Generalized System of Preferences

From Academic Kids

The Generalized System of Preferences, or GSP, is a formal system of exemption from the more general rules of the World Trade Organization, WTO, (formerly, the General Agreement on Tariffs and Trade or GATT). Specifically, it's a system of exemption from the Most Favored Nation principle, MFN, that obligates WTO member countries to treat the imports of all other WTO member countries no worse than they treat the imports of their "most favored" trading partner. In essence, MFN requires WTO member countries to treat imports coming from all other WTO member countries equally, that is, by imposing equal tariffs on them, etc.

GSP exempts WTO member countries from MFN for the purpose of lowering trade barriers for developing countries (without also doing so for rich countries). The exemption was enacted under GATT in the 1960s at the prompting of developing countries such as India and Brazil in the Group of 77 who claimed that GATT was disproportionately benefiting richer countries. Among other things, these developing countries claimed that MFN was creating a disincentive for richer countries to reduce and eliminate tariffs and other trade restrictions with enough speed to benefit developing countries.

Thus, an exemption was established allowing contracting parties to the GATT (the equivalent of today's WTO members) to establish systems of trade preferences for other countries, with the caveat that these systems had to be "generalized" with respect to the countries they benefited (so-called "beneficiary" countries) and the products they covered. Countries were not supposed to set up GSP programs that benefited just a few of their "friends," or that covered just a few products.

Within 10 years of the GSP exemption being established, nearly every rich country in the world, including most OECD member countries and many wealthy Arab states, established a GSP program, and all of those programs continue in operation today.

From the perspective of developing countries as a group, GSP programs have been a mixed success. On one hand, most rich countries have complied with the obligation to generalize their programs by offering benefits to a large swath of beneficiaries, generally including nearly every non-OECD member state. Certainly, every GSP program imposes some restrictions. The United States, for instance, has excluded countries from GSP coverage for reasons such as being communist (Vietnam), being placed on the U.S. State Department's list of countries that support terrorism (Libya), and failing to respect U.S. intellectual property laws.

But more significant is that most GSP programs are not completely generalized with respect to products. That is, they don't cover most products, at least most products of export interest to developing countries. And this is by design. In the United States and many other rich countries, domestic producers of "simple" manfuctures, such as textiles, leather goods, ceramics, glass and steel, have long claimed that they could not compete with large quantities of imports. Thus, such products have been categorically excluded from GSP coverage under the U.S. and many other GSP programs. Unfortunately, these excluded products are precisely the kinds of manufactures that most developing countries are able to export. (Most developing countries can't efficiently produce things like locomotives or telecommunications satellites, but they can make shoes.)

Even in the face of its limitations, it would not be accurate to conclude that GSP has failed to benefit developing countries. Rather, it is the case that GSP has benefited some developing countries a lot and others very little. Specifically, for most of its history, GSP has benefited "richer developing" countries, such as Brazil and India, and more recently "Asian tigers" such as Taiwan, Hong Kong, Singapore, Thailand and Malaysia substantially, while providing virtually no assistance to the world's least developed countries, such as Haiti, Nepal, and most countries in sub-Saharan Africa.

Notably, during the past decade, an historic change affecting developing countries has occurred within the WTO. Namely, WTO rules have been extended to cover both textiles and agricultural products. For nearly all of the WTO's (and GATT's) existence, which started in 1948, textiles and agricultural products were excluded from WTO/GATT coverage because they were so sensitive to GATT's primary promoters, the United States and Europe. But now that situation has changed. Under new WTO rules, many textiles tariffs and quotas already have been eliminated, and liberalization of trade policy also is occurring on the complex agricultural front. Given that textiles and agricultural products - especially processed agricultural products, such as flour as opposed to wheat - are the main products that many of the world's least developed countries are able to export competitively and lucratively, these and similar changes at the WTO may someday mean that the limitations of GSP programs will be resolved - outside of the rubric of GSP itself.

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