97-389 E
CRS Report for Congress
Received through the CRS Web
Generalized System of Preferences
Updated August 20, 1997
George Holliday
Specialist in International Trade and Finance
Economics Division
Congressional Research Service ˜ The Library of Congress

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Generalized System of Preferences
SUMMARY
The Generalized System of Preferences (GSP) extends duty–free treatment to certain
products that are imported from designated developing countries. The primary purpose of
the program, which the United States and other industrial countries initiated in the 1970s,
is to promote economic growth and development in these countries by stimulating their
exports. The program expired May 31, 1997, and was subsequently reauthorized by a
provision of the Taxpayer Relief Act of 1997 (P.L. 105-34, enacted August 5, 1997). The
reauthorization extended the program retroactively to May 31, 1997, so that importers who
would have benefitted from duty-free treatment during the period of expiration are eligible
for refunds. Since the law extends GSP only until June 30, 1998, the 105th Congress is
likely to consider proposals for another reauthorization.
U.S. companies and consumers who use products that benefit from duty–free treatment
are strong supporters of legislation to reauthorize GSP. They argue that GSP reduces costs
of production for companies that import components and parts under the program and
lowers the prices that consumers pay. The program is also supported by observers who
think that GSP is an effective, low–cost means of providing economic help to developing
countries. They maintain that encouraging trade by private companies stimulates economic
development more effectively than intergovernmental aid and other means of assistance.
There are several sources of opposition to GSP. Import–competing producers
complain that preferential tariff treatment generates unfair competition. Others are
concerned about the effects of GSP on the exporting countries. Some criticize the program
for benefitting higher income developing countries disproportionately and providing too
little assistance to the poorest countries. Some observers are concerned that tariff
preferences may encourage inefficient trade and production patterns in the developing
countries. Other critics maintain that U.S. officials have not vigorously enforced the country
practice provisions, such as protection of intellectual property rights and observance of
worker rights, which are required by the law.
Budgetary constraints have been the primary impediment to a long-term authorization
for GSP. Because the reduction of tariff revenues under GSP increases the budget deficit,
congressional budget rules require that an extension of the program must be offset by
increased revenues or reduced spending elsewhere. Since 1993, the program has received
four short-term extensions and expired three times. The lack of predictability and stability
in the program, some observers claim, seriously undermines the incentive to invest in export
industries in the beneficiary countries.

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CONTENTS
Rationale for GSP . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
The U.S. GSP Program . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
Economic Effects of GSP . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
Effects on Beneficiary Countries . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
Effects on the U.S. Economy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
The Diminishing Effects of GSP . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
Issues for Congress . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7

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Generalized System of Preferences
The Generalized System of Preferences (GSP) provides preferential tariff treatment
to certain products that are imported from designated developing countries. The primary
purpose of the program, which the United States and other industrial countries initiated in
the 1970s, is to promote economic growth in developing countries and countries in transition
by stimulating their exports. P.L. 105-34, enacted August 5, 1997, reauthorized the program
only until June 30, 1998. Thus, the 105th Congress is likely to consider proposals for
another reauthorization. Among the issues that Congress may consider are the effects of
GSP on U.S. producers and on the beneficiary countries, the criteria for eligibility for the
program, and the program's budgetary costs.1
Rationale for GSP
The United States and other industrial countries2 established the Generalized System
of Preferences in the early 1970s to promote economic development in developing countries
through increased trade. The program extends preferential tariff treatment -- low or zero
duties for designated products exported from beneficiary countries -- which provides a
competitive advantage in the markets of industrial countries. It is a unilateral grant of tariff
concessions; developing countries are not required to extend reciprocal tariff reductions.
(They must, however, meet certain conditions.) The program is intended to give preferential
tariff treatment to developing countries until their exporters are able to compete on world
markets with normal, nonpreferential tariffs.
The preferential and unilateral nature of GSP is a departure from the principles that
have guided post-World War II multilateral tariff reductions under the General Agreement
on Tariffs and Trade (GATT). The GATT provides that trade must be conducted on a
nondiscriminatory, or most-favored-nation (MFN), basis. Generally, members of the World
Trade Organization (the organization that replaced the GATT Secretariat in 1995 and
currently administers world trading rules) must extend any tariff concessions to all trading
partners. Tariff reductions under the GATT have also been based on reciprocity: tariff
concessions from each member country are reciprocated by concessions from others. Since
1971, however, a GATT waiver has allowed the industrial countries to extend preferential
tariff treatment for developing countries.
This report discusses major iss
1
ues relating to proposals to reauthorize the generalized system of
preferences. It will be updated as issues develop and new legislation is introduced. For the most
current information about pending legislation, please consult the Legislative Information System
(LIS) at http://www.congress.gov.
In addition to the United States, the European Union and
2
13 other countries --Australia, Belarus,
Bulgaria, Canada, Czech Republic, Hungary, Japan, New Zealand, Norway, Poland, Slovak Republic,
Switzerland, and the Russian Federation -- currently have GSP programs.

