Order Code RS22183
Updated September 16, 2005
CRS Report for Congress
Received through the CRS Web
Trade Preferences for Developing Countries
and the WTO
Jeanne J. Grimmett
Legislative Attorney
American Law Division
Sabu Mathai
Law Clerk
American Law Division
Summary
World Trade Organization (WTO) Members must grant immediate and
unconditional most-favored-nation (MFN) treatment to the products of other Members
with respect to tariffs and other trade-related measures. Programs such as the
Generalized System of Preferences (GSP), under which developed countries grant
preferential tariff rates to developing country products, are facially inconsistent with this
obligation since they accord goods of some countries more favorable tariff treatment
than that accorded goods of other WTO Members. Because such programs have been
viewed as trade-expanding, however, Contracting Parties to the General Agreement on
Tariffs and Trade (GATT) provided a legal basis for one-way tariff preferences and
certain other preferential arrangements in a 1979 decision known as the Enabling
Clause. WTO Members have received GATT waivers for preferences that exceed what
this GATT exception allows. In 2004, the WTO Appellate Body ruled that the Enabling
Clause allows developed countries to offer different treatment to developing countries,
but only if identical treatment is available to all similarly-situated GSP beneficiaries.
Two 109th Congress bills (S. 191 and H.R. 886) would grant preferential market access
to products of the least-developed countries. H.R. 3175 would expand textile-related
trade preferences to sub-Saharan African countries. This report will be updated.
Trade Preferences and GATT MFN Requirements
As parties to the General Agreement on Tariffs and Trade (GATT) 1994, World
Trade Organization (WTO) Members must under Article I:1 of the GATT grant
immediate and unconditional most-favored-nation (MFN) treatment to the products of
other Members with respect to customs duties and import charges, internal taxes and
regulations, and other trade-related matters. Thus, whenever a WTO Member accords a
benefit to a product of one country, whether it is a WTO Member or not, the Member
Congressional Research Service ˜ The Library of Congress

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must accord the same treatment to the like product of all other WTO Members.1 Tariff
preference programs for developing countries are facially inconsistent with this obligation
because the favorable treatment provided by the granting country to the goods of a
specific group of countries is not extended to all WTO Members. Since preference
programs have been viewed as vehicles of trade liberalization and economic development
for developing countries, however, GATT Parties have accommodated them in a series
of joint actions.
In 1965, the GATT Parties added Part IV to the General Agreement, an amendment
that recognizes the special economic needs of developing countries and asserts the
principle of non-reciprocity. Under this principle, developed countries forego the receipt
of reciprocal benefits for their negotiated commitments to reduce or eliminate tariffs and
restrictions on the trade of less developed contracting parties.2 Because of the underlying
MFN issue, GATT Parties in 1971 adopted a waiver of Article I for the Generalized
System of Preferences (GSP), which allowed developed contracting parties to accord
more favorable tariff treatment to the products of developing countries for ten years.3 The
GSP was described in the decision as a “system of generalized, non-reciprocal and non-
discriminatory preferences beneficial to the developing countries.”
At the end of the Tokyo Round of Multilateral Trade Negotiations in 1979,
developing countries secured adoption of the Enabling Clause, a permanent deviation from
MFN by joint decision of the GATT Contracting Parties. The Clause states that
notwithstanding GATT Article I, “contracting parties may accord differential and more
favourable treatment to developing countries, without according such treatment to other
contracting parties” and applies this exception to: (1) preferential tariff treatment in
accordance with the GSP; (2) multilateral non-tariff preferences negotiated under GATT
auspices; (3) multilateral arrangements among less developed countries; and (4) special
treatment of the least developed countries in preference programs.4 To describe the GSP,
the Clause refers to the above-quoted description in the 1971 waiver. The Enabling
Clause has since been incorporated into the GATT 1994.5
1 While the WTO uses the term “most-favored-nation” to describe nondiscriminatory trade
treatment, U.S. law has since 1998 referred to this treatment as “normal trade relations” (NTR)
status. See P.L. 105-206, § 5003. This report uses the WTO terminology.
2 E. McGovern, International Trade Regulation § 9.212 (updated 1999)[hereinafter cited as
McGovern]. Part IV is generally viewed as non-binding, though some have argued otherwise
with regard to certain of its provisions. Id.; J. Jackson, W. Davey & A. Sykes, Legal Problems
of International Economic Relations 1171 (4th ed. 2002).
3 Generalized System of Preferences; Decision of 25 June 1971 (L/3545)(June 28, 1971),
available at [http://gatt.stanford.edu/page/home].
