakistan. The number of products covered by this scheme is higher than the general scheme (around 7200) and they have access to the EU market duty-free.

There is a special scheme for Least Developed Countries (LDCs): ‘Everything but Arms’. For the world’s 50 poorest countries this allows duty free access to the EU for all products except arms and ammunition.

The new system: three schemes instead of five

The revised system is designed to be simpler, more transparent and more stable.

There will be three schemes instead of five:

• General scheme: product coverage increases from about 6900 to about 7200. It will incorporate 300 additional products mostly in the agriculture and fishery sectors, of interest for developing countries

• There will be a new ‘GSP Plus’ scheme for especially vulnerable countries with special development needs. It will cover around 7200 products which can enter the EU duty free. The beneficiaries must meet a number of criteria (see below) including ratification and effective application of 27 key international conventions on sustainable development and good governance.

• ‘Everything but Arms’ will remain unchanged.

‘GSP Plus’: A new deal for vulnerable countries

To benefit from ‘GSP Plus’ countries need to demonstrate that their economies are poorly diversified, and therefore dependent and vulnerable. Poor diversification and dependence is defined as meaning that the five largest sections of its GSP-covered imports to the Community must represent more than 75% of its total GSP-covered imports.

GSP-covered imports from that country must also represent less than 1% of total EU imports under GSP.

They also have to have ratified and effectively implemented the 16 core conventions on human and labour rights and 7 (out of 11) of the conventions related to good governance and the protection of the environment. At the same time beneficiary countries must commit themselves to ratifying and effectively implementing the international conventions which they have not yet ratified. In any case, the 27 conventions have to be ratified by the beneficiary countries by 31 December 2008. (The list of Conventions is annexed).

A simpler mechanism for graduation

Certain products from GSP beneficiaries can be graduated from the scheme if they become competitive on the EU market. This is a sign that these products no longer need the GSP to boost their exportation. Thus, graduation is not a penalty, but indicates that the GSP has successfully performed its function, at least in relation to the country and product in question. This ensures that the GSP focuses on the countries most in need and helps them play a greater role in international trade.

Changes will be made to the graduation mechanism to make it simpler in the new system. The current criteria (share of preferential imports, development index and export-specialisation index) have been replaced with a single straightforward criterion: share of the Community market expressed as a share of preferential imports. This share would be 15%, with 12.5% for textiles. .

EU imports from developing countries

The EU absorbs one fifth of developing country exports. 40% of EU imports originate in developing countries. The EU is also the world largest importer of agricultural products from developing countries, absorbing more than the US, Canada and Japan taken together.

Thanks to the ‘Everything But Arms initiative’ the worlds 50 poorest countries – out of which 34 are Sub-Saharan – export to the EU duty-free and quota-free.

In addition to the GSP regime, the EU also has a preferential system for imports from Africa, Caribbean and Pacific (ACP) countries under the Cotonou Convention.

Among the current GSP beneficiaries, the largest are China (35.8% of imports under GSP), India (11.8%) and Indonesia (5%). Under the new scheme China’s improved competitiveness means that 80% of its past GSP exports will now graduate out of GSP.

In 2002 EU preferential imports from LDCs amounted to €12.6 billion, much bigger than the US AGOA regime (in which oil represents almost 80% of the flows). Agricultural products account for around 10% of both the EU GSP and EBA imports while their share in EU imports from ACP countries was around 30% in 2002.

List of Conventions to qualify for ‘GSP Plus’

Core human and labour rights UN/ILO Conventions (all must be ratified and effectively implemented for GSP Plus to apply):

International Covenant on Civil and Political Rights

International Covenant on Economic Social and Cultural Rights

International Convention on the Elimination of All Forms of Racial Discrimination

Convention on the Elimination of All Forms of Discrimination Against Women

Convention Against Torture and other Cruel, Inhuman or Degrading Treatment or Punishment,

Convention on the Rights of the Child

Convention on the Prevention and Punishment of the Crime of Genocide

Minimum Age for Admission to Employment (N° 138)

Prohibition and Immediate Action for the Elimination of the Worst Forms of Child Labour (N° 182)

Abolition of Forced Labour Convention (N° 105)

Forced Compulsory Labour Convention (N° 29)

Equal Remuneration of Men and Women Workers for Work of Equal Value Convention (N° 100)

Discrimination in Respect of Employment and Occupation Convention (N° 111)

Freedom of Association and Protection of the Right to Organise Convention (N° 87)

Application of the Principles of the Right to Organise and to Bargain Collectively Convention (N°98).

International Convention on the Suppression and Punishment of the Crime of Apartheid.

Conventions related to environment and governance principles (7 must be ratified and effectively implemented for GSP Plus to apply, all must be raftified and implemented by 2009:

Montreal Protocol on Substances that deplete the Ozone Layer

Basel Convention on the Control of Transboundary Movements of Hazardous Wastes and Their Disposal

Stockholm Convention on persistent Organic Pollutants

Convention on International Trade in Endangered Species

Convention on Biological Diversity

Cartagena Protocol on Biosafety

Kyoto Protocol to the UN Framework Convention on Climate Change

UN Single Convention on Narcotic Drugs (1961)

UN Convention on Psychotropic Substances (1971)

UN Convention against Illicit Traffic in Narcotic Drugs and Psychotropic Substances (1988)

Mexico UN Convention Against Corruption.

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