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The U.S. GSP Program
Title V of the Trade Act of 1974 (P.L. 93-618), as amended,3 authorizes the U.S. GSP
program. It authorizes the President to provide duty-free treatment for any eligible product
from any beneficiary developing country (BDC) and spells out criteria for designating
eligible countries and products. Currently about 4,600 products from over 140 BDCs are
eligible for duty-free treatment under GSP. In 1996, the United States imported $16.9
billion under the program. Consumer electronics, office equipment, and telephones were
among the leading imports. (See Appendix table.)
In designating beneficiary countries, the President is directed to take into account the
level of economic development of the country, its commitment to a liberal trade policy, the
extent to which it provides adequate protection of intellectual property rights, and its
observance of internationally recognized workers rights.4 The law prohibits (with certain
exceptions) the President from extending GSP treatment to other industrial countries,
Communist countries, countries that provide preferential treatment to the products of a
developed country, and countries that nationalize or expropriate the property of U.S.
citizens, or otherwise infringe on the property rights of U.S. citizens.
The Trade Act also restricts the President's discretion in designating eligible products.
It lists categories of import-sensitive products -- certain textile and apparel products,
watches, electronic articles, steel products, footwear, glass products, and other items -- that
are not eligible for GSP treatment. In addition, the Act establishes "competitive need
limits," which require the President to suspend GSP treatment when U.S. imports of a
product from a single country reach a specified threshold value or when 50% of total U.S.
imports of the product come from a single country.
The Trade Act authorizes the President to withdraw GSP treatment for any article or
any country. The program is reviewed annually by a subcommittee of the Trade Policy Staff
Committee (TPSC). It is chaired by the Office of the U.S. Trade Representative (USTR)
and includes representatives from the Departments of Agriculture, Commerce, Interior,
Labor, State, and Treasury. The subcommittee meets annually to decide which countries
are eligible and to consider petitions to add or remove items from the list of eligible
products.
Recent reviews by the TPSC have resulted in several changes in country eligibility.
For example, Mexico, then the largest beneficiary, graduated from the program on January
1, 1994, with the advent of the North American Free Trade Agreement. In 1995 Armenia,
Moldova, and the West Bank and Gaza Strip were designated as GSP beneficiaries. The
Bahamas and Israel became ineligible following determinations that they exceeded the per
capita income limits set by law. (Since Israel, like Mexico, is a signatory to a free-trade
agreement, its exports to the United States will continue to receive duty-free treatment.) In
The GSP Program was reauthorized and amen
3
ded by the Trade and Tariff Act of 1984 (P.L. 98-
573). Four subsequent laws have authorized short-term extensions, most recently through June 30,
1998. (See discussion below, pp. 7-8)
Wor
4
kers rights are defined by law for the purposes of GSP to include: the right to association;
the right to organize and bargain collectively; a prohibition on the use of any form of forced or
compulsory labor; a minimum age for the employment of children; and acceptable conditions of work
with respect to minimum wages, hours of work, and occupational safety and health.

