Generalized System Of Preferences

Published Apr 29, 2024

Definition of Generalized System of Preferences (GSP)

The Generalized System of Preferences (GSP) is an international trade policy that allows for the preferential treatment of imports from developing countries into developed countries. It is designed to promote economic growth in the developing world by providing tariff reductions or exemptions on certain products. The GSP aims to increase export revenues, promote industrialization, and enhance the standard of living in beneficiary countries without imposing reciprocal trade concessions.

How GSP Works

To qualify for GSP benefits, countries must meet certain eligibility criteria set by the developed countries offering the preferences. These criteria often involve respecting human rights, committing to environmental protection standards, and ensuring good governance practices. Once eligible, products from these countries can enter the markets of developed countries at reduced tariff rates or, in some cases, completely duty-free. However, the list of products eligible for GSP benefits and the countries that can receive them vary between different developed countries’ GSP programs.

Example

Consider a small textile manufacturer in Bangladesh, a country that benefits from the GSP. The manufacturer produces cotton shirts that, under normal circumstances, would face a tariff of 12% when exported to the European Union (EU). However, under the EU’s GSP, these shirts are eligible for duty-free entry into the EU market. This tariff reduction makes the shirts more competitive in price compared to similar products from countries that do not benefit from the GSP, thereby encouraging the growth of Bangladesh’s textile sector and contributing to the country’s economic development.

Importance of GSP

The GSP is crucial for developing countries as it facilitates access to large consumer markets in developed countries. It helps them diversify their economies, create employment opportunities, and reduce poverty. For developed countries, the GSP forms part of their foreign policy and development assistance programs, enabling them to support economic development in poorer nations while also potentially benefiting from access to raw materials and cheaper goods.

Frequently Asked Questions (FAQ)

What is the difference between GSP and other trade agreements?

Unlike comprehensive trade agreements that often include a wide range of trade and investment provisions requiring reciprocal concessions, the GSP is unilateral. This means that developing countries do not need to give anything in return to benefit from the GSP preferences granted by developed countries. Furthermore, while trade agreements typically cover nearly all trade between the signing countries, GSP focuses on specific products from developing countries.

Can a country lose its GSP status?

Yes, countries can lose their GSP status if they no longer meet the eligibility criteria, such as failing to uphold human rights or not meeting the required governance standards. Additionally, countries can graduate out of the GSP if they reach a certain level of economic development that deems them capable of competing in the international market without preferential treatment.

How do developed countries benefit from offering GSP?

While the primary goal of the GSP is to support economic development in poorer nations, developed countries also benefit in several ways. By offering GSP, developed countries can foster stronger political and economic ties with developing countries, which can be strategically important. Additionally, consumers in developed countries gain access to a wider variety of goods at lower prices. The GSP can also stimulate business for importers and retailers in developed countries by lowering import costs for goods from GSP beneficiary countries.

The Generalized System of Preferences illustrates the interdependence of global economies and the role of trade policy in supporting developing countries’ growth. By lowering trade barriers, the GSP aims to create a more equitable international trading system that promotes sustainable development and poverty reduction.