Critics Slam Proposed EU Trade Preference Overhaul

1 June 2011

A recent proposal to reform the EU's Generalised System of Preference (GSP) was panned by civil society representatives and some MPs last week in Brussels. The controversial 10 May European Commission (EC) proposal would massively overhaul the GSP system, which aims at supporting developing countries' exports by granting them unilateral tariff concessions.

During European Parliament hearings, which took place on 24 May, civil society and some parliamentarians criticised the EC for proposing the use of the World Bank classification to rank developing countries, which would use gross domestic product (GDP) per capita as a method of ranking. Doing so would lead resource-rich countries to be excluded from the new GSP scheme, despite high levels of poverty.

The EC justified the system by explaining that a high gross national income (GNI) per capita but low level of development is a symptom of inadequate income redistribution. Since that is a problem resulting from domestic economic policy, trade preferences cannot solve that issue.

The establishment of the EU GSP dates back to 1971, with the latest version being from 2008. The system covers three preference regimes: the standard GSP under which all 176 developing countries benefit from preferential access to the EU; the GSP+ that offers additional tariff reductions to support vulnerable developing countries in the implementation of various international conventions; and the Everything But Arms (EBA) initiative that provides quasi duty-free, quota-free access for all LDCs' products to the European market.

The EC presented its reform proposal as "focusing on needs" - i.e. those developing countries most in need of assistance would be able to receive preferential treatment. EU Trade Commissioner Karel De Gucht praised the proposed system, stating that "[...]trade and development go hand in hand and tariff preferences are a small part of our wider agenda to help poorer economies scale up their presence in global markets."

A mix of benefits and challenges

The new plan limits the access of the EU's GSP system to approximately 80 lower and lower-middle income countries. This proposal, therefore, excludes most Latin American countries, including Argentina and Brazil; most Caribbean islands; and Fiji in the Pacific. In Africa, the countries that would no longer have access to the GSP would be Botswana, Gabon, Mauritius, Namibia, Seychelles, and South Africa.

However, countries such as China, India and Indonesia would not be excluded using this new criterion. The EC explained this by stating that not all developing countries have the same needs; therefore, the EC must take into account more advanced developing countries that are now more globally competitive and account for 40 percent of all preferential imports.

The EC also proposed that developing countries benefiting from an FTA providing equivalent market access to the EU be excluded from the GSP for two years after having signed the trade pact. This requirement would be necessary to rationalise the scheme. Additionally, the proposal would make the scheme open-ended, but subject to revision every five years.

The GSP+, a subset of the GSP that provides additional tariff concessions to vulnerable countries that abide by a set of 27 international conventions relating to human and labour rights, along with environmental and good governance standards, would also go through major transformations under this proposal. For instance, the EC also proposes to reverse the burden of proof for the implementation of the 27 international conventions: countries would now have to demonstrate that they are indeed taking measures to implement the principles embodied in the conventions. Meeting this new requirement could, however, pose a challenge to countries that lack the necessary capacity.

The EC has also proposed that restrictions on the access of raw materials be explicitly cited as an "unfair" trading practice that could lead to the suspension from the scheme.

Pakistani textiles could see a boost

Another potential benefit of the reform proposal is that GSP+ status would now be both easier to access and more attractive for these countries: the criteria defining vulnerability has been relaxed and the so-called "graduation" of competitive products abolished. However, these changes, while a benefit to those developing countries that would now qualify for GSP+ status, could cause harm to some EU industries.

Under the new GSP, the import-share criterion for countries to qualify as "vulnerable," and there be included in the GSP+, will be relaxed from one percent to two percent. According to Reuters, some European Commission members have found the change to the import-share criterion problematic. For instance, Pakistan and the Ukraine would now fall under the two percent threshold, which would allow some of their industries - such as textiles in Pakistan's case - to benefit at the expense of European producers of the same product. The EU has been trying to obtain a WTO waiver for granting preferential access to Pakistan textiles since September of last year; the new GSP reform could be a way around that roadblock (Bridges Weekly, 6 April 2011).

With regards to the "graduation" of products, the current scheme holds that specific sectors or products can graduate out of the GSP or the GSP+. This would occur if that product group reaches a certain threshold of total EU imports over three consecutive years. The threshold under the old scheme is set at 15 percent of total EU imports and the textile graduation threshold is set at 12.5 percent.

The current GSP scheme will end in December 2011. The Commission has put forward a "roll-over" regulation, which would extend the present system through the end of 2013. The new GSP scheme is set to enter into force in 2014. However, it must first be ratified after both the Council of the European Union and the European Parliament, in accordance with the EU's ordinary legislative procedure.

ICTSD reporting; "New EU trade plan attracts broad internal criticism," REUTERS, 6 May 2011.

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