Preferential trade arrangements

Distortion of international trade by discriminatory preference agreements
Discrimination under the generalized system of preferences
Preferential trade agreements (collectively know as the generalized system of preferences or "GSP") between developed and developing countries may favour one or more developing countries at the expense of others ("most-favoured-nation" status). Discriminatory practices and privileged treatment may apply to developing countries' imports or exports or to both. Preferential trade agreements relating to customs duties, quantitative restrictions, licences, technical and safety specifications or standards, inspections, packing, loading and unloading, and various other procedures, and their related costs are closely related to preferential trade financing agreements such as credits and other direct aid for import purchases, monetary cooperation, import-related technical assistance, and banking and financial services support. Preferential agreements may also apply to bartering transactions, and similar arrangements. All of the foregoing practices and their many variants discriminate against a number of developing countries, denying them markets or adequate prices for their exports and increasing the costs of their imports. Such economic discrimination may be part of the foreign policy of the superpowers and their allies, intended to support friendly developing countries while repressing or undermining others.

Trade preferences, and in particular tariff preferences, do not by themselves provide a full explanation of the geographical pattern of the trade flows in individual commodities or even of a country's total trade. Several effects ascribed to trade preferences may in fact be due to special links existing in fields other than trade. Non-tariff measures (NTMs) linked to GSP schemes can significantly reduce the benefits of these schemes. Major beneficiaries under the various GSP schemes appear to be those most affected by NTMs. Under the conditions of depressed world commodity markets and falling prices, special trade preferences have tended to produce changes in the geographical pattern of trade; under such conditions, however, tariff preferences alone do little to stimulate new investment in the expansion of production.

Since the attainment of political independence, the economic structure of many developing countries, and particularly of those which acceded to political independence relatively recently, has remained largely determined by their past economic ties. They have continued to export predominantly primary commodities, and the developed countries linked with them by preferential ties have remained their most important markets as well as suppliers. With a view to preserving their position in their most important export markets, securing better access to those sheltered markets for their future processed products and obtaining special financial and other advantages important for their development, most developing countries decide continue their special economic ties, including preferential tariffs and other conditions of mutual trade with the developed countries concerned.

The attainment of political independence by a great number of developing countries, particularly in Africa, coincided in time with the formation of regional economic groupings by the developed countries in Europe. Both the European Economic Community (EEC) and the European Free Trade Association (EFTA) include key countries of the major existing preferential systems involving a considerable number of developing countries. The regional economic integration of the developed countries has an important impact on special preferential arrangements. The establishment of the EEC/EU led to a geographical extension of the area in which goods enjoy preferential duty-free access. Originally the overseas territories (in particular French and to a certain extent also Italian, Belgian and Dutch) enjoyed preference in their respective metropolitan markets. This preferential access was extended to all other markets of the EEC/EU, for instance, to the market of the (then) Federal Republic of Germany which - while being an important dynamic market - had until then been accessible to all developing countries on equal terms. On the other hand, there was a general reduction in preferential margins and a gradual transition took place from special marketing arrangements, securing for some products of the developing countries guaranteed prices and outlets (in France and Italy), to a system of world market prices.

The associated countries extended reciprocal tariff and quota preferences to all EEC/EU members and began to dismantle their customs duties and quantitative restrictions (with certain exceptions) [vis-à-vis] all EEC/EU members. In the case of EFTA, the position of the developing countries enjoying Commonwealth preferences was affected by the formation of the free trade area, since their industries and products have to compete on equal terms in the UK market not only with the British and other developed Commonwealth countries' industries, but also with duty-free imports from other EFTA members, so far as industrial products are concerned. The extent to which they are affected depends, of course, on the commodity composition and geographical pattern of their export trade. While in the case of the EEC/EU there has been practically no effect on the trade of the associated developing countries, owing mainly to the low level of development of their manufacturing industries, in the case of EFTA the consequence was a significant dilution of the competitive advantages derived from Commonwealth preferences.

The extension of special preferences by all the EEC/EU countries to the associated States has not so far brought about a substantial change in the export pattern of the latter, a fact which has prompted them to call for the strengthening of special advantages. On the other hand, the extension of preferential access to other developed country markets previously open to all countries on equal terms gave rise to fears on the part of the outside developing countries that important markets for their traditional export products might be threatened. The further extension of preferential treatment to additional developed country markets, and to additional developing countries, as well as the lack of progress towards general solutions favourable to all developing countries, induced the developing countries that were being discriminated against to seek special solutions to their problems, either by applying for preferential treatment or by exploring other defensive measures.

The chain reaction of the kind witnessed during recent years has shown that any geographical extension of special preferences such as occurred in connection with the formation of the EEC/EU creates tendencies towards further extensions of the same nature. A proliferation of special preferential arrangements places in a particularly unfavourable position those developing countries which do not enjoy preferential access to any developed market, as well as those whose exports consist of one or a few commodities for which the developed countries participating in the groupings are the main outlet. The territorial extension of the special preferential system implies not only a greater scope of discrimination, but also a greater potential internal self-sufficiency of the enlarged grouping. For countries outside the preferential area, the potential loss of markets is the more serious the more countries are included, the greater their production potential and the complementarity of their resources and the wider the preferential margin of discrimination. Moreover, the creation of large sheltered trade areas favours a possible shift of capital flows to the protected area.

