EU Trade Preference for Developing Countries: the GSP & 'Everything but Arms'

EU trade preferences for developing countries: the GSP & ‘Everything But Arms’

Standard Note: SN/EP/3369 Last updated: 30 December 2008

Author: Ian Townsend Section Economic Policy & Statistics

The European Union offers developing countries lower tariffs on their exports into the EU through its ‘Generalised System of Preferences’ (GSP). Other developed countries operate similar schemes, which are allowed under international trade law even though this normally outlaws discrimination between trading partners, and so effectively makes goods from beneficiary countries more attractive to importers in the country running a GSP.

The European Union implemented the world’s first GSP in 1971. The current GSP runs from 2006-2015, which saw the number of elements within it reduced from five to three:

• a standard scheme, open to the broadest group of developing countries;

• a more generous ‘GSP+’, giving lower tariffs to ‘vulnerable’ countries that implement 27 specific labour and human rights agreements; and

• ‘Everything But Arms’ (EBA), available only to Least Developed Countries (LDCs), which gives their exports to the EU almost duty and quota-free access for almost all goods, apart from armaments.

The current cycle was recently renewed for a second three-year period (2009-2011), with the revisions taking effect from 1 January 2009. These were relatively minor, dubbed by one commentator “a mini reform”.

The three-tier structure remains, although some countries, now regarded as competitive based on their share of the EU market, were ‘graduated’ from preferences, while some others were ‘de-graduated’, i.e. preferences returned. Also while 14 countries were eligible for GSP+ in 2006-2008, 16 countries will benefit from 2009 (although two, Sri Lanka and El Salvador are under investigation for alleged non-implementation). The rules for determining origin of products to benefit from preferences (rules of origin) are also currently under review.

For updates see the European Commission GSP page. Other relevant notes include: EU/ACP Economic Partnership Agreements (EPAs) (SN/EP/3370), and Special & Differential treatment for developing countries at the WTO (SN/EP/3739), EU trade policy, the customs union & the UK (SN/EP/1423), and EU trade agreements with third countries (SN/EP/3747).

This information is provided to Members of Parliament in support of their parliamentary duties and is not intended to address the specific circumstances of any particular individual. It should not be relied upon as being up to date; the law or policies may have changed since it was last updated; and it should not be relied upon as legal or professional advice or as a substitute for it. A suitably qualified professional should be consulted if specific advice or information is required.

This information is provided subject to our general terms and conditions which are available online or may be provided on request in hard copy. Authors are available to discuss the content of this briefing with Members and their staff, but not with the general public. Contents

1 GSPs: Special treatment for developing countries 2

2 The EU’s GSP: an introduction 3 2.1 The lead up to the 2006-2015 GSP cycle 4 2.2 Overview of the 2006-2015 GSP cycle 5

3 The GSP in detail 7 3.1 Standard scheme 7 3.2 GSP+ scheme 7 3.3 ‘Everything But Arms’ (EBA) 9 3.4 Statistics on the GSP schemes (2007 data) 10 3.5 Graduation 11

4 Changes to the GSP for 2009-2011 11 4.1 Changes to GSP+ beneficiaries 12 4.2 Changes to EBA 13 4.3 Graduation & ‘de-graduation’ 13

5 Suspended preferences 14

6 Reform of GSP Rules of Origin 15

Appendix: Links to info on other developed countries’ GSPs 16

1 GSPs: Special treatment for developing countries Non-discrimination between trading partners is a basic World Trade Organisation (WTO) principle. However, it accepts that developing countries should be given preferential treatment, known as ‘special and differential treatment’, commensurate with their comparative economic positions.

In June 1971, following an UNCTAD (United Nations Conference on Trade & Development) recommendation in 1968, countries that had signed up to the General Agreement on Tariffs and Trade (GATT, precursor to what is now the WTO) agreed a ten-year waiver of the provisions requiring equal treatment of trade partners in GATT article I. This allowed developed countries to offer non-reciprocal preferences to less developed countries.

November 1979 saw a decision on ‘Differential and More Favourable Treatment, Reciprocity and Fuller Participation of Developing Countries’, also known as the ‘enabling clause’.1 This

1 GATT Document L/4903, see http://www.wto.org/gatt_docs/English/SULPDF/90970166.pdf.

2 allowed permanent “generalized, non-reciprocal and non-discriminatory” preferential treatment for developing countries. As a paper from 2002 summarised:2

Under the Enabling Clause, trade preferences have to be non-discriminatory, non- reciprocal and autonomous. No discrimination across developing countries is permitted except in favor of the least developed countries. Preferences must also be one-way meaning that they must not require beneficiary countries to grant reciprocal preferences. Finally, the preferences cannot be a part of a contractual agreement with the recipient countries. Thus, GSP preferences are distinct from the ACP preferences, which are contractual and require a GATT waiver distinct from the one available under the Enabling Clause.

Under a WTO dispute case brought by India against a former aspect of the EU’s GSP, the ruling was made that some differentiation between countries “within the GSP is possible provided that it is related to objective and internationally accepted differences in circumstance”,3 and applied without discrimination to all countries in a similar situation. This is covered in part 3.2.

Views on GSPs are mixed. Although they are intended to help developing countries to integrate themselves into the world trading system, one critic argued that:4

Far from being general or systematic, the GSP has remained unilateral, non-reciprocal and discretionary […] operated over three decades, it is neither general nor systematic; and, since inception, has remained unilateral, non-reciprocal and discretionary. […] When countries tend to depend heavily on the US or the European Union, it provides a leverage to add non-trade objectives into the GSP.

