UK’s Trade Approach Towards Developing Countries
The UK’s GSP framework
After Brexit, the United Kingdom has developed its own Generalised Scheme of preferences (GSP), which has been in place since 1 January 2021. It largely resembles EU GSP in terms of treatment of imports from developing and least developed countries (LDCs). The UK GSP is provided under three schemes: the Least Developed Countries Framework (similar to the Everything But Arms of the EU), the Enhanced Framework (comparable to EU GSP+), and the General Framework (equivalent to EU Standard GSP). Currently, around 67 developing nations are eligible for the UK GSP under these frameworks.
The most generous tariff preferences are provided to LDCs. The LDC Framework (LFCF) grants duty-free, quota-free imports from eligible beneficiary countries for all goods other than arms and ammunitions. Currently 47 LDCs, as classified by the United Nations, are enjoying trade preferences in the UK under this scheme.
The General Framework (GF) provides duty concessions for two-thirds of UK tariff lines. Different types of concessions are allowed: full reduction; a 3.5-percentage point reduction relative to standard import duty rates; a 20% reduction relative to standard import tariffs; or a 30 per cent reduction on the specific duty for those cases where it is the only duty expression representing the standard rate of import duty.[1] Where compound tariff rates exist, any duty concessions apply to ad-valorem tariffs only. Currently 12 countries that are low-income and lower-middle income countries as per World Bank classification of global economies are eligible for the General Framework.
From the recipient country point of view, the Enhanced Framework (EF) is more generous than the General Framework. Duty suspension for two-thirds of UK tariff lines is allowed under the EF. For compound tariff rates, the enhanced framework removes the ad-valorem tariff only, keeping the specific duty unchanged for agricultural goods. To be eligible for enhanced framework, low-income or lower-middle-income countries must satisfy two criteria: (i) the eligible beneficiary country must be economically vulnerable due to a lack of export diversification and because of a low level of integration with the international trading system; and (ii) the economically vulnerable country must ratify and implement 27 international conventions related to human and labour rights, environment, and good governance. This is again consistent with EU GSP regulation. Under Enhanced Framework, countries face non-preferential duty on 1,026 tariff lines (or, around 9% of all tariff lines). The General Framework countries face non-preferential tariff for 1,085 lines.[2]
Table 1: UK GSP arrangements and provisions
Preference scheme | Eligibility criteria | No. of eligible countries | Tariff concession | Rules of origin |
Least Developed Countries Framework | Least Developed countries as classified by the UN. | 47 LDCs | 0% import tariffs on all products excluding arms and ammunition | Single transformation for textile and clothing items. For all other products, the general RoO is the minimum local value addition of 30%. There are a few product specific rules of origin requirements. |
General Framework | Low-income and Lower-middle Income countries as classified by the World Bank. | 12 countries[3] | Tariff reduction on two-thirds of product lines | Double transformation for textile and clothing items. For all other products, the general RoO requires a minimum local value addition of 50%. There are a few product specific rules of origin requirements. |
Enhanced Framework | Low-income and lower middle-income countries which are classified as economically vulnerable and have satisfied requirements relating to the 27 international conventions | 8 countries[4] | Tariff suspension for two-thirds of product lines | Double transformation for textile and clothing items. For all other products, the general RoO stipulates a minimum local value addition of 50%. There are a few product specific rules of origin requirements. |
Source: International Economics Consulting compilation.
Complying with the scheme
The rules of origin (RoO) are used to determine appropriate tariff rates and access to specific preferential trade scheme. To qualify as ‘originating’ from a GSP country, the goods produced in beneficiary countries or used materials from other countries must be substantially processed or transformed. The rules of origin requirements for benefiting from UK GSP are similar to those used for EU GSP. To qualify for preferential market access, the RoO requirements for LDCF is single transformation for textile and clothing items and a minimum local content is 30 per cent for other products. For other beneficiaries (under General as well as Enhanced framework), a double transformation in textile and clothing would required, while a minimum value-addition of 50 per cent is required for all most other products. There are some product specific rules of origin in UK GSP and these are described in Schedule 1 part 2 of the Customs (Origin of Chargeable Goods: Trade Preference Scheme) (EU Exit) Regulations 2020.
