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Importing for development: reforming the UK’s trade preferences

Written by Dirk Willem te Velde, Maximiliano Mendez-Parra

Image credit:Port of Dover Image license:CC BY-NC-ND 2.0

The UK government is considering how to reform its preferences under the World Trade Organization (WTO) Generalized System of Preferences (GSP). The reform should be ambitious, while remaining focused on what it was meant to be used for. We identify a range of broad UK GSP reform options which should be seen in the wider context of a UK import policy.

The UK has had its own preference scheme since 1 January 2021 when it left the European Union. It replicated the EU’s scheme in broad terms, incorporating only a few changes, such as not taking over the partial suspension of the EU’s trade preferences for Cambodia. The lack of radical reform was a missed opportunity, for example to remove conditionalities or replace Economic Partnership Agreements (EPAs) in Africa through the trade preference system until a UK-Africa Free Trade Agreement (FTA) is possible in coming decades. Instead, the UK negotiated its own separate EPAs.

Previous empirical work such as an ODI-TPO paper on the UK’s post Brexit trade policy, an ODI paper on UK preferences, this ODI blog on UK-Africa trade and investment relations, and this analysis explored the role of UK preferences including the value for preferences put at £1.8 billion annually (estimated before the recent revision in the UK’s global tariff).

What should the UK government do?

Consider role of GSP within UK import policy

The UK should first understand the role of GSP within broader UK import policy. The UK should design an overarching import policy, just as it has an export or investment policy. This could have multiple objectives, with different weights of importance for different stakeholders. These include:

  • Commercial – lower tariffs to have access to cheap inputs and consumer goods
  • Environmental – lower tariffs to incentivise clean imports
  • Consumer safety – non-trade distortionary standards that ensure high product quality
  • UK national security – to have access to goods and services in the national interest (e.g. rare earth metals) and ban trade in weapons and illegal substances
  • Developmental – to support imports from countries with high vulnerability and low development levels
  • Governance and human rights – to support broad level governance reforms.

A range of instruments can be employed to implement and support an import strategy:

  • Trade policy instruments such as global or most-favourable nation (MFN) tariffs and preferences (such as in GSP), services regulation, standards, etc
  • Collaboration around mutual recognition, professional bodies or dialogue around human and labour rights
  • Outward investment promotion to support the productive capacity and logistics; and
  • Aid and development finance.

Different instruments will be appropriate to promote different objectives (see table below). Across the board MFN tariffs and standards can be used to address commercial and environmental objectives as they are mainly product and not country specific. Trade preferences under the GSP can be used to stimulate imports from the most vulnerable and poorest countries. Other measures such as enhanced collaboration can complement trade measures to attain governance and human rights objectives for which trade measures are too blunt and likely to be ineffective. Aid measures can enhance development, security, commercial, environmental and governance objectives but they need to be focused primarily on supporting poorer countries.

Using trade policy and other measures to support UK import objectives

Trade measures Collaboration Outward investment promotion Aid and development finance
Commercial MFN, services regulations Sharing best practices around digital etc. Creation of partnership between importers and exporters (e.g. value chains) Investment to gain access to inputs.
Investment to develop products that can be imported into the UK
When untied and for development
Environmental MFN on ESG, services regulations, standards Sharing best practices around clean technology.
Assist in the development of national carbon markets and standards
Investment to gain access to green inputs, developing green industries in country, etc. in countries When focused on development (e.g. monitoring and upgrading standards). Climate aid.
(Consumer) Safety Standards (non-trade distortionary) Assist in improving and converging domestic standards Investment to increase standards, quality, etc. When focused on development (e.g. upgrading standards)
National security MFN, regulatory, trade bans (e.g. illegal substances) Create a mutually defensive security partnership with suppliers of raw materials? Investment to gain access to goods and services When focused on development
Development (trade and economic) MFN, GSP Create development partnerships with countries Investment to build productive capacities supports exports Aid for trade
Wider principles for development Na Political dialogue around human, labour and women’s rights Na Possible

Adopt some core principles behind the reform of the UK’s GSP

Once the UK has clarified what it seeks to achieve from its GSP, it could set out some basic principles to make it more relevant to the needs of beneficiary countries as well as addressing some of the problems. GSP reform should not be confined to the limits of the existing framework. This would be a missed opportunity as the current regime has serious problems.