For more on special and differential treatment for developing countries more generally, see SN/EP/3739.

2 The EU’s GSP: an introduction The first Generalised System of Preferences in the world was implemented by the then European Economic Community (EEC) in 1971. Following its accession to the Community in 1973, the UK adopted the EEC GSP scheme in 1974.5

Although most other developed countries have their own GSP systems, the EU claims that its GSP is the most widely used.6 Using 2005 figures, the European Commission claims that it had a greater volume of imports entering under its GSP than under the equivalent systems run by the US, Canada and Japan combined.7

The GSP has been revised in ten-year cycles. The current cycle runs from 2006 to 2015. Within these cycles, it is implemented through regulations agreed by EU Member States through the Council of Ministers. However, like other aspects of trade policy, the European Commission manages the GSP on a day-to-day basis (see SN/EP/1423 for more information

2 Panagariya, A. “EU Preferential Trade Policies and Developing Countries”, University of Maryland Center for International Economics, 27 August 2002, GSP, part 3.3 3 Stevens, C. & Kennan, J. GSP Reform: a longer-term strategy (with special reference to the ACP), Report for the Department for International Development, February 2005, pv 4 “Generalised System of Preferences - Carrots are not forever”, Business Line (The Hindu), 30 January 2007 5 Weston, A. “How sensitive is the EEC‘s Generalised System of Preferences?”, (ODI) Development Policy Review A13:1, pp11-29, p28 6 European Commission, “Generalised System of Preferences: EU GSP+ granted to an additional 15 developing countries”, 21 December 2005 7 European Commission, Briefing Note on new GSP, 21 December 2005

3 on EU trade policy). It is aided by the Generalised Preferences Committee, made up of representatives of EU Member States, which is chaired by the Commission.8 It forms part of the decision-making processes behind, for example, preference withdrawal investigations and consideration of annual reports on what is now known as ‘GSP+’, and the GPC “may examine any matter relating to the application of this Regulation, raised by the Commission or at the request of a Member State.”9

The GSP is an exclusive Community competence, and as such the European Parliament is not part of the formal decision marking process, although it is consulted. However, in its report on the proposed regulation for the GSP for 2009-2011, the International Trade Committee of the European Parliament stated that “Regrettably, and contrary to the wishes expressed by Parliament […] the Commission did not transmit its proposal sufficiently in advance (by 1 June 2007) to enable the European Parliament to be fully consulted within a reasonable timescale.”10

In fact, the GSP implementing regulation should be published sufficiently in advance to enable economic operators and beneficiary countries to adjust to the changes introduced. Your rapporteur therefore regrets that the Commission presented its proposal only on 21 December 2007. On 31 January 2008 the Council asked the Parliament to give its opinion before 10 April.

Under the proposals outlined in the Lisbon Treaty, future GSP regulations would be subject to co-decision, with the full involvement of the European Parliament.

2.1 The lead up to the 2006-2015 GSP cycle Ahead of the new ten-year cycle beginning in 2006 the European Commission reviewed the previous GSP cycle.11 It called for a “stable, predictable, objective and simple”, “more accessible” GSP aimed at:12

[…] the countries that most need it and must encourage regional cooperation between developing countries by various means. The GSP should assist these countries to attain a level of competitiveness which could make them self-supporting economically and full partners in international trade.

It acknowledged that the GSP’s value to developing countries was being reduced by the multilateral lowering of tariffs though successive WTO trade rounds. This causes ‘preference erosion’, as GSP benefits are based on the Most Favoured Nation (MFN) tariffs that have gradually been reduced through multilateral trade negotiations. It also noted the effects of abolishing duties in whole sectors through WTO agreements, such as for textiles from the start of 2005, and the increase in regional trade agreements, through trade partners can

8 The GPC was originally established by Council Regulation (EC) No 3281/94, Article 17. 9 Council Regulation (EC) No 732/2008 of 22 July 2008, Article 27(2) 10 European Parliament INTA Committee, “REPORT on the proposal for a Council regulation applying a scheme of generalised tariff preferences for the period from 1 January 2009 to 31 December 2011”, 29 May 2008, p28 11 European Commission, The European Union’s Generalised System of Preferences (GSP), p15. This provides a useful summary of the previous GSP. 12 European Commission Communication to the Council, Parliament & Economic And Social Committee, “Developing countries, international trade and sustainable development: the function of the Community’s generalised system of preferences (GSP) for the ten-year period from 2006 to 2015” (COM(2004)461 final), 7 July 2004, p3; http://trade-info.cec.eu.int/doclib/docs/2004/july/tradoc_117929.pdf and press release http://trade-info.cec.eu.int/doclib/html/117919.htm

4 agree ‘better than MFN’ tariffs between them.13 The Commission’s communication proposed:

• including more products (around a tenth of products were excluded from the last GSP);

• redefining some ‘sensitive’ products as non-sensitive, and so eligible for lower tariffs;

• a new way to ‘graduate’ countries, to ease their transition from being Least Developed Countries (as defined by the United Nations) grouping and so losing the benefit of lower tariffs from being so classified; and

• addressing “other vulnerable countries”, such as land-locked and low income countries.

A further issue that the new GSP would have to address was a successful legal challenge of one aspect of the previous GSP by India. The WTO had ruled that the drug scheme within the EU’s GSP lacked transparency and objective criteria for determining eligibility. As a European Commission communication summarised:14

WTO Members are in principle allowed to grant different tariffs to products originating in different GSP beneficiaries under the condition that identical treatment is available to all similarly-situated GSP beneficiaries. A WTO Member which intends to grant additional tariff preferences under its GSP scheme would have to identify on an objective basis the special “development needs” of developing countries which can be effectively addressed through tariff preferences.

