Trade preferences for particular groups of countries run counter to one of the central pillars of the GATT, namely the principle of non-discrimination expressed in the MFN clause, which requires (among other things) importers to accord all suppliers the same treatment as the most-favoured nation among the suppliers, (Article I of the GATT). Because of the fundamental importance of this principle for the multilateral trading system, exceptions from MFN treatment are closely circumscribed in GATT 1994, and require specific GATT/WTO legislation.
The original text of the General Agreement did not allow for preferences in favour of developing countries. The only exception to the MFN principle built into the GATT legal framework from the beginning was the provision for reciprocal free trade within customs unions and free-trade areas (GATT Article XXIV). This provision could not be applied to preferential imports from developing countries because no reciprocity was involved in these development-oriented trade preferences. Moreover, trade preferences for developing countries were not intended to cover “substantially all the trade” as required for free-trade areas in GATT Article XXIV. Since no other GATT provision could possibly provide shelter, trade preferences for developing countries were simply illegal at that time. When Part IV of the GATT, on Trade and Development, was negotiated in 1964, a number of developing countries suggested that GATT Article I should be amended so as to allow trade preferences for developing countries.[22] However, no agreement on preferential trade provisions could be reached at the time, and Part IV, therefore, only drops the reciprocity requirement for developing countries when developed countries negotiate (non-preferential) concessions with them.
Thus, when developed countries began to accord preferential treatment to imports from developing countries in the 1960s, they needed to find a specific exemption from GATT rules for this purpose. At the time this was achieved through waivers under GATT Article XXV:5 for the individual developed countries providing preferences. The issue of trade preferences came up in a more general form again in GATT when the GSP approach was adopted in an UNCTAD understanding in October 1970. Among the various options considered for solving the resulting legal problem in GATT, the Contracting Parties opted again for a waiver approach, in a decision adopted in May 1971. However, during the Tokyo Round negotiations, a Framework Group was established at the request of developing countries, with the objective of finding a more permanent legal solution for trade preferences. As a result of the negotiations, an agreement was reached, as one part of the Tokyo Round results, which became known as the ‘Enabling Clause’.[23] This agreement did not amend the text of the GATT, but as a decision by the GATT Contracting Parties it had an essentially equivalent legal effect.
Under the Enabling Clause, “Notwithstanding the provisions of Article I of the General Agreement, contracting parties may accord differential and more favourable treatment to developing countries, without according such treatment to other contracting parties”. More specifically, the clause allows for: “preferential tariff treatment accorded by developed contracting parties to products originating in developing countries in accordance with the Generalized System of Preferences”; “differential and more favourable treatment... concerning non-tariff measures”; “regional or global arrangements... amongst less-developed contracting parties for the mutual reduction or elimination of tariffs... [and] non-tariff measures, on products imported from one another”; and “special treatment of the least developed among the developing countries in the context of any general or specific measures in favour of developing countries”. Under the Enabling Clause, “developed countries do not expect reciprocity for commitments made by them in trade negotiations”, and “shall exercise the utmost restraint in seeking any concessions or contributions for commitments made by them to reduce or remove tariffs and other barriers to the trade of [least-developed countries], and the least-developed countries shall not be expected to make concessions or contributions that are inconsistent with the recognition of their particular situation and problems”.
The Enabling Clause has thus created a permanent legal basis for trade preferences provided by developed countries, both generally for all developing countries under GSP regimes, and also for specific more preferential treatment of the least-developed countries. On the other hand, there is no absolute legal requirement in GATT for providing any given trade preferences. In other words, developed countries can and should provide trade preferences for developing countries, but they are not legally bound to do so. As a result, trade preferences under the GSP continue to be granted unilaterally by the developed countries concerned, and so can always be changed, and even withdrawn completely, without violating GATT/WTO commitments. While MFN tariffs, where bound in the Schedules of the importing countries concerned, are legal commitments that cannot be changed without following the respective GATT rules, trade preferences for developing countries are not so bound and hence can, as far as GATT/WTO rules are concerned, be changed unilaterally by the developed countries granting them.
The Enabling Clause relates only to preferences provided by developed countries, and to mutual, i.e. reciprocal, trade preferences among developing countries. It does not, however, establish a legal basis for the provision of trade preferences by developing countries for imports from the least-developed countries. For such preferences, a specific waiver is required. A waiver to that effect was agreed by the WTO Members on 15 June 1999.[24] Under this decision, “the provisions of paragraph 1 of Article I of the GATT 1994 shall be waived until 30 June 2009, to the extent necessary to allow developing country Members to provide preferential tariff treatment to products of least-developed countries, designated as such by the United Nations, without being required to extend the same tariff rates to like products of any other Member,... on a generalized, non-reciprocal and non-discriminatory basis.”
