International Trade: U.S. Trade Preference Programs Provide Important Benefits, but a More Integrated Approach Would Better Ensure Programs Meet Shared Goals
Published: 2008-03-07T00:00:00

Fast Facts:

Highlights:
section_title: Why GAO Did This Study
paragraphs: U.S. trade preference programs promote economic development in poorer nations by providing export opportunities. The Generalized System of Preferences, Caribbean Basin Initiative, Andean Trade Preference Act, and African Growth and Opportunity Act unilaterally reduce U.S. tariffs for many products from over 130 countries. However, three of these programs expire partially or in full this year, and Congress is exploring options as it considers renewal. GAO was asked to review the programs' effects on the United States and on foreign beneficiaries' exports and development, identify policy trade-offs concerning these programs, and evaluate the overall U.S. approach to preference programs. To address these objectives, we analyzed trade data, reviewed trade literature and program documents, interviewed U.S. officials, and did fieldwork in six countries.
section_title: What GAO Found
paragraphs: Overall, trade preference programs have a small effect on the U.S. economy. Some U.S. industries have shared-production arrangements with foreign producers that depend on preference benefits, while others compete with preference imports. Preference programs are used to advance U.S. goals, such as intellectual property rights protection. Developing countries extensively use preferential access to boost exports to the United States. Preference imports have grown faster than overall U.S. imports, and recent changes in product coverage have expanded beneficiaries' export opportunities. Gaps in duty-free access continue for sectors such as agriculture and apparel. Preference exports remain concentrated in a few countries and products, but trends indicate greater diversification and increased use by the poorest countries. Those GAO interviewed in beneficiary countries also stressed the benefits derived from preferences. Preference programs balance two key policy trade-offs. First, programs offer duty-free access to the U.S. market to increase beneficiaries' trade, while attempting not to harm U.S. industries. Second, Congress faces a trade-off between longer program renewals, which may encourage investment, and shorter renewals, which may provide more opportunities to change the programs to meet evolving priorities. Finally, some beneficiary countries' concerns over the eroding value of preferences must be weighed against the likely greater economic benefits of broader trade liberalization. Trade preference programs have proliferated over time, becoming more complex, but neither Congress nor the interagency Trade Policy Staff Committee that manages the programs has formally considered them as a whole. Responsive to their legal mandates, the Office of the U.S. Trade Representative (USTR) and other agencies use different approaches to monitor compliance with program criteria, resulting in disconnected review processes and gaps in reporting on some countries and issues. Separate reporting and examination also hinder measuring programs' contribution to economic development.

section_title: Letter
paragraphs: In an effort to promote and achieve various U.S. foreign policy objectives,  trade preference programs have expanded in number and scope over the  past three decades. The purpose of these programs is to foster economic  development through increased trade in qualified beneficiary countries  while not harming U.S. domestic producers. The trade preferences, which  reduce tariffs, or duties, for many products from eligible countries, are  “nonreciprocal”—they are granted unilaterally, without requiring reciprocal  liberalization for U.S. goods for countries receiving them. Currently, the  United States offers the Generalized System of Preferences (GSP) and  three regional programs, the Caribbean Basin Initiative (CBI), the Andean  Trade Preference Act (ATPA), and the African Growth and Opportunity Act  (AGOA).
As we noted in our previous report on U.S. trade preference programs,  these programs represent a small share of total U.S. imports, but they  constitute a significant share of many beneficiary countries’ exports to the  United States. Imports under U.S. preference programs have grown sharply  since 2002. In 2006, imports through U.S. trade preference programs totaled  approximately $92 billion—about 5 percent of total U.S. goods imports.
However, while U.S. preference programs are widely used, concerns exist  about perceived shortcomings in these programs. For example, frequent  program lapses and renewals have created uncertainty about program  availability, and questions have been raised about effectiveness. This year,  three preference programs expire partially or in full; as a result, Congress is  exploring options for improvements as it considers program renewal. At  your request, in this report, we (1) describe how U.S. preference programs  affect the United States, (2) review the effects of U.S. preference programs  on foreign beneficiaries’ exports and development, (3) identify the trade- offs policymakers face with respect to U.S. preference programs, and (4)  evaluate the overall U.S. approach to preference programs.
