Proposal for a COUNCIL REGULATION applying a scheme of generalised tariff preferences for the period 1 January 2002 to 31 December 2004

(presented by the Commission)

EXPLANATORY MEMORANDUM

1. Council Regulation (EC) No 2820/98 of 21 December 1998 [1] applying a multiannual scheme of generalised tariff preferences will expire on 31 December 2001. In 1994, the Commission adopted some guidelines on the role of the GSP for the ten-year period 1995 to 2004 [2]. A new regulation is required in order to implement those guidelines for the remainder of the period, i.e. the years 2002 to 2004. This memorandum is meant to explain the proposal for that new regulation.

[1] OJ L 357 of 30.12.1998, p. 1.

[2] COM (94) 212 final

2. The guidelines of 1994 brought about a number of important changes. Since 1995, GSP schemes of the European Union replaced the traditional approach of granting duty free market access for restricted quantities, by the concept of modulation, which provides limited preferences for unlimited quantities. At the same time, new rules were introduced on graduation, allowing for the exclusion of specific sectors of exports from individual beneficiary countries. Subsequently, additional preferences were offered in the framework of special incentive arrangements, meant to promote the objectives of sustainable development, in particular the protection of labour rights and of the environment.

3. As most of those features were genuine innovations, it was difficult to anticipate their effects. Fortunately, many fears that had been raised prior to their adoption turned out to be unfounded. Thus, the decision to abandon quotas and ceilings did not give rise to a major surge of preferential imports. To the extent that some of the provisions of the present regulation are obviously too cautious and complicated, they should be streamlined.

4. On the other hand, some of the expectations, on which the present rules were shaped, did not materialise. Potential beneficiaries of the special incentive arrangements were reluctant to take up the opportunities they are offered. It would therefore seem necessary to adjust the measures, which are meant to put them into practice.

5. The present GSP regulation is the first one to combine all different arrangements and sectors, which used to be governed by different regulations. It falls short, however, of fully harmonising and unifying all rules and procedures. The 1994 guidelines clearly state a need for simplification. The better part of the proposed amendments pursues this objective, and does not imply changes in terms of substance.

I. Modulation

6. The approach advocated by the 1994 guidelines to replace quotas and ceilings by a modulation mechanism that differentiates preferences according to the sensitivity of products turned out to be the right one. More sensitive products usually enjoy higher tariff protection, but benefit from smaller preferences, while less sensitive products, on which duties are normally lower, enjoy bigger preferences. In other words, higher tariff rates typically combine with smaller preferences, while lower tariff rates do so with bigger preferences. Thus, as long as the differences between the average duty rates in the four product categories are proportional to the differences between the four preferential rates, the modulation mechanism produces similar benefits for each of those categories.

7. In practice, however, as a result of progressive tariff dismantling, this is not the case anymore. The differences between preferences for each product category are now considerably higher than those between the average duty rates. The tariff reductions that the present modulation mechanism grants to each of those four categories are therefore increasingly unequal. As far as non-sensitive and semi-sensitive products are concerned, their comparatively high preferences result, in spite of relatively low tariffs, in average reductions of 4 percentage points. In contrast, although tariffs for sensitive and very sensitive products are higher, the rather slim preferences for these product categories produce reductions in the range of only 2 percentage points, and often less.

8. It is therefore not surprising that the utilisation rate for the two less sensitive product categories is significantly higher than for the other two. While the rate for non-sensitive and semi-sensitive products is now around 45 %, it is only 37 % for sensitive and 32 % for very sensitive products. It therefore seems necessary to improve the preferential treatment for more sensitive products.

9. The 1994 guidelines envisaged a modulation mechanism with only two categories, sensitive and non-sensitive products, which seems indeed more appropriate than the four categories established by the present regulation. The number of categories should therefore be reduced to two, sensitive and non-sensitive products. The classification of non-sensitive products should be maintained, while all other products classified under the present regulation as semi-sensitive, sensitive and very sensitive products should be regrouped in a second new category of sensitive products.

10. Like under the present regulation, non-sensitive products should continue to enjoy duty free access, while the future category of sensitive products should enjoy a tariff reduction, which ought to be the same for all products of that category. The amount of that reduction should not only be sufficiently attractive, but also in line with the principle of neutrality, enshrined in the 1994 guidelines.

11. According to this principle, the Community scheme of generalised tariff preferences must continue to aim at a level of liberalisation at which the impact of the preferential margin on the potential volume of preferential trade is neutral overall compared with the previous schemes. As a result of progressive trade liberalisation, the potential volume of preferential trade decreased significantly. And so did preferential margins.

12. Preferences that are determined as a percentage of the MFN duty are bound to shrink where the MFN duty rate is lowered. In order to halt further erosion of GSP preferences, it would therefore seem preferable to determine preferences as a reduction of MFN duty rates by a flat rate, i.e. by a certain number of percentage points.

13. At the time the present GSP regulation was adopted, the trade-weighted average preferential margin offered by the GSP was 3,68 %. The present mean tariff reduction for non-sensitive and semi-sensitive products is of the same magnitude, which also seems to be sufficiently attractive. Thus, a flat reduction of the MFN duty rate by 3,5 percentage points would seem appropriate for all sensitive products.

14. For most of them, the preferential treatment resulting of a flat rate reduction of 3,5 percentage points would be the same or slightly better than the one they enjoy under the present regulation, while a limited number of products would enjoy a less favourable treatment.

15. However, the great variations between specific duty rates rule it out to reduce them by a flat rate. The present system of reducing them by a percentage should therefore remain in place. In order to simplify the scheme, a uniform reduction of 30 % should be applied to all products concerned.

16. The "nuisance duties", concerning specific duties, providing total exemptions where preferences result in duties of less than EUR 0,5, should be raised to EUR 2.

II. Graduation

17. The 1994 guidelines clearly state the requirement to target preferential treatment on those developing countries which need it most. The present regulation pursues this objective by a set of different rules allowing, on the one hand, for the exclusion of countries, and on the other, for the graduation of specific production sectors of individual beneficiary countries. Moreover, some sectors are not included only because they never were for the countries concerned. While those rules seem rather complex, they are all justified for different reasons. As a whole, they are part of a regime that strikes a balance between the scope of preferences and the list of countries for whom they are available.

18. As far as the exclusion of countries is concerned, one of the two criteria - per capita gross national product - needs update. In order to use a neutral criteria which is regularly revisited, reference should be made to the threshold according to which the World Bank classifies countries as high-income countries.

19. In order to enhance the objectivity of the regime, the list of beneficiary countries should be revised on a yearly basis.

