What is Generalised System of Preferences (GSP)?
Historical Background
Key Points
10 points- 1.
The core principle of GSP is non-reciprocity. This means that developing countries receiving preferential treatment are not required to offer the same level of tariff reductions or other trade concessions to the developed countries providing the GSP benefits. This is crucial because it acknowledges the power imbalance in trade relations.
- 2.
Each GSP scheme has its own set of rules regarding country eligibility. These rules often consider factors like a country's level of development, human rights record, and protection of intellectual property. For example, a country might be excluded from a GSP scheme if it's found to be engaging in unfair trade practices.
- 3.
GSP schemes also specify which products are eligible for preferential treatment. Typically, manufactured goods and some agricultural products are included, but there are often exclusions for sensitive sectors like textiles or certain types of steel. The specific list of eligible products can vary significantly between different GSP programs.
- 4.
Many GSP schemes include graduation mechanisms. This means that a country can 'graduate' out of the GSP program if it reaches a certain level of economic development or if its exports of a particular product become too competitive. This is intended to ensure that GSP benefits are targeted towards countries that genuinely need them.
- 5.
A key difference between GSP and a Free Trade Agreement (FTA) is that GSP is unilateral and non-contractual, while an FTA is a negotiated agreement with reciprocal obligations. GSP can be withdrawn or modified at any time by the granting country, whereas FTAs are legally binding and more stable.
- 6.
One common misconception is that GSP benefits are permanent. In reality, GSP programs are often subject to periodic reviews and renewals. This creates uncertainty for businesses in beneficiary countries, as their access to preferential tariffs can be revoked at any time. This uncertainty can discourage long-term investment.
- 7.
For a business in a developing country, GSP can mean the difference between being competitive in a developed market and being priced out. For example, a small garment manufacturer in Bangladesh might be able to export its products to the US duty-free under GSP, making it more attractive to American buyers than a manufacturer in a country without GSP benefits.
- 8.
The US GSP program, for instance, has specific criteria related to intellectual property rights. If a country is found to be inadequately protecting American intellectual property, it can be suspended from the program. This highlights how GSP is often linked to broader policy objectives beyond just trade.
- 9.
India has been both a beneficiary and a target of GSP-related actions. In 2019, the US terminated India's designation as a beneficiary developing country under its GSP program, citing that India had not assured the US that it would provide equitable and reasonable access to its markets. This had a significant impact on Indian exports to the US.
- 10.
UPSC examiners often test your understanding of the conditions attached to GSP schemes, the reasons for their withdrawal, and the impact on specific countries. Be prepared to analyze case studies and evaluate the effectiveness of GSP as a development tool. They also test the difference between GSP and FTAs.
Visual Insights
Evolution of the Generalised System of Preferences (GSP)
A timeline showing the key events in the history of GSP, from its inception to recent developments.
GSP schemes have been a tool for promoting economic growth in developing countries since the 1960s.
- 1960sThe idea of preferential treatment for developing countries emerges.
- 1970sFirst GSP schemes are implemented by developed countries.
- 1974The US GSP program is established.
- 2019The United States terminates India's beneficiary status under the US GSP program.
- 2020The European Union reviews its GSP scheme, placing greater emphasis on human rights and environmental standards.
- 2023The UK's Developing Countries Trading Scheme (DCTS) comes into effect.
- 2026US and India strike a trade deal that lowered reciprocal tariffs on India from 50% to 18%.
Recent Developments
9 developmentsIn 2019, the United States terminated India's beneficiary status under the US GSP program due to concerns over market access.
In 2020, the European Union reviewed its GSP scheme, placing greater emphasis on human rights and environmental standards as conditions for receiving preferences.
In 2023, the UK's Developing Countries Trading Scheme (DCTS), which replaced the EU's GSP post-Brexit, came into effect, offering tariff reductions to a range of developing countries.
As of 2024, discussions are ongoing between India and the US regarding the potential reinstatement of GSP benefits for India, contingent on addressing US concerns about market access and trade barriers.
The US Congress periodically reviews and reauthorizes the US GSP program. Its expiration and subsequent renewal (or non-renewal) often creates uncertainty for beneficiary countries. The program is currently active, but its future beyond the current authorization period is subject to legislative action.
In February 2026, the US and India struck a trade deal that lowered reciprocal tariffs on India from 50% to 18%.
This deal comes after a period where India paid the highest tariffs in the world after the US raised import duties on Indian goods from 25% to 50% in August of the previous year.
The new tariff rate of 18% brings India in line with other Asian countries like Vietnam, Thailand, and Bangladesh, who pay duties between 19% and 40% on US exports.
India and the EU announced "the mother of all trade deals" last week, eliminating tariffs on 80-90% of goods. It was Delhi's ninth free trade agreement in four years.
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EconomyUPSC Relevance
GSP is a frequently tested topic in the UPSC exam, particularly in GS Paper 2 (International Relations) and GS Paper 3 (Economy). Questions often focus on the objectives of GSP, the criteria for beneficiary countries, the impact of GSP on India's trade, and the reasons for the withdrawal of GSP benefits by developed countries. In Prelims, expect factual questions about the WTO's role and the conditions attached to GSP.
In Mains, you might be asked to critically analyze the effectiveness of GSP as a tool for promoting development or to compare GSP with other trade agreements. Recent years have seen questions on trade wars and their impact on developing economies, making GSP a relevant and important topic to understand. When answering, always provide a balanced perspective, considering both the benefits and limitations of GSP.