To address these objectives, we reviewed and analyzed U.S. laws and  regulations and authoritative international trade documents. We analyzed  official U.S. trade data and we spoke with officials from agencies  participating in the Trade Policy Staff Committee (TPSC)—including the  Office of the U.S. Trade Representative (USTR)—and reviewed and  analyzed documentation we received from the agencies. We conducted a  literature search on the impacts of U.S. preference programs on the United  States and on foreign beneficiaries. We attended the sixth AGOA Forum in  Accra, Ghana, in July 2007. We also traveled to Brazil, Colombia, Haiti,  Kazakhstan, and Turkey to meet with U.S. embassy officials, foreign  officials, and industry groups using U.S. preference programs. We selected  at least one country from each of the preference programs based on  income levels according to the World Bank and United Nations and the  spectrum of issues related to usage and capacity of each of the programs  in-country (for more information on the how we selected these countries,  see the full scope and methodology in app. I). We conducted this  performance audit from March 2007 to February 2008 in accordance with  generally accepted government auditing standards. Those standards  require that we plan and perform the audit to obtain sufficient, appropriate  evidence to provide a reasonable basis for our findings and conclusions  based on our audit objectives. We believe that the evidence obtained  provides a reasonable basis for our findings and conclusions based on our  audit objectives.
subsections: section_title: Background
paragraphs: The United States extends unilateral tariff reductions to over 130  developing countries through one general trade preference program (GSP)  and three regional programs—CBI, ATPA, and AGOA (see table 1). The  preference programs are tools that the U.S. government uses to assist  countries in the developing world.
At the United Nations Conference on Trade and Development (UNCTAD) in  1964, developing countries asserted that one of the major impediments to  their accelerated economic growth and development was their inability to  compete with developed countries in the international trading system; the  developing countries argued that preferential tariffs would allow them to  increase exports and foreign exchange earnings necessary to diversify their  economies and reduce dependence on foreign aid. The rationale for trade  preferences was that poorer countries need to develop industrial capacity  for manufacturing in order to move away from dependence on imports and  production of traditional commodities that could be subject to declining  prices in the long term. It was argued that poorer countries also needed  time to retain some protection to develop their “infant industries,” but that  increases in exports would be necessary to help countries capture  economies of scale in production and earn foreign exchange. In addition, it  was evident that some provision for the elimination of preferences once the  industries were firmly established was necessary. The argument was that  trade preferences should be temporary, introduced for a period of no less  than 10 years with respect to any given industry in any developing country.  At the end of the 10-year period, preferences would be withdrawn unless it  could be shown that special circumstances warranted their continuation.
At the second UNCTAD conference in New Delhi in 1968, the United States  joined other participants in supporting a resolution to establish a mutually  acceptable system of preferences. In order to permit the implementation of  the generalized preferences, in June 1971 the developed countries,  including the United States, were granted a 10-year waiver from their  obligations under the global trading system, now embodied in the World  Trade Organization (WTO), to trade on a most favored nation (MFN) basis.  Following the granting of this waiver, developed countries created their  GSP programs, and Congress enacted the U.S. GSP program in January  1975. The United States maintained that GSP was a temporary program to  advance trade liberalization in the developing world, but it recognized the  need to address the legal basis for granting these preferences, in  anticipation of the expiration of the waiver in 1981. An agreement was  reached at the 1979 conclusion of the Tokyo Round of Multilateral Trade  Negotiations, known as the “Enabling Clause,” which has no expiration  date and replaces the waiver. Because the Enabling Clause applies to  preference regimes that are “generalized, non-reciprocal, and non- discrimatory,” separate waivers have been sought for U.S. regional  preference programs.
The GSP program seeks to accelerate economic growth and development  in developing countries by providing access to the U.S. market. GSP  establishes a basic level of product coverage common to all the preference  programs. Over the years, Congress has also enacted a series of regional  trade preference programs that have evolved to address U.S. foreign policy  objectives beyond the shared general objective of promoting economic  development. The regional programs expand on GSP to cover additional  products that are not covered by GSP, including some apparel, footwear,  and certain leather-related products. While regional programs may  generally have more liberal conditions for product entry than GSP, these  differences are more likely to affect products for which countries cannot  receive GSP benefits (e.g., textiles and apparel). CBI was created to  promote economic and political stability in the Central America and  Caribbean region, to diversify exports, and to expand trade between those  countries and the United States. ATPA was established to combat drug  production and trafficking by providing sustainable economic alternatives  to beneficiary countries in the Andean region of South America. AGOA was  set up to facilitate Sub-Saharan Africa’s integration into the global  economy.
