More benefits from preferential trade tariffs for countries most in need: Reform of the EU Generalised Scheme of Preferences

Brussels, 3-11-2012 — / — The Generalised Scheme of Preferences (GSP) aims at helping developing countries by making it easier for them to export their products to the European Union. This is done in the form of reduced tariffs for their goods when entering the EU market. It allows these countries to participate more fully in international trade and generate additional export revenue. It is an autonomous measure by the EU: there is no expectation or requirement that this access be reciprocated by the countries concerned.

GSP covers three separate regimes:

  • The “standard” GSP; which currently provides 176 developing countries and territories with preferential access to the EU.
  • The special incentive arrangement known as “GSP+”, which offers additional tariff reductions to support vulnerable developing countries in the implementation of international conventions in the areas of sustainable development and good governance.
  • The Everything But Arms (EBA) arrangement, under which all products from Least Developed Countries (LDCs) are not subject to any import duties in the EU.

The EU has applied the GSP since 1971. The currently applicable scheme dates back to 2008 and has been reviewed on the basis of a proposal made by the European Commission in May 2011 and adopted by the European Parliament and the Council.

While new GSP regulation has been published on 31 October 2012, the new preferences will apply as of 1 January 2014. This provides ample time for economic operators to adapt smoothly to the new GSP, thus ensuring a smooth transition. Until 1 January 2014, the preferences from the 2008 scheme will continue to apply.

Why has the EU reformed the Generalised Scheme of Preferences?

The objectives of the reform are to:

  • Better focus on those countries in need;
  • Further promote core principles of sustainable development and good governance;
  • Enhance stability and predictability.

Not all developing countries have the same needs: the last twenty to thirty years have seen the emergence of more advanced developing countries, which are now globally competitive. On the other hand, many poorer countries are lagging behind. They are affected by competition from more advanced emerging countries and have suffered during the global economic crisis.

Advanced emerging economies are amongst the biggest beneficiaries of GSP preferences, currently accounting for around 40% of preferential imports under GSP. There is significant competition between GSP beneficiaries. Hence the need to concentrate preferences on those that most need them: low and lower middle income countries which do not already have another preferential arrangement to enter the EU market.

How has “graduation” changed?

To ensure better targeting and more uniform treatment of products, “graduation” principles have been revised.

The graduation mechanism

Graduation means that imports of particular groups of products (referred to as “sections” in customs jargon) and originating in a given GSP beneficiary country lose GSP and GSP+ preferences if they have been deemed to be competitive. Under the 2008 scheme, graduation applies when the average imports of a section from a country exceed 15% of GSP imports of the same products from all GSP beneficiary countries during three years (the trigger is 12.5% for textiles and clothing). It concerns therefore imports from countries that are competitive on the EU market and so no longer need the GSP to boost their exports to the EU.

Under the new scheme, the graduation principles will change as follows:

1) product sections used for graduation are expanded from 21 to 32. This ensures that graduation is more objective, as the products in the categories are more homogenous;

2) graduation thresholds move from 15 % to 17.5 % (and from 12.5% to 14.5% for textiles);

3) graduation does not apply to GSP+ countries: these are vulnerable countries with a non-diversified export base. (N.B.: Graduation has never applied to EBA: all Least-developed countries are considered to be vulnerable and have a non- diversified export base.)

A list with all graduated product sections will be published by the beginning of 2013. This provides economic operators with ample time to adapt before the new preferences start applying as of 1 January 2014.

What happens to GSP+?

The EU has the objective to further promote core human and labour rights, and principles of sustainable development and good governance. To achieve these aims, the EU will provide for more incentives for countries to join the GSP+ scheme, while at the same time enhancing its leverage to ensure those rights and principles are respected.

Incentives to join GSP+ include the fact that there will be less competition from more advanced emerging economies. Moreover, GSP+ countries will no longer be graduated. The vulnerability criterion is one of two economic conditions a country needs to fulfill in order to be eligible for GSP+. Under the new GSP, it will be opened to allow more countries to benefit, and applications will be taken into consideration at any time (rather than once every 1.5 year, as was the case until now).The opening of the “vulnerability criterion” is a key point of openness for the new GSP.

The vulnerability criteria

Any GSP+ beneficiary must be considered “vulnerable” in terms of its size or the limited diversification in its exports. Under the 2008 scheme, the import-share criterion defines that a country is only eligible if its GSP-covered imports represent less than 1% of the EU’s imports by all GSP beneficiaries. For the non-diversification criterion, the country’s 5 largest product sections must cover at least 75% of its total exports to the EU. The vulnerability criteria ensures that only countries that are not competitive on the EU market and that do not have a diversified export base may be eligible to profit from GSP+.

