A preliminary investigation into the effects of the changes in the EU’s GSP

15 July 2011

The EU's GSP proposals are intended to make preferences more valuable for countries most in need. There is little change in product coverage or the degree of preferences offered, and some relaxation of graduation rules. The key changes are in the criteria determining beneficiary status. High and upper middle income economies will lose beneficiary status, as will countries in an FTA with the EU, and the Overseas Countries and Territories. Additionally the GSP+ eligibility criteria have changed. These changes could result in important changes in trade. A preliminary country-by-country and tariff-line level examination has been prepared by CARIS and InterAnalysis [1]. The work is based on examining the structural features of existing trade at a high level of disaggregation as opposed to any formal modelling. This note summarises the key results.

The countries which stand to lose most in terms of market share are those reclassified into the MFN category and which do not have an FTA with the EU. This is likely to apply to 30 countries. The impact on these countries depends on the importance of the EU as a trading partner in those products where there is a preference margin, and on the extent of the preference margins applicable to their existing trade with the EU. The countries with the highest share of trade that could be impacted are Cuba (9.4 percent), Bahrain (9.1 percent) and Costa Rica (5.4 percent). The difference between the average tariff these countries face and the average MFN tariff for the same products is 6.4 percent, 2.1 percent and 1.6 percent respectively. For all other countries the share of their trade likely to be affected is less than 5 percent and/or the preference margin is extremely small. In aggregate terms, therefore, and with perhaps the exception of Cuba, there is little evidence of a substantial negative impact on those that graduate out of the GSP on income grounds.

The countries likely to gain market share are those experiencing "preference consolidation" as a result of the exclusion of previous beneficiaries: (a) those that retain GSP status; (b) those that retain or gain GSP+ status and (c) EBA countries. The magnitude of the impact on these countries will depend on structural features - the importance of their trade with the EU and how much of that trade utilises preferences. It will also depend on the extent of competitive pressure they experience in the EU from those countries losing their GSP status, which in turn depends on the composition of these countries' trade and the extent of their preference margin. For example, where the MFN tariff is zero, there would be no change in competitive pressure.

For each of these categories of countries, we examine their key structural features and the degree of competitive pressure. For those in group (a), most countries will generally not benefit substantially. For some, the competitive pressure is larger and the impact may therefore be greater (Moldova, Uzbekistan, Kyrgyzstan and Tajikistan). But it is unlikely to be significant, as their share of total trade affected is 8.3 percent, 4 percent, 3.1 percent and 2.4 percent respectively and it is only on this upper bound share that any competitive pressures would be exercised.  With respect to (b), for the existing GSP+ countries other than Armenia for whom over 30 percent of its trade may be affected and where the competitive pressure is higher, similar conclusions can be derived. The potential new GSP+ countries are Pakistan and the Philippines, but even here there may not be a big impact. For Pakistan, the extent of competitive pressure from those losing GSP status is low (although there is some deepening of preferences and improvements in rules of origin, e.g. for textiles, which could be significant), and so is the share of trade affected (2.7 percent) for the Philippines. Finally, for those in group (c), we again find little evidence of a substantial impact, with the greater impact most likely to be found in countries such as Djibouti, Eritrea, Gambia, Malawi, and Senegal.

Conclusions

Overall, it is hard to avoid the conclusion that the change in beneficiary status is unlikely to have a big impact either on the newly excluded countries, or on those experiencing preference consolidation. This is not to say there will be no impact. It is also important to note that, although undertaken at the tariff-line level, this analysis provides a summary of the aggregate effect for each country. That aggregate effect is likely to mask substantial impacts that may occur for individual industries. It should also be noted that we have not analysed important future changes in trade relations which are likely to occur. First, those losing GSP beneficiary status will be encouraged to sign FTA agreements with the EU. This will lead to further preference erosion for remaining GSP countries, since FTA coverage is broader and sometimes deeper than GSP. Secondly, when China graduates out of GSP as it surely will in the not-too-distant future, this is likely to have a big impact on graduation and GSP+ status by increasing the GSP market share for some countries above the required threshold, and, therefore, de facto reducing the number of eligible countries.

This supports the conclusions arrived at in our earlier CARIS report reviewing the existing GSP scheme, which identified the limited impact that the GSP scheme can have in helping those countries most in need because of the structural limitations of the system (see previous article on pages 11-12). We therefore reiterate our previous conclusions that, in order to effectively help developing countries integrate into the world economy, much more creative policies (with respect to rules of origin, non-tariff measures, and Aid for Trade interventions to overcome domestic constraints) need to be developed.

Authors: see biography in previous article

[1] The full report (which intensively used the TradeSift software) can be found at http://www.tradesift.com/tradesift-reports.aspx

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