Global System of Trade Preferences - Explained
What is the Global System of Trade Preferences?
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Table of ContentsWhat is the Global System of Trade Preferences (GSTP)?How does the Global System of Trade Preferences Work?Academic Research on The General System of Trade Preferences among Developing Countries (GSTP)
What is the Global System of Trade Preferences (GSTP)?
The Global System of Trade Preferences or GSTP is a trade agreement developed by the United Nations. It was signed and consented to by developing countries under the aegis of the United Nations on 13th April, 1988.
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How does the Global System of Trade Preferences Work?
This trade agreement is referred to as the Global System of Trade Preferences (GSTP). GSTP as initiated by the UN is targeted at enhancing profitable and efficient trade between diverse economies within the edifice of the United Nations. GSTP is not just a mere agreement, rather, it is strategically designed to uphold and elevate trade between emerging countries.
Also, the preferential trade agreement has provision for tariff concessions in order to reduce the costs, taxes and levies paid for imported goods. This will in turn aid a smooth business transaction between these developing countries. However, this preferential trade agreement cannot be well executed without the involvement of WTO, World Trade Organisation. Hence, the UN saw the necessity to notify WTO of this signed trade agreement.
Although, GSTP agreement came into came into force on 19th April 1989, WTO was notified on 25th September 1989. Nine developing countries consented to the preferential tragedy agreement at the initial stage. These countries are regarded to as initial members or beneficiaries of GSTP, they are; Zimbabwe, Cuba, Tanzania, Sri Lanka, Nigeria, Singapore, India, Ghana and Bangladesh. However, after GSTP came into force in 1989, many other countries both developing and less-developed showed interest to be members of GSTP.
In accordance to the United Nations Conference on Trade and Development, the promotion of intra-developing-country trade is crucial to GSTP. This refers to a sustainable mutual trade or business transactions between evolving countries. The promotion of intra-developing-country trade would also help to stimulate development of countries across boarders. With an increase in the membership of GSTP in 1989, where countries like Uruguay, Uganda and many others joined, there are seven notable members of GSTP that are Less Developed Countries, otherwise known as LDCs.
Countries of the world are categorized under three economies, these are; advanced economies, emerging or developing economies and the less developed countries or economies. LDCs are countries characterised with minimal industrial activities, low incomes for citizens and well as low standards of living. Tanzania, Sudan, Myanmar, Mozambique, Guinea, Benin, and Bangladesh are members of GSTP that are LDCs. Also, Romania and Yugoslavia were one members before their memberships were withdrawn after they joined the European Union.
GSTP is sensitive to the needs of the members, especially that of the LDCs. To cater for the specific needs of the LDCs, preferential measures in favor of LDCs was incorporated into GSTP. With these preferential measures, LDCa are expected to upgrade from their current status to become developing economies. Other members of GSTP are also expected to uphold these preferential measures while trading with LDCs. That is, developing countries should offer favorable and preferential terms when dealing with LDCs and expect nothing in return from them. This means that LDCs do not need to return the favor or preferential treatments they receive from other countries while transacting with them. This also entails that if a nation like India allows importation of good from Guinea without any importation tariff or levy, Guinea as a LDC should not be expected to do the same considering their status.
Academic Research on The General System of Trade Preferences among Developing Countries (GSTP)
- The developing countries and regionalism, Langhammer, R. J. (1992). JCMS: Journal of Common Market Studies, 30(2), 211-232.
- Developing countries and unilateral trade preferences in the new international trading system, Onguglo, B. (1999). The Brookings Institution Press/Organization of American States, Washington, DC.
- Why do countries seek regional trade agreements?, Whalley, J. (1998). In The regionalization of the world economy(pp. 63-90). University of Chicago Press. This paper emphasizes the range of factors which enter country calculations to seek regional trading arrangements. These include conventional access benefits, but extend to safe haven concerns, the use of trade arrangements to underpin security arrangements, and tactical interplay between multilateral and regional trade negotiating positions. In a final section, results from an earlier modelling effort by Perroni and Whalley are used to emphasize that non- traditional objectives may be quantitatively more important than traditionally analyzed objectives.
