Trade Preferences for Developing Countries and the World Trade Organization (WTO)
Released: 2013-01-03T00:00:00

Trade Preferences and GATT MFN Requirements

As parties to the General Agreement on Tariffs and Trade 1994 (GATT 1994), World Trade Organization (WTO) Members must under Article I:1 of the General Agreement on Tariffs and Trade (GATT) grant most-favored-nation (MFN) treatment "immediately and unconditionally" to like products of other Members with respect to customs duties and import charges, internal taxes and regulations, and other trade-related matters. Thus, whenever a WTO Member accords a benefit or advantage to a product of one country, whether it is a WTO Member or not, the Member must accord the same benefit or advantage to the like product of all other WTO Members. Tariff preference programs for developing countries, however, are facially inconsistent with MFN obligations. Nevertheless, because preference programs have been viewed as vehicles of trade liberalization and economic development for developing countries, GATT Parties have accommodated them in a series of joint actions.

In 1965, the GATT Parties added Part IV (Arts. XXXVI-XXXVIII) to the General Agreement . This amendment recognizes the special economic needs of developing countries and asserts the principle of nonreciprocity. Under this principle, developed countries forgo the receipt of reciprocal benefits for their negotiated commitments to reduce or eliminate tariffs and restrictions on the trade of less developed contracting parties. Because of the conflict with MFN obligations, GATT Parties in 1971 adopted a waiver of Article I for the Generalized System of Preferences (GSP) to allow developed contracting parties to accord more favorable tariff treatment to the products of developing countries for 10 years. The waiver describes the GSP as a "system of generalized, nonreciprocal and nondiscriminatory preferences beneficial to the developing countries."

At the end of the GATT Tokyo Round in 1979, developing countries secured adoption of the Enabling Clause, a permanent deviation from MFN agreed to by the GATT Contracting Parties. The Enabling Clause states that notwithstanding GATT Article I, "contracting parties may accord differential and more favorable treatment to developing countries, without according such treatment to other contracting parties" and applies this exception to (1) preferential tariff treatment in accordance with the GSP; (2) multilateral nontariff preferences negotiated under GATT auspices; (3) multilateral arrangements among less developed countries; and (4) special treatment of the least-developed countries "in the context of any general or specific measures in favour of developing countries." The Enabling Clause has since been incorporated into the GATT 1994.

In 1999, the WTO General Council adopted a decision, captioned "Preferential Tariff Treatment for Least-Developed Countries," which waived GATT Article I:1 until June 30, 2009, "to the extent necessary to allow developing country Members to provide preferential tariff treatment to products of least-developed countries (LDCs), designated as such by the United Nations, without being required to extend the same tariff rates to like products of any other Member." Along with setting out various standards and notification and procedural requirements, the waiver, at paragraph 6, provides that it "does not affect in any way and is without prejudice to rights of Members in their actions pursuant to" the Enabling Clause. The waiver was recently extended until June 30, 2019.

WTO Waivers for Certain Tariff Preferences

WTO Members maintaining preference programs or preferential trade agreements that fall outside the scope of the Enabling Clause or particular GATT articles may seek waivers of Article I:1 and other GATT obligations under Article IX:3 of the Agreement Establishing the World Trade Organization (WTO Agreement). Article IX:3 permits WTO Members as a whole to waive obligations imposed on a WTO Member by WTO multilateral agreements, including the GATT. A request for a GATT waiver must first be submitted by the requesting Member to the WTO Council for Trade in Goods, which, after considering the request, reports to the WTO General Council. The waiver becomes effective after the General Council agrees to the proposal.

Preferential Trade Agreements

One program that fell outside the scope of the Enabling Clause was the European Union (EU) Lomé IV Convention, a preferential, nonreciprocal trade arrangement between the European Economic Community (EEC) and African, Caribbean and Pacific (ACP) countries. The Convention extended beneficial tariff and quota treatment to ACP imports as well as development assistance to ACP countries. The EU argued that it could deviate from Article I:1 MFN requirements for nonreciprocal free trade with developing countries under GATT Part IV, as well as Article XXIV, which provides an MFN exception for customs unions and free trade areas meeting specified conditions. GATT panels concluded in unadopted 1993 and 1994 reports that such a deviation was not justified under either provision. Regarding the Article XXIV claim, the 1994 report concluded that because Lomé IV involved non-GATT Parties, the Article did not cover the agreement and thus could not be used to justify the inconsistency with Article I of trade preferences for bananas imported from ACP countries.

