Nonreciprocal preferential trade arrangements originated with the concept of special and differential treatment for developing countries. This treatment was meant to compensate for developing countries’ unequal economic status compared with the developed world. In the late 1960s, the United Nations Conference on Trade and Development (UNCTAD) concluded that trade on a most-favored-nation (MFN) basis did not take into account developing countries’ inability to compete on an equal basis with richer nations. UNCTAD also concluded that the objectives of nonreciprocal preference programs should be to increase export earnings, promote industrialization, and raise the economic growth rates of developing countries. These objectives laid the foundation for the creation of the U.S. and EU GSP programs. Both the United States and the European Union established GSP programs in the early 1970s, each offering trade preferences to more than 100 developing countries around the world. The United States later established other nonreciprocal trade preference programs through the Caribbean Basin Economic Recovery Act (CBERA) in 1983; the Andean Trade Preference Act (ATPA) in 1991; and, most recently, through the Trade and Development Act of 2000, which extended nonreciprocal preferences with the majority of the sub-Saharan African countries as well as the Caribbean Basin region. Specifically, Title I of the act is cited as the African Growth and Opportunity Act (AGOA), while Title II is cited as the Caribbean Basin Trade Partnership Act (CBTPA). Presently, the United States offers nonreciprocal trade preferences to 151 countries and territories. (See app. II for more details on the U.S. programs.) Similarly, the European Union has extended nonreciprocal trade preferences to many countries in the African, Caribbean, and Pacific (ACP) regions since 1975 through its ACP-EC Convention of Lomé. The European Union will continue to offer nonreciprocal preferences until 2008 through the Lomé Convention’s replacement agreement, known as the Contonou Agreement of 2000. Like the United States, the European Union also expanded the number of products receiving tariff preferences under its GSP program for the 49 nations designated by the United Nations as “least developed countries” (LDC). Recently, the European Union further expanded these GSP preferences by adopting the “Everything But Arms” amendments, which offer duty-free access for all LDC products except arms by 2009. Presently, the European Union offers nonreciprocal trade preferences to 171 countries and territories under its GSP program and its Cotonou Agreement. (See app. II for more details on the EU programs.) EU and U.S. nonreciprocal trade preference programs share certain common features and requirements. They offer reduced or duty-free access to eligible products from beneficiary countries, with lesser preferences for products deemed more sensitive or competitive with U.S. or EU domestic producers. Sensitive products are either excluded completely from coverage or provided access at a higher preferential duty than other covered products. For example, while the U.S. GSP offers duty- free treatment for all eligible products, it excludes completely from coverage sensitive products like textiles and apparel. The EU GSP scheme, on the other hand, offers incremental tariff reductions on the basis of a product’s sensitivity. EU and U.S. programs also contain requirements regarding product origin, which all beneficiary countries must meet to receive preferential tariff rates on their products. “Rules of origin” ensure that tariff advantages apply only to products actually produced in beneficiary countries. Producers in beneficiary countries may use imported materials to produce goods for export, provided the inputs comply with specific criteria outlined in the rules of origin for the preference program. For example, rules of origin may specify a maximum percentage of imported materials that can be included in a product or may require that specific amounts and types of processing be carried out on imported inputs in order for the final product to qualify for preferential treatment. Both the United States and the European Union allow, to a varying extent, countries to comply with rules of origin by cumulating inputs or sharing production processes with designated beneficiary countries or groups of countries. For example, under the U.S. GSP program, Botswana could use imported inputs from Tanzania in the production of a good for export to the United States because both beneficiaries are eligible for cumulation benefits as members of the Southern African Development Community. In general, allowing broader cumulation provides producers in beneficiary countries with greater flexibility in complying with rules of origin requirements. Finally, U.S. and EU trade preference programs contain eligibility requirements in the form of certain country practices. For example, receiving program tariff preferences may be dependent upon countries’ having policies in place to ensure worker rights, protect intellectual property, or adequately control illegal