Under the new scheme, the import-share criterion will be relaxed from 1% to 2%, while the diversification criterion will remain stable at 75% of a country’s exports to the EU, but for its 7 (not 5) largest sections. The increase in the number of sections derives from the expansion in the number of product sections. As a result, the proportion of sections used for this purpose remains stable (just under 25%: 5 out of 21 in the old scheme and 7 out of 32 in the new scheme).

But meeting the vulnerability criterion is not in itself sufficient for benefiting from GSP+. Applicants will have to ratify conventions and subscribe to binding commitments to ensure implementation (in line with the incentive-based nature of the scheme). Examples of such Conventions are the International Convention on the Rights of the Child, the Freedom of Association and Protection of the Right to Organise Convention; and Convention on International Trade in Endangered Species. The new GSP drops one of the 27 Conventions, on apartheid and will add the United Nations Framework Convention on Climate Change.

With the new scheme, the EU will have more leverage to achieve GSP+ goals:

  • In case binding commitments are not met, exclusion procedures will be swift;
  • Monitoring procedures will be reinforced, with the publication of a report every two years;
  • The Council of Ministers and the European Parliament will exert more scrutiny, and will have a say every two (and not three as things stand now) years;
  • Crucially, beneficiaries have to prove they are abiding by their commitments— not as now, where the Commission has to prove they are in breach.

Withdrawal mechanisms will be more effective, taking on board the lessons of the investigation in the Sri Lanka case:

  • The EU will have access to more sources of information, not limited to UN/ International Labour Organisation reporting systems;
  • “Effective implementation of conventions”, as a benchmark, will be much better defined;
  • The Regulation elaborates on the specific roles for all contributing parties,
  • And again, beneficiaries have to prove they are implementing their obligations.

This “reversal of the burden of proof” will be a particularly strong tool to ensure GSP+ beneficiaries walk the talk in terms of human, labour, environmental and governance standards.

All countries wishing to benefit from the new GSP+ must make a formal application, including current GSP+ beneficiaries.

What happens to EBA?

The Everything But Arms arrangement already is an open-ended scheme and will not change. Least Developed Countries continue to benefit from duty-free, quota-free access to the European market for all products – except for arms and ammunition. LDCs will also continue to benefit from the recently amended, more favourable, GSP Rules of Origin.

Under the new GSP, the effectiveness of the EBA scheme will be strengthened. Reducing the GSP to fewer beneficiaries will reduce competitive pressure and make the preferences for LDCs more meaningful—providing for new opportunities to export.

What about stability and predictability for businesses?

Importers and exporters need stability and predictability to actually use GSP preferences. These have been reinforced by the new GSP, in several ways:

1. The new scheme will last ten years as compared to the current timeframe of three years. EBA has no expiry date.

2. There will be transition periods of at least one year for changes in the original set of beneficiaries list.

3. Removals from the beneficiary lists will happen only if countries are listed as high or upper-middle income 3 years in a row.

4. There are many procedures (temporary withdrawals, safeguards) which affect operators—yet the current regulation is often silent about how these work and how operators can defend their rights. The new GSP has made all of these more detailed and transparent.

5. The new preferences will apply as of 1 January 2014—but the legal texts and rules of the new GSP have been published more than one year in advance. This provides ample time for economic operators to adapt.

What else has been changed?

The new GSP also introduces balanced improvements to the conditions for withdrawal from the whole GSP scheme – notably in making explicit that unfair trading practices include those affecting the supply of raw materials.

Procedures that trigger the general safeguard clause have also been clarified, and special safeguards have been expanded to cover all textiles and ethanol.

Institutional adaptations

The new institutional framework of the Treaty of Lisbon, with the enhanced role of the European Parliament in trade policy, is reflected in the new GSP. The GSP is a dynamic tool, allowing countries to potentially come in and out of the beneficiary lists. This implies that the different thresholds foreseen in the regulation which are linked to the beneficiary pool (graduation, vulnerability), as well as the different lists of beneficiaries, will have to be amended swiftly. In particular the text of the new GSP foresees that all these elements, which have been included in different annexes, can be amended by the Commission via delegated acts and not via the ordinary legislative procedure which would take much longer.

So what happens next?

The fact that the new preferences will apply only on 1 January 2014, i.e., more than one year after publication of the new GSP, provides ample time for operators to adapt. Until then, the current preferences under Council Regulation (EC) No. 732/2008, as extended by Regulation (EU) No 512/2011 of the European Parliament and of the Council will, apply.

The EU will publish in 2013 legal acts covering amongst others the following aspects:

  • procedures regarding GSP+ entry, withdrawals and safeguards;
  • list of graduated sectors;
  • adjustments to the GSP beneficiary list due to changes in World Bank classification or provisional application of market access arrangements such as free trade agreements,
  • countries which receive GSP+.

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