Generalized System of Preferences

Generalized System of Preferences

Order Code 97-389 E
Report for Congress
Received through the CRS Web
Generalized System of Preferences
Updated August 12, 2002
William H. Cooper
Specialist in International Trade and Finance
Foreign Affairs, Defense, and Trade Division
Congressional Research Service ˜ The Library of Congress

Generalized System of Preferences
Summary
The Generalized System of Preferences (GSP) extends duty-free treatment to
certain products that are imported from designated developing countries. The
primary purpose of the program, which the United States and other industrial
countries initiated in the 1970s, is to promote economic growth and development in
these countries by stimulating their exports. The program had expired on September
30, 2001. However, on July 27, 2002, the House passed (215-212) the conference
report on H.R. 3009 (H. Rept. 107-624), the Trade Act of 2002, which contained
reauthorization of GSP retroactively from September 30, 2001 to December 31,
2006. The Senate passed the report (64-34) on August 1, 2002, and President Bush
signed it into law (P.L. 107-210) on August 6, 2002.
U.S. companies and consumers who use products that benefit from duty-free
treatment are strong supporters of legislation to reauthorize GSP. They argue that
GSP reduces costs of production for companies that import components and parts
under the program and lowers the prices that consumers pay. The program is also
supported by observers who think that GSP is an effective, low-cost means of
providing economic help to developing countries. They maintain that encouraging
trade by private companies stimulates economic development more effectively than
intergovernmental aid and other means of assistance.
There are several sources of opposition to GSP. Import-competing producers
complain that preferential tariff treatment generates unfair competition. Others are
concerned about the effects of GSP on the exporting countries. Some criticize the
program for benefitting higher income developing countries disproportionately and
providing too little assistance to the poorest countries. Some observers are concerned
that tariff preferences may encourage inefficient trade and production patterns in the
developing countries. Other critics maintain that U.S. officials have not vigorously
enforced the country practice provisions, such as protection of intellectual property
rights and observance of worker rights, which are required by the law. This report
will be updated as events warrant.

Contents
Rationale for GSP . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
The U.S. GSP Program . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
Economic Effects of GSP . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
Effects on Beneficiary Countries . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
Effects on the U.S. Economy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
The Diminishing Effects of GSP . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
Issues for the 107th Congress . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
List of Tables
Table 1. U.S. Imports Under GSP — Leading Beneficiaries
and Total, 2001 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8

Generalized System of Preferences
The Generalized System of Preferences (GSP) provides preferential tariff
treatment to certain products that are imported from designated developing
countries.1 The primary purpose of the program, which the United States and other
industrial countries initiated in the 1970s, is to promote economic growth in
developing countries and countries in transition by stimulating their exports. The
program was reauthorized by the 106th Congress, retroactively from July 1, 1999
through September 30, 2001 and was allowed to expire. However, on July 27, 2002,
the House passed (215-212) the conference report on H.R. 3009 (H. Rept. 107-624),
the Trade Act of 2002, which contained reauthorization of GSP retroactively from
September 30, 2001 to December 31, 2006. The Senate passed the report (64-34)
on August 1, 2002, and President Bush signed it into law (P.L. 107-210) on August
6, 2002.
Rationale for GSP
The United States and other industrial countries2 established the Generalized
System of Preferences in the early 1970s to promote economic development in
developing countries through increased trade. The program extends preferential tariff
treatment — low or zero duties for designated products exported from beneficiary
countries — which provides a competitive advantage in the markets of industrial
countries. It is a unilateral grant of tariff concessions; developing countries are not
required to extend reciprocal tariff reductions. (They must, however, meet certain
conditions.) The program is intended to give preferential tariff treatment to
developing countries until their exporters are able to compete on world markets with
normal, nonpreferential tariffs.
The preferential and unilateral nature of GSP is a departure from the principles
that have guided post-World War II multilateral tariff reductions under the General
Agreement on Tariffs and Trade (GATT). The GATT provides that trade must be
conducted on a nondiscriminatory, or most-favored-nation (MFN), basis. Generally,
members of the World Trade Organization (the organization that replaced the GATT
Secretariat in 1995 and currently administers world trading rules) must extend any
tariff concessions to all trading partners. Tariff reductions under the GATT have also
been based on reciprocity: tariff concessions from each member country are
1 This report was originally written by George Holliday, Specialist in International Trade
and Finance.
2 In addition to the United States, the European Union and 13 other countries —Australia,
Belarus, Bulgaria, Canada, Czech Republic, Hungary, Japan, New Zealand, Norway, Poland,
Slovak Republic, Switzerland, and the Russian Federation — currently have GSP programs.

