Generalised System of Preferences

Indian Economy glossary

Also called: GSP · Topic: International Trade Policy, WTO and Intellectual Property · NCERT: Beyond NCERT

Meaning

The Generalised System of Preferences (GSP) is a scheme under which a developed country charges lower or zero tariffs (taxes on imports) on goods from developing countries. The developing country does not have to cut its own tariffs in return. This one-way treatment is called non-reciprocal.

It matters for two reasons. It is one of the main exceptions to the most-favoured-nation (MFN) rule of GATT/WTO. It is also a tool of special and differential treatment (S&DT), meant to help poorer countries sell more to rich markets. It is often in the news for India because the US withdrew India's GSP benefits in June 2019.

Explanation

How it works

  • The rule it breaks: Under MFN (GATT Art. I), any tariff benefit given to one WTO member must be given "immediately and unconditionally" to all members.

  • GSP openly breaks this. A rich country charges a lower tariff to some countries, the developing ones, and not to others.

  • The legal cover: The Enabling Clause (1979), which came out of the Tokyo Round (1973–79), is the legal basis for GSP. It lets developed countries give non-reciprocal preferences to developing countries without breaking WTO law.

  • Who decides: Each developed country runs its own GSP scheme, under its own national law.
  • That country alone decides which countries qualify, which products are covered and how big the tariff cut is.

  • So a GSP benefit is a unilateral gift, not a treaty right. The giver can withdraw it at any time.

  • Worked example (made-up numbers):

  • Say a rich country's normal MFN tariff on leather bags is 10%.
  • Under its GSP, bags from a developing country pay 0%.
  • A bag worth ₹1,000 now enters ₹100 cheaper than a similar bag from a non-GSP country.
  • This gap is the exporter's margin of preference, i.e. its price advantage over rivals.

Main features and conditions

  • Non-reciprocal: the beneficiary gives nothing back.
  • Generalised: in principle it is open to all developing countries, not to one chosen partner.
  • Non-discriminatory among beneficiaries: similar developing countries should get similar treatment.
  • Rules of origin: a good gets the lower tariff only if enough of it is really made in the beneficiary country. This stops other countries' goods being routed through it.
  • Graduation: a country, or one of its products, can be removed from the scheme once it becomes competitive enough or its income rises.
  • Conditions: many schemes are tied to things like labour rights, environmental rules or giving market access to the donor country.

Types and related schemes

  • Standard GSP: tariff cuts for a broad group of developing countries.
  • Deeper schemes for the poorest: some donors add extra layers for least developed countries (LDCs), the world's poorest countries as listed by the UN. The EU's GSP, for example, has such layers.
  • Duty-free quota-free (DFQF) access for LDCs follows the same idea in its strongest form: no tariff at all, and no limit on quantity.

What makes its value rise or fall

  • Rises when the donor's normal MFN tariffs are high, because the margin of preference is bigger.
  • Falls when:
  • MFN tariffs are cut for everyone (called preference erosion);
  • the donor signs FTAs with rival countries, which then get the same low tariff;
  • the rules of origin are too strict for the exporter to meet;
  • the country graduates out of the scheme or its benefits are withdrawn.

In India

  • India as a GSP beneficiary:
  • For many years Indian exporters sent goods to rich-country markets at lower tariffs under GSP schemes.
  • The US withdrew India's GSP benefits in June 2019. The US linked the decision to its complaint that India was not giving US goods fair market access. This shows GSP is a discretionary benefit that the giver controls.

  • Exporters of goods that used to enter the US at zero or low duty now pay the normal MFN tariff. This makes them less competitive.

  • India as a giver of preferences:

  • India runs its own one-way scheme for the poorest countries, the Duty Free Tariff Preference (DFTP) scheme (2008).

  • It gives LDCs duty-free access on about 98% of India's tariff lines.

  • The link to India's WTO position:

  • India says S&DT is a treaty-embedded right, meaning it is written into the WTO agreements and is not a favour.
  • GSP is the weak spot in this argument. Unlike binding S&DT provisions, GSP can be taken away one-sidedly, as the 2019 US decision showed.
  • Because there is no WTO definition of a "developing country" and each member declares itself one, the donor country decides for itself who gets GSP.

Don't confuse with

  • Free trade agreement (FTA): tariff cuts under an FTA (GATT Art. XXIV) are reciprocal and bind both sides by treaty. GSP is one-way and can be withdrawn by the giver alone.
  • Most-favoured-nation (MFN) treatment: MFN means the same tariff for all WTO members. GSP is a permitted exception that gives developing countries a lower tariff than MFN.
  • Enabling Clause: the Enabling Clause (1979) is the legal permission in WTO law. GSP is the actual scheme each developed country runs under that permission.
  • DFQF / India's DFTP: DFQF is aimed only at LDCs and gives zero duty with no quantity limits. GSP covers the wider group of developing countries, often with partial tariff cuts.

Prelims Hooks

  • GSP = non-reciprocal tariff cuts by developed countries on imports from developing countries.
  • Legal basis: the Enabling Clause (1979), from the Tokyo Round (1973–79). It is an exception to MFN (GATT Art. I), not to Art. XXIV (which covers FTAs and customs unions).
  • The US withdrew India's GSP benefits in June 2019.
  • GSP is granted unilaterally by each donor country under its own law. It is not negotiated at the WTO and not binding on the donor.
  • India's DFTP (2008) gives LDCs duty-free access on about 98% of India's tariff lines. Here India is a giver of preferences, not a receiver.
  • Trap: "Developing country" status at the WTO is self-declared. There is no WTO definition. So "the WTO decides who gets GSP" is false, because the donor country decides.

Mains Points

  • Charity or right? The S&DT debate:
  • India argues that S&DT is a treaty right. GSP shows the weakness in this, because rich countries can give or withdraw it at will (US–India, June 2019).
  • This supports the Class 11 complaint that developing countries are "forced to open their markets" but "not allowed access to the markets of developed countries".

  • A GS-II/III line: preferences that can be withdrawn at will give weak incentives for long-term export investment. Binding, targeted S&DT is more reliable.

  • Preference erosion and trade fragmentation:

  • As rich countries sign FTAs and cut MFN tariffs, the value of GSP shrinks.
  • Tying GSP to conditions such as market access, labour rules or security makes it a bargaining tool of power-based trade, not a development tool.

  • India's policy answer: sign its own FTAs to secure access by treaty, and make exports competitive without relying on preferences.

  • India's dual role:

  • India lost GSP benefits as a receiver, but it acts as a giver through DFTP (2008, about 98% of tariff lines for LDCs).
  • This helps India's claim to lead the Global South. It also weakens the view that large emerging economies should simply "graduate" out of all development provisions.

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