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1996, the President determined that Malaysia would graduate on January 1, 1997, because
it had made sufficient progress in economic competitiveness. He also determined that,
effective January 1, 1998, Cyprus, Aruba, Macau, the Netherlands Antilles, Greenland, and
the Cayman Islands would no longer be eligible because they are high income countries.
The subcommittee also resolves questions about country practices -- trade policies,
protection of intellectual property rights, observance of worker rights, and other matters --
on which eligibility for GSP is conditioned. Although some critics maintain that U.S.
officials have not vigorously enforced the country practice provisions, the subcommittee has
occasionally denied benefits because of country practices. In 1994, for example, Maldives
was suspended from the list of beneficiaries because it was not making sufficient progress
in protecting basic labor rights. In 1996, some products from Pakistan were suspended
because it was not making enough progress in protecting workers' rights. In January 1997,
Argentina lost 50% of its GSP benefits because of inadequate protection of intellectual
property rights. Some observers maintain that the threat of losing benefits sometimes
persuades beneficiary countries to change objectionable policies or practices.
The subcommittee also makes recommendations about which products should be
removed from the list because they have become sufficiently competitive or because they
are import-sensitive. Since the law does not clearly define the terms "import-sensitive," or
"sufficiently competitive," the subcommittee must make a judgement on a case-by-case basis
for each product. Those who are affected by the subcommittee's decisions often complain
that the lack of clear definitions or criteria lead to subjective and inconsistent interpretations
on product eligibility.5
The last major statutory change in the U.S. GSP program was enacted August 20, 1996
(P.L. 104-188). The 1996 law included several significant reforms of the program and an
extension of its authority to May 31, 1997. (The program was extended retroactively
because it had expired for over a year.) Among the most important changes were provisions
to redistribute the benefits of GSP among beneficiary countries. It stipulated that, when the
official statistics of the World Bank demonstrate that a beneficiary developing country has
become a "high income" country, the President would terminate the country's eligibility for
GSP benefits. (World Bank statistics include countries with per capita incomes of over
$8600 in the "high income" category. Under the previous law, the per capita income
threshold for graduation had been $11,800.) Since the new income per capita threshold is
considerably lower, countries will graduate from GSP sooner. The largest beneficiaries will
not, however, be immediately affected.
Another provision lowered the competitive need limit from $114 million in 1994 to
$75 million in 1996 and increased it by $5 million each year after 1996. The law also
provided specific authority for the President to designate additional articles from the least
developed beneficiary countries as eligible for GSP.
P.L. 104-188 made several other minor changes. It retained, with some exceptions, the
prohibition on designating communist countries as GSP beneficiaries, but removed a
prohibition on members of the Organization of Petroleum Exporting Countries (OPEC). It
also prohibited consideration of an article for GSP treatment for three years following
formal consideration and denial of that article. The law, which went into effect October 1,
1996, authorized refunds to importers for duties paid after July 31, 1995, on goods that
U.S. General Accounting Office.
5
Assessment of the Generalized System of Preferences Program.
November 1994, pp. 79-81. GAO/GGD-95-9. (Hereafter, cited as GAO.)