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reciprocated by concessions from others. Since 1971, however, a GATT waiver has
allowed the industrial countries to extend preferential tariff treatment for developing
countries.
The U.S. GSP Program
Title V of the Trade Act of 1974 (P.L. 93-618), as amended,3 authorizes the U.S.
GSP program. It authorizes the President to provide duty-free treatment for any
eligible product from any beneficiary developing country (BDC) and spells out
criteria for designating eligible countries and products. Currently about 4,600
products from over 140 BDCs are eligible for duty-free treatment under GSP. In
2001, the United States imported $15.8 billion under the program. Petroleum
products, automobile parts, jewelry, and furniture were among the leading imports.
In designating beneficiary countries, the President is directed to take into
account the level of economic development of the country, its commitment to a
liberal trade policy, the extent to which it provides adequate protection of intellectual
property rights, and its observance of internationally recognized workers rights.4 The
law prohibits (with certain exceptions) the President from extending GSP treatment
to other industrial countries, Communist countries, countries that provide preferential
treatment to the products of a developed country, and countries that nationalize or
expropriate the property of U.S. citizens, or otherwise infringe on the property rights
of U.S. citizens. The Trade Act also restricts the President’s discretion in designating
eligible products. It lists categories of import-sensitive products — certain textile
and apparel products, watches, electronic articles, steel products, footwear, glass
products, and other items — that are not eligible for GSP treatment. In addition, the
Act establishes “competitive need limits,” which require the President to suspend
GSP treatment when U.S. imports of a product from a single country reach a
specified threshold value or when 50% of total U.S. imports of the product come
from a single country.
The Trade Act authorizes the President to withdraw GSP treatment for any
article or any country. The program is reviewed annually by a subcommittee of the
Trade Policy Staff Committee (TPSC). It is chaired by the Office of the U.S. Trade
Representative (USTR) and includes representatives from the Departments of
Agriculture, Commerce, Interior, Labor, State, and Treasury. The subcommittee
meets annually to decide which countries are eligible and to consider petitions to add
or remove items from the list of eligible products. The subcommittee also resolves
questions about country practices — trade policies, protection of intellectual property
3 The GSP Program was reauthorized and amended by the Trade and Tariff Act of 1984
(P.L. 98-573). Six subsequent laws have authorized GSP most recently through September
30, 2001. (See discussion below, pp. 7-8)
4 Workers rights are defined by law for the purposes of GSP to include: the right to
association; the right to organize and bargain collectively; a prohibition on the use of any
form of forced or compulsory labor; a minimum age for the employment of children; and
acceptable conditions of work with respect to minimum wages, hours of work, and
occupational safety and health.

