Features
    Trade Fact Of The Week
    Congress carried out an unplanned tariff-hike experiment last year by letting GSP expire China looks like the beneficiary.
    July 23, 2014

    THE NUMBERS: Import shares for top 250 ‘GSP’ products, 2012 and 2014 -

    * Projected based on five months’ data. The import share for 2013 was 23.7 percent China, 10.5 percent GSP developing countries.

    2012 Projected 2014*
    China 22.1% 24.5%
    GSP Developing Countries 11.2% 10.2%

    WHAT THEY MEAN:

    The Generalized System of Preferences, known for short as “GSP,” expired on July 30th, 2013 – a year ago next Wednesday. The largest and oldest American ‘trade preference’ program for developing countries, GSP dates to 1974 and waives U.S. tariffs on 3,291 types of goods (about a third of America’s 10,714 tariff “lines” ) from 122 developing countries and territories. A year of this unplanned experiment suggests results as follows: (a) smaller developing countries’ share of imports has fallen; (b) China’s share has grown, and (c) overall import trends are unchanged. Some background, then the results:

    The GSP System: GSP’s 3,291 waivers cover microwave ovens, gold necklaces, silicone, auto parts, frozen fish, arc lights, automobile tires, slabs of building stone for construction sites, sheets of sterile jelly for scientific labs, plywood doors, auto parts, aluminum foil, guava juice, and in general a wide swathe of miscellaneous goods. Most get tariff rates of 1 percent to 8 percent. Very high-tariff products like T-shirts, butter, and running shoes are not included, nor are sophisticated heavy-industry products like cars; most natural resource goods and high-tech products are permanently duty-free anyway.

    As of 2012, GSP waivers were most important in trade with countries in the Middle East, the Balkans, and the Caucasus. GSP waived tariffs on 91 percent of imports from Armenia, 55 percent from Georgia, 50 percent from Lebanon, 26 percent from Albania, and 21 percent from Tunisia and the West Bank. (See below for a small single-product case-study of Tunisian olive oil.) The largest GSP exporters in dollar terms, though, were India, Thailand, Brazil, the Philippines, South Africa, Indonesia, and Turkey. Meanwhile, buyers of Chinese, Vietnamese, Taiwanese, European, and Japanese products pay full rate, while buyers of goods from the U.S.’ 20 FTA partners get zero tariffs.

    The experiment: As a temporary waiver program rather than a permanent FTA-like abolition of tariffs, GSP needs to be renewed periodically by Congress. Without a renewal bill, GSP expires, waivers end, and tariffs go back into effect. Last year’s renewal didn’t happen, due not to opposition per se but a confusing argument over procedural ‘pay-fors.’ (For those interested, an explanation is below, after the olive-oil case.), Tariffs have therefore risen for beneficiary countries; remained in place on Chinese, European, Japanese, and Taiwanese goods; and stayed at zero for FTA partners. To find out what has happened since, ProgressiveEconomy over the past week examined data on imports of the top 250 GSP products, which make up about 75 percent of all GSP imports. The results:

    1. Overall Import Levels Stable: Total imports of the 250 products rose from $192 billion in 2012 to $197 billion in 2013, and likely around $205 billion in 2014. This is growth of 8 percent, slightly higher than the 6 percent increase in U.S. imports of all goods (excluding petroleum). Expiration of GSP thus does not appear to have changed any balance between importing and local production.

    2. Beneficiary Country Share Drops: In 2012, the 127 beneficiary countries accounted for 11.2 percent of imports of the 250 studied products – more or less the same as their 11.1 percent shares in 2010 and 2011. In 2013, with the program expiring at mid-year, the GSP beneficiaries’ share of imports fell to 10.5 percent; this year, the figure is likely to be 10.2 percent. Countries with especially noticeable drops include Indonesia, Tunisia, Georgia, Lebanon, Fiji, and Papua New Guinea.

    3. Chinese Share Rises: About 22.1 percent of the 250 studied GSP products came from China in 2012. This is essentially the same as the 21.9 percent for 2011 and the 22.2 percent in 2010. China’s share rose to 23.7 percent in 2013 as GSP expired; the 2014 level appears likely to be around 24.5%.

