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The European Commission’s (EC’s) proposal for a new Generalised System of Preferences (GSP) includes more stringent provisions on graduation (whereby countries’ eligibility for the GSP is removed) than does the current system.

The proposal is that the number of countries eligible for the GSP is reduced from 176 states to about 80. Exact figures are not yet known: the Commission has only proposed the eligibility criteria and that these should be applied definitively shortly before implementation (expected to be in 2014) and periodically thereafter.

But the proposal includes an illustrative list of country eligibility if the criteria were applied now, and it is this list that has largely been used for the results in this report. Although the cut will be achieved partly by tidying up, it will also involve increasing European Union (EU) tariffs on imports from two groups of countries:

1. All imports from upper-middle income countries (UMICs) that do not have a free trade agreement (FTA) with the EU – ‘income graduation’;
2. Some imports from those lower-middle and low-income countries (LMICs and LICs) not covered by an FTA or the Special Incentive Arrangement for Sustainable Development and Good Governance (GSP+) regime – ‘product graduation’.

The EC proposal argues that this will create space in the European market for poorer states that find it difficult to compete head on with richer and highly competitive developing countries. The explanatory memorandum argues that graduation ‘would focus GSP preferences on the countries most in need’. But will it help poor states’ exports? And what will be the net effect on poverty reduction: are the producing communities in the states that may gain exports poorer than those in the graduates, and will the relative economy-wide poverty reduction effects be greater? This report answers both questions.

The report does not consider the possible effects of the EC proposal to alter the eligibility criteria for GSP+, partly because this would involve speculation over which countries will fulfil the social, political and environmental requirements. Two complementary studies of the reform proposals (by the EC and the University of Sussex) do assess the assumed effects of the GSP+ change but do not look in as much detail at the effects of graduation. Taking account of these differences, the findings of all three studies are broadly compatible with each other which increases confidence that the results described below provide an accurate picture.