Generalized System of Preferences: Background and Renewal Debate Vivian C. Jones Specialist in International Trade and Finance January 9, 2013 Congressional Research Service 7-5700 www.crs.gov RL33663 CRS Report for Congress Prepared for Members and Committees of Congress Generalized System of Preferences: Background and Renewal Debate Summary The U.S. Generalized System of Preferences (GSP) program provides non-reciprocal, duty-free tariff treatment to certain products imported from designated beneficiary developing countries. The United States, the European Union, and other developed countries have implemented similar programs since the 1970s in order to promote economic growth in developing countries by stimulating their exports. The U.S. program was first authorized in Title V of the Trade Act of 1974, and is subject to periodic renewal by Congress. The GSP program was most recently extended until July 31, 2013, in Section 1 of P.L. 112-40. GSP trade benefits became effective 15 days after the date of enactment (October 21, 2011), on November 5, 2011. P.L. 112-40 also retroactively extended the GSP program to eligible merchandise that entered the United States between the expiration date, December 31, 2010, and the date that the GSP renewal entered into force. The GSP is one of several U.S. trade preference programs through which the United States seeks to help developing countries expand their economies. Other U.S. trade preference programs include the African Growth and Opportunity Act (AGOA), the Andean Trade Preference Act (ATPA), and the Caribbean Basin Initiative (CBI). The GSP program provides duty-free entry for over 3,500 products (based on 8-digit U.S. Harmonized Tariff Schedule tariff lines) from 127 designated countries and territories, and duty-free status to an additional 1,500 products from 44 GSP beneficiaries that are additionally designated as least-developed beneficiary developing countries. U.S. implementation of the GSP program requires that eligible countries and products conform to certain criteria. First, to be designated a beneficiary developing country (BDC), developing countries must be taking steps to grant internationally recognized worker rights and to reduce trade-distorting investment policies and practices, among other things. Second, at least 35% of the appraised value of the product must be the “growth, product, or manufacture” of the BDC. Third, the GSP program also includes certain curbs on product eligibility intended to shield U.S. manufacturers and workers from harm due to the duty-free treatment. These include specifically excluding certain “import sensitive” products (e.g., textiles and apparel) from GSP, and placing limits on the quantity or value of any one product imported under the program. Fourth, GSP country and product eligibility are subject to an annual review. The expiration of the GSP in July 2013 means that renewal of the program is likely to be a legislative issue in the first session of the 113th Congress. In recent years, renewal of trade preference programs in general, and of the GSP program in particular, has been somewhat controversial. For example, some Members have reportedly asserted that more “advanced” BDCs, such as Brazil and India, should not receive benefits under U.S. preference programs, and propose ending or limiting their benefits in favor of providing a greater share of benefits to eligible leastdeveloped countries (LDCs). Other Members have proposed expanding preferences to grant dutyfree, quota-free access (DFQF) to all least-developed countries. This report presents, first, a brief history, economic rationale, and legal background leading to the establishment of the GSP. Second, the report presents a discussion of U.S. implementation of the GSP, along with the present debate surrounding its renewal and legislative developments to date. Third, the report presents an analysis of the U.S. program’s effectiveness and the positions of various stakeholders. Fourth, implications of the expiration of the U.S. program and possible options for Congress are discussed. Congressional Research Service Generalized System of Preferences: Background and Renewal Debate Contents Introduction...................................................................................................................................... 1 History and Rationale of the GSP .................................................................................................... 2 Economic Basis ......................................................................................................................... 2 International Legal Framework ................................................................................................. 3 Comparison of International GSP Programs ............................................................................. 6 U.S. Implementation ........................................................................................................................ 8 Beneficiary Countries ................................................................................................................ 8 Reporting Requirements.................................................................................................... 10 Least-Developed Beneficiaries.......................................................................................... 10 Countries Recently Included or Suspended....................................................................... 10 Products ................................................................................................................................... 11 Competitive Need Limits .................................................................................................. 12 Other Waivers .................................................................................................................... 12 Rules of Origin .................................................................................................................. 13 Annual Review ........................................................................................................................ 13 2011 Annual Review Results............................................................................................. 13 2012 Annual Review ......................................................................................................... 15 Graduation ............................................................................................................................... 15 Legislation ..................................................................................................................................... 16 112th Congress GSP Extension ................................................................................................ 16 Other 112th Congress Legislation ............................................................................................ 16 Effectiveness of GSP ..................................................................................................................... 17 Effects on Developing Countries ............................................................................................. 17 Economic Effects on the U.S. Market ..................................................................................... 19 Stakeholders’ Concerns ........................................................................................................... 20 “Special and Differential Treatment” ................................................................................ 20 Erosion of Preferential Margins ........................................................................................ 21 Under-Utilization of GSP .................................................................................................. 22 Trade as Foreign Assistance .............................................................................................. 22 Conditionality of Preferences ............................................................................................ 23 Lower Costs of Imports ..................................................................................................... 23 Conclusion and Options for Congress ........................................................................................... 24 Allow GSP To Expire .............................................................................................................. 25 Scrap GSP in Favor of Free-Trade Agreements or Regional Trading Arrangements .............. 26 Authorize GSP Only for Least-Developed Countries.............................................................. 26 Modify GSP ............................................................................................................................. 27 Restrict Application of Preferences ................................................................................... 27 Expand Application of GSP .............................................................................................. 28 Figures Figure 1. U.S. Imports from GSP Countries .................................................................................. 18 Congressional Research Service Generalized System of Preferences: Background and Renewal Debate Tables Table 1. Dutiable and Duty-Free Tariff Lines in Harmonized Tariff Schedule of the United States by Product Category ............................................................................................. 11 Table A-1. Leading U.S. Product Imports Under GSP, 2010 ......................................................... 29 Table A-2. Leading Product Imports Under GSP, 2011 ................................................................. 30 Table A-3. Leading GSP Beneficiaries and Total, 2010 ................................................................ 32 Table A-4. Leading GSP Beneficiaries, 2011 ................................................................................ 32 Table B-1. GSP Implementation and Renewal, 1974-2013 ........................................................... 34 Table C-1.Beneficiary Developing Countries and Regions for Purposes of the Generalizes System of Preferences ................................................................................................................ 36 Appendixes Appendix A. Trade Statistics ......................................................................................................... 29 Appendix B. GSP Implementation and Renewal ........................................................................... 34 Appendix C. GSP Beneficiary Countries....................................................................................... 36 Contacts Author Contact Information........................................................................................................... 38 Congressional Research Service Generalized System of Preferences: Background and Renewal Debate Introduction The Generalized System of Preferences (GSP) program provides preferential tariff treatment to certain products imported from designated beneficiary developing countries (BDCs). The United States, the European Union, and other developed countries have implemented such programs since the 1970s in order to promote economic growth in developing countries by stimulating their exports. The U.S. program (as established by Title V of the Trade Act of 1974) is subject to periodic renewal by Congress, and was last extended through July 31, 2013, in P.L. 112-40. The short-term extension of the GSP program means that program renewal, and possible reform, may continue to be a legislative issue in the 113th Congress. The President signed P.L. 112-40 on October 21, 2011, and GSP trade benefits became effective 15 days after that date, or on November 5, 2011. The legislation also extended GSP benefits retroactively to eligible merchandise that entered the United States between the expiration date, December 31, 2010, and the date the GSP renewal entered into force. This means that U.S. importers who imported eligible products during the program’s lapse may retroactively apply to U.S. Customs and Border Protection (CBP) for tariff refunds on entries of these products.1 In 2012, the President made changes to the status of several countries under GSP. On December 20, 2012, the President determined that St. Kitts and Nevis had become a “high income country” and terminated its GSP beneficiary status as of January 1, 2014.2 The President made the same determination on June 29, 2012, with respect to Gibraltar and the Turks and Caicos (also effective January 1, 2014).3 In the June 29th proclamation, the President also designated Senegal as a leastdeveloped beneficiary developing country, effective 60 days after the date of the proclamation (or September 27, 2012).4 On March 26, 2012, President Obama suspended GSP benefits for Argentina because “it has not acted in good faith in enforcing arbitral awards in favor of United States citizens or a corporation, partnership, or association that is 50% or more beneficially owned by United States citizens,” meaning that Argentina was not fulfilling a requirement of GSP eligibility.5 In the same proclamation, the President also designated the Republic of South Sudan as a least-developed beneficiary developing country under the GSP.6 This report presents, first, a brief history, economic rationale, and legal framework behind establishment of the Generalized System of Preferences, and a brief comparison of GSP programs worldwide. Second, the report presents a description of U.S. implementation of the GSP program, along with recent legislative developments and the debate surrounding its renewal. Third, it provides a brief analysis of the U.S. program’s effectiveness and the positions of various 1 The African Growth and Opportunity Acceleration Act of 2004 (P.L. 108-274) previously extended GSP preferences for all beneficiary developing sub-Saharan African countries under the African Growth and Opportunity Act (AGOA) through September 30, 2015. Therefore, even though the GSP program had lapsed, AGOA beneficiaries still continued to receive GSP preferences. 2 Proclamation 8921 of December 20, 2012, 77 Federal Register 76799, December 28, 2012. 