20. This, however, could result in a lack of predictability. It would therefore be preferable to require that a country meet the criteria for exclusion during three consecutive years, before it should be eliminated from the list of beneficiary countries.

21. Finally, for the sake of providing a fair treatment to all countries, those which had been eliminated should be readmitted in case that they do not meet the criteria for exclusion during three consecutive years.

22. As far as graduation is concerned, both basic rules - the so-called lion's share clause and the graduation mechanism - should be maintained. In order to make graduation more neutral and automatic, it should also be applied on a more regular basis, i.e. once a year.

23. That amendment should be balanced by an additional requirement according to which graduation should only take place where beneficiary countries meet one of the criteria during three consecutive years. This condition should be considered to be fulfilled also where it is not the same criterion that is met during each of the three years.

24. This requirement would enhance predictability. Beneficiary countries should be notified of the results of calculations and should be provided an opportunity to comment. Where sectors have met the criteria for graduation during two years, chances are that this might also happen during the third year. Thus, countries - and traders - would benefit from some kind of early warning. This, in turn, would allow implementing graduation with a shorter delay - one year after the decision has been taken - and in one go.

25. Implementing graduation now, on the basis of the most recent statistics, would remove GSP coverage from more than half the trade volume that would be covered without graduation. The requirement to fulfil the criteria for graduation during three consecutive years before graduation can take place would reduce the number of sectors to be graduated by more than 20.

26. Neither the 1994 guidelines nor the present regulation foresee the possibility to reverse graduation in cases where the criteria are not met anymore. Such possibility should be provided, for the same reason as in the case of the exclusion of countries.

27. As soon as the new GSP Regulation is adopted by the Council, the Commission will prepare a revision of the sectors that will have to be graduated according to the new regime. The results of that revision will enter into force on 1 January 2003.

III. The special incentive arrangements

28. The special incentive arrangements did not encounter the success that was hoped for at the time they were adopted. This is certainly due to various reasons, one of which may be the relatively small margin of preferences available under those arrangements. Another one seems to be the extremely complicated calculation of the additional preferences that beneficiaries might get on top of the normal ones - which are already sufficiently difficult to calculate. Countries might refrain from requesting the benefit of those arrangements simply because they find it difficult to assess.

29. In order to give momentum to the present trend under which acceptance of the arrangements by potential beneficiary countries gains ground, it would seem imperative to make them more attractive. In line with the present scheme, but in order to simplify it, additional preferences should double the general preferences - i.e. they should provide an additional flat reduction by 3,5 percentage points on ad valorem MFN duties, and an additional reduction of specific duties by another 30 %. Such rule would also have the advantage of being easily understood.

30. The benefit of the special incentive arrangements is, at present, also available for sectors in which the country concerned is graduated, but only where graduation took place under the graduation mechanism (and not under the lion's share clause). In order to make the arrangements more attractive for more advanced developing countries (which are more likely to be graduated and to fulfil the requirements of the social clause), the benefit should also be given where graduation took place on grounds of the lion's share clause.

31. In its present shape, the social incentive arrangements establish a double conditionality, where a country has to qualify for being granted the status of a beneficiary country of the arrangements and where exports from that country have to be certified as being manufactured in accordance with the labour standards concerned. This includes all inputs, even imported ones. Such requirement is not viable, since a beneficiary country is not in a position to control compliance in that respect. Therefore, the requirement should be dropped.

32. The special incentive arrangements for the protection of labour rights initially referred to ILO Conventions No. 87, 98 and 138. According to the ILO Declaration on Fundamental Principles and Rights at Work, those principles and rights include the freedom of association and the effective recognition of the right to collective bargaining, the elimination of all forms of forced or compulsory labour, the effective abolition of child labour, and the elimination of discrimination in respect of employment and education. In order to bring the special incentive arrangements into line with the concept of "core labour standards", beneficiary countries should also be asked to effectively comply with ILO Conventions No 29, No 100, No 105, No 111 and No 182.

33. As far as the special arrangements for the protection of the environment are concerned, internationally agreed standards and an internationally recognised system of certification are still not in place. Things are moving, however, and there are chances that the ITTO criteria are complemented in the near future. On the other hand, some national certification schemes have acquired a certain degree of international recognition. In order to take this into account, the wording of the draft proposal uses more general terms than the present regulation. In the framework of the revision of the GSP for the next decade, due consideration should be given to broaden both the scope of the special incentive arrangements for the protection of the environment and the requirements to be fulfilled.

IV. Special arrangements supporting Least Developed Countries

34. The present draft proposal takes into account the new regulation granting duty free access for essentially all products from Least Developed Countries.

V. Special arrangements to combat drug production and trafficking

35. At the time the present GSP Regulation was under preparation, attempts were made in order to remove the inconsistency between the benefits of the drug regime, which are given without any prerequisite, and those of the special incentive arrangements, which are conditional. It is indeed necessary to establish some kind of assessment monitoring ensuring that the drug regime achieves the objectives for which it is granted. These objectives are to favour sustainable development, so as to improve the conditions under which the beneficiary countries are combating drug production and trafficking. Sustainable development requires, first, the creation of new jobs in all sectors of the economy, including industry, for which the GSP had been established initially. This implies improving the supply side and diversifying exports; secondly, solid development through the effective implementation of ILO core labour standards; and thirdly, the protection of the environment, including in particular the sustainable management of the tropical forest.

36. The Commission should have a clear picture of the extent to which these arrangements actually achieve their objectives. It should therefore monitor the application of the arrangements as well as their effects, taking into account the assessments conducted by independent international organisations and agencies, and it should have an exchange of views with the beneficiary countries on those assessments. While the evaluations should not lead to discontinue the arrangements before 2004, they should help to answer the question whether it is appropriate to maintain the arrangements beyond that date.

VI. Withdrawal

37. In general, the GSP should be used, to a larger extent, as a means for promoting the protection of core labour standards. It is therefore proposed to include serious and systematic violation of those standards as a reason for temporary withdrawal of GSP benefits. Similarly, it is proposed to include significant detrimental effects on the environment arising from the production of certain products also as such reason.

2001/0131 (ACC)

Proposal for a COUNCIL REGULATION applying a scheme of generalised tariff preferences for the period 1 January 2002 to 31 December 2004

THE COUNCIL OF THE EUROPEAN UNION,

Having regard to the Treaty establishing the European Community, and in particular Article 133 thereof,

Having regard to the proposal from the Commission [3],

[3] OJ C of , p. .

Having regard to the opinion of the European Parliament [4],

[4] OJ C of , p. .

Whereas:

(1) Since 1971, the European Community has granted trade preferences to developing countries, in the framework of its scheme of generalised tariff preferences.