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rights, observance of worker rights, and other matters — on which eligibility for GSP
is conditioned. Although some critics maintain that U.S. officials have not
vigorously enforced the country practice provisions, the subcommittee has
occasionally denied benefits because of country practices. In 1994, for example,
Maldives was suspended from the list of beneficiaries because it was not making
sufficient progress in protecting basic labor rights. Some observers maintain that the
threat of losing benefits sometimes persuades beneficiary countries to change
objectionable policies or practices.
The subcommittee also makes recommendations about which products should
be removed from the list because they have become sufficiently competitive or
because they are import-sensitive. Since the law does not clearly define the terms
“import-sensitive,” or “sufficiently competitive,” the subcommittee must make a
judgement on a case-by-case basis for each product. Those who are affected by the
subcommittee’s decisions often complain that the lack of clear definitions or criteria
lead to subjective and inconsistent interpretations on product eligibility.5
The last major statutory change in the U.S. GSP program was enacted August
20, 1996 (P.L. 104-188). The 1996 law included several significant reforms of the
program and an extension of its authority to May 31, 1997. (The program was
extended retroactively because it had expired for over a year.) Among the most
important changes were provisions to redistribute the benefits of GSP among
beneficiary countries. It stipulated that, when the official statistics of the World Bank
demonstrate that a beneficiary developing country has become a “high income”
country, the President would terminate the country’s eligibility for GSP benefits.
(World Bank statistics include countries with per capita incomes of over $8600 in the
“high income” category. Under the previous law, the per capita income threshold for
graduation had been $11,800.) Since the new income per capita threshold is
considerably lower, countries will graduate from GSP sooner. The largest
beneficiaries will not, however, be immediately affected.
Another provision lowered the competitive need limit from $114 million in
1994 to $75 million in 1996 and increased it by $5 million each year after 1996. The
law provided specific authority for the President to designate additional articles from
the least developed beneficiary countries as eligible for GSP. It also prohibited
consideration of an article for GSP treatment for three years following formal
consideration and denial of that article.
5 U.S. General Accounting Office. Assessment of the Generalized System of Preferences
Program. November 1994, pp. 79-81. GAO/GGD-95-9. (Hereafter, cited as GAO.)

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Economic Effects of GSP
The GSP program affects trade flows and production patterns in both
beneficiary developing countries and the industrialized countries. The effects on
both groups of countries, however, are probably not large.
Effects on Beneficiary Countries
Supporters of GSP maintain that it is an effective, low-cost means of providing
economic help to developing countries. They argue that encouraging trade by private
companies stimulates economic development more effectively than government-to-
government aid or other means of assistance.
Empirical studies, based mostly on trade data from the late 1970s and mid-
1980s, provide some support for the view that GSP stimulates development. Most
suggest that GSP has modestly increased the exports of beneficiary countries. One
study, for example, found that the eligible exports of beneficiary countries to the
industrial countries increased by about 8% annually because of GSP.6 The increase
results mostly from creation of new trade opportunities, as relatively low-cost
producers in the beneficiary countries take advantage of lower tariffs to displace
higher cost producers in the markets of the industrialized countries.
The benefits of GSP to developing countries are limited by several features of
the program. In 2001, for example, only about 10% of U.S. imports from beneficiary
countries entered on preferential terms under GSP. Many products that were
technically eligible for GSP treatment were excluded, most often because they
exceeded the competitive need limit of a given product or because they did not meet
the rules of origin requirements of the law.7 Because the list of eligible products can
change and because different countries make different products eligible for GSP, it
is difficult for export industries in the developing countries to specialize to take
advantage of the tariff preferences.
GSP tariff cuts can also result in efficiency and welfare losses for the world
economy. Because GSP reduces tariffs in a discriminatory manner (that is, it favors
some producers in developing countries over other producers), it can divert trade
from more efficient producers in third countries to less efficient producers in
beneficiary countries. Such costs are borne by relatively more efficient producers
6 Laird, Samuel and Andre Sapir. Tariff Preferences. In Finger, J. Michael and Andrzej
Olechowski, eds. The Uruguay Round: A Handbook on the Multilateral Trade Negotiations.
Washington, World Bank, 1987. Pp. 101-109. See also, Sapir, Andre and Lars Lundberg.
The U.S. Generalized System of Preferences and Its Impacts. In Baldwin, Robert E., and
Anne O. Krueger, eds. The Structure and Evolution of Recent U.S. Trade Policy. Chicago,
The University of Chicago Press, 1984. p. 195-231.
7 In 1999, of $22.8 billion in imports that were eligible for GSP, $13.6 billion actually
entered duty free. Other U.S. imports from developing countries entered duty free under
other preferential tariff programs, such as the Caribbean Basin Initiative, or because the
MFN tariff rate is zero.

