A Ticking Clock on GSP
U.S. small businesses are major beneficiaries of the Generalized System of Preferences (GSP), a U.S. program that allows eligible developing countries to export certain products to the U.S. duty-free to spur economic growth in those countries. The program expires on December 31, 2020. Dan Anthony of The Trade Partnership and Coalition for GSP discusses the rationale for GSP, the issues at hand for Congress, and what’s at stake if it expires.
Opinions expressed on Trade Matters are solely those of the guest or host and not the Yeutter Institute or the University of Nebraska-Lincoln.
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Jill O'Donnell: Welcome to Trade Matters, a podcast by the Yeutter Institute at the University of Nebraska - Lincoln. I'm Jill O'Donnell. Our guest today is Dan Anthony, Vice President of the Trade Partnership and Executive Director of the Coalition for GSP.
So the topic today is the Generalized System of Preferences, or GSP, one of the oldest, or the oldest, of US trade preference programs. The basic rationale behind it, as you know, is to provide eligible developing countries with preferential access to the US markets in order to help spur economic growth in poorer countries. This program has been around in the US since the 1970s, give us a little more context first about the impetus for creating this program and how it all got started.
Dan Anthony: Sure. So the real theory behind GSP, and this isn't just a US program, there's a number of them like this around the world, came out of the UN Conference on Trade and Development, or UNCTAD, and it was trying to come up with new ways in sort of the early 1970s to promote trade, not aid. And when you think about it at a very basic level, if you send money, or you send food supplies, or something like that to developing countries and particularly those without great rule of law in place, you've got more questions about corruption or how those resources are being used. And so instead of giving something tangible where you don't know where it's going, by opening up your own market, you encourage those industries in those countries to develop. And you're really giving that preference to your domestic companies to buy from those developing countries that are eligible, as opposed to say other rich countries.
Jill O'Donnell: Okay. So eligibility, as it seems to be an important word here in discussing this program. So as best as I can tell, there are about 120 developing countries and territories that are currently GSP beneficiary countries. So what do countries have to do in order to be eligible? What makes them eligible in the case of the US GSP program?
Dan Anthony: So, there’s a couple of different, there’s very objective criteria, and then there are some subjective criteria. On the objective side, very cut and dry. If a country is deemed to be high income by the World Bank, it graduates out of the program. And so that’s a number that sort of published every year, and all of the countries in the world are sort of into these groupings of high income, middle income, low income. And if a country that is eligible for the program reaches that high income status, they lose GSP usually a year or two later, depending on when the announcement is made. And so there are other very objective criteria. There’s a list of countries that cannot get it. So EU members can not be eligible for the GSP program, the US GSP program. And so, for example, when Bulgaria and Romania joined the EU in 2007, they automatically lost their GSP. So you have this list of criteria that are really black and white. Then you have subjective criteria associated with really with actions that we would like to see countries taking. And so protecting intellectual property rights, protecting internationally recognized worker rights, providing reasonable market access to US exports, and things like that. And they tend to be high level criteria as opposed to very sort of prescriptive you need to provide these types of tariffs to US exports. It’s very subjective, and that’s where you have some of these country specific reviews that raised questions about whether a country should maintain its GSP eligibility.
Jill O’Donnell: Okay, and to follow up on this point about reviewing countries, and their eligibility status, how does that take place? Is that an annual process? Are there opportunities for other stakeholders to weigh in? Can you talk just a little bit more about how that review happens?
Dan Anthony: Sure. And so again, if a country meets one of those black and white criteria, there is no review associated with it. It's just an announcement that's made as part of a proclamation. On the subjective eligibility criteria, the US government can self-initiate reviews, stakeholders can file petitions saying we don't believe that country X is meeting this criteria, and then the Office of the US Trade Representative would lead a government review that brings in stakeholders from State Department, Commerce Department, USDA, depending on what the issue is. Obviously Department of Labor would be involved if it's questions about workers' rights, they would play a larger role. And so you've got this inter-agency process that seeks to identify issues, and then determine whether countries are meeting the eligibility requirements. Generally, it's not a process that's intended to remove benefits, but trying to find solutions and working with then the foreign governments on what steps can be taken to bring that country into compliance.
