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

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

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Published by Cato Institute
The preferential market access given by the United States to most developing countries through the Generalized System of Preferences yields real benefits for the covered countries and for U.S. consumers and firms importing the goods. Americans save hundreds of millions of dollars a year from duty-free imports, and many poor people abroad have benefited from preferential access to a rich market

Against these benefits, Congress must consider the significant costs of unilateral preference programs — to the preference recipients themselves, to excluded developing countries, and to the world trading system in general — when the program expires at the end of this year

Product exclusions, import limits that are triggered just when an exporter becomes successful, outdated eligibility criteria, and complex administrative and customs requirements all serve to limit the usefulness of the program to the ostensible beneficiaries and to U.S. consumers. Trade preferences distort markets and discourage unilateral and multilateral trade liberalization: when beneficiary countries concentrate their efforts in preserving their preferential access rather than becoming competitive, it undermines efforts for multilateral trade liberalization and keeps them beholden to artificial arrangements and the whims of rich-country politicians

The United States should not abandon its efforts to bring down global trade barriers through multilateral trade talks. In the meantime, however, unilateral reform is within reach. The expiration of the GSP at the end of 2010 provides a timely opportunity for the United States to correct the most egregious of the GSP's limitations and to move toward opening the U.S. market on a permanent and nondiscriminatory basis. That is surely the best way to encourage a more open, free, and prosperous global economy.
The preferential market access given by the United States to most developing countries through the Generalized System of Preferences yields real benefits for the covered countries and for U.S. consumers and firms importing the goods. Americans save hundreds of millions of dollars a year from duty-free imports, and many poor people abroad have benefited from preferential access to a rich market

Against these benefits, Congress must consider the significant costs of unilateral preference programs — to the preference recipients themselves, to excluded developing countries, and to the world trading system in general — when the program expires at the end of this year

Product exclusions, import limits that are triggered just when an exporter becomes successful, outdated eligibility criteria, and complex administrative and customs requirements all serve to limit the usefulness of the program to the ostensible beneficiaries and to U.S. consumers. Trade preferences distort markets and discourage unilateral and multilateral trade liberalization: when beneficiary countries concentrate their efforts in preserving their preferential access rather than becoming competitive, it undermines efforts for multilateral trade liberalization and keeps them beholden to artificial arrangements and the whims of rich-country politicians

The United States should not abandon its efforts to bring down global trade barriers through multilateral trade talks. In the meantime, however, unilateral reform is within reach. The expiration of the GSP at the end of 2010 provides a timely opportunity for the United States to correct the most egregious of the GSP's limitations and to move toward opening the U.S. market on a permanent and nondiscriminatory basis. That is surely the best way to encourage a more open, free, and prosperous global economy.

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Published by: Cato Institute on Nov 15, 2010
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Daniel T.Griswold is associate director ofthe Cato Institute’s Center for Trade PolicyStudies.
 The preferential market access given by the 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 poorpeople abroad have benefited from prefer-ential access to a rich market.Against these benefits, Congress mustconsider the significant costs of unilateralpreference programs—to the preferencerecipients themselves, to excluded devel-oping countries, and to the world tradingsystem in general—when 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 theostensible 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 abandonits 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 GSP’s limitations and to move towardopening the U.S. market on a permanent andnondiscriminatory 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 Institute’s Center for Trade PolicyStudies.
Executive Summary 
   L   I   C   Y   A   N   A   L   Y   S   I   S   T   R   A   D   E   P   O   L   I   C   Y   A   N   A   L   Y   S   I   S   T   R   A   D   E   P   O   L   I   C   Y   A   N   A   L   Y   S   I   S   T   R   A   D   E   P   O
November 16, 2010No. 43
 
Introduction
Since the mid-1970s, the U.S. governmenthas maintained programs to benefit certain de- veloping countries and aid their developmentthrough 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 inthe 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 somepeople: 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 amore liberal global trade regime and a more sta-ble and permanent path to economic growth.
 The Aims and Limitations of  Trade Preferences
Put simply, the rationale for preferentialmarket access programs—whether by grantingthe privileged exporters’ goods lower tariff rates, larger quotas, or a mixture of both—is 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 B,then 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 recipient’seconomic 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 longbeen acknowledged—and has, more recently,been explicitly recognized in Goal 8 of the UN’sMillennium Development Goals, which callsfor an “an open, rule-based, predictable, non-discriminatory trading and financial system”
1
the 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, by passing the so-called Resolution 21, which stat-ed that. . . the objectives of the generalized,non-reciprocal, non-discriminatory system 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 countriesneed most is a stable commercial environmentthat encouragesinvestment.
 
(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 them—those fromBelarus, Estonia, Bulgaria, and Russia—arefrom non-OECD (Organisation for EconomicCo-operation and Development, a group of high-income countries) members (the other 9programs are those of Australia, Canada, theEuropean Union, Japan, New Zealand, Nor- way, Switzerland, Turkey, and the UnitedStates).
3
 The 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 of the mandate of the current World Trade Or-ganization round of trade talks, formally calledthe Doha Development Agenda, is to extendduty-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 vulnerable”because of factors such as their small size, sus-ceptibility to natural disasters, and the volatility and/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 Property Rights (TRIPS) embody the principle of most-favored-nation (MFN) treatment, which re-quires that WTO members treat imports fromall other WTO members equally, for exampleby 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 on“Differential 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 allowedunder the conditions imposed by Article XXIV of 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 how they designed such schemes, specifying only that 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
Unilateral preferenceprograms can becounterproductiveto achieving a moreliberal global traderegime and a more stable andpermanent path toeconomic growth.

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