Generalized System of Preferences: Objectives, Benefits & More| UPSC Notes

GSP stands for Generalized system of preferences. It is a trade principle that allows Least developed countries (LDCs) and Developing Nations to receive special and differentiated treatment from a developed country in terms of the tariffs which are to be imposed on the products that are being exported by the developing country into the developed country. Under this arrangement, the developed country offering the benefits is known as the donor country while the developing country receiving the benefits is known as the beneficiary country.

Source: NSEZ

In this article on the Generalized System of Preferences UPSC, let us look at the Background of GSP, the concept of the Most favoured Nation, the Benefits of the Generalized System of Preference, and the US withdrawal of GSP for the UPSC IAS Exam.

 Generalized System of Preferences GSP

The Generalized System of Preferences GSP is a trade program designed to promote economic development in developing countries. It provides preferential duty-free or reduced-duty access to the markets of developed countries. It originated in the 1960s as an initiative of the United Nations Conference on Trade and Development (UNCTAD). It aimed to address the developmental challenges faced by developing countries in accessing international markets.

Objectives of Generalized System of Preferences GSP

The Generalized System of Preferences aims to stimulate economic growth and industrialization in developing countries by facilitating their access to global markets.

• The Generalized System of Preferences GSP program encourages diversification of export products and markets in beneficiary countries by providing tariff preferences on a wide range of goods.
• By enhancing export opportunities and generating employment in key sectors, GSP contributes to poverty reduction and improving living standards in beneficiary countries.
• GSP promotes mutually beneficial trade relations between developed and developing countries, fostering economic cooperation and integration.
• The preferences offered under GSP enable beneficiary countries to enhance their competitiveness in international trade. This thereby boosts their participation in the global economy.

Rules of Origin

In order to identify the products and the countries to which the Generalized System of Preferences system will apply there is a set of criteria. These are known as rules of origin.

Rules of origin are based on three principles:

• Origin criteria: The product enjoying tariff benefits must be produced and must originate in the developing country identified.
• Transport conditions: The product enjoying tariff benefits must pass through a defined route before reaching the donor country.
• Documentary evidence: Once the beneficiary product lands on the shores of the donor country certain documentary evidence has to be produced which is known as a ‘Certificate of Origin.’

Most Favored Nation status (MFN)

According to the most favored Nation status concept, every member of the WTO must enjoy the same trade privileges and restrictions in relation to a particular country, as are enjoyed by any one of the members. Thus, any member of the WTO may not discriminate between members in providing benefits and imposing restrictions. This principle was intended to encourage nations to join the WTO.

However, the Generalized System of Preferences GSP system allows developed nations to create exceptions in granting tariff benefits to developing and least developed countries. This is contrary to the principle of equal treatment under Most Favored Nation status.

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Benefits of Generalized System Preferences GSP

• GSP provides beneficiary countries with preferential access to the markets of developed countries, thereby expanding their export opportunities.
• Duty-free or reduced-duty treatment under GSP lowers the cost of exporting goods for beneficiary countries. This makes their products more competitive in international markets.
• GSP encourages beneficiary countries to diversify their export base by offering tariff preferences on a wide range of products. This reduces their reliance on a few export commodities.
• Generalized System of Preferences contributes to economic development by promoting investment, employment generation, and technological transfer in beneficiary countries.
• Increased export earnings and employment opportunities resulting from GSP facilitate poverty reduction and socio-economic development in beneficiary countries.

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Impact of US’ Withdrawal of GSP on India

• USA withdrew the Generalized System of Preferences GSP for India with effect from June 2019. In fact, India is not the only country to have experienced this.
• The US has withdrawn this system for over 94 products for all beneficiary countries, including India.
• Due to this move by the US, it is estimated that around 1,937 products exported by India to the US will be affected. The export value of these products is estimated to be nearly 5.6 billion dollars.
• These products will not be able to enjoy the tariff benefits offered earlier leading to them losing their competitive advantage.
• The most affected sectors are estimated to be textile agriculture and handicrafts, which are the most labor-intensive sectors of the Indian economy.
• India may lose its market share to rivals such as Vietnam and Bangladesh which will continue to enjoy duty-free access under the generalized system of preferences.
• On the other hand, many experts have argued that most of the products of India were being exported through the normal route and hence there may not be any major effect of the withdrawal of the GSP status on India.

List of Countries granting GSP preferences

The following countries grant benefits to developing and Least Developed Countries under the Generalized System of Preferences GSP program:

• Australia
• Belarus
• Canada
• European Union
• Iceland
• Japan
• Kazakhstan
• New Zealand
• Norway
• Russia
• Switzerland
• Turkey
• USA

Way Forward

• Efforts should be made to enhance awareness among beneficiary countries about the opportunities offered by GSP.
• Regular review of the Generalized System of Preferences schemes are essential to ensure their effectiveness in promoting sustainable development and poverty reduction.
• Technical assistance and capacity-building support should be provided to beneficiary countries to enhance their trade-related infrastructure.
• Dialogue and cooperation between beneficiary countries and granting countries are crucial for addressing issues related to market access.

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