3 Proclamation 8840 of June 29, 2012, 77 Federal Register 39885, July 5, 2012. 4 Ibid. 5 Proclamation 8788 of March 26, 2012, 77 Federal Register 18899, March 29, 2012. 6 Ibid. Congressional Research Service 1 Generalized System of Preferences: Background and Renewal Debate stakeholders. Fourth, the report analyzes implications of GSP expiration and options for Congress. History and Rationale of the GSP The basic principle behind the GSP is to provide certain goods originating in developing countries with preferential market access to developed-country markets in the form of lower tariff rates (or as in the U.S. case, duty-free status) in order to spur economic growth in the poorer countries. The program was first adopted internationally in 1968 by the United Nations Conference on Trade and Development (UNCTAD) at the UNCTAD II Conference.7 Economic Basis The GSP was established based on an economic theory that preferential tariff rates in developed country markets could promote export-driven industry growth in developing countries. It was believed that this, in turn, would help to free beneficiaries from heavy dependence on trade in primary products, whose slow long-term growth and price instability contributed to chronic trade deficits.8 It was thought that only the markets of industrialized trading partners were large enough to provide enough economic stimulus to attain these goals.9 Some economists also mention that the GSP was established, in part, as a means of reconciling two widely divergent economic perspectives of trade equity that arose during early negotiations on the General Agreement on Tariffs and Trade (GATT).10 Industrialized, developed nations argued that the most-favored-nation principle11 should be the fundamental principle governing multilateral trade, while less-developed countries believed that equal treatment of unequal trading partners did not constitute equity, and called for “special and differential treatment” for developing countries. GSP schemes thus became one of the means of offering a form of special treatment that developing nations sought while allaying the fears of developed countries that tariff “disarmament” might create serious disruptions in their domestic markets.12 Due to differences in developed countries’ economic structures and tariff programs—as well as different domestic industries and products each wanted to shield from such competition—it 7 U.N. Conference on Trade and Development, “About GSP,” at http://www.unctad.org. In addition to the United States, the European Union and 11 other developed countries—Australia, Belarus, Bulgaria, Canada, Japan, New Zealand, Norway, Switzerland, and the Russian Federation—currently have GSP programs. 8 OECD Secretary-General. The Generalized System of Preferences: Review of the First Decade. Organization of Economic Cooperation and Development, 1983, p. 9 (hereinafter OECD GSP Review). 9 Ibid. 10 Sapir, A. and L. Lundberg, “The U.S. Generalized System of Preferences and its Impacts,” in R. Baldwin and A. Krueger (eds.) The Structure and Evolution of Recent U.S. Trade Policy, Chicago: The University of Chicago Press, 1984. 11 The most-favored-nation principle means that countries must treat imports from other trading partners on the same basis as that given to the most favored other nation. Therefore, with certain exceptions (including GSP, regional trading arrangements, and free trade agreements), every country gets the lowest tariff that any country gets, and reductions in tariffs to one country are provided also to others. The term “most-favored-nation” has been changed in U.S. law to “normal trade relations.” 12 OECD GSP Review, p. 11. Congressional Research Service 2 Generalized System of Preferences: Background and Renewal Debate proved difficult to create one unified system of identical tariff concessions. Therefore, the GSP became a system of individual national schemes based on common goals and principles—each with a view toward providing developing countries with generally equivalent opportunities for export growth.13 As a result, the preference-granting countries implemented various individual schemes of temporary, generalized, non-reciprocal, non-discriminatory preferences under which tariffs were lowered or eliminated on certain imports from developing countries. As a condition for providing such tariff preferences, GSP preference-granting countries reserved the right to (1) exclude certain countries; (2) determine product coverage; (3) determine rules of origin governing the preference; (4) determine the duration of the scheme; (5) reduce any preferential margins accruing to developing countries by continuing to lower or remove tariffs as a result of multilateral negotiations; (6) prevent the concentration of benefits among a few countries; (7) include safeguard mechanisms or “escape” clauses; and (8) place caps on the volume of duty-free trade entering under their programs.14 Although GSP programs were intended to be temporary, an international legal framework under the GATT (as discussed below) was developed to allow these programs to continue. Additionally, many developed countries have also decided to grant additional market access, through GSP or other preferential programs, to products of countries they designate as least-developed countries (LDCs). At the sixth World Trade Organization (WTO) Ministerial Conference in Hong Kong in December 2005, developed country WTO members and “developing country members declaring themselves in a position to do so” agreed to deepen this commitment by providing “duty-free and quota-free market [DFQF] access on a lasting basis, for all products originating from all least developed countries by 2008 or no later than the start of the implementation period in a manner that ensures stability, security and predictability.”15 Members “facing difficulties” with providing such access would be permitted to exempt 3% of all tariff lines, provided they take steps to achieve the goal of total duty-and quota-free access by incrementally building on the list of covered products.16 Since multilateral negotiations in the WTO Doha Development Agenda (DDA) have been suspended, this duty-free/quota-free offer seems to be in jeopardy, at least on a multilateral basis. International Legal Framework17 Because it is a preference program, by its very nature, the GSP posed a problem under the General Agreement on Tariffs and Trade (GATT) in that the granting of preferences would be facially inconsistent with the fundamental obligation placed on GATT Parties in GATT Article I:1 to grant most-favored-nation (MFN) tariff treatment to the products of all other GATT Parties. As noted, however, preference programs were viewed as vehicles of trade liberalization and economic development for developing countries. Thus, GATT Parties accommodated them in a series of joint actions. 13 Ibid., p. 10. Wall, David. “Problems with Preferences,” International Affairs, vol. 47, October 1971, p. 95. 15 World Trade Organization, Ministerial Declaration, Annex F. December 18, 2005, WT/MIN(05)/DEC. 16 Ibid. 17 This section was written by Jeanne J. Grimmett, Legislative Attorney, American Law Division. For further discussion of trade preference programs in light of obligations under the General Agreement on Tariffs and Trade (GATT), see CRS Report RS22183, Trade Preferences for Developing Countries and the World Trade Organization (WTO), by Daniel T. Shedd, Jane M. Smith, and Brandon J. Murrill. 14 Congressional Research Service 3 Generalized System of Preferences: Background and Renewal Debate In 1965, the GATT Parties added Part IV to the General Agreement, an amendment that recognizes the special economic needs of developing countries and asserts the principle of nonreciprocity. Under this principle, developed countries forego the receipt of reciprocal benefits for their negotiated commitments to reduce or eliminate tariffs and restrictions on the trade of less developed contracting parties.18 Because of the underlying MFN issue, GATT Parties in 1971 adopted a waiver of Article I for GSP programs, which allowed developed contracting parties to accord more favorable tariff treatment to the products of developing countries for 10 years.19 The GSP was described in the decision as a “system of generalized, non-reciprocal and nondiscriminatory preferences beneficial to the developing countries.” At the end of the Tokyo Round of Multilateral Trade Negotiations in 1979, developing countries secured adoption of the Enabling Clause, a permanent deviation from MFN by joint decision of the GATT Contracting Parties.20 The Clause states that notwithstanding GATT Article I, “contracting parties may accord differential and more favorable treatment to developing countries, without according such treatment to other contracting parties” (¶1) and applies this exception to: (a) Preferential tariff treatment accorded by developed contracting parties to products originating in developing countries in accordance with the Generalized System of Preferences; (b) Differential and more favorable treatment with respect to the provisions of the General Agreement concerning non-tariff measures governed by the provisions of instruments multilaterally negotiated under the auspices of the GATT; (c) Regional or global arrangements entered into amongst less-developed contracting parties for the mutual reductions or elimination of tariffs and, in accordance with criteria or conditions which may be prescribed by the CONTRACTING PARTIES for the mutual reduction or elimination of non-tariff measures, on products imported from one another; (d) Special treatment on the least developed among the developing countries in the context of any general or specific measures in favour of developing countries (¶ 2). To describe the GSP, the Clause refers to the above-quoted description in the 1971 waiver (i.e., a “system of generalized, non-reciprocal and non-discriminatory preferences beneficial to the developing countries”).21 Among other things, the Clause further provides, at ¶ 3(c), that any differential and more favorable treatment provided under the Clause “shall in the case of such treatment accorded by developed contracting parties to developing countries be designed and, if necessary, modified, to respond positively to the development, financial and trade needs of developing countries.” 18 Edmond McGovern, International Trade Regulation ¶ 9.212 (updated 1999). Part IV is generally viewed as nonbinding, though some have argued otherwise with regard to certain of its provisions. Id.; John H. Jackson, William J. Davey & Alan O. Sykes, Jr., Legal Problems of International Economic Relations 1171 (4th ed. 2002). 19 GATT, Generalized System of Preferences; Decision of 25 June 1971, L/3545 (June 28, 1971), available at http://www.wto.org/gatt_docs/English/SULPDF/90840258.pdf. 20 GATT, Differential and More Favourable Treatment, Reciprocity and Fuller Participation of Developing Countries; Decision of 28 November 1979, L/4903 (December 3, 1979)(footnotes omitted)(hereinafter Enabling Clause), available at http://www.wto.org/gatt_docs/English/SULPDF/90970166.pdf 21 Id. ¶ 2, n.3. Congressional Research Service 4 Generalized System of Preferences: Background and Renewal Debate In addition, if a GATT Party (now WTO member) who has instituted a GSP program subsequently takes action “to introduce modification or withdrawal of the differential treatment so provided,” the member is required to notify and consult with other WTO members. Specifically, ¶ 4(a) requires the acting member to notify WTO members as a whole and to “furnish them with all the information they may deem appropriate relating to such action.” Further, under ¶ 4(b), the member must “afford adequate opportunity for prompt consultations at the request of any interested contracting party with respect to any difficulty or matter that may arise.” If requested by any such interested party, WTO members must as a whole consult with all WTO members concerned over the issue at hand with the aim of reaching a solution that is satisfactory to all such members. This requirement does not affect any member’s rights under the GATT.22 Paragraph 7 of the Clause provides that the less-developed WTO members “expect that their capacity to make contributions or negotiated concessions or take other mutually agreed action under the provisions and procedures of the General Agreement would improve with their progressive development of their economies and improvement in their trade situation and they would accordingly expect to participate more fully in the framework of rights and obligations under the General Agreement.” This paragraph is generally considered to support the “graduation” of a beneficiary country out of a grantor’s GSP program by the grantor, either entirely or with respect to particular products, once the beneficiary country has attained a certain level of economic development.23 The Enabling Clause does not contain express criteria or procedures for graduation, however, leaving grantor countries to establish criteria on a unilateral basis. The Enabling Clause also states that it “would remain open for the CONTRACTING PARTIES to consider on an ad hoc basis under the GATT provisions for joint action any proposals for differential and more favorable treatment not falling within the scope of this paragraph,” that is, a program that does not fit within one of the four categories described above.24 This provision suggests the use of GATT waivers for more ambitious programs; in practice, waivers have been adopted for a variety of such programs, including several U.S. non-GSP tariff preferences.25 The Enabling Clause was incorporated into the GATT 1994 upon the entry into force of the Uruguay Round agreements on January 1, 1995.26 In 1999, the WTO General Council adopted a 22 Id. ¶ 4, n.1. Note also notification requirements under ¶ 4 of the Enabling Clause, discussed in the text. See generally Simon Lester, The Asian Newly Industrialized Countries to Graduate from Europe’s GSP Tariffs, 36 Harv. Int’l L. J. 220 (1995); Gregory O. Lunt, Graduation and the GATT: The Problem of the NICs, 31 Colum. J. Transnat’l L. 611 (1994); Robert E. Hudec, GATT and the Developing Countries, 1992 Colum. Bus. L. Rev. 67. 24 Enabling Clause, supra note 15, at ¶ 2, n.2. 