4 Differential and More Favourable Treatment, Reciprocity and Fuller Participation of
Developing Countries; Decision of 28 November 1979 (L/4903)(December 3, 1979). This
document and subsequently-cited WTO documents are available at [http://docsonline.wto.org].
5 Agreement Establishing the World Trade Organization, Annex 1A, General Agreement on
Tariffs and Trade 1994, ¶ 1(b)(iv); see European Communities – Conditions for the Granting of
Tariff Preferences to Developing Countries; Report of the Appellate Body (WT/DS246/AB/R)
(April 7, 2004), at ¶ 90.3

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WTO Waivers for Preferential Trade Agreements
The European Union had argued in the GATT that it could further deviate from
Article I:1 MFN requirements for non-reciprocal free trade with developing countries
pursuant to GATT Part IV, discussed above, as well as GATT Article XXIV, which
provides an MFN exception for customs unions and free trade areas meeting specified
conditions. At issue was the Lomé IV Convention, a preferential, non-reciprocal trade
arrangement between the EEC and African, Caribbean and Pacific (ACP) countries. The
Convention extended beneficial tariff and quota treatment to ACP imports as well as
development assistance to ACP countries. GATT panels concluded in two unadopted
panel reports, one issued in 1993 and the other in 1994, that such a deviation was not
justified under either provision.6 With regard to the Article XXIV claim, the 1994 report
concluded that because the Lomé Convention involved non-GATT Parties, it was not an
agreement covered by the Article and thus it could not be used to justify the inconsistency
with Article I of trade preferences for bananas imported from ACP countries.7 Shortly
thereafter the European Communities (EC) obtained a temporary waiver of GATT Article
I:1 for the Lomé agreement; it later received a waiver for the successor ACP-EC
Partnership Agreement (Cotonou Agreement) until December 31, 2007.8
WTO Waivers for U.S. Preference Programs9
The United States holds a temporary GATT waiver for the preferential tariff program
established in the Caribbean Basin Economic Recovery Act (CBERA);10 the waiver
expires on December 31, 2005, however, and pertains solely to U.S. obligations under
GATT Article I:1. The United States also holds a waiver of Article I:1 obligations with
regard to tariff preferences accorded the former Trust Territories of the Pacific Island
(TTPI); the waiver expires on December 31, 2006.11 Although the United States acquired
a GATT waiver from Article I:1 obligations for the Andean Trade Preference Act (ATPA),
6 McGovern, supra note 2, at ¶ 9.212.
7 EEC – Import Regime for Bananas; Report of the Panel, DS38/R, ¶¶ 156-164 (1994), as
reprinted in 34 Int’l Legal Mat.180 (1995).
8 GATT, Document L/7604 (December 19, 1994); WTO, WT/L/436 (December 7, 2001). The
current waiver may be nullified as of January 1, 2006, as it applies to bananas if the EC, in
converting to a tariff-only system for banana imports as of that date, does not provide adequate
market access for WTO Members exporting bananas to the European Union on an MFN basis.
9 For further information on current U.S. trade preference programs, see CRS Report 97-389,
Generalized System of Preferences, by William H. Cooper; CRS Report RL32895, Textile
Reports to Trade Preference Regions, by Bernard A. Gelb; CRS Report RS21772, AGOA III:
Amendment to the African Growth and Opportunity Act, by Danielle Langton; and CRS Report
IB95050 Caribbean Basin Interim Trade Program: CBI/NAFTA Parity, by Vladimir N. Pregelj.
10 See WTO Council for Trade in Goods, Caribbean Basin Economic Recovery Act; Draft
Decision (G/C/W/21/Rev.1)(October 23, 1995), and World Trade Organization, Guide to GATT
Law and Practice; Analytical Index 903 (updated 6th ed. 1995).
11 United States – Former Trust Territory of the Pacific Islands; Decision of 14 October 1996
(WT/L/183)(October 18, 1996). The waiver covers the Republic of the Marshall Islands, the
Federated States of Micronesia, the Commonwealth of the Northern Mariana Islands, and the
Republic of Palau.