The regional preference programs have some eligibility criteria that overlap  with GSP, but the regional programs also set forth additional eligibility  criteria that are not part of the GSP statute. In order to be eligible for  AGOA, a country must also be eligible for GSP. In addition, all preference  programs contain certain common eligibility requirements, such as having  national policies to ensure workers’ rights and protect intellectual property.  Regional program beneficiary countries are subject to more extensive  eligibility criteria than GSP beneficiary countries. For example, ATPA  requires cooperation with U.S. counternarcotics and antiterrorism efforts,  and AGOA requires that countries be making progress toward political  pluralism and not commit gross violations of human rights.
Eight agencies have key roles in administering U.S. trade preference  programs. Led by USTR, they include the Departments of Agriculture,  Commerce, Homeland Security, Labor, State, and Treasury, as well as ITC.  USTR utilizes an interagency mechanism, the TPSC, and its associated  subcommittees to consult and coordinate with these and other agencies  such as USAID.
This year, ATPA, CBTPA, and GSP expire, and Congress will need to  explore the option of renewing these programs. At the same time,  legislative proposals to provide additional, targeted benefits for the poorest  countries are pending. In addition to examining the benefits trade  preference programs provide, Congress will need to consider concerns by  beneficiary and other developing countries, industry groups, and economic  experts surrounding these programs. Such concerns include the potential  for diversion of trade from other countries that these programs can cause;  the complexity, scope of coverage, certainty, and conditionality of these  programs; and the potential opposition to multilateral and bilateral import  liberalization that preference programs can create.
section_title: Preference Programs Have Some Economic Effects on the United States and Provide an Opportunity to Advance U.S. Foreign Policy
paragraphs: The overall effects of trade preference programs on the U.S. economy are  small, but preference programs have direct effects on U.S. businesses,  consumers, and the federal budget. Effects on U.S. industries and  individual businesses vary; some have shared-production arrangements  with preference beneficiaries, while a few U.S. industries compete with  imports benefiting from preferences. U.S. consumers have benefited from  lower prices resulting from duty-free imports under trade preference  programs, while tariff revenues to the U.S. Treasury have been lower  because of foregone tariff revenues. In addition, preference programs serve  as a tool to advance U.S. foreign policy objectives.
subsections: section_title: The Overall Effect of Trade Preference Programs on the U.S. Economy Is Small
paragraphs: Imports under preference programs represent a small share of total U.S.  imports. As shown in table 2, U.S. preference imports across all programs  accounted for about 5 percent of U.S. imports in 2006.
In general, studies of the effects of preference programs on the U.S.  economy find that the overall impact is small. For example, the ITC  consistently finds in its biennial reports on ATPA and CBI that the impact  of imports from these programs on the U.S. economy is minor. In the most  recent ITC reports on ATPA and CBI, ITC reported again that the overall  effect of imports from these programs on the U.S. economy continued to be  negligible, representing only 0.09 percent and 0.10 percent, respectively, of  the U.S. gross domestic product in 2005. Similarly, in January 2008, the  Congressional Research Service concluded that the overall effects of GSP  on the U.S. economy are relatively small and that the rate of increase of  imports entering under GSP in the past 10 years is relatively flat, indicating  that there may be little impact on the U.S. market as a whole by extending  these preferences.
section_title: Trade Preference Programs Have Direct Effects on Some U.S. Businesses, Consumers, and the Federal Budget
subsections: section_title: Businesses
paragraphs: Some U.S. industries and individual businesses have shared-production  arrangements with foreign producers that depend heavily on duty-free  preference benefits. Over the last two decades, U.S. producers of apparel  have come to rely on “outward processing arrangements.” In such  arrangements, U.S. factories focus on relatively capital-intensive  operations, such as fabric production. Fabrics and components are then  shipped to CBI, ATPA, or AGOA countries, where factories conduct the  relatively labor-intensive business of assembling the finished garments.
