the u.s. generalized system of preferences: helping the poor, but at what price?, cato trade policy...

8/8/2019 The U.S. Generalized System of Preferences: Helping the Poor, But at What Price?, Cato Trade Policy Analysis No. 43

1/20

Daniel T. Griswold is associate director of the Cato Institutes Center for Trade Policy

Studies.

The preferential market access given bythe United States to most developingcountries through the Generalized Systemof Preferences yields real benefits for thecovered countries and for U.S. consumersand firms importing the goods. Americanssave hundreds of millions of dollars a yearfrom duty-free imports, and many poor

people abroad have benefited from prefer-ential access to a rich market.

Against these benefits, Congress mustconsider the significant costs of unilateralpreference programsto the preferencerecipients themselves, to excluded devel-oping countries, and to the world tradingsystem in generalwhen the programexpires at the end of this year.

Product exclusions, import limits thatare triggered just when an exporter be-comes successful, outdated eligibility cri-

teria, and complex administrative andcustoms requirements all serve to limitthe usefulness of the program to the

ostensible beneficiaries and to U.S. con-sumers.

Trade preferences distort markets anddiscourage unilateral and multilateral tradeliberalization: when beneficiary countriesconcentrate their efforts in preserving theirpreferential access rather than becomingcompetitive, it undermines efforts for mul-

tilateral trade liberalization and keeps thembeholden to artificial arrangements and the

whims of rich-country politicians.The United States should not abandon

its efforts to bring down global trade barriersthrough multilateral trade talks. In the mean-time, however, unilateral reform is withinreach. The expiration of the GSP at the endof 2010 provides a timely opportunity for theUnited States to correct the most egregiousof the GSPs limitations and to move towardopening the U.S. market on a permanent and

nondiscriminatory basis. That is surely thebest way to encourage a more open, free, andprosperous global economy.

The U.S. Generalized Systemof Preferences

Helping the Poor, But at What Price?

by Sallie James

Sallie James is a policy analyst with the Cato Institutes Center for Trade PolicyStudies.

Executive Summary

LIC

YANALYSISTR

ADEPOLICYAN

ALYSISTRADE

POLICYANALY

SISTRADEPO

November 16, 2010 No. 43


2/20

Introduction

Since the mid-1970s, the U.S. governmenthas maintained programs to benefit certain de-

veloping countries and aid their development

through preferential access to the U.S. market.American companies can import products frombeneficiary countries (i.e., those eligible for thespecial treatment afforded by the programs) at alower than normal or zero rate of import duty.Making goods from beneficiary countries cheap-er to import than those from non-eligible coun-tries creates an incentive to buy from those coun-tries covered by the program.

The largest of these unilateral trade preferenceprograms, the Generalized System of Preferences,and a preference program benefiting countries in

the Andean region (in the hope of steering thosecountries away from narcotics production andtrafficking) called the Andean Trade Preferenceand Drug Eradication Act (ATPDEA) expire onDecember 31, 2010, so Congress must pass legis-lation to renew them before the end of thelegislative year. In advance of the deadline forrenewal, and after several years of tentative andultimately unsuccessful efforts to reform the pro-grams, lawmakers and interest groups are intensi-fying their advocacy efforts.

The GSP has provided some benefits to some

people: most obviously the eligible industries inbeneficiary countries but, also importantly, con-sumers of those products in the United States.

Those benefits should not be overlooked.More than temporary programs, however,

what poor countries need most is a stable com-mercial environment that encourages invest-ment. To the extent that preference recipients

jealously guard their special access and resistglobal efforts to liberalize trade on a nondis-criminatory basis, unilateral preference pro-grams can be counterproductive to achieving a

more liberal global trade regime and a more sta-ble and permanent path to economic growth.

The Aims and Limitations ofTrade Preferences

Put simply, the rationale for preferential

market access programswhether by grantingthe privileged exporters goods lower tariffrates, larger quotas, or a mixture of bothis togive an incentive to the home countries firmsand consumers to buy goods from the benefi-

ciary countries. If an importer must pay a 10percent tariff on a good from country A, but noimport taxes on the same good from country Bthen they will, other things being equal, pur-chase from country B.

Preferential access to a market may be grant-ed as a result of a bilateral (or regional) tradedeal between certain countries on a reciprocalbasis, or on a non-reciprocal or unilateral basisin an effort to foster the preference recipientseconomic development. In programs motivatedby development concerns, like the GSP, select-

ed products originating in developing countriesare granted reduced or zero tariff rates com-pared to the rate that generally applies. Often,the least developed countries receive even fur-ther enhanced preferential treatment, for exam-ple by receiving preferential access for a widercoverage of products or even deeper tariff cuts

These unilateral preference programs, and inparticular the United States GSP, are the mainfocus of this paper.

Although the contribution of free trade toeconomic growth and development has long

been acknowledgedand has, more recently,been explicitly recognized in Goal 8 of the UNsMillennium Development Goals, which callsfor an an open, rule-based, predictable, non-discriminatory trading and financial system1the idea of rich countries granting preferentialmarket access to poorer countries exporters isrelatively new. The United Nations Conferenceon Trade and Development (UNCTAD) firstformally recognized these schemes in 1968, bypassing the so-called Resolution 21, which stat-ed that

. . . the objectives of the generalized,non-reciprocal, non-discriminatorysystem of preferences in favor of thedeveloping countries, including specialmeasures in favor of the least advancedamong the developing countries,should be:

2

More thantemporary

programs, whatpoor countries

need most is astable commercial

environmentthat encourages

investment.


3/20

(a) to increase their export earnings;(b) to promote their industrialization;

and(c) to accelerate their rates of econom-

ic growth.2

It is important to note that it is not only therichest countries that offer preferential marketaccess to poorer countries. Of the 13 develop-ment-based preferential programs currently reg-istered with UNCTAD, 4 of themthose fromBelarus, Estonia, Bulgaria, and Russiaarefrom non-OECD (Organisation for EconomicCo-operation and Development, a group ofhigh-income countries) members (the other 9programs are those of Australia, Canada, theEuropean Union, Japan, New Zealand, Nor-

way, Switzerland, Turkey, and the UnitedStates).3The so-called Group of 77 developingcountries also has an agreement among them-selves, called the Global System of Trade Pref-erences, to provide each other with preferentialaccess for a limited number of goods.4

Many countries, including developing coun-tries, provide duty-free and quota-free access togoods from the very poorest countries. Part ofthe mandate of the current World Trade Or-ganization round of trade talks, formally calledthe Doha Development Agenda, is to extend

duty-free and quota-free access to the 33 WTOmembers that the UN has designated LeastDeveloped Countries (there are 49 LDCs intotal). LDCs are those that (a) have an averageannual per-capita income under $750; (b) havelower levels of human development based onfactors relating to health, nutrition, and educa-tion; and (c) are economically vulnerablebecause of factors such as their small size, sus-ceptibility to natural disasters, and the volatilityand/or instability of their export markets orproduction base.5

Most of the countries providing preferentialmarket access to developing countries are alsomembers of the WTO, which holds as a found-ing principle the concept of nondiscrimination.

To this end, Article I of the General Agreementon Tariffs and Trade (GATT), Article II of theGeneral Agreement on Trade in Services(GATS), and Article IV of the Agreement on

Trade-Related Aspects of Intellectual PropertyRights (TRIPS) embody the principle of most-favored-nation (MFN) treatment, which re-quires that WTO members treat imports fromall other WTO members equally, for example

by applying equal tariffs. Market access condi-tions granted to one member must be extendedto all other members.