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would have been duty-free under GSP. The budgetary cost of the extension was estimated
to be $817 million.
Economic Effects of GSP
The GSP program affects trade flows and production patterns in both beneficiary
developing countries and the industrialized countries. The effects on both groups of
countries, however, are probably not large.
Effects on Beneficiary Countries
Supporters of GSP maintain that it is an effective, low-cost means of providing
economic help to developing countries. They argue that encouraging trade by private
companies stimulates economic development more effectively than government-to-
government aid or other means of assistance.
Empirical studies, based mostly on trade data from the late 1970s and mid-1980s,
provide some support for the view that GSP stimulates development. Most suggest that GSP
has modestly increased the exports of beneficiary countries. One study, for example, found
that the eligible exports of beneficiary countries to the industrial countries increased by
about 8% annually because of GSP.6 The increase results mostly from creation of new trade
opportunities, as relatively low-cost producers in the beneficiary countries take advantage
of lower tariffs to displace higher cost producers in the markets of the industrialized
countries.
The benefits of GSP to developing countries are limited by several features of the
program. In 1995, for example, only about 16% of U.S. imports from developing countries
entered on preferential terms under GSP. Many products that were technically eligible for
GSP treatment were excluded, most often because they exceeded the competitive need limit
of a given product or because they did not meet the rules of origin requirements of the law.7
Because the list of eligible products can change and because different countries make
different products eligible for GSP, it is difficult for export industries in the developing
countries to specialize to take advantage of the tariff preferences.
GSP tariff cuts can also result in efficiency and welfare losses for the world economy.
Because GSP reduces tariffs in a discriminatory manner (that is, it favors some producers
in developing countries over other producers), it can divert trade from more efficient
producers in third countries to less efficient producers in beneficiary countries. Such costs
are borne by relatively more efficient producers who compete with those exporters that
benefit from tariff preferences and by consumers in importing countries.
6 Laird, Samuel and Andre Sapir. Tariff Preferences. In Finger, J. Michael and Andrzej
Olechowski, eds. The Uruguay Round: A Handbook on the Multilateral Trade Negotiations.
Washington, World Bank, 1987. pp. 101-109. See also, Sapir, Andre and Lars Lundberg. The U.S.
Generalized System of Preferences and Its Impacts. In Baldwin, Robert E., and Anne O. Krueger,
eds. The Structure and Evolution of Recent U.S. Trade Policy. Chicago, The University of Chicago
Press, 1984. pp. 195-231.
In 1995, of $28.7 billion in imports that were eligible for GSP, $1
7
8.3 billion actually entered duty
free. Other U.S. imports from developing countries entered duty free under other preferential tariff
programs, such as the Caribbean Basin Initiative, or because the MFN tariff rate is zero.

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Trade diversion can harm not only producers in third countries but also the domestic
economy of the beneficiary country. Tariff preferences could encourage exports of goods
for which a country does not have a comparative advantage, thus distorting the domestic
allocation of resources. By diverting resources away from potentially efficient producers,
preferences could, over time, result in reduced exports and growth. Although the costs of
trade diversion are real, the empirical evidence suggests that trade diversion from GSP is
small.8
The lack of reciprocity in the GSP program may also result in long-term costs for the
beneficiary countries. In multilateral trade negotiations, the requirement for reciprocal tariff
reductions means that all signatories reduce their tariffs. By avoiding reciprocal tariff
reductions under GSP, however, some developing countries have tended to keep in place
protectionist, import-substitution trade policies that have impeded their long-term growth.
Because preferential tariffs under GSP can lead to inefficient production and trade
patterns, most economists prefer multilateral, nondiscriminatory tariff cuts. When tariffs
are reduced in a nondiscriminatory manner, countries tend to produce and export on the
basis of their comparative advantage. That is, countries export products that they produce
relatively efficiently and import products that others produce relatively efficiently.
Multilateral tariff reductions such as those agreed to in the Uruguay Round of GATT,
redistribute the benefits of trade liberalization in developing countries. Some exporters
benefit because they face reduced tariffs in the industrial countries, while others are hurt
because the margin of preference under GSP is reduced.
Effects on the U.S. Economy
Several factors suggest that the overall effects of GSP on the U.S. economy are small.
First, in 1996, only about 2% of total U.S. imports entered duty-free under GSP. Second,
most products that would otherwise have been eligible for GSP did not come from GSP
beneficiaries; they were imported from non-beneficiary countries at normal MFN tariff
rates. Third, many imports that entered duty-free under GSP would probably be competitive
without preferential rates. Since, for many products, U.S. MFN rates are not much higher
than the GSP rates, the effects of paying the higher rates would be small. Thus, the U.S.
market for most products is unlikely to be adversely affected by imports under GSP.
Nevertheless, some domestic producers and consumers benefit significantly from GSP.
For some companies that use parts, components, or materials that are imported under GSP,
the reduced tariffs can mean lower costs. Consumers who buy products imported under
GSP or products that are produced with GSP inputs may benefit from significantly lower
prices. Those who benefit from GSP have provided a strong base of support for the
program.
Domestic producers who compete with imports that enter duty free under GSP,
however, can bear significant adjustment costs. Adjustment costs include the costs to
workers for retraining and finding new employment and the costs to firms for retooling to
become more competitive or to shift capital to other uses. Such costs are ameliorated by the
exclusion of import-sensitive products and by the competitive need limits of the program.
Nevertheless, those who compete against GSP imports complain that preferential tariff
treatment generates unfair competition.
Laird and Sapir, p. 105.
8