In December 2003 the EU decided to extend the previous GSP by a year up to the end of 2005 to allow acceding EU Member States be involved in its renegotiation.15 However, the WTO set a 1 July 2005 deadline for the EU to bring the GSP into compliance with its ruling.

Commission proposals for the new GSP were presented to the Council of Ministers in October 2004. The UK Government’s consultation on the proposals outlined its GSP objectives:16

• To increase the developmental gains to beneficiary countries of increased trade with the European Union, within the context of trade liberalisation through the WTO;

• To demonstrate the EU’s commitment to ‘the development of sustainable and competitive production in developing countries’, in the light of the current position of the Doha Development Agenda;

• To maximise the benefits to UK industry and consumers through the availability of cheaper imports.

2.2 Overview of the 2006-2015 GSP cycle A July 2004 Commission Communication outlined guidelines for the entire new GSP cycle.17

13 For more on regional trade agreements, see SN/EP/1308, and SN/EP/3747 on the EU’s RTAs. 14 EC Communication, July 2004, op cit,. p6, and http://www.wto.org/english/tratop_e/dispu_e/246_arb_e.pdf. This case is covered in detail in McKenzie, “Case Note: European Communities — Conditions For The Granting Of Tariff Preferences To Developing Countries”, in Melbourne Journal of International Law; http://mjil.law.unimelb.edu.au/issues/archive/2005(1)/05McKenzie.pdf 15 The previous GSP regulation (No 2501/2001 of 10 December 2001) for the period 2002-2004 is at http://europa.eu.int/comm/external_relations/ca/doc/reg01_en.pdf 16 Department of Trade and Industry, Consultation on the European Commission proposal for a Regulation applying a scheme of generalised tariff preferences (now on BERR website: http://www.berr.gov.uk/files/file13796.pdf, p7

5 Following the South-East Asian tsunami, the European Commission proposed in February 2005 to bring forward the new GSP by three months to 1 April 2005 to aid reconstruction in the countries affected. The Commission noted that “Sri Lanka, Indonesia, Thailand and India will be among the greatest beneficiaries of the new regime.”18 After opposition from importers who felt there was an insufficient adjustment period and difficulties reaching agreement on early implementation among EU countries, the new regulation was agreed on 27 June 2005.19

The previous GSP cycle was subject to annual change. After criticism of the unpredictability this caused, the new GSP would be fixed for three years at a time. Initially it would be fixed for 2006-2008. It was recently re-examined and renewed for 2009-2011 (see part 4).

The previous GSP had five schemes. The new cycle would reduce these to three, in brief (and outlined in more details in part 3).

• ‘standard’ scheme, from which the broadest group of countries would benefit;

• the ‘GSP+’ for certain countries meeting of ‘sustainable development and good governance’ criteria offering more generous preferences;

• the ‘Everything But Arms’ (EBA) for Least Developed Countries (LDCs), offering the most favourable – duty-free – treatment.

The standard GSP scheme and the EBA continued from the previous cycle. The single GSP+ scheme replaced the three special schemes – on drugs, social and environmental – the previous cycle. The GSP+ was implemented provisionally from 1 July 2005, abolishing the drugs scheme which the WTO had ruled against, requiring compliance by this date.

The EU’s GSP gives beneficiary countries either reduced (preferential) or zero tariff access to EU markets for their exports. The GSP covers almost all products that have tariffs levied on them.20 Least Developed Countries (LDCs) receive duty-free access. The new cycle saw a “large number of tariff lines were also added to the scheme, including sensitive items such as fishery products.”21

Another major change in the new cycle was the criteria for ‘graduation’. These rules would set out the process by which countries that become sufficiently competitive would leave the GSP, and lose their preferences (see part 3.5). There are also criteria for determining the origin of a good for tariff purposes, intended to ensure that only products genuinely originating in beneficiary countries benefit from preferential tariffs. These ‘rules of origin’ (ROOs) are under review (see part 6).

Also, countries that have better market access than offered by the GSP though a bilateral or regional trade agreement with the EU would no longer be listed as a beneficiary.

17 European Commission Communication on the function of the Community's generalised system of preferences for the ten year period from 2006-2015, 7 July 2004; from http://europa.eu/scadplus/leg/en/lvb/r11016.htm 18 European Commission, “European Commission accelerates preferential trade measures to benefit tsunami-hit countries”, 10 February 2005; http://europa.eu.int/comm/trade/issues/bilateral/regions/asem/pr100205_en.htm 19 Council Regulation (EC) No 980/2005; http://trade.ec.europa.eu/doclib/docs/2005/june/tradoc_123910.pdf 20 MFN tariffs which are applied to all trading partners on a non-discriminatory basis. For products that already have a zero MFN tariff preferential tariff rates cannot be offered. 21 Ingrid Kersjes & Yee Man Yu, “The EU’s General System of Preferences – (to be) continued”, ICTSD Trade Negotiations Insights 7:7, September 2008, p6

6 The tariff facing imports of any product from any country can be verified using the EU’s Expanding Exports helpdesk: http://exporthelp.europa.eu/.

3 The GSP in detail The EU’s GSP gives beneficiary countries either reduced or zero tariff access to EU markets for their exports. Least Developed Countries (LDCs) receive duty-free access.

