While American companies have come to rely on the Generalized System of Preferences (GSP) program to lower costs for key imports, the original intent was to promote economic growth in developing countries around the world. Instead of traditional means to stimulate growth, such as providing direct foreign aid, GSP created an incentive for U.S. companies to buy from certain countries. The idea was simple: Trade, not aid.
Today, GSP eliminates import taxes on approximately 3,400 products from nearly 130 developing countries. Imports of an additional 1,450 products receive duty-free treatment when sourced from more than 40 least-developed countries. In total, American companies claimed GSP benefits for about $19 billion worth of imports from GSP beneficiary countries in 2013.
The majority of GSP imports come from countries that are still quite poor. India, the top source country under GSP in 2013, has a per capita income of just $1,550 annually. That’s roughly what the average American earns in a week and a half. Thailand, Indonesia, and the Philippines, which accounted for about one-third of GSP imports in 2013, all have annual per capita incomes between $2,500 and $5,210.
GSP has certain rules in place to ensure that it remains a development program, including automatic graduation of countries that reach “high-income” status as defined by the World Bank. Just yesterday, the President announced his intention to graduate Russia for exceeding that high-income threshold – once GSP is renewed.
And that’s the rub. How can GSP promote development if there is not certainty that the benefits will be in place when the goods ordered from these countries reaches the United States? This is not the first, second, or even third time that Congress has failed to renew GSP before expiration in the program’s nearly 40-year history. It’s the ninth.
The results are quite predictable: in a recent survey of more than 200 American companies that use GSP, more than 40 percent reported losing sales because they had reduced import volumes. The products benefiting from GSP previously simply aren’t competitive once the tariff rate is included. One survey respondent in Michigan noted that its largest customer was actively seeking alternative sources from China and two Chinese competitors were gaining market share in the United States. As highlighted the other day, a Texas company discontinued imports of a whole product line from Brazil. Those impacts are felt both in the United States and developing countries.
The longer GSP expiration drags on, the more it will hurt the program’s long-term development goals. After all, it’s hard to promote economic growth through trade as opposed to aid when the American companies are pulling back on GSP purchases.