1
WIIT CHARITABLE TRUST ESSAY WRITING CONTEST SUBMISSION
Liberalizing Trade with Least Developed Countries:
U.S. Generalized System of Preferences Renewal and Suggested Reforms
Elena V. Szajewski
March 15, 2015
Szajewski 2
The U.S. Generalized System of Preferences (GSP) has outlived its usefulness in its current
configuration and needs to be reformed. Though the program is currently expired, it is a
preferential tariff system which provides for a formal exception of most favored nation
treatment, allowing least developed countries (LDCs) to receive preferential reduced or zero
tariff rates when exporting to developed country markets1. The purpose of the program is to
relatively decrease the price of goods imported from developing countries, and thus encourage
their sale in developed country markets.
Resolution 21 (iii) taken at the United Nations Conference on Trade and Development in
New Delhi in 1968 states that “… the objectives of the generalized, non-reciprocal, nondiscriminatory system of preferences in favor of the developing countries, including special
measures in favor of the least advanced among the developing countries should be to (a) increase
their export earnings, (b) promote their industrialization, and (c) accelerate their rates of
economic growth.”2 This resolution was established on the theory that preferential tariff rates in
developed country markets could promote export-driven industry growth in developing
countries, and help developing countries diversify their economies to promote stable growth.3
The U.S. GSP program was first authorized in 1974.
Most recently, the U.S. GSP provided duty-free entry for over 5,000 products from 122
beneficiary developing countries (BDCs).4 The program had been very successful; according to
International Trade and Finance Specialist Vivian C. Jones “No other U.S. preference program is
1
“Generalized System of Preferences,” Accessed March 13, 2015,
http://unctad.org/en/Pages/DITC/GSP/Generalized-System-of-Preferences.aspx.
2
Ibid.
3
Organization for Economic Cooperation and Development Secretary-General, The Generalized System of
Preferences: Review of the First Decade, 1983, p. 9.
4
Vivian C. Jones, “Generalized System of Preferences: Background and Renewal Debate” (report prepared for
members and committees of Congress, December 16, 2014).
Szajewski 3
more broadly based or encompasses as many countries as GSP.” Supporters of the legislation
believe that it is an effective, low-cost means of providing economic assistance to developing
countries. Critics like the Zambian author Dambisa Moyo argue that encouraging private trade
stimulates economic activity and paves a much smoother path to sustainable development than
regular aid.5 Further, the GSP serves developed nations’ interests by providing leverage to
promote foreign policy agendas and leads to lower costs of imports.
On July 31, 2013, the U.S. GSP expired without renewal. While many advocate for a speedy
renewal of the legislation,6 it has not yet been passed. The Heritage Foundation’s Ryan
Olson argues that the lapse needs to be taken advantage of to reform and then ensure continual
renewal of the program. He argues that “new GSP legislation should be passed which focuses on
increasing GSP imports while reducing regulatory pressures that hinder GSP utilization.”7
The largest tell that GSP legislation needs reform is the heavy decline of its use. After it was
first passed imports greatly increased, and then beginning in the mid-1990s, GSP imports
stabilized,8 and from 2006-2013, they declined by almost 40%, returning to 1993 levels.9
Alternatively, all other import categories, including other imports from BDCs, declined slightly
due to the 2008 recession, but have since recovered. Olson warns that “If overall GSP imports
continue to decline at the same pace as they have declined since 2006, imports under the GSP
5
Dambisa Moyo, Dead Aid: Why Aid is Not Working and How There is Another Way for Africa (New York: Farrar,
Straus and Giroux, 2009).
6
Coalition for GSP, “Renew GSP Today,” Accessed March 13, 2015, http://renewgpstoday.com.
7
Ryan Olson, “The Generalized System of Preferences: Time to Renew and Reform the U.S. Trade Program,” The
Heritage Foundation, Last Modified September 10, 2014, http://www.heritage.org/research/reports/2014/09/thegeneralized-system-of-preferences-time-to-renew-and-reform-the-us-trade-program.