Under the Enabling Clause, tariff preferences granted by developed countries must not discriminate among developing countries, except for the possibility of providing more generous preferences to all least-developed countries. Specific preferences for limited groups of developing countries granted by individual developed countries, such as those granted by EU to ACP countries under the Lomé Convention, are not covered by the Enabling Clause. For a long time no objections were raised in GATT to these specific preferential schemes, and it was not completely clear whether they were (implicitly) considered to be legal. It was not before the first GATT panel on the EU import regime for bananas in 1993 that an explicit decision was taken on the issue. The panel found the EU’s preferences for banana imports from the ACP countries inconsistent with GATT Article I, and also with GATT rules on free-trade areas, stating that Part IV of the GATT did not provide a justification for non-reciprocity in free-trade areas involving developing countries. The Enabling Clause did not provide a shelter for these ACP preferences as they were not extended to all developing countries. By implication that meant that all specific EU preferences for the ACP countries, and all other similar schemes of other developed countries, were to be considered illegal under the GATT. In response to this panel outcome, rather than eliminating its trade preferences under the Lomé Convention, the EU requested a GATT/WTO waiver that would allow it to continue to provide the special trade preferences to the ACP countries. That waiver was indeed granted in 1994, for a period lasting until the expiration of Lomé IV, i.e. 29 February 2000.[25]
Given the GATT inconsistency of special preferences for groups of developing countries, the EU looked for alternative approaches in the negotiations with the ACP countries on a successor agreement to the Lomé Convention. In the end, these attempts failed in the sense that a completely new and WTO-compatible framework, substituting for the Lomé trade arrangements already in 2000, could not yet be agreed. However, a new agreement between the EU and the ACP countries was signed in Cotonou, Benin, in June 2000. Like Lomé IV, the new Cotonou Agreement includes trade preferences for the ACP countries. The trade arrangements under the Cotonou Agreement are of a temporary nature, but outline the path towards a new trading regime between the ACP countries and the EU which it is hoped will establish conditions which will eventually be WTO-compatible.
The new arrangements will take essentially two forms. First, new economic partnership agreements (EPAs) will be negotiated which aim at a progressive removal of trade barriers between the EU and the ACP countries concerned. It is intended that each EPA will establish reciprocal free trade between the relevant trading partners, in line with WTO rules on regional free trade arrangements. The intention is to establish the new EPAs with all ACP countries which are not LDCs. Hence, the second element of the trading arrangements foreseen relates to the LDCs. In this regard, the EU committed itself to “start by the year 2000, a process which by the end of the multilateral trade negotiations and at the latest 2005 will allow duty-free access for essentially all products from all least developed countries, building on the level of the existing trade provisions of the Fourth ACP-EC Convention”.[26] In other words, this second part of the future trade arrangements seeks to avoid the problem of WTO inconsistency by extending unilateral EU trade preferences to all least-developed countries, including those that are not members of the ACP group (currently nine countries). The European Council has meanwhile adopted a new regime that will provide zero-duty access for all products except arms from the least-developed countries, under a regime dubbed “Everything but Arms” (EBA) (see above, Section 2).
During the period in which these new arrangements are negotiated, scheduled to last until 2008 at the latest, the ACP countries and the EU will need another WTO waiver for the arrangements established under the Cotonou Agreement. The EU, and Tanzania and Jamaica on behalf of the ACP countries, approached WTO about a new waiver on 29 February 2000.[27] However, at the time of writing a decision on that waiver had not yet been taken by WTO.[28]
Equivalent to the EU’s problem with trade preferences for the ACP countries is the situation regarding the special trade preferences granted by the United States under the Caribbean Basin Economic Recovery Act. Like the EU, the United States received a WTO waiver in 1995, valid until 31 December 2005.[29] It appears that there is wide agreement in WTO that such waivers for specific preferential schemes should not be extended indefinitely. The developing and developed countries engaged in such schemes will therefore have to work towards new solutions, possibly in the form currently considered between the EU and the ACP countries.
In sum, universal trade preferences for imports from all developing countries, as extended under the GSP, are consistent with the GATT under the Enabling Clause. The same holds for specifically generous preferences granted to all least-developed countries. However, developed countries are not legally committed to providing such preferences. They can, therefore, decide unilaterally on preference margins, and also withdraw preferences without violating GATT/WTO commitments. Specific trade preferences for limited groups of developing countries, such as those provided under the Lomé Convention or under the Caribbean Basin Economic Recovery Act, however, are not consistent with the GATT. Yet, the WTO has in the past granted waivers that allowed the countries concerned to maintain these specific preferences.