Giving preferential treatment to certaincountries, including on development grounds,obviously violates that principle. The WTOtherefore allows its members to deviate fromMFN treatment in favor of developing countriesthrough a loophole known as the enablingclause.6 Formally titled the agreement onDifferential and More Favorable Treatment,Reciprocity and Fuller Participation of Develop-

ing Countries, the enabling clause was adoptedas part of the Tokyo Round of multilateral tradenegotiations in 1979 and was originally intendedto last for 10 years. Paragraph 2(a) of the agree-ment, however, provided a legal basis for exten-sion beyond the initial 10-year period and it hasin fact served to make the enabling clause per-manent as part of the GATT 1994, which estab-lished the WTO. Other preferential trade dealsthat violate the MFN principle, for examplethose establishing a free-trade agreement or cus-toms union on a reciprocal basis, are allowed

under the conditions imposed by Article XXIVof the GATT.

In an attempt to promote better integrationof developing countries into the world tradingsystem, the enabling clause also allowed devel-oping countries to enter into preferential agree-ments with each other under conditions lessstringent than those laid out in Article XXIV.For example, paragraph 2(c) of the enablingclause permits preferential arrangements amongdeveloping countries that do not cover substan-tially all trade.

The exemption from MFN provided by theenabling clause also gave all countries grantingthese preferences significant leeway as to howthey designed such schemes, specifying onlythat they should be generalized, non-discrim-inatory and non-reciprocal with respect to thebeneficiary countries. In other words, the gen-eralized system of preferences must be just

3

Unilateralpreferenceprograms can becounterproductiveto achieving a morliberal global traderegime and amore stable andpermanent path to

economic growth.


4/20

that: general in nature, and not just targeted toa few chosen countries.

The degree to which preference-grantingcountries abide by the principles of a generalizedsystem of preferences as originally envisaged by

the UNCTAD declarationespecially withrespect to conditionality and nonreciprocityisa point of contention.7 Certainly the UnitedStates GSP program has some questionablegaps and limitations in that regard.

The United StatesGeneralized System

of Preferences The United States currently provides GSP

preferences for 131 countries and territories. Tobe eligible for the program, countries must meeta number of criteria. Most obviously, they mustbe developing countries. The United States ex-cludes those countries defined as high incomeusing the World Banks benchmark, which iscurrently set at an average Gross National

Income of $12,166 per year.8 In practice, and asTable 1 shows, most of the top sources of GSPimports are relatively fast-growing and amongthe richer developing countries, with the excep-tion of Angola and Equatorial Guinea, promi-

nent because as LDC beneficiaries they getduty-free access for their oil exports.In addition to specifying a maximum per

capita annual income level, a few other condi-tions apply. Like many other rich countriesdevelopment-based preference programs, theU.S. GSP excludes some countries for geopoliti-cal reasons. The United States currently ex-cludes China and Vietnam, for example, on thebasis of their communist regimes, and othercountries such as Libya and Iran are ineligiblebecause of their links to terrorist groups. Coun-

tries that have seized property of Americanswithout compensation, or those that fail to takesteps to eliminate child labor, are likewise ineligi-ble. Certain other geographical preference pro-grams, such as the African Growth and Oppor-tunity Act (AGOA), attach further conditions totheir more generous market access offerings.

4

Most of thetop sources of

GSP imports arerelatively fast-

growing andamong the

richerdevelopingcountries.

Table 1

Top Ten Sources of GSP Imports, 2009 (US$ millions)

Beneficiary Duty-Free U.S. Total U.S. imports Share of U.S. imports

country imports under GSP from beneficiary using GSP (%)

Angolaa

4,142.4 9,305.8 44.5

Thailand 2,886.2 18,964.5 15.2

India 2,848.0 21,227.6 13.4

Brazil 1,977.8 19,612.0 10.1

Equatorial Guineaa

1,676.9 2,391.5 70.1

Indonesia 1,454.7 12,916.8 11.3

South Africa 742.3 5,876.7 12.6

Philippines 733.6 6,793.0 10.8

Turkey 644.4 3,648.8 17.7

Argentina 505.9 3,820.6 13.2

Top ten beneficiaries 17,612.3 104,557.2 16.8

All beneficiaries 20,259.0 241,495.9 8.4

Source: U.S. International Trade Commission.a

Denotes Least Developing Country, eligible for duty-free treatment on oil.


5/20

Zimbabwe, for example, lost its AGOA prefer-ences because of its human rights violations,although it still receives preferences under theGSP.9

Almost 3,500 articles are eligible for duty-

free treatment under the GSP (with a further1,400 or so articles eligible for duty-free treat-ment if the exporter is an LDC beneficiary).10

That represents about one third of the totalnumber of productssometimes called tarifflinesimported into the United States. Thearticles include mainly manufactured andsemi-manufactured goods, and a limited num-ber of agricultural goods (at least up to a certainquota) and fisheries goods that are not other-

wise duty-free.To receive GSP treatment, a product must

meet the so-called rules of origin require-ments that determine the product is indeedmade in country X. That is to prevent non-GSP countries from transshipping theirexports through GSP beneficiary countries inorder to evade the MFN tariffs that would oth-erwise apply. Rules of origin are defined by the

WTO as laws, regulations and administrativeprocedures which determine a products coun-try of origin. In the current era of complexoften globalsupply chains, determining ex-actly where a product comes from is not sim-

ple. Indeed, one can make a good argumentthat origin is increasingly meaningless.11Theorigin of a product is, however, commerciallyand legally significant, as it determines the tar-iffor lack thereof.

The WTO currently sets no rules dictatinghow its members must structure rules-of-ori-gin when they offer unilateral preferential pro-grams like the GSP, so countries have consid-erable discretion. To qualify for the AmericanGSP and receive duty-free treatment, a quali-fying product must be the growth, product, or

manufacture of a [beneficiary country], and thesum of the cost or value of materials producedin the [beneficiary country] plus the directcosts of processing must equal at least 35 per-cent of the appraised value of the article at thetime of entry into the United States.12

There is some flexibility in applying thatrule. GSP countries can include imported inputs

as part of the 35 percent value-added require-ment if they are substantially transformed intonew and different inputs in the beneficiarycountry. (The usual standard for determining

whether a product has been substantially trans-

formed is to establish that it entered the countryunder one chapter of the Harmonized Systemof product classifications and exited the countryunder a different chapter). Countries that jointhe GSP as part of a regional association areconsidered as one country for rules-of-originpurposes, so that articles can enter the UnitedStates duty free if the combined value-addedcontribution of the two (or more) associationmembers is more than 35 percent of the totalproduct value.

The U.S. government limits the amount of

imports for which a developing country bene-ficiary can receive GSP treatment (there are nolimits if the beneficiary is an LDC). A benefi-ciary is considered to be sufficiently competi-tive in a given product, and therefore ineligibleto receive GSP treatment on that product, ifthe annual imports from that country account-ed for 50 percent or more of the total U.S.imports of that product; or if they exceed a cer-tain statutory value ($140 million in 2010, in-creasing by $5 million annually). Those limitsare called competitive need limits (CNLs), and

they literally punish beneficiaries for theirexporting success.