(2) A communication of the Commission to the Council of 1 June 1994 sets out the guidelines for the application of the scheme for the period 1995-2004 [5].

[5] COM (94) 212 final

(3) Council Regulation (EC) No 2820/98 of 21 December 1998 [6] implements the scheme of generalised tariff preferences until 31 December 2001. Thereafter, the scheme should continue to apply until 31 December 2004, in accordance with the guidelines.

[6] OJ L 357 of 30.12.1998, p. 1.

(4) It should incorporate the provisions of Council Regulation (EC) No 416/2001 amending Council Regulation (EC) No 2820/98 applying a multiannual scheme of generalised tariff preferences for the period 1 July 1999 to 31 December 2001 so as to extend duty-free access without any quantitative restrictions to products originating in the least developed countries [7].

[7] OJ L 60 of 1.3.2001, p. 43

(5) The special arrangements to combat drug production and trafficking should be closely monitored during the period covered by this Regulation in order to determine whether they should be maintained thereafter.

(6) Preferences should be differentiated according to the sensitivity of products. It would be sufficient to differentiate between two products categories, sensitive and non-sensitive products.

(7) Tariff duties on non-sensitive products should continue to be suspended, while duties on sensitive products should enjoy a tariff reduction.

(8) Such reduction should be sufficiently attractive in order to motivate traders to use the opportunities offered by the scheme. As far as ad valorem duties are concerned, the reduction should therefore be a flat rate of 3,5 percentage points of the MFN duty rate, while specific duties should be reduced by 30 %. Where such duties specify a minimum duty, that minimum duty shall not apply.

(9) Duties should be totally suspended where preferential treatment results in ad valorem duties of 1 % or less or in specific duties of 2 Euro or less.

(10) The provisions on the exclusion of beneficiary countries on grounds of the degree of their development should be applied once a year. However, countries should only be excluded where they meet the criteria for exclusion during three consecutive years, and they should be readmitted where they do not meet those criteria during three consecutive years.

(11) During the first year of application of this Regulation the countries previously excluded should remain excluded.

(12) The provisions on graduation of sectors should be applied once a year. However, sectors should only be graduated where they meet the criteria for graduation during three consecutive years, and they should be readmitted where they do not meet those criteria during three consecutive years.

(13) During the first year of application of the Regulation the sectors previously graduated should remain graduated.

(14) The tariff preferences under the special incentive arrangements should be as high as the preferences offered under the general arrangements, thus doubling the latter.

(15) The special incentive arrangements should grant tariff preferences in all sectors that had been graduated, equivalent to the preferences available under the general arrangements.

(16) The special incentive arrangements for the protection of labour rights should require effective application of all standards referred to in the ILO Declaration on Fundamental Principles and Rights at Work.

(17) The general rules concerning proof of origin and methods of administrative co-operation laid down in Commission Regulation (EEC) No 2454/93 [8] and the rules concerning the customs debt, in particular Article 220 (2) (b) of Council Regulation (EEC) No 2913/92 [9] shall apply to tariff preferences granted under the special incentive arrangements for the protection of labour rights.

[8] OJ L 253 of 11.10.1993, p. 1

[9] OJ L 302 of 19.10.1992, p. 1

(18) The special incentive arrangements for the protection of the environment should take into account new developments concerning internationally agreed standards and certification schemes.

(19) The reasons for temporary withdrawal should include serious and systematic violation of any standards referred to in the ILO Declaration on Fundamental Principles and Rights at Work as well as significant detrimental effects on the environment.

(20) Temporary withdrawal of all tariff preferences in respect of imports of products originating in Myanmar should remain in force.

HAS ADOPTED THIS REGULATION:

Article 1

1. The Community scheme of generalised tariff preferences shall apply during the years 2002, 2003 and 2004 in accordance with the provisions of this Regulation.

2. This Regulation provides for

- general arrangements,

- special arrangements for Least Developed Countries,

- special arrangements to combat drug production and trafficking,

- special incentive arrangements for the protection of labour rights, and

- special incentive arrangements for the protection of the environment.

TITLE I

General Provisions

Article 2

The beneficiary countries of each of the arrangements referred to in Article 1 (2) are listed in Annex I.

Article 3

1. A beneficiary country shall be removed from Annex I where it has met, during three consecutive years, both the following criteria:

- classification by the World Bank as high-income country,

- a development index, as defined in Annex II, higher than - 1.

2. Where a country or territory, which had been removed from Annex I, has not met, during three consecutive years, the criteria set out in paragraph 1, it shall again be included in Annex I.

3. On the basis of the most recent data available on 1 September of each year, the Commission shall establish which beneficiary countries meet the criteria set out in paragraph 1.

4. The Commission shall notify the beneficiary countries which meet the criteria set out in paragraph 1 in respect of the most recent year for which data is available.

5. Before the end of each year, the Commission shall decide, in accordance with the procedure referred to in Article 37, to remove from Annex I the beneficiary countries which meet the condition set out in paragraph 1 and to include those which meet the condition laid down in paragraph 2.

6. A decision taken in accordance with paragraph 5 shall enter into force on 1 January of the second year following the one during which it was taken.

7. The Commission shall notify a decision taken in accordance with paragraph 5 to the beneficiary country concerned and inform it of the date on which that decision enters into force.

Article 4

The products included in each of the arrangements referred to in Article 1 (2) are listed in Annex IV.

Article 5

1. The tariff preferences provided for by this Regulation shall apply to imports of products included in the arrangements enjoyed by the beneficiary country in which they originate.

2. The rules concerning the definition of the concept of originating products, the proof of origin and the methods of administrative co-operation, for the purposes of the arrangements referred to in Article 1 (2) of this Regulation, are laid down in Commission Regulation (EEC) No 2454/93.

3. For the purposes of determining whether a product manufactured in a beneficiary country which is a member of a regional group originates therein, products originating in a country which does not benefit from the arrangements applying to the final product, shall be treated as if they originate in the country of further manufacture, provided that both countries belong to the same regional group and that both countries benefit from regional cumulation for that group according to Commission Regulation (EEC) No 2454/93.

Article 6

1. For the purposes of this Regulation, the term "Common Customs Tariff duties" means the duties specified in Part Two of Annex I of Council Regulation (EEC) No 2658/87 [10] on the tariff and statistical nomenclature and on the Common Customs Tariff, except those duties set up within the framework of tariff quotas.

[10] OJ L 256 of 7.9.1987, p. 1.

2. For the purposes of this Regulation, the term "sector" means any of the sectors of products listed in Annex III.

3. For the purposes of this Regulation, the term "Committee" means the Generalised Preferences Committee referred to in Article 36.