    4. FTA Partners Stable: The U.S.’ 20 FTA partners, finally, have stayed about the same: 38.3 percent in 2010, 38.2 percent in 2011 and 2012; 38.3% in 2013; the 2014 share likely to be 38.1 percent or 38.2 percent.

    A. Conclusion: These results are partial, of course. Changes in trade flows generally or any particular product – see Tunisia’s olive oil trade below – may result from random variations or local events; and trends for the 25 percent of GSP imports not reviewed in our survey could diverge from those in the top goods. But so far, last year’s tariff-policy experiment appears to have produced a clear trend: with GSP gone, China has gained and smaller developing countries lost ground.

    FURTHER READING:

    The U.S. Trade Representative’s guide to the GSP system: http://www.ustr.gov/trade-topics/trade-development/preference-programs/generalized-system-preference-gsp

    Case study -

    USAID’s July 2013 post happily claims a bit of credit for Tunisia’s successful olive-oil presentation at a New York gourmet food convention a year ago:

    “Following the Tunisian revolution in January 2011, USAID began working with local partners on a broad range of economic development programs to address some of the underlying causes of the revolution: high unemployment, lack of opportunities, and barriers to economic growth. … Since December 2012, USAID has provided technical assistance to Tunisian companies producing and marketing olive oil. The olive oil industry is particularly significant to Tunisia’s economy—it’s the fifth most important source of foreign currency earnings (accounting for 45 percent of agricultural exports) and employs approximately 270,000 people.”

    A bit premature, unfortunately. A few days after the convention, the end of GSP added a, 5 cent-per-kilo tariff to the price of Tunisia’s oil. Since then, Tunisia’s olive oil sales here have not taken off, but instead dropped from 18,400 kilos in the first five months of 2013 to 6,600 kilos so far in 2014. In this case, rival Spanish products have taken up the slack; in gold jewelry, Tunisia’s other top GSP export, China’s share has grown. Lebanon has had much the same experience in both products. Georgia’s drops are most noticeable in grape juices and food products; Indonesia’s, in aluminum and jewelry.

    USAID boosts Tunisian olive oil: http://www.usaid.gov/results-data/success-stories/tunisian-olive-oil-finds-new-gourmet-market

    And producer Sarra Huile has background on the industry: http://www.sarrahuiles.com.tn/index.php?option=com_content&view=article&id=63&Itemid=79&lang=en

    Why did GSP expire? Or, offsets explained -

    The GSP waivers ended last year not because a Congressional majority decided to end them, nor because a passionate minority blocked renewal. Rather the reason was an unrelated argument over ‘pay-fors.’

    According to the Congressional Budget Office, renewing GSP means waiving $742 million a year (as of 2013) in estimated tariff payments on the olive oil jugs, microwaves, necklaces, arc lamps, etc. Congressional fiscal-probity rules adopted in 2009 require a step like this to be chaperoned by an ‘offset,’ which means raising an equivalent amount of taxes and fees elsewhere, cutting an equivalent amount of spending, or some combination of the two. Sen. Thomas Coburn, a retiring Republican from Oklahoma, felt that the ‘offset’ in last year’s renewal bill used wasn’t a virtuous one, and so blocked the otherwise accepted ‘unanimous consent’ agreement needed to bring up GSP renewal for Senate approval last July. No solution has been found since.

    Sen. Coburn explains, in September 2013: http://www.politico.com/story/2013/09/budget-trade-tom-coburn-reduced-tariffs-bill-96863.html

    In principle, perhaps Congress should live strictly and virtuously. But in practice, fiscal chastity rules appear to apply more rigorously to small things than to big ones. Seven months before the blocked renewal of GSP, the “Taxpayer Relief Act of 2013” approved $329 billion in extension of tax cuts and emergency spending programs. $329 billion per year; $3.5 trillion over ten year). In proportion, the TRA added 440 times more to future debt than GSP renewal would have. Nonetheless the TRA bill did not get an ‘offset,’ even an unseemly fig-leaf-like one, nor did anyone block it in protest. Using a bitter metaphor, if the two bills were animals, the analogy might be a landlord barring a new tenant in one apartment from bringing a guinea pig, while casually approving a full-grown grizzly bear for the family next door. CBO has the figures:

    TRA – $328,366 million for one year, no ‘offset’: http://www.cbo.gov/publication/43829

    GSP – $742 million for one year, ‘offset’ strictly required: http://cbo.gov/publication/42638