The UK cumulation arrangements include, bilateral, regional (a GSP-beneficiary country to cumulate within its own regional group), extended (a beneficiary to apply for cumulation with a country that has a trade arrangement with the UK) and cumulation with the EU, Norway and Switzerland (materials originating from these countries). Materials falling within Chapters 1 to 24 of the Harmonized System of Trade Classification which originate from Norway or Switzerland are not covered by cumulation. The cumulation arrangement in UK GSP is comparable with the EU GSP system. For regional cumulation, the UK GSP defines two regions whereas the current EU GSP regulations consider four regions.
Under the UK GSP regime, the suspension of GSP is possible because of country graduation, trade agreement suspension and goods/products graduation. In the case of a country graduation arrangement, the UK will provide—just like the EU—a transition period of at least 3 years before removing the country from the relevant framework. It also creates an opportunity for the graduated country to enter another GSP framework if it meets the relevant requirements. For trade agreement suspension, the GSP rates may be withdrawn for countries once they implement a new trade agreement with the UK, which provides them with equivalent or better preferential market access than the GSP. For instance, Since December 2021, Ghana, Kenya and Jordan have been suspended from receiving preferential rates of import duty under the UK GSP as the UK has agreed an alternative trade arrangement with these countries.
Goods graduation refers to the suspension of preferential rates of import duty on a specific product group that is already highly competitive without trade preferences. The relevant goods graduation thresholds are same as the current EU GSP. The UK’s first list of graduated goods is valid until the end of 2022. The next list of graduated goods will take effect in 2023. It will be reviewed once in every three years.
Level of trade potentially impacted by the schemes
The total imports from General Framework and Enhanced Framework countries were respectively $16.1 billion and $9.8 billion in 2020 (Figure 1). In 2020, the UK imported around $30 billion or GBP22 billion (equivalent to around 5 per cent of total imports) worth of goods from GSP beneficiary countries (Figure 1). The total imports from LDC framework countries was $4.8 billion (equivalent to just 0.75 per cent of total imports) in 2020 (Figures 1 and 2). It is worth pointing out that all imports from LDCs do not benefit from the duty-free access under LDCF because of lack of fulfilment of rules of origin requirements. Again, not all of these imports are subject to trade preferences given that for these countries there exist non-preferential tariff lines and not all goods can satisfy rules of origin requirements event when tariff preferences exist.
From the LDCF beneficiary countries, Bangladesh is the leading exporters – accounting for more than 60 per cent of all imports from LDCs in the UK (Figure 3). It is followed by Cambodia (20.3 per cent) and Myanmar (7.4 per cent). Clothing is the largest import items from LDCs comprising more than 80 per cent of all imports from LDC framework beneficiary countries (Figure 4).
Note: The imports figures do not reflect all imports benefitting from the UK GSP. The information on preferential imports in the UK is not available currently.
Source: ITC Trademap.
