According to multiple recent press reports, adding eligibility criteria has become the hang up for GSP renewal. There doesn’t seem to be opposition to the idea of potentially adding new criteria, but the timing. Senate Finance Committee Chairman Grassley introduced a 16-month extension to give give “time for debate on any changes that members are interested in making,” while House Ways and Means Trade Subcommittee Chairman Earl Blumenauer introduced a 6-month extension with a number of changes (and presumably more requested changes in the interim).
Before debating specific criteria, policymakers should consider carefully how GSP benefits work, when eligibility criteria can (or cannot) work, and who is impacted most by GSP benefits or losses. Here are some basic facts to help guide any conversation about GSP eligibility criteria.
The U.S. government provides no specific, tangible benefit to foreign governments through GSP. It is not military aid or food aid, where the U.S. government can stop shipments. It is not like USAID projects, where the U.S. government can cut future funding. GSP eligibility is not a prerequisite for funding under other programs. It gives foreign governments nothing, and therefore cannot take anything away, through GSP eligibility.
The U.S. government benefit provided through GSP is lower taxes on American companies. When GSP is in place, U.S. companies don’t pay import taxes on qualifying products. When GSP is not in place, US companies pay the taxes. That’s why you hear a lot more about the importance of GSP from US companies – like hundreds of them calling for renewal last week – than from foreign governments or exporters. It is not that those groups aren’t interested in GSP, it’s that interests are indirect.
Based on those two principles:
There is a fundamental mismatch between the entities whose actions eligibility criteria seek change and who is punished in the event of non-compliance. It’s like former-UNLV Basketball Coach Jerry Tarkanian’s famous quote: “The NCAA is so mad at Kentucky they’re going to give Cleveland State another year of probation.” If those committing perceived misdeeds don’t feel the repercussions, eligibility criteria provide little leverage to demand change. Instead the pain is felt by the American importers, many of which (e.g., Fair Trade companies) are promoting the very values (e.g., high wages, environmental sustainability, women’s economic empowerment) that governments are accused of neglecting.
Eligibility criteria “leverage” is, at best, indirect and several degrees of separation away. The first level of impact is US companies, who will pay higher tariffs. The second level is their foreign suppliers, who *may* fear lost exports due to higher tariffs on their products. The third level is foreign governments, who *may* be lobbied by domestic constituencies that *may* fear lost exports. When playing pool, it may be hard to sink a cue ball directly into a corner pocket. If you must bank it off two rails first, it is exponentially harder.
Two data points related to India, whose GSP benefits were terminated in June 2019, help illustrate the difficulty of using eligibility criteria to demand change: 1) GSP covered just 12% of U.S. goods imports from India in 2018; and 2) U.S. imports of (previously) GSP-eligible products from India were higher in September 2020 than any month since India lost GSP. So the domestic constituency within India to lobby its government to comply was small to begin with, and even those exporters have not suffered (China tariffs, anyone?). Bangladesh, whose exports to the United States have increased about 4x faster than the world average since it lost GSP in 2013, provides a similar example.
Adding eligibility criteria that countries cannot/will not meet is an argument for higher taxes on American companies in the long run (with little chance of changing foreign practices). For eligibility criteria to provide true leverage and induce desired policy changes, foreign governments must care about GSP for domestic political reasons. That likely requires much larger constituencies within those countries to have a stake in continued GSP. Adding eligibility criteria changes alone cannot make countries care more, and countries may become more likely to stop even trying to meet ever-increasing U.S. demands.
Blocking GSP renewal over adding eligibility criteria that that countries cannot/will not meet is an argument for higher taxes on American companies in the immediate future (still with little chance of changing foreign practices). American companies will pay millions of dollars a day in new tariffs – starting in just a few weeks – if Congress allows GSP to expire over a desire to add new eligibility criteria. Letting GSP expire halts work on current GSP eligibility reviews and prevents consideration of new country practice reviews based on existing criteria. It is lose-lose all around.
Eliminating GSP benefits, whether through expiration or suspension, risks hurting the marginalized communities within the developing countries that the criteria are meant to help. The GSP Coalition tends to focus on U.S. impacts, but they are two sides to the same coin. If U.S. companies import less due to lost GSP – and there’s lots of evidence to show they do – it means lower sales for workers in developing countries whose livelihoods depend on those exports. Lost GSP – no matter how well-intentioned the reason – is bad for development and the economic prospects of workers in developing countries.
Just as the Covid-19 pandemic and recession makes it terrible time to impose new costs on American companies and workers, it is an equally bad time to take away opportunities for producers in developing countries to recover from those same challenges.
In conclusion, conversations about the role of GSP in U.S. trade and foreign policy are worthwhile and important, but they must be based on open and honest discussion about how GSP incentives and punishments work in practice as opposed to theory. Eligibility criteria are a means to an end, not the end itself. To better promote development through GSP requires recognizing the limitations of eligibility criteria to induce change and considering steps that could be taken to overcome those limitations. It’s a difficult tightrope to walk, but thinking you can rush ahead without considering the balance needed is a sure-fire way to fall off.
As last week’s letter stated, many American companies are eager to participate in conversations on how to improve the program based on 40+ years of experience. But these important talks can’t happen in the next week, so Congress should renew GSP now – to the benefit of companies and workers in the United States and GSP beneficiary countries – and leave any talk of changes to the next Congress.