Arms and ammunition are excluded from the GSP,22 and product and scale of preferential tariff available can vary depending on which of the three schemes apply and the country concerned. At its broadest, the GSP covers 7,218 products (EBA), with 6,355 products covered by the standard GSP, and slightly more (6,421) covered by GSP+.23

3.1 Standard scheme The general scheme is open to 176 developing countries and territories.24 As under the scheme that ran until 2006, products are split into ‘sensitive’ and ‘non-sensitive’ (as defined in the regulation establishing the new GSP).25

Of the 6,400 or so products covered around 2,500 are ‘non-sensitive’ and 3,900 are ‘sensitive’.26 Sensitive products have a reduced tariff of 3.5 percentage points below the MFN tariff. Non-sensitive products have duty free (i.e. zero tariff) access.27 The 3.5 percentage point margin was also maintained under the new scheme. 28

3.2 GSP+ scheme The GSP+ scheme, the “Special Incentive Arrangement for Sustainable Development and Good Governance”, offers greater preferences than the standard scheme, and replaced the three special arrangement schemes in the previous GSP cycle (based on countries combating drug production and trafficking, respecting International Labor Organisation conventions on labour rights, and environmental protection).

The scheme targets “especially vulnerable countries that have ratified and effectively implemented key international conventions on sustainable development, labour rights and good governance.”29

22 All products in chapter 93 of the Harmonised System (Arms & Ammunitions and parts thereof) are excluded, hence the “Everything But Arms” name for the LDC scheme. 23 European Commission presentation, “An Introduction to the EU scheme of Generalised Tariff Preferences” (un-dated). “The new GSP saw around 250-300 products added “comprising fish and prepared fruits and vegetables” (from European Commission, “Proposal for a Council Regulation applying a scheme of generalised tariff preferences for the period from 1 January 2009 to 31 December 2011” - Commission Staff Working Document - Impact Assessment Report, 21 December 2007, p8) 24 In theory 178 countries could benefit, but Myanmar and Belarus have had their eligibility suspended under Council Regulations (EC) 552/97 and 1933/2006. (Also, Moldova has been removed from the list of GSP beneficiaries as the EU granted it separate preferential access in March 2008) 25 See list on pages 19-42 of http://trade-info.cec.eu.int/doclib/docs/2005/june/tradoc_123910.pdf. 26 European Commission, “Proposal for a Council Regulation applying a scheme of generalised tariff preferences …” - Commission Staff Working Document - Impact Assessment Report, 21 December 2007, p16 27 For textiles and clothing the preferential tariff is 20% below the MFN tariff rate. 28 European Commission, “Proposal for a Council Regulation applying a scheme of generalised tariff preferences …” - Commission Staff Working Document - Impact Assessment Report, 21 December 2007, p8 29 European Commission, “European Member States back new EU Generalised System of Preferences (GSP)”, 23 June 2005; http://europa.eu.int/comm/trade/issues/global/gsp/pr230605_en.htm.

7 Countries applying for GSP+ and meeting the necessary criteria get duty-free (zero tariff) access to the EU market for all 6,400 products covered by the general scheme. As the Commission have noted: 30

Tariff cuts include tobacco (cut by up to 52%), various fruit juices (up to 30%), fruits (up to 20%), vegetables (up to 14%), fish (up to 20%) and honey (up to 17%).

Applicants must be economically ‘vulnerable’, and have ratified various international agreements.

To qualify as being vulnerable a country must: (a) not be classified a high-income country under the World Bank’s categorisation system; (b) its five largest groups of products (termed ‘sections’) must not exceed 75% of their total GSP exports to the EU; and (c) have GSP exports to the EU accounting for less than 1% of total GSP-covered imports into the EU from all sources.31 These criteria would have the effect of excluding those developing countries with larger economies from GSP+ benefits.

GSP+ beneficiaries would also be expected to adhere to 27 international conventions on human rights, labour standards, sustainable development and good governance. These comprise 16 UN/ILO conventions on human and labour rights and 11 environment- and governance-related conventions. As one source noted:32

Among the listed conventions are the Kyoto protocol on global warming, the Cartagena protocol on genetically modified organisms, the Convention on Biological Diversity, the Convention on International Trade in Endangered Species (CITES) as well as conventions against forced labour, child labour, racial and sexual discrimination as well as an agreement defending workers’ rights to organise and bargain collectively.

Countries would be expected to have ratified and fully implemented the 27 conventions by the end of 2008. In an interim period, they would have to implement the 16 human and workers rights conventions and 7 out of the 11 governance and environmental conventions.33

There were criticisms of the conditionality of the GSP+. The Financial Times editorial called it ‘veiled protectionism’ and said:34

The manipulation of trade privileges, whether by the carrot of access or the stick of tariffs, should rarely be used to achieve non-trade goals. Hanging peripheral or unrelated issues on trade negotiations only encourages trading partners to do likewise until the entire multilateral system collapses under the weight of extraneous policy matters which would be better dealt with elsewhere.

[…] But by implementing the principle of raising labour or environmental standards as a prerequisite for market access, the Commission makes it easier to insert more serious restrictions later and encourages its own domestic producers and trade unions to look for ways of using such standards as de facto protectionism, a game at which some of their US counterparts have become adept. Trade agreements should not be a lever for

30 “EU gives developing countries duty-free access with GSP+”, European Commission release, 9 December 2008; http://ec.europa.eu/trade/issues/global/gsp/pr091208_en.htm 31 European Commission memo “GSP: The new EU preferential market access system for developing countries”, 23 June 2005 32 ICTSD, Bridges Weekly Trade News Digest 8:36, October 2004 33 “GSP: The new EU preferential market access system for developing countries”, EC memo, 23 June 2005, includes full list of conventions. 34 [Leader] “Trading in pieties: Brussels is wrong to tie market access to unrelated issues”, Financial Times, 22 October 2004, p16

8 rich countries to force other governments to implement unrelated policies, however symbolic. The EU has got this one wrong.