In addition, U.S. manufacturers and importers benefit from the lower cost  of consumer goods and raw materials imported under preference  programs, such as jewelry, leather, and aluminum imported through GSP.  Furthermore, U.S. manufacturers also rely on and benefit from  intermediate goods from preference beneficiary countries. For example,  Brazil is a major user of GSP. In 2006, 10 percent of all nonfuel imports to  the United States from all preference programs came from Brazil. Much of  what Brazil ships to the United States under GSP are intermediate goods  produced by U.S.-affiliated multinational companies. Once exported to the  United States, these goods are further processed or incorporated into U.S.- manufactured goods such as cars and power generators. Given the  importance of these intermediate goods to domestic manufacturers, the  Congressional Research Service reported that an expiration or  modification of GSP would directly affect them, at least in the short term.  Smaller U.S. businesses that regularly import inputs under a preference  program may be especially affected by a lapse or expiration of the program  because they rely on GSP’s duty savings to compete with much larger  companies, and they are less able to adjust to increased costs. A wide range  of U.S. companies submitted official comments to USTR on several  countries during an overall review of GSP in 2006. For example,  concerning GSP imports from Thailand, U.S. companies’ comments were  overwhelmingly positive and supported continued preferential treatment  for imports that included items such as jewelry, bottle-grade polyethylene  terephthalate resin, motor vehicle tires, microwave ovens, ophthalmic  lenses, televisions, cookware, golf equipment, and tuna.
On the other hand, certain other U.S. industries compete with imports  benefiting from preferences. For example, ITC estimates that U.S.  methanol producers may have experienced displacement of between 5.2  percent and 10.1 percent of production, valued at $27.6 million to $54.2  million in 2006, because of methanol imports from CBI countries. ITC also  found that U.S. asparagus, fresh cut roses, chrysanthemums, carnations,  and anthuriums may have experienced displacement of more than 5  percent of the value of production in 2005 because of imports that receive  ATPA preferences. However, product coverage of the preference programs  is dynamic, based on statutory provisions. Based on thresholds added by  the legislation passed by Congress in December 2006 when it extended the  GSP program, the President removed GSP duty-free treatment for  methanol from Venezuela.
section_title: Consumers
paragraphs: U.S. consumers benefit to the extent that tariff savings result in lower  prices on final products, as well as from the lower costs of intermediate  goods. U.S. importers of goods who import duty-free components, parts, or  materials under GSP maintain that the preference results in lower costs for  these intermediate goods that, in turn, can be passed on to consumers. In a  May 1, 2006, letter to the House Ways and Means and Senate Finance  committees, a coalition of importers and retailers stated that if GSP were  allowed to expire or its benefits were reduced, it “would impose a costly  hardship on not only beneficiary countries but their American customers as  well.” As part of biennial reviews of CBI and ATPA, ITC assessed the effects  of these programs on the U.S. economy, industries, and consumers.  Following are illustrative (not comprehensive) single-year examples  extracted from the most recent ITC reports on CBI and ATPA, highlighting  products where U.S. consumers benefited:  ITC found that, in 2006, knitted cotton T-shirts provided the largest gain  in consumer surplus ($63.7 million to $68.5 million) resulting  exclusively from CBI tariff preferences. The price U.S. consumers would  have paid for imports of such T-shirts from CBI countries would have  been 12 percent higher without CBI. Men’s and boys’ woven cotton  trousers or shorts provided the second-largest gain in consumer surplus  ($56.7 million to $62.3 million). Without CBI, the import price of such  woven cotton trousers or shorts from CBI countries would have been 15  percent higher.
ITC found that, in 2005, men’s or boys’ knitted shirts provided the largest  gain in consumer surplus ($30 million to $34 million) from lower prices  and higher consumption resulting exclusively from ATPA tariff  preferences.
section_title: Federal Budget
paragraphs: In December 2006, the Congressional Budget Office (CBO) issued cost  estimates associated with the extension of GSP, ATPA, and AGOA and the  enactment of HOPE under the Tax Relief and Health Care Act of 2006,  including the loss of tariff revenues that would otherwise accrue to the U.S.  Treasury. In the multiyear review, CBO came to the following conclusions:  Changes to the GSP program will result in an estimated reduction in  revenues of $297 million in 2007 and of $992 million over the 2007 to  2009 period. This estimated reduction of revenue is due to the extension  of GSP to December 31, 2008, and the new provisions concerning  competitive need limit waivers. In addition, CBO estimated in its  “Budget Outlook” for fiscal years 2007 to 2016 that revenue losses would  amount to about $3.1 billion if GSP were extended to 2011.
The extension of ATPA to June 30, 2007, was estimated to result in a  decrease in revenues of $25 million in 2007. The most recent ATPA  extension to December 31, 2008, will result in $119 million in reduced  revenues in 2008 and 2009, according to a February 2008 CBO cost  estimate.
AGOA will result in an estimated reduction in revenues of about $2  million in 2007, $127 million over the 2007 to 2011 period, and $180  million over the 2007 to 2016 period.
The enactment of HOPE will result in an estimated reduction of $4  million in 2007, and $28 million over the 2007 to 2011 period.
