MCom I Semester Business Environment GSTP GSP Counter Trade Study Material Notes

MCom I Semester Business Environment GSTP GSP Counter Trade Study Material Notes: Global System of Tariff Preference ( GSTP) Principle of Global System of Tariff Preference Objectives of Global System of Tariff Preference ( GSTP) Working of GSTP Generalised System of Preference ( GSP ) Counter Trade Long Answer Questions Short Answer Questions Objective Questions

BCom 2nd Year Advance Payment Tax Study Material Notes in Hindi

G.S.T.P., G.S.P. and Counter Trade

GLOBAL SYSTEM OF TARIFF PREFERENCE (GSTP)

GSTP is a major initiative of developing countries to expand mutual trade through grant of tariff and non-tariff concessions. The ideas of creating framework for the exchange of trade preferences among developing countries was first discussed by the group of 77 in 1982. The rules and procedures of GSTP are drawn by UNCTAD. The intention was to promote trade and economic cooperation among developing countries through the exchange of concessions such as tariff preferences on selected products and removal of non-tariff barriers. Rather than replace existing agreements, the new accord was intended to supplement sub-regional, regional and inter-regional economic grouping.

On June 16, 2004 a ministerial conference was held in Brazil under the chairmanship of Industrial Minister of Argentina. India has been the founder member of GSTP. India has provided tariff preferences to 22 products and received preferences for 32 products from the other countries under GSTP. Objectives of Global System of Tariff Preference (GSTP)

The main objectives of GSTP are as follows:

(i) To promote and develop mutual trade between developing countries.

(ii) To promote economic cooperation between developing countries.

(iii) To make special efforts for the development of least developed countries.

(iv) To enhance production and employment in developing countries by establishing a new economic order. Principles of Global System of Tariff Preference (GSTP)

The GSTP functions according to the following principles :

1 For becoming a participant in GSTP, the developing country has to be a member of G-77.

2. The GSTP is based on the principle of mutual benefit to all the participants, taking into account their respective levels of economic and industrial development.

3. GSTP would include all products, i.e., raw material, semi-finished and manufactured goods.

4. The GSTP is not to replace G-77 but to supplement and reinforce it.

Preferential measures should be given to clearly recognised least developed countries. These measures would include elimination of tarill and non-tamil barriers and long-term contracts for the sustainable growth of exports of these countries.

GSTP GSP Counter Trade

Working of GSTP

The GSTP functions through a GSTP Committee. The Committee consists of government representatives from participant countries. The Committee performs the function of facilitating the operation and furthering of the objectives of GSTP. The main functions of GSTP Committee are :

(i) Reviewing and monitoring the results of negotiations.

(ii) Carrying out consultations.

(iii) Making various advisory recommendations.

(iv) Taking final decisions

GSP and GSTP

The basic objectives of both GSP and GSTP is development of trade of the developing countries through tariff and non-tariff concession. Under GSP, the concessions are given by a developed country to a developing country whereas under GSTP, the concessions are given by one developing country to another developing country.

Preferential measures should be given to clearly recognised least developed countries. These measures will include elimination of tariff and non-tariff barriers and long-term contracts for the sustainable growth of these countries.

All participant countries under GSTP have agreed to extend tariff and nontariff concessions for agricultural and industrial products. At present there are 1629 products which are eligible for concessions under GSTP. The participant countries can take safeguard measures to protect domestic products but they have to notify the GSTP Committee of its intention and GSTP Committee will circulate this intention to all other participants. At present GSTP is offering preferential treatment to 1629 items exported from one developing participant country to another participant country. For utilising the preferential treatment, the product must be in the list of the committee and comply with the rules of GSTP.

GENERALISED SYSTEM OF PREFERENCE (GSP)

When the tariff concession had been given to selected countries, it is called Generalised Special Preferences or Generalised System of Preferences (GSP). It had been realised by the developed countries that if export earnings of developing nations decline, their external purchasing power reduces, hence, their importing capacity gets reduced and as a result the exports of developed nations to these countries would fall and the world trade may experience a down turn. To avoid this misfortune, the developed nations removed tariff and non-tariff barriers and a more free trade was encouraged.

Durir, the New Delhi Round of UNCTAD in 1968, several aspects of trade preferences and concessions were discussed. The conference reaffirmed that for prosperity as a whole, a generalised, non-reciprocal and non-discriminatory system of preferences in favour of less developed countries should be implemented as soon as possible. The final resolution of the conference stressed that a mutually acceptable system of generalised, non-reciprocal and non-discriminatory preferences beneficial to the developing countries should be immediately established. It is popularly known as Generalised System of Preferences (GSP).