The president has the authority to grant awaiver for a product that would otherwise besubject to a CNL, if he is determined that the

waiver is in the national economic interest ofthe United States.13 A de minimus waivermay be granted when a beneficiary countryotherwise breaches the 50 percent rule, buttotal U.S. imports of a product are sufficientlysmall ($20 million for 2010, increasing by$500,000 every calendar year). Waivers are also

often granted in response to a petition from aninterested party, although in that case the pres-ident is required to consider the extent to

which the beneficiary provides access to itsmarket for U.S. goods, and the protection theyprovide to U.S. intellectual property. It is alsopossible to secure waivers for imports of prod-ucts no longer made in the United States.

5

Competitive needlimits literallypunish beneficiarifor their exportingsuccess.


6/20

The Office of the U.S. Trade Representativeconducts a review of the GSP program every

year, recommending changes in response topetitions submitted by foreign firms and gov-ernments, or U.S. firms that benefit from the

program. The president has the authority toconduct reviews outside of the annual reviewprocess, too, if he feels it is necessary.

In the most recent annual review, PresidentObama issued a proclamation to withdrawGSP benefits from some countries (e.g., duty-free treatment for imports of shrimp productsand certain passenger tires from Thailand, andgold necklaces from India); to extend preferen-tial treatment on, for instance, carnations fromColombia and silver jewelry from Thailand,and by adding certain frozen vegetables to the

list of GSP-eligible goods; and to continueapplying GSP treatment to more than 100products from 19 GSP countries because im-ports of those goods exceed the usual CNLs bya small (de minimus) amount.

Legislators occasionally attempt to makechanges too. This year, although the presidentdenied the petition to remove certain sleepingbags from the list of GSP-eligible products,Rep. Robert Aderholt (R-AL) has since intro-duced the Save U.S. Manufacturing and JobsAct (H.R. 5940) to remove them from the list

by legislative means, on the grounds that sleep-ing bags should be considered textile goods (notincluded in GSP). Representative Aderholtscongressional district is, coincidentally, home toa sleeping bag manufacturing company calledExxel Outdoors Inc.14

In addition to these relatively minor, routineannual changes and product-level adjustmentsto the GSP, some advocacy groups and tradespecialists have suggested broader reforms.

These include revising the eligibility criteria (forexample, by insisting on more stringent labor,

environmental, and/or intellectual property rulesin beneficiary countries); increasing the benefitsavailable to LDCs; and changing the competi-tive need limits.

The political calculations around extendingand reforming these programs are not straight-forward. Indeed, the GSP, the ATPDEA, andthe AGOA initially expired in December

2009, but Congress could not agree on ele-ments of reform. At the last minute, Congresspassed simple extensions and President Obamasigned into law a bill extending them untilDecember 2010. With the expiration of the

latest extension imminent, it is worthwhile toconsider the benefits of the GSP, as well as itslimitations and costs.

Real Benefits for Poor Countries and U.S.Consumers

That preference programs provide sombenefits for some industries in the recipientcountries is undeniable. By securing a U.S. gov-ernment-created competitive edge, those firms

will be able to out-compete their nonpreferredcompetitors. Some advocates also point to the

side effects of GSP preferences: that, by linkingpreferential access to the large and lucrative U.Smarket, the GSP encourages beneficiaries toprotect workers rights and respect the intellec-tual property rights of Americans.15

The benefits of the GSP to eligible coun-tries can be seen by observing the import data.Figure 1 is adapted from a chart by the Coa-lition for GSP and shows total U.S. imports andGSP imports from 1992 to 2009, with the GSPrenewal dates marked by the vertical lines. Atfirst glance, it would appear that the increase in

GSP imports starting in the early 2000s reflectsa broader trend of rising imports generally, sug-gesting that the program is not especially valu-able. But a closer look reveals that, in fact, totalimports were also rising in the late 1990s andearly 2000s, when imports under the GSP werestagnant or even falling. The stark increase inGSP imports began just after Congress re-newed the program for a period of five years inlate 2001. Clearly importers and their suppliersabroad will take advantage of the program

when they can have some certainty that it will

continue.In 2009, the GSP provided duty-free access

for over $20 billion worth of imports (with a fur-ther $42 billion entering under other develop-ment-type preference programs such as AGOAand the program for Haiti). These imports in-cluded jewelry, chemicals, vehicle parts, and rawmaterials.

6

By reducing theprices of imported

goods, the GSP

puts money inthe hands of

Americanconsumers,

increasing theirpurchasing power.


7/20

Democratic trade analyst and advocate ofpreference programs Edward Gresser pointsout that those imports bring important bene-fits for poor people abroad. In Thailand, for

example, silver jewelry makers employ tens ofthousands of people countrywide, including inpoor rural areas, to sell to the U.S. market duty-free.16

Although it is self-evident that providingduty-free treatment on some goods will benefitthe covered industries in developing countries,lets not forget the significant benefits forAmericans. By reducing the prices of importedgoods, the GSP puts money in the hands ofAmerican consumers, increasing their purchas-ing power. The U.S. Chamber of Commerce

estimates that three-quarters of U.S. importsunder the GSP program are raw materials,components, and other inputs used by U.S.firms, which help them stay competitive.17

The United States has a generally open tradepolicy, with a simple average tariff (i.e., the sumof all tariffs divided by the number of tariff lines)of 3.5 percent and a trade-weighted average tar-

iff (total tariff revenue divided by the value ofimports) of 2.2 percent. Almost 50 percent ofmanufactured products, and just over one thirdof agricultural products, are imported duty-free

on an MFN basis.18 But there are significanttariff peaks in the schedule, and a range of othertrade barriers like antidumping orders that keepimport prices higher than they would be in a freemarket. The average tariff on imported footwearand leather products is, according to the U.S.International Trade Commission, 10 percent,19

with some types of shoes attracting a tariff of 48percent.20 Americans paid a (trade-weighted)average 11.4 percent tariff on apparel imports in2007. That average obscures even higher taxesfor individual products, such as the 28.6 percent

women paid for imported woven man-madefiber pants.21 In theory, tariff peaks should rep-resent valuable opportunities for exporters andimporters to trade those products duty-freeunder the GSP program, but as we will shortlysee there are important gaps in the programthat prevent those opportunities from beingrealized.

7

Figure 1

U.S. Imports under GSP vs. Total U.S. Imports (US$ billions)

U.S.

ImportsunderGSP

TotalU.S.

Imports

Year

Sources: Coalition for GSP; U.S. International Trade Commission Dataweb.

Note: Vertical lines mark GSP renewal dates.


8/20

Despite its significant limitations, the GSPsaved Americans hundreds of millions of dol-

lars last year by allowing them to import prod-ucts duty-free. Table 2 shows the top 20 duty-saving opportunities afforded by the GSP last

year. From jewelry parts ($71.4 million) tovehicles and vehicle parts ($17.2 million), rub-ber products ($38.9 million), and the $3.8 mil-lion saved on copper and copper products,American consumers and manufacturers saved

a total of more than $584 million in 2009thanks to the GSP.

These savingsand billions more besidewould naturally obtain from unilateral liber-alization in the United States, too, of course, sothe savings in Table 2 can be thought of aslargely stemming from trade diversion (dis-cussed below). In the context of the protection-ist status quo, though, the GSP clearly yieldsbenefits.

8

Despite itssignificant

limitations, theGSP saved

Americanshundreds of

millions of dollarslast year by allowing

them to importproducts duty-free.

