Tuesday, 28 June 2011

Reforming the Generalised System of Preferences – is it worth the effort?

By Xavier Cirera

Last week I had the opportunity to participate in an informal dialogue with members of the European Commission and country representatives, and organised by ECDPM analysing the new reform proposal of the Generalised System of Preferences (GSP) to start in 2014.

The proposed reform has different components, but in a nutshell it is an attempt to consolidate existing preferences for LDCs and lower middle income countries. The EU is aiming to do so via removing most middle income countries (mainly Latin American countries) from the list of beneficiaries, so reducing the targeted countries to those more in need, but without increasing the product coverage of preferences.

The GSP grants lower tariffs and duty free-access to a large number of imports (all imports for LDCs) from 178 developing countries and territories into the EU market, and it has been in place since the late 1960s.

So what is the likely impact?
  • In the medium run, the proposed changes may erode rather than consolidate preferences. Some of the countries that will be excluded from GSP are currently negotiating a Free Trade Agreement (FTA) with the EU. Removing them from the GSP may push some of these countries to sign an FTA, improving their market access to the EU and further eroding the existing tariff preference enjoyed by GSP eligible countries.
  • The reform excludes some countries with large number of poor people (the new bottom billion).
  • The potential gains and costs appear to be small according to my CARIS colleagues in an initial assessment. Also, some of the exporters that will lose preferential access may continue exporting by reducing their price margins, and some of the opportunities created by exiting firms could be taken by developed countries firms.
The European Commission is aware of the expected small impact of the GSP reform. The mid-term evaluation of the GSP that we did last year is testament to the fact that the impact of GSP has been significant but small. However, it has had not had an impact in encouraging export diversification and more importantly, there is hardly any room left for increasing impact using tariff instruments.

Putting aside the political relations between the EU and developing countries, the key question is whether so little impact justifies distorting European markets with unilateral preferences, especially when the main constraint for developing countries is lack of supply capacity.

Some would rightly argue that:
  1. Unilateral preferences have had an impact on increasing trade in products that were already exported; and,
  2. Underneath all the products included in unilateral preferences there are particular product lines where preferences may still be valuable; this is where preference margins are large and developing countries could potentially export them.
But it seems to me that a much better approach would be to understand why the GSP reform does not work and to use instruments that overcome these challenges, rather than blindly focusing on what could potentially work. In practical terms, this would mean directly linking the GSP system to specifically tailor made Aid for Trade interventions designed to overcome binding constraints for selected products with larger margins. 

I would argue to shy away from using most of the current generic approaches, where trade policy and Aid for Trade are implemented in “parallel” (i.e. unilateral preferences + road rehabilitation + trade policy capacity building). It is easy to think that these generic approaches are more likely to be guided by administrative convenience for policy makers, where Aid and Trade Policy are formulated in different departments, rather than considering the actual effectiveness.