The UK Government also raised some concerns in its consultation paper on the proposals:35

[…] Whilst the Government supports efforts to encourage the ratification and implementation of international conventions, there is concern that the proposed approach could undermine the integrity of these key international conventions. For example, GSP+ might encourage developing countries to ratify conventions before they are in a position to meet the obligations under these conventions. There are also issues around monitoring and compliance that will need to be further explored to ensure that procedures for GSP+ fit with the existing procedures of relevant international organisations.

The Commission has called the scheme “a concrete incentive for developing countries to promote best practice in key areas and support sustainable development policies.”36 It also highlighted the WTO-compatibility of the scheme, declaring it to be “based on clear, transparent and non-discriminatory criteria” and which according to the Commission “fully complies with the WTO Appellate Body ruling” on India’s challenge to the previous drugs regime.37

In December 2005, after assessing applicant countries the European Commission announced the 15 countries which would be eligible for GSP+:38

• five South American countries (Bolivia, Columbia, Ecuador, Peru & Venezuela);

• six Central American countries (Costa Rica, El Salvador, Guatemala, Honduras, Nicaragua & Panama); and also

• Moldova, Georgia, Mongolia and Sri Lanka.

Eligibility was then re-appraised in the lead up to the 2009-2011 GSP (see part 4.1).

3.3 ‘Everything But Arms’ (EBA) The third, most generous scheme of the GSP is for Least Developed Countries only.39 The Least Developed Countries (LDC) classification, and therefore EBA eligibility, is determined by United Nations criteria. 50 countries are currently so defined.40

Since February 2001 the LDC countries have benefited from duty-free and quota-free (DFQF) access to EU markets for all products, except arms and ammunition (excluded from

35 http://www.dti.gov.uk/consultations/files/publication-1430.pdf, para 19 36 EC, “Generalised System of Preferences: EU "GSP+" granted to an additional 15 developing countries”, 21 December 2005; http://europa.eu.int/comm/trade/issues/global/gsp/pr211205_en.htm 37 EC, “Developing countries: the Commission proposes system of trade preferences for 2006-2008 – targeting countries most in need, simpler, encouraging sustainable development”, 20 October 2004; http://europa.eu.int/comm/trade/issues/global/gsp/pr201004_en.htm. However, this opinion is not universally held, see Bartels, L. “The WTO Legality Of The EU’s GSP+ Arrangement”, Journal of International Economic Law, 11 October 2007 (see abstract) 38 Commission Decision 2005/924/EC; http://trade-info.cec.eu.int/doclib/docs/2006/january/tradoc_126925.pdf 39 See http://europa.eu.int/comm/trade/issues/global/gsp/eba/index_en.htm. 40 http://www.un.org/special-rep/ohrlls/ldc/list.htm

9 the whole GSP).41 Some sensitive products – bananas, rice and sugar – would not be liberalised immediately. A European Commission EBA ‘users guide’ is available.42

EBA covers around 7,200 tariff lines. EBA continued from the previous 10-year GSP cycle. However, new transition arrangements were introduced for countries ‘graduating’ from the LDC status and therefore EBA in 2004. As the European Commission explained:43

[…] measures have been adopted to dampen the shock when the United Nations removes a country from the list of LDCs, in the form of a transition period for gradual withdrawal of a country from the special GSP, the Everything-But-Arms arrangement. At present, the country in question automatically loses all the GSP advantages it enjoyed as an LDC. The new mechanism allows for a gradual removal of a country from the EBA arrangement.

This process of graduation from LDC status is distinct from the process of graduation of product sections under the EU GSP (see part 3.5).

3.4 Statistics on the GSP schemes (2007 data) The total value of imports into the EU under the GSP was over €57 billion in 2007, up 12% on 2006 (€51 billion) following a 10% increase between 2005 and 2006.44

For products imported under the GSP+ scheme imports were up 10% in 2007 following a 15% increase between 2005 and 2006.45 Although EBA imports from LDCs in 2006 were up 35% on 2005, they remained stable in 2007. With some LDCs in the African, Caribbean and Pacific (ACP) region opting to trade under EBA from the beginning of 2008 instead of signing up to new Economic Partnership Agreements, this figure may increase in 2008.

GSP beneficiaries, 2007 €, billions & percentages Users €, billions % of total Sectors €, billions % of total Beneficiaries €, billions % of total (duties forgone) India 11.3 19.8% Textiles & Clothing 13.2 23.1% Bangladesh 0.42 16.4% Brazil 4.3 7.5% Machinery 5.8 10.1% India 0.34 13.5% Thailand 4.2 7.3% Mineral Products 5.1 8.9% Thailand 0.15 5.7% Bangladesh 3.5 6.1% Plastics & Rubber 4.5 7.9% Brazil 0.14 5.6% Vietnam 3.2 5.6% Base Metals 3.8 6.6% Ecuador 0.12 4.7% Indonesia 3.0 5.2% Footwear 3.7 6.5% Vietnam 0.11 4.3% Malaysia 2.7 4.7% Animals & Animal Products 3.5 6.1% Sri Lanka 0.11 4.2% Pakistan 2.6 4.5% Ukraine 2.2 3.8%

Total 57.2 Total 57.2 Total 2.55

Source: European Commission, “An Introduction to the EU Scheme of Generalised Tariff Preferences", July 2008