The European Union subsequently obtained a temporary waiver of GATT Article I:1 for the Lomé agreement; a waiver was later granted for the successor ACP-EC Partnership Agreement (Cotonou Agreement) until December 31, 2007. The European Union has since been negotiating Economic Partnership Agreements (EPAs) with ACP countries to replace the Cotonou Agreement. Various WTO Members have raised concerns as to whether MFN clauses in the EPAs, under which trade benefits negotiated by ACP countries with third countries would be accorded to the European Union, are consistent with the Enabling Clause.

Waivers for U.S. Preference Programs

Along with maintaining its long-standing GSP program, the United States administers various regional preferences for which it holds WTO waivers. GATT Article I:1 has been waived for tariff preferences for the former Trust Territory of the Pacific Islands until December 31, 2016. The United States has also obtained waivers for the following programs: (1) the Caribbean Basin Economic Recovery Act (CBERA), as amended, through December 31, 2014; (2) the Andean Trade Preference Act (ATPA), as amended, through December 31, 2014; and (3) the African Growth and Opportunity Act (AGOA), through September 30, 2015. These programs extend duty-free treatment that in some cases is subject to quantitative restrictions, and, thus, the WTO has agreed to waive not only GATT Article I:1 but also GATT Article XIII, paras. 1 and 2, which require nondiscrimination in administering quotas.

The United States submitted a waiver request for AGOA, as well as requests for renewals of expired or expiring waivers for the CBERA and ATPA programs, in February 2005. Revised requests were submitted in March 2009, reflecting legislative amendments to the CBERA and ATPA programs. During this period, Brazil, China, India, and Pakistan raised questions on the U.S schemes focused primarily on textile issues, while Paraguay questioned why it had not been included in the ATPA program. The U.S. requests were ultimately approved by the WTO Council on Trade in Goods in March 2009, and by the WTO General Council in May 2009.

WTO-Legality of Non-Trade Conditions in Preference Programs

In European Communities — Conditions for the Granting of Tariff Preferences to Developing Countries , the WTO Appellate Body (AB) explained how developed country WTO members may design preferential-tariff programs within the requirements of the Enabling Clause. The dispute between India and the European Union (EU) stemmed from an EU Regulation which awarded tariff preferences to a closed group of 12 beneficiary countries on the condition that they combat illicit drug production (the Drug Arrangements). India brought the claim alleging that the Drug Arrangements were inconsistent with GATT Article I:1 and unjustified by the Enabling Clause.

The initial dispute panel, in a report issued on December 1, 2003, concluded that the EU was in violation of its WTO obligations, with one panelist dissenting on procedural grounds. Addressing the nature of the Enabling Clause and its procedural implications, a two member majority first concluded that the Enabling Clause functions as an exception to the GATT Article I:1 MFN obligation and that, consequently, the burden of proof rests on the party that invokes the Enabling Clause as a defense. The lone dissenter argued that the MFN obligation does not apply to the Enabling Clause and that India did not properly bring the claim under the Enabling Clause. Employing a broad reading of the term "non-discriminatory" in the Enabling Clause's description of the GSP, the panel concluded that developed countries were required to provide "identical tariff preferences" under GSP schemes to "all developing countries without differentiation, except for the implementation of a priori limitations." Applying this standard, the panel then ruled that the Drug Arrangements were inconsistent with GATT Article I:1 and could not be justified under the Enabling Clause. The European Union appealed.

The AB report, issued on April 7, 2004, first addressed the relationship between GATT Article I:1 and the Enabling Clause. The AB upheld the panel's findings that the Enabling Clause is an exception to GATT Article I:1 and that the Enabling Clause does not exclude the applicability of Article I:1. The AB explained that the Enabling Clause is to be read together with Article I:1 in the procedural sense, since a challenged measure, such as the Drug Arrangements, is "submitted successively to the test of compatibility with the two provisions." In other words, when the Enabling Clause is implicated, the dispute panel first examines whether a measure is consistent with Article I:1, "as the general rule," and, if it is found not to be so, the panel then examines whether the measure may be justified under the Enabling Clause.

Noting the "vital role" played by the Enabling Clause "in promoting trade as a means of stimulating economic growth and development" and the intent of WTO Members through the Enabling Clause to encourage the adoption of preference schemes, the AB found that the Enabling Clause was not a typical GATT exception or defense. Thus, the AB modified the panel's finding and held that, unlike the ordinary practice with respect to GATT exceptions, under which exceptions are invoked only by the responding party, "it was incumbent upon [complainant] India to raise the Enabling Clause in making its claim of inconsistency with Article I:1 of the GATT 1994" and to identify specific provisions of the Enabling Clause which it believed were violated by the respondent's measure. At the same time, the burden of justifying GSP schemes under the cited Enabling Clause provisions still rests on a respondent. In application, the AB found that India sufficiently raised the issue, thereby placing the burden on the EU to justify the Drug Arrangements under the Enabling Clause.