Jill O'Donnell: Okay. And how would you assess the success of the GSP program and the 40 plus years or so that the US has had its program in place? Have there been a number of countries that have graduated out of it, because they have achieved higher levels of economic development, aside from the EU accession example that you mentioned earlier with Romania and Bulgaria, but rather on that list of subjective criteria, have you seen countries actually get stronger on those criteria and quote, unquote, graduate out of the program? How would you discuss its evolution and the success of this program?
Dan Anthony: This is a tricky question, and it's a trickier question for me, because my members and the companies that I work with are all the US companies that import under the program. So for them graduation isn't a success. It means that they lose the benefits that they're used to, and they're used to receiving, but I think, generally speaking, there haven't been a ton of countries who have hit that threshold. And in part it's because the World Bank's income metric is a sliding scale. So countries can be have an improving standard of living, their GDP per capita might be going up, but if they're not closing the gap and moving from sort of one grouping of countries into the next, and it's all relative, they're not going to be graduated, even if they're not as poor as they were three, or five, or 10 years ago. So there's that relative nature, which means that not a lot of countries sort of cross that threshold from one grouping into the next, but again, I don't think that's necessarily a way of saying it's unsuccessful if you're seeing improvements in those countries.
The bigger challenge is that even on the income thresholds, some of the decisions tend to be seemingly more political than economic. And so countries can be graduated for being sufficiently economic developed, even if they don't hit those income thresholds. The last that this happened to was Turkey in 2019, and again, it followed a review for a wholly different reason that really didn't seem to be progress and then they were removed from the program for the economic development while they were in recession. 2014, Russia was removed for being sufficiently developed, but it really was associated with the annexation of Crimea. Again, that's not to say that Russia's actions were right, but the economic development criteria can be used for noneconomic reasons, because it's just a reason that can be justified to remove programs.
So there's a lot of nuance here, and I think it creates some challenges on saying, was it successful? We have more information on individual products that have lost GSP. And so just like countries can be graduated if they hit certain income thresholds, there are what are called competitive need limitation thresholds. So if imports from say Brazil, if they reach a certain volume for a given product, or they account for more than half of US imports, they're deemed to be competitive. And so that's another process of removing individual products. The thinking being that if they've hit those levels, they really don't need the GSP benefits. But when we look at the products that have lost GSP over time, about 90% of them in 2019 were below those statutory thresholds. So what we can sort of see there is once products are removed, imports drop, people start buying from other countries, and they really weren't that competitive in the first place. And so over time, those have accumulated and now you've got probably about a hundred million dollars in tariffs that are being paid a year on products that wouldn't lose GSP today, but they lost it at some point over the last 20 or 30 years, and imports have declined as a result.
Jill O'Donnell: Interesting. Okay, so there's a lot to draw out there in everything that you just said. And so, one point I want to pick up on is this idea that success can look differently dependent on who's doing the looking, right? So for an importing US company who is importing products from a GSP eligible country and paying low or no tariffs, for that country to graduate, or for that product to lose that status, that's not a success in the eyes of those running that company. On the other hand, you have the developing countries themselves who would like to continue to have this market access and sell their product. So that's an interesting way, I think, of looking at this program, and I want to get into a little bit more of this, how this looks on the US side, how it impacts US companies. The latest statistics that I have found from 2018 show that about $23 billion worth of product entered the US duty-free under GSP out of 238 billion worth of imports from all GSP eligible countries that year. So that's about 10% of everything, GSP eligible countries are export into the US is coming in under GSP.