41 Council Regulation (EC) 416/2001, 28 February 2001; http://trade- info.cec.eu.int/doclib/docs/2004/october/tradoc_111459.pdf 42 http://europa.eu.int/comm/trade/issues/global/gsp/eba/ug.htm 43 COM(2004) 699 final, http://www.dti.gov.uk/ewt/gsp_proposal.doc 44 European Commission, “Factsheet: EC Generalised Scheme of Tariff Preferences (GSP) 2009-2011” 45 “European Union maintains trade preferences for developing countries”, European Commission release, 23 July 2008

10 As the table below shows, the notional ‘cost’ of the GSP in terms of tariff duty forgone was €2.5 billion in 2007. Of this, around 60% was accounted for by the standard GSP, and the GSP+ and EBA accounting for around 20% each.46

GSP schemes, 2007 €, billions & percentages Users Preferential imports % of total Nominal duty loss % of total €, billions €, billions Standard GSP 47,848 83.9% 1.5 60.5% GSP+ 4,900 8.6% 0.5 19.7% EBA 4,302 7.5% 0.5 19.8%

Total 57,050 - 2.5 -

Source: as above, and http://ec.europa.eu/trade/issues/global/gsp/index_en.htm 3.5 Graduation The GSP allows for the withdrawal of trade preferences from countries reaching a given level of development and competitiveness in a specific sector (graduation) or for all products (exclusion). LDC products exported under EBA are not subject to graduation (although a country may graduate from LDC status if it attains a certain level of development, as Cape Verde recently has).47

The European Commission explained that it saw competitiveness as “a sign that these products no longer need the GSP to boost their exportation”:48

[…] graduation is not a penalty, but indicates that the GSP has successfully performed its function, at least in relation to the country and product in question. This ensures that the GSP focuses on the countries most in need and helps them play a greater role in international trade.

In the previous GSP cycle there were three graduation criteria, based on share of overall GSP imports, a development index and an export-specialisation index, judged over a three-year period.

These three criteria have been replaced with one, again judged over a three-year period: where a country’s product groups (based on Harmonised System product sections) exceed 15% of total EU GSP country imports of the group they will be graduated. For textiles and clothing, the threshold for graduation is 12.5%.

As at the end of 2007, there were nine countries graduated from GSP preferences for either a product section or sections: Brazil, China, Algeria, Indonesia, India, Malaysia, Russia, Thailand, and South Africa.49

4 Changes to the GSP for 2009-2011 The 2006-2008 scheme would expire at the end of December 2008, and so EU Member States adopted a regulation in July 2008 applying the new GSP for the three year period

46 “European Union maintains trade preferences for developing countries”, European Commission release, 23 July 2008 47 For the UN’s LDC criteria, see http://www.un.org/special-rep/ohrlls/ldc/ldc%20criteria.htm. 48 European Commission Memo, “GSP: The new EU preferential market access system for developing countries”, 23 June 2005; http://europa.eu.int/comm/trade/issues/global/gsp/memo230605_en.htm 49 European Commission, “Proposal for a Council Regulation applying a scheme of generalised tariff preferences…” Commission Staff Working Document - Impact Assessment Report, 21 December 2007, p11

11 2009-2011. This regulation enters into force on 1 January 2009.50 The European Parliament was consulted on the proposals, but a draft opinion from its INTA (trade) committee suggests that it felt that it was not “fully consulted”, as it was asked to respond to the Commission less than four months after the draft regulation was published.51 It also noted that proposals in the Treaty of Lisbon would make future GSP decisions a matter for co-decision. It also called for new rules of origin to be applied from the same date as the GSP regulation.

The European Commission said that the new GSP “will be updated and improved”, and “targeted at those countries that need it most.”52 The Commission has said that the GSP’s “primary objective […] is to contribute to the reduction of poverty and the promotion of sustainable development and good governance.”53 It has stated that “to ensure continuity […] the new Regulation ensures that the substance of the scheme remains unchanged from that established under the current Regulation.”54 However, there are “some technical changes, in particularly taking account of evolutions in trade flows.”55 One report called it a “mini reform”.56

4.1 Changes to GSP+ beneficiaries To benefit from GSP+ in 2009-2011, countries – including the existing 14 beneficiaries – had to apply by 31 October.57 The transition period allowing countries to implement conventions that was part of the 2006-2008 scheme has been removed. However, countries will have another chance to apply for GSP+ in mid-2010, the mid-point of the life of the Regulation. Countries would have otherwise had to have waited until 2012 at the earliest (as under the previous Regulation).

The Commission published a revised list of countries it defined as ‘vulnerable’ (see part 3.2) under the criteria laid down in the 2006-2015 GSP Regulation, which confirmed that this provision would see the larger developing countries like Argentina, Brazil and India excluded.58 A review of was also published in October 2008.59