25 CRS Report RS22183, Trade Preferences for Developing Countries and the World Trade Organization (WTO), supra note 12, at 3. On May 27, 2009, the WTO General Council approved U.S. requests for waiver renewals for two non-GSP preference programs and an initial waiver for a third program, this being the final WTO action needed for the waivers to enter into effect. The waiver renewals cover the Caribbean Basin Economic Recovery Act (as amended by the United States-Caribbean Trade Partnership Act) and the Andean Trade Preference Act (as amended by the Andean Trade Promotion and Drug Eradication Act), each through December 31, 2014. Earlier waivers for these programs had expired in 2005 and 2001, respectively. The new waiver covers the African Growth and Opportunity Act through September 30, 2015. Some WTO Members (e.g., China and Pakistan), had expressed concerns regarding U.S. treatment of textiles in these programs, while Paraguay objected to the U.S. request in part because of its exclusion from the Andean preference scheme. 26 Agreement Establishing the World Trade Organization, Annex 1A, General Agreement on Tariffs and Trade 1994, ¶ (continued...) 23 Congressional Research Service 5 Generalized System of Preferences: Background and Renewal Debate decision, captioned “Preferential Tariff Treatment for Least-Developed Countries,” which waived GATT Article I:1 until June 30, 2009, “to the extent necessary to allow developing country Members to provide preferential tariff treatment to products of least-developed countries (LDCs), designated as such by the United Nations, without being required to extend the same tariff rates to like products of any other Member.”27 Along with setting out various standards and notification and procedural requirements, the waiver, at paragraph 6, provides that it “does not affect in any way and is without prejudice to rights of Members in their actions pursuant to” the Enabling Clause. The waiver was recently extended until June 30, 2019.28 In addition, in a WTO dispute proceeding brought by India challenging special GSP benefits maintained by the European Communities (EC), European Communities—Conditions for the Granting of Tariff Preferences to Developing Countries (WT/DS246), the WTO Appellate Body addressed the issue of the extent to which a granting country may accord such benefits within a GSP program to countries meeting a separate set of criteria. The dispute stemmed from an EC Regulation which awarded tariff preferences to a closed group of 12 beneficiary countries on the condition that they combat illicit drug production (Drug Arrangements). India claimed that the Drug Arrangements were inconsistent with GATT Article I:1 and could not be justified by the Enabling Clause. In its 2004 report, the Appellate Body ruled that developed countries may grant preferences beyond those provided in their GSP to countries with particular needs, but only if identical treatment is available to all similarly situated GSP beneficiaries.29 Among other things, the Appellate Body cited ¶ 3(c) of the Enabling Clause, providing that any differential and more favorable treatment provided under the Clause “shall ... be designed and, if necessary modified to respond positively to the development, financial and trade needs of developing countries.”30 Comparison of International GSP Programs One economist has referred to the Generalized System of Preferences as a non-homogeneous set of national schemes sharing certain common characteristics.31 Generally, each preferencegranting country extends to qualifying developing countries (as determined by each benefactor) an exemption from duties (reduced tariffs or duty-free access) on most manufactured products and certain “non-sensitive” agricultural products. Product coverage and the type of preferential treatment offered vary widely.32 (...continued) 1(b)(iv); see Appellate Body Report, European Communities—Conditions for the Granting of Tariff Preferences to Developing Countries, ¶ 90.3, WT/DS246/AB/R (April 7, 2004)(hereinafter EC Preferences AB Report). 27 Preferential Tariff Treatment for Least-Developed Countries; Decision on Waiver, WT/L/304 (June 17, 1999) (adopted June 15, 1999), at http://docsonline.wto.org/DDFDocuments/t/WT/L/304.DOC; see also discussion in WTO Committee on Trade and Development, Note on the Meeting of 2 March 1999, at 2-6, WT/COMTD/M/24 (April 27, 1999). 28 Preferential Tariff Treatment for Least-Developed Countries; Decision on Extension of Waiver, WT/L/759 (May 29, 2009)(adopted May 27, 2009). 29 EC Preferences AB Report, supra note 21. 30 Id. at ¶¶ 162-165. For further discussion of the Appellate Body report, see CRS Report RS22183, Trade Preferences for Developing Countries and the World Trade Organization (WTO), supra note 12, at 4-5. 31 Sanchez Arnau, Juan C. The Generalized System of Preferences and the World Trade Organization. London: Cameron May, Ltd., 2002, p. 187. 32 Ibid. Congressional Research Service 6 Generalized System of Preferences: Background and Renewal Debate Although most GSP schemes (including the U.S. program) admit all eligible products duty-free, some countries provide tariff reductions, rather than complete exemption from duties.33 The Australian system, for example, is based on a five percentage point margin of preference. When the Australian General Tariff (GT) is 5% or higher, the amount of the tariff is reduced by 5% for products of beneficiary countries. When the GT rate is 5% or less, the preferential rate is zero.34 In the WTO, developing country status is generally based on self-determination. However, with regard to GSP, each preference-granting country establishes particular criteria and conditions for defining and identifying developing country beneficiaries. Consequently, the list of beneficiaries and exceptions may vary greatly between countries. If political or economic changes have taken place in a beneficiary country, it might be excluded from GSP programs in some countries (such as the United States) but not in others. Most countries, including the United States, also exclude countries if they have entered into another kind of commercial arrangement (e.g., a free trade agreement) with any other GSP-granting developed country. In terms of additional GSP product coverage for LDCs, the European Community program, which offers duty-free access for “everything but arms,”35 is currently perhaps the most inclusive. GSP-granting countries may also have incentive-based programs that provide enhanced benefits for beneficiary countries that meet certain additional criteria. For example, in 2007 the European Community implemented a regulation that grants additional GSP benefits to those countries that have demonstrated their commitment to sustainable development and internationally recognized worker rights.36 Each preference-granting nation also has safeguards in place to ensure that any significant increases in imports of a certain product do not adversely affect the receiving country’s domestic market. Generally, these restrictions take the form of quantitative limits on goods entering under GSP. Under Japan’s system, for example, imports of certain products under the preference are limited by quantity or value (whichever is applicable) on a first-come, first-served basis as administered on a monthly (or daily, as indicated) basis. For other products, import ceilings and maximum country amounts are set by prior allotment.37 The United States quantitatively limits imports under the GSP program by placing “competitive need limit” (CNL) thresholds on the quantity or value of commodities entering duty-free, as discussed in more detail below. Each GSP benefactor also has criteria for graduation—the point at which beneficiaries no longer qualify for benefits because they have reached a certain level of development. Most preference33 World Trade Organization, Committee on Trade and Development. The Generalized System of Preferences: A Preliminary Analysis of the GSP Schemes in the Quad. WTO Document WT/COMTD/W/93, October 5, 2001. 34 United Nations Conference on Trade and Development, Generalized System of Preferences on the Scheme of Australia. UNCTAD Technical Cooperation Project on Market Access, Trade Laws and Preferences, June 2000 (INT/97/A06), p. 5. http://www.unctad.org/en/docs/itcdtsbmisc56_en.pdf. 35 European Communities, GSP Council Regulation (EC) No. 2501/2001. See also Council Regulation (EC) No 732/2008 of 22 July 2008 applying a scheme of generalised tariff preferences for the period from 1 January 2009 to 31 December 2011 and amending Regulations (EC) No 552/97, (EC) No 1933/2006 and Commission Regulations (EC) No 1100/2006 and (EC) No 964/2007. Published in Official Journal of the European Communities, (OJ) OJ L 211 of 6 August 2008. The “Everything but Arms” provision applies to all goods except arms and munitions and white sugar (from October 1, 2009 to September 2012, sugar importers “shall undertake to purchase such products at a minimum price not lower than 90% of the reference price.”). See Council Regulation (EC) No 2501/2001. 36 Ibid. 37 World Trade Organization, Committee on Trade and Development. Notification by Japan, June 21, 2000, WT/COMTD/N/2/Add.9. Congressional Research Service 7 Generalized System of Preferences: Background and Renewal Debate granting countries require mandatory graduation based on a certain level of income per capita based on World Bank calculations. Some programs, such as the European Union’s, also specifically provide for graduation of certain GSP recipients with respect to individual sectors of the economy. U.S. Implementation Congress first authorized the U.S. Generalized System of Preferences scheme in Title V of the Trade Act of 1974 (P.L. 93-618), as amended.38 P.L. 93-618 authorizes the President to grant duty-free treatment under the GSP for any eligible product from any beneficiary developing country (BDC) or least-developed beneficiary developing country (LDBDC), provides the President with economic criteria in deciding whether to take any such action, and also specifies certain criteria for designating eligible countries and products.39 Based on the statutory requirements which countries must meet—and continue to practice—while participating in the program, the U.S. GSP program might be characterized as a foreign policy tool as well as an international trade program. Although GSP benefits are non-reciprocal, certain criteria speak to important U.S. commercial interests, such as ensuring “equitable and reasonable” access in the beneficiaries’ market to U.S. products, protecting intellectual property rights, and preventing the seizure of property belonging to U.S. citizens or businesses. In addition, since certain “import sensitive” products are excluded from eligibility and quantitative/value limitations apply to any eligible imports, the economic costs of the preference are quite small. Beneficiary Countries When designating BDCs and LDBDCs, the President is directed to take into account certain mandatory and discretionary criteria. The law prohibits (with certain exceptions) the President from extending GSP treatment to certain countries, as follows:40 • other industrial countries (Australia, Canada, European Union member states, Iceland, Japan, Monaco, New Zealand, Norway, and Switzerland are specifically excluded); • communist countries, unless they are a WTO member, a member of the International Monetary Fund and receive Normal Trade Relations (NTR) treatment; must also not be “dominated or controlled by international communism;” • countries that collude with other countries to withhold supplies or resources from international trade or raise the price of goods in a way that could cause serious disruption to the world economy; 38 Trade Act of 1974, P.L. 93-618, Title V, as amended, 19 U.S.C. §2461-2467. The GSP Program was reauthorized and amended by the Trade and Tariff Act of 1984 (P.L. 98-573), and again by Subtitle J (the GSP Renewal Act of 1996) of P.L. 104-188. Ten laws have authorized GSP with relatively minor modifications, most recently through July 31, 2013 (P.L. 112-40). See Table B-1. 39 19 U.S.C. § 2461. 40 19 U.S.C. § 2462. Congressional Research Service 8 Generalized System of Preferences: Background and Renewal Debate • countries that provide preferential treatment to the products of another developed country in a manner likely to have an significant adverse impact on U.S. commerce; • countries that have nationalized or expropriated the property of U.S. citizens, or otherwise infringe on U.S. citizens’ property rights, including patents, trademarks, or copyrights; countries that have taken steps to repudiate or nullify existing contracts or agreements of U.S. citizens (or corporations, partnerships, or associations that are 50% or more owned by U.S. citizens) in a way that would nationalize or seize ownership or control of the property; or countries that have imposed or enforced taxes or other restrictive conditions on measures on the property of U.S. citizens; unless the President determines that compensation is being made, good faith negotiations are in progress, or a dispute has been handed over to arbitration in the Convention for the Settlement of Investment Disputes or another forum; • countries that have failed to act in good faith in recognizing as binding or in enforcing arbitral awards in favor of U.S. citizens (or corporations, partnerships, or associations that are 50% or more owned by U.S. citizens); and • countries that grant sanctuary from prosecution to any individual or group that has committed an act of international terrorism, or has not taken steps to support U.S. efforts against terrorism. Mandatory criteria also require that beneficiary countries: • have taken or be taking steps to grant internationally recognized worker rights (including collective bargaining, freedom from compulsory labor, minimum age for employment of children, and acceptable working conditions with respect to minimum wages, hours of work, occupational safety and health); and • implement their commitments to eliminate the worst forms of child labor.41 The President is also directed to consider certain discretionary criteria (“factors affecting country designation”), such as the following: • the country’s expressed desire to be designated a beneficiary developing country for purposes of the U.S. program; • the