Without econometric analysis, it may be difficult to determine whether,  absent preferences, the same volume of goods would still be exported to  the United States. If no or a reduced volume of exports occurs without the  preferences, less tariff revenue would be foregone.
section_title: Preference Programs Have Significance as a Tool to Advance U.S. Foreign Policy
paragraphs: Preference programs have been used to advance U.S. foreign policy goals  in areas such as intellectual property protection, labor, and human rights,  as well as on broader market-oriented and democratic governance reforms.  Some supporters of GSP and other nonreciprocal preferences believe that  the country practice criteria that developing countries must meet if they  are to qualify for GSP provide the United States with political leverage that  can be used to support U.S. foreign and commercial interests. Periodic and  petition-initiated reviews under the programs provide the United States the  opportunity to engage with governments and motivate policy change. As  we noted in our previous report, these reviews serve to encourage  beneficiary countries to comply with country eligibility criteria, such as the  extent to which the country is providing adequate and effective protection  of intellectual property rights (IPR), taking steps to afford internationally  recognized worker rights, and implementing its commitments to eliminate  the worst forms of child labor. For example, GSP has annual reviews of  country and product eligibility, based on petitions (requests) filed with  USTR concerning GSP beneficiary countries and products by U.S. industry  groups, governments, and nongovernmental organizations (NGOs) such as  labor unions. According to USTR, the United States works with a  beneficiary country during a country practice review before removing it  from eligibility. Our review of agency records and meetings with officials  and interest groups indicate that the leverage associated with preferences  creates an opportunity to secure improvements in IPR and labor  protections.
Regional trade preference programs also serve important foreign policy  interests. For example, ATPA complements counternarcotics efforts by  providing opportunities for legal crops to be exported to the U.S. market,  thus encouraging farmers to shift away from coca and heroin poppy  production. Similar to GSP, ATPA also has an annual review of country  eligibility practices, based on petitions filed against beneficiary countries  by the public; this review has not resulted in the withdrawal or suspension  of benefits from any ATPA country.
section_title: By Providing New Opportunities, Preferences Can Increase U.S. Imports from Developing Countries and Thus Promote Economic Development
paragraphs: In assessing the effects of trade preferences on beneficiary country  development, economists note that preferences are just one element of a  complex economic development process and that isolating their direct  impact is difficult. However, there is fairly wide agreement among  economists that expanding trade promotes growth and development. If  trade preferences lead to increased exports, and export earnings are used  to expand industrialization and promote a more diverse economy, then  preferences can contribute to the economic development of beneficiary  countries. To shed light on the question of whether U.S. trade preference  programs are helping countries develop, we look at the fundamental link  between the programs and the trade activity of beneficiary countries,  focusing on three key elements: (1) the extent and nature of the new  opportunities provided under U.S. preference programs, (2) whether  countries are fully using the available opportunities, and (3) whether U.S.  imports from beneficiaries have grown and diversified. We also report  countries’ perspectives on the benefits they derive from U.S. preferences,  based on fieldwork. Overall, we find that U.S. trade preference programs  have contributed to increased and more diverse trade for many developing  country partners.
subsections: section_title: Opportunities Offered Beneficiaries under U.S. Preferences Have Expanded
paragraphs: To assess the opportunities provided to beneficiary countries by U.S.  preference programs, we examined the scope of programs’ coverage by  beneficiary and product, the size of tariff cuts (or margins of preference),  and some eligibility conditions that can affect the ability of beneficiaries to  access program opportunities. Overall, we found that the opportunities for  beneficiaries to export under preferences have expanded, but still have  gaps (see detailed data and further discussion in app. III).
subsections: section_title: Coverage
paragraphs: As detailed in appendix III, product coverage, as measured by tariff lines  eligible for duty-free treatment, is extensive for most U.S. preference  programs, products, and partners. In 1996, the number of duty-free tariff  lines offered under GSP was expanded to provide additional benefits to  beneficiary least-developed countries (LDC). Enactment of the regional  programs continued this expansion. But, as figure 1 shows, notable gaps  remain in tariff lines available for duty-free import under preference  programs, particularly in agricultural and textile and apparel products.
