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The UK's new Developing Countries Trading Scheme: a welcomed change?

Written by Maximiliano Mendez-Parra

The UK Government has launched its new UK Developing Countries Trade Scheme (DCTS). This constitutes the new UK version of the Generalized System of Preferences (GSP) that many countries offer to lower income countries. The DCTS aims to address the long overdue UK commitment to improving preferences for these countries after Brexit.

What has changed?

The DCTS changes little in terms of structure with respect to the EU’s GSP and the current system that was put to bridge them. The DCTS offers preferential tariffs to countries in three tiers: Comprehensive Preferences for Least Developed Countries (LDCs), Enhanced Regime (ER) and Standard Preferences. In this sense, an opportunity has been lost to simplify the regime, especially when it is considered that there are only two countries in the top tier regime being eligible for the ER: India and Indonesia. Moreover, excluding these countries (which are both G20 countries) from the regime would have constituted an opportunity to increase the value of the DCTS for the other countries.

The scheme for LDCs has changed little and it continues offering duty free and quota free access to its members in all products (except arms and ammunition). There are some changes in relation to rules of origin, which is discussed in more detail later in this document.

The ER, which replicates the EU GSP+, offers duty free access in 85% of the products (an improvement with respect to the GSP+). Finally, the Standard Preferences offers preferential duty-free access in 33% of the products and partial reduction in duties in a similar number of tariff lines. For both regimes, nuisance duties (lower than 2%) have been eliminated, which is welcomed. These changes generate a marginal improvement in market access for the countries under these tiers.

A significant and welcomed departure with respect to the EU GSP is that, to qualify under the ER, countries will only need to meet the vulnerability criteria. Countries will not need to ratify and comply with the list of conventions related to labour and human rights, environmental and climate protection and good governance requested under the GSP+ (a futile request considering that the assessment made by the EU should suffice). Countries will automatically qualify as long as they remain qualified as vulnerable based on their lack of export diversification, and they will not need to apply for the benefit.

Still, countries will be monitored with respect to the compliance of treaties and conventions that they are part of, and they could be excluded from the ER in case of significant deviations. This puts these countries in a disadvantageous position with respect to other countries that are not subject to this monitoring. We consider that preferences or their suspension should only be evaluated with respect to their economic merits alone.

The expansion of the ER is welcomed for countries such as Angola and Bangladesh (whose graduation from the LDC group in 2024 and 2026, respectively) and for other countries such as Algeria, Nigeria and the Republic of Congo among others, that will see an immediate improvement in their market access to the UK in a significant number of products. This is because Angola and Nigeria, in the current regime, only qualify for the Standard Preferences. However, it is potentially problematic for some countries as more competitors will benefit from the same level of market access: preferences for everyone, is preference for no one. Still, the gains in terms of market access are likely to be low, in the short term, given the reduction in the UK Global Tariff applied since 2021 and the exporting profiles of the involved countries.

There are also changes with respect to the DCTS graduation criteria (affecting currently only India and Indonesia). This applies to countries that become significant exporters in certain products and, consequently, will lose the preferential access. Rather than be calculated based on sections of the Harmonized System, countries will graduate only on the respective chapters. This would allow a country, for example, to graduate only on cereals (Chapter 10) and not on the entire Section II (Vegetable Products) that include fruit, vegetables and oilseeds among many others.

A significant and welcome change: Rules of origin

Rules of origin are used to determine whether a product originates from the preferential or Free Trade Agreement (FTA) partner. They are necessary to ensure that tariff duties generated from the imports from non-beneficiary countries of preferences of FTA are not eluded by being channelled through a beneficiary country. They establish, in broad terms, when a product would have received enough transformation or contains enough domestic value added to be considered original from the beneficiary country and, consequently, receive the preferential treatment.

For exports originated in LDCs, the DCTS new rules of origin allow up to 75% non-domestic content in 50% of the chapters. All product specific rules (frequently used for textiles and garments) will allow exporters to meet alternatives rules, given them more flexibility. The simplification goes further as many chapters have rules that applied entirely without exceptions to the rules. This is a very positive outcome.

For LDCs, the new UK DCTS allows inputs originated from the UK to count as originated in the beneficiary country, in the EU, in any other DCTS beneficiary and in the UK’s Economic Partnership Agreements (Kenya, Ghana and Cameroon among others). These changes in the cumulation rules are very welcomed as it gives more flexibility for exporters in LDCs to utilise inputs from a wider range of countries without losing the preferential access. Moreover, it facilitates the integration of beneficiary countries’ firms into regional value chains.

It could have been better

However, these rules would not extend to other countries that negotiated FTAs with the UK. DCTS beneficiary countries will not be able to cumulate from products originated in Korea, Japan and Canada among others, as well as the FTA currently under negotiation with India among many other countries. Despite that the risk of tariff deflection would be zero (as the product would attract zero duty when exported directly to the UK from these countries), they would not count as being of origin from the DCTS beneficiaries. This is a missed opportunity to extend the benefits of the FTAs negotiated by the UK to lower income countries.

More problematic is the situation in Africa, as this exclusion will affect the cumulation of African LDC DCTS beneficiaries with Morocco, Tunisia and Egypt- three countries that have FTAs with the UK. This is critical for countries such as Senegal or Mauritania that have a high level of integration with Moroccan firms and products.

It would have been better if, in addition to the support already provided to the African Continental Free Trade Area (AfCFTA) integration, the UK would have treated the entire African continent as a cumulation zone giving their exporters the maximum flexibility to cumulate. This will be beneficial to the existing, as well as any new regional and continental, value chains that the AfCFTA may help to develop in the continent.

Trade and development policy beyond preferences

The new DCTS constitutes an improvement and a fulfilment of a long overdue promise after Brexit. There are some small tweaks to the regime that could make a significant difference in supporting the formation of value chains.

There is a significant risk that the UK, with its new DCTS, may ‘rest on its own laurels’ and consider that this is the only way it can boost development through trade. In fact, there are many other mechanisms to do so. For instance, one action would be to include the possibility of cumulation with beneficiaries of the DCTS in the FTAs that the UK is negotiating with other partners.

The UK should put more resources and thinking into taking a more comprehensive view on how trade (and investment) can boost development. This should include the DCTS, but also instruments to promote and support investors in beneficiary countries as well as assisting countries in policymaking and relevant reforms to boost trade and investment.

Finally, and in more general terms, the UK should work on the development of its own import policy to identify the critical partners that will supply inputs and products for its firms and consumers. Investment, development assistance and trade policy, including the DCTS, would be critical instruments.