8
United States International Trade Commission, “Interactive Tariff and Trade Dataweb,” Accessed March 15,
2015, http://dataweb.usitc.gov.
9 Olson, “Generalized System of Preferences.”
Szajewski 4
program will approach zero by about 2025.”10 Possible reasons for the diminished GSP
participation can fall into four main categories: (a) GSP import transfer to other programs; (b)
domestic protectionism; (c) erosion of preferential margins and; (d) regulations not reflecting
needs of BDCs, and specifically, least developed beneficiary developing countries (LDBDCs).
Since the GSP was first authorized, several newer more liberal preference schemes have
begun crowding out GSP participation.11 Many GSP products are now imported at lower rates
under regional U.S. preference schemes like the African Growth and Opportunity Act, Andrean
Trade Preference Act, and the Caribbean Basin Initiative. Creation of these supplementary
preference schemes acknowledges some of the deficits of GSP legislation. A reformed GSP
which incorporates their more liberal regulations would entice importers to transition back to
GSP participation, and significantly broaden the reach of the GSP scheme.
While the GSP was created to favor trade from developing countries and promote burgeoning
industries by helping them gain a foothold in developed economies, three types of protectionist
policies have been placed specifically within the U.S. GSP to keep competitive foreign products
out of the U.S. market. To begin with, products like textiles, apparel, watches, footwear,
electronics, steel and glass products and certain agricultural products are deemed “import
sensitive” and excluded from GSP duty-free treatment due to the existence of domestic
production competitors.12 Second, “competitive need limits” (CNL) import ceilings apply to
products from single countries which either reach a specific threshold or proportion of total U.S.
imports. When the CNL is reached, the product is declared “internationally competitive” and
Ibid.
Organization for Economic Cooperation and Development, Preferential Trading Arrangements in Agriculture and
Food Markets: The Case of the European Union and the United States: United States Preference Schemes,
Agriculture and Food 1 (2005); 81.
12
United Nations Conference on Trade and Development, GSP – Handbook on the Scheme of the United States of
America, 2, 2010.
10
11
Szajewski 5
loses GSP benefits. Finally, certain products may simply be excluded from GSP benefits by a
domestic manufacturer petition.13 All three of these regulations directly oppose the objectives of
the GSP program by either blocking duty-free developing country imports, or ensuring that
successful products lose eligibility for duty-free import. Large reforms need to be made in this
area to realign GSP intention with actual legislation. Low-cost competitive developing country
products must be allowed into U.S. markets with GSP benefits, and CNL thresholds must be
significantly raised or eliminated to allow successful products to gain a foothold in U.S. markets.
Another issue leading to decreased GSP usage is the erosion of preferential margins once
enjoyed by GSP exporting countries. As global trends lean toward free-trade through programs
like the North American Free Trade Agreement, the advantage of GSP participation diminishes.
Little can be done to combat this since the only way to re-inflate preferential margins would be
the introduction of negative import duties for GSP participating nations.
Finally, the problem of GSP eligible products poorly reflecting the production capabilities of
LDBDCs must be reformed. More than anything else, LDCs are prepared to produce agriculture
and food products, as well as some labor-intensive products, like apparel and footwear.14 Apparel
and textiles in particular make up a significant portion of exports from LDCs, yet do not fully
qualify for GSP benefits.15 Exceptions to the textile rule are folklore products, national flags,
banners et cetera.16 Unfortunately, the production of these particular products will not drive the
development of diverse economies.
13
Jones, “Generalized System of Preferences,” p. 9.
Bernard Hoekman, Francis Ng, and Marcelo Olarreaga, “Eliminating Excessive Tariffs on Exports of Least
Developed Countries,” World Bank Economic Review 16:1 (2002); 4, doi:
http://elibrary.worldbank.org/doi/abs/10.1093/wber/16.1.1.