But I want to talk about what this means for US manufacturers, looking at the product list that I could find from 2018, it looked like quite a lot of the products coming in under GSP are what could be considered intermediate imports. So items that companies need to build what they build. And looking at Nebraska, where I'm sitting, the statistics that I could see were that the average tariff on an imported item would have faced without GSP coming into Nebraska under that program in 2018 was about 3.5%. So that may not sound like a huge number, but it can make a big difference to a small business importing items that they need to use in their manufacturing processes. So could you just comment a little bit on the significance of GSP for US manufacturers, especially small businesses?
Dan Anthony: Yeah. I mean, the one thing that we've seen sort of over and over and over again is that US small businesses are the biggest beneficiaries of the GSP program. We have something that's called the GSP supporter list. It's on our website, companies who use the program can add their name to it for free. And basically we ask questions, who are you? Where are you? What do you buy? How many employees do you have? What countries do you source from under the program? How much does it save you? And the typical company that adds their name has 12 employees and saves about $100,000 a year in eliminated tariffs. And those numbers have been fairly consistent over the years. We've collected this type of data back to 2011 on and off. We always end up in a range of 11 to 13 employees. Sometimes that's based on 50 companies responding, sometimes it's based on 700 companies responding, and we're always in that range. And so we know sort of beyond a reasonable doubt that sort of that sweet spot. That big enough to have multiple employees and maybe a separate warehouse on the other side of the country, and saving what is a lot of money to a company of that size, $100,000 a year, but not necessarily the type of company that makes news when they hire or lay off workers, or no one really tells news stories about $50,000 or $80,000.
The other thing that we've found and this sort of really affects, I think the manufacturers particularly, is a lot of them are operating in niche markets. And so they sell very specific items, and they import very specific items, and maybe they only do it from one supplier, or one country. And so for them, if all of their products get GSP and GSP goes away, they're in a very different position than say a large company with hundreds of suppliers spread throughout the world who have a lot more flexibility in moving around. And so, those impacts are something that we've really been and able to see. And I think that's reflected in a lot of the work that we've done, because again, a 10 person company that's going to face a hundred thousand dollars in costs, they react very differently to the prospect of lost GSP than a company with billions of dollars in revenue. Even if that larger company is going to lose, a million dollars, two million dollars due to loss GSP.
I'll also say just a quick sort of jumping back to that relatively small share of imports from GSP countries, can be a little deceptive. And the reason for that is there's a really large share of imports from the world are duty free for all countries. And so, on GSP, it's something like almost half of all imports from GSP countries face zero tariffs regardless of which country they come from. Then you've got GSP countries like the African countries, that get separate benefits under the AGOA program, or you have Haiti that gets separate benefits under a Caribbean program. And so, they're not claiming GSP because they're claiming something else a lot of the time. And then, when they're not claiming something else, it's because they don't need to claim anything.
Jill O'Donnell: So AGOA, the African Growth and Opportunity Act, that's another question we could talk about is how GSP overall relates to some of these regionally based acts. I also want to follow up though, I think you've done a great job, sort of explaining what the stakes can be for small businesses, particularly those that operate in a niche market, and GSP, as you know, expires in December of this year, December 31st, 2020. There are small businesses in Nebraska that benefit from this program, or import products under GSP. One of them, a company in Scottsbluff called Couplamatic Systems was a signatory to a letter back in June that many companies signed on to urging Congress to act to renew this program. And again, you've laid out the stakes for some of these small businesses too, if this program does not get renewed. So, other than sending a letter to Congress, what other opportunities are there for the American public or companies to weigh in on GSP, whether it's through a regular government review or otherwise, is their input actively sought through normal review processes, or do they just need to act on their own through the coalition that you run, or on their own to contact with those who have a voice or a vote in renewing this?