The European Union’s trade The union has granted duty-free or Pean Union’s trade policy is closely linked to its development policy, as granted duty-free or cut rate preferential access to its market for

imports from developing countries and economies in transition under neral system of preferences (GSP). The Union has implemented this system for three years at a time. GSP includes three preferences:

1 GDP is a standard which provides generalised system of preferences to 176 developing countries, it comprises development of country and based on 620 tariff lines.

2. GSP provides incentives for sustained growth and good administration and support concessions in addition to tariffs.

3. It goes even further for the 50 poorest countries in the world, all of whose exports with the sole exemptions of arms (EBA System) are to enjoy duty free entry to the EU market.

The GSP dates back of the early 1970s. It resulted from a growing recognition in the 1960s that developing countries did not benefit from international trade because of structural weakness and trade barriers in developed countries. Special and differential treatment was seen as a way to improve the competitive position of developing countries. In 1971, the GATT contracting parties decided to allow developed countries to provide tariff preference to developing countries on a non-reciprocal and non-discriminatory basis. This preference scheme came to be known as the generalised system of preferences.

The EEC, Japan and Norway were the first to implement GSP in 1971, followed by Denmark, Finland, Sweden, New Zealand, Switzerland, Austria in 1972, by Australia and Canada in 1974 and finally by U.S.A. in 1976.

In 1971, GATT exempted the member countries from the most favoured nation clause and permitted developed countries to give tariff concessions to the developing nations. At this time GSP started its working, because without this exemption of most favoured nation clause GSP could not function. Some European countries gave some concessions and facilities under the GSP specially to exports of manufactured and semi-finished goods produced by developing countries. USA, however, did not do any thing in this matter on the contrary, in 1971, when USA imposed a 10% surcharge on her imports in order to save dollar from crisis, the developing countries exports to the USA suffered to that extent. And even though, after the devaluation of dollar the surcharge was removed, the purchasing power of foreign exchange reserves of the developing nations had declined atleast by $ 50 crores as a result of dollar devaluation.

In 1980, UNCTAD analysed GSP and concluded that it had failed to attain its objectives. All developed countries provide special treatment to least developed countries. Most of the developed countries like countries of European community, Japan, Switzerland, America, Norway, Sweden, Finland, etc. provide duty free access for a long list of products. Canada, too has a system in place, which provides duty-free access for most agricultural products from least developed countries. Recently, the European Union has extended duty-free market access for least developed countries to everything but arms including agricultural products. The world at present is passing through a period of recession. Developed countries are dumped with surplus production and excessive production capacity. To overcome this recession, they have to protect their market by increasing tariff. They cannot think of giving tariff preferences to developing countries in such a situation.

GSTP GSP Counter Trade

Benefits of GSP

The main benefits of GSP are as follows:

1 GSP offers better price when selling into the protected markets, as the reduced or zero tariffs increase the returns to the exporters. Also they secure access for particular quantities of exports, allowing production and shipping to be geared to established market.

2. It has increased competitive power of developing countries for the products included in the list with domestically produced goods.

3. These schemes have helped in enlarging the size of the market in importing countries but because of quota restrictions the enlargement of market could not help free economic role because of artificial constraints placed by importing countries but it has been a step in the right direction. Limitations of GSP

The limitations of GSP are as follows:

1 Despite efforts made to expand the coverage of GSP, such important items as textiles, clothing, leather and leather products, steel, footwear are excluded by a number of developed countries.

2. Among the LDCs, the benefits of GSP have been consistently concentrated among the few of the more advanced developing countries. The scope for extension of GSP is quite limited. A product producer in LCDs have a strong competitive position in world markets.

3. Many developed countries have developed their own schemes which subject the preferences to a variety of restrictions. Some give preferential tariff treatment to those LCDs that abide by voluntary export restraint.

4. GSP concessions are given at the whims and desires of the developed nations, there is no guarantee of these concessions. These can be withdrawn at any time, then it will very badly affect the export earnings of developing countries.

COUNTERTRADE

Counter trade is a modernised form of barter trade. Counter trade is that trade in which goods are purchased from the seller only when the seller is ready to buy something from the purchaser also. It is a bilateral trade agreement between the two countries, under which one country imports products from the other country on the condition that the country will also import products from them of the same value. Counter trade policy is adopted in international trade when imports of goods are paid for by exports of goods instead of money payments. No foreign exchange is required in such type of agreement and hence the countries do not have to face the problem of balance of payments. Since 1980 the policy of counter trade has replaced the barter trade. Counter trade transactions generally take place when the countries facing foreign exchange crisis find it more convenient to exchange goods rather than using foreign exchange as a medium of exchange.

