GSP is Good for America
Laura M. Baughman and Daniel Anthony

The Generalized System of Preferences (GSP) program, established by the Trade Act of 1974, provides duty-free access to the U.S. market for certain goods from developing countries in an effort to promote development through trade rather than aid. Over the past 30 years, the program has undergone numerous changes, including the list of countries that receive GSP benefits, the conditions required of those countries to get or maintain benefits, and the products that the United States allows developing countries to export without paying standard tariff rates.

Most of these changes have served to benefit both the United States and developing countries. For example, automatic graduation thresholds, coupled with annual reviews and subjective removal of benefits, help ensure that advanced developing countries do not receive unnecessary advantages at the expense of other developing countries or unfair advantages over U.S. producers. Similarly, conditions for benefits have helped advance the causes - and gain the support - of many U.S. interests that typically have "issues" with developing countries, including organized labor and the intellectual property rights protection community.

So GSP offers something for everyone, it seems, and thus the question is how to make an extended program better for each of the many groups that benefit from the program. Two actions are key:

1. EXTEND THE PROGRAM FOR A MINIMUM OF 5 YEARS

Development programs do not work overnight. In order to stimulate development, programs must provide incentives for businesses (domestic or foreign) to invest in GSP beneficiary developing countries (BDCs). This investment, in addition to providing immediate jobs for poor workers, creates technology and business practices transfers (if the investor is foreign)-with a ripple effect on other industries within the country. Encouraging this investment, perhaps more so than the trade itself, is key to helping poor countries become more competitive in the world trading system.

However, from the vantage point of American businesses, one- or two-year extensions do not provide enough predictability to promote long-term investment-inducing sourcing from BDCs. It may take several years for a company to make a new factory operational or qualify an existing factory for production of specific goods. Given all the factors that must be considered, companies cannot base their investment and/or sourcing decisions on tariff preferences that may not exist by the time the first export reaches the United States. With frequent short-term renewals and expirations for preferential programs, duty-free access becomes an added bonus (when it exists) as opposed to an incentive for long-term investments and partnerships.

In addition to the business advantages, from the political perspective, long renewal periods decrease the likelihood that GSP expires (and is eventually renewed retroactively). The renewal process typically includes congressional hearings, submission of comments by interested parties, meetings and negotiations within and between the Administration and congress, and finally, reaching a consensus on renewal. This is a major undertaking - and one that is difficult for Congress to complete every year or two. To give a sense of the scope of program review, when the Office of the U.S. Trade Representative (USTR) asked for public comments on GSP this past summer, it received more than 800 responses, which it compiled for public viewing into 23 files totaling more than 3,300 pages!

In addition to minimizing the time Congress must spend discussing GSP, long renewal periods decrease the likelihood that GSP (or preference programs like it) are linked to issues to which they are only tangentially related. For example, perceived non-cooperation by Brazil and India in the Doha negotiations has held up GSP renewal this year to the detriment of more than 100 other developing countries. Similarly, intense partisanship and the midterm elections have created a hostile environment for any trade issue this year. While they cannot ensure smooth passage, long renewals do help insulate programs like GSP from traditional political fights - something trade programs typically cannot avoid.

2. EXPAND GSP'S PRODUCT COVERAGE

While excluding "sensitive" products from duty-free access under GSP reduces domestic opposition to GSP from industries traditionally opposed to lowering U.S. trade barriers, it also severely inhibits the ability of producers and consumers both at home and abroad from maximizing the potential benefits of the program. The sad fact is that GSP does not apply to many of the products that a large number of developing countries produce best - like footwear and apparel. So a second way to make GSP "better" for both BDCs and importers is to expand its product coverage.

