Criticism of the General System of Preferences
The purpose of this article is to recall the definition of GSP, and then to bring to light some of the critics that have been done about this concept, first, as stated in Resolution 21 taken at the UNCTAD Conference in New Delhi in 1968, "… the objectives of the generalized, non-reciprocal, non-discriminatory system of preferences in favour of the developing countries, including special measures in favour of the least advanced among the developing countries, should be:
- (a) To increase their export earnings
- (b) To promote their industrialization
- (c) To accelerate their rates of economic growth.
Is the GSP the final solution to enhance the economy of poor countries?
Many economists believe that GSP does not seem to be a suitable instrument to promote sustainable economic growth and development of low-income countries. Here are the major argument that they present to support their opinion.
First, GSP schemes are criticized for being not so much an instrument to promote the exports of developing countries but more the means to improve the trade position of industrialized countries (see e. g. Mattoo et al., 2003). An example for this so-called opportunistic behavior is the specific design of RoO criteria. As a commonly used condition, local content rules require a minimum value-added within the exporting country. GSP schemes typically allow so-called partial cumulation of local content which means that intermediate input factors imported from the GSP granting country can also be included in the local value-added required by RoO. As a result, GSP receiving countries are likely to import intermediate inputs from the GSP granting country which thereby also benefits from GSP.
Additionally, to be eligible for GSP, companies have to comply with complex rules of origin (RoO) which induce costs for administrative procedures and specific technical requirements. Since the various GSP granting countries demand different RoO, the corresponding costs for the exporters can be prohibitively high. For instance, Anson et al. (2005) estimate the costs of compliance with RoO in the North American Free Trade Agreement (NAFTA) at 6%. UNCTAD (2003) argues that compliance costs may generally be higher in developing countries than in developed economies due to the lack of administrative and industrial capacities.
Second, Criticism has been leveled noting that most GSP programs are not completely generalized with respect to products, and this is by design. That is, they don't cover products of greatest export interest to low-income developing countries lacking natural resources. In the United States and many other rich countries, domestic producers of "simple" manufactured goods, such as textiles, leather goods, ceramics, glass and steel, have long claimed that they could not compete with large quantities of imports. Thus, such products have been categorically excluded from GSP coverage under the U.S. and many other GSP programs. Critics assert that these excluded products are precisely the kinds of manufactures that most developing countries are able to export, the argument being that developing countries may not be able to efficiently produce things like locomotives or telecommunications satellites, but they can make shirts.
Furthermore, 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 mow 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. Despite this, most advanced emerging economies are the biggest beneficiaries of GSP, 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.
There are many arguments that support that the effects of GSP have been found to be controversial to the expected results. However, some of these gaps have been closed by the U.S. through creation of supplemental preference programs like the African Growth and Opportunity Act. Also, EU is proposing to reform the GSP in order to achieve a better focus on those countries in need, promote care principles of sustainable development and good governance, and enhance legal certainty and stability.