The UK GSP regime must be exclusively focused on trade. The GSP was created to assist countries who were struggling to deal with the tariff peaks and escalation in their key export destinations). Therefore, the GSP is an instrument to address a specific trade policy issue. However, over the years, the EU, and now the UK GSP has added conditionalities aimed at generating change, policy or action in the beneficiary countries in areas such as human rights, governance, etc. According to this line of thinking, the UK GSP Enhanced (which replaced the EU GSP+ in the UK) regime should benefit countries that, for example, have ratified and implemented some international conventions on a wide range of topics.

Although these are important areas, it is more efficient to use other instruments to address these issues and use trade preferences to address their original purpose. There are risks that preferences, under conditionalities, may have their effectiveness reduced. The Tinbergen principle states that to achieve multiple targets it is necessary to have control over at least one tool for each target. Conditionality reduces the effectiveness of preferences in achieving both the trade and non-trade related outcomes. In this sense, the UK should aim to eliminate all conditionalities attached to the Enhanced system (EU’s GSP+) and leave the GSP system based exclusively to address with trade issues.

Keep the focus on the countries most in need including poor and vulnerable countries. While it is tempting to include as many countries as possible in the regime, it should be clear that preferences for everyone are preferences for no one. The more the countries included, the lower the effective preference margin for each beneficiary.

The reformed UK GSP should be available to a limited set of countries, which should include the Least Developed Countries (LDCs) but go beyond them to include more countries based on income and vulnerability criteria that can be designed within WTO rules to benefit different types of countries in different geographies. This could also deal with concerns around LDC graduation (many of which would be in Asia, which the UK may want to include in addition to African countries) as preferences would not be necessarily lost by countries that are still vulnerable when they have graduated from LDC status.

Simplicity. The reformed UK GSP should be simpler in both structure and processes. This implies reducing the number of tiers to one as well as simplifying and making graduation more transparent. The new system should avoid product-specific or partial graduation. Considering the need of focusing the benefits, the UK should aim to have a single-tiered regime offering duty-free and quota-free access in all products to its beneficiaries.

Simple and value chain development compatible rules of origin (RoO). RoOs aim to prevent exporters from non-beneficiary countries from using GSP preferential access to the UK. However, it can be a serious burden to comply with RoOs for example to prove compliance for the exporters of the beneficiary countries and meeting origin thresholds can be difficult.

The new UK GSP regime should try to have general rules of origin rather than product specific. This is likely to increase the simplicity of the regime. Moreover, rules of origin should be compatible with those existing in other trade agreements that the UK has negotiated and with other countries to which an exporter exports. They could also recognise the use of inputs that are considered environmental goods. This will allow cumulation of origin or the possibility that exporters count the origin of imported materials as local and, consequently, eligible for preferential treatment. With respect to cumulation, the rules of origin should allow cumulation without limits bilaterally (I.e. with the UK) and with other UK FTA partners, including other GSP beneficiaries.

Minimise negative impacts from reform. A deep reform of the regime, as suggested in this blog, may lead to some negative impacts on exporters from countries that are no longer be beneficiaries. This will require some form of compensation which the UK should be prepared to offer.

Key role for aid (for trade) in ensuring development. Preferences are just one instrument within the trade and development toolbox. Aid, trade and investment support economic transformation and development.

Ensuring trade policy reform is consistent with climate change. While it inevitable that there will be a focus on environmental aspects in trade in the future, the question is how. We suggest the use of MFN tariffs and product standards are a better route than conditionalities on GSP for specific countries. For example, one could use lower tariffs and rules of origin to incentivise greater use of environmental goods and services (of course the benefits of GSP will be lower, the lower the MFN tariff). In this way the GSP contributes to sustainable development as part of a wider UK import strategy that also supports climate change ambitions.