The Hindu Business Line : Generalised System of Preferences

Developing countries have had a love-hate relationship with the Generalised System of Preferences (GSP). As the programme has 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. A Congressional Research Service document characterised the US GSP programme "as a foreign policy tool as well as international trade device." (CRS Report No. RL 33663, Generalised System of Preferences: Background and Renewal Debate, Vivian Jones, September 26, 2006.)

It was a benign era when developing countries pleaded for special and differential treatment (SDT) within the GATT regime. In the late 1950s and the early 1960s, development per se had a higher preference than trade. Development economists such as Raul Prebisch and Hans Singer held the view that developing countries needed to create industrial capacity in non-traditional manufacturing both to reduce import dependence and to diversify from primary commodities, which were subject to adverse terms of trade.

The United Nations Conference on Trade and Development (UNCTAD) was established in 1964 with Raul Prebisch as its first Secretary General. In 1968, the UNCTAD recommended the programme of GSP under which industrialised countries would grant trade preferences to developing countries.

The concept of GSP was in conflict with the basic `Most Favoured Nation' rule of the GATT. Special waivers were given under the GATT to resolve it. Waivers given in 1971, as a temporary measure, were made permanent in 1979 through the `Enabling Clause' introduced during the Tokyo Round. Part IV and the Enabling Clause did not (and could not) define issues such as country eligibility, product coverage, preference margins, etc. These were assigned to the discretion of preference granting countries. SDT provisions, including the GSP, were, so to say, commitments of intent and could well be enlarged to include non-trade conditionalities. The harsh reality was that there was no common purpose, which would result in the adoption of harmonised rules for granting preferences.

Fulfils graduation criteria

It was in 1974 that US Congress authorised the GSP in Title V and the Trade Act of 1974 (P.L. 93-618). It authorised the President to grant duty-free status under the GSP for any eligible product from any beneficiary developing country (BDC). It provided economic criteria in deciding such action and criteria for designating eligible countries and products. These are captured by `graduation' of countries and determination of their `competitive need limits' (CNLs). The President had the discretion to suspend the operation of any of these conditions.

Conforming to labour clauses

The mandatory conditions are that the BDC should conform to the labour conditions such as worker rights, minimum wages, elimination of child labour, etc In short, these are attempts to enforce "labour clauses" which are yet to be settled in the WTO and resisted by developing countries.

The GSP operated smoothly for many years. It was re-authorised in 1984 and seven more authorisations extended its validity up to the end of December 2006. In the early years, it was extended routinely and, if necessary, even with retrospective effect if there was delay in re-enactment. This time however it began to feel the backlash of the negotiations under WTO in the Doha Development Agenda (DDA).

In 2002, India tried to attack the manner of operation of EU's GSP as arbitrary. This was a bold step and came to be known as India-EU Drugs case. The idea was to ensure that the GSP operated in an even-handed manner applicable to all developing countries.

The dispute dragged on for two years. At the end of it, while inclusion of "drug administration" was ruled as violative of the GATT rules; it left all other issues open. India won the battle, but did not gain any new territory. Some commentators argued that if such challenges to the GSP multiply, donor countries would choose to forego GSP arrangements altogether. In the meantime, it got linked to the DDA.

Survival of GSP

It was evident that the GSP would not survive if the WTO negotiations proved successful. Sadly, the DDA ran aground. The US authorities, especially Congress, took note that the demands in DDA were led by India and Brazil. Sadly, they were also the leading beneficiaries of the US GSP. As early as January 2006, Senate Finance Committee Chairman Chuck Grassley commented that renewal of GSP was "not a foregone conclusion" and that its extension should be tied to the US receiving reciprocal benefits as part of a successful conclusion of the Doha Round. In a Senate hearing in May 2006, Ms Susan Schwab, the US Trade Representative-designate, warned them that she might oppose GSP renewal as a result of their obstruction or tighten the eligibility requirements.

Limiting eligibility

By early August 2006, there were reports that the Bush Administration was considering ending trade concessions to India and Brazil under the GSP.

A review was undertaken and Ms Susan Schwab explained, "The review I am announcing today, the first in 20 years, will help make certain that we are administering the program consistent with the statutory criteria." The idea was whether to "limit, suspend or withdraw the eligibility of 13 countries that shipped more than $100 million worth of goods under the program in 2005 or accounted for more than 0.25 per cent world good exports." The list of countries included India and Brazil. This message affected Indian exporters of gem and jewellery. Data provided in the CRS suggest that in 2005 India exported gold jewellery worth $1.6 billion; it supplied 27.4 per cent of US imports. Export of other items such as gold and silver jewellery do not exceed $100 million.

The review was completed by the USTR and the President signed the legislation extending the GSP for two more years ending December 2008. The CNLs have been modified as: $125 million in 2006 and 50 per cent of total US imports of that product. Separate notifications rescinding waivers will be issued by late February 2006 based on full trade data. According to preliminary indications in the USTR's press release, India will lose the GSP benefits for gold jewellery and brass lamps. Both the sectors are sensitive and labour intensive. Gem and jewellery, diamond trade in particular, employs nearly 2 million people. More importantly, it would jeopardise our export strategy at least in the short term.

As explained by the Reserve Bank of India, "Apart from the changing pattern of demand, the proposal in the US to do away with the Generalised System of Preferences (GSP) concessions extended to India is also likely to deter the prospects of India's gem and jewellery exports" (Reserve Bank of India Bulletin, December 2006, p.1539). Some strategies and roadmaps (Vision 2015) announced recently for the gem and jewellery sector. These do not seem to take note of the special situation created in the US for exports. Any new strategy for exports to the US is on the basis that carrots are not forever.

(The author, a former Finance Ministry official, has extensive experience in international, financial and trade issues.)