Institutional factors of international trade: A case of the European Union’s Generalized System of Preferences and World Trade Organization

Abstract

International trade, a cornerstone of global economic activity, is significantly influenced by institutional framework. This framework comprises a complex array of policies, agreements, and regulations that govern the interaction between nations in the global marketplace. One prominent example of an institutional factor that drives international trade is the European Union (EU) that created one of the largest single markets in the world through its internal market with free movement of goods, services, capital, and labor. The World Trade Organization (WTO) is yet another institutional factor that significantly shapes international trade. In 2014, the European Union established the Generalized System of Preferences (GSP) which sought to provide eligible developing countries with preferential access to the European market by reducing or suspending tariffs on certain imported goods. However, since its formation, it has been questioned whether GSP (later extended to GSP+) is in accordance with the World Trade Organization (WTO) law. This paper explores the role of institutional framework in driving international trade dynamics, highlighting its impact on trade policies, market access, and economic development. In particular, we analyze whether the current EU's GSP aimed to boost sustainable development and good governance is compatible with the entrenched institutions of international trade represented by the WTO rules and laws. We find that despite some contentious elements, no disruptions can be found. Nevertheless, it is crucial for the EU to address and reform the GSP to continuously increase its effectiveness.