Table 2

Top 20 Duty-Saving GSP Imports, 2009

Value of

Value Share of total duties saved

(US$ millions) GSP imports (%) (US$ millions)

Petroleum and oils 6,481.5 32.0 9.1

Pearls, stones, and jewelry metals 1,268.4 6.3 71.4

Electrical machinery and equipment 1,220.5 6.0 37.5

Machinery and mechanical appliances 1,063.8 5.3 32.2

Plastics and plastic articles 880.6 4.4 43.2

Rubber and rubber articles 872.3 4.3 38.9

Vehicles and vehicle parts 677.3 3.3 17.2

Organic chemicals 630.6 3.1 30.9

Iron or steel articles 548.8 2.7 21.4

Aluminum and aluminum articles 499.5 2.5 19.5

Wood and wood articles 432.2 2.1 21.6

Optical, photographic, and similar instruments 382.2 1.9 12.9

Sugar 378.9 1.9 14.4

Prepared vegetables, fruits, or nuts 376.4 1.9 26.1

Iron and steel raw materials 311.2 1.5 8.4

Inorganic chemicals and precious metals 283.4 1.4 11.1

Miscellaneous edibles 258.7 1.3 15.7

Stone, plaster, and cement articles 252.4 1.3 12.9

Copper and copper articles 184.3 0.9 3.8

Animal or vegetable fats and oils 179.5 0.9 9.0

Total, 20 main products 17,182.7 84.8 457.3

Total, all GSP products 20,259.0 100.0 584.4

Source: U.S. International Trade Commission Dataweb and Census Bureau.


9/20

Ironically, the largest product class of GSPimports saved Americans very little. Almost athird of the imports entering under the GSP in2009 were oils and petroleum products fromLDCs who, unlike the relatively more devel-

oped developing country beneficiaries, are eli-gible for duty-free treatment on those energyproducts. But petroleum and related productsare subject to very small, fixed-dollar-amount-per-unit (specific) duties in any case. So whilethey are far and away the largest single productgrouping to be imported under the GSP, thetotal savings represented by importing themduty-free is relatively small: Americans savedonly $9.2 million in duties from GSP oilimports in 2009.22

The additional application of CNL waivers

can provide an extra source of savings onoreven access tootherwise difficult-to-sourcegoods, especially in the important case of natur-al resources. For example, a South Carolinabased manufacturer testified earlier this year thata CNL waiver enabled his company to continueimporting lithium, a valuable and relatively raremineral, from Argentina. Natural resources arenot always evenly distributed around the

worldnearly all U.S. imports of lithium aresourced from either Chile or Argentinaand so

when it looked as though the 50-percent-of-

U.S.-imports threshold might be breached andtariffs would start to apply, a CNL waiver kickedin, helping the manufacturer to stay competi-tive.23

The Coalition for GSP, a Washington-basedadvocacy group, takes the enlightened positionthat the benefits to U.S. consumersparticular-ly U.S. businesses using GSP-covered productsas inputsare a key benefit of the program.

While touting the development benefits of tradepreferences, the Coalition has the explicit goal ofreminding lawmakers that Americans gain from

the lower prices and increased choice that comefrom lower trade barriers. That sets them apartfrom many of the other groups advocating forextending the GSP.

The Office of the U.S. Trade Representative,to its credit, also draws attention to the benefitsto American producers and consumers from theGSP program. Indeed, the first item on its fact

sheet on the GSP is entitled GSP CreatesAmerican Jobs and Keeps U.S. CompaniesCompetitive and touts the many benefits oflower import barriers. Those include lowerprices on consumer goods, particularly for

American families on a budget, and cost savingsfor U.S. companiesespecially small businessesand manufacturing firmslooking for cheaperinputs.24 (If only the U.S. Trade Representative

would strike that import-friendly tone all thetime.)

During congressional testimony earlier thisyear, the Coalition for GSP made an importantpoint regarding the success of the GSP andother preference programs:

Preference programs succeed in their

primary goalpromoting growth indeveloping countries through tradeonly if U.S. companies find them attrac-tive to incorporate into their sourcingand investment/production plans. U.S.companies will do so only if the benefitsof the preference programs contributepositively to their bottom lines, if theprograms can be relied upon, and if therules and regulations associated withclaiming program benefits are not socomplicated as to be more trouble than

the benefits are worth.25

The devil of this well-intentioned program is,apparently, in the details.

The Limitations and Costs of the GSP That there are real benefits to be gained

from having preferred access to a rich-countrymarket is obvious and nontrivial. But the sig-nificant costs of these programsto the pref-erence recipients themselves, to excludeddeveloping countries, and to the world trading

system in generalare not always immediate-ly apparent.

Just like bilateral or regional preferentialtrade deals, unilateral preference programs areinherently discriminatory: by taxing importsfrom some countries at a different rate thanthose from others, they skew incentives to buyfrom certain chosen countries. Indeed, that is

9

Just likebilateral or regionapreferential tradedeals, unilateral

preferenceprograms areinherentlydiscriminatory.


10/20

the point of the programs. That creates bene-fits for the consumers and producers of thecovered goods, but leaves outsiderssome of

whom may be as poor if not poorer than the

programs beneficiariesout in the cold.International trade theory has long recog-

nized that, in addition to potentially harming apoorer outsider, so-called trade diversionharms the domestic economy if it imports froma less-efficient but lower-taxed trade partner atthe expense of a more-efficient, but higher-taxed trade partner. When a country appliesthe same tariff to all trade partners it willalways import from the most efficient produc-er. Ed Gresser rightly points out that the neg-ative unintended effects of trade diversion are

difficult to predict and observe.26

Empirically, the trade figures suggest that thesuccess of the program has been mixed at best.Although the GSP beneficiary countries makeup more than half of Americas trade partners bynumber, imports under the GSP account for lessthan 1.5 percent of total U.S. imports by value,as shown in Table 3. Most U.S. imports, in other

words, enter on an MFN basis (80 percent) or asa result of a reciprocal preferential trade agree-ment (e.g., the North American Free TradeAgreement, or NAFTA). The GSP, at least as it

currently functions, is not a significant source ofimports.

The program is not even a significansource of imports from GSP beneficiaries: only8.4 percent of U.S. imports sourced from GSP-eligible countries enter under the GSP27withthe remaining entering the United States pay-ing MFN rates (which are admittedly some-times zero), or under other preference pro-grams such as AGOA. Taking into account allpreference programs, and the fact that manyMFN tariffs are zero, that leaves just fewer

than 38 percent of imports from GSP benefi-ciaries still subject to tariffs.28

The fact that trade entering under the GSPis relatively minoras a share of total U.S.imports, and as a share of U.S.-bound exportsof GSP beneficiariesis not necessarily a signthat the beneficiaries are commercially or logis-tically unworthy of the program. The relatively

10

The GSP, at leastas it currently

functions, is not asignificant source

of imports.

Table 3

U.S. Imports by Treatment, 2009

Program Total (US$ billions) Share (%)

General (MFN) 1,247.0 80.5

FTAs 240.0 15.5

NAFTA 219.6 14.1

Other FTA partners 20.6 1.3

Preferences 62.0 3.9

GSP 20.2 1.3

Caribbean programs (CBI/CBTPA) 2.2 0.1

Andean programs (ATPA/ATPDEA) 9.7 0.6

AGOA 28.1 1.8Mid-East program (QIZ) 1.4 0

Total 1,549.0 100

Source: International Trade Commission Dataweb.