TITLE II

Tariff preferences

Section 1

General arrangements

Article 7

1. Common Customs Tariff duties on products listed in Annex IV as non-sensitive products shall be entirely suspended.

2. Common Customs Tariff ad valorem duties on products listed in Annex IV as sensitive products shall be reduced by 3,5 percentage points, save as otherwise provided in that Annex.

3. Common Customs Tariff specific duties on products listed in Annex IV as sensitive products shall be reduced by 30 %, save as otherwise provided in that Annex.

4. Where Common Customs Tariff duties on products listed in Annex IV as sensitive products include ad valorem duties and specific duties, the specific duties shall not be reduced.

5. Where the duties referred to in paragraphs 2 and 3 specify a minimum duty, that minimum duty shall not apply.

6. The tariff preferences referred to in paragraphs 1 to 3 shall not apply to imports of products of sectors which according to Annex I are not included for the country of origin concerned.

7. The tariff preferences referred to in paragraphs 1 to 3 shall not apply to imports of products of sectors in respect of which those tariff preferences have been removed, for the country of origin concerned, in accordance with Article 12 or with similar provisions of a previous regulation on the Community scheme of generalised tariff preferences.

Section 2

Special incentive arrangements

Article 8

1. Subject to the provisions of Title III, Common Customs Tariff ad valorem duties on products referred to in Article 7 (2), of sectors which according to Annex I are included, for the country of origin concerned, in the special incentive arrangements for the protection of labour rights, shall be reduced by another 3,5 percentage points, save as otherwise provided in Annex IV. Specific duties on products to which apply the tariff preferences referred to in Article 7 (3), shall be reduced by another 30 %, save as otherwise provided in Annex IV.

2. The special incentive arrangements for the protection of labour rights shall not include sectors which according to Annex I are not included in the general arrangements for the country of origin concerned.

3. Subject to the provisions of Title IV, Common Customs Tariff ad valorem duties on products referred to in Article 7 (2), which according to Annex IV are included in the special incentive arrangements for the protection of the environment and which originate in a country that according to Annex I benefits from those arrangements, shall be reduced by another 3,5 percentage points. Specific duties on products to which apply the tariff preferences referred to in Article 7 (3), shall be reduced by another 30 %.

4. The tariff preferences referred to in paragraphs 1 and 3 shall apply simultaneously where the conditions set out in both paragraphs are met.

5. Common Customs Tariff duties on imports of products to which the tariff preferences referred to in Article 7 (1) do not apply according to Article 7 (7), shall be entirely suspended where those products are included, for the country of origin concerned, in the special incentive arrangements for the protection of labour rights.

6. Common Customs Tariff duties on imports of products which are included in the special incentive arrangements for the protection of the environment and which originate in a country, to which the tariff preferences referred to in Article 7 (1) do not apply according to Article 7 (7), shall be entirely suspended where those products originate in a country that benefits from those arrangements.

7. The tariff preferences referred to in paragraphs 1 and 3 shall also apply to imports of products to which the tariff preferences referred to in Article 7 (2) and (3) do not apply according to Article 7 (7). The certificate of origin Form A or the invoice declaration for such products shall be valid only in respect of the tariff preferences referred to in paragraphs 1 and 3.

Section 3

Special arrangements for Least Developed Countries

Article 9

1. Without prejudice to paragraphs 2 to 4, Common Customs Tariff duties on all products of Chapters 1 to 97, except those of Chapter 93, originating in a country that according to Annex I benefits from the special arrangements for Least Developed Countries, shall be entirely suspended.

2. Common Customs Tariff duties on the products of CN code 0803 00 19 shall be reduced by 20% annually starting on 1 January 2002. They shall be entirely suspended as from 1 January 2006.

3. Common Customs Tariff duties on the products of tariff heading 1006 shall be reduced by 20% on 1 September 2006, by 50% on 1 September 2007 and by 80% on 1 September 2008. They shall be entirely suspended as from 1 September 2009.

4. Common Customs Tariff duties on the products of tariff heading 1701 shall be reduced by 20% on 1 July 2006, by 50% on 1 July 2007 and by 80% on 1 July 2008. They shall be entirely suspended as from 1 July 2009.

5. Until Common Customs Tariff duties are entirely suspended in accordance with the provisions of paragraphs 3 and 4, a global tariff quota at zero duty shall be opened for every marketing year for products of tariff heading 1006 and subheading 1701 11 10 respectively, originating in the countries benefiting from these special arrangements. The initial tariff quotas for the marketing year 2001/2002 shall be equal to 2 517 tonnes, husked rice equivalent, for products of tariff heading 1006, and 74 185 tonnes, white sugar equivalent, for products of subheading 1701 11 10. For each of the following marketing years, the quotas shall be increased by 15% over the quotas of the previous marketing year.

6. The Commission shall adopt detailed rules governing the opening and administration of the quotas referred to in paragraph 5, in accordance with the procedure laid down in Article 37. In opening and administrating these quotas, the Commission shall be assisted by the management committees for the relevant common market organisations.

7. The Commission shall, in close co-operation with the Member States, carefully monitor imports of the products referred to in paragraphs 2 to 4. Member States or any interested natural or legal persons shall communicate to the Commission immediately all relevant information that may justify suspension of preferences. Where the Commission considers that there is sufficient evidence that the conditions for suspension are met, it shall take all appropriate measures as quickly as possible.

Section 4

Special arrangements to combat drug production and trafficking

Article 10

1. Common Customs Tariff ad valorem duties on products which according to Annex IV are included in the special arrangements to combat drug production and trafficking and which originate in a country that according to Annex I benefits from those arrangements, shall be entirely suspended, save as otherwise provided in Annex IV.

2. The Commission shall monitor and evaluate the effects of the arrangements referred to in paragraph 1, in respect of each beneficiary country's:

(a) use of the tariff preferences provided for by these arrangements;

(b) efforts in combating drug production and trafficking;

(c) social development, in particular the respect and promotion of the standards laid down in the ILO Conventions referred to in the ILO Declaration on Fundamental Principles and Rights at Work;

(d) environmental policy, in particular the sustainable management of tropical forests.

3. The evaluation referred to in paragraph 2 (b), (c) and (d) shall take into account the findings of the relevant international organisations and agencies. The Commission shall inform each beneficiary country of its evaluation and invite it to comment. The evaluation will be without prejudice to the continuation of the arrangements referred to in paragraph 1 until 2004, and their possible extension thereafter.

4. Before the end of 2004, the Commission shall conduct a general evaluation of the results of the arrangements referred to in paragraph 1. It shall take account of the findings when establishing guidelines for a scheme of generalised tariff preferences for the decade 2005 to 2014.

