As Congressional debate heats up over the passage of Trade Promotion Authority (TPA), one of the bill’s attachments, renewing the Generalized System of Preferences (GSP), is drawing increased attention. Instituted in 1976, GSP aims to promote economic growth in the developing world by providing preferential, duty-free treatment for up to 5,000 products when imported from one of 127 countries.
The program has significant domestic support. A coalition of over 450 companies (mostly small businesses that import) recently sent a letter to the House and Senate in support of GSP reauthorization. And U.S. Trade Representative Michael Froman argues that the “GSP is a time-tested tool for advancing international economic development while also helping U.S. businesses, workers, and consumers by lowering the costs of imported goods, including those used as inputs for U.S. manufacturing.”
Despite this praise, GSP has evolved into a free pass for nations with egregious trade mercantilist practices that hurt U.S. companies and U.S. jobs. These practices, including forcing local production as a criterion for market access, subsidizing exports, stealing intellectual property and favoring domestic companies over foreign ones are growing. According to the World Trade Organization the number of technical barriers to trade reached a high of 1,560 in 2012. As such Congress should not rubber stamp reauthorization; rather, they need to significantly reform the program.
Since the 1980s, when the Senate made reforms to the GSP program that specified conditions beneficiary countries must meet in order to gain and maintain their preferential trade status, administrations have had the ability to add or eliminate nations from the list. Divided between “mandatory” and “discretionary” criteria, the President has 15 qualifications to consider before a country can be granted beneficiary status. The criteria related to trade mercantilism are discretionary – “the extent to which such country has assured the United States that it will provide equitable and reasonable access to its markets and basic commodity resources and the extent to which it has assured the United States it will refrain from engaging in unreasonable export practices,” and “the extent to which such country is providing adequate and effective protection of intellectual property rights.”
When making these reforms, the Senate Finance Committee report explained that: “In delegating this discretionary authority to the President, it is the intent of the Committee that the President will vigorously exercise the authority to withdraw, to suspend or to limit GSP eligibility for non-complying countries.”
Unfortunately, very few nations have ever been removed for engaging in trade mercantilism. Removal or suspension has been mostly made on the basis labor rights violations, graduation (attaining a higher level of economic development), or implementation of a free trade agreement that supersedes the GSP. In fact, in the last 12 years, Ukraine has been the only country to lose its GSP benefits for a mercantilist practice, from 2001 to 2005, for the failure to provide adequate intellectual property protection. In 2006, Ukraine was reinstated to the GSP program, despite the fact that every year since it has been listed on USTR’s Special 301 Report, which identifies nations that do not provide adequate protection of intellectual property rights. And in ITIF’s report, The 10 Worst Innovation Mercantilist Policies of 2013, which details policies that are damaging to the entire global innovation system five nations-Brazil, Uruguay, Russia, India, Ukraine – are GSP beneficiary countries.
In other words, nations can freely flaunt accepted norms and rules of global free trade, including stealing U.S. intellectual property and erecting mercantilist trade barriers and be reasonably assured that we will turn a blind eye to them and maintain their GSP benefits. It’s long past time for the United States to look out for its own interests when it comes to the GSP.
Now some will argue that even if the program does not benefit the U.S. economy, we should set aside our own interests to help truly poor nations. Yet only one of the 2012 top ten beneficiaries of GSP, Angola, is a least developed country (LDC). Indeed, among the 127 beneficiary countries, only 43 are LDCs.
As a result, it’s time for Congress to fundamentally reform GSP. First, Congress should require that if nations are a Priority Foreign Country or on the Priority Watch List of the Special 301 Report for 2 years or more, the President should be required to withdraw GSP preferences unless the nation is an LDC. Second, rather than make GSP preference more or less automatic, USTR should be required to report to Congress annually why nations with problematic mercantilist practices, including but not limited to IP theft, have not been cut off.
Nations that refuse to play by the rules do not deserve trade benefits from the United States. But if we are serious about this then we need to change the system to reflect this idea. So before Congress automatically renews GSP as part of TPA, it needs to seriously reform the program first.