The Generalized System of Preferences after Four Decades: Conditionality and the Shrinking Margin of Preference

Abstract

The legal cornerstone of special and differential treatment in favor of developing countries is the Generalized System of Preferences. Since 1971 – the year in which the Generalized System of Preferences (GSP) was first authorized under GATT auspices – GSP has become a fixture in the trade policies of developed countries. The GSP marked its 40th anniversary in 2011, an appropriate occasion to ask whether or not GSP remains relevant. This article examines two sets of questions. First, are the conditions that are an intrinsic part of the U.S. and EU GSP programs WTO-legal? Do the preconditions and conditions to being designated as a GSP beneficiary under both the U.S. and EU trade preference programs bear a rational relationship to the overarching goal of economic development within beneficiary countries? Besides examining the conditionality that is an inherent feature of the U.S. and EU GSP programs, the second overarching question that this article addresses is whether GSP remains economically relevant or whether instead the shrinking margin of preference between the most-favored-nation (MFN) duty rate and the preferential duty rate has reduced the efficacy of national GSP programs to the vanishing point.

Assuming that these programs remain economically relevant, do the conditions and limitations that are an integral part of them suffer from a lack of coherency? Is it time to overhaul trade and development policy, at least with respect to GSP programs? The author’s answers to the first set of questions on the legality of conditionality is a qualified “no” and to the second set of questions on whether the GSP remains economically relevant is a qualified “yes.” The author recommends reforming the GSP program and moving beyond the GSP as a key piece of preference-granting countries’ trade and development policy for developing countries. His prescription is fourfold: (1) integrate and expand the four U.S. trade preference programs, (2) revisit and substantially revise conditionality, (3) harmonize preferential rules of origin at the international level, and (4) provide better focused and coordinated aid for trade.

Keywords: Generalized System of Preferences, trade preferences, developing countries, aid for trade, margin of preference, conditionality