Reacting to criticism that EU preferential tariff measures have had disappointing results and lack proper management, the European Commission has made significant improvements to the European Union’s Generalised Scheme of Preferences (GSP) for developing countries. The modifications include changes to beneficiary lists, eligibility criteria, transfer of benefits by sector and enhanced monitoring. These changes will not only make the EU GSP regime more complex but will also force GSP users and beneficiaries to focus more on the regime’s business impact.
The Commission has been under pressure from other EU institutions to justify the cost of the GSP regime and propose reforms, especially in view of the current economic context.1 In 2014, the European Court of Auditors found that that the EU GSP was not effective in creating export diversification of vulnerable developing countries, vitiating the EU’s aim to focus on countries that deserve and need maximum help. The Court of Auditors also found that preferential trade arrangements in general lacked proper monitoring.2
In addition, most of the fraud investigations conducted by the European Anti-fraud Office (OLAF) in the area of preferential trade arrangements have concerned GSP countries; the investigations demonstrated that imported goods from these countries were not eligible for preferential tariff measures, thus creating a duty liability for EU importers.
1. EU reviews the list of GSP beneficiaries
Owing to the EU’s determination to give preferences to the weakest economies, several countries have lost or will lose GSP and GSP+ benefits.3 Table 1 shows the removals from the GSP and GSP+ beneficiary lists since January 1, 2014.4
Table 1. List of countries losing GSP benefits
On the flip side, some countries have been reintroduced into either the GSP or GSP+ regime. Table 2 shows the additions to the GSP and GSP+ beneficiary lists, again since January 1, 2014.
Table 2. Countries gaining GSP and GSP+ benefits
2. More countries now eligible for GSP+ preferences
The changes to beneficiary lists enable other countries to seek GSP+ eligibility, provided they can fulfill a so-called “vulnerability criterion,” meaning that they should be suffering from economic weakness and lack of diversification. Fulfilling this criterion means staying under a “vulnerability threshold”: a ceiling on the country’s level of exports to the EU expressed as a percentage of the value of the total GSP-covered imports into the EU.10 In April 2015, the European Commission relaxed the vulnerability criterion by increasing the vulnerability threshold from 2 percent to 6.5 percent. This move will allow more countries to apply for GSP+ eligibility.11
3. Faster transfer of GSP+ preferences from successful to vulnerable sectors
Successful export sectors of developing countries, such as textiles and chemicals, do not need preferential support when exporting to the EU. Whenever a sector “graduates” to global competitiveness, the EU withdraws preferential GSP benefits. The Commission uses a graduation threshold to this end, i.e., the value of average imports in that sector from the country in question as a percentage of the value of GSP-covered imports of the same products for all beneficiary countries over a three-year period.
The Commission’s proposal to amend the graduation threshold is currently under discussion. If the threshold is adjusted, the resulting “suspension” of competitive products from the GSP will enable the Commission to better shift GSP support to sectors where products remain non-competitive. The revised suspensions will apply for the calendar years 2017, 2018 and 2019.
4. EU proposes more controls in the GSP regime
In order to reinforce controls and ensure that only eligible goods are exported under the EU GSP from beneficiary countries, the Commission has laid out an Action Plan for monitoring of preferential rules of origin. Suggested new controls include (i) visits to a beneficiary country and (ii) periodic reporting by beneficiary countries on their management and control of preferential origin. By 2016, the Commission plans to report to the European Parliament and Member States on the effects of the GSP regime. By 2017, it plans to report on the overall operation of any new regulation.
Promoting sustainable development and good governance are not the only objectives of the EU GSP. Safeguards for the EU’s financial and economic interests are also part of the policy. Accordingly, the Commission has acknowledged the need to correct problems with the GSP’s safeguard mechanisms, recognizing that these mechanisms have failed to protect the financial and economic interests of EU industry, and could even harm them. In order to reinforce customs controls applied by Member States and thus fight fraud and customs duty evasion more effectively, the Commission has proposed to assess fraud and customs duty evasion issues in a report to be presented to the European Parliament and Council by November 2017.
The Commission will also continue to exercise the option of temporary withdrawal of preferences in the event of problems with a country’s management of the preferences and/or other significant breaches of customs legislation or non-cooperation. The Commission may also issue notices to specific importers. The Commission will aim to include these safeguards in all future preferential arrangements.