level of economic development of the country; • whether or not other developed countries are extending similar preferential tariff treatment to the country; • its commitment to a liberal trade policy; • the extent to which it provides adequate protection of intellectual property rights; 41 19 U.S.C. § 2462(b). The most recent amendments required the support of U.S. efforts against terrorism and expanded the definition of internationally recognized worker rights (Section 4102 of P.L. 107-210). See also United States Trade Representative. U.S. Generalized System of Preferences Guidebook, December 2011, p. 19 (hereinafter USTR Guidebook). Congressional Research Service 9 Generalized System of Preferences: Background and Renewal Debate • the extent to which it has taken action to reduce trade-distorting investment policies and practices, and to reduce or eliminate barriers to trade in services; and • whether or not it has taken steps to grant internationally recognized worker rights.42 The law further authorizes the President, based on the required and discretionary factors mentioned above, to withdraw, suspend, or limit GSP treatment for any beneficiary developing country at any time.43 Reporting Requirements The President must advise Congress of any changes in beneficiary developing country status, as necessary.44 The President must also submit an annual report to Congress on the status of internationally recognized worker rights within each BDC, including findings of the Secretary of Labor with respect to the beneficiary country’s implementation of its international commitments to eliminate the worst forms of child labor.45 Least-Developed Beneficiaries The President is also authorized by statute to designate any BDC as a least-developed beneficiary (LDBDC), based on an assessment of the conditions and factors previously mentioned.46 Although factors such as per capita income level, economic stability, and quality of life indicators (on which the United Nations-designated list of LDCs is based) are taken into account,47 the U.S. administration also assesses the level of compliance with other GSP statutory requirements and comments from the public (as requested in the Federal Register) before identifying a country as “least-developed” for purposes of the GSP.48 Countries Recently Included or Suspended On June 29, 2012, the President designated Senegal as a least-developed beneficiary developing country, effective 60 days after the date of the proclamation (or September 27, 2012).49 On March 26, 2012, President Obama suspended GSP benefits for Argentina because “it has not acted in good faith in enforcing arbitral awards in favor of United States citizens or a corporation, partnership, or association that is 50% or more beneficially owned by United States.50 In the 42 19 U.S.C. § 2462(c). Ibid., p. 20. 19 U.S.C. § 2462(d). 44 19 U.S.C. §2462(d)(3). 45 19 U.S.C. § 2464. 46 19 U.S.C. § 2462(a)(2). 47 19 U.S.C. § 2462(c)(2). 48 See 71 F.R. 43543. 49 Ibid. 50 Proclamation 8788 of March 26, 2012, 77 Federal Register 18899, March 29, 2012. 43 Congressional Research Service 10 Generalized System of Preferences: Background and Renewal Debate March 26th proclamation, the President also designated the Republic of South Sudan as a leastdeveloped beneficiary developing country under the GSP.51 Products The Trade Act of 1974 authorizes the President to designate certain imports as eligible for dutyfree treatment under the GSP after receiving advice from the United States International Trade Commission (USITC).52 “Import sensitive” products specifically excluded from preferential treatment are most textiles and apparel goods; watches; footwear and other accessories; most electronics, steel, and glass products; and certain agricultural products subject to tariff-rate quotas.53 The lists of eligible products and the list of beneficiary developing countries are reviewed and revised annually by the GSP Subcommittee.54 Any modifications to these lists usually take effect on July 1 of the following calendar year.55 In terms of product coverage, more than 3,500 products are currently eligible for duty-free treatment, and about 1,500 additional articles originating in LDBDCs may receive similar treatment (see Table A-2). Leading imports in 2011 under the GSP program included silver jewelry and parts; aluminum alloy plates, sheet, and strip, car and truck tires; and petroleum products, especially crude oil.56 Table 1. Dutiable and Duty-Free Tariff Lines in Harmonized Tariff Schedule of the United States by Product Category HTS Product Category Animal and plant products Prepared food, beverages, spirits, tobacco Chemicals and plastics Wood and paper products Textiles, leather, and footwear Glassware, precious metals and stones, jewelry Total Tariff Lines in Category MFN Dutyfree Tariff Lines Duty-free under GSP Duty-free under GSP for LDC Additional Dutyfree under other trade preferences 1,096 304 282 402 16 741 137 267 200 11 2,211 742 1,021 441 6 481 407 60 10 4 1,320 257 176 30 223 388 144 177 51 6 51 Ibid. 19 U.S.C. § 2463(a)(1). 53 19 U.S.C. § 2463(b). 54 The GSP Subcommittee is a sub-group of the Trade Policy Staff Committee, given jurisdiction over designating beneficiary countries and covered products in the GSP program in Executive Order 11846, 40 F.R. 14291, as amended. 55 USTR Guidebook, p. 8. 56 USTR Guidebook and Table A-2, Appendix A. 52 Congressional Research Service 11 Generalized System of Preferences: Background and Renewal Debate HTS Product Category Base metals and articles of base metals Total Tariff Lines in Category MFN Dutyfree Tariff Lines Duty-free under GSP Duty-free under GSP for LDC Additional Dutyfree under other trade preferences 855 491 321 41 2 Machinery, electronics, and hightech apparatus 1,893 988 810 85 10 Aircraft, autos, and other transportation 240 123 77 40 0 Miscellaneous manufacturing 543 201 186 89 66 72 41 7 24 0 Apparel 667 44 22 0 0 Totals 10,507 3,879 3,406 1,413 344 Fuels Source: U.S. General Accountability Office. International Trade: U.S. Trade Preference Programs Provide Important Benefits, But a More Integrated Approach Would Better Ensure that Programs Meet Shared Goals. GAO 08-443, March 2008. Competitive Need Limits The law establishes “competitive need limits” (CNLs) that require the President to automatically suspend GSP treatment for BDCs (LDBDCs and sub-Saharan beneficiaries are exempt) if imports of a product from a single country reach a specified threshold value ($155 million in 2012 and $160 million in 2013), or if 50% or more of total U.S. imports of a product entering under the preference come from a single country.57 CNL waivers for products imported from BDCs may be granted on the basis of certain criteria. In deciding whether to grant a waiver, the President must (1) receive advice from the USITC as to whether a U.S. domestic industry could be adversely affected by the waiver; (2) determine that the waiver is in the U.S. economic interest; and (3) publish the determination in the Federal Register.58 The President is also required to give “great weight” to the extent to which the BDC opens its markets and resources the United States, provides internationally recognized worker rights, and protects intellectual property rights.59 Other Waivers Waivers for BDCs may also be provided (in some cases automatically) if total U.S. imports of a product from all countries is small or “de minimis” (not to exceed 20.5 million in 2011 and $21 57 19 U.S.C. § 2463(c)(2)(A). See also USTR Guidebook, p. 11. 19 U.S.C. § 2463(d). 59 19 U.S.C. § 2463(d)(2). 58 Congressional Research Service 12 Generalized System of Preferences: Background and Renewal Debate million in 2012),60 or if the GSP-eligible article was not produced in the United States on January 1, 1995 (known as a 504(d) waiver).61 Rules of Origin Eligible goods under the U.S. GSP program must meet certain rules of origin (ROO) requirements in order to qualify for duty-free treatment. First, duty-free entry is only allowed if the article is imported directly from the beneficiary country into the United States. Second, at least 35% of the appraised value of the product must be the “growth, product or manufacture” of a beneficiary developing country, as defined by the sum of (1) the cost or value of materials produced in the beneficiary developing country (or any two or more beneficiary countries that are members of the same association or countries and are treated as one country for purposes of the U.S. law) plus (2) the direct costs of processing in the country.62 Annual Review The U.S. GSP program is subject to annual review by the GSP Subcommittee of the Trade Policy Staff Committee (TPSC), a body chaired by the Office of the U.S. Trade Representative (USTR), and including representatives from the Departments of Agriculture, Commerce, the Interior, Labor, State, and the Treasury.63 The GSP Subcommittee (also responsible for making initial country eligibility recommendations) considers and makes recommendations to the President concerning the continued eligibility of countries to receive benefits. The GSP Subcommittee also resolves questions regarding BDCs’ and LDBDCs’ observance of country practices (such as worker rights, or protection of intellectual property rights); investigates petitions to add or remove items from the list of eligible products; and considers which products should be removed on the basis that they are “sufficiently competitive” or “import sensitive.” In preparation for the annual review, the USTR may also seek an investigation by the USITC for the purpose of providing advice concerning any possible modifications to the GSP.64 2011 Annual Review Results On Thursday, July 12, 2012, the USTR announced the results of the 2011 Annual GSP Review “with respect to: (1) products considered for addition to the list of eligible products for GSP; (2) decisions related to competitive need limitations (CNLs), including petitions for waivers of CNLs and revocation of previous CNL waivers; (3) redesignation of products previously excluded from GSP eligibility for certain countries; and (4) petitions to modify the GSP status of certain GSP beneficiary countries because of country practices.”65 The President announced the results of the Annual Review in Proclamation 8840 of June 29, 2012:66 A summary of the results follows: 60 19 U.S.C. § 2463(c)(2)(F). 19 U.S.C. § 2463(c)(2)(E). 62 19 U.S.C. § 2463(a). 63 Regulations for implementation of the GSP program were issued by the Office of the United States Trade Representatives at 15 C.F.R. §2007. Provisions for the GSP Annual Review are set out at 15 C.F.R. §2007.2(c)-(h). 64 19 U.S.C. § 1332(g), 19 U.S.C. § 2463. 65 77 Federal Register 41209. 66 77 Federal Register 39885, July 5, 2012. See also Results of the 2011 GSP Annual Review. 61 Congressional Research Service 13 Generalized System of Preferences: Background and Renewal Debate • Adding additional products to the GSP - A decision was deferred on a petition to add reclosable polyethylene pinch-seal bags (included in Harmonized Tariff Schedule (HTS) subheading 3923.21.00.30) to the list of GSP-eligible products. According to a USITC report on the possible impact of adding these products, there were two U.S. manufacturers that opposed the addition.67 - Seven HTS categories of cotton fiber products were added to the list of eligible products for least-developed beneficiary developing countries. The USITC stated that there were no comments received either in support of, or in opposition to, addition of these products to the GSP list.68 • Waivers - Four petitions for new CNL waivers were granted, including (1) certain chemicals used in germicides or wood preservatives from the Philippines;69 (2) certain perfume/room deodorizing preparations from India;70 (3) seamless vulcanized rubber gloves from Thailand;71 and (4) parts for air conditioning machines from Thailand.72 - CNL waivers on radial tires bus and truck tires (HTS 4011.20.10) and silver jewelry from Thailand (HTS 7113.11.50) were revoked, as well as a waiver on wool hand-hooked carpets from India (HTS 5703.10.20). - Products newly subject to CNLs included certain aluminum products (HTS 7601.10.30 and 7606.12.30) from Venezuela and Indonesia, and vehicle parts from India (HTS 8708.30.50). - Over 50 de minimis waivers were granted. • Redesignation of products as GSP-eligible: - A petition for redesignation of Kola nuts (HTS 0802.70.20) from Cote d’Ivoire was granted. About 150 other redesignation petitions were denied. • Country Practice Petitions - Two petitions for investigations of GSP eligibility based on worker rights practices were accepted regarding country practices in Iraq and Fiji. A worker rights investigation on practices in Sri Lanka was closed without a modification 67 U.S. International Trade Commission, Advice Concerning Possible Modifications to the U.S. Generalized System of Preferences, 2011 Review of Additions and Competitive Need Limitation Waivers, Investigation No. 332-529, USITC Publication 4327, May 2012. 68 Ibid. Products included were those in HTS subheadings 5201.00.22, 5201.00.24, 5201.00.34, 5202.91.00, 5203.00.05, 5203.00.10, and 5203.00.50. 69 HTS 2921.2960, Other acyclic monoamines and their derivatives (normally a duty rate of 6.5% ad valorem would apply). 70 HTS 3307.41.00, “Agarbatti” and other odiferous preparations which operate by burning, to perfume or deodorize rooms or used during religious rites (normally a duty rate of 2.4% ad valorem would apply). 71 HTS 4015.19.10, Seamless gloves of vulcanized rubber other than hard rubber, other than surgical or medical gloves (normally a duty rate of 3.0% ad valorem would apply). 