The not‐so‐generalised effects of the Generalized System of Preferences

• Author: Emanuel Ornelas,Marcos Ritel
• Published date: 01 July 2020
• DOI: http://doi.org/10.1111/twec.12988
• Date: 01 July 2020

World Econ. 2020;43:1809–1840. wileyonlinelibrary.com/journal/twec

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© 2020 John Wiley & Sons Ltd

Received: 5 July 2019

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Revised: 15 November 2019

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Accepted: 7 January 2020

DOI: 10.1111/twec.12988

ORIGINAL ARTICLE

The not-so-generalised effects of the Generalized

System of Preferences

EmanuelOrnelas1

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MarcosRitel2

1Sao Paulo School of Economics-FGV, CEPR, CESifo and CEP-LSE, Sao Paulo, Brazil

2Sao Paulo School of Economics-FGV, Sao Paulo, Brazil

Funding information

Coordenação de Aperfeiçoamento de Pessoal de Nível Superior; Conselho Nacional de Desenvolvimento Científico e

Tecnológico; CNPq

KEYWORDS

gravity equation, GSP, non-reciprocity, trade policy, trade preferences

1

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INTRODUCTION

A cornerstone of the world trading system is the idea, represented in several articles of the General

Agreement on Tariffs and Trade (GATT), that developing countries should receive ‘special and differ-

ential treatment’. Such a special treatment comes in many forms, but is most visible in the Generalized

System of Preferences (GSP). Those preferences have been firmly in place since the early 1970s and

apply over a sizeable share of the exports from developing economies. Currently, all industrialised

nations have a GSP programme. It is also common to have more privileged preference programmes,

sometimes restricted to least developed countries (LDCs) and sometimes limited to developing na-

tions from a specific region. More recently, even some emerging economies have put in place their

own GSPs. For brevity, we call the programmes of non-reciprocal trade preferences collectively by

non-reciprocal trade preferences, or NRTPs; currently, there are 27 of them in force.1

The formal goal of NRTPs is to foster economic growth in developing economies. Yet, despite the

longevity of the system and its potential importance for developing countries and for the multilateral

trading system more generally, the empirical evidence on the effectiveness of non-reciprocal prefer-

ences is lacking in many ways. In fact, we do not have even a clear picture of their effects on aggregate

exports. Some authors argue that NRTPs have a large and positive effect on the exports of beneficia-

ries. Others indicate that they have a large but negative effect. Some studies point instead to

1Ornelas (2016) provides a detailed discussion of the institutional setting of GSP and other forms of the special and

differential treatment offered to developing countries in the world trading system. The volume edited by Hoekman and Ozden

(2006) collects much of the earlier literature on the topic, whereas the volume edited by Zissimos (2019) emphasises the

various roles of the World Trade Organization in economic development.

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ORNELAS ANd RITEL

ambiguous effects. This is troubling, because if we hope to assess the effectiveness of non-reciprocal

trade preferences in promoting economic growth, we need to know at least their effects on beneficia-

ries' exports. Since the United States is currently tightening the enforcement of eligibility criteria for

recipients of its NRTPs, such an assessment seems particularly timely.2

In this paper, we aim to fill this gap. Using data between 1950 and 2015, we establish some key

facts about the aggregate trade effects of NRTPs employing a standard but theoretically consistent

gravity equation framework. At least as importantly, we use a recent, carefully constructed dataset put

together by Scott Baier and Jeffrey Bergstrand, which to our knowledge has not been used to scrutinise

the effects of NRTPs yet.

In line with the received literature, we find that NRTPs do not have a clear, uniform effect on the

average exports of beneficiary countries. They do promote exports of LDC beneficiaries—but only

if they are members of the World Trade Organization (WTO). In that case, NRTPs increase trade

significantly. In contrast, non-LDCs that receive non-reciprocal preferences are also able to increase

exports, but only if they are not WTO members. For all others, the average export effect of NRTPs is

essentially mute, although we observe positive effects for them until the 1980s. Those findings are ro-

bust to different econometric specifications and different trade agreement definitions and are observed

across most of the decades covered in our dataset.

Hence, the upshot of our analysis is that we need to allow for heterogeneity to understand the

effects of NRTPs, as they are effective in promoting aggregate exports of beneficiary countries only

under some circumstances. In particular, the results point to interesting linkages between the export

benefits from participation in the WTO (where tariff concessions are negotiated multilaterally and are

non-discriminatory) and the benefits from non-reciprocal, preferential tariff concessions. For some

types of economies, they are complementary to each other; for others, they are substitutes.