Dan Anthony: Yeah, there really aren't other options unfortunately. The administrative reviews, whether it's for countries or products, the product specific reviews generally are due to a petition or something hitting one of those competitive need limit thresholds. And it's a very narrow review, and very few tend to be impacted. It's a handful of companies. On the broader questions about eligibility, a challenge there for the companies that use the program in the US is they don't have a formal role in that process. So let's say there's a complaint about intellectual property rights in a given country. The review led by USTR is really focused solely on the question are that country's policies compliant or not. It's not a review to determine, okay, on balance is the United States better off punishing that country by raising tariffs or not. And so, the program users have a very limited scope on that. They can weigh in, but if they say I would be really hurt by removing these benefits, that doesn't really answer the question as to whether or not that country is compliant or not. And so, you've just got a very one-sided process there. And I think, Nebraska is an interesting case here, the latest figures we have that you cited of over $300,000 in tariffs saved this year, that corresponding figure for tariffs paid because of some of these country decisions over the last year. So India lost its benefits, Turkey lost its benefits, Thailand lost some of its benefits. Nebraska companies have paid about $830,000 this year due to those decisions. And so that mix of Nebraska companies who cares about GSP renewal, why do they care? Is very different today than it was even a year or two ago. And Nebraska is really, sort of born the brunt of those decisions just through some of those company specific links to various countries. And so, Nebraska's lost over 70% of its GSP benefits compared to only about 30% nationally. And so, I think they're third or fourth sort of most impacted state by those decisions. And that does get to that. What is the process for weighing in? And again, there really isn't one, no one asked Nebraska companies if they would be hurt by removing GSP benefits. The only questions that went out were sort of a is Turkey providing market access? Is India providing reasonable market access? Is Thailand meeting labor rights criteria? And these are all things that are out of control of Nebraska companies who ultimately are paying the price to that.
Jill O'Donnell: Right. That's a really interesting perspective on this, what does and does not get considered in the review process. Country's losing GSP eligible status for other reasons and not looking maybe at how exactly that impacts importers that may rely on imports from a country that lost its status to make what they make in a niche market. So Senator Chuck Grassley, the chairman of the Senate Finance Committee has introduced legislation to extend GSP through April of 2022. It's a simple extension that doesn't alter the program, and he has said himself that such an extension would give Congress time to debate possible changes to the program. Do you see that bill moving yet this year? How do you see extension and/or renewal playing out?
Dan Anthony: So I think a bill like that is the best chance of moving this year. And so, there are always people that want to see changes to GSP. Obviously I think from some of the things I've already said, we have our own concerns with the way the program is run and some of the rules associated with it. So I have a big list of changes that I would like to see that I think could make the program better, but it's going to expire in a little over two months, and there's a lot going on in the US between now and then. And we really don't have time for that thoughtful conversation that I think needs to be had, because the devil was always in the details. And so, I think whether it's the Grassley bill or something like it, we're probably looking at a simple extension, or we're looking at another expiration, and unfortunately that's something that has happened a lot in the past, because you're just not going to have that ability to get everyone on board with proposed changes in the next six weeks or so. And I think there's going to be... there's at least the potential for really big changes in the political dynamic in Washington next year, on a number of fronts. And so I think that that short-term nature of the Grassley proposal recognizes that some of the people who want to make changes probably think they're going to be in a better position to make changes next year. So that this has a better chance of moving quickly than say a reauthorization that's five years long and sort of kicks the can way down the road.
Jill O'Donnell: Right. And could you give us just a quick preview of what you think might be, say the top couple of issues that you think will be kind of at the top of this debate when we do get to such a time where Congress is actively considering legislation to renew the program, and would be potentially making changes through that debate?