72 HTS 8415.90.80, Parts for air conditioning machines, not otherwise specified or indicated (normally a duty rate of 1.4% ad valorem would apply). Congressional Research Service 14 Generalized System of Preferences: Background and Renewal Debate of GSP benefits. Worker rights investigations on country practices in Bangladesh, Niger, Philippines, Uzbekistan, and Georgia were continued. - Two petitions for investigations of GSP eligibility based on intellectual property rights (IPR) practices were accepted regarding country practices in Ukraine and Indonesia. IPR investigations on country practices in Lebanon, Russia, and Uzbekistan were ongoing and will be continued. - A decision on whether to accept a petition for investigation of GSP eligibility based on expropriation country practices in Russia was deferred. • Country Eligibility - Gibraltar and the Turks and Caicos Islands were determined to be no longer eligible for GSP benefits because they were found to have become “high income” countries (see “Graduation” below). - Senegal was determined to be a least-developed beneficiary developing country for purposes of the GSP. 2012 Annual Review On July 30, 2012, the USTR announced the initiation of the 2012 Annual GSP Product and Country Practices Review. All petitions to modify the eligibility status of goods or to review the GSP status of beneficiaries are due by October 5, 2012.73 Graduation The President may remove a beneficiary developing country from GSP eligibility because the country is determined to be sufficiently competitive or developed that it no longer requires GSP benefits.74 The President may graduate a BDC completely, or may do so with respect to the country’s individual products or industries. Mandatory country graduation occurs when the BDC is determined to be a “high income country” (as defined by official International Bank for Reconstruction and Development statistics), or as a result of a review of the BDC’s advances in economic development and trade competitiveness.75 On December 20, 2012, the President determined that St. Kitts and Nevis had become a “high income country” and terminated its GSP beneficiary status as of January 1, 2014.76 The President made the same determination on June 29, 2012, with respect to Gibraltar and the Turks and Caicos (also effective January 1, 2014).77 Thus, these countries were mandatorily graduated from the GSP program. Countries also become ineligible for GSP benefits if they formally enter into a bilateral trading relationship with another developed country.78 Bulgaria and Romania were the last countries to 73 77 Federal Register 44704. In this case, the discretionary eligibility criteria under 19 U.S.C. § 2462(c)(2) applies. 75 19 U.S.C. § 2462(e). 76 Proclamation 8921 of December 20, 2012, 77 Federal Register 76799, December 28, 2012. 77 Proclamation 8840 of June 29, 2012, 77 Federal Register 39885, July 5, 2012. 78 Although not specifically stated in the statute, the United States has generally removed countries from GSP eligibility that sign FTAs with the United States as well. 74 Congressional Research Service 15 Generalized System of Preferences: Background and Renewal Debate become ineligible for this reason, “effective for each of the countries when it becomes a European Member State” as of January 1, 2007 (Presidential Proclamation 8098, December 29, 2007).79 Legislation Prior to 2006, GSP renewal was generally considered non-controversial. At times that it was not renewed prior to repeal, it was widely expected that Congress would retroactively renew the preference as it did in the Trade Act of 2002.80 Since its renewal in December 2006, however, the extension of the GSP program and other trade preferences has continued to be a matter of some debate. For example, Some in Congress have asserted that certain “more advanced” developing countries (such as Brazil and India) are receiving GSP benefits to the exclusion of lesserdeveloped countries. The consideration of Vietnam as a potential GSP beneficiary―initially proposed by the Bush Administration—has also been a matter of debate for some in Congress, largely due to concerns over the country’s record on worker rights.81 112th Congress GSP Extension The GSP program was extended through July 31, 2013, in P.L. 112-40. The GSP extension was introduced in H.R. 2832, the Trade Adjustment Assistance Extension Act of 2011, on September 6, 2011, and passed in the House under suspension of the rules on September 7. The measure passed the Senate, with an amendment, on September 22, 2011. The House subsequently passed H.R. 2832, as amended, on October 12. The President signed the legislation enacting the GSP on October 21, 2011. GSP trade benefits became effective 15 days after the date of enactment, or on November 5, 2011. The GSP program was also retroactively extended to eligible merchandise that entered the United States between the expiration date, December 31, 2010, and the date the GSP renewal entered into force. Therefore, importers of GSP-eligible products may seek reimbursement for tariffs paid during the laps of GSP coverage. On October 23, 2011, U.S. Customs and Border Protection (CBP) issued instructions for claiming refunds of duties paid on GSP-eligible merchandise.82 Other 112th Congress Legislation Other GSP-related bills in the 112th Congress included section 201 of S. 308, the “Trade Extenders Act of 2011” (introduced February 8, 2011), which sought, among other things, to 79 72 F.R. 459. USTR officially announced the graduation of Bulgaria and Romania on January 22, 2007 (72 Federal Register 2717). 80 In each instance since 1993 (the last time that the program expired) it was allowed to lapse and was extended retroactively from the expiration date to the date of enactment. P.L. 107-210, for example, applied the preference to any goods entering the United States between September 30, 2001 and August 6, 2002. See Table B-1. The 2006 renewal (until December 2008) was the first time since 1993 that the program had not been allowed to lapse prior to renewal. 81 CRS Report RL34702, Potential Trade Effects of Adding Vietnam to the Generalized System of Preferences Program, by Vivian C. Jones and Michael F. Martin. 82 U.S. Customs and Border Protection, Renewal of the Generalized System of Preferences, Memorandum, http://www.cbp.gov/linkhandler/cgov/trade/trade_programs/international_agreements/special_trade_programs/ gsp_gen_system/mem_gsp.ctt/mem_gsp.pdf. Congressional Research Service 16 Generalized System of Preferences: Background and Renewal Debate renew GSP until June 30, 2012, and to apply the preference retroactively from the date of enactment to the previous expiration date (December 31, 2010). Section 202 would have specified that certain sleeping bags are not eligible to receive GSP preferences. This section was included, reportedly, in response to opposition regarding certain sleeping bags being imported duty-free from Bangladesh under GSP.83 Bills with similar provisions were H.R. 622, H.R. 913, S. 221, and S. 433. Effectiveness of GSP The statutory goals of the GSP are (1) to promote the development of developing countries; (2) to promote trade, rather than aid, as a more efficient way of promoting economic development; (3) to stimulate U.S. exports in developing country markets; and (4) to promote trade liberalization in developing countries.84 It is difficult to assess whether or not the program alone has achieved these goals, however, because the GSP is only one of many such foreign aid initiatives used by the United States to assist poorer countries. Economic success within countries is also related to internal factors, such as stability, wise policy decisions, availability of infrastructure to foster industry, and legal/financial frameworks that encourage foreign investment. What follows, therefore, are general comments, rather than hard data, about the impact of GSP on developing countries, and possible economic effects on the U.S. market. The positions of various stakeholders regarding the value of the program are also discussed. Effects on Developing Countries In the last 20 years, total U.S. imports from all GSP beneficiaries have increased dramatically, from $150 billion in 2000 to a peak of $365 billion in 2008 (see Figure 1). The general growth trend in total imports over the time series could indicate, in very broad terms, that the GSP and other preferential programs have helped create some export-driven growth in developing countries. In 2009, total imports from all GSP beneficiaries dropped to $236 billion—most likely due to the global economic recession—but rebounded once again to $366 billion in 2011. Total imports entering duty-free under the GSP preference also increased markedly from $17 billion in 1996 to $32 billion in 2008. In 2009, the value of goods entering under GSP fell to about $20 billion, and recovered slightly in 2010 to $23 billion. The 2011 drop in imports under GSP to about $19 billion was most likely due to the lapse in GSP authorization in 2011. However, the percentage of goods entering the United States duty-free under the GSP program, relative to total U.S. imports from BDCs (includes products that were imported under MFN rates), has remained relatively flat—at around 10% of total imports annually for all GSP beneficiaries combined. This could be due, in part, to the presence of the automatic competitive 83 “Preference Reform Will Take Backseat to Renewal of ATPDEA, GSP,” Inside U.S. Trade, January 20, 2011. the issue of sleeping bags’ GSP status was finally settled by the TPSC, when it determined in the 2010 Annual Review that GSP would no longer apply to sleeping bags in the applicable HTS subheading. 84 P.L. 98-573, Section 501(b), 19 U.S.C. § 2461 note. Additional factors are to allow for differences in developing countries; help developing countries generate foreign exchange reserves, further integrate developing countries into the international trading system; and encourage developing countries to eliminate trade barriers, guard intellectual property rights, provide worker rights; and address concerns of the United States with regard to adverse effects on U.S. producers and workers and compliance with GATT obligations. Congressional Research Service 17 Generalized System of Preferences: Background and Renewal Debate need limits (CNLs) on GSP-eligible products originating in non-LDC beneficiaries, combined with the mandatory graduation requirement for all beneficiaries that have become “high income” countries. Figure 1. U.S. Imports from GSP Countries 400 350 300 $ Billions 250 200 150 100 50 19 97 19 98 19 99 20 00 20 01 20 02 20 03 20 04 20 05 20 06 20 07 20 08 20 09 20 10 20 11 0 Total U.S. Imports Under GSP Total U.S. Imports from GSP Beneficiaries Source: ITC Trade Dataweb. Another indicator of the GSP’s impact on developing countries is the utilization rate of the preference. At first glance, it seems that only a few beneficiary developing countries use GSP to a great extent. However, as one study pointed out, the apparent lack of utilization masks the fact that many GSP-eligible goods may also be imported duty-free under other U.S. regional preference schemes, such as AGOA.85 The study also illustrated that, for certain industries in BDCs, the positive impact of GSP is quite significant. For example, for all agricultural commodities eligible for GSP treatment, the GSP utilization rate was approximately 58%.86 Therefore, for individual industries in developing countries, the positive impact of the GSP could be seen as quite significant. 85 Organization for Economic Cooperation and Development (OECD). Agriculture and Food. Preferential Trading Arrangements in Agricultural and Food Markets The Case of the European Union and the United States: United States Preference Schemes. Volume 2005, No. 1, p. 81. See also U.S. Government Accountability Office. U.S. Trade Preference Programs Provide Important Benefits, but a More Integrated Approach Would Better Ensure Programs Meet Shared Goals, March 2008, p. 19. 86 Ibid. Congressional Research Service 18 Generalized System of Preferences: Background and Renewal Debate Many developing countries with a natural competitive advantage in certain products use trade preferences such as the GSP to gain a foothold in the international market. For example, India and Thailand have well-established jewelry industries. Exporters in these industries were able to expand their international reach through GSP programs. However, some countries could also be encouraged by preferential programs to develop industry sectors where they would otherwise never be able to compete, thus diverting resources from other industries that might actually become competitive over time (trade diversion).87 The lack of reciprocity in the GSP program could also result in long-term costs for beneficiary countries. In multilateral trade negotiations, such as the Doha Development Round, countries may engage in reciprocal tariff reductions, meaning that all parties would agree to reduce their tariffs. By avoiding such reciprocal concessions, some developing countries might have tended to keep in place trade policies that may, in fact, impede their long-term growth. Moreover, these preferences could become an impediment to negotiations as developing countries seek ways of maintaining them.88 For this reason, some economists prefer multilateral, nondiscriminatory tariff cuts because preferential tariff programs, such as the GSP, can lead to inefficient production and trade patterns.89 When tariffs are reduced across-the-board, rather than in a preferential manner, countries tend to produce and export on the basis of their comparative advantage—thus exporting products that they produce relatively efficiently and importing products that others produce relatively efficiently. However, while some developing country producers (especially those whose products do not qualify under GSP) may benefit from multilateral tariff reductions, other industries may be hurt because their margin of preference under GSP is reduced. Economic Effects on the U.S. Market U.S. imports under the GSP program in 2011 represented about $19 billion (or about 1%) in comparison to total imports of about $2.2 trillion (imports for consumption, customs value). This might indicate that the overall effects of GSP on the U.S. economy are quite small. In addition, while U.S. imports from GSP countries has grown rapidly, the rate of increase of imports actually entering under the GSP program has, in the past 10 years, been relatively flat (see Figure 1). This factor could indicate that there may be little impact on the U.S. market as a whole by extending the preference. In federal budgetary terms, the Congressional Budget Office cost estimate for H.R. 4284 (became P.L. 111-124), the GSP program would cost the United States $980 million in 2012 and $503 million in 2013 in foregone tariff revenues.90 In addition, most U.S. producers of import-competing products are largely protected from severe economic impact. First, certain products, such as most textile and apparel products, are 87 OECD. “Making Open Markets Work for Development.” Policy Brief, October 2005, p. 2. Patrick Low, Roberta Piermartini, and Jurgen Richtering, Multilateral Solutions to the Erosion of Non-Reciprocal Preferences in NAMA, World Trade Organization, Economic Research and Statistics Division, Working Paper ERSD2005-05, October 2005. R. E. Baldwin and T. Murray, “MFN Tariff Reductions and Developing Country Trade Benefits Under the GSP,” The Economic Journal, vol. 87, no. 345 (March 1977), pp. 30-46. 