5. Implications and opportunities
Users and beneficiaries of the GSP can be sure that (i) the system will remain in place until the end of 2023 and (ii) the link between trade and development policy will remain an essential part of the EU Trade Strategy.12
The GSP is a fairly technical system. Nevertheless, it is a system that offers important duty benefits and therefore deserves attention. Companies that monitor GSP developments will be able to anticipate the changes and benefit most from them. Occasionally, it may also be possible to provide input on important GSP criteria, e.g., regarding “graduation” or “responsible sourcing supply chains”.13 Stakeholders who engage in the legislative process may avoid the loss of duty benefits or even obtain a benefit.
Concretely, business operators should:
- Carefully select suppliers
Careful supplier selection is the best way to ensure long-term efficiency of the supply chain. Since the GSP attaches significant attention to environmental practices, safety standards and human rights policies, these should be factored into the selection process.
- Adapt contracts and train suppliers
Companies dealing with GSP suppliers should ensure their suppliers know and correctly apply the GSP origin rules, e.g., through training. Indeed, incorrect origin declarations (and thus duty benefits) are the responsibility of the importer. Companies should also consider tailoring their contracts so as to (i) guarantee correct application of the origin rules by their suppliers and (ii) include a right to recourse in case of incorrect origin statements.
- Review risks
EU importers or distributors relying on the GSP should proactively review the effects of the proposed changes to the GSP regime on their operations, particularly the changes to origin rules, and consider taking appropriate action.
1 The European Parliament’s in-depth analysis, “The European Union’s trade policy, five years after the Lisbon Treaty,” by Roberto Bendini, March 2014.
2 European Court of Auditors Special Report, “Are preferential trade arrangements appropriately managed?”, 2014.
3 Countries benefiting from GSP preferences are included in Annex II of the GSP Regulation, while countries benefiting from GSP+ preferences are included in Annex III. Please refer to the fuller citations below.
4 Changes to beneficiaries’ lists come with a transition (notice) period of at least one year so that stakeholders have time to adjust their operations.
5 Commission Delegated Regulation (EU) No 1421/2013 of October 30, 2013 amending Annexes I, II and IV to Regulation (EU) No 978/2012 of the European Parliament and of the Council applying a scheme of generalised tariff preferences, OJ L 355, 31.12.2013, p. 1.
6 Commission Delegated Regulation (EU) No 182/2014 of December 17, 2013 amending Annex III to Regulation (EU) No 978/2012 of the European Parliament and of the Council applying a scheme of generalised tariff, OJ L 57, 27.2.2014, p. 1.
7 Commission Delegated Regulation (EU) No 1015/2014 of July 22, 2014 amending Annexes II and III to Regulation (EU) No 978/2012 of the European Parliament and of the Council applying a scheme of generalised tariff preferences, and repealing Commission Delegated Regulation (EU) No 154/2013, OJ L 283, 27.9.2014, p. 20.
8 Commission Delegated Regulation (EU) No 1016/2014 of July 22, 2014 amending Annex II to Regulation (EU) No 978/2012 of the European Parliament and of the Council applying a scheme of generalised tariff preferences, OJ L 283, 27.9.2014, p. 23.
9 Commission Delegated Regulation (EU) No 1386/2014 of August 19, 2014 amending Annex III to Regulation (EU) No 978/2012 of the European Parliament and of the Council applying a scheme of generalised tariff preferences, OJ L 369, 24.12.2014, p. 33.
10 In this context, “GSP-covered” means products benefiting from the GSP regime, GSP+ arrangements, or from Everything But Arms (EBA) treatment – a duty-free quota extended to certain Least Developed Countries (LDCs).
11 Commission Delegated Regulation (EU) 2015/602 of February 9, 2015 amending Regulation (EU) No 978/2012 of the European Parliament and the Council as regards the vulnerability threshold defined in point 1(b) of Annex VII to that Regulation, OJ L 100, 17.4.2015, p. 8.
12 The revised Trade Strategy was announced by the Commission on October 14, 2015. This new strategy outlines next steps, highlighting the need “to promote responsible sourcing supply chains.”
13 European Commission DG Trade news of March 20, 2015 “A trade and investment strategy for growth and jobs.”
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