The Perversity of preferences: GSP and developing country trade policies

Developed countries maintain special tariff preferences, namely the Generalized System of Preferences (GSP), for imports from developing countries. Critics have highlighted the underachieving nature of such preferences, but developing countries continue to place GSP at the heart of their agenda in multilateral negotiations. What effect do such preferences have on a recipient’s own trade policies? We develop and test a simple theoretical model of a small country’s trade policy choice, using a dataset of 154 developing countries from 1976 through 2000. We find that countries removed from GSP adopt more liberal trade policies than those remaining eligible. The results, corrected for endogeneity and robust to numerous alternative measures of trade pol-icy, suggest that developing countries may be best served by full integration into the reciprocity-based world trade regime rather than continued GSP-style special prefer-ences