The impact of GSP Preferences on Developing Countries' Exports in the European Union: Bilateral Gravity Modelling at the Product Level

Unilateral preferences aim at increasing exports from developing countries via reductions on applied tariffs and the incentives created by the preference margin. After decades of existence of these schemes, an important policy question is whether preferential schemes have been effective in increasing exports. This paper evaluates empirically the impact of the European Union (EU) GSP preferential regimes on exports from developing countries using a bilateral gravity model at the product level. Rather than using dummy variables to proxy each trade regime as in most empirical papers, this paper uses a unique dataset at CN-10 digits that allows us to determine the tariff rate paid by each export to the EU and the preferential regime of entry and address the issue of utilisation and nonutilisation of trade preferences, which can result in wrong attribution of causality between trade regimes and export flows. The most important finding of the paper is the fact that the results critically depend on (i) how the advantage provided by the preferences measure is measured, and (ii) whether the extensive margin of trade is included. Overall the results suggest preferences have a very small impact on trade, and negligible or even negative when we consider the scope for trade diversification. Therefore, it appears that the GSP system has provided a small effect on increasing exports at the intensive margin, but no effect on export diversification.