Saturday, 27 January 2007

A Faustian bargain: the effect of GSP on developing country trade policies

In this article, the authors argues that preference schemes such as the GSP would offer the recipient little benefit. The biggest winner seems to be the donor countries instead.

"How do nonreciprocal preferences such as GSP affect the trade policies of beneficiary
countries? In this paper, we provide the first extensive evidence on this question. Using a
dataset of annual observations of 154 developing countries since the United States started
its GSP program in 1976, we demonstrate that countries dropped from GSP subsequently
adopt lower trade barriers than those remaining eligible. These findings control for
income, market size, geography, growth, and other factors; they are robust to five different
measures of trade barriers; and, most importantly, they hold when correcting for possible
endogeneity of GSP eligibility.

We offer one candidate explanation for why nonreciprocal preferences might have
these perverse effects. Governments set trade barriers while balancing political support
from import-competing and export sectors. By de-linking foreign market access from the
recipient's own trade policy, however, nonreciprocal preferences bremove the major
incentive that export industries have. . .for opposing protectionist trade policies at homeQ
(Hudec, 1987). Hence, GSP shifts the political balance in the beneficiary country to the
import-competing sector. Domestic politics within the donor state compound this effect.
In particular, the ease of altering unilateral (as opposed to GATT-bound reciprocal)
commitments skews protectionist pressures within the donor state towards the GSP
instrument. Because its preferences will be removed if its exports increase significantly,
the recipient thus has a perverse incentive to implement even more protectionist
policies to limit its exports. Conversely, if GSP is indeed withdrawn, the resulting
conditionality of foreign market access reinvigorates the interest of the export sector in the
recipient government's trade policy decision, reducing the optimal level of protection. We
accordingly hypothesize that withdrawal from GSP will induce a developing country to
lower its own trade barriers."

Caglar Oezden and Eric Reinhardt, 'The Perversity of Preferences: GSP and Developing Country Trade Policies, 1976–2000', 78 Journal of Development Economics (2005)

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