11/20

poor showing of GSP beneficiary countries inthe import figures can be explained largely bythe way the program is structured and, related-ly, by the type of products beneficiary countriesproduce and export.

First and most significantly, the GSPexcludes whole swaths of products, mainly sim-ple manufactured goods. About two-thirds ofU.S. tariff lines are ineligible for GSP treatment.Many of the ineligible products are labor-inten-sive textile and less labor-intensive but nonethe-less important agricultural goods in which rela-tively labor-abundant developing countries havea comparative advantage. Unfortunately, politi-cally powerful U.S. producers ensure that theseexclusions persist, thereby robbing the programof much of its potential value. Even in the wake

of the recent devastating floods in Pakistan, U.S.textile groups were urging the administrationnot to expand preference programs to Pakistanby cutting textile tariffs.29The U.S. sugar lobbyhas been tremendously successfulif thats thecorrect wordin seeing off threats to the highsugar tariffs that keep the U.S. market protectedfrom competition.

There is some hope for exporters and U.S.consumers of textiles and apparel: although theGSP is prohibited by law from giving treat-ment to most textiles, the AGOA and Haiti

programs have closed some of those gaps byincluding some textile and apparel products.But those imports are subject to caps, and aresubject to complicated rules of origin and U.S.-input requirements that inhibit the usefulnessof the program and add to importers costs.30

Other significant product exclusions in theGSP, many of which are subject to relativelyhigh MFN tariffs, include home linens, watch-es, footwear, handbags, luggage, tableware andflat goods, glass, work gloves, and other leatherclothing goods. Other products determined to

be import-sensitive, such as steel, glass, andelectronics, are also ineligible.31

Some products, although eligible for GSPrates in general, are ineligible if they come fromcertain countries. Beef from Argentina or driedlentils from India, for example, are not eligiblefor GSP preferences because they are so com-petitive.32 Those imports enter the United

States at the MFN rate. As discussed above,punishing truly competitive exporters by remov-ing their preferences just when they becomecompetitive is damaging to U.S. consumers anddistorts the economies of the erstwhile benefi-

ciaries by encouraging the shifting of resourcesaway from their most competitive sectors.In addition to the total graduation of a

country out of the GSP when its gross nation-al income reaches the critical level, as discussedearlier, the president has the discretion andauthority to graduate a country if they are suf-ficiently competitive across a range of exports.

The four Asian tigersHong Kong, SouthKorea, Taiwan, and Singaporewere graduat-ed by this method in 1989, even though theyhad not technically reached the high-income

threshold.33

One may reasonably ask whetherthe program in some senses provides a disin-centiveto development at the margin.

Second, as the Trade Partnership, a Wash-ington-based think tank, points out, many GSPbeneficiaries are also eligible for duty-free treat-ment under other preference programs (such asthe Caribbean Basin Initiative) that cover manyof the same products as the GSP but havelonger authorization periods and are thereforemore reliable programs under which U.S.importers can source products.34 Products that

are eligible for GSP treatment therefore enterthe United States under, and show up in theimport figures for, those other programs.

Third, even when the program structure isnot stacked against them, the administrativerequirements place heavy burdens on importersof GSP products. The rules of origin for theU.S. GSP, while relatively simple compared tosome other rich-country development-basedschemes, still add significantly to trading costsand are in some respects a nontariff barrier totrade. Recent studies have shown that restric-

tive and cumbersome rules of origin are insome cases (especially in the European Union)so high that importers prefer to pay MFN tar-iffs just to avoid the compliance costs.35

When the program is temporary, and bene-fits can be withdrawn at any time and foralmost any reason as long as the generalnature of the program is maintained, adminis-

11

Even when theprogram structureis not stackedagainst them, the

administrativerequirements placheavy burdens onimporters of GSPproducts.


12/20

trative and cost burdens imposed by the pro-gram become especially important. Temporaryprograms simply wont encourage long-terminvestment in the beneficiary countries becausethe policy environment is not stable. As we saw

in Figure 1, when firms and importers can besurer of the policy environment, use of the pro-gram expands.

In testimony a few years ago, the Coalitionfor GSP acknowledged the costs imposed byrules-of-origin requirements, and how theyrelate to long-term business decisions:

It is not uncommon for U.S. importersto conclude that the paperwork in-

volved in ensuring that a product com-plies with the preference programs

rules of origin represents a costanda risk if U.S. Customs finds the evi-dence insufficientthat is not worththe effort. When the whole cost pack-age is evaluatedpurchasing from apreference country with duty savingsbut risk associated with demonstratingthat the rules of origin have been met,

versus purchasing from a non-prefer-ence country that offers less risk, high-er cost (from duties) but better qualityor delivery certaintythe latter sup-

plied often wins the order.36

The cost-benefit calculation for any given im-porter will no doubt be very different when theMFN tariffs are high, and therefore the benefitfrom duty-free imports relatively large, com-pared to a situation when the duty is only a verysmall percentage of the products total cost. Butin the new era of global supply chains and tightmargins, those costs are increasingly pertinent.

Fourth, eligible countries are still vulnerableto traps set by other U.S. trade barriers. A recent

example is passenger tires from Thailand. Whenthe U.S. International Trade Commission ruledin September 2009 that Chinese passenger tires

were harming the interests of U.S. tire produc-ers, President Obama imposed tariffs of 35 per-cent on Chinese tires. U.S. tire importers startedsourcing their tires from other countries, includ-ing Thailand, instead. As a result of the increase

in imports of tires from Thailand, the CNL wasbreached and Thailand lost its GSP access for itstires, which now face the MFN rate of 4 per-cent.

Fifth, and this applies to any trade liberal-

ization or negotiation program, the GSP repre-sents needless government intervention. Everynew unilateral preference program brings withit a new bureaucracy to implement the pro-gram, monitor and report on it, and deal withongoing concerns. This leads to more regula-tion and more complexity. For example, therequirement for annual reviews is a time- andresource-consuming activity for the U.S. gov-ernment and for U.S. and foreign beneficiaries.It is not immediately obvious that these costs,combined with the unseen costs of trade diver-

sion noted above, are outweighed by the bene-fits of the program.Sixth, there is a risk that the existence of

preference programs sends a misleading andultimately damaging signal to developingcountries about the source of gains from trade.

The programs are a good public relations exer-cise for the rich countries who employ them,even as the programs are, as we have seen,structured in a way to pose minimal threat topowerful special interests at home.37The ben-efits from these PR moves may be eroding in

the face of growing global awareness of the dis-tortions caused by rich country barriers andsubsidies, but the programs essentially send themessage that opening domestic markets tocompetition is a generous concession, ratherthan a favor to our own consumers and nation-al interest.

Worse, the programs perpetuate the noentirely accurate idea that high tariffs are an evilimposition of the rich world upon the poor. Tobe sure, there are significant and damaging dis-tortions in the world trading system as a result

of rich countries barriers and subsidies, andthose distortions are long overdue for seriousreform. But these are often relatively small com-pared to the barriers to trade imposed by poorcountries against each other. In reality, many ofthe highest tariffs on developing country exportsare applied by other developing countries in acase of beggar-thy-poor-neighbor.

12

Everynew unilateral

preference programbrings with it a new

bureaucracy. Thisleads to more

regulation andmore complexity.


