The Trade Effects of Graduation in the EU’s GSP Scheme

Abstract: Graduation has been imposed in unilateral preferential trade agreements when product groups from beneficiaries or beneficiaries themselves are viewed as too competitive and developed. What happens to the product groups of the beneficiaries when the trade preferences are withdrawn? This paper addresses the potential trade effects of graduation from the European Unions Generalized System of Preferences by using disaggregated data on HS chapter level. A gravity model with specific exporter-product linear time trend is estimated with an Ordinary Least Square estimator using fixed effects. The specific exporter-product linear time trends are included in order to deal with the endogeneity issue that arises and makes it possible to capture the real effect of graduation on imports. The estimated results indicate that the import of the graduated products to the EU12 decreases as a consequence of graduation. This goes in line with the theoretical prediction, which is that removed GSP benefits would have a negative effect on the trade flow due to increased trade costs.