The results for non-LDCs are very intuitive. Non-reciprocal preferences help if the country does

not have secure access to developed markets through (generally low) MFN tariffs; once they do, the

extra market access through (revocable and therefore insecure) NRTPs becomes less important.3 For

LDCs, on the other hand, NRTPs complement the market access gains that they accrue from partic-

ipating in the WTO. That result is less immediate. Yet an important factor behind the ineffectiveness

of NRTPs for very poor countries that are not WTO members may be the difficulties those countries

face in accessing world markets due to both lacking infrastructure and distorted incentives. Once

they become members of the WTO, an event that usually prompts (and is prompted by) other insti-

tutional reforms, resources can more easily flow to comparative advantage sectors, allowing them to

effectively take advantage of the preferences. We provide suggestive evidence that, indeed, institu-

tions (as proxied, e.g., by a democracy index) are central to explain the effectiveness of NRTPs for

LDCs.

Now, it is important to stress that, even if we were absolutely sure that NRTPs boosted exports

for some groups of countries, this would constitute an important but only the first element in a

2As US Trade Representative Robert Lighthizer recently indicated, ‘President Trump has sent a clear message that the United

States will vigorously enforce eligibility criteria for preferential access to the U.S. market. Beneficiary countries choose to

either work with USTR to meet trade preference eligibility criteria or face enforcement actions’ (https://ustr.gov/about -us/

polic y-offic es/press -offic e/press -relea ses/2017/decem ber/trump -admin istra tion-enforces). As a concrete action in that

direction, in June 2019 the United States removed India and Turkey from its GSP programme.

3Carnegie (2013) shows that WTO rules weaken the leverage that larger economies have over smaller ones once they become

members. As a result, the ‘donor’ countries tend to make the threat of GSP revocation more salient to achieve international

political goals. Such increased insecurity of GSP eligibility could also help to explain this finding.

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thorough assessment of the desirability of NRTPs. For starters, the theoretical basis for NRTPs is

shaky (see e.g., Bagwell & Staiger,2014). In particular, they stand in stark contrast with the prin-

ciples of reciprocity (the preferences are unilateral) and of non-discrimination (they discriminate

across sources of imports by design), the two main pillars of the world trading system (Bagwell

& Staiger,1999, 2002). Furthermore, because preferences are given and taken at the discretion

of the ‘donor’ countries, the continuity of the improved market access is uncertain. But as Limao

(2016) makes clear, such trade policy uncertainty can undermine the effectiveness of preferential

market access.

1.1

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Related literature

We build on a broad literature that estimates ex-post trade effects of trade agreements on aggregate

bilateral imports using a gravity equation.4 Even though NRTPs have been a staple of the world trad-

ing system since the 1970s, and despite some early estimates of the impact of GSP on trade flows

(e.g., Sapir,1981), there are surprisingly few papers whose primary goal is to study NRTPs. However,

the literature concerned with the trade effects of WTO membership has always included in its empiri-

cal specifications controls for GSP status. Hence, a large part of research on the trade effects of

NRTPs can be viewed as an ‘incidental literature’, whose main concern lies elsewhere. Put together,

results are all over, depending on the empirical specification and the dataset used.5

Rose (2004), Subramanian and Wei (2007) and Liu (2009) are some of the main studies that es-

timate the trade effect of GSP as a by-product of their analyses of the WTO trade effect. The main

drawbacks in their analyses are the use of average trade as the dependent variable (Rose); the lack of

proper control for multilateral resistance (both Rose and Liu); and the absence of control for time-in-

variant country-pair heterogeneity (Subramanian and Wei). As Head and Mayer (2014) make clear,

all of that matters. Furthermore, Rose codes GSP as a bilateral variable, but by definition it represents

unilateral trade preferences.

In terms of results, Rose (2004) and Subramanian and Wei (2007) find very large positive

trade effects for GSP, although Subramanian and Wei obtain contrasting results when disaggre-

gating by main sector of activity. Chang and Lee (2011) reach the same conclusion using

non-parametric methods, but recognising that their framework is not well suited to control for

endogenous multilateral resistance terms. On the other hand, Liu's (2009) results vary with the

specification.6

Herz and Wagner (2011) and Gil-Pareja, Llorca-Vivero, and Martinez-Serrano (2014) do place

NRTPs at the centre of their analysis. Eicher and Henn (2011) also discuss the effects of NRTPs,

although their main goal is to estimate the trade effect of preferential trade agreements (PTAs),

4See Limao (2016) for a recent and insightful review of the branch of that literature dealing with reciprocal preferences in the

context of preferential trade agreements.

5We direct the reader to Ornelas (2016, Section 4.2) for a more detailed discussion of this literature and its controversial and

diverse results. Here, we only highlight what we believe are the main sources of disagreement about the results. Ornelas

(2016) does not, however, discuss the problems arising from the different sources of data on NRTPs used in the literature, one

of our emphases here.

6Additional evidence on the effects of NRTPs can be found in the literature regarding heterogeneous effects of preferential

trade agreements, as summarised by Limao (2016). While estimates often show no trade effects for NRTPs, the effect rises in

size and significance as the ‘depth’ of the agreement increases. In line with those findings, Kohl etal.(2016) take into

account the content and scope of trade deals in their gravity analysis and confirm that more comprehensive agreements are

more likely to promote trade.