In 1968, industrialized countries agreed to provide preferences for the exports of developing countries at the United Nations Conference on Trade and Development (UNCTAD conference) in New Delhi, India. Under this scheme, known as the Generalized System of Preferences (GSP), preference-giving countries would allow exports of selected products from selected less developed countries at preferential tariff rates as compared to the Most Favored Nation (MFN) rate.

Preferential treatments for some countries required special negotiations because the MFN clause of the global trading rules under the General Agreement on Tariffs and Trade (GATT) required that all members of GATT automatically became entitled to the lowest tariff rate on a product that an importing country charged any other member of GATT. Each member of GATT was entitled to be treated as a most favored nation. Without the GSP scheme an importing country that tried to give preference to a specific developing country had to offer the same low rate to all other members of GATT. This would have negated the intention of the preferential treatment, which was to give the developing country a price advantage over more experienced exporters. The GSP scheme allowed an exception to the MFN clause to be negotiated and allowed industrialized countries to give preferential treatment to developing countries’ exports without having to give the same treatment to the exports coming from other industrialized countries.

The purpose of the GSP scheme was to encourage developing countries to rely upon exports rather than aid to speed up their industrialization process. The GSP scheme applied primarily to manufactured products and it was hoped that a preferential treatment for manufactures would help the poorer countries reduce their dependence on exports of primary industries like agricultural products and minerals.

Developing countries also argued that preferential treatment for their exports actually creates a fairer situation and equality of trading opportunities between them and the industrialized countries. Their argument was that the MFN treatment—which was the hallmark of GATT—results in an unfair advantage for industrialized countries due to their large size and their lead and experience in producing manufactured products.

Since the needs of each industrialized country (the country providing the preferential treatment) and those of each developing country (the country that needed preferential treatment) were very different, it became difficult to negotiate one global GSP agreement. Instead, 13 industrialized countries, including the United States, European Union, Japan, Canada, and Australia had national GSP schemes by 2008 (UNCTAD estimate). These countries granted temporary, generalized, nonreciprocal, and nondiscriminatory preferential treatments to specific developing countries (of their choice) and excluded certain products from such treatment. The GSP list of the United States included 109 countries in 2008. Each preference-giving country determines the preferential rate that it will give, and the tariff structure tends to become quite complex. Only one country, Australia, has developed a very simple rule for pBibliography: All Australian tariffs above 5 percent will be reduced by 5 percent and those below 5 percent will be eliminated.

GSP is estimated to have had only a minor effect on the imports of the preference-granting countries. U.S. Congressional studies show that only a minor fraction of U.S. imports enter the country under the GSP scheme. Moreover, most of the goods entering under this scheme are noncritical items with little or no domestic production. U.S. importers gain due to the lower cost imports. UNCTAD studies indicate that developing countries use the GSP system to gain entry into the industrialized countries and tend to benefit from GSP schemes that offer protection at stable rates and for extended periods of time.

Bibliography:

  1. Vivian Jones, “Generalized System of PBibliography: Background and Renewal Debate,” CRS Report for Congress, Order Code RL33663 (2006);
  2. The Generalized System of Preferences (GSP) Investment and Business Guide (International Business Publications, 2007);
  3. UNCTAD, “Trade Preferences For LDCs: An Early Assessment of Benefits and Possible Improvements,” UNCTAD/ITCD/ TSB/2003/8 (2004);
  4. United States International Trade Commission, Advice Concerning Possible Modifications to the U.S. Generalized System of Preferences, 2007 Review of Additions and Removals: Investigation No. 332-493. USITC Publication 3982 (U.S. International Trade Commission, 2008).