13/20

Table 4 compares rich- and poor-world aver-age tariffs on a range of tropical products. Onlyin the case of some forms of sugar were devel-oped country tariffs higher than those in devel-oping countries. Cato policy analyst Marian

Tupy noted a similar trend in manufacturedgoods trade, too, and found the average tariffrates in developing countries are more thanthree times higher than developed countriesaverage tariffs. Developing countries also initiatemore antidumping actions than do developed

countries.38 Preference programs and special anddifferential treatment provisions in multilateraltrade negotiations enable developing countrytrade regimes to escape much-needed scrutinyand reform.

Finally, the broader, more systemic costsimposed on the open global economy shouldbe kept in mind. There is some evidence to

suggest, for example, that countries remainingin the GSP have less-liberal trade policies thanthose dropped from the program. Moreover,the greater the export dependence on U.S.GSP preferences, the greater the resistance totrade liberalization.39 Because the politicaleconomy of international trade policy is suchthat countries often find it easier to liberalize

when they do so in concert with others, theGSP could be seen as part of the Gordian Knotin which trade negotiators find themselves.

Concerns over losing privileged access todeveloped-country markets as general tariffrates come down lead to the somewhat perversesituation of some poor countries being opposedtopermanent trade liberalization through multilat-eral means. If a country lowers its general MFNrate of a GSP product from say, 10 percent to 2percent, then the benefits of getting duty-free

13

Preferenceprograms andspecial anddifferentialtreatmentprovisions inmultilateral tradenegotiations enabldeveloping countrtrade regimes toescape much-needed scrutinyand reform.

Table 4

Applied Import Tariffs on Developing Country Exports of Selected Tropical Products,a

2006 (%)

Product Developed countries Developing countries

Coffee, roasted 1.14 22.56

Black tea (packages


14/20

access to that country erode (thats why thiseffect is called preference erosion.) Prominenttrade economist Jagdish Bhagwati calls prefer-ences a wasting asset from the beneficiariespoint of view.40

Preference erosion pits developing countriesagainst each other in multilateral negotiations,because the same reductions in MFN tariffs thaterode beneficiaries preference margins may helptheir perhaps equally poor brethren in an out-side country. Developing country groups haveprovided an unfortunate but instructive examplein the Doha round: there was significant overlapbetween the list of tropical products for whicheight Latin American countries sought especial-ly rapid and significant liberalization during theDoha round talks, and the list of items the

African, Caribbean and Pacific Group of States(ACP) wanted shielded from multilateral tariffliberalization because of concerns about prefer-ence erosion.41

Preference programs can encourage countriesto produce according to the artificial signal ofpreferences, rather than what a free market

would dictate. Certain developing countries were worried about losing tariff preferences forbananas during the long-running trade disputebetween Ecuador, which wanted to see lower tar-iffs on its banana exports, and the EU, under

pressure to maintain high MFN tariffs onbananas in order to preserve the preference mar-gins of their former colonies and overseas territo-ries in the ACP. The ACP countries argued thatbananas were so important to their economiesthat to see those preferences eroded by multilat-eral liberalization would cause economic devas-tation, and even political instability.42

Aside from the irony of countries arguingagainst improved market access opportunities,it is worth noting that the ACP countries weremore concerned about maintaining their mar-

ket share in a product in which they were at acompetitive disadvantage compared to theirLatin American competitors than in diversify-ing into other products and services. The EUpreferences were, in that sense, proving a disin-centive to innovate and diversify.

Ultimately, the long-term solution for thedevelopment of markets for items from poor

countries is to ensure the conditions in thosecountries are optimal for rewarding hard workand ingenuity, and to enable them to be global-ly competitive. A recent example is instructive.Pop singer Bono and his wife started a clothing

line (Edun) to revitalize the clothing industry insub-Saharan Africa. But problems with qualityhave meant that now about 70 percent of theclothing line is sourced from China. Accordingto a recent Wall Street Journalarticle, the brandsowners are realizing that, ultimately, for a prod-uct to compete in the global economy, it needsto meet the demands of the market:

Edun . . . launched to great fanfare butquickly ran into problems with sourc-ing and delivery. Shipments from

Africa arrived late, and retailers com-plained about the clothes design andfit, leading to poor sales. Last year, thecollection was carried at just 67 storesglobally, down from hundreds in 2006.

The sustainability of the product does-nt have any value unless the fashion iscorrect, says Ron Frasch, president andchief merchant at Saks, which droppedthe line several seasons ago.43

All the preferential access in the world will not

make products competitive as long as the qual-ity is not what consumers demand, or the sup-ply is not reliable. And those sorts of problemscan be fixed only at the country level.

GSP advocate Ed Gresser sums it up well:

Trade policy itself has limits. The best-designed trade policypreference,FTA, multilateral agreement or otheroptionwill fail as a development tool

without peace and political stability,universal education, an effective rule of

law, and functioning internal marketsand safety nets. Here aid can oftenhelp, but responsibility lies ultimately

with the governments of developingcountries [themselves].44

Cato scholar Marian Tupy, writing in the con-text of sub-Saharan African development, like-

14

Preferenceprograms

can encouragecountries to

produce accordingto the artificial

signal of prefer-ences, rather than

what a free marketwould dictate.


15/20

wise points to the crucial role of developingcountries governments:

Blaming African poverty on forcesbeyond the control of Africas political

elites takes the spotlight away fromdecades of failed economic policies, wholesale looting of Africas wealth,and loss of countless lives to politicalrepression and ethnic conflicts. . . . Inorder to escape poverty, [sub-SaharanAfrican] countries must begin by lib-eralizing their trade with one anotherand with the rest of the world . . .regardless of what the developed

world does . . . [but] the benefits oftrade liberalization will be severely

restricted unless trade opening isaccompanied by far-reaching econom-ic and political changes on the Africancontinent.45

Although countless studies have shown theimportance of free trade and open markets inpromoting prosperity, unilateral preferenceprograms offered by rich countries to the poorare clearly insufficient for development. Thatmay at first blush seem discouraging, but thepositive corollary is that creating the conditions

for economic development is largely within thepower of developing countries themselves,should they choose to seize the opportunity.

Recommendations andConclusion

It is clear that the GSP is in need of reform.Product exclusions; anti-competitive limits onimports that are triggered just when an exporterbecomes successful; outdated eligibility criteria;

and complex administrative and customs re-quirements all serve to limit the usefulness of theprogram to the ostensible beneficiaries and toU.S. consumers.

Ideally, the United States, as the worldslargest economy and a global proponent of openmarkets and globalization, should open its mar-kets to all goods from all countries on a perma-

nent, nondiscriminatory basis.46 Moreover, itsstatus as a global leader in trade talks gives it achance to use its considerable internationaldiplomatic power for good. Encouraging otherbig traders, including fast-growing developing

countries, to follow the U.S. lead by openingtheir own markets would enhance global growthand development and improve the UnitedStates standing in the world.

At a minimum, the United States should bemore active in the Doha round of multilateraltrade talks if unilateral liberalization is political-ly too difficult. An often overlooked but poten-tially valuable part of the Doha round is thenegotiations to improve so-called trade facilita-tion, which aims at lifting administrative bur-dens imposed when goods cross national bor-

ders. Liberalization in this area could go a longway to lifting some of the logistical hurdles tofreer trade, many of which are particularly acutein developing countries. Countries should andcan do a lot to remove many of these burdensunilaterally, of course, but once again a multilat-eral context may help to overcome domesticpolitical resistance to reform.47

Given the slow pace of the Doha round,and the urgent need for reforms to the GSP asit stands now, Congress can take several stepsin the meantime to improve the ability of poor

countries to develop through increased trade with the United States. To the extent thatpoorer countries of the world should be grant-ed special privileges on the basis of their devel-opment status, solutions exist to minimize thecosts associated with unilateral preferences.