The current product coverage of GSP is limited. GSP covers just under half - about 4,650 out of more than 10,000 - of the products (based on tariff lines) imported into the United States. Forty-one beneficiaries, designated as "least developed" countries (LDCs), receive duty-free benefits for an additional 1,800 products, including certain chemicals, steel products, and tableware. It is possible to add products to the GSP eligibility list through the annual review process. Interested parties - typically exporters from developing countries or importers within the United States - submit petitions to the USTR requesting that a product be added. USTR, along with the U.S. International Trade Commission (USITC), hold hearings, review comments, and then present the President with recommendations on whether or not to approve the product addition. Conversely, interested parties can use this same process to remove products from the list.

Despite the seemingly easy process, in practice, it can be quite difficult to add products to the GSP eligibility list. During the 2005 review, domestic producers submitted petitions to grant duty-free benefits to eight tariff lines - seven of which were watches - but the USTR denied all requests. In the 2004 review, the USTR added certain rugs, denied certain truck parts, and granted eligibility to two types of dates while denying three other date products.

A potential solution to the petition problem would be to change the nature of GSP eligibility from an exclusive to an inclusive list. As opposed to USTR designating specific products for duty-free treatment, all products would receive GSP benefits unless USTR decided to remove them from the list. This type of change would benefit three distinct groups (although it would also face strong opposition from certain domestic producers).

First, firms in developing countries without the technical know how to petition USTR - or the resources to hire a Washington, DC-based law/lobbying firm - would receive improved duty-free access to the U.S. market for their products. In addition, BDCs could get benefits for products for which they have the labor skills to produce most competitively, notably footwear and apparel. It is ironic that Bangladesh, one of the poorest countries in the world, is relegated to exporting golf clubs duty-free to the United States under GSP and that apparel, its largest industry, continues to face U.S. tariffs averaging 16 percent.

Second, U.S. manufacturers would benefit from decreased input costs associated with lower tariffs on raw materials and intermediary goods imported under GSP. Nearly three-quarters of all GSP imports are used by domestic manufacturers to produce goods in the United States, including special fabrics for textiles, ferroalloys for steel production, engineered parts for automobiles, and wood products for construction. However, these companies typically benefit unintentionally - they did not recognize that tariffs on certain products prevented effective sourcing, identify potential suppliers in GSP BDCs, and then petition the USTR for duty-free treatment for these goods.

Assuming they have even heard of GSP, domestic companies - and particularly small businesses - may not understand the potential benefits or have the desire or resources to undertake the USTR petition process. For some businesses, the benefits are diffuse. Only by taking the onus off individual businesses to petition for additional GSP benefits will U.S. producers receive the maximum benefit from programs such as GSP.

Finally, American consumers would benefit immensely from an inclusive GSP eligibility list. Not only would they benefit from lower prices on finished American goods made with GSP imports, but also from the 25 percent of GSP imports that are finished consumer goods - like the watches that were denied eligibility in 2005. Because the benefits of GSP are not obvious to the average American consumer - a problem for all proponents of freer trade - it is unreasonable to think that individual consumers will ever petition USTR for additional product eligibility.

CONCLUSION

GSP has much to offer the developing countries for which it was designed as well as American importers - be they manufacturers sourcing duty-free raw materials for their U.S. production facilities or retailers seeking to stock their shelves with lower-cost consumer goods. But it could do so much more if the rules were adjusted to make it easier for BDCs to use, for U.S. consumers to benefit, and for Congress and USTR to administer. The 110th Session of Congress will likely take a long look at U.S. preference programs, including GSP, and thus offers a chance to have these and other changes considered and incorporated into a Bigger and Better GSP.

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It is important to note that many LDC exports, such as agricultural and textiles products, still do not receive GSP benefits, and product coverage severely limits the utilization of the program by LDCs. In 2005, non-oil imports under GSP from these countries were valued at only $236 million, or a paltry 1.1 percent of total non-oil imports under the program. Oil does represent a major export under GSP for five LDCs, but it helps to separate oil out of the overall value of exports from LDCs, since it is not something other countries can choose to produce.

Laura Baughman is the president of The Trade Partnership and Trade Partnership Worldwide, LLC. Daniel Anthony is a trade policy analyst at The Trade Partnership.

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