Most important, the AB reversed the panel's substantive decision regarding the breadth of acceptable preference programs under the Enabling Clause. The AB found instead that developed countries can grant preferences beyond those provided in their GSP to developing countries with particular needs, but only if identical treatment is available to all similarly situated GSP beneficiaries. The AB elaborated that similarly situated GSP beneficiaries are all GSP beneficiaries that have the "'development, financial and trade needs' to which the treatment in question is intended to respond." In reaching this conclusion, the AB reversed the panel's reading of the term "non-discriminatory" as used to define the GSP in the Enabling Clause. Even under the more expansive view of the Clause, however, the AB upheld the Panel's ruling that the EU had failed to prove that the Drug Arrangements were in fact "non-discriminatory." Two factors led the AB to its conclusion: (1) the closed list of beneficiary countries in the Drug Arrangements could not ensure that the preferences would be available to all GSP beneficiaries suffering from illicit drug production and trafficking; and (2) the Drug Arrangements did not set out objective criteria that distinguished beneficiaries under the Arrangements from other GSP beneficiaries.

Before the WTO Dispute Settlement Body adopted the ruling, the U.S. representative stated, according to meeting minutes, that the United States was pleased that the AB had "reversed the Panel's finding that the Enabling Clause required developed countries under their GSP programs to provide identical preferences to all developing countries" and that the AB's decision "would help maintain the viability of GSP programs." The United States raised concerns, however, about the AB's finding that complainant India needed to raise the Enabling Clause, but that the EU bore the burden of proving that the Drug Arrangements were consistent with the Enabling Clause. The United States questioned the legal basis for this "hybrid approach" suggesting that difficulties might ensue in allowing the complaining party to set the burden of proof for the respondent.

Current Status of Preference Programs

In December 2009, Congress extended the GSP and Andean trade preference programs to December 31, 2010, continuing an existing denial of benefits to Bolivia. In December 2010, Congress enacted legislation extending Andean trade preferences, as accorded to Colombia and Ecuador, through February 12, 2011. Andean benefits for Peru, which has been a party to a free trade agreement with the United States since February 2009, were terminated as of December 31, 2010, in the same enactment.

While Congress did not reauthorize the GSP program upon its December 2010 expiration, it has since extended the program through July 31, 2013, and authorized the retroactive application of duty-free rates and other GSP benefits to entries of goods made after December 31, 2010, in P.L. 112-40 . The U.S-Colombia Trade Promotion Agreement Implementation Act, P.L. 112-42 , extended ATPA benefits to Colombia and Ecuador through July 31, 2013, with retroactive application to February 12, 2011; however, pursuant to the act, the President removed Colombia from the GSP and ATPA programs when the U.S-Colombia Trade Promotion Agreement entered into force on May 15, 2012.

Congress has made the Caribbean Basin Economic Recovery Act (CBERA) program permanent and has authorized through September 30, 2020, the expanded tariff benefits contained in the Caribbean Basin Trade Partnership Act and as well as tariff preferences for Haiti enacted in 2010. The African Growth and Opportunity Act (AGOA) program is authorized through September 30, 2015.

112th Congress Legislation

H.R. 2387 (McDermott), S. 105 (Ensign), and S. 1244 (Inouye) would extend duty-free benefits to certain apparel items from the Philippines subject to the President's certification that the Philippines is meeting enumerated trade and customs-related conditions. Under H.R. 2387 and S. 1244 , benefits would remain in effect for seven years after they were proclaimed by the President and would terminate were the Philippines to become ineligible for GSP treatment. S. 105 would extend benefits for 10 years after proclamation, subject to GSP eligibility.

S. 1443 (Feinstein) would authorize through December 31, 2022, duty-free treatment for certain items deemed import-sensitive under the GSP as well as extend certain AGOA textile benefits for certain least-developed countries in Asia and the South Pacific.

While Congress has extended the GSP and ATPA programs through July 31, 2013, other legislation to reauthorize these programs has also been introduced in the 112 th Congress. H.R. 913 (Aderholt) and S. 433 (Sessions) would extend the GSP program through June 30, 2012, with retroactive application to entries made after December 31, 2010; make certain sleeping bags ineligible for GSP benefits; and extend ATPA benefits to Colombia and Ecuador through June 30, 2012, with the extension effective as of February 12, 2011. S. 308 (Casey) would extend the GSP program and the ATPA, as applicable to Colombia and Ecuador, to June 30, 2012, with retroactive application to their current expiration dates, and make certain sleeping bags ineligible for GSP benefits, with exceptions for higher-value bags and certain kits. S. 380 (McCain) would extend ATPA benefits to Colombia and Ecuador through November 30, 2012, with retroactive application to entries made after February 12, 2011.