Who needs special and differential treatment?

1 July 2014
ITC News
Clearer principles are needed for Special and Differential Treatment, and Generalized System of Preferences schemes

How can trade policies support development? Fifty years ago, the concept of Special and Differential Treatment (SDT) was introduced and implemented in the form of the Generalized System of Preferences (GSP). This permitted the grant of better trading conditions to developing countries, and preferential tariffs under the GSP were a main pillar. This evident discrimination between countries is allowed under World Trade Organization (WTO) rules. But because GSP is implemented through national schemes, there are variations across donor countries.

In the 1960s, notions such as the ‘Third World’ and ‘developing countries’ had clear meanings, so it was obvious who the beneficiaries were. Fifty years later these terms have become blurred. Some former developing countries have grown rich: in Singapore, for example, per capita income in 2012 stood at US$ 52,050. Such high-income countries have generally ‘graduated’ from GSP or other SDT measures, with little controversy. Recently, however, even some middle-income countries have graduated from GSP systems based on the assumption that ‘they do not need it any more’. Some principles have been agreed at the WTO, but practices continue to vary across donor countries and, to a large extent, SDT remains in flux.

Which countries need SDT?

Classifying according to the World Bank’s income groups, the figure shows the shares of different developing country groups in the world total in 2009, covering the economy, population, poverty and trade. We have classified China separately since it has recently switched from a lower middle-income (LM) to upper middle-income country (UM).

Traditionally, all the income groups in the chart would be entitled to GSP. However, the European Union GSP reform carried out in early 2014 illustrates that this is no longer so straightforward. The EU has discontinued GSP for the UM countries. As a result, China will soon lose its GSP benefits in the EU, since it has recently surpassed the relevant income threshold (in 2012 this threshold was per capita income of US$ 4,086). Hence, in the sphere of GSP, there is no longer agreement on what a developing country is and which countries are entitled to such benefits. This new practice by the EU differs from other GSP schemes, but also from classifications commonly used to decide the eligibility for development aid.

Extended trade benefits for the LDCs: the DFQF regimes

Should SDT or GSP be granted in the same way to all beneficiary countries, or do some countries need it more than others? For a long time, there has been agreement at the WTO that least developed countries (LDCs) should be accepted as a special category that might receive extended benefits. Several countries have taken steps to implement this concept, through duty-free quota-free (DFQF) regimes for LDCs. According to UNCTAD, 12 developed and six developing countries have established such regimes, with extended benefits for the LDCs. In the Doha Round negotiations, one ambition has been to establish such DFQF regimes for the LDCs as a general WTO practice.

There is a problem with DFQF, however, in that the poorest countries have limited export capacity. In many cases, this means that trade preferences are not very efficient in generating trade. As the figure indicates, low-income countries have a significant share of the world’s poor, but a very small share of world trade. This is a challenge for countries or trade blocs with GSP regimes. In Norway’s GSP regime, for example, manufacturing tariffs are low but agricultural protection is very high, meaning that DFQF amounts to a huge tariff preference for many goods. Despite this, import growth for agricultural products from LDCs has been marginal, which resulted in Norway reforming its GSP.

In the future, DFQF may face a further challenge: While the number of LDCs has been almost constant during recent decades, continued economic growth may reduce the size of the group. In 2011, only 29 out of the 49 LDCs were low-income countries. Recent data for 178 countries (Services and Development: The Scope for Special and Differential Treatment in the GATS, Melchior et al., 2012) suggested that the number of low-income countries had decreased rapidly (from 59 in 1999 to 34 in 2009). This trend is likely to continue and will lead to reductions in the LDC group, with more countries to ‘graduate’. The importance of extended benefits to LDCs will therefore decline over time, and inflict pain on those that graduate.

More steps in the SDT ladder?

Since the ‘second-poorest’ countries have greater export capacity, SDT can generate more trade by extending the benefits to middle-income countries. In particular, lower-middle income countries have a significant share not only of world poverty, but also of world trade. If these countries obtain better market access, trade will certainly grow, with a positive impact on development. Still, when countries become more competitive, they also become stronger competitors, which can lead to resistance to liberalization among some interest groups.

Norway’s DFQF had a modest trade impact on LDCs, and DFQF was therefore extended to 13 other low-income countries in a GSP reform in 2008. Extended GSP benefits were also granted to lower-middle income countries in 2013, although less extensive than DFQF. And with a population threshold of 75 million, large countries such as India were excluded from these extra benefits. This was probably in response to opposition from Norway’s farming lobby, which was unenthusiastic about DFQF for the LM countries, fearing agricultural competition from India and other countries with a larger export potential. Despite this limitation, the Norwegian reforms, especially the first step in 2008, could be considered as comparatively generous.

Norway’s GSP regime comprises three steps: DFQF for LDCs and low-income countries; an intermediate regime for LM countries except large countries; and ‘ordinary GSP’ for the UM countries. The reason for adding an intermediate category was to avoid graduation from DFQF leading to a massive deterioration in market access. This issue may soon become relevant when the low-income and LDCs shrink in size and many will graduate.

Another approach to SDT differentiation is the so-called GSP+ systems in the EU and the United States, which are not based on income criteria. In the EU, for example, GSP+ is granted to countries that ratify and implement international conventions related to human and labour rights, the environment and good governance.

In the WTO, meanwhile, the only group distinguished clearly in relation to SDT is LDCs. This has become a matter of litigation. Some years ago, India brought a challenge under the WTO's dispute settlement system to one of the EU’s GSP+ arrangements – the ‘countries fighting drugs’ regime for certain Latin American countries. The verdict in this case suggests that within SDT/GSP, discrimination between subgroups of developing countries is possible, provided it is related to objective and general criteria related to development (Trade policy differentiation between developing countries under GSP schemes, Melchior, 2005). For example, income criteria (World Bank thresholds or other) could be used.

SDT continues to be an important part of the multilateral trading system. But definitions are unclear and practices vary across countries. There is no agreement on the group of beneficiaries, and economic growth may shrink in the low-income countries and LDCs. In time, this is likely to lead to serious problems concerning graduation and differentiation between developing countries. To counter this, it might be hoped that the WTO and UNCTAD would find the time – and courage – to establish clearer principles in the field.