COMPETITIVE NEED LIMITS AND THE U.S. GENERALIZED SYSTEM OF PREFERENCE

I. INTRODUCTION Under the Generalized System of Preferences (GSP) developed countries offer preferential tariff treatment to imports from developing countries. The GSP's stated purpose is to stimulate industrialization of developing countries by giving their exports preferential tariff treatment. While the GSP has stimulated developing countries' exports, most analysts agree that it has not lived up to its original promise primarily because most developed countries offer limited GSP coverage (Baldwin and Murray, 1977; Karsenty and Laird, 1987; MacPhee and Oguledo, 1991; and Murray, 1977). GSP coverage is restricted in several ways. This paper examines one restriction the United States employs known as a competitive need limit. It applies to GSP-eligible imports of a beneficiary's product when these imports exceed a certain dollar value or import share. GSP-eligible imports that exceed either threshold lose preferential tariff treatment. Thus, competitive need limits restrict the benefits of the U.S. GSP. Competitive need limits are one of many restrictions that the United States and other developed countries use in their GSP schemes. Others include import ceilings, value-added requirements, and exclusions for import-sensitive industries. Analyzing competitive need limits is important for several reasons. First, in 1994, these limits applied to imports valued at $4.2 billion. The fact that competitive need limits affect a small number of products and countries magnified the impact on these imports. Just 10 competitive need limits covered more than half of affected imports in 1994. Workers and producers in developing country industries targeted by competitive need limits can suffer greatly. Second, competitive need limits represent one of many restrictions that the United States uses to limit its GSP coverage. While the effect of any one restriction may seem minor, their combined impact is substantial. Without these restrictions, imports receiving preferential treatment under the U.S. GSP would have increased from $18.4 billion in 1994 to $29.2 billion, or by about 60%. Competitive need limits accounted for a large fraction of the U.S. imports denied GSP treatment. Finally, analyzing competitive need limits helps identify who benefits from these limits. Competitive need limits apply only when import competition from a developing country is serious. Thus, domestic producers likely are the principal beneficiaries, especially when the import share of affected imports is high. In these cases, the developing country affected by a competitive need limit is likely to represent the only real competitive threat to a U.S. industry. In the only previous study of the effects of competitive need limits, MacPhee and Rosenbaum (1989) find that competitive need limits reduce the market share of affected imports by an unweighted average of 23% and by a weighted average of 6% without significantly increasing imports from other GSP beneficiaries. This paper extends MacPhee and Rosenbaum's analysis in two ways. First, it estimates the effect that existing competitive need limits have on affected GSP imports and import shares. Second, it uses the most recent period for which data are available. MacPhee and Rosenbaum use data from 1976-1983. Substantial changes have occurred in the U.S. GSP since then, including a major revision in 1984. The list of beneficiary countries also has changed. A number of countries either have lost eligibility (Hong Kong, Korea, Singapore, and Taiwan) or have gained eligibility (Eastern European countries and the former Soviet republics), and one has received greater duty-free access (Mexico). These changes have altered the impact of competitive need limits, making a reappraisal worthwhile. The completion of the Uruguay Round Agreement alters the effect of competitive need limits. This agreement cuts the average U.S. tariff rate by about a third, weakening the impact of the GSP and competitive need limits by lowering preference margins. …