GSP Shouldn’t Be Your Father’s Trade Preference Program

In August 1974, President Gerald Ford became the 38th President of the United States. Several months after he took office, he signed into law the Trade Act of 1974, which authorized the U.S. Generalized System of Preferences (GSP) program.

In its 45-year history, the GSP program has served as an important tool in trade policy.

On one hand, by providing duty-free access for thousands of products exported to the U.S. by companies in developing countries, GSP has lifted millions out of poverty and fostered economic growth throughout the world. It has done this without hurting U.S. domestic interests, as the program has several safeguards to prevent injury to the domestic industry, including by providing companies, fearing import competition, the ability to ask that products be excluded from GSP eligibility.

In addition, by conditioning this duty-free access on the progress of foreign GSP beneficiary countries in meeting certain criteria — in areas like intellectual property protection, market access and workers’ rights — GSP has advanced U.S. trade policy goals as well. Stakeholders can regularly petition the administration to review a country’s GSP status if they feel the country is not making adequate progress or even backsliding from previous commitments. Indeed, the Trump Administration has used these reviews aggressively — initiating several on their own and accepting others — to advance a range of U.S. trade priorities.

Of course, U.S companies and their stakeholders — U.S. workers and consumers — benefit immensely as well. The Coalition for GSP, which represents U.S. companies using the program, reports that in 2018, U.S. companies saved $1.03 billion in tariffs. Companies used those savings by passing them along to consumers, hiring more U.S. workers, cutting costs on key inputs used for manufacturing and investing them back into businesses. The Coalition estimates that GSP direct beneficiary companies are in every state.

Unfortunately, though, the GSP program has been scarcely updated. While the GSP has come before Congress more than a dozen times since 1974, most of these have been straight extensions or renewals. As a result, like a fly trapped in amber, GSP still largely reflects the Cold War economy of the 1970s.

For example, some products — that were considered sensitive during 1974 — are still statutorily excluded from GSP treatment. This means that companies cannot even petition to ask for their consideration for the program. 

Apparel and footwear, for example, are ineligible to be considered for GSP status even if there is zero production in the United States. This is a travesty given that these two industries are critical for development and women’s empowerment and represent a significant portion of exports from the developing world. While such an exclusion may have made political sense in the mid-1970s — when more than half our shoes and clothes were still produced domestically — the case for continuing that exclusion is now hanging by a thread, when import penetration for these items now stands at approximately 98 percent.

This isn’t to say that all such articles should automatically receive GSP treatment. Far from it. There continues to exist a small but committed domestic footwear industry that benefits from and continues to require tariff protection. Those sensitivities should be respected as they have been in recent trade agreements. Moreover, adding new footwear and apparel items can and should be done so as not to disrupt strategic economic and security relationships with existing trade partners. But these considerations should not preclude — as the status quo automatically does — importers of select footwear and apparel from even asking the question if they can apply for and receive GSP benefits.

The case for removing these statutory exclusions has received a boost from an unlikely source: President Trump’s China tariffs. This policy seeks to shift supply chains out of China by making it costlier to do business there. But because China is not a GSP country, the same goal can be achieved by making these products eligible for GSP status. That would instantly confer a price advantage to China’s main competitors but would do so in a way that would enable duty savings to be passed along to U.S. consumers through lower prices or U.S. workers through higher wages. In fact, we saw this dynamic play out with travel goods — items like backpacks, luggage, and purses — after Congress removed the statutory exclusion that had kept them out of the GSP program until a few years ago.

What’s more, adding these products would make the GSP conditionality dynamic more robust, increasing U.S. leverage over developing countries by making potential loss of GSP status more painful. This is probably best depicted in the curious case of Bangladesh, which lost its GSP status in 2013 because of long standing concerns over worker rights and worker safety. However, since nearly all of Bangladesh’s exports to the U.S. were already statutorily excluded from the program, the practical effect of losing GSP status amounted to little more than a tickle on the wrist. 

Congress may soon consider the U.S. Mexico Canada Agreement (USMCA) to update the North American Free Trade Agreement (NAFTA), which is considered old at 25. And indeed, the USMCA contains many provisions to reflect trade policy innovations from the last quarter century. How much more so — at the ripe age of 45 — does the GSP require modernization, too?

Stephen Lamar is Executive Vice President at the American Apparel & Footwear Association (AAFA).

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