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who compete with those exporters that benefit from tariff preferences and by
consumers in importing countries.
Trade diversion can harm not only producers in third countries but also the
domestic economy of the beneficiary country. Tariff preferences could encourage
exports of goods for which a country does not have a comparative advantage, thus
distorting the domestic allocation of resources. By diverting resources away from
potentially efficient producers, preferences could, over time, result in reduced exports
and growth. Although the costs of trade diversion are real, the empirical evidence
suggests that trade diversion from GSP is small.8
The lack of reciprocity in the GSP program may also result in long-term costs
for the beneficiary countries. In multilateral trade negotiations, the requirement for
reciprocal tariff reductions means that all signatories reduce their tariffs. By avoiding
reciprocal tariff reductions under GSP, however, some developing countries have
tended to keep in place protectionist, import-substitution trade policies that have
impeded their long-term growth.
Because preferential tariffs under GSP can lead to inefficient production and
trade patterns, most economists prefer multilateral, nondiscriminatory tariff cuts.
When tariffs are reduced in a nondiscriminatory manner, countries tend to produce
and export on the basis of their comparative advantage. That is, countries export
products that they produce relatively efficiently and import products that others
produce relatively efficiently. Multilateral tariff reductions such as those agreed to
in the Uruguay Round of GATT, redistribute the benefits of trade liberalization in
developing countries. Some exporters benefit because they face reduced tariffs in the
industrial countries, while others are hurt because the margin of preference under
GSP is reduced.
Effects on the U.S. Economy
Several factors suggest that the overall effects of GSP on the U.S. economy are
small. First, in 2001, only about 2.2% of total U.S. imports entered duty-free under
GSP. Second, most products that would otherwise have been eligible for GSP did
not come from GSP beneficiaries; they were imported from non-beneficiary countries
at MFN (or normal trade relations) tariff rates. Third, many imports that entered
duty-free under GSP would probably be competitive without preferential rates.
Since, for many products, U.S. MFN rates are not much higher than the GSP rates,
the effects of paying the higher rates would be small. Thus, the U.S. market for most
products is unlikely to be adversely affected by imports under GSP.
Nevertheless, some domestic producers and consumers benefit significantly
from GSP. For some companies that use parts, components, or materials that are
imported under GSP, the reduced tariffs can mean lower costs. Consumers who buy
products imported under GSP or products that are produced with GSP inputs may
benefit from significantly lower prices. Those who benefit from GSP have provided
a strong base of support for the program. Domestic producers who compete with
8 Laird and Sapir, p. 105.

