Order Code RS22183
Updated September 25, 2006
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
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 because they accord goods of some countries more favorable tariff treatment
than that accorded to 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. In 2004, the WTO Appellate Body ruled that the Clause allows developed
countries to offer different treatment to developing countries, but only if identical
treatment is available to all similarly situated GSP beneficiaries. Where WTO
Members’ preference programs have provided expanded benefits, the WTO has on
occasion waived Members’ WTO obligations. A number of trade preference bills have
been introduced in the 109th Congress, including proposed extensions of the GSP and
Andean preference programs, each of which is set to expire in 2006. Among these are
H.R. 5070, which would extend the GSP and Andean preferences for one year and
expand and extend textile benefits under the African Growth and Opportunity Act
(AGOA); H.R. 6076 and S. 3904, which would extend until 2008 the GSP, Andean
preferences, and a third-country fabric provision for lesser-developed beneficiaries
expiring in 2007; and H.R. 6142, which would extend the GSP and the AGOA third-
country fabric provision until 2008 and expand textile and apparel benefits for Haiti.
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
Congressional Research Service ˜ The Library of Congress

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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
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
as 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 nonreciprocity. 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 10 years.3 The
GSP was described in the decision as a “system of generalized, nonreciprocal and
nondiscriminatory preferences beneficial to the developing countries.”
At the end of the GATT Tokyo Round 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
nontariff preferences negotiated under GATT auspices; (3) multilateral arrangements
among less developed countries; and (4) special treatment of the least-developed countries
“in the context of any general or specific measures in favour of developing countries.”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 Edmond McGovern, International Trade Regulation ¶ 9.212 (updated 1999)[hereinafter
McGovern]. Part IV is generally viewed as nonbinding, though some have argued otherwise with
regard to certain of its provisions. Id.; John H. Jackson, William J. Davey & Alan O. Sykes, Jr.,
Legal Problems of International Economic Relations 1171 (4th ed. 2002).
3 GATT, Generalized System of Preferences; Decision of 25 June 1971, L/3545 (June 28, 1971).
4 GATT, Differential and More Favourable Treatment, Reciprocity and Fuller Participation of
Developing Countries; Decision of 28 November 1979, L/4903 (Dec. 3, 1979). In 1999, the
WTO General Council waived GATT Article I:1 until June 30, 2009, to allow developing country
Members to provide preferential tariff treatment to products of least-developed countries,
without being required to do so for like products of other Members. Preferential Tariff Treatment
for Least-Developed Countries; Decision on Waiver, WT/L/304 (June 17, 1999).
5 Agreement Establishing the World Trade Organization, Annex 1A, General Agreement on
Tariffs and Trade 1994, ¶ 1(b)(iv); see WTO Appellate Body Report, infra note 15, 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 nonreciprocal free trade with developing countries
under GATT Part IV, discussed above, as well as 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, nonreciprocal 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 unadopted 1993 and 1994 panel reports
that such a deviation was not justified under either provision.6 Regarding the Article
XXIV claim, the 1994 report concluded that because the Lomé Convention involved non-
GATT Parties, the Article did not cover the agreement and thus could not be used to
justify the inconsistency with Article I of trade preferences for bananas imported from
ACP countries.7 The European Communities (EC) subsequently obtained a temporary
waiver of GATT Article I:1 for the Lomé agreement; a waiver was later granted for the
successor ACP-EC Partnership (Cotonou) Agreement until December 31, 2007.8
WTO Waivers for U.S. Preference Programs9
The United States holds a waiver of Article I:1 obligations for tariff preferences
accorded the former Trust Territories of the Pacific Island (TTPI); the waiver expires
December 31, 2006.10 U.S. waivers for tariff preferences under the Caribbean Basin
Economic Recovery Act (CBERA) and the Andean Trade Preference Act (ATPA), each
of which pertained solely to GATT Article I:1 obligations, expired December 31, 2005,
and December 4, 2001, respectively.11 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, 2015.12
6 McGovern, supra note 2, ¶ 9.212.
7 Panel Report, EEC — Import Regime for Bananas, ¶¶ 156-164, DS38/R (1994), as reprinted
in
34 Int’l Legal Materials 180 (1995).
8 GATT, L/7604 (December 19, 1994); WTO, WT/L/436 (December 7, 2001).
9 For further information on current U.S. trade preference programs, see CRS Report 97-389,
Generalized System of Preferences, by Vivian C. Jones; CRS Report RL32895, Textile Exports
to Trade Preference Regions
, by Bernard A. Gelb; CRS Report RS21772, AGOA III: Amendment
to the African Growth and Opportunity Act
, by Danielle Langton.
10 United States — Former Trust Territory of the Pacific Islands; Decision of 14 October 1996,
WT/L/183 (Oct. 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.
11 Council for Trade in Goods, Caribbean Basin Economic Recovery Act; Draft Decision,
G/C/W/21/Rev.1 (Oct. 23, 1995); Council for Trade in Goods, Andean Trade Preference Act;
Draft Decision, G/C/W/54 (Sept. 4, 1996); World Trade Organization, WTO Analytical Index;
Guide to WTO Law and Practice 87 (1st ed. 2003).
12 African Growth and Opportunity Act, P.L. 106-200, Title I, 19 U.S.C. §§ 3701 et seq., as
(continued...)