89 Bernard Herz and Marco Wagner, The Dark Side of the Generalized System of Preferences, German Council of Economic Experts, Working Paper 02/2010, February 2010, p. 27. 90 Congressional Budget Office, H.R. 2832, An Act to Extend the Generalized System of Preferences, and for Other Purposes, Cost Estimate, October 6, 2011, http://www.cbo.gov/sites/default/files/cbofiles/attachments/hr2832.pdf. 88 Congressional Research Service 19 Generalized System of Preferences: Background and Renewal Debate designated “import sensitive” and therefore most are ineligible for duty-free treatment. Second, “competitive need limits” (discussed in more detail above) are triggered when imports of a product from a single country reach a specified threshold value or when 50% of total U.S. imports of a product come from a single country.91 Third, U.S. producers may petition the USTR that GSP treatment granted to eligible articles be withdrawn.92 The fact that, as illustrated in Figure 1, the dollar amount of imports entering under GSP has remained fairly level for at least the past 10 years may also indicate that the GSP has little impact on most domestic producers. Some U.S. manufacturers and importers also benefit from the lower cost of consumer goods and raw materials imported under the GSP program. U.S. demand for certain individual products, such as jewelry, leather, and aluminum, is quite significant.93 However, it is difficult to gauge, other than anecdotally, the overall impact of the GSP program on the U.S. market when compared to similar imports from other countries that do not receive the preference. It is possible that some merchandise entering under the GSP could be competitive even without the preference, but it is also possible that the duty-free status is the primary factor that makes imports from these countries more attractive. Stakeholders’ Concerns Supporters of the GSP include beneficiary developing country governments and exporters, U.S. importers, and some U.S. manufacturers who use inputs entering under GSP in downstream products. Some policymakers favor GSP renewal because they believe it is an important development and foreign policy tool. Those who oppose the program include some U.S. producers who manufacture competing products and some in Congress who favor more reciprocal approaches to trade policy. What follows is a thematic approach to the major topics of discussion in the GSP renewal debate. “Special and Differential Treatment” Developing countries have long maintained that “special and differential treatment,” such as that provided by the GSP, is an important assurance of access to U.S. and other developed country markets in the midst of increasing globalization.94 Many of these countries have built industries (or segments of industries) based on receiving certain tariff preferences. Those who oppose automatic renewal of GSP have expressed the desire to see some “reciprocity” and “appreciation” on the part of BDCs—in the form of offers of improved market access—in return for renewal of the program.95 Some of these policy makers reportedly favor continued progress in bilateral or multilateral negotiations in lieu of extending automatic, nonreciprocal 91 19 U.S.C. §2463(c). 15 C.F.R. 2007.0(b). 93 In some product categories, imports under GSP account for 25% or more of total U.S. imports, including leather (45% of all U.S. leather imports), jewelry and jewelry parts (43%), ferroalloys (36%), copper wire (25%), and aluminum (25%). 94 Women in International Trade (WIIT) event, “The Value of Attending a World Trade Organization Ministerial Conference,” January 20, 2006. 95 “Sen. Grassley Warns Brazil, India, on GSP; Stops Short of Predicting Graduation,” Inside U.S. Trade, May 19, 2006. 92 Congressional Research Service 20 Generalized System of Preferences: Background and Renewal Debate benefits such as the GSP. Others have also charged that some of the more advanced BDCs have obstructed multilateral trade talks, especially in the WTO Doha Round. Some Members are reportedly becoming more skeptical about the efficacy of any further trade concessions as they hear from constituents about lost jobs and other domestic hardships attributed to global competition.96 Other Members assert that extension and expansion of these programs “will send a signal to developing countries that we will stand with them as they grow.”97 Erosion of Preferential Margins Developing countries have expressed concern about the overall progressive erosion98 of preferential margins as a result of across-the-board tariff negotiations within the context of multilateral trade negotiations such as the Doha Round. In 1997, a study prepared by the Organization for Economic Cooperation and Development (OECD) found that the degree of erosion of preferences resulting from Uruguay Round (1986-1994) tariff concessions by the Quad countries (Canada, European Union, Japan, United States) was indeed significant.99 Some economists point out that if multilateral rounds of tariff reductions continue, the preference may disappear completely unless GSP tariff headings are expanded to include more “import-sensitive” products.100 One example of present concern of preference erosion is the aforementioned group of business and NGO groups that have proposed providing duty-free, quota-free (DFQF) U.S. market access to all least-developed countries. However, many sub-Saharan African countries have expressed concern that an approach like this could place them in direct competition for U.S. market share with countries like Bangladesh, thus diluting the value of the preferential treatment that they receive through the African Growth and Opportunity Act (AGOA).101 Other economists say that preference erosion could be more than outweighed by the benefits of increased market access, even for developing countries, brought about by multilateral trade liberalization.102 These economists say that, rather than continuing GSP and other preferential programs (either through inertia or concern that removing them would be seen as “acting against” 96 Washington International Trade Association (WITA) event. “The 2006 Congressional Trade Agenda,” February 15, 2006. 97 “Rangel Bill Would Extend Trade Benefits for Developing Countries,” Press Release, March 30, 2006. 98 While overall multilateral preferences may be eroding, the tariff benefits for individual items is still quite significant. For example, the U.S. tariff on flashlights (eligible for duty-free access for all BDCs) is 12.5% ad valorem. Some GSPeligible jewelry items have tariffs as high as 13.5%. 99 Organization for International Cooperation and Development, Market Access for the Least-Developed Countries: Where are the Obstacles? Published by World Trade Organization, WT/LDC/HL/19, October 21, 1997, Table 12, p. 47. The study estimated that in 1997, the loss in the Canadian market was approximately 71%, in the EU 26%, in Japan 34%, and in the United States, 50% (hereinafter OECD study). 100 Sanchez Arnau, Juan C. The Generalized System of Preferences and the World Trade Organization, London: Cameron May, Ltd., 2002, p. 282. 101 Alliance to End Hunger, et al. Letter to House Ways and Means and Senate Finance Chairs and Ranking Members, April 22, 2009. 102 Baldwin, R.E. and Murray, T. “MFN Tariff Reductions and Developing Country Trade Benefits Under the GSP,” Economic Journal 87:345, March 1977, p. 46. Congressional Research Service 21 Generalized System of Preferences: Background and Renewal Debate the world’s poorest populations), a better approach might be to “assist them in addressing the constraints that really underlie their sluggish trade and growth performance.”103 Under-Utilization of GSP Some who oppose the GSP program say that the proportionately small amount of trade entering under the GSP means that the program is underused, and therefore easily eliminated. Some supporters agree that this is especially true for many least-developed country beneficiaries, who historically are not large users of the preference. Others have suggested that the GSP may not be used by some countries because they are unfamiliar with the program, because some BDC governments do a poor job of promoting the existence of available opportunities under the preference, because of the lack of available infrastructure (for example, undeveloped or damaged roads and ports that impede the efforts to get goods into the international market), or a combination of all of these factors.104 One option for addressing these factors is assistance through U.S. trade capacity building efforts. Trade as Foreign Assistance No other U.S. preference program is more broadly based or encompasses as many countries as the GSP. As a result, the GSP program is supported by many observers who believe that it is an effective, low-cost means of providing economic assistance to developing countries. They maintain that encouraging trade by private companies through the GSP stimulates economic development much more effectively than intergovernmental aid and other means of assistance.105 Economic development assistance through trade is a long-standing element of U.S. policy, and other trade promotion programs such as the AGOA and the Caribbean Basin Trade Partnership Act (CBTPA) are also based on this premise. One example of support for GSP renewal occurred in April 2009, when a coalition of nongovernmental organizations (NGOs) working to reduce world poverty and U.S. businesses interested in including developing countries in their sourcing plans, urged USTR Ron Kirk to “seek timely renewal of expiring preference programs for those countries found to fulfill each program’s eligibility criteria and to initiate review and reform of existing U.S. preference programs.”106 The coalition mentioned that preference programs, like GSP, help to spur muchneeded economic development and opportunity, and that quick renewal could help cushion beneficiary countries from the economic impact brought about by declines in trade flows during the global economic crisis.107 The coalition also spoke to the effectiveness of preference programs 103 OECD study, p. 27. U.S. General Accountability Office. International Trade: U.S. Trade Preference Programs Provide Important Benefits, But a More Integrated Approach Would Better Ensure that Programs Meet Shared Goals. GAO 08-443, March 2008., pp.33-35 (Hereinafter, 2008 GAO Report). 105 September 21, 2006 DC Bar meeting. 106 Letter to United States Trade Representative Ron Kirk on renewal of trade preferences, signed by representatives of the Alliance to End Hunger, the American Apparel and Footwear Association, the Business Roundtable, and other business groups and NGOs, April 22, 2009. 107 Ibid. 104 Congressional Research Service 22 Generalized System of Preferences: Background and Renewal Debate in helping to address development challenges while taking into account the needs of U.S. companies and workers.108 Conditionality of Preferences Some supporters of the GSP and other non-reciprocal preferences assert that the conditions required (such as worker rights and intellectual property requirements) for GSP qualification provide the United States with international political leverage that can be used to preserve U.S. foreign and commercial interests.109 However, some beneficiary countries actively object to these “country practice” provisions and regard them as penalties. Some countries (such as Brazil and India), that have been targeted for GSP eligibility review in the past, perceive that such action indicates that they are being penalized for advocating for their own national development goals in multilateral talks.110 Some U.S. intellectual property industry representatives, worker rights groups, and other constituencies oppose what they perceive to be the U.S. administration’s inconsistent enforcement of these provisions. For example, one lobbying group expressed that they were “shocked and dumbfounded” that the GSP is being annually renewed for such countries as Brazil, Russia, and Venezuela in spite of intellectual property rights violations.111 This domestic opposition may indicate that, at times, the GSP as a tool is of limited usefulness. According to the USTR, however, U.S. officials favor working with beneficiary countries during country practice reviews to actively address compliance issues before removing a country from eligibility. Between 2001 and 2006, one country was removed from eligibility for GSP because of intellectual property rights concerns but was reinstated a few years later after taking steps to resolve the problem.112 Lower Costs of Imports U.S. importers of goods who import components, parts, or materials duty-free under the GSP maintain that the preference results in lower costs for these intermediate goods which, in turn, can be passed on to consumers. In a May 1, 2006, letter to the House Ways and Means and Senate Finance Committees, a coalition of importers and retailers warned that if the GSP was allowed to expire, or if its benefits were reduced, it “would impose a costly hardship on not only beneficiary countries, but their American customers as well.”113 Industry representatives mentioned that smaller domestic manufacturers who regularly import inputs under the preference may be especially affected by a lapse or expiration of the program because they are less able to adjust to the increased costs that would result.114 108 Ibid. The Coalition for GSP. The U.S. Generalized System of Preferences Program: An Integral Part of the U.S. Economy. January 1997, p. 3. 110 September 6, 2006 public comment letter to USTR from ActionAid International USA. 111 “Grassley Throws Up Obstacle to Trade-Preference Renewal.” Congress Daily, September 18, 2006. 