15 Olson, “Generalized System of Preferences.”
16 Ibid.
14
Szajewski 6
Conversely, top GSP imports are crude oil, motor vehicle parts, certain alloys, rubber tires,
stone, insulated wire and other goods.17 Cheap import of these products aids mostly the
importing developed country and emerging economies of India, Brazil, Indonesia, Turkey,
Philippines, South Africa and others.18 Renewed GSP legislation should include reforms to
expand product eligibility to more closely match the production capacity of its intended
beneficiaries, lowest income countries.
While GSP legislation has consistently enjoyed broad support, certain reforms must be made
to revitalize the program in its current context. Regulations need to be liberalized to incorporate
regional trade program concessions and entice importers to transition back to GSP participation.
Product eligibility must be expanded to decrease the quantity of import sensitive and CNLrestricted products. Eligible products for GSP import should be the same ones that LDBDCs are
most ready to produce.
The option to renew GSP legislation is supported by BDC governments and exporters, U.S.
importers and consumers, and some U.S. manufacturers who use GSP inputs in downstream
products.19 The Coalition for GSP reminds us that as a result of the expired GSP program,
“American companies now face an estimated $2 million per day in new taxes.”20 Even with the
old program’s flaws, it is sorely missed. Reforming and subsequently reinstating an improved
and expanded U.S. GSP is an imperative step in ensuring U.S. foreign policy, supporting
developing country welfare and production industries, and providing for a competitive market
benefitting U.S. consumers.
17
Rick Helfenbein, “Failure to Renew GSP is America’s Hidden Fiasco,” The Hill, Last Modified January 29, 2015,
http://thehill.com/blogs/pundits-blog/finance/231071-the-failure-to-renew-gsp-is-americas-hidden-fiasco.
18
Ibid.
19
Jones, “Generalized System of Preferences,” p. 19.
20 Coalition for GSP, “Renew GSP Today.”
Szajewski 7
Bibliography
Coalition for GSP. “Renew GSP Today.” Accessed March 13, 2015. http://renewgsptoday.com/.
Helfenbein, Rick. “Failure to Renew GSP is America’s Hidden Fiasco.” The Hill. Last Modified
January 29, 2015. http://thehill.com/blogs/pundits-blog/finance/231071-failure-to-renewgsp-is-americas-hidden-fiasco.
Hoekman, Bernard, Francis Ng, and Marcelo Olarreaga. “Eliminating Excessive Tariffs on
Exports of Least Developed Countries.” World Bank Economic Review 16:1 (2002); 4.
doi: http://elibrary.worldbank.org/doi/abs/10.1093/wber/16.1.1.
Jones, Vivian C. “Generalized System of Preferences: Background and Renewal Debate.” Report
prepared for members and committees of Congress, December 16, 2014.
Moyo, Dambisa. Dead Aid: Why Aid Is Not Working and How There is Another Way for Africa.
New York: Farrar, Straus and Giroux, 2009.
Olson, Ryan. “The Generalized System of Preferences: Time to Renew and Reform the U.S.
Trade Program.” The Heritage Foundation. Last Modified September 10, 2014.
http://www.heritage.org/research/reports/2014/09/the-generalized-system-of-preferencestime-to-renew-and-reform-the-us-trade-program.
Organization for Economic Cooperation and Development. Preferential Trading Arrangements
in Agricultural and Food Markets: The Case of the European Union and the United
States: United States Preference Schemes. Agriculture and Food 1 (2005); 81.
Organization for Economic Cooperation and Development Secretary-General. The Generalized
System of Preferences: Review of the First Decade. 1983, p. 9.
United Nations Conference on Trade and Development. GSP - Handbook on the Scheme of the
United States of America. 2, 2010.
United Nations Conference on Trade and Development. “Generalized System of Preferences.”
Accessed March 13, 2015. http://unctad.org/en/Pages/DITC/GSP/Generalized-System-of
Preferences.aspx.
United States International Trade Commission. “Interactive Tariff and Trade Dataweb.”
Accessed March 13, 2015. http://dataweb.usitc.gov/.