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The Diminishing Effects of GSP
Two kinds of developments in the world trading system are reducing the effects of
GSP on the U.S. economy and the economies of beneficiary developing countries. First, as
multilateral trade agreements reduce tariffs worldwide, the margin between the GSP
preferential rates and MFN rates becomes smaller. For example, U.S. tariff rates, which
averaged 5.4% on industrial products before the Uruguay Round, will be reduced to 3.5%
when the new reductions are completed. The General Accounting Office estimates that the
value of tariff relief on GSP-eligible products will be reduced by about 40% under the new
reductions.9
Second, the growing number and size of other preferential tariff arrangements are also
diminishing the value of tariff relief under GSP. The United States, for example, extends
duty-free treatment to imports under the North American Free Trade Agreement, the U.S.-
Israeli Free Trade Agreement, the Caribbean Basin Initiative, and the Andean Initiative. The
Clinton Administration has also proposed an expansion of NAFTA to other Western
Hemisphere nations, and, in the future, the development of a Free Trade Area of the
Americas and elimination of trade barriers in the Asia Pacific region. The European Union
is also expanding its preferential trading arrangements in Africa, Central and Eastern
Europe, and elsewhere. As the number of preferential tariff agreements expands, the value
of tariff preferences under GSP will decline. That is, beneficiaries of GSP are increasingly
either participating in alternative preferential arrangements or competing with producers
who enjoy preferential treatment under other arrangements.
Issues for Congress
The U.S. GSP program expired May 31, 1997, and was subsequently reauthorized by
a provision of the Taxpayer Relief Act of 1997. The reauthorization extended the program
retroactively to May 31, 1997, so that importers who would have benefitted from duty-free
treatment during the period of expiration are eligible for refunds. Since the law extends
GSP only until June 30, 1998, the 105th Congress is likely to consider proposals for another
reauthorization.
Congress is also considering proposals to increase the participation of sub-Saharan
African countries in the GSP program. H.R. 1432 and S. 778 would authorize the President
to provide duty-free treatment for any non-import sensitive article from sub-Saharan Africa
and would waive the competitive need limit for these countries. The Clinton Administration
has announced that additional products imported from the least developed beneficiary
countries, mainly in Africa, would be selected for GSP eligibility.
Because the reduction of tariff revenues under GSP increases the budget deficit, an
extension of the program must be offset by increased revenues or reduced spending
elsewhere.
10 The budgetary cost of the 13-month extension under P.L. 105-34, for example,
is estimated to be $378 million. Budgetary constraints have been the primary impediment
to a long-term authorization for GSP. Since 1993, the program has received four short-term
GAO, p. 126.
9
10 Title XIII of the 1990 Budget Act requires that any reduction in revenues must be offset
elsewhere in the budget by increased revenues or reduced spending.