If the optimal solution of total unilateraltrade liberalization is not feasible, and if theDoha round does not bear fruit, that does notpreclude more limited reforms that are lesspolitically contentious and that dont require thecooperation of other countries. First, the federal

government could give benefits to U.S. firmsand citizens, to some of the worlds poorest peo-ple, and to its own international reputation byimmediately treating, on a most-favored-nationbasis, goods of special interest to poor countriesand low-income consumers. The U.S. tariff codeis especially regressive in this regard, because tar-iffs are highest on lower-end goods made by

15

The federalgovernment couldgive benefits toU.S. firms andcitizens and tosome of the worldpoorest people byeliminating tariffson goods of specia

interest to poorcountries.


16/20

poor people abroad and consumed by lower-income Americans.48 In addition, the U.S.should grant 100 percent duty-free, quota-free(DFQF) access to all least developed countries,immediately. The United States grants DFQF

access presently for only 97 percent of tarifflines. The fact that the remaining 3 percent ofproducts are mainly textiles and agriculture, twoareas where developing countries are relativelycompetitive, is telling. AGOA provides someaccess for textiles, but opening up the U.S. tex-tile and apparel market to the more competitivefirms from Asia is, apparently, a bridge too farfor the U.S. textile lobby and, it must be said,some African LDCs benefiting from AGOApreferences.

The United States is not alone in limiting its

DFQF program. The declaration at the HongKong meeting of WTO trade ministers to pro-vide DFQF access on a lasting basis to all LDCmembers upon implementation of the Doharound agreements had a get-out clause: Mem-bers facing difficulties at this time to providemarket access as set out above shall provide duty-free and quota-free market access for at least 97per cent of products originating from LDCs,defined at the tariff-line level, by 2008 or no laterthan the start of the implementation period.49

That declaration reflects consensus of the mem-

bership as a whole, including some poor coun-tries trying to protect their privileged access orotherwise concerned about increased competi-tion.50 Regardless of which countries or lobbygroups are behind the push for thinly veiled tar-geted exclusions and a failure to commit to bind-ing the increased access (as opposed to the vaguerpromise to provide it on a lasting basis), thesecarve-outs give ammunition to those who con-tend the world trading system has inherent pro-tectionist biases against truly free trade.

Second, and recognizing that special and

differential treatment for developing countriesmay unfortunately be with us for a while, U.S.trade negotiators should endeavor to limit anysuch treatment in the Doha negotiations (andsubsequent trade rounds) to longer phase-inperiods for tariff cuts or, perhaps for LDCs atleast, delayed implementation. The WTO mustbe vigilant against so-called safeguards: they

should not, for example, extend to allowingdeveloping countries to increase barriers to im-ports that reflect normal market growth.

Third, U.S. farm policyand that of sever-al other large rich economies such as the EU

and Japanhas been rightly accused of unfair-ly distorting global agricultural markets.Developing countries are in some senses cor-rect to feel they cannot compete with the rich

worlds producers or, more accurately, theiready access to their governments treasuries

The experience of Brazils emergence as aagricultural powerhouse provides something ofa counterweight to the assertion that develop-ing countries are forever at a disadvantage, butthe rich worlds subsidies to its farmers are asignificant barrier to free trade, as well as a fis-

cal affront to their taxpayers.Cotton is a common example of how devel-oped country farm subsidies harm the interestsof some of the worlds poorest farmers, and forgood reason. A 2007 study for Oxfam Americaby University of California economists esti-mated that the elimination of U.S. cotton sub-sidies would increase the world price of cottonby between 6 and 14 percent, increasing thehousehold income of poor West Africancotton-producers by 2.3 to 5.7 percent, or anextra $46 to $114 per household per year.51

Despite multiple clear rulings from the WTOthat its cotton subsidies were against the rules,not to mention injurious to the interests ofother cotton exporters, the United States has sofar chosen to settle the dispute by payingBrazilian cotton farmers almost $150 millionannually. Complying with a WTO ruling by,essentially, paying a bribe is a shameful blighton the record of a founding member of the

WTO ostensibly committed to the rule of lawand an open global economy. Ending cottonsubsidies, and those going to other farm prod-

ucts, is an immediate and significant step theUnited States can and should take, to the ben-efit of its taxpayers and poor people abroad.

The long-term solution to developmenthrough trade is to open American markets togoods from around the world on a permanent,unilateral basis. By opening up to trade in anondiscriminatory manner, the need for dedi-

16

The WTO must bevigilant against so-called safeguards:they should not, forexample, extend to

allowing developingcountries to

increase barriers toimports that reflect

normal marketgrowth.


17/20


18/20

Restraints p. 45.

22. The Trade Partnership, The U.S. GeneralizedSystem of Preferences Program: An Update, preparedfor the Coalition for GSP, March 2010, www.tradepartnership.com/pdf_files?2010_GSP_Update.pdf.

23. Testimony of Eric Norris, FMC Corporation,before the U.S. Senate Committee on FinanceHearing on U.S. Preference Programs: Options forReform, March 9, 2010.

24. Office of the United States Trade Representa-tive, GSP: Critical to the United States and De-

veloping Countries, Fact Sheet, December 2009,http://www.ustr.gov/about-us/press-office/fact-sheets/2009/december/gsp-critical-united-states-and-developing-countries.

25. Written statement of the Coalition for GSP tothe United States Senate Committee on Finance

hearing on U.S. Preference Programs: Optionsfor Reform, March 9, 2010, www.tradepartnership.com/pdf_files/GSPCoalition_SFC_03092010.pdf, downloaded June 25, 2010, p. 2.

26. Testimony of Edward Gresser, p. 8.

27. The Trade Partnership.

28. International Trade Commission Datawebusing data from the U.S. Department of Com-merce and the U.S. International Trade Commis-sion.

29. Letter from textile and cotton producers toUnited States Trade Representative Ron Kirk andSecretary of State Hillary Clinton, September 1,2010, http://www.nationaltextile.org/library/roz/letter_2010_09_01.pdf.

30. U.S. International Trade Commission, TheEconomic Effects of Significant U.S. ImportRestraints: Sixth Update 2009, p. 46.

31. Office of the United States Trade Representa-tive, U.S. Generalized System of Preferences (GSP)Guidebook.

32. GSP products from all beneficiary countries(including least-developed beneficiaries), http://www.ustr.gov/sites/default/files/GSP-Products-in-2009-HTS.pdf.

33. Office of the United States Trade Representa-tive, U.S. Generalized System of Preferences (GSP)Guidebook.

34. The Trade Partnership.

35. Bernard Hoekman, More Favorable Treat-ment of Developing Countries: Ways Forward, in

Richard Newfarmer, ed., Trade, Doha, and Develop-ment: A Window into the Issues (Washington: WorldBank, 2005), pp. 21321; Paul Brenton, and TakakoIkezuki, The Value of Trade Preferences for Africa,in Richard Newfarmer, pp. 22329; Paul Brentonand Miriam Manchin, Making EU Trade Agree-ments Work: The Role of Rules of Origin, The

World Economy 26, no. 5 (2003): 75569; Productiv-ity Commission, Rules of Origin under the Australia New Zealand Closer Economic Relations Trade Agreement, Productivity Commission, Canberra, Australia2004.