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the waiver expired on December 4, 2001.12 The United States does not hold a waiver for
preferences authorized in the African Growth and Opportunity Act (AGOA), which are
available to sub-Saharan African countries through September 30, 2015.13
In February 2005, the United States submitted requests for new GATT waivers for
the following preferential tariff programs through their current expiration dates: (1)
CBERA, as amended by the United States-Caribbean Trade Partnership Act (through
September 30, 2008); (2) ATPA, as amended by the Andean Trade Promotion and Drug
Eradication Act (through December 31, 2006); and (3) AGOA (through September 30,
2015).14 These programs extend duty-free treatment that in some cases is subject to
quantitative restrictions (QRs) and, consequently, the requests seek waivers not only of
GATT Article I:1 but also of GATT Article XIII, paragraphs 1 and 2, which require non-
discrimination in administering QRs. Answering a question from India about the
exclusion of some sub-Saharan countries from AGOA, the United States outlined criteria
used annually to determine a country’s eligibility for preferences, among which were the
establishment of a market-based economy and the rule of law.15 The United States also
faced questions about whether requirements that apparel imported under the preference
programs be assembled from U.S. yarn and fabric constituted an export advantage to U.S.
producers. The United States responded that the objective of the legislation is to “boost
production, employment, and investment in the beneficiary countries.”16 The waivers are
still pending.
WTO-Legality of Non-trade Conditions in Preference Programs
In European Communities - Conditions for the Granting of Tariff Preferences to
Developing Countries, the WTO Appellate Body (AB) explained how developed country
WTO members may design preferential-tariff programs within the requirements of the
Enabling Clause.17 The dispute between India and the European Communities (EC)
stemmed from an EC Regulation which awarded tariff preferences to a closed group of 12
beneficiary countries on the condition that they combat illicit drug production (the Drug
12 See WTO Council for Trade in Goods, Andean Trade Preference Act; Draft Decision
(G/C/W/54)(September 4, 1996).
13 African Growth and Opportunity Act, P.L. 106-200, Title I, 19 U.S.C. §§ 3701 et seq. as
amended by § 3108 of the Trade Act of 2002 (P.L. 107-210), the AGOA Acceleration Act of
2004 (P.L. 108-274), and the Miscellaneous Trade and Technical Corrections Act of 2004 (P.L.
108-429).
14 See Request for a Waiver; Caribbean Basin Economic Recovery Act (G/C/W/508)(January 3,
2005); Request for a Waiver; Andean Trade Preferences Act (G/C/W/510)(January 3, 2005) and
((G/C/W/510/Add.1)(March 15, 2005); and Request for a Waiver; African Growth and
Opportunity Act (AGOA)(G/C/W/509)(January 3, 2005).
15 United States – Requests for Waivers; Replies of the United States to comments and questions
from China, India and Pakistan (G/C/W/518)(May 13, 2005), at 3.
16 Id. at 2-3. See also id. at 5-7. For subsequent discussions on U.S. waiver requests, see Replies
of the United States to comments and questions from China and Pakistan (G/C/W/526)(July 15,
2005) and Comments and questions from Brazil (G/C/W/527)(July 20, 2005).
17 European Communities – Conditions for the Granting of Tariff Preferences to Developing
Countries; Report of the Appellate Body (WT/DS246/AB/R)(April 7, 2004).

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Arrangements). India brought the claim alleging that the Drug Arrangements were
inconsistent with GATT Article I:1 and unjustified by the Enabling Clause.
The initial dispute panel, in a report issued on December 1, 2003, concluded that the
EC was in violation of its WTO obligations, with one panelist dissenting on procedural
grounds.18 Addressing the nature of the Enabling Clause and its procedural implications,
a two member majority first concluded that the Enabling Clause functions as an exception
to the GATT Article I:1 MFN obligation and that, consequently, the burden of proof rests
on the party that invokes the Enabling Clause as a defense (¶ 7.53). The lone dissenter
argued that the MFN obligation does not apply to the Enabling Clause and that India did
not properly bring the claim under the Clause (¶¶ 9.15, 9.21). Employing a broad reading
of the term “non-discriminatory” in the Clause’s description of the GSP, the panel
concluded that developed countries were required to provide “identical tariff preferences”
under GSP schemes to “all developing countries” (¶ 7.161). Applying this standard, the
panel then ruled that the Drug Arrangements were inconsistent with GATT Article I:1 and
could not be justified under the Clause (¶ 7.177). The European Communities appealed.
The Appellate Body report, issued on April 7, 2004, first addressed the relationship
between GATT Article I:1 and the Enabling Clause. The AB upheld the panel’s findings
that the Enabling Clause is an exception to GATT Article I:1 and that the Clause does not
exclude the applicability of Article I:1 (¶¶ 99-103). The AB explained that the Enabling
Clause is to be read together with Article I:1 in the procedural sense, since a challenged
measure, such as the Drug Arrangements, is “submitted successively to the test of
compatibility with the two provisions.” In other words, when the Enabling Clause is
implicated, the dispute panel first examines whether a measure is consistent with Article
I:1, “as the general rule,” and, if it is found not to be so, the panel then examines whether
the measure may be justified under the Clause (¶¶ 101-102).