Trade and trade policies influence women and men in different ways. Therefore, it is important to consider the different impacts on women and men from the design, implementation, and evaluation of trade policies to help reveal the impact of trade on gender equality. For example, textile and textile products is a sector that traditionally has a larger proportion of female workers, and as such, would have a more severe gender impact from unfavourable trade policies on that sector. On the one hand, export growth supported by trade preferences can create opportunities for women, as it leads to more job opportunities and increased pay. On the other hand, increased exports may also lead to exporting firms resorting to cheap female labour as a source of competitive advantage, thereby segregating women and trapping them in low-skilled sectors and low-paying jobs, leading to a deterioration in both wages and working conditions for everyone.[5]
Box 1 Ensuring that trade liberalisation works for women
Fontana (2009) suggests three essential steps to ensure that trade liberalization translates into economic benefits and social inclusion for all members of society, particularly women. First, there will need to be a detailed gender picture of the economy, including, among others, the gender composition of the labour force and exposure to foreign competition; the working conditions, earnings, and labour market segmentation; the access to and control over economic resources; the time burdens and gender division of household responsibilities; the household consumption patterns; and the public provision of social services. From this basis, the second step is to analyse the gender characteristics of production and consumption of products and services to be liberalized and excluded. The final step involves gender analysis of the revenue effects of tariff changes. Source: Fontana, M. (2009) Gender Justice in Trade Policy: The gender effects of Economic Partnership Agreements. One World Action. |
Overall, unilateral trade preferences granted by developed countries to developing countries have had a positive effect in promoting the beneficiaries’ exports.[6] Persson & Wilhelmsson (2013) highlighted that both the EU’s GSP and GSP+ have a positive impact on the extensive margin of their beneficiaries.[7] Similarly, Foliano, Cirera, & Gasiorek (2016) found a positive relationship between the EU’s preferential regimes and trade with developing countries. Specifically, the authors found that the main factors contributing to such increase were the lower tariffs and larger preferential margins, highlighting that the greater the depth and range of preferences on offer, the greater the likely effects on trade.[8] Sorgho & Tharakan (2019), in an analysis of the United States’ African Growth and Opportunity Act (AGOA), the unilateral programme for African countries, and the EU’s Everything-but-Arms (EBA) programme, have allowed beneficiary countries to increase their market share in the donor's market, with the AGOA having a larger impact than the EBA initiative.[9] Ito & Aoyagi (2019), in an analysis of Japan’s unilateral preferences for least developed countries (LDCs), confirm that these countries have benefited from the duty-free quota-free market access to the Japanese market, particularly on those tariff lines with higher margins of preferences.[10]
However, the impact of the trade preferences on women, is not yet clear. On the one hand, trade preferences have boosted the production and exports of the eligible sectors, such as textiles and apparel, low-skilled sectors.[11] As women in developing countries tend to comprise a significant share of the labour force in light manufacturing sectors in developing countries, trade preferences expected to increase women’s employment and wage gains. On the other hand, exporting firms may resort to the use of a cheap female labour force as a source of competitive advantage, thereby segregating women and trapping them in low-skilled sectors and low-paying jobs. Therefore, the increased share of female employment in export sectors may also lead to downward pressure and a deterioration in both wages and working conditions for all.[12]
To date, only the EU’s GSP+ has attached any gender-related conditionality to benefit from unilateral trade preferences. Some of those requirements include the Convention concerning Equal Remuneration of Men and Women Workers for Work of Equal Value, No. 100 (1951) or the Convention on the Elimination of All Forms of Discrimination Against Women (1979). However, the existence of such requirements does not always effectively transform into an immediate implementation. For example, ActionAid and Oxfam reported in 2015 that, due to an EBA-driven surge in exports, a series of cases of land grabbing or inadequate compensation to grant land for companies had been experienced in Ethiopia and Cambodia, particularly for the floriculture and commercial agro-industry sectors.[13]
Within free trade agreements (FTAs), gender-related provisions have been more common in recent years, although it is not commonplace. For example, the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP), to which the UK is in discussions to join, belongs to a class of so-called deep trade agreements which means that it includes a broad range of provisions impacting market access not only through addressing border barriers but also behind the border measures. Nevertheless, this does not necessarily imply that the agreement also has provisions to address issues such as gender equality and inclusivity in a broader sense.