50 The Commission proposed a new regulation on 21 December 2007 (see also related staff working document) and a regulation was adopted by the Council of Ministers on 22 July 2008 (Council Regulation (EC) No 732/2008, 22 July 2008, published in the Official Journal of the European Union 6 August 2008 (OJ L211, 6 August 2008, p1). 51 European Parliament INTA Committee draft opinion EP (INTA A6-0200/2008); http://www.europarl.europa.eu/meetdocs/2004_2009/documents/pr/718/718848/718848en.pdf 52 “European Union maintains trade preferences for developing countries”, European Commission release, 23 July 2008 53 “The Generalised System of Preferences (GSP) 2009-2011”, European Commission, 22 July 2008 54 “The Generalised System of Preferences (GSP) 2009-2011”, European Commission, 22 July 2008 55 “European Union maintains trade preferences for developing countries”, European Commission release, 23 July 2008 56 Ingrid Kersjes & Yee Man Yu, “The EU’s General System of Preferences - (to be) continued”, Trade Negotiations Insights 7:7, September 2008, p6 57 The current GSP+ beneficiaries are: Bolivia, Colombia, Costa Rica, Ecuador, Georgia, Guatemala, Honduras, Sri Lanka, Moldova, Mongolia, Nicaragua, Panama, Peru, El Salvador, Venezuela 58 European Commission, “List of countries considered "vulnerable" in the sense of Article 8 of the GSP Regulation 2009-2011”; http://www.trade.cec.eu.int/webwork/transfert/doclib_docs/2008/july/tradoc_139963.pdf 59 European Commission, “Report on the status of ratification and recommendations by monitoring bodies concerning conventions of annex III of the Council Regulation (EC) No 980/2005 of 27 June 2005 applying a scheme of generalised tariff preferences (the GSP regulation) in the countries that were granted the Special incentive arrangement for sustainable development and good governance (GSP+) by Commission Decision of 21 December 2005”, 22 October 2008, and related Commission Staff Working Document.

12 The final list of 16 future GSP+ beneficiaries was agreed on 9 December:60

• 5 in Eastern Europe and Asia: Armenia, Azerbaijan, Georgia, Mongolia, Sri Lanka;

• 11 in Central and South America: Bolivia, Colombia, Costa Rica, Ecuador, El Salvador, Guatemala, Honduras, Nicaragua, Paraguay, Peru, Venezuela

The new GSP+ beneficiaries are Armenia, Azerbaijan and Paraguay. One previous recipient, Panama, is not included as it did not apply in time.61 As noted in part 5, El Salvador and Sri Lanka are under investigation for non-implementation of the international conventions upon which GSP+ is dependent.

The Commission did not publicise those countries that had applied for GSP+, but that were rejected. However, Nigeria – which had opted not to sign an Economic Partnership Agreement (EPA) with the EU at the end of 2007 – had applied and was not successful. Reportedly, it was deemed ineligible as it had not ratified the UN Convention on the Prevention and Punishment of the Crime of Genocide.62

The EU Trade Commissioner, Catherine Ashton, said:63

GSP+ is at the heart of our pro-development trade policy. The decision today ensures that sustainable development and good governance will continue to be rewarded.

4.2 Changes to EBA The main change for EBA regards the end of transition period for lowering tariffs on sugar imports by 1 October 2009. This was previously 1 July 2009, and according to the Commission the change is “to ensure coherence with the EU marketing year (which now begins on 1 October every year rather than 1 July)” and “the results of recent Economic Partnership Agreements (EPA) negotiations with ACP countries (many of which are also LDCs)”.64 A “minimum price arrangement” is also established for 1 October 2009 until 30 September 2012 “to ensure coherence with” the outcomes of EPA negotiations.65

4.3 Graduation & ‘de-graduation’ As noted above, countries may be excluded from GSP or GSP+ benefits if they become sufficiently competitive in the EU market (or indeed restored if they become less so) over a three year period. “Graduation is triggered when a country becomes competitive in one or more product groups and is therefore considered no longer to be in need of the preferential tariff rates.”66 LDC exports under EBA are not affected by this process.

60 European Council decision 2008/938/EC, 9 December 2009 61 “The EC Special Incentive Arrangement for Sustainable Development and Good Governance (GSP+) 2009- 2011”, European Commission Memo, 9 December 2008; http://ec.europa.eu/trade/issues/global/gsp/memo091208_en.htm 62 “EU Rejects Country's Request for Trade Deal”, All Africa, 23 December 2008 (via Factiva). A document on the ACP-EU.org website confirms this: http://www.acp-eu- trade.org/library/files/EC_EN_091208_EC_Commission-decision-Nigeria.pdf. 63 “EU gives developing countries duty-free access with GSP+”, European Commission release, 9 December 2008; http://ec.europa.eu/trade/issues/global/gsp/pr091208_en.htm 64 European Commission factsheet, “Generalised Scheme of Tariff Preferences (GSP) 2009-2011”, p3 65 ibid. 66 “European Union maintains trade preferences for developing countries”, European Commission release, 23 July 2008

13 As noted above, under the 2006-2008 GSP scheme nine countries were ‘graduated’ for certain products. The 2009-2011 renewal allows for recalculations based on trade data for 2004-2006, resulting in the following changes:

• Graduated: Vietnam (footwear, headgear, umbrellas, and some other products).

• ‘De-graduated’: Algeria (minerals), India (jewellery), Indonesia (wooden goods), Russia (“chemical products, wood pulp or paper products and base materials”), South Africa and Thailand (both transport equipment).67

Moldova was also removed from the GSP beneficiary list, because it was granted more wide-ranging preferences in March 2008.

5 Suspended preferences In December 2006 the EU agreed to suspend GSP preferences to Belarus following “serious and systematic violations of core labour rights.”68 Commissioner Mandelson said: “This decision is a test case of our collective commitment to the promotion of workers (sic) rights as an integral part of our trade policy”.

It was given six months to address the situation, but after the International Labour Organisation (ILO) reported that Belarus had not resolved the problem, the EU announced that GSP preferences would be withdrawn from 21 June 2007. It was thought that this would affect 12% of Belarus exports to the EU. GSP preferences would be restored if Belarus acted.69

The Commission has noted that:70

Two countries (Myanmar and Belarus) remain temporarily withdrawn from GSP preferences on the basis of Council Regulations (EC) No 552/97 and No 1933/2006 respectively, as the reasons for their withdrawals still persist.