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extensions and expired three times. The lack of predictability and stability in the program,
some observers claim, seriously undermines the incentive to invest in export industries in
the beneficiary countries. A long-term extension, they argue, is essential to promote
economic development effectively.
One proposal to alleviate the budgetary constraints is to reduce the costs of the
program by graduating more countries and products. Some critics of the current program
note that a large share of U.S. imports under GSP came from a small number of more
advanced developing countries. The top ten beneficiaries accounted for 85% of U.S. GSP
imports in 1996. (See table 1.) Of the top ten, only India was classified by the World Bank
as a "low income" country. The Philippines, Thailand, Russia, Venezuela, and Indonesia
were classified as "lower middle income," and Brazil, Malaysia, South Africa, and
Argentina, as "upper middle income."11 By ending eligibility of the richer developing
countries, the costs of the program could be reduced, and the benefits could be channeled
to needier countries.
TABLE 1. U.S. Imports under GSP -- Leading Beneficiaries and Total, 1996
(Million dollars)
Rank
Beneficiary Country
Total Imports from Country
GSP Duty-Free Imports
from Country
1
Malaysia
17,771
4,064
2
Thailand
11,320
2,341
3
Brazil
8,868
1,962
4
Indonesia
8,078
1,861
5
Philippines
8,173
1,428
6
India
6,143
964
7
Venezuela
12,329
509
8
Rep. of South Africa
2,306
429
9
Argentina
2,189
388
10
Russia
3,528
357
Imports from Top 10
80,704
14,305
Beneficiaries
Total Imports from all
124,120
16,922
Beneficiaries.
Source: U.S. International Trade Commission. The Year in Trade 1996: Operation of the Trade
Agreements Program. 48th Report, USITC Publication 3024, Washington, April 1997, p. 144.
Many observers are opposed to cutting costs by removing countries and products.
They argue that many U.S. producers and consumers benefit from low-cost imports from the
more advanced developing countries. Without GSP tariff reductions, exporters in those
World Bank,
11
World Development Report 1996: From Plan to Market, Washington, 1996, pp.
238-239.

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countries might not be competitive in the U.S. market, resulting in higher prices or less
choice for U.S. buyers.
Some observers maintain that no legislative changes are needed to channel GSP
benefits to poorer developing countries. After the amendments enacted in 1996, they claim,
the wealthier countries will begin to graduate from the program earlier. Moreover, they note
that the Administration has sufficient discretionary authority and has already taken actions,
such as graduating some countries and expanding the list of eligible products for the least
developed beneficiaries.

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APPENDIX
Leading Categories of U.S. Imports Under GSP, 1996
(Thousand dollars)
Description of Item
Total Imports of
GSP duty-free
Item
Imports
Color magnetic tape-type video
2,582,783
677,334
Cordless handset telephones
1,441,569
666,622
Reception apparatus for radiotelephony
860,077
379,294
Wooden (except bent-wood) furniture
1,634,025
366,945
Raw sugar
900,754
366,941
Radiobroadcast receivers
493,653
285,032
Ethers of monohydric alcohols
859,127
212,433
Telephone sets; videophones
1,067,543
212,280
Surgical, medical clothing of vulc. rubber
734,662
198,652
Microwave ovens
672,620
195,094
Ferrochromium, less than 3% carbon
202,432
173,921
Parts of seats for motor vehicles
437,211
163,094
Indic. panels incorp. liquid crystal devices
759,773
161,082
Telephonic apparatus; intercom systems
347,341
157,701
Upholstery of bovine and equine leather
357,879
145,926
Air conditioners, window or wall types
395,021
142,592
Ignition and other wiring sets
3,733,386
134,727
Radio tape player combinations
1,688,066
132,082
Articles or jewelry, parts, of silver
347,318
121,706
Ferrosilicon manganese
187,881
120,854
Total, above items
19,703,122
5,014,312
Source: U.S. International Trade Commission. The Year In Trade, 1996: Operation of the Trade
Agreements Program, 48th Report, USITC Publication 3024, Washington, April 1997, p. 210.

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