- Conditions in the European Community Generalized System of Preferences: A Little Known Case with Major Repercussions for Political Conditionality in US Trade , Howse, R. (2003). Chi. J. Int'l L., 4, 385. Trade sanctions as a means of foreign policy on trade has been a constant issue in the United States. Trade sanctions refer to penalties meted out by a nation to another nation, the penalties can come in form of financial constraints, trade barriers, tariffs and other levies. The use of these sanctions has been a burning issue, not only because its efficacies and capabilities are questionable but because these sanctions violate the rules of World Trade Organization (WTO) and the provisions of GATT, General Agreement on Tariffs and Trade as claimed by free traders. The trade sanctions are liable to be effected on innocent victims and they can sometimes be politically motivated. As part of the policies of WTO, in terms of goods, free trade is not in any way placed above political values, although there are exemptions in cases of trade necessary for the protection of public morals and for security purposes. Free trade however refers to trade that takes a natural course, a trade between buyers and sellers without tariffs, levies, quotas, restrictions and prohibitions and all these are contrary to what trade sanctions stand to gain. It has however been a longstanding issue on how much freedom has been accorded to trade sanctions, even the politically-motivated sanctions by WTO.
- On the potential for expanding South-South trade through the extension of mutual preferences among developing countries, Erzan, R., Laird, S., & Yeats, A. (1988). World Development, 16(12), 1441-1454. To further establish the impact of GSTP on member countries both developing economies and LDCs, a study has been carried out and it highlighted the enormous effects of GSTP. Among many strategies employed by GSTP, Collective self-reliance is an important strategy that allows the dependability of member countries on one another through trade, which will in turn give room for independence and development of each country in terms of trade. This study however shows that there is a higher margin in favor of South-South trade and this could be as a result of trade preferences. This South-South realises about $14 billion annually and this is higher that all existing margins. Therefore, in terms of the benefits of GSTP enjoyed by member countries, there might be marginalisation. Some countries may benefit more than the others, leaving the benefits unequally distributed among members of GSTP. It further implies that regional trade agreement can result in dangerous liaison between certain countries. Hence, some emerging economies are likely to suffer retardation in trade and development due to unhealthy marginalisation.
- Regional trade agreements: Dangerous liaisons?, Laird, S. (1999). Regional trade agreements: Dangerous liaisons?. World Economy, 22(9), 1179-1200.
- A SouthSouth survival strategy: the potential for trade among developing countries, Fugazza, M., & Vanzetti, D. (2008). World Economy, 31(5), 663-684. Despite that significant barriers in trade and tariffs still exist, the reduction in trade barrier and tariff has brought about a blooming trade and transaction between the South-South, as well as expansion of trade between other developing countries. Nevertheless, while the Southern markets experience an unrivalled growth in trade, some other developing countries are left in their shadow due to their unwillingness to further reduce or remove trade tariffs and barriers. The removal of trade barriers by Southern markets has opened up the market for gains from advanced countries as well as regional free trade unlike the Northern counterpart. The removal of trade barriers has proven to be a survival strategy devised by the Southern markets and this has helped them over the years. Contrary to the Removal of trade barriers which the Southern markets adopted, the Northern markets upheld preferential bilateral tariffs and this made Northern market a missed opportunity for emerging economies. According to the Global Trade Analysis Project (GTAP) model, which is an equilibrium model, the impacts of both the Southern and Northern markets were highlighted. While the Northern market would realise annual welfare gains of $22 billion, the Southern would realise a much larger percentage as a result of removal of barriers. Therefore, the removal of barriers as a survival strategy for the South, if utilised by developing countries has potential effects of improving trade and development among willing developing countries. It will create an access to developed country markets as well as multilateral liberalisation of emerging economies.
- Generalized system of preferences in general agreement on tariffs and trade/World Trade Organization: History and current issues, Dos Santos, N. B., Farias, R., & Cunha, R. (2005). J. World Trade, 39, 637. There is a present study by GATT and WTO that focuses on the Generalized System of Preferences (GSP) in relation to agreement of tariffs by developed and developing countries. The study also focuses on concepts like Multilateral Trading System (MTS) as well as the impacts of the Most-Favoured-Nation (MFN) on general agreements on tariffs and trade in the world. There are certain policies and demands of MTS such as special and differential treatment of countries while doing trade and business transactions. The policies or demands of MTS have overtime define how countries structure their market rules in compliance to the demands of MTS. The study further explains preferential treatment using two examples as case studies. These are the role of the American GSP scheme and the dispute of India and the European Union about the European Unions GSP scheme. However, the notion of preferential treatment or agreement has created a lot of conflicts among developing countries because of its perceived tendency to decrease the importance of Regional Trade Agreements (RTAs) which is an integral part of MTS. These deficiencies and internal issues further created the need for a paradigm shift in MTS and gave rise to the concept of Most-Favoured-Nation (MFN)
- GSTP tariff reduction and its effects on south-south trade in manufactures, Linnemann, H., & Verbruggen, H. (1991). World Development, 19(5), 539-551. Import tariffs on trade have great impact on manufactures or goods both at the export level and import level. And the impact can either be short-termed or long-termed.
- Trade preference erosion: Measurement and policy response, Bussolo, M., & E. De Hoyos, R. (Eds.). (2009). The World Bank.