drugs. Thirteen percent ($133 billion) of total 1999 imports into the United States came from beneficiaries of U.S. nonreciprocal programs, while 34 percent ($248 billion) of total 1999 imports into the European Union came from beneficiaries of the EU GSP and ACP programs. However, a smaller percentage of imports from these beneficiary countries actually received preferential treatment—2 percent ($18 billion) of total U.S. imports and 6 percent ($45 billion) of total EU imports in 1999. (See fig. 1.) The U.S. and EU Generalized System of Preferences (GSP) programs accounted for the majority of the preference trade, with the U.S. program offering duty-free entry and the EU program providing duty-free entry or reduced tariffs. Although imports from beneficiary countries comprised small portions of total U.S. and EU imports in 1999, the United States and the European Union are the primary export markets for many beneficiaries. For example, in 1999, 52 percent of Costa Rica’s total exports were destined for the United States, and 58 percent of Ghana’s total exports went to the European Union in the same year. (See app. III for the percentages of exports destined for the U.S. and EU markets for each beneficiary country by program). In addition, a large share of some countries’ total exports to the United States and the European Union enter at reduced tariff rates under one of the U.S. or EU trade preference programs. For example, over 90 percent of St. Lucia, St. Vincent and the Grenadines, Namibia, and Senegal’s dutiable exports to the European Union received reduced tariff rate preferences in 1999. The same was true for the dutiable exports of Benin and Zaire. Figure 1 also illustrates that, compared with the United States, imports from beneficiaries of EU nonreciprocal programs comprised a larger portion of total EU imports in 1999. One reason for this difference is that the European Union extended preferences to 20 countries that were not covered by the U.S. programs. For example, the EU GSP program gave preferences to certain imports from Malaysia and China. Imports from these two countries comprised about 30 percent of EU imports under the GSP program in 1999. Appendix III also provides additional data on the share of imports from beneficiaries of U.S. and EU nonreciprocal programs. Overall, the total value of imports under U.S. nonreciprocal programs and the EU GSP program has remained generally flat or declined over time. (See fig. 2.) Imports under the U.S. GSP, its largest program, peaked in 1993 and have generally declined since then. This is partly because some significant countries, including Mexico and Malaysia, were removed from the program in 1994 and 1998, respectively. Although the total value of imports into the United States under all U.S. preference programs remained generally flat since 1993, imports under the smaller U.S. preference programs, including CBERA and ATPA, increased between 1992 and 2000. As for the EU GSP program, the value of imports declined overall between 1995 and 1999. The European Union removed from GSP coverage a significant share of products from large beneficiary countries such as Malaysia and China, which contributed to this decline. However, the yearly imports under the EU GSP were more than double that of imports under all U.S. programs during the same period. In addition, the value of imports receiving preferences under U.S. and EU GSP programs may have been flat or declining over time due to the elimination of tariffs on many products through multilateral trade negotiations. The United States and the European Union have offered greater tariff preferences over time, both in terms of product coverage and reduced restrictions. At the same time, they have increased and refined country eligibility requirements. In the future, the United States and the European Union may be moving away from purely nonreciprocal arrangements, though in different ways. (See app. II for further details on the U.S. and EU programs.) Since 1976, the U.S. GSP has offered duty-free treatment for eligible products and completely excluded some sensitive products from coverage. However, in 1983 and 1991, respectively, the CBERA and the ATPA extended tariff rates below MFN treatment for several items completely excluded from coverage under its GSP program, including luggage, handbags, and leather apparel. In addition, neither CBERA nor ATPA is subject to GSP’s competitive need and country income restrictions. In 1997, the United States added more than 1,700 new products to its duty- free treatment under GSP for eligible LDCs. Between 1996 and 1997, the value of nonpetroleum exports from LDCs to the United States increased by 71 percent. Further, in 2000, the United States, for the first time, offered duty-free and quota-free treatment for certain qualified textile and apparel products that meet rule of origin requirements, through (1) AGOA for certain sub-Saharan African countries and (2) CBTPA for CBERA beneficiaries. AGOA also extended GSP-type preferences to several new products. Finally, AGOA’s preferences are more long term, compared with GSP.