36. Laura Baughman, Written Statement of theCoalition for GSP to the United States SenateCommittee on Finance Regarding U.S. TradePreferences, How Well Do They Work? June 12,2008, www.tradepartnership.com/pdf_files/2008GSPCoalitionCommentsFinanceJune12.pdf.

37. The high tariffs on textiles and agriculturalgoods in rich countries is not wholly a result of

deliberately targeted protectionism: agriculturewas not part of the GATT/WTO architecture until1995 and, as Jagdish Bhagwati points out, develop-ing countries were largely exempt from the tariffcuts precipitated by previous multilateral tradenegotiations, so richer countries concentrated theirliberalization efforts in areas of export interest tothemselves (machinery, chemicals, and industrialproducts other than textiles and clothing). JagdishBhagwati, Trading for Development: Poor Coun-tries Caveat Emptor, http://www.columbia.edu/~jb38/papers/pdf/Economist_June_10_Revised_Final.pdf, p. 5.

38. Marian L. Tupy, Trade Liberalization and Pov-erty Reduction in sub-Saharan Africa, Cato Insti-tute Policy Analysis no. 557, December 6, 2005.

39. Caglar Ozden and Eric Reinhardt, ThePerversity of Preferences: GSP and DevelopingCountry Trade Policies, 19762000, Journal o

Development Economics 78 (2005): 121.

40. Bhagwati, p. 10

41. AG: Members Trying to Bridge Gaps on Trop-ical Products, Preference Erosion, Bridges WeeklyTrade News Digest 10, no. 18 (May 2006), http

//ictsd.org/i/news/bridgesweekly/6316/.

42. ACP Countries under Pressure to ReachBanana Deal at WTO talks, African AgricultureBlog, July 29, 2008, http://www.africanagricultureblog.com/2008/07/acp-countries-under-pressureto-reach.html.

43. Rachel Dodes, Out of Africa, Into Asia, WalStreet Journal, September 10, 2010, http://onlinewsj.com/article/SB10001424052748704358904575478310504593870.html?mod=WSJ_hpp_MID

18


19/20

DLENexttoWhatsNewsTop.

44. Testimony of Edward Gresser, p. 14.

45. Tupy.

46. The focus of discussion here on goods trade isnot an indication that services trade liberalizationis unimportant, or that developing countriesnew as they are to services tradecould not takeadvantage of trade preferences in service indus-tries. In principle, it should be possible to givedeveloping country service providers preferentialaccess to the U.S. market. But the nature of ser-

vices trade barriersthey are more about domesticregulations and less about border taxesmeansreducing them would involve many different regu-latory agencies in a more complex process than forgoods trade liberalization. Moreover, it would like-ly involve a liberalization of immigration policythat unfortunately does not appear to have signif-icant political support. These special features of

services trade liberalization are not excuses forinaction, of course.

47. Daniel J. Ikenson, While Doha Sleeps: Secur-ing Economic Growth through Trade Facilita-tion, Cato Institute Trade Policy Analysis no. 37,

June 17, 2008, http://www.cato.org/pub_display.

php?pub_id=9468.

48. Daniel Griswold,Mad About Trade (Washington:Cato Institute, 2009) chap. 9; Edward Gresser,Free-dom from Want: American Liberalism and the Global

Economy (Brooklyn, NY: Soft Skull Press, 2007).

49. World Trade Organization, Hong KongMinisterial Declaration, annex F, para. 36(a)(ii),December 22, 2005, WT/MIN(05)/DEC, http://www.wto.org/english/thewto_e/minist_e/min05_e/final_annex_e.htm#annexf.

50. Just-style.com: U.S.: Textile groups urge WTOto review DFQF initiative, October 2, 2008, http:

//www.just-style.com/news/textile-groups-urge-wto-to-review-dfqf-initiative_id102128.aspx;Centre for Trade and Development, LDCs AreDisappointed, Not Despondent: Debapriya Bhat-tacharya, February 2006, http://www.centad.org/focus_17.asp.

51. Julian M. Alston, Daniel A. Sumner, and Hen-rich Brunke, Impacts of Reductions in U.S.Cotton Subsides on West African Cotton Produc-ers, Oxfam America Research Report, June 21,2007, http://www.oxfamamerica.org/publications

/impacts-of-reductions-in-us-cotton-subsidies-on-west-african-cotton-producers.

19


20/20

Board of Advisers

James Bacchus

Greenberg Traurig LLP

Jagdish BhagwatiColumbia University

Donald J. BoudreauxGeorge Mason University

Douglas A. IrwinDartmouth College

Jos PieraInternational Center forPension Reform

Russell RobertsGeorge Mason University

Razeen SallyLondon School ofEconomics

George P. ShultzHoover Institution

Clayton Yeutter

Former U.S. TradeRepresentative

The mission of the Cato Institutes Center for Trade Policy Studies is to increase publicunderstanding of the benefits of free trade and the costs of protectionism. The centerpublishes briefing papers, policy analyses, and books and hosts frequent policy forums andconferences on the full range of trade policy issues.

Scholars at the Cato trade policy center recognize that open markets mean wider choicesand lower prices for businesses and consumers, as well as more vigorous competition thatencourages greater productivity and innovation. Those benefits are available to any countrythat adopts free-trade policies; they are not contingent upon fair trade or a level playingfield in other countries. Moreover, the case for free trade goes beyond economic efficiency.

The freedom to trade is a basic human liberty, and its exercise across political borders unitespeople in peaceful cooperation and mutual prosperity.

The center is part of the Cato Institute, an independent policy research organization inWashington, D.C. The Cato Institute pursues a broad-based research program rooted in thetraditional American principles of individual liberty and limited government.

For more information on the Center for Trade Policy Studies, visit www.freetrade.org.

Other Trade Studies from the Cato Institute

A Free Trade Agreement with South Korea Would Promote Both Prosperity and Securityby Doug Bandow, Trade Briefing Paper no. 31 (October 20, 2010)

The Miscellaneous Tariff Bill: A Blueprint for Future Trade Expansion by Daniel Griswold,Trade Briefing Paper no. 30 (September 9, 2010)

Manufacturing Discord: Growing Tensions Threaten the U.S.-China EconomicRelationship by Daniel J. Ikenson, Trade Briefing Paper no. 29 (May 4, 2010)

Made on Earth: How Global Economic Integration Renders Trade Policy Obsolete byDaniel Ikenson, Trade Policy Analysis no. 42 (December 2, 2009)

A Harsh Climate for Trade: How Climate Change Proposals Threaten Global Commerceby Sallie James, Trade Policy Analysis no. 41 (September 9, 2009)

Restriction or Legalization? Measuring the Economic Benefits of Immigration Reform by

Peter B. Dixon and Maureen T. Rimmer, Trade Policy Analysis no. 40 (August 13, 2009)

CENTER FOR TRADE POLICY STUDIES

Nothing in Trade Policy Analysis should be construed as necessarily reflecting the views of the

Center for Trade Policy Studies or the Cato Institute or as an attempt to aid or hinder the pas-

sage of any bill before Congress. Contact the Cato Institute for reprint permission. Additional

copies of Trade Policy Analysis studies are $6 each ($3 for five or more). To order, contact the

Cato Institute 1000 Massachusetts Avenue N W Washington D C 20001 (202) 842-

the u.s. generalized system of preferences: helping the poor, but at what price?, cato trade policy...

Documents