While NAFTA renegotiations and adjacent bilateral trade disputes have dominated the current discourse on trade policy, the future of the less-discussed Generalized System of Preferences looks as though it will provide both an important and comprehensive look into government’s trade priorities. Congress must now decide whether it will act to preserve these tariff reductions, which have long contributed to American prosperity.
The GSP program was first established by the Trade Act of 1974 and has systematically cut tariffs on thousands of products imported from designated beneficiary countries and territories. The countries that enjoy freer trade because of the GSP program represent diverse regions of the world, as well as developing economies whose imports have enriched both American companies and consumers. These developing countries participate in the GSP program because the status offers lower duties than what those countries would otherwise pay under the most-favored-nation status observed by the World Trade Organization.
The GSP has always been a mutually beneficial program. Total U.S. imports under the GSP in 2016 amounted to almost $19 billion across 120 participating countries. These imports provide raw materials and intermediary goods to various U.S. industries, from manufacturers and fisheries to retailers and wholesalers. A 2006 study from the U.S. Chamber of Commerce estimates that GSP imports support more than 81,000 American jobs across various supply chains for nearly 5,000 related products. The globalization of supply chains and greater access to imports has been especially important to small businesses.
The U.S. trade representative also affirms the importance of the GSP program in promoting economic growth and sustainable development for all countries, especially among participants of least-developed country status. For example, the USTR estimated in 2011 that about 65 percent of Paraguay’s total exports to the U.S. benefit from GSP status, as well as 86 percent of Armenian exports. These imports generally foster formal-sector growth in developing countries without competing with U.S.-made goods.
With GSP-eligible imports ranging from motor vehicle parts and piping to flavored water, it comes as no surprise that more than 350 companies and associations recently sent a letter urging Congress to renew the GSP program ahead of the December 31 expiration date. The letter estimates that companies will “be forced to pay over $2 million a day in new taxes” if Congress fails to renew GSP before adjourning for the year. A look at recent history demonstrates the perils of congressional inaction on this issue.
When the GSP program last expired in August 2013, the failure of Congress to reauthorize the program until July 2015 led to disastrous consequences for certain businesses. At the time, Rick Helfenbein of the American Apparel and Footwear Association estimated that “Forty-four percent of American GSP companies … slowed down their planned hires, 40 percent … delayed or canceled job-creating investments, 22 percent … cut employee wages and 13 percent were actually forced to lay off workers,” thus providing baseline estimates of the damages that future GSP expiration could present.
Even though the retroactive reauthorization of the GSP program allowed companies to receive refunds, recovering from losses in delayed investment and layoffs proved difficult for many, especially for small businesses. Businesses forced to close down in the interim period suffered even more serious losses. Similar losses can also be expected for importers, many of whom seek to compete with China for access to U.S. markets. Some of the poorest, often rural, residents in these developing countries will also be disproportionately harmed, along with American consumers and small businesses. The public need not repeat past errors and fall victim to governmental inaction.
In the past round of reauthorization in 2015, Congress voted overwhelmingly in favor of GSP renewal, and for good reason. There is no reason why Congress’ or the administration’s goals should run counter to the economic consensus in favor of trade liberalization.
Clark Packard (@clark_packard) is a contributor to the Washington Examiner's Beltway Confidential blog. He is an outreach manager and policy analyst for the R Street Institute.
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