Section 5

Common provisions

Article 11

1. The tariff preferences provided for in this Regulation shall not apply to products which are subject to anti-dumping or countervailing measures under Council Regulations (EC) No 384/96 [11] or No 2026/97 [12], where the level of those measures is based on an injury margin derived from import prices which do not reflect the said tariff preferences.

[11] OJ L 56 of 06.03.1996, p. 1

[12] OJ L 288 of 21.10.1997, p. 1

2. The Commission shall publish in the Official Journal of the European Communities a notice indicating the products to which tariff preferences do not apply pursuant to paragraph 1.

Article 12

1. The tariff preferences referred to in Articles 7 and 10 shall be removed in respect of products from a beneficiary country, of a sector which has met, during three consecutive years, either of the following criteria:

(a) imports from that country of all products, included in Annex IV, of the sector concerned, exceed 25 % of imports of the same products from all countries and territories listed in Annex I;

(b) the sector's specialisation index exceeds the threshold corresponding to that country's development index, as defined in Annex II.

2. Paragraph 1 shall not apply

- to beneficiary countries whose development index is lower than -2;

- where imports from a beneficiary country of all products, included in Annex IV, of the sector concerned do not exceed 2 % of imports of the same products from all countries and territories listed in Annex I.

3. Where a sector, in respect of which tariff preferences had been removed in accordance with this Article or similar provisions of a previous regulation on the Community scheme of generalised tariff preferences, has not met, during three consecutive years, either of the criteria set out in paragraph 1, the tariff preferences shall be re-established.

4. On the basis of the most recent data available on 1 September of each year, the Commission shall establish which sectors meet the conditions laid down in paragraphs 1 and 3.

5. The Commission shall notify beneficiary countries which sectors meet the condition laid down in paragraph 1 in the most recent year for which data are available.

6. Before the end of each year, the Commission shall decide, in accordance with the procedure referred to in Article 37, to remove tariff preferences in respect of sectors which meet the condition set out in paragraph 1 and to re-establish tariff preferences for sectors which meet the condition laid down in paragraph 3.

7. A decision taken in accordance with paragraph 6 shall enter into force on 1 January of the second year following the one during which it was taken.

8. The Commission shall notify a decision taken in accordance with paragraph 6 to the beneficiary country concerned and inform it of the date on which that decision enters into force.

Article13

1. Where the rate of an ad valorem duty reduced in accordance with the provisions of this Title is 1 % or less, that duty shall be entirely suspended.

2. Where the rate of a specific duty reduced in accordance with the provisions of this Title is 2 Euro or less per individual Euro amount, that duty shall be entirely suspended.

3. Subject to paragraphs 1 and 2, the final rate of preferential duty calculated in accordance with this Regulation shall be rounded down to the first decimal place.

TITLE III

Special incentive arrangements

Section 1

Special incentive arrangements for the protection of labour rights

Article 14

1. The tariff preferences referred to in Article 8 (1) shall apply to imports of products originating in a country which according to Annex I benefits from the special incentive arrangements for the protection of labour rights, or which has subsequently been granted those arrangements by a decision taken in accordance with Article 18, for the sector concerned, provided that the products are accompanied by the statement referred to in Article 19.

2. The special incentive arrangements for the protection of labour rights may be granted to a country whose domestic legislation incorporates the substance of the standards laid down in the ILO Conventions referred to in the ILO Declaration on Fundamental Principles and Rights at Work and which effectively applies that legislation.

Article 15

1. The special incentive arrangements for the protection of labour rights shall be granted provided that:

- they are requested by a country or territory listed in Annex I,

- the examination of the request shows that the requesting country fulfils the condition laid down in Article 14 (2),

- the requesting country has made an undertaking to monitor the application of the special incentive arrangements and to provide the necessary administrative co-operation,

- the requesting country has stated the agreement referred to in Article 17.

2. The requesting country shall submit its request to the Commission in writing and shall provide comprehensive information of:

- the domestic legislation referred to in Article 14 (2), the measures taken to implement it and to monitor its application,

- any sectors in which that legislation is not applied.

3. The full official text of the legislation referred to in Article 14 (2) and of the implementing measures shall be attached to the request.

4. Where the legislation referred to in Article 14 (2) is only applied in certain sectors, a country may request the special incentive arrangements only for the sectors in which it is applied.

Article 16

1. Where the Commission receives a request accompanied by the information referred to in Article 15 (2), it shall publish a notice in the Official Journal of the European Communities, announcing that request. The notice shall state that any relevant information concerning that request may be sent to the Commission and it shall specify the period within which interested parties may make their views known in writing.

2. The Commission shall examine the request and may ask the requesting country any questions which it considers relevant.

3. The Commission shall seek all information it considers necessary and may verify the information received with the requesting country or any natural or legal person.

4. The examination of a request should be completed within a year of the date of receipt. The Commission may extend this period, after prior information of the Committee.

5. The Commission shall submit its findings to the Committee.

Article 17

During the examination of the request, the Commission shall determine, in agreement with the requesting country,

(a) the authorities of that country that will be in charge of the administrative co-operation,

(b) the authorities of that country that will be in charge of issuing the statement referred to in Article 19.

Article 18

1. The Commission shall decide, in accordance with the procedure referred to in Article 37, whether to grant a requesting country the special incentive arrangements for the protection of labour rights.

2. Where a request was made according to Article 15 (4) or where the examination referred to in Article 16 shows that in some sectors the legislation referred to in Article 14 (2) is not applied, the special arrangements may be granted only for the sectors in which it is applied.

3. The Commission shall notify a requesting country of a decision taken in accordance with paragraph 1. Where a country is granted the special incentive arrangements, it shall be informed of the date on which that decision enters into force.

4. Where a requesting country is not granted the special incentive arrangements or where some sectors are excluded, the Commission shall explain the reasons if that country so requests.

Article 19

1. The tariff preferences referred to in Article 8 (1) shall apply provided that the products concerned are accompanied by a statement issued by the authorities referred to in Article 17 (b), certifying that those products have been manufactured in that country under conditions complying with the legislation referred to in Article 14 (2). This statement shall be validated by a stamp of the issuing authority, in accordance with Commission Regulation (EEC) No 2454/93.

2. The statement referred to in paragraph 1 shall mention:

'ILO Conventions No 29, No 87, No 98, No 100, No 105, No 111, No 138, No 182 -Title III of Council Regulation (EC) No xxxx',

and shall be entered in box 4 of the certificate of origin Form A or on the invoice declaration referred to in Commission Regulation (EEC) No 2454/93.

