Trade Preferences for Developing Countries

One of the most original new initiatives in the field of international trade policy aimed at stimulating economic development is the concept of preferential treatment in favour of the developing countries. In a strict sense the concept is not new, as the industrial centre has historically devoted special attention to the periphery especially under colonial-type arrangements. Grants in AID and concessionary development loans are other examples. However, the new initiative takes a non-traditional approach by granting exports from developing countries preferential access to the markets of the industrial centre, i.e. these preferential arrangements constitute a ‘trade’ policy rather than a more traditional ‘AID’ policy.

A major prerequisite for putting the system of generalised preferences into operation is to determine which countries would be the recipients of the special tariff rates. Since the system is based on preferential treatment, at least two groups of countries must be identified — those whose exports would benefit and those whose exports would not.

The primary objective of the G.S.P. is to expand exports and export earnings of developing countries by stimulating donor-country imports of manufactured products from them, the incentive being provided by preferential tariff rates. Before judging its effectiveness, however, this programme must be placed in its proper perspective. First and foremost it is a tariff policy, and therefore can contribute to increased exports of only those products subject to duty. There is no scope within the context of the G.S.P. for assisting the export prospects of products which currently enter donor countries free of duty on an M.F.N. basis.

In introducing its preference schemes each donor country reserves the right to withdraw or modify G.S.P. tariff treatment; and such limitations could be applied against a given beneficiary country for one or more products or against a given product for one or more beneficiaries. Thus the donor-country reservation was extremely broad in its potential application.

The primary objective of the G.S.P. is to stimulate production and employment in export sectors of the developing countries. However, preferential tariff rates as a stimulus might lead to a different result, namely a deflection of international trade among industrial countries. Instead of one industrial nation exporting goods directly to another and facing M.F.N. tariffs, the exporter might send the goods first to a beneficiary developing country for importation and immediate re-exportation to the initially intended industrial nation, thereby gaining customs clearance under G.S.P. tariff rates. In this way the G.S.P. could initiate a system of trade diversion through beneficiary countries, stimulating the creation of ‘trading houses’ rather than industrial production and employment. It is true that a certain degree of ‘paper-processing’ employment and income would be generated in the developing countries, but the benefits of such economic activity would fall far short of the G.S.P. objectives of industrialisation and acceleration of economic growth. To prevent such a deflection of trade, ‘rules of origin’ were established. These rules constitute a set of requirements designed to prevent the beneficiaries from simply re-exporting goods produced elsewhere unless such goods were substantially processed in the exporting beneficiary developing country.

At the time the G.S.P. was being negotiated international trade was ‘considered’ to be governed by the most-favoured-nation (M.F.N.) principle of GATT. However, in reality there were a number of preferential arrangements in operation, for example the European Customs Union (E.E.C), the European Free Trade Area (EFTA), the British Commonwealth Area, and the E.E.C. association agreement with eighteen African countries (Yaoundé Convention). Each of these exceptions to the M.N.F. principle provided for preferential tariff treatment on a reciprocal basis. In essence each party to an agreement discriminated against imports from third countries and in favour of imports from other members of its respective agreement. Thus the Commonwealth developing countries discriminated in favour of U.K. exports and received preferential access for their exports in U.K. markets; similarly the African states associated with the E.E.C. granted special access to E.E.C. exports and received special access to E.E.C. markets. The major tool of discrimination was preferential tariff rates.

Soon after the introduction of the first G.S.P. scheme in 1971 and before the United States introduced the last scheme in 1976, the big three G.S.P. donors (the United States, the E.E.C. and Japan) set the stage for a new round of multilateral tariff negotiations (the so-called M.T.N.). As of this date, the negotiations have not yielded any concrete results but are still actively proceeding. If the end-result is anything like that which emerged from the Kennedy Round, where duties on manufactured products were reduced by an average of 35 per cent, this new round of tariff negotiations will have dire implications for the continuing value of the G.S.P. as a trade policy benefiting the developing countries.

The developing countries first began the call for a new international economic order during the late 1950s. Their initial complaints stemmed from an impotence of domestic policy initiatives to speed their rates of economic development. They found themselves excessively dependent upon the developed community for the requisites of economic development — industrial machinery and technical expertise — requisites which they could not purchase in sufficient quantities due to inadequate foreign-exchange earnings (foreign aid was insufficient to fill the gap).