"World Trading System" - What is it all about?

Questions about Regional and Preferential agreements and the GSP

Topics:

	Compensation for Loss of Preferential Market Access
	Generalized System of Preferences (GSP)
	Multi-Fibre Agreement (MFA)
	Reconciling with Multilateral Trading System and MFN
	Requirements for Customs Unions and Free-trade Areas

Compensation for Loss of Preferential Market Access:
The tariff reductions that are being implemented by developed countries on a Most-Favoured-Nation (MFN) basis as a result of the Uruguay Round are eroding the margins of preference for developing countries under the GSP. Is any compensation for this loss of preferential market access being envisaged? Compensation for loss of preference margins under the GSP due to MFN tariff reductions have been requested from time to time by GSP recipient countries. Top of page		However, the developed countries extending GSP preferences have consistently refused this request on the ground that the GSP was a voluntary scheme introduced on the understanding that it would not prevent the further reduction or elimination of MFN tariffs in future multilateral trade negotiations.

Generalized System of Preferences (GSP):
What is the relationship between the multilateral trading system and the Generalized System of Preferences (GSP)? Under the GSP, developed countries have for some time, on a voluntary and unilateral basis, applied preferential tariff rates to imports from developing countries, while normal MFN rates are applied to imports from other countries. Since this amounted to a discriminatory treatment in favour of developing countries and thereby constituted a deviation from the MFN principle, the previous GATT at the time of inception of the GSP granted a general waiver (an exemption from the obligation to treat all member states alike). Top of page		How long will the GSP continue to exist? The GSP is not time-limited, but national schemes have been subject to frequent changes and modifications. The tariffs under the GSP are therefore less predictable than the MNF tariffs which are legally bound in the WTO against unilateral increases.

Multi-Fibre Agreement (MFA):
Will the phasing out of the Multi-Fibre Agreement (MFA) under the Agreement on Textiles and Clothing (ATC) have any consequences on the GSP? The MFA was the legal framework under which certain developed countries imposed restrictions, such as quotas, on the volume or value of textile and clothing imports. The GSP, on the other hand, is an open-ended scheme of tariff preferences in favour of developing countries--although some GSP donors apply such preferential treatment only within certain quantity or value limits. Top of page		Therefore, there is no direct legal linkage between the two arrangements. However, the phasing-out of MFA restrictions will tend to increase the importance of the GSP tariff preferences for the supplying developing countries.

Reconciling with Multilateral Trading System and MFN:
How can regional/preferential agreements be reconciled with the multilateral trading system and in particular with the most-favoured-nation (MFN) clause? While the most-favoured-national principle of the WTO (under which each member country must accord the same treatment to all other members) is the cornerstone of the multilateral trading system, it is at the same time recognized that the volume of trade can be increased through closer economic integration between countries. Such integration most frequently takes the form of a customs union such as the European Union or MERCOSUR, or a free-trade area such as ASEAN and NAFTA, and provides for preferential market access in trade between the member states.   Top of page		However, the WTO stipulates that these agreements should not raise barriers to the trade of other member states of the WTO. It therefore contains strict requirements for the conclusion of these preferential agreements. A special WTO committee, set up to examine all such agreements, has the power to recommend to the parties a modification of the agreements if they do not respect the conditions and criteria laid down in the WTO.

Requirements for Customs Unions and Free-trade Areas:
Which are the specific requirements of the WTO for the conclusion of customs unions and free-trade areas? In a free-trade area: import duties and other restrictive regulations of commerce must be eliminated on substantially all the trade between its members; the import regime of the members applicable to third countries must not be more restrictive compared to the situation before the creation of the free-trade area.     Top of page		In a customs union: the same conditions apply. In addition, however, its members shall apply the same import duties and other regulations of commerce vis-a-vis third countries. The members thereby become a single customs territory. Therefore, a customs union is a tighter economic entity whose members apply a common external tariff to trade with third countries. In a free-trade area, members may maintain their own national foreign trade regime, provided that the internal trade is free of tariffs and other border measures.