112 United States Government Accountability Office, U.S. Trade Preference Programs: An Overview of Use by Beneficiaries and U.S. Administrative Reviews. GAO-07-1209, September 2007, p. 4. 113 “U.S. Retailers, Importers Push for GSP Renewal Despite Opposition,” Inside U.S. Trade, May 5, 2006. 114 Discussion with officials of the Joint Industry Group, August 18, 2006. 109 Congressional Research Service 23 Generalized System of Preferences: Background and Renewal Debate Even though most U.S. producers are shielded by the automatic safeguards triggered by increased imports under the GSP, some U.S. manufacturers and workers might be adversely affected by the program due to CNL waivers.115 For example, in 2010, Exxel Outdoors, a U.S. company that manufactures certain non-down sleeping bags, petitioned for their removal from GSP eligibility, claiming that their business operations were being harmed by imports of duty-free sleeping bags from Bangladesh under the GSP program.116 These sleeping bag categories were ultimately removed from GSP duty-free treatment in January 2012.117 However, results of U.S. manufacturers have not always been successful. For example, in 2004, three U.S. producers of titanium complained that the Bush Administration refused to terminate duty-free market access for wrought titanium (ordinarily subject to a 15% duty assessment), despite a petition asking the government not to waive the import limits. Russian imports of titanium were allowed to continue to enter duty-free under the presidential waiver even though its sales made up more than 60% of U.S. imports.118 Conclusion and Options for Congress The U.S. GSP program, as established by Title V of the Trade Act of 1974 was last extended through July 31, 2013, in P.L. 112-40, for all GSP beneficiary countries not covered by the African Growth and Opportunity Act (AGOA).119 Therefore, Congress may once again consider its extension during the 113th Congress. The African Growth and Opportunity Acceleration Act of 2004 (P.L. 108-274) had previously authorized an extension of GSP preferences for all beneficiary developing sub-Saharan African countries under the African Growth and Opportunity Act (AGOA) through September 30, 2015, therefore, whether or not the GSP program is renewed with respect to other countries, GSP benefits will continue to be extended to all AGOA countries until that date.120 Several options are available to Congress with respect to the treatment of the GSP program. As explained more fully below, Congress could allow the GSP program to expire, support reciprocal tariff and market access benefits through free trade agreements, renew the GSP for leastdeveloped beneficiaries only, renew the existing program for all beneficiaries without major amendments, or extend the program in a modified form. Although the GSP is a unilateral and non-reciprocal tariff preference, any changes to the program would need to be considered in light of the requirements of the WTO Enabling Clause, as it has been interpreted by the WTO Appellate Body. At a minimum, the United States would need to notify—and possibly consult with—other WTO members regarding any withdrawal or modification of GSP benefits, as required by paragraph 4 of the Clause. The United States could also pursue a WTO waiver were any modifications of the GSP program considered not to comport fully with U.S. WTO obligations. 115 19 U.S.C. § 2463(c). “Sleeping Bags Removed from GSP after USTR Administrative Review,” Inside U.S. Trade, January 5, 2012. 117 77 Federal Register 1549, January 10, 2012. 118 “Administration Decides to Keep Russian GSP Benefits for Titanium,” Inside U.S. Trade, July 9, 2004. 119 As of January 1, 2012, there are 38 AGOA beneficiaries. 120 19 U.S.C. §2466b, as amended by Section 7 of the AGOA Acceleration Act of 2004 (P.L. 108-274). 116 Congressional Research Service 24 Generalized System of Preferences: Background and Renewal Debate Allow GSP To Expire The GSP statute will automatically expire for all beneficiary developing countries (except for AGOA-eligible countries) on July 31, 2013.121 No legislative action would be required if Congress were to allow the expiration of GSP for beneficiary developing countries not otherwise granted GSP benefits through other preferential programs (such as AGOA). Some in Congress assert that if the GSP were not renewed, it could spur positive movement in multilateral negotiations, such as the now-stalled DDA. This position was presented during the 2006 renewal debate by then-House Ways and Means Chairman Representative Bill Thomas and then-Senate Finance Committee Chairman Senator Charles Grassley.122 A similar position was also advocated in early 2002 when, while testifying on intellectual property issues, then-USTR Robert B. Zoellick mentioned that “the threat of loss of GSP ... benefits has proven to be an effective point of leverage with some of our trading partners.”123 Other observers indicate, however, that if GSP were allowed to expire, or be otherwise modified through country graduation or limitations on CNL waivers, these actions might also weaken the hand of U.S. negotiators because GSP could no longer be used as an incentive for participation. Many developing nations already perceive the United States as generally unwilling to accept multilateral efforts to grant additional “special and differential treatment” for developing country WTO members unless more reciprocal concessions for improved market access are made for U.S. products. They say that GSP expiration could cause the negotiating positions of developing countries to harden, rather than soften, as they seek to make up for these lost benefits through the negotiations. These observers say that the United States could also lose substantial leverage in addressing important trade-related foreign policy and development concerns that beneficiary nations must accept prior to BDC designation. Furthermore, interested domestic and international parties may now file petitions requesting the USTR to review the GSP status of BDCs based on the eligibility criteria in the statute (e.g., worker rights practices). If the GSP program were no longer in effect, these avenues of encouraging certain developing country practices would no longer be available.124 Additionally, some domestic manufacturers, such as the U.S. automobile industry, could be additionally impacted by GSP expiration or modification, due to dependence on duty-free (thus lower-cost) manufacturing inputs imported under the preference, such as brake parts, vehicle transmissions, and tires. Smaller businesses could be disproportionately affected because they are less able to adjust to increased costs of factors of production. On the other hand, some U.S. manufacturers of import-competing products might, at least marginally, benefit. 121 19 U.S.C. § 2465. “Thomas Urges USTR to Shift from Lagging Doha Round Completing FTAs,” Inside U.S. Trade, April 7, 2006. 123 U.S. Senate, Committee on Foreign Relations, “Examining the Theft of American Intellectual Property at Home and Abroad.” Hearing, February 12, 2002, S. Hrg. 107-457. 124 15 C.F.R. 2007.0(b). 122 Congressional Research Service 25 Generalized System of Preferences: Background and Renewal Debate Scrap GSP in Favor of Free-Trade Agreements or Regional Trading Arrangements Some Members of Congress have suggested that the GSP should be abandoned in favor of free trade agreements (FTAs) or regional trading arrangements (RTAs) that would provide the United States with reciprocal benefits. Such arrangements could provide additional markets for U.S. exports, as well as stimulate the growth of industries in developing-country trading partners. Thus, U.S. exporters, as well as importers, could benefit from reciprocal tariff concessions. Since these tariff concessions under these agreements would probably apply to many more goods and industries than are covered by the existing GSP program, they might increase the likelihood of across-the-board economic stimulation in the developing country trading partner. In addition, absent a favorable conclusion to WTO negotiations, FTAs and RTAs could also be used as a way to lead countries toward further multilateral trade liberalization. However, such reciprocal agreements could actually harm import-competing U.S. manufacturers more than unilateral preferences under the GSP, because automatic safeguards written into the statute, such as competitive need limitations, might no longer apply. Any such agreement could also involve a greater number of U.S. tariff concessions, thus certain import-sensitive items ineligible for GSP status could also be on the table. On the other hand, other U.S. manufacturers might benefit from the increased market access that an FTA or RTA would provide. Some developing countries could also be put at a greater disadvantage in free-trade or regionaltrade agreement negotiations because they are ill-equipped to implement the additional standards that accompany a comprehensive U.S. free trade agreement.125 For example, some countries such as South Africa and other countries in the South African Customs Union (SACU) have been unsuccessful in the past when negotiating such agreements with the United States due to their inability to conform to these standards. In addition, since the GSP is the largest U.S. preferential trading program, some developing countries that currently receive GSP benefits could easily be left out of such agreements, either because their markets are of little commercial value to U.S. interests, or because time constraints involved in the negotiating process do not make it worthwhile for U.S. negotiators to include them. Authorize GSP Only for Least-Developed Countries Some in Congress favor modifying the GSP so that the benefits apply only to least-developed beneficiaries. Since many African least-developed beneficiaries126 will continue to receive the GSP preference until mid-2015 under AGOA, an LDC-only GSP extension, if applied in mid2013,at least in the short term, would apply to the following LDCs: Afghanistan, Bangladesh, Bhutan, Cambodia, Central African Republic, Guinea-Bissau, Haiti,127 Kiribati, Madagascar, 125 Vamvakidis, Ahtanasios, “Regional Trade Agreements or Broad Liberalization: Which Path Leads to Faster Growth?” IMF Staff Papers, Vol. 46:1, March 1999, p. 42. 126 These least-developed African countries are: Angola, Benin, Burkina Faso, Burundi, Chad, Comoros, Congo (Kinshasa), Djibouti, Ethiopia, The Gambia, Guinea, Lesotho, Liberia, Malawi, Mauritania, Mozambique, Niger, Rwanda, Sao Tome and Principe, Senegal, Sierra Leone, South Sudan, Tanzania, Togo, Uganda, and Zambia. 127 Haiti was recently provided additional preference benefits through the Haiti Economic Lift Act of 2010 (P.L. 111171). See CRS Report RL34687, The Haitian Economy and the HOPE Act, by J. F. Hornbeck. Congressional Research Service 26 Generalized System of Preferences: Background and Renewal Debate Nepal, Samoa, The Solomon Islands, Somalia, Tuvalu, Vanuatu, and Yemen.128 Of these countries, three, Nepal, Samoa, and Yemen, would likely benefit more than the others, because they are the only least developed beneficiaries in the group that currently export goods under GSP that account for more than 7% of their total imports to the United States. Therefore, if the GSP program were to be renewed and extended to LDCs only (absent any other modifications), these three countries, at least initially, would be the primary beneficiaries. Arguably, U.S. efforts through trade capacity building could help other LDCs take greater advantage of the preference. Modify GSP Another possible approach for Congress would be to modify the Generalized System of Preferences scheme as it applies to all beneficiary developing countries, including leastdeveloped countries. Some of these options would have the effect of narrowing the application of the GSP program, while others would expand it. Restrict Application of Preferences The following is a list of possible approaches if Congress desired to extend, but further restrict, imports under the GSP: • Refine statutory criteria for GSP treatment. For example, make the existing discretionary criteria mandatory requirements. • Strengthen the requirement that benefits under the preference may (or must) be terminated for non-compliance with mandatory or discretionary criteria. Add additional criteria to include movement toward sustainable development or environmental preservation. • Reconsider criteria for graduation of countries from GSP, or strengthen the provision that allows graduation of individual industries within beneficiary countries. For example, the President could be required to grant BDC status only if a country (1) complies with all mandatory requirements and (2) has a percapita income below a certain level. • Modify the rules of origin requirement for qualifying products to require that a greater percentage of the direct costs of processing operations (currently 35%)129 originate in beneficiary developing countries. • Lower the threshold at which the President may (or must) withdraw, suspend, or limit the application of duty-free treatment of certain products (competitive need limitation).130 128 The Central African Republic, Guinea-Bissau, Madagascar, Mali, and Somalia are not designated as beneficiary sub-Saharan African countries in 2013, but retain their GSP eligibility. 129 19 U.S.C. §2463(a)(2)(A)(ii)(II). The statute further specifies that a product may be made in one BDC or any two or more such countries that are members of the same designated association of countries. For beneficiary countries under AGOA, this percentage may also include up to 15% (as to value) of U.S. origin (19 U.S.C. §2466a(b)(2)). 