Noting the “vital role” played by the Enabling Clause “in promoting trade as a means
of stimulating economic growth and development” and the intent of WTO Members
through the Clause to encourage the adoption of preference schemes, the AB found that
the Clause was not a typical GATT exception or defense (¶ 106, 114). Thus, the AB
modified the panel’s finding and held that, unlike the ordinary practice with respect to
GATT exceptions, under which exceptions are invoked only by the responding party, “it
was incumbent upon [complainant] India to raise the Enabling Clause in making its claim
of inconsistency with Article I:1 of the GATT 1994” and to identify specific provisions
of the Clause which it believed were violated by the respondent’s measure (¶¶ 115,
123)(emphasis in original). At the same time, the burden of justifying GSP schemes under
the cited Enabling Clause provisions still rests on a respondent (¶ 125). In application, the
AB found that India sufficiently raised the issue, thereby placing the burden on the EC to
justify the Drug Arrangements under the Clause.
Most importantly, the AB reversed the panel’s substantive decision regarding the
breadth of acceptable preference programs under the Enabling Clause. The AB found
instead that developed countries can grant preferences beyond those provided in their GSP
to developing countries with particular needs, but only if identical treatment is available
18 European Communities – Conditions for the Granting of Tariff Preferences to Developing
Countries; Report of the Panel (WT/DS246/R)(December 1, 2003).

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to all similarly-situated GSP beneficiaries (¶ 173). The AB elaborated that similarly-
situated GSP beneficiaries are all GSP beneficiaries that have the “development, financial,
and trade needs” to which the treatment is intended to respond (¶ 173). In reaching this
conclusion, the AB reversed the panel’s reading of the term “non-discriminatory” as used
to define the GSP in the Enabling Clause. Even under the more expansive view of the
Enabling Clause, however, the AB upheld the Panel’s ruling that the EC failed to prove
the Drug Arrangements were in fact “non-discriminatory” (¶ 189). Two factors led the
AB to its conclusion: (1) the closed list of beneficiary countries in the Drug Arrangements
could not ensure that the preferences would be available to all GSP beneficiaries suffering
from illicit drug production and trafficking, and (2) the Drug Arrangements did not set out
objective criteria that distinguished beneficiaries under the Drug Arrangements from other
GSP beneficiaries (¶¶ 187, 188).
Before the ruling was adopted by the WTO Dispute Settlement Body, the U.S. WTO
representative stated, according to meeting minutes, that the United States was pleased that
the Appellate Body had “reversed the Panel’s finding that the Enabling Clause required
developed countries under their GSP programs to provide identical preferences to all
developing countries” and that the AB’s decision “would help maintain the viability of
GSP programs.”19 However, the United States raised concerns about the AB’s finding
that complainant India needed to raise the Enabling Clause, but that the EC bore the
burden of proving that the Drug Arrangements were consistent with it, questioning the
legal basis for this “hybrid approach” and suggesting that possible future difficulties may
ensue in allowing the complaining party to set the burden of proof for the respondent.
Trade Preference Legislation in the 109th Congress
Currently pending in the 109th Congress are two bills that would offer preferential
market access for goods produced in certain least-developed countries (S. 191
(Smith)/H.R. 886 (Kolbe)).20 The eligible duty-free goods would include textiles, even
though these are excluded from the GSP. The pending bills also incorporate the criteria
for eligibility outlined in AGOA. In addition, H.R. 3175 (McDermott) would extend
through September 30, 2015, a provision in AGOA that authorizes the extension of duty-
free treatment to apparel assembled in lesser developed AGOA beneficiaries regardless of the
origin of the fabric. The existing provision is set to expire September 30, 2007.21 Among
other provisions, the bill would also authorize duty-free treatment of over-quota
agricultural products from AGOA beneficiary countries, but with a formula for the
possible imposition of a safeguard tariff in the event the unit import price of a good is
lower than an annual trigger price.
19 Dispute Settlement Body; Minutes of Meeting, April 20, 2004 (WT/DSB/M/167)(May 27,
2004), at ¶¶ 58-59 (emphasis in original).
20 Countries that may be designated as beneficiaries include Afghanistan, Bangladesh, Bhutan,
Cambodia, Kiribati, Lao People’s Democratic Republic, Maldives, Nepal, Samoa, Solomon
Islands, Timor-Leste (East Timor), Tuvalu, Vanuatu, Yemen, and Sri Lanka.
21 The current third-country fabric expiration date was enacted in the AGOA Acceleration Act
of 2004, P.L. 108-274, which extended the provision for three years from September 30, 2004.

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