Is this the end of the generalized system of preferences on trade?

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I’ve said it before and I’ll say it again: The US should retire, not renew, the Generalized System of Preferences (GSP). Ironically, if some Democrats get their way in redrafting GSP, that’s exactly what might happen.  

GSP gives developing countries duty-free market access to the U.S. on some 5,000 goods. The program, which dates to the 1970s, is a form of “trade as aid.” The idea is to make it easier for developing countries to export by granting them one-way tariff concessions, without having to reciprocate.

But there’s a catch. GSP comes with conditionality. Labor and environmental standards stand out in this regard. Developing countries on GSP are required to give workers the right to bargain collectively, for example, and enforce their environmental laws, otherwise they can be “suspended” from the program. 

GSP expired on Dec. 31. The Senate Finance Committee has a bill to get GSP back up and running. But Democrats on the House Ways and Means Committee want more focus on labor and environmental standards. They’ve penned the “Generalized System of Preferences and Miscellaneous Tariff Bill Modernization Act of 2021.” It renews GSP through 2024 but moves the goal posts on how the U.S. evaluates whether developing countries are complying with labor and environmental standards.

At present, a developing country can be suspended if it is “not taking steps to” improve its labor or environmental standards. The proposed text sets a higher bar, threatening removal if a developing country “fails to effectively” provide for these standards, or doesn’t “effectively enforce” them. What does this mean? It sounds like an outcome, while “steps” seem more like a process. Some will cheer this as a tougher stance, but it’s doubtful to have the desired effect. Why?

There are two reasons. First, interest in using GSP isn’t what it once was. That’s because most developing countries are now members of the World Trade Organization (WTO), and thus get the U.S.’s most-favored nation (MFN) rate, which is fairly low. Some developing countries are not yet members of the WTO, but can still get MFN, even if this isn’t automatic. GSP’s margin of preference over MFN varies between 0 and 35 percent, and averages 2.44 percent. That’s still real money, but this savings comes at a price. 

GSP is costly to use. There’s paperwork, rules-of-origin that can constrain supply chains, limits on annual export growth and the risk of suspension. If suspensions can be triggered over a failure to “effectively enforce” labor and environmental standards, for example, the odds are that developing-country exporters will increasingly turn away from GSP. On a country-product-year basis, GSP utilization averages only 60 percent. It will continue to fall, especially if Democrats on House Ways and Means get their way.

Second, the bill calls for a new process to review whether developing countries are living up to GSP’s conditionality. The push seems to be to get more parties in on the action, and to do so more frequently. Unions file the vast majority of petitions, leading developing countries to view labor and environmental standards as disguised protectionism. If the process is politicized to an even greater extent, this narrative will deepen, drowning out any talk about whether GSP helps with labor and the environment. Optics matter.

There are many reasons to dislike GSP. There’s little, if any, evidence that GSP gives the U.S. leverage on labor and the environmental standards. GSP makes no sense to voters because, unlike a trade deal, it doesn’t get the U.S. reciprocal market access. In fact, GSP undermines the incentive for developing countries to lower their own tariffs, hurting U.S. exports and their own economic growth.

Rather than renew a revised GSP, Congress should phase out the program. Trade deals are the future, not GSP.

Marc L. Busch is the Karl F. Landegger Professor of International Business Diplomacy at the Walsh School of Foreign Service at Georgetown University, a nonresident senior fellow at the Atlantic Council and host of the podcast TradeCraft.

Tags economy Generalized System of Preferences GSP House Ways and Means Committee Market access Most favoured nation Tariff World economy World Trade Organization
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