Access to GSP+ can be withdrawn if the international conventions on which it is dependent are no longer being implemented. The Commission launched an investigation into whether El Salvador has not incorporated ILO labour standards into national legislation in and May 2008.

As of October 2008, the Commission is also investigating whether human rights conventions national legislation in Sri Lanka “incorporating international human rights conventions, in particular the International Covenant on Civil and Political Rights, the Convention Against Torture and other Cruel, Inhuman or Degrading Treatment or Punishment and the Convention on the Rights of the Child” are not being effectively implemented.71

67 “The Generalised System of Preferences (GSP) 2009-2011”, European Commission, 22 July 2008 and Ingrid Kersjes and Yee Man Yu, “The EU’s General System of Preferences – (to be) continued”, Trade Negotiations Insights 7:7, September 2008, p6 68 “EU Member States back Commission recommendation to withdraw trade privileges from Belarus over labour standards”, EC release, 20 December 2006 69 “EU will withdraw GSP trade preferences from Belarus over workers' rights violations”, EC press release, 15 June 2007 70 European Commission factsheet, “Generalised Scheme of Tariff Preferences (GSP) 2009-2011”, p3 71 “EU Generalised System of Preferences: Commission initiates investigation on the effective implementation of certain human rights conventions in Sri Lanka”, European Commission release; http://trade.ec.europa.eu/doclib/docs/2008/october/tradoc_141139.pdf

14 6 Reform of GSP Rules of Origin Despite the recently updated GSP Regulation for 2009-2011 a significant area of reform remains incomplete. To ensure that only exports from GSP-eligible countries benefit from lower tariffs, products must meet criteria in order for them to be deemed as ‘originating’ in that country. Similar rules are used in free trade agreements to determine whether a given good is eligible for preferential tariffs or not. These are known as ‘rules of origin’ (ROOs).

Where products are produced entirely within a beneficiary country they are deemed to have originated from there. However, for products that include elements from other countries rules about processing or transformation must be met in order to receive trade preferences. If these rules are not met, the (non-GSP) Most Favoured Nation tariff would likely apply. A useful BERR guide to EU ROOs is available.72

The ROOs for the EU’s GSP are broadly seen as relatively strict. As one commentator noted, GSP use “has not yet reached full capacity”, and “to stimulate exports from developing countries further, the rules of origin need to be improved.”73 The origin rules have been criticised for being overly restrictive as trade barriers that prevent developing countries from securing the full benefit from preferences, and so undermine the apparent market access opportunities. They have also been criticised for preventing beneficiary countries from gaining from the export of higher value and processed products.

These rules are laid down separately (i.e. they do not form part of the GSP regulation).74 Reforms were originally proposed under the original Commission Communication which led to the 2006-2015 scheme, and the process began with an initial Commission proposal in October 2007. The work, undertaken by the Commission’s DG Taxation and Customs Union (rather than by DG Trade), was intended to lead to reform alongside the implementation of the 2009-2011 GSP Regulation.75

However, new proposals were issued in November 2008 which envisage reform by 1 January 2010 (1 January 2013 for procedures). The Commission drew attention to the proposals which it said “should help GSP beneficiary countries to draw the full benefit of the GSP scheme”, highlighting:76

Appropriate rules determining the acquisition of origin: The rules for determining whether goods have been sufficiently worked or processed are adapted to each sector (instead of the single method based on value added which was favoured by the communication and included in the first proposal, but which was strongly opposed by many stakeholders). The rules are based on value added, change of tariff heading or a specific processing requirement, according to the case. There are many simplifications compared to the current rules, plus targeted relaxation, in particular for the least developed countries. The revised proposal also further

72 BERR, A Guide to the European Community Rules of Origin, March 2008; http://www.berr.gov.uk/files/file45006.pdf 73 Ingrid Kersjes and Yee Man Yu, “The EU’s General System of Preferences - (to be) continued”, Trade Negotiations Insights 7:7, September 2008, p6 74 In Commission Regulation No 2454/93 implementing the Community Customs Code 75 European Commission, “Proposal for a Council Regulation applying a scheme of generalised tariff preferences for the period from 1 January 2009 to 31 December 2011” - Commission Staff Working Document - Impact Assessment Report, 21 December 2007, p14. In the meantime, revised ROOs for the new Economic Partnership Agreements with ACP countries were adopted (see for example Naumann, E. “Preferential Rules of Origin in Economic Partnership Agreements: Key features and changes” in ICTSD Trade Negotiations Insights 7:10, December 2008) 76 See ec.europa.eu/taxation_customs/customs/customs_duties/rules_origin/preferential/article_777_en.htm.

15 relaxes the non-manipulation clause which was already proposed in October 2007 to replace the current burdensome direct transport rule.

Cumulation of origin: Regional cumulation of origin is maintained, but the conditions are relaxed, which will allow it to work more effectively.

Efficient procedures / responsibilities of operators and authorities in establishing and controlling origin: As envisaged by the communication and already proposed in October 2007, a clarification and re-balancing of the rights and obligations of both operators and administrations. In particular, the current system of certification of origin by the authorities of the beneficiary country concerned would be replaced by statements on origin to be given directly by registered exporters. The authorities of the country concerned would concentrate on more effective post-export controls.

Notably, the proposals do not cover agricultural or processed agricultural products “as there is no agreement between the Commission services on these yet.”

These proposals will now be considered by EU Member States (through the Customs Code Committee). Assuming there is agreement on the new proposals, existing rules will remain in force until then.77