The number of countries doing counter trade has increased from 88 in 1983 to 153 in 2001 and upto 2008 most of countries of the world have adopted counter trade policy. For example, USSR paid Vodka for Coca-cola. Similarly, Poland also paid Coca-cola in the same way. Counter trade has been divided in five parts:

1 Barter

2. Counter Purchase

3. Offset

4 Buyback or compensation.

5. Switch Trading.

1 Barter: Barter is the most common method of counter trade. In a barter deal goods are exchanged for goods, principal export is paid for with goods or services from the importing market.

2. Counter Purchase: It means that payment is made through purchases of some other goods or services.

3. Offset: It is also a bilateral agreement of counter purchase.

4. Buy back: In buy back, a construction company, under an agreement, agrees to accept a percentage of profit for its investment.

5. Switch Trading : Switch trading arises when third party to the trade makes counter purchases and resale to the second party for better use. For example, Brazil at one time had a large credit surplus with Poland. These surpluses could be tapped by third countries, so that for example, U.K. exports to Brazil could be financed from the sale of Polish goods to the UK or elsewhere.

Advantages of Counter Trade : The main advantages of counter trade are as follows:

1 Countertrade makes exports stable because in counter trade, there are less fluctuations in demand. Moreover, long-term counter trade agreements provide more stability.

2. Counter trade helps the countries who are facing foreign exchange crisis. These countries can have their essential imports with the help of counter trade without aggravating their debt crises further.

3. Trade agreements in counter trade are based on the transactions of goods and services. Imports of goods are paid for by export of goods instead of money payment. Therefore counter trade does not put any burden on the balance of payment of a country.

4. The developing countries can develop their exports also with the help of counter trade. It is a bilateral agreement which requires that the exporting country will have to import products of the same value from the importing country. Thus, the developing countries can have international market for their product

Drawbacks of Counter Trade

Despite the above mentioned benefits the counter trade has not been very popular. Counter trade is criticised on the following grounds:

1 It restricts the free flow of goods, hence benefit of competition in international trade cannot be availed.

2. Though it is a modernised form of barter trade, yet it suffers from all inherent limitations of barter.

3. Sometimes unnecessary imports have to be made in exchange for the export as money is not medium of exchange and the exporting country has to import products of the same value.

Though, counter trade can be used as an effective international business too but with the increase in trade under provisions of WTO, importance of counter trade is getting eliminated day by day. More and more countries are adopting the provisions of WTO and are becoming liberalised and globalised.

EXERCISE QUESTIONS

Long Answer Questions

1 What is the Generalised System of Preference? What are its limitations?

2. What is meant by GSP, GSTP and Counter Trade? Explain the advantages and disadvantages of counter trade.

Short Answer Questions

1 What are the main objectives of GSP?

2. Write the limitations of GSP.

3. What is GSTP?

4. What do you mean by Counter Trade?

GSTP GSP Counter Trade

Objective Questions

(1) Select the Correct Alternatives :

1 In Internaational trade, the policy in which imports of goods are paid by export of goods, is known as:

(a) multilateral imports

(b) counter trade

(c) bilateral trade agreement

(d) all of above.

2. GSTP stepped forward to :

(a) encourage technical knowledge

(b) providing economic cooperation among developing countries

(c) encourage foreign trade

(d) all of above

3. Which economic group strongly urged to grant a “Generalised System of Preferences:

(a) G-20

(b) G-15

(c) G-8

(d) group of 77 developing countries

4. In which UNCTAD conference, establishment of GSP was suggested :

(a) UNCTAD-III

(b) UNCTAD-IV

(c) UNCTAD-II

(d) none of these

(Ans: 1. (b), 2. (b), 3. (d), 4. (c)]

(II) Write True or False :

1 The main objective of GSTP is to promote mutual trade between developing countries.

2. The main function of GSTP is carrying out consultations and making various advisory recommendations.

3. Counter trade put burden on the balance of payment of a country.

4. Counter trade is free from the defects of barter system.

[Ans: 1. True, 2. Trus, 3. False, 4. False)

(III) Fill in the blanks :

1 For becoming a participant in GSTP, the developing country has to be a member of

2. GSTP would include all products, i.e., raw materials, semi-finished and … products.

3. The developing countries face the problem of foreign exchange and. …………….., Japan and Norway were the first to implement GSP.

[Ans: 1. G-77, 2. manufactured 3. debt crisis, 4. The European Economic Community.)

GSTP GSP Counter Trade