Article 20

1. The provisions of Commission Regulation (EEC) No 2454/93 concerning the proof of origin and the methods of administrative co-operation shall apply mutatis mutandis to the statement referred to in Article 19, as far as beneficiary countries are concerned.

2. The Commission, in accordance with the procedure referred to in Article 38, may review the non-exhaustive list of criteria specifying cases of reasonable doubt which may arise concerning compliance with the special incentive arrangements [13]. Any changes to that list shall be published in the Official Journal of the European Communities.

[13] OJ C 321 of 10.11.2000, p. 18

3. Where a second communication is sent for the purpose of the subsequent verification of certificates of origin Form A and of invoice declarations in accordance with Commission Regulation (EEC) No 2454/93, concerning the tariff preferences referred to in Article 8 (1), the customs authorities in the Community shall inform the Commission, which shall immediately publish a notification in the Official Journal of the European Communities, announcing that reasonable doubt exists in respect of certain products, producers or exporters, and stating those.

4. Where it has been established in accordance with the procedure laid down in Commission Regulation (EEC) No 2454/93 for the purpose of the subsequent verification of certificates of origin Form A and of invoice declarations, that the tariff preferences referred to in Article 8 (1) do not apply to products from certain producers or exporters, the customs authorities of the Community shall inform the Commission, which shall immediately publish a notification in the Official Journal of the European Communities.

Section 2

Special incentive arrangements for the protection of the environment

Article 21

1. The tariff preferences referred to in Article 8 (2) shall apply to imports of products of the tropical forest originating in a country which according to Annex I benefits from the special incentive arrangements for the protection of the environment or which has subsequently been granted those arrangements by a decision taken in accordance with Article 23.

2. The special incentive arrangements for the protection of the environment may be granted to a country which effectively applies domestic legislation incorporating the substance of internationally acknowledged standards and guidelines concerning sustainable forest management.

Article 22

1. The special incentive arrangements referred to in Article 21 shall be granted provided that:

- it is requested by a country or territory listed in Annex I,

- the examination of the requests shows that the requesting country fulfils the condition laid down in Article 21 (2),

- the requesting country has made an undertaking to maintain the domestic legislation referred to in Article 21 (2), to monitor the application of the special incentive arrangements and to provide the necessary administrative co-operation.

2. The requesting country shall submit its request to the Commission in writing and shall provide comprehensive information of:

- the domestic legislation referred to in Article 21 (2), the measures taken to implement it and to monitor its application,

- any forest management certification system, where such system is used in that country.

3. The full official text of the legislation referred to in Article 21 (2) and of the implementing measures shall be attached to the request.

4. The Commission shall process requests made pursuant to paragraph 2 in accordance with the provisions of Article 16.

Article 23

1. The Commission shall decide, in accordance with the procedure referred to in Article 37, whether to grant a requesting country the special incentive arrangements for the protection of the environment.

2. The Commission shall notify a requesting country of a decision taken in accordance with paragraph 1. Where a country is granted the special incentive arrangements, it shall be informed of the date on which that decision enters into force.

3. Where a requesting country is not granted the special incentive arrangements, the Commission shall explain the reasons if that country so requests.

Article 24

1. Where a credible forest management certification system is used in a country benefiting from the special incentive arrangements for the protection of the environment, the products enjoying the tariff preferences referred to in Article 8 (2) shall be accompanied by that system's label or certificate attesting that they stem from a sustainably managed forest.

2. The tariff preferences referred to in Article 8 (2) shall apply provided that the certificates of origin Form A or the invoice declarations referred to in Commission Regulation (EEC) No 2454/93 bear the following statement:

'Environmental clause -Title III of Council Regulation (EC) No xxxx'.

TITLE IV

Suspension of tariff preferences

Section 1

Temporary withdrawal

Article 25

1. The preferential arrangements provided for in this Regulation may be temporarily withdrawn, in respect of all or of certain products, originating in a beneficiary country, for any of the following reasons:

(a) practice of any form of slavery or forced labour as defined in the Geneva Conventions of 25 September 1926 and 7 September 1956 and ILO Conventions No 29 and No 105;

(b) serious and systematic violation of the freedom of association, the right to collective bargaining or the principle of non-discrimination in respect of employment and occupation, or use of child labour, as defined in the relevant ILO Conventions;

(c) export of goods made by prison labour;

(d) shortcomings in customs controls on export or transit of drugs (illicit substances or precursors), or failure to comply with international conventions on money laundering;

(e) fraud, irregularities or systematic failure to comply or to ensure compliance with the rules of origin of products and the proof thereof, and to provide the administrative co-operation as required for the implementation and the control of the respect of the arrangements referred to in Article 1 (2);

(f) unfair trading practices, including those which are prohibited or actionable under the WTO Agreements, provided that a determination to that effect has been made previously by the competent WTO body;

(g) infringement of the objectives of international conventions such as NAFO, NEAFC, ICCAT and NASCO concerning the conservation and management of fishery resources;

(h) significant detrimental effects on the environment arising from the production of products included in these arrangements.

2. The administrative co-operation referred to in paragraph (1) (e) requires, inter alia, that a beneficiary country:

(a) communicate to the Commission and update the information necessary for the implementation of the rules of origin and the control of their respect;

(b) assist the Community by carrying out, on request of the customs authorities of Member States, subsequent verification of the proof of origin and to communicate its results in time;

(c) assist the Community by allowing the Commission, in co-ordination and close co-operation with the competent authorities of the Member States, to conduct Community administrative and investigative co-operation missions in that country, in order to verify the authenticity of documents or the accuracy of information relevant for granting the benefit of the arrangements referred to in Article 1(2);

(d) carry out or arrange for appropriate inquiries to identify and prevent contravention to the rules of origin;

(e) comply or ensure compliance with the rules of origin in respect of regional cumulation, if the country benefits therefrom.

3. Without prejudice to paragraph 1, the special incentive arrangements referred to in Title III may be temporarily withdrawn, in respect of all or certain products included in those arrangements, originating in a beneficiary country, for any of the following reasons:

(a) if the domestic legislation no longer incorporates the standards referred to in Article 14 (2) or 21 (2) or if that legislation is not effectively applied;

(b) non-respect of the undertaking referred to in Articles 15 (1) or 22 (1).

4. Without prejudice to Article 11, the preferential arrangements provided for in this Regulation shall not be withdrawn pursuant to paragraph 1 (f) in respect of products which are subject to anti-dumping or countervailing measures under Council Regulations (EC) No 384/96 or No 2026/97, for the reasons justifying those measures.

Article 26

1. The Commission shall communicate to the Member States all relevant information that may justify temporary withdrawal.

2. Consultations shall take place in the Committee, within 15 days from the date of the communication referred to in paragraph 1 or from the date on which a Member State so requests.