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imports that enter duty free under GSP, however, can bear significant adjustment
costs. Adjustment costs include the costs to workers for retraining and finding new
employment and the costs to firms for retooling to become more competitive or to
shift capital to other uses. Such costs are ameliorated by the exclusion of import-
sensitive products and by the competitive need limits of the program. Nevertheless,
those who compete against GSP imports complain that preferential tariff treatment
generates unfair competition.
The Diminishing Effects of GSP
Two kinds of developments in the world trading system are reducing the effects
of GSP on the U.S. economy and the economies of beneficiary developing countries.
First, as multilateral trade agreements reduce tariffs worldwide, the margin between
the GSP preferential rates and MFN rates becomes smaller. For example, U.S. tariff
rates, which averaged 5.4% on industrial products before the Uruguay Round, will
be reduced to 3.5% when the new reductions are completed. The General
Accounting Office estimates that the value of tariff relief on GSP-eligible products
will be reduced by about 40% under the new reductions.9
Second, the growing number and size of other preferential tariff arrangements
are also diminishing the value of tariff relief under GSP. The United States, for
example, extends duty-free treatment to imports under the North American Free
Trade Agreement, the U.S.-Israeli Free Trade Agreement, the Caribbean Basin
Initiative, the Andean Initiative, and under the African Growth and Opportunity Act.
The Clinton Administration has also proposed an expansion of NAFTA to other
Western Hemisphere nations, and, in the future, the development of a Free Trade
Area of the Americas and elimination of trade barriers in the Asia Pacific region.
The European Union is also expanding its preferential trading arrangements in
Africa, Central and Eastern Europe, and elsewhere. As the number of preferential
tariff agreements expands, the value of tariff preferences under GSP will decline.
That is, beneficiaries of GSP are increasingly either participating in alternative
preferential arrangements or competing with producers who enjoy preferential
treatment under other arrangements.
Issues for the 107th Congress
The GSP program expired on September 30, 2001. On October 5, 2001, the
House Ways and Means Committee marked up and reported out H.R. 3010, which
would have extended the current GSP program to December 31, 2002, retroactively
from September 30, 2001.
On May 23, 2002, the Senate passed a manager’s amendment (S.Amdt. 3401)
in the form of a substitute to H.R. 3009, the House-passed bill to reauthorize the
Andean Trade Preferences Act (ATPA) program. The amendment included
provisions that would have reauthorized GSP retroactively from September 30, 2001,
through December 31, 2006. The amendment would revise the core labor standards
9 GAO, p. 126.

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to which GSP beneficiaries must adhere to include an ILO convention against the
worst child labor practices. The two versions of the bill were then considered by a
House-Senate conference. On July 26, the House-Senate conference on H.R. 3009
reported out a compromise bill (H.Rept.107-624) that would extend GSP until
December 31, 2006, retroactively from September 30, 2001, and included the Senate
bill’s additions to the core labor standards provisions. The House approved the
report (215-212) on July 27, and the Senate passed it (64-34) on August 1. President
Bush signed H.R. 3009 into law on August 6 (P.L. 107-210).

One proposal to alleviate the budgetary constraints is to reduce the costs of the
program by graduating more countries and products. Some critics of the current
program note that a large share of U.S. imports under GSP came from a small
number of more advanced developing countries. The top 10 beneficiaries accounted
for 77% of U.S. GSP imports in 2001. (See Table 1 below.) Of the top 10 many are
classified as “upper middle income.” By ending eligibility of the richer developing
countries, the costs of the program could be reduced, and the benefits could be
channeled to needier countries.
Many observers are opposed to cutting costs by removing countries and
products. They argue that many U.S. producers and consumers benefit from low-cost
imports from the more advanced developing countries. Without GSP tariff
reductions, exporters in those countries might not be competitive in the U.S. market,
resulting in higher prices or less choice for U.S. buyers. Some observers maintain
that no legislative changes are needed to channel GSP benefits to poorer developing
countries. After the amendments enacted in 1996, they claim, the wealthier countries
will begin to graduate from the program earlier. Moreover, they note that the
Administration has sufficient discretionary authority and has already taken actions,
such as graduating some countries and expanding the list of eligible products for the
least developed beneficiaries.

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Table 1. U.S. Imports Under GSP — Leading Beneficiaries
and Total, 2001
(million dollars)
Total Imports
GSP Duty-Free Imports
Rank
Beneficiary Country
from Country
from Country
1
Angola
3,100
2,635
2
Thailand
14,279
2,197
3
Brazil
14,462
1,949
4
India
9,738
1,334
5
Indonesia
10,105
1,321
6
Philippines
11,331
668
7
Venezuela
15,236
637
8
South Africa
4,204
506
9
Chile
3,555
483
10
Turkey
3,054
437
Imports from Top 10
89,064
12,167
Beneficiaries
Total Imports from
160,559
15,830
all Beneficiaries.
Source: USITC Database.