An empirical analysis of the Swiss generalized system of preferences

Abstract

The progressively introduced DFQFMA for LDCs has a positive effect on the size of LDCs’ preferential exports to Switzerland. Consequently, the DFQFMA has considerably improved market access for the world’s poorest countries. Eliminating tariffs (progressively) causes preferential agro-food and textile exports of LDCs to rise substantially. However, it has to be remarked that the success of the DFQFMA is limited to the agro-food and textile sectors and to a few countries. The descriptive analysis of agro-food exports indicates that trade liberalization is a success story merely for a few LDCs, namely Tanzania, Ethiopia, Côte d’Ivoire, Mozambique, Malawi, Senegal and Uganda. Those seven countries capture a total share of nearly 80 percent of LDCs’ agro-food exports to Switzerland. In the textile sector we observe an even higher degree of market concentration concerning LDCs’ preferential exports. Here, three countries, namely Bangladesh, Cambodia and Nepal, account for 98 percent of LDCs’ preferential textile exports. It also can be noted that the GSP is a useful supplement to ‘duty-free tariffs’ (duty-free market access) under the WTO regime. For instance, 100 percent of LDCs’ agro-food exports from 2002 to 2011 entered Switzerland under reduced or duty-free tariffs. However, the share of preferential exports under the GSP was on average only 36 percent. In this context, the preference margin, which represents the main incentive to export under preferential conditions, compensates the costs of compliance associated with the GSP and yields an additional benefit for the importer has a consistent and positive effect on the level of the utilization rate. In particular, the application of the Heckman´selection model in article no. 1 makes clear that once trade contracts are established and an exporter has overcome bureaucratic obstacles in the form of proof of origin and proof of direct shipment, the ‘preference margin’ appears as the main incentive to export under preferential conditions granted by the GSP. While the effect of the size of ‘GSP eligible trade’ has a positive and significant effect in the case of the PPML estimations, the effect turned negative when the sample was restricted to positive values of the utilization rate in the case of the outcome equation of the Heckman selection model. This finding encourages our confidence that the ‘preference margin’ acts as the main incentive for exporting under preferential conditions. However, to benefit from these preferential tariffs, the institutional quality of a given DC or LDC is of crucial importance. Additionally, we address the question of whether reciprocal trade preferences are more beneficial for DCs compared to non-reciprocal trade preferences. Because trade preferences under the Swiss GSP are offered to the country group of DCs as a whole, non-reciprocal trade preferences are not tailored to the export structure of a particular DC. Consequently, by switching from non-reciprocal to negotiated reciprocal trade preferences, DCs such as Tunisia expect to negotiate terms which are tailored to their export structure and better conditions than competitors from countries which are still beneficiaries of the GSP. The Tunisian case study reveals that the switch from the GSP to an FTA causes no significant advantage in most of the export sectors. This implies that switching from non-reciprocal to reciprocal trade preferences yields advantages in export sectors where Tunisia has comparative cost advantages. This is especially true for the textile sector and partly so for the agro-food sector.