Article 27

1. The Commission may suspend the preferential arrangements provided for in this Regulation in respect of all or of certain products, originating in a beneficiary country:

(a) where it considers that there is sufficient evidence that temporary withdrawal is justified for the reasons referred to in Article 25 (1) (e);

(b) where imports under these arrangements massively exceed production and export capacities of that country.

2. Before taking a decision in accordance with paragraph 1, the Commission shall inform the Committee and the beneficiary country concerned.

3. The Commission shall publish a decision taken in accordance with paragraph 1 in the Official Journal of the European Communities, stating the reasons thereof.

4. Any Member State may refer a decision taken in accordance with paragraph 1 to the Council within 10 days. The Council, acting by qualified majority, may adopt a different decision within 30 days.

5. The period of suspension is limited to three months and may be renewed once. It may be extended in accordance with the procedure referred to in Article 38.

Article 28

1. Where the Commission considers, following the consultations referred to in Article 26 (2), that there are sufficient grounds for an investigation, it may decide, in accordance with the procedure referred to in Article 38, to initiate such investigation.

2. The Commission shall announce the initiation of an investigation in the Official Journal of the European Communities and notify the beneficiary country concerned thereof. The announcement shall provide a summary of the information received and state that any useful information may be sent to the Commission. It shall specify the period within which interested parties may make their views known in writing.

3. The Commission shall provide the beneficiary country concerned with every opportunity to co-operate in the investigation.

4. The Commission shall seek all information it considers necessary and may verify the information received with economic operators and the beneficiary country concerned.

5. The Commission may be assisted by officials of the Member State on whose territory verification might be sought, if that Member State so requests.

6. Where information requested by the Commission is not provided within a reasonable period or the investigation is significantly impeded, findings may be made on the basis of the facts available.

7. The investigation should be completed within a year. The Commission may extend this period, in accordance with the procedure referred to in Article 38.

Article 29

1. The Commission shall submit its findings to the Committee.

2. Where the Commission considers that the findings do not justify temporary withdrawal, it shall decide, in accordance with the procedure referred to in Article 38, to terminate the investigation. In that case, the Commission shall publish a notice in the Official Journal of the European Communities, announcing the termination of the investigation and setting out its main conclusions.

3. Where the Commission considers temporary withdrawal to be necessary, it shall submit an appropriate proposal to the Council, which shall decide within 30 days by a qualified majority.

Section 2

Safeguard clause

Article 30

1. Where a product originating in a beneficiary country is imported on terms which cause or threaten to cause serious difficulties to a Community producer of like or directly competing products, normal Common Customs Tariff duties on that product may be reintroduced at any time at the request of a Member State or on the Commission's initiative.

2. The Commission shall take a decision within 30 days after consulting the Committee.

3. Any Member State may refer the Commission's decision to the Council within 10 days. The Council, acting by qualified majority, may adopt a different decision within 30 days.

4. The Commission shall inform the beneficiary country concerned of any decision taken in accordance with paragraph 1 before it becomes effective.

5. Where exceptional circumstances requiring immediate action make either notification or investigation impossible, the Commission may, after prior information of the Committee, implement any preventive measure which is strictly necessary and which satisfies the conditions laid down in paragraph 1.

Article 31

1. The Commission shall announce the initiation of an investigation in the Official Journal of the European Communities. The announcement shall provide a summary of the information received and state that any useful information should be communicated to the Commission. It shall specify the period within which interested parties may make their views known in writing.

2. In examining whether there are serious difficulties the Commission shall take account, inter alia, of the following factors where the information is available:

- reduction in the market share of Community producers

- reduction in their production

- increase in their stocks

- closure of their production capacity

- bankruptcies

- low profitability

- low rate of capacity utilisation

- employment

- prices.

Article 32

1. Where imports of products included in Annex I to the Treaty cause or threaten to cause serious disturbance to Community markets or their regulatory mechanisms, the Commission may suspend the preferential arrangements in respect of the products concerned after prior information of the management committee for the relevant common market organisation.

2. Any Member State may refer the Commission's decision to the Council within 10 days. The Council, acting by qualified majority, may adopt a different decision within 30 days.

3. The Commission shall inform the beneficiary country concerned of any decision taken in accordance with paragraph 1 before it becomes effective.

Article 33

Nothing in this Title shall affect the application of safeguard clauses adopted as part of the common agricultural policy under Article 37 of the Treaty, or as part of the common trade policy under Article 133 of the Treaty, or any other safeguard clauses which may be applied.

TITLE VI

Procedural provisions

Article 34

1. Changes to the Annexes of this Regulation made necessary by amendments to the Combined Nomenclature or by changes in the international status of countries or territories shall be adopted in accordance with the procedure referred to in Article 38.

2. Where imports of products originating in a beneficiary country benefit from a preferential treatment which is equivalent or better than the preferential arrangements provided for in this Regulation, the beneficiary country may be removed from Annex I or tariff preferences provided for in this Regulation may be removed in respect of the sectors concerned, in accordance with the procedure referred to in Article 37.

Article 35

1. Within six weeks of the end of each quarter the Member States shall send the Statistical Office of the European Communities their statistical data on products admitted for free circulation during that quarter under the tariff preferences provided for in this Regulation. This data, supplied by reference to Combined Nomenclature codes and, where applicable, TARIC codes, shall show, by country of origin, values, quantities and any supplementary units required in accordance with the definitions in Council Regulation (EC) No 1172/95 [14] and Commission Regulation (EC) No 1917/2000 [15].

[14] OJ L 118 of 25.05.1995, p. 10

[15] OJ L 229 of 09.09.2000, p. 14

2. In accordance with Article 308d of Commission Regulation (EEC) 2454/93, the Member States shall forward to the Commission, at its request, details of the quantities of products admitted for free circulation under the tariff preferences provided for in this Regulation, during the previous months.

Article 36

1. In implementing this Regulation, the Commission shall be assisted by a Generalised Preferences Committee, composed of representatives of the Member States and chaired by the representative of the Commission.

2. The Committee may examine any matter relating to the application of this Regulation raised by the Commission or at the request of a Member State.

3. The Committee shall examine the effects of the Community scheme of generalised tariff preferences, on the basis of an annual report from the Commission. This report shall cover all preferential arrangements referred to in Article 1 (2).

Article 37

1. Where reference is made to this Article, the regulatory procedure laid down in Article 5 of Council Decision 1999/468/EC shall apply, in compliance with Article 7 (3) thereof.