130 19 U.S.C. §2463(c). Congressional Research Service 27 Generalized System of Preferences: Background and Renewal Debate • Require the President to more frequently and actively monitor (currently an annual process) the economic progress of beneficiary countries, as well as compliance with mandatory and discretionary criteria. • Weed out countries considered “unfriendly” to U.S. interests, such as Venezuela, India, and Brazil. Expand Application of GSP Were Congress to expand or enhance application of the GSP, the following options could be exercised: 131 • Expand the list of tariff lines permitted duty-free access. Allow some “import sensitive” products (in which developing countries often have a competitive advantage) to receive preferential access. • Improve rule of origin requirements to provide more predictability. Current rules provide no measurable definition of “substantial transformation,” therefore, U.S. officials often make eligibility decisions on a case-by-case basis. Thus, BDCs sometimes have no predictable way of knowing before shipment whether certain foreign components can be included as part of the 35% domestic content.131 • Eliminate competitive need limitations or raise the thresholds that trigger them. • Ensure uniform application of country practice requirements, or eliminate them. 2008 GAO Report, p. 55. Congressional Research Service 28 Generalized System of Preferences: Background and Renewal Debate Appendix A. Trade Statistics Table A-1. Leading U.S. Product Imports Under GSP, 2010 HTS MFN Tariff Rate Description Value of Imports Under GSP (actual U.S. $) 27090020 10.5 cents/bbl Petroleum oils and oils from bituminous minerals, crude, testing 25 degrees A.P.I. or more $4,696,304,004 27090010 5.25 cents/bbl Petroleum oils and oils from bituminous minerals, crude, testing under 25 degrees A.P.I. $736,731,150 71131150 5% Silver articles of jewelry and parts thereof, not elsewhere specified or indicated, valued over $18 per dozen pieces or parts $598,381,383 40111010 4% New pneumatic radial tires, of rubber, of a kind used on motor cars (including station wagons and racing cars) $494,605,939 76061230 3% Aluminum alloy, plates/sheets/strip, w/thick. o/0.2mm, rectangular (incl. sq), not clad $398,345,686 72024100 1.9% Ferrochromium containing by weight more than 4% of carbon $376,940,924 72023000 3.9% Ferrosilicon manganese $247,137,897 40112010 4% New pneumatic radial tires, of rubber, of a kind used on buses or trucks $230,404,109 21069099 6.4% Food preparations not elsewhere specified or included, not canned or frozen $217,386,372 71131929 5.5% Gold necklaces and neck chains (o/than of rope or mixed links) $205,974,798 72022150 1.5% Ferrosilicon containing by weight more than 55% but not more than 80% of silicon, not otherwise specified or indicated $197,786,992 40151910 3% Seamless gloves of vulcanized rubber other than hard rubber, other than surgical or medical gloves $186,540,232 17011110 1.4606¢/kg less 0.020668¢/kg for each degree under 100 degrees (and fractions of a degree in proportion) but not less than 0.943854¢/kg Cane sugar, raw, in solid form, not containing added flavoring or coloring matter, not otherwise specified or indicated, described in additional U.S. note 5 (Chapter 17) and provisional $185,649,026 71131950 5.5% Precious metal (other than silver) articles of jewelry and parts thereof, whether or not plated or clad with precious metal, not elsewhere specified or indicated $160,490,974 Congressional Research Service 29 Generalized System of Preferences: Background and Renewal Debate HTS 68029900 MFN Tariff Rate 6.5% Description Monumental or building stone and arts thereof, not otherwise specified or indicated, further worked than simply cut/sawn, not otherwise specified or indicated Value of Imports Under GSP (actual U.S. $) $145,900,293 Source: USITC Trade Dataweb, http://dataweb.usitc.gov, and Harmonized Tariff Schedule, 2009. Notes: Imports for consumption, actual U.S. dollars. Tariff rates are ad valorem unless otherwise specified. Table A-2. Leading Product Imports Under GSP, 2011 HTS MFN Tariff Rate Description Value of Imports Under GSP (actual U.S. $) 71131150 5% Silver articles of jewelry and parts thereof, not elsewhere specified or indicated, valued over $18 per dozen pieces or parts $665,294,807 76061230 3% Aluminum alloy, plates/sheets/strip, with thickness over 0.2mm, rectangular (including square), not clad $492,083,242 40111010 4% New pneumatic radial tires, of rubber, of a kind used on motor cars (including station wagons and racing cars) $409,181,627 40112010 4% New pneumatic radial tires, of rubber, of a kind used on buses or trucks $386,108,113 72024100 1.9% Ferrochromium containing by weight more than 4% of carbon $386,025,268 27090020 10.5 cents/bbl Petroleum oils and oils from bituminous minerals, crude, testing 25 degrees A.P.I. or more $345,610,422 72023000 3.9% Ferrosilicon manganese $278,647,336 17011110 1.4606¢/kg less 0.020668¢/kg for each degree under 100 degrees (and fractions of a degree in proportion) but not less than 0.943854¢/kg Cane sugar, raw, in solid form, without added flavoring or coloring, subject to additional U.S. note 5 to Chapter 17 $273,562,956 21069099 6.4% Food preparations not elsewhere specified or indicated, not canned or frozen $259,827,557 40151910 3% Seamless gloves of vulcanized rubber other than hard rubber, other than surgical or medical gloves $224,215,926 Congressional Research Service 30 Generalized System of Preferences: Background and Renewal Debate HTS MFN Tariff Rate Description 69091950 5.8% Ceramic wares for laboratory, chemical or other technical uses (other than of porcelain or china), not elsewhere specified or indicated 84099991 2.5% Parts, not elsewhere specified or indicated, used solely or principally with the engines of heading 8408, for vehicles of heading 8701.20, 8702, 8703, 8704 Value of Imports Under GSP (actual U.S. $) $203,297,127 $156,178,555 79011100 1.5% Zinc (other than alloy), unwrought, containing over 99.99% by weight of zinc $154,406,565 87083050 2.5% Parts & accessories of motor vehicles of 8701, not elsewhere specified or indicated, and 8702-8705, brakes and servo-brakes & parts thereof $145,209,650 Source: USITC Trade Dataweb, http://dataweb.usitc.gov, and Harmonized Tariff Schedule, 2012. Notes: Imports for consumption, actual U.S. dollars. Tariff rates are ad valorem unless otherwise specified. The GSP was not renewed until October 21, 2011. The program was renewed retroactively for all those entries made between January 1, 2011 and November 5, 2011 (the 15th day after enactment of the Act, the day the GSP renewal entered into force). Countries were given 180 days after enactment to apply for the preference to be granted retroactively (until April 28, 2012) on shipments to the United States. Therefore, the figures for 2011 may be incomplete. Congressional Research Service 31 Generalized System of Preferences: Background and Renewal Debate Table A-3. Leading GSP Beneficiaries and Total, 2010 Rank Beneficiary Developing Country GSP Duty-Free Imports ($ millions) Total Imports ($ millions) 1 Thailand $3,612 $22,653 2 Angola $3,544 $11,779 3 India $3,482 $29,614 4 Brazil $2,124 $23,402 5 Indonesia $1,856 $16,330 6 Equatorial Guinea $1,275 $2,324 7 South Africa $1,200 $8,199 8 Philippines $913 $7,958 9 Turkey $793 $4,180 10 Russia $578 $25,199 11 Argentina $529 $3,739 12 Chad $454 $2,038 13 Congo (DROC) $247 $435 14 Pakistan $165 $3,491 15 Colombia $159 $15,673 Imports from Top 15 Beneficiaries $21,585 $43,027 Total Imports from all Beneficiaries $22,554 $303,178 Source: USITC Trade Dataweb, http://dataweb.usitc.gov. Table A-4. Leading GSP Beneficiaries, 2011 Rank Beneficiary Developing Country GSP Duty-Free Imports ($ millions) Total Imports ($ millions) 1 India $3,736 36,003 2 Thailand $3,720 24,687 3 Brazil $2,059 30,368 4 Indonesia $1,965 19,064 5 South Africa $1,333 9,473 6 Philippines $1,134 9,112 7 Turkey $895 5,185 8 Russia $575 33,610 9 Argentina $477 4,525 10 Colombia $384 22,391 11 Angola $300 13,756 Congressional Research Service 32 Generalized System of Preferences: Background and Renewal Debate Rank Beneficiary Developing Country GSP Duty-Free Imports ($ millions) Total Imports ($ millions) 12 Yemen $156 $536 13 Ecuador $147 $9,500 14 Sri Lanka $135 $2,080 15 Namibia $134 $436 Imports from Top 15 GSP Beneficiaries $17,150 $220,726 Total Imports from all GSP Beneficiaries $18,539 $365,902 Source: USITC Trade Dataweb, http://dataweb.usitc.gov, and Harmonized Tariff Schedule, 2012. Notes: Imports for consumption, actual U.S. dollars. Tariff rates are ad valorem unless otherwise specified. The GSP was not renewed until October 21, 2011. The program was renewed retroactively for all those entries made between January 1, 2011, and November 5, 2011 (the 15th day after enactment of the Act, the day the GSP renewal entered into force). Countries were given 180 days after enactment to apply for the preference to be granted retroactively (until April 28, 2012) on shipments to the United States. Therefore, the figures for 2011 may be incomplete. Congressional Research Service 33 Generalized System of Preferences: Background and Renewal Debate Appendix B. GSP Implementation and Renewal Table B-1. GSP Implementation and Renewal, 1974-2013 Public Law Effective Date Date Expired Notes P.L. 93-618, Title V, Trade Act of 1974 January 2, 1975 January 2, 1985 Statute originally enacted. P.L. 98-573, Title V, Trade and Tariff Act of 1984 October 30, 1984 July 4, 1993 Substantially amended and restated. P.L. 103-66, Section 13802 (in Omnibus Budget Reconciliation Act, 1993) August 10, 1993 September 30, 1994 Extended retroactively from July 5, 1993 to August 10, 1993. Also struck out reference to “Union of Soviet Socialist Republics” P.L. 103-465, Section 601 Uruguay Round Agreements Act December 8, 1994 July 31, 1995 Extended retroactively from September 30, 1994 to December 8, 1994. No other amendments to provision. P.L. 104-188, Subtitle J, Section 1952 GSP Renewal Act of 1996 (in Small Business Job Protection Act of 1996) October 1, 1996 (for GSP renewal only) May 31, 1997 Substantially amended and restated. Extended retroactively from August 1, 1995 to October 1, 1996. P.L. 105-34, Subtitle H, Section 981 (in Taxpayer Relief Act of 1997) August 5, 1997 June 30, 1998 Extended retroactively from May 31, 1997 to August 5, 1997. No other amendments to provision. P.L. 105-277, Subtitle B, Section 101 (in Omnibus Consolidated and Emergency Supplemental Appropriations, 1999) October 21, 1998 June 30, 1999 Extended retroactively from July 1, 1998 to October 21, 1998. No other amendments to provision. P.L. 106-170, Section 508, (in Ticket to Work and Work Incentives Act of 1999) December 17, 1999 September 30, 2001 Extended retroactively from July 1, 1999 to December 17, 1999. No other amendments to provision. P.L. 107-210, Division D, Title XLI Trade Act of 2002 August 6, 2002 December 31, 2006 Extended retroactively from September 30, 2001, to August 6, 2002. Amended to (1) include requirement that BDCs take steps to support efforts of United States to combat terrorism and (2) further define the term “internationally recognized worker rights.” P.L. 109-432, Title VIII December 31, 2006 December 31, 2008 Extended before program lapse. P.L. 110-436, Section 4 October 16, 2008 December 31, 2009 Extended before program lapse. Congressional Research Service 34 Generalized System of Preferences: Background and Renewal Debate Public Law Effective Date Date Expired Notes P.L. 111-124 December 28, 2009 December 31, 2010 Extended before program lapse. P.L. 112-40 November 5, 2011 July 31, 2013 Extended retroactively from December 31, 2010 to November 5, 2011. Source: CRS analysis using the Legislative Information System (LIS). Congressional Research Service 35 Generalized System of Preferences: Background and Renewal Debate Appendix C. GSP Beneficiary Countries Table C-1.Beneficiary Developing Countries and Regions for Purposes of the Generalizes System of Preferences as of January 2013 Independent Countries AfghanistanA+ Ecuador Macedonia, Former Yugoslav Republic of Senegal Albania Egypt MadagascarA+ Serbia Algeria Eritrea MalawiA+ Seychelles AngolaA+ Ethiopia A+ Maldives Sierra LeoneA+ Armenia Fiji MaliA+ Solomon Islands A+ Azerbaijan Gabon MauritaniaA+ SomaliaA+ BangladeshA+ Gambia, TheA+ Mauritius South Africa Belize Georgia Moldova South Sudan A+ BeninA+ Ghana Mongolia Sri Lanka BhutanA+ Grenada Montenegro Suriname BoliviaJ GuineaA+ MozambiqueA+ Swaziland Bosnia and Hercegovina Guinea-BissauA+ Namibia TanzaniaA+ Botswana Guyana NepalA+ Thailand Brazil HaitiA+ NigerA+ Timor-Leste A+ Burkina FasoA+ India Nigeria TogoA+ BurundiA+ Indonesia Pakistan Tonga CambodiaA+ Iraq Panama Tunisia Cameroon Jamaica Papua New Guinea Turkey Cape Verde Jordan Paraguay TuvaluA+ Central African RepublicA+ Kazakhstan Philippines UgandaA+ ChadA+ Kenya Russia Ukraine ComorosA+ KiribatiA+ RwandaA+ Uruguay Congo (Brazzaville) Kosovo St. Kitts and Nevis Uzbekistan Congo (Kinshasa) A+ Kyrgyzstan Saint Lucia VanuatuA+ Cote d’Ivoire Lebanon Saint Vincent and the Grenadines Venezuela DjiboutiA+ LesothoA+ SamoaA+ Republic of YemenA+ Dominica LiberiaA+ Sao Tome and PrincipeA+ ZambiaA+ Zimbabwe Congressional Research Service 36 Generalized System of Preferences: Background and Renewal Debate Non-Independent Countries and Territories Anguilla Gibraltar Saint Helena British Indian Ocean Territory Heard Island and McDonald Islands Tokelau Christmas Island (Australia) Montserrat Turks and Caicos Islands Cocos (Keeling) Islands Niue Virgin Islands, British Cook Islands Norfolk Island Wallis and Fortuna Falkland Islands (Islas Malvinas) Pitcairn Islands West Bank and Gaza Strip Western Sahara Associations of Countries (treated as one country) Member Countries of the Cartagena Agreement (Andean Group) Bolivia Ecuador Venezuela Qualifying Member Countries of the Association of South East Asian Nations (ASEAN) Cambodia Indonesia Philippines Thailand Member Countries of the West African Economic and Monetary Union (WAEMU) Benin Burkina Faso Cote d’Ivoire Guinea-Bissau Mali Niger Senegal Togo Qualifying Member Countries of the Southern Africa Development Community (SADC) Botswana Mauritius Tanzania Qualifying Member Countries of the Caribbean Common Market (CARICOM) Belize Dominica Grenada Guyana Jamaica Montserrat St. Kitts and Nevis Saint Lucia Saint Vincent and the Grenadines Qualifying Member Countries of the South Asian Association for Regional Cooperation (SAARC) Afghanistan Bangladesh Bhutan India Nepal Pakistan Sri Lanka Source: Harmonized Tariff Schedule, January 2013. Notes: A+ indicates Least-Developed Countries. Congressional Research Service 37 Generalized System of Preferences: Background and Renewal Debate Author Contact Information Vivian C. Jones Specialist in International Trade and Finance vcjones@crs.loc.gov, 7-7823 Congressional Research Service 38