The Generalized System of Preferences


As the trade policy debate has focused on the suspended WTO negotiations and efforts on bilateral trade agreements, reauthorization of the Generalized System of Preferences (GSP) has received little attention. The system was created in the Trade Act of 1974 to provide opportunities for developing countries to increase exports to the U.S., and its latest reauthorization in 2002 expires on December 31 of this year.

The U.S., EU and 11 other countries, such as Canada, Japan, Russia and Australia, have GSP programs. Import tariffs are zero or close to it and the developing countries are not required to reciprocate in any way, though there are qualifications for participation such as a commitment to open trade and protection of intellectual property rights and workers rights. A country no longer qualifies when it becomes a high income country by World Bank statistics, currently $10,000 per capita per year. The intent of the program is to give preferential access until exporters can compete with exporters from other countries. This approach is inconsistent with WTO policies of treating all trading partners equally, but is allowed under a WTO waiver.

According to the U.S. Trade Representative’s website, the U.S. currently provides tariff free access for more than 4,650 products from 144 designated countries and territories. There are special rules for the least-developed countries. The Trade Act of 1974 restricts eligibility for a list of products — certain textile and apparel products, watches, electronic articles, steel products, footwear, glass products and other items. The President is required to suspend GSP access when U.S. imports of a product from a single country reaches $125 million per year or when 50% of U.S. imports come from a single country. The President can wave these requirements and often does on minor items. A subcommittee of the executive branch’s Trade Policy Staff Committee with representatives from USTR and Departments of Agriculture, Commerce, Interior, Labor, State, and Treasury meets yearly to consider changes in countries and products eligible for GSP treatment.

In 2005, 9.6% of U.S. imports from GSP countries entered on preferential terms with total GSP imports of $26.7 billion. The GSP program is not the only preferential import program of the U.S. Others include the Caribbean Basin Initiative, the Andean Trade Preference Act, and the African Growth and Opportunity Act.

The Bush Administration has been accused of being slow in promoting reauthorization of GSP and of using it as a tool to get developing countries to support the administration’s WTO Doha Round trade agenda. The Administration has proposed a five-year reauthorization as part of its 2007 budget. The Trade Policy Staff Committee created some concern in October of last year when it initiated a further review of some countries that currently qualify for participation in the program to determine whether they had progressed in economic development to the point that their eligibility should be limited, suspended or withdrawn. They reviewed countries with total GSP trade of $100 million or more, classified by the World Bank as upper-middle-income countries or that accounted for more than 0.25 percent of world exports. The list included countries like Brazil, India and Thailand.

Since the WTO negotiations provide for reciprocal reductions in trade barriers, including tariff reductions, it is logical to ask if countries who receive preferential trade access are dragging their feet in the Doha Round because they already have a one-way access agreement. Some countries have even argued against unilateral efforts by the U.S. to reduce tariffs on specific items because they would lose their preferential advantage. For example, the government of South Africa asked that legislation to eliminate the 14 percent tariff on manganese metal flake be rejected because GSP status gives them an advantage they would lose without the current tariff.

With all of these crosscurrents, it is easy to get lost in the debate over GSP and other preference programs. To begin with, tariff-free trade is good and more tariff-free trade is better than less. While people think free trade is good because more goods can be exported, it is important to recognize that importing more products at a lower price results in a higher standard of living for the importing country. Trade preferences are written to help businesses in developing countries, but the U.S. is also benefiting because businesses and consumers have lower costs. Some economists quickly point out that allowing one country to have preferential access may actually cause another country with a comparative advantage to be disadvantaged and cause a waste of resources. That is why South Africa wants the U.S. to retain the 14 percent tariff on manganese metal flake.

If the economic policy choice were between free trade and preferential tariffs, free trade would win. At this time free trade is not one of the policy options; the only options are various unilateral, bilateral and multilateral programs that result in more open trade than would exist without those programs. As noted above, unilateral tariff preference programs are of benefit to both the U.S. and developing countries and should be continued. They can reduce the incentives for developing countries to negotiate in the Doha Round, but the developing countries are the losers when they chose not to cut their tariffs.

Eliminating preference programs to encourage developing countries to negotiate in the WTO Doha Round would be short sighted. Whatever is accomplished in those negotiations is helpful, but should not be viewed as superior to unilaterally opening the U.S. market to more trade. The debate over GSP should be about reauthorizing it for more than five years and on including more products and more countries. That would improve everyone’s standard of living.

Ross Korves

Ross Korves

Ross Korves served Truth about Trade & Technology, before it became Global Farmer Network, from 2004 – 2015 as the Economic and Trade Policy Analyst.

Researching and analyzing economic issues important to agricultural producers, Ross provided an intimate understanding regarding the interface of economic policy analysis and the political process.

Mr. Korves served the American Farm Bureau Federation as an Economist from 1980-2004. He served as Chief Economist from April 2001 through September 2003 and held the title of Senior Economist from September 2003 through August 2004.

Born and raised on a southern Illinois hog farm and educated at Southern Illinois University, Ross holds a Masters Degree in Agribusiness Economics. His studies and research expanded internationally through his work in Germany as a 1984 McCloy Agricultural Fellow and study travel to Japan in 1982, Zambia and Kenya in 1985 and Germany in 1987.

Leave a Reply