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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).13 These programs extend duty-free treatment that in some cases is subject to
quantitative restrictions 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
nondiscrimination in administering quotas. The waivers are still pending, with questions
on the programs having been raised by Brazil, China, India, Pakistan, and Paraguay14
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.15 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 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.16 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”
12 (...continued)
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).
13 See Request for a Waiver; Caribbean Basin Economic Recovery Act , G/C/W/508 (Jan. 3,
2005); Request for a Waiver; Andean Trade Preferences Act, G/C/W/510 (Jan. 3, 2005) and
G/C/W/510/Add.1 (Mar. 15, 2005); and Request for a Waiver; African Growth and Opportunity
Act (AGOA), G/C/W/509 (Jan. 3, 2005).
14 See Minutes of the Meeting of the Council for Trade in Goods, May 9, 2006, at 3-11, G/C/M/84
(June 29, 2006); Mar. 10, 2006, at 3-13, G/C/M/83 (May 1, 2006); Nov. 10, 2005, at 9-12,
G/C/M/82 (Nov. 28, 2005).
15 Appellate Body Report, European Communities — Conditions for the Granting of Tariff
Preferences to Developing Countries
, WT/DS246/AB/R (Apr. 7, 2004).
16 Panel Report, European Communities — Conditions for the Granting of Tariff Preferences to
Developing Countries
, WT/DS246/R (Dec. 1, 2003).

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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
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 WTO Dispute Settlement Body adopted the ruling, 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

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to all developing countries” and that the AB’s decision “would help maintain the viability
of GSP programs.”17 The United States raised concerns, however, about the AB’s finding
that complainant India needed to raise the Clause, but that the EC bore the burden of
proving that the Drug Arrangements were consistent with the Clause. The United States
questioned the legal basis for this “hybrid approach” suggesting that difficulties might
ensue in allowing the complaining party to set the burden of proof for the respondent.
Trade Preference Legislation in the 109th Congress
S. 191 (Smith) and H.R. 886 (Kolbe) would offer preferential market access for
goods produced in certain least-developed countries.18 The eligible duty-free goods would
include textiles, even though they are excluded from the GSP. The pending bills also
incorporate the criteria for eligibility in AGOA. H.R. 3175 (McDermott) would extend
through September 30, 2015, an AGOA provision that authorizes duty-free treatment of
apparel assembled in lesser-developed AGOA beneficiaries regardless of the origin of the
fabric. The provision, under which preferential treatment is granted in annually decreasing
amounts, is set to expire September 30, 2007 (19 U.S.C.A. § 3721(b)(3)(B)(i)). 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. S. 1937
(DeWine) and H.R. 4211 (Meek) would amend the CBERA to accord duty-free treatment
to certain textiles from Haiti, provided the President certifies that Haiti meets a variety of
eligibility requirements, including eliminating barriers to U.S. trade and investment,
combating corruption, and protecting internationally recognized worker and human
rights.19 H.R. 5070 (Rangel) would, inter alia, extend the GSP and the Andean trade
preference programs for one year, and extend until December 31, 2007, the AGOA third-
country fabric provision for lesser-developed African countries. H.R. 6076 (Rangel) and
S. 3904 (Baucus) would extend the GSP and Andean preferences, as well as the above-
described AGOA benefit, until 2008. H.R. 6142 (Thomas) would also extend the GSP
until 2008, with tightened rules for competitive need limitations waivers; extend the
AGOA third-country fabric provision until 2008, with an amended rule of origin
thereafter; and expand textile and apparel benefits for Haiti. The GSP and Andean
programs are set to expire on December 31, 2006.20
17 Dispute Settlement Body, Minutes of Meeting, Apr. 20, 2004, ¶¶ 58-59, WT/DSB/M/167
(May 27, 2004)(emphasis in original).
18 Countries that could 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.
19 For further information, see CRS Report RS21839, Haitian Textile Industry: Impact of
Proposed Trade Assistance
, by Bernard A. Gelb.
20 Current beneficiaries of the Andean trade preference program, 19 U.S.C.A. §§ 3201 et seq., are
Bolivia, Colombia, Ecuador, and Peru. All but Bolivia have been engaged in free trade
agreement (FTA) negotiations with the United States, with negotiations having been concluded
with Colombia and Peru. It has been U.S. policy to remove a beneficiary country from a tariff
preference program once it becomes a party to a U.S. FTA.