Dan Anthony: Sure. I mean, the big ones on the eligibility criteria side would be things like adding in an environmental provision, which is in a lot of US trade agreements, but is not in GSP. Similar, there is a provision that countries must sort of have rule of law, be making progress on rule of law issues like elections. That is a criteria in the AGOA program, but not in GSP. So there's sort of pieces that can be picked out of other trade programs that don't currently fit into the GSP program. So I think those are some of the issues that would be discussed. From my perspective, some of the product rules around product loss or country graduation and product reinstatement, like I said, there's a lot of products that if they were in the program today would not be at risk of losing them, but because they've lost products over the last 20 or 30 years, and products are rarely reinstated. Those are the types of things that are people leaving a lot of money on the table here and sort of undermining the development goals without really gaining anything. So I think those are the big ones, and the other one that's actually out there is senators Casey and Cortez Masto from Pennsylvania and Nevada introduced legislation to add a criterion associated with women's economic development. So that's going to be a topic of conversation, and then changing the products. So most sensitive products as defined in the 1970s are still excluded. There's a number of companies that would like to add things like apparel and footwear that don't get GSP, but are really what these countries specialize in. To the program, given the sort of reductions in US production of those goods since the program was first founded. So lots of issues at play.
Jill O'Donnell: Okay. Yes, clearly there are, and that's an excellent preview for us. Thank you, Dan. So last question today, which is one that I ask every guest on the show is what is something you have read recently, book, article report about trader global commerce that's been particularly striking to you?
Dan Anthony: So the one that really jumps out at me was a paper by, and I wrote these down, so I didn't mess this up, by Kyle Handley from University of Michigan, Fariha Kamal from the Census Bureau, and Ryan Monarch from the Federal Reserve, and the paper's called Rising Import Tariffs, Falling Export Growth: When Modern Supply Chains Meet Old-Style Protectionism. And so basically they had access to confidential firm-level data and found that firms that eventually faced import tariffs from the Trade War in 2018 and 2019 accounted for 84% of US exports. And that as a result, because it's the same companies paying import tariffs that are then turning around and exporting the Trade War was basically the equivalent of a two to 4% tariffs on US exports, even if they weren't the products on retaliation lists. And so when I read that it was very much a light bulb turning on for me, because wearing my non-GSP hat, I was, at the time, doing research on comparing US export trends for products hit by retaliation and those that weren't. The products hit by a retaliation things like soy beans. They got a ton of press, and they saw immediate declines. And it was a very obvious impact, but what I was seeing in the data was that products that didn't get hit by retaliation, basically stopped growing, and then started declining. And because that was such a large universe of products that weren't facing retaliation, those few percentage points declines had a much bigger impact on US import trends than the actual ones that everyone was reporting on, and I had no idea why that was. And so reading that paper on those linkages about how an import tariff becomes an export tariff, it really just tied together things that I was seeing in the data, and I spend a lot of time in the data and it really just brought it all home to me. And so I thought that was a very interesting paper. It came out, I think earlier this year, or late last year, but it's that question of when you impose import tariffs, what are all of the impacts that you're not thinking about? I mean, it ties back to GSP, same thing, the manufacturers who lose GSP, and now have to start paying more if they're turning around and exporting to other countries, those US exports are less competitive.
Jill O'Donnell: That is very well stated, Dan. And actually I have seen that paper, and we in fact had Dr. Kyle Handley on a webinar that we hosted here at the Yeutter Institute just a few weeks ago, that does really tie a lot together. As you said, I'm glad you mentioned it, and we will put that in our show notes for sure. Dan, we are going to have to have you back to follow up on more of these topics at some point here on Trade Matters, but for today, I want to thank you very much for giving us a good education on GSP, how it works, and some of the issues at stake, so thank you.
Dan Anthony: Yes. Thank you. My pleasure.
Jill O'Donnell: That's it for this episode of Trade Matters. Thanks for listening, and a big thank you to Alex Voichoskie and Jacy Thoman for helping produce this podcast. Please subscribe to Trade Matters on iTunes, Spotify, Stitcher, or wherever you get your podcasts. If you have ideas or topics you would like to hear about on Trade Matters, we'd love to hear from you. Send us an email at email@example.com or follow us on Twitter @YeutterUNL. Opinions expressed on Trade Matters are solely those of the guests or hosts and not the Yeutter Institute or the University of Nebraska - Lincoln.