2. The period provided for in Article 5 of Decision 1999/468/EC shall be 3 months.

Article 38

Where reference is made to this Article, the advisory procedure laid down in Article 3 of Council Decision 1999/468/EC shall apply, in compliance with Article 7 (3) thereof.

TITLE VII

Final provisions

Article 39

1. Requests concerning Title III of this Regulation made under the provisions of a previous regulation on the Community scheme of generalised tariff preferences, on which no decision has been taken before this Regulation enters into force, shall be considered to refer to the corresponding provisions of this Regulation.

2. Council Regulation (EC) No 552/97 of 24 March 1997 [16] temporarily withdrawing access to generalised tariff preferences from the Union of Myanmar, which refers to Council Regulations (EC) No 3281/94 [17] and (EC) No 1256/96 [18], shall be considered to refer to the corresponding provisions of this Regulation.

[16] OJ L 85 of 27.03.1997, p. 8

[17] OJ L 348 of 31.12.1994, p. 1

[18] OJ L 160 of 29.06.1996, p. 1

3. This Regulation replaces Council Regulation (EC) No 416/2001 amending Council Regulation (EC) No 2820/98 applying a multiannual scheme of generalised tariff preferences for the period 1 July 1999 to 31 December 2001 so as to extend duty-free access without any quantitative restrictions to products originating in the least developed countries.

Article 40

1. This Regulation shall enter into force on 1 January 2002.

2. It shall apply until 31 December 2004. This date shall not apply to the special arrangements for Least Developed Countries, nor, to the extent that they are applied in conjunction with those arrangements, to any other provisions of this Regulation.

This Regulation shall be binding in its entirety and directly applicable in all Member States.

Done at Brussels, [date].

For the Council

The President

ANNEX I

Beneficiary countries of the Community's scheme of generalised tariff preferences

A. INDEPENDENT COUNTRIES

Column A: country code according to the nomenclature of countries and territories for the external trade statistics of the Community

Column B: name of country

Column C: sectors not included for the beneficiary country concerned (Article 7 (6))

Column D: sectors in respect of which tariff preferences have been removed for the beneficiary country concerned (Article 7 (7))

Column E: countries included in the special arrangements for Least Developed Countries referred to in Article 9

Column F: countries included in the special arrangements to combat drug production and trafficking referred to in Article 10

Column G: countries included in the special arrangements for the protection of labour rights (Title III Section1)

Column H: sectors included in these arrangements for the beneficiary country concerned (Article 8 (1))

Column I: countries included in the special arrangements for the protection of the environment (Title III Section 2)

>TABLE POSITION>

>TABLE POSITION>

B. COUNTRIES AND TERRITORIES

dependent or administered or for whose external relations Member States of the Community or third countries are wholly or partly responsible

>TABLE POSITION>

ANNEX II

1. Development index

The development index refers to a country's level of industrial development. It compares that level to the one of the European Union, using the following formula:

{log[(Yi/POPi)/(Yue/POPue)]+log[Xi/Xue]}/2

where

Yi = the beneficiary country's gross national product,

Yue = the European Union's gross national product,

POPi = the beneficiary country's population,

POPue = the population of the European Union,

Xi = the value of the beneficiary country's manufactured exports,

Xue = the value of the European Union's manufactured exports.

2. Specialisation index

The specialisation index refers to the importance of a sector in the Community imports from a beneficiary country. It is based on the ratio between that country's share in imports from all countries, of all products of the sector concerned, whether included in the preferential arrangements or not, and its share in all imports from all countries.

3. Thresholds

Development index Threshold for the Specialisation index

= or > - 1,00 100 %

< - 1,00 and = or > - 1,23 150 %

< - 1,23 and = or > - 1,70 500 %

< - 1,70 and = or > - 2,00 700 %.

4. Statistical sources

Figures for income and population are those of the World Development Report, for manufactured exports those of the UNCTAD Handbook of International Trade and Development Statistics, and for Community imports those of COMEXT statistics.

ANNEX III

Sectors referred to in Article 6 (2)

>TABLE POSITION>

ANNEX IV

List of products included in the arrangements referred to in Article 1 (2)

CN code: For reasons of simplification, products are listed in groups. These may include products for which Common Customs Tariff duties are exempted or suspended. Where certain arrangements include a group of products while other arrangements include only certain products of the same group, these products are also listed individually. In that case, individual products belonging to a group of products included in certain arrangements are again shown as included in those arrangements.

Description: Notwithstanding the rules for the interpretation of the Combined Nomenclature, the description of products is to be considered as indicative, the tariff preferences being determined by the CN codes. Where ex CN codes are indicated, the tariff preferences are to be determined by the CN code and the description together.

Column G: Products included in the general arrangements (Article 7): NS = non-sensitive product in the meaning of Article 7 (1); S = sensitive product in the meaning of Article 7 (2)). Products classified neither S nor NS are not included in the general arrangements.

Column E: Products included in the special incentive arrangements for the protection of the environment (Article 8 (3)).

Column D: Products included in the special arrangements to combat drug production and trafficking (Article 10).

>TABLE POSITION>

Financial statement

Title of action

Proposal for a regulation applying a scheme of generalised preferences for the period 2002 to 2004.

Legal basis

Article 133 of the Treaty.

Objective of the action

The purpose of the regulation is to implement the scheme of generalised preferences in the third part of the ten-year period 1995 to 2004.

Budgetary costs

The regulation does not entail any expenditure that needs to be entered in the Community budget. Its application will, however, result in a loss of customs revenue. In 1997, when the regulation currently in force was being drafted, the annual customs revenue loss was estimated at EUR1.6 billion for all products covered by the GSP. However, in 1994 it was EUR2.5 billion just for industrial products, so in the last few years the loss has tended to get smaller.

This trend is partly the result of the erosion of preferences. Out of a total of some 7 800 tariff lines covered by the scheme when the current regulation came into force, about 1 300 have in the meantime been completely liberalised. The MFN rates for many others have gone down. The new regulation will therefore result in a smaller loss of customs revenue than the regulation currently in force.

In addition, the share of trade that is covered by the GSP but does not benefit from it because it has been graduated, may well increase. At present it includes a little more than a third of eligible trade. According to the latest forecasts, this share could be as much as half, despite the planned strengthening of the rules. The result would be a considerable reduction in the loss of customs revenue.

On the other hand, the proposal incorporates the scheme established by the regulation granting duty-free access without any quantitative restrictions to all products originating in the LDCs, except arms. Hence it also incorporates the financial impact of the regulation - but this will be negligible during the period 2002 to 2004.

Some countries have also expressed their interest in benefiting from the special arrangements for the protection of labour standards. The additional loss of customs revenue that would result from granting these arrangements is not likely to reverse the downward trend in the overall loss.