Since a number of preferred countries are actual or potential producers of commodities that are also traditionally supplied by outside developing countries, a further proliferation of preferential trading arrangements is likely to have serious repercussions on other developing countries' exports to the developed countries belonging to such areas. Another important aspect is the repercussion which the reciprocal preferences enjoyed by developed countries in the preferential area produce on the progress in trade expansion, economic cooperation and regional or sub-regional integration among the developing countries.

Grave concern about the preferential policy of the EEC/EU persisted in Latin America. The Latin American countries, while requesting EEC/EU to eliminate special preferences, in particular within the framework of international commodity arrangements, gave serious consideration to the possibility of counterbalancing their disadvantages by the creation of preferential trading arrangements in the western hemisphere. The existing special preferential arrangements, as well as the tendency of several developing countries to arrive at similar special solutions, constitute important obstacles to the negotiation of general solutions in favour of all developing countries.

Preferential trade arrangements are being used to strengthen regional trading blocs. Examples are the EEC/EU, [US-Canada Free Trade Agreement] and [Australia-New Zealand Trade Agreement].

As recent examples of bilateral preferential trade treatment, in 1991 the EEC/EU extended preferential treatment to Bulgaria and Czechoslovakia on a temporary basis. It has also recognized Namibia as a beneficiary of the scheme, as have Norway, Switzerland and the USA. In 1990, the product coverage of the EEC/EU and the USA schemes was extended to cover new products offering a relatively significant opportunity to beneficiary countries (particularly least developed countries) to increase exports under the generalized system of preferences (GSP). In order to assist four Andean countries (Bolivia, Colombia, Ecuador and Peru) in their efforts to reduce dependence on drugs through the expansion of non-traditional exports, the EEC/EU and the USA are providing special treatment. In 1988, four Asian beneficiaries (Taiwan Province of China, Hong Kong, Republic of Korea and Singapore) graduated from the USA preferential scheme because they had reach industrialized status. The GSP scheme of Japan, the first to complete it 10-year period, has been extended for another 10 years until March 2001.

Total imports by OECD preference-giving countries in 1988 (other than Australia and New Zealand) amounted to roughly $371 billion, of which 76% or $282 billion were technically eligible for GSP (as "most-favoured-nation dutiable"). However, of this amount only $138 billion or 49% consisted of products actually covered by schemes, and $56.4 billion or 41% of the covered imports actually received preferential treatment. If preferential imports by Australia and New Zealand were added to the other imports of OECD preference-giving countries in 1988, the total preferential imports were approximately $60 billion. GSP utilization rates (ratio of imports which actually received preferential treatment to covered imports) varied from one scheme to another. However, two major schemes, namely the EEC/EU and the USA, these rates declined from 1987 to 1988. Following the graduation of the four Asia newly industrialized economies in 1988, the utilization rate of the USA GSP increased in 1989.

The average annual growth in preferential imports by OECD countries was almost twice as high as that of imports from all sources. This is due to the increased product coverage of the schemes, the enhancement of beneficiary export supply capabilities and efforts to diversify exports towards non-traditional products. However, the average annual rate of increase was least rapid in the case of least developed countries (LDCs). This was largely due to the high dependence by LDCs on exports of duty-free primary and resource products, rules of origin difficulties, and lack of expertise among LDC traders or ignorance concerning the advantages of the GSP.

While the continuance of special preferences in favour of those developing countries whose commodities cannot compete on the world markets appear at first sight to be the simplest course of action in many cases, such special trade preferences providing particular advantages to exports of some developing countries but discriminating against others cannot be considered as a solution for the problems of all or even most developing countries. Moreover, even from the standpoint of the original preferred countries, the extension of special preferences to additional developing countries might in a number of cases remove valuable special trade advantages previously enjoyed only by them.

Taking account of the vital need of all developing countries, including those receiving special preferences, for a general solution of their fundamental trade and development problems, as well as of the dangers of the proliferation of the special preferential arrangements, the replacement of special preferences by adequate world-wide solutions is urgently required. Simultaneously, the elimination of reciprocal preferences enjoyed by developed countries would reduce the losses resulting for some developing countries from the abolition of special preferences.

1. The general economic, trade and financial position of countries enjoying special preferences explains why the transition from special preferences to equal competition may give rise to considerable problems for most of them and, in particular, for those which could not compete efficiently with some other developing countries or which depend on commodities for which the outlook is not encouraging.

The position of such individual countries varies according to the commodity composition and geographical breakdown of their exports, as well as according to the nature and scope of their existing links with the developed countries and the economic potential of each of them. For several of them, however, an elimination of special trade preferences would require important adjustments of their production and marketing to wider competition, an expansion of their exports to new markets, both developed and developing, and a greater geographical spread and diversification of their commodity trade. The adjustment, even if facilitated by a stabilization of world commodity prices at remunerative levels, by improved access to the markets of the developed countries and by financial assistance, as well as by continuation of other than discriminatory special links with the individual developed countries, would not as far as most primary commodities are concerned, be accomplished without a certain transitional period. Irrespective of the disappearance of special preferences and other transitional arrangements, the special economic, social and political links that have traditionally strengthened the relations between certain countries should continue to support the development efforts of the individual developing countries concerned; the correct function of these links, however, should be to serve as instruments of economic cooperation rather than as means of discrimination against trade with outside countries.

2. [General Agreement on Tariffs and Trade] (GATT) rules in 1989 cover only about 60% of international trade in goods and services or -- put another way -- only 7% of world economic activity, and there is therefore much potential for further liberalization.

(D) Detailed problems