34 Box 6

# The Impact of Preference Erosion on Major Egyptian Exports

In 1989 Egypt exported 1,209 different tariff line level products to the EU (EU customs schedules distinguish between some 8,700 individual tariff line items. A zero MFN duty was applied to 120 of these products and the remainder (1,089) had a nonzero tariff applied. However, because of the GSP Egypt received tariff preferences on 765 of these lines, i.e, on 70 percent of all lines with MFN tariffs and on 63 percent of all lines exported, which allowed it to pay no duties or charges below the prevailing rate.* As a result of this preferential access Egyptian exporters were given a competitive edge over those in countries which faced the MFN tariff.

||Eg|ypt's Exports: Number of|Tariff Line Level Produc|ts|
|---|---|---|---|---|
|Import Market|Zero MFN Duty<br>Lines|Lines With Nonzero<br>MFN Duties|Lines Receiving<br>GSP Treatment|Total Lines<br>Exported|
|European Union|120|1,089|765|1,209|
|Japan|20|74|48|94|
|<br>United States|79|306|137|385|

## Source: World Bank-UNCTAD SMART Database

The above tabulations show the extent to which Egyptian products receive preferential market access in the EU, Japan and United States. Egypt receives preferential access on 65 percent of (non-zero MFN) line items exported to Japan and on 45 percent of the shipments to the United States. The relatively low US figure is due to the exclusion of textiles and clothing from this country's GSP scheme.

The following statistics give another perspective on the GSP by showing the share (in terms of values) of total EU, Japan and US imports that are covered by these preferential tariffs. About 15 percent of EU imports from Egypt receive GSP treatment while the corresponding US and Japanese shares are about 4 percent. The exclusion of textiles and clothing from the GSP accounts for the low US share. Japan's largest imports from Egypt are raw cotton and crude petroleum -- products which are imported under zero MFN duties.

|||Share of Egypt's Exports U|nder Different Tariff Regi|mes|
|---|---|---|---|---|
|Import Market|Zero MFN Tariffs|Under Zero GSP Rates|Nonzero GSP Rates|Nonzero MFN Rates|
|European Union|58.3|14.4|0.2|27.1|
|Japan|40.8|3.7|0.1|55.4|
|United States|12.0|3.9|0.0|84.1|

The Uruguay Round made substantial reductions in OECD countries MFN tariffs -- about 40 percent on average (see Table 13). These cuts will reduce the _margins of preference_ that Egypt formerly received -- the margins would be completely eliminated if the MFN rate were cut to zero. As a result of this reduction (or elimination) of preferences some of Egypt's exports could be displaced by other countries that formerly faced MFN duties. How large this displacement will be depends on the ability of Egyptian exporters to offset these competitive losses. It should be noted, however, that Egypt would experience positive export gains on those items where it faced MFN tariffs that were cut in the Round. (See Box 7 for estimates of the size of these positive and negative effects).

*There is a complication in that ceilings or quotas may be applied to products receiving GSP treatment in OECD markets. Once these quotas are exceeded further imports are taxed at the prevailing MFN tariff rate.