In fact, during the negotiations of the predecessor to the CPTPP (the Trans-Pacific Partnership, or TPP) several of the negotiating parties expressed concerns about the insufficient attention given to the possible impacts of these “aggressive” trade and investment liberalization on societal groups that have already been disproportionately adversely affected by globalization, especially women and indigenous people. Some of the CPTPP members attach great importance to the impacts of trade (liberalization) on all in their society (e.g., Canada, Chile, and New Zealand through their variants of “trade for all” strategies). Nevertheless, the negotiated text did not include specific nor binding provisions in this area. The exception is Article 23, where the members say they “shall consider undertaking cooperative activities aimed at enhancing the ability of women, including workers and business owners, to access and benefit from CPTPP opportunities.” The list of possible activities includes: providing advice or training; exchanging information and experiences on programs aimed at helping women build skills and capacity; enhancing women’s access to markets, technology, and financing; developing women’s leadership networks; and identifying best practices relating to workplace flexibility. In addition to this, the CPTPP text includes a raft of gender-neutral measures that should, at least indirectly, help women in CPTPP economies trade more successfully.
Making UK GSP more development-friendly
It is expected that the new scheme will be simpler, more generous, pro-growth to trading with developing countries. It is important to note that the UK government initiated a consultation for simplifying the UK GSP. The current UK GSP will be replaced by a new UK-specific ‘Developing Countries Trading Scheme’ in this year (2022). A committee has been formed to figure out how the new system will work in practice, and what the implications of the change will be for developing countries, as well as UK and international businesses and the public. The objectives are: simplifying rules of origin requirements for least developed countries; reducing tariffs for low-income and lower middle-income countries; amendments to the approach to goods graduation, which suspends preferential rates on particular goods from certain countries on the basis of their competitiveness; and, amendments to the conditions and reporting requirements that enable a low-income or lower middle-income country to benefit from more generous provisions through the Enhanced Framework; and simplifying the conditions that could lead to variation or suspension of preferences for any beneficiary country.
There are several areas where the UK can make substantial improvement over the GSP provisions, which have been inherited from the EU, making the UK’s regime more development friendly. For instance, there is merit for making the UK GSP system simplified by abolishing the goods graduation system. First and foremost, the threshold values associated with various goods, e.g., 17.5% for live plants and certain agricultural products, 47.2% for apparel and clothing goods, and 57% of all other goods are arbitrary in nature. These threshold figures come from the EU regime, which undertakes periodical review of determining new values. In further reviews, be it after 3 years or more, the exercise for determining these thresholds will again be arbitrary in nature. It is worth pointing out that the EU is a much bigger market (than the UK) and thus the absolute exports under those thresholds would be much bigger. As the UK market is going to be much smaller, going over the same threshold value may not indicate a country's reaching the level of perceived competitiveness not requiring preference.
Additionally, the UK market could be a niche market for many Commonwealth LDCs and other GSP beneficiary countries due to historical, cultural, and language linkages and there is no reason to believe that export success in the UK would indicate global competitiveness. Hitting the predetermined threshold level could also indicate a GSP-recipient country’s lack of diversification in its export basket (which is a general problem for many developing countries). Therefore, it is possible a that a recipient country would be penalised for its inherent vulnerability and not being able to diversify into other products. This could especially be problem—as mentioned—the UK market is going to be a much smaller than the combined EU market. Therefore, the thresholds could unreasonably limit preferential exports from a country.
Since the UK is excluding all upper-middle income countries from its GSP schemes and thus there is perhaps no need for imposing restrictions on preferential access by graduating LDCs and other lower-middle-income countries. If the thresholds are to be maintained, then countries under Enhanced Framework (like the LDCs) should be allowed not to be constrained by the provision.
It is important to reassess the GSP sections. The goods graduation assessment, which determines the graduated goods list, groups GSP goods according to “GSP sections”. The use of GSP sections has been rolled over from the EU’s GSP. If the UK is going to maintain such a list of goods, it would be more appropriate to assess the grouping of goods used in the goods graduation assessment. For instance, it is not clear why textiles and apparel (under S11a and S11b of EU groupings), agriculture and fisheries should be considered as sensitive products for which safeguard measures would be required (i.e., Safeguards in the Textile, Agriculture and Fisheries Sectors under Article 29 of the proposed EU GSP 2024-34). The UK can introduce an improved system by not establishing any such safeguard measures for Enhanced Framework countries.
