European Commission Proposes Update of Generalized System of Preferences (GSP)
On September 22, 2021, the European Commission ("Commission") published a proposal for a new regulation ("Proposal") on the generalized scheme of tariff preferences ("GSP").1 The Proposal anticipates the upcoming expiry of the current GSP Regulation on December 31, 2023.2 Through the GSP, the European Union (“EU” or “Union”) provides preferential access to its market for imports from eligible developing countries ("Beneficiary Countries"). The Proposal retains the overall architecture of the current GSP while enhancing the powers of the Commission to suspend or withdraw preferential tariffs in cases of non-respect of the objectives of the GSP or when the Union's interest so requires.
This Legal Update sets forth the key proposed changes and their potential impact on businesses with supply chains involving GSP beneficiary countries.
WHAT IS BEING PROPOSED?
1. Changes to GSP+ access while the overall architecture of the GSP remains the same
The Proposal maintains the three existing structures of GSP arrangements:
- The general arrangement, granting low- and lower-middle-income countries a duty reduction on two-thirds of EU tariff lines.
- The Special Incentive Arrangement for Sustainable Development and Good Governance ("GSP+"), granting extended tariff preferences and only accessible to vulnerable countries that ratify and implement specific international environmental and human rights-related conventions.
- The special arrangement for Least-Developed Countries ("LDCs"), also known as the Everything But Arms arrangement ("EBA"). This scheme provides duty-free, quota-free access for all products except arms and ammunition to all countries identified as LDCs by the United Nations.
The criteria to access the GSP+ arrangement will be amended under the Proposal. Specifically, the conditions to be considered a "vulnerable country," will be eased through the removal of the export competitiveness criterion, while the list of international conventions to be ratified and implemented is extended by six new environmental and good governance conventions.3
2. Increased possibilities for the withdrawal tariff preferences
The number of situations under which the Commission can withdraw preferential arrangements is increased under the Proposal. Whereas currently withdrawal is only available in cases of certain human rights and labor rights violations, this possibility will be extended to cases of serious and systematic violations of principles laid down in specifically listed environmental and good governance treaties.4 In addition, withdrawal will also be possible in cases of shortcomings related to the obligation to readmit the developing country’s nationals illegally present on the territory of an EU member state.5
These changes are accompanied by enhanced flexibility in the procedure leading to withdrawal, which is reduced from six to two months when the "exceptional gravity of the violations calls for a rapid response."6
3. Lower thresholds for EU protective measures (safeguards)
The current GSP allows reintroducing import duties in cases where products are "imported in volumes and/or at prices that cause, or threaten to cause, serious difficulties to Union producers" (“general safeguard”) after a formal investigation by the Commission.7 In addition, the EU can resort to an "automatic safeguard" in the textile, agriculture and fisheries sectors when imports reach specific thresholds.8 An automatic suspension of tariff preferences can also result from the "graduation" mechanism when a product from a beneficiary country represents more than a set percentage of total GSP imports over three consecutive years.9
No substantial changes regarding the above-mentioned mechanisms are proposed by the Commission. That being said, the Proposal reduces the threshold to trigger an automatic safeguard and the threshold for the graduation mechanism from 57 to 47 percent of the total GSP imports of the product.10 Additionally, these thresholds will be calculated in terms of value rather than volume.
4. A new process regarding requests for cumulation
The Proposal introduces a specific process for granting cumulation. In the context of rules of origin and designating whether a product is eligible for preferential tariff treatment (for example, under the GSP), cumulation allows for the use of inputs and parts originating from another Beneficiary Country without this jeopardizing access to the GSP preferential tariffs. The rules applicable to the GSP allow Beneficiary Countries to request from the Commission cumulation with another Beneficiary Country from the same regional group11 (“regional cumulation”), a Beneficiary Country of different regional groups (“inter-regional cumulation”) or a country having a trade agreement with the EU (“extended cumulation”).
The Proposal formalizes the process for such cumulation to be granted. Notably, beneficiaries must evidence that (i) cumulation is necessary "in view of [their] specific trade, development and financing needs" and (ii) the beneficiary "cannot comply with the rules of origin applicable to the goods in question, without such cumulation being granted."12 The Commission will then assess whether these two conditions are fulfilled (taking into account the level of dependency of the beneficiary country on integrated production with the third countries) and verify that the cumulation does not create undue trade difficulties for other eligible countries.
WHAT IS THE EXPECTED IMPACT ON BUSINESSES, AND HOW SHOULD THEY REACT?
The Proposal of the Commission is further evidence of the increased focus on the enforcement aspect of the common commercial policy. It follows the first imposition of safeguard measures under the safeguards mechanism of the GSP Regulation in 2019,13 the recent withdrawal of certain tariff preferences for Cambodia14 and the creation of the position of a chief trade enforcement officer in 2020.
Given that it:
- imposes more stringent conditions for GSP+ eligibility,
- increases the possibilities for the withdrawal of preferences and
- lowers the threshold for EU protective measures
the Proposal may signal increased uncertainty for companies whose supply chain involves GSP Beneficiary Countries. At the same time, due to the introduction of a more formal process for requesting inter-regional and/or extended cumulation, the revised GSP may offer additional opportunities for economic operators.
WHAT WILL HAPPEN NEXT?
The Proposal will now be examined by the European Parliament and the Council, which may amend the proposal. Companies with international supply chains and/or exporting to the EU from developing countries should assess the impact of the Proposal on their business model. In addition, they have the opportunity to make their views known to EU institutions through a consultation process until November 19, 2021.
Mayer Brown has extensive experience advising on market access questions and customs law and stands ready to assist its clients in analyzing the impact of the Proposal on their supply chains.
1 https://trade.ec.europa.eu/doclib/docs/2021/september/tradoc_159803.pdf
2 Regulation (EU) No 978/2012 of the European Parliament and of the Council of 25 October 2012 applying a scheme of generalised tariff preferences and repealing Council Regulation (EC) No 732/2008, OJ L 303, 31.10.2012, p. 1, Recital 7 ("GSP Regulation").
4 Proposal, Article 19 and Annex VI.
6 Proposal, Article 19. This procedure can be triggered by the Commission itself or upon a complaint.
7 GSP Regulation, Chapter VI, Section I.
8 GSP Regulation, Chapter VI, Section II. The automatic safeguard does not apply to EBA beneficiaries.
9 GSP Regulation, Article 8. A country graduation system also exists and covers situations in which countries lose their LDC status, upgrade to high or upper-middle income status or have a trade agreement with the EU.
10 Proposal, Annex IV. From 47.2 to 37 percent for certain Textile products. The 17.5 percent threshold for certain agricultural and mineral products remains unchanged.
11 The EU distinguishes between four different regional groups mentioned in Article 55 of Commission Delegated Regulation (EU) 2015/2446 of 28 July 2015 supplementing Regulation (EU) No 952/2013 of the European Parliament and of the Council as regards detailed rules concerning certain provisions of the Union Customs Code (OJ L 343 29.12.2015, p. 1).
13 Commission Implementing Regulation (EU) 2019/67 of 16 January 2019 imposing safeguard measures with regard to imports of Indica rice originating in Cambodia and Myanmar/Burma, OJ L 15, 17.1.2019, p. 5.
14 Commission Delegated Regulation (EU) 2020/550 of 12 February 2020 amending Annexes II and IV to Regulation (EU) No 978/2012 of the European Parliament and of the Council as regards the temporary withdrawal of the arrangements referred to in Article 1(2) of Regulation (EU) No 978/2012 in respect of certain products originating in the Kingdom of Cambodia, OJ L 127, 22.4.2020, p. 1.