Rules of Origin is another area where the UK can offer more development-friendly and commercially meaningful market access conditions for LDCs and Enhanced Framework countries (including graduating LDCs). Graduating LDCs moving into the Enhanced Framework can be offered the same rules of origin provisions as those for LDCs. This is because despite many LDC’s making impressive socio-economic progress, their capacity to create enough backward linkage in their economies remain extremely limited. If the same level of LDC RoO for EF/graduating countries cannot be granted for an indefinite period, a five to ten year extended period (for keeping the same rules of origin applicable for LDCs) should be provided.
In textile and clothing, LDCs currently enjoy single transformation rules of origin requirement while countries in the Enhanced Framework have to follow a 'double-transformation'. This will make it very difficult for graduating LDCs to benefit from the Enhanced Framework. Either the same single transformation can be offered to the graduating LDCs/countries under Enhanced Framework or a simplified minimum value-added provision (e.g., of 25%) to be considered. Finally, the minimum value addition requirement of 40% for Enhanced Framework countries, for goods other than textiles and apparels, is too stringent and unrealistically high considering today's value-chain led trade, where countries trade based on very small margins. Therefore, it will be only reasonable to consider a lower value of e.g., 25% to allow many capacity-constrained countries to make use of GSP provisions.
Given the UK's global leadership role in promoting trade-led development, the forthcoming UK GSP regime should be much simpler than that of the EU yet effective, accessible, and commercially meaningful for LDCs, graduating LDCs, and other vulnerable countries.
Finally, while we agree that upper middle-income countries may not need the benefits of preferential margins, this is often not the case for Small Island Development States (SIDS). While several SIDS are upper middle income, they are vulnerable with poor economic diversification, due to size and inherent constraints arising from a lack of physical connectivity to markets. Landlocked developing countries (LLDCs) also face unusual connectivity challenges as they must transit through a neighbouring country to access global markets. Given that several Commonwealth countries are categorized as SIDS or LLDCs, the Enhanced Framework should consider granting similar conditions to those offered to LDCs, no matter their level of income.
The UK, through its Developing Countries Trading Scheme, can ensure that women are not left behind in terms of trade preferences, and enjoy the same opportunities than men. To do so, the following recommendations[14] are put forward:
- Expand trade preferences to trade in services. Trade in Services is not generally covered through unilateral preferences, despite the sector becoming the largest and most important part of many countries’ outputs. Particularly, many women are already present within the services sector, whether that be in tourism and hospitality, as well as retail. Therefore, this sector cannot be excluded from the UK’s Developing Countries Trading Scheme if it wants to have a meaningful impact on women in developing countries.
- Implement an effective monitoring and evaluation system to track the impact of trade preferences on women. The UK should actively encourage and facilitate the full participation of local and international CSOs to assess and strengthen the status of women’s economic empowerment, as key informants on the priorities, constraints, achievements, and measures to be adopted. Enhanced monitoring of the gender-specific international conventions and laws to ensure the most impact on women’s economic empowerment. Some of these indicators include the gender wage ratio, export revenues increase by x% for male and x% for women, gender equality in export employment, etc.
- Adopt a company-specific approach to the removal of preferences. The withdrawal of the preferences might have deep and severe negative consequences for the country’s economy, negatively impacting women. In this context, a company-specific approach could be adopted. Similar to the application of anti-dumping duties, whenever a country sees its unilateral preferential market access removed due to women’s rights violations, companies in the target countries should be able to continue benefiting from the preferences if they are to prove that they actually and effectively respect women’s rights and comply and adhere to the relevant international standards.
- Go beyond tariff reductions. The Developing Countries Trading Scheme will need to go beyond mere tariff reduction if it aims to have a deep socio-economic impact on developing countries, and particularly women in those countries. Rules of Origin, amongst other non-tariff measures, are major barriers impeding women’s ability to trade, and thus these should be reformed to ease its impact. For example, A possible solution would consist in modifying the existing de minimis rule, granting a waiver in terms of value of duty paid, rather than value of imported goods.
28 February 2022
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