Moreover, in examining coverage by beneficiary countries’ trade with the  United States in 2006, using the ratio of eligible to dutiable imports for  each partner, we find wide variation in coverage even within programs. Our  analysis finds that: (1) countries eligible for only GSP or GSPLDC have the  least coverage of partners’ dutiable imports—approximately 25 percent, (2)  regional programs and GSPLDC have much higher coverage of partners’  dutiable imports, and (3) country variations in coverage are wide. For  example, 35 GSP or GSPLDC beneficiaries, including Lebanon, Paraguay,  Somalia, and Zimbabwe, have high coverage rates, exceeding 75 percent of  the value of their dutiable imports. Yet, 54 GSP or GSPLDC beneficiaries  such as Bangladesh, Egypt, Pakistan, and Uzbekistan have low coverage  rates (less than 25 percent of dutiable imports).
section_title: Preference Margins
paragraphs: The expansion of U.S. program coverage since 1996 appears to have  increased the benefit of U.S. preferences by adding some key products  under GSP-LDC and the regional programs that otherwise would face  relatively high U.S. tariffs. A recent effort to quantify margins of  preference (the difference between the preference rate and the otherwise- applicable tariff rate) across all U.S. preference programs, including GSP,  by staff economists at ITC and the World Bank finds that preference  margins are relatively high for apparel products, as well as certain  agricultural goods (melons, cut flowers, frozen orange juice, raw cane  sugar, and asparagus); they tend to be relatively low for other products  and fairly uniform among programs.
section_title: Program Conditions
paragraphs: Conditions on product entry are also a significant factor affecting  opportunities and trade under U.S. preference programs. While the data on  coverage and margins of preference suggest a degree of success in  improving the benefits of U.S. preference programs, in general, recent  assessments of the literature express some skepticism as to whether trade  preferences, and GSP in particular, have had more than a very modest  impact on the export performance, and hence the development, of eligible  countries. In discussing factors that underlie the performance of  preference programs, researchers Ozden and Reinhardt, for example, not  only indicate that GSP often fails to cover products in which beneficiary  countries have the greatest comparative advantage, such as agricultural  products, but cite administrative features of the programs—notably, export  ceilings and rules of origin—as key constraints on benefits. Nevertheless,  conformity with such requirements can be vital to ensuring that benefits  flow to the intended country—that is, the designated beneficiary country or  countries, rather than countries that are ineligible for preferences.
Two specific conditions—“competitive need limitations” and “rules of  origin”—illustrate how administrative implementation of statutory  provisions, although addressing important policy considerations, may  affect the ability of beneficiary countries to fully access the opportunities  otherwise offered by U.S. preference programs. GSP places export ceilings,  or competitive need limitations (CNL), on eligible products from GSP  beneficiaries that exceed specified value and import market share  thresholds (LDCs and AGOA beneficiaries are exempt). Rules of origin for  U.S. trade preference programs typically specify a minimum percentage  value-added to the entering product that must come from the beneficiary  country. However, more complex rules apply to some products, notably  textiles and apparel. Our fieldwork revealed examples where complex  rules-of-origin requirements appear to be complicating preference trade,  for example, in Haiti and in Ghana. On the other hand, liberalizing quotas  and rules of origin have been the principal means by which the regional  programs have been liberalized or made more likely to permit imports in  recent years, particularly on apparel products.
section_title: Utilization of Regional Programs Is Fairly High Compared with GSP but Varies by Partner
paragraphs: The effectiveness of trade preference programs in expanding trade is also  dependent on beneficiaries’ actual use of the preference opportunities  offered. The utilization rate indicates the extent to which beneficiaries are  taking advantage of the opportunities offered.
Our analysis shown in appendix III finds that U.S. preference programs  have fairly high utilization rates, but utilization varies by program and  beneficiary. Although utilization of the regional preference programs is  higher than utilization of GSP, to some extent, this lower utilization of GSP  reflects the fact countries that have access to both GSP and regional  programs often opt to use the regional programs. Our analysis of utilization  across programs by beneficiary country finds substantial variation. For  example, under AGOA, a number of countries, such as Nigeria, Angola,  Chad, and Gabon have high utilization rates, but 12 of the 38 AGOA eligible  countries did not export under the program.
section_title: Overall U.S. Imports from Developing Countries Have Risen, and Preference Imports Have Risen Even Faster
paragraphs: The improved opportunities for market access provided by U.S. preference  programs appear to have contributed to the rapid growth in U.S. imports  from developing countries in recent years. The total dollar value of U.S.  imports from both developed and developing countries has steadily grown  since 1992, but developing countries have witnessed much faster growth  since 2000. The developing countries’ share of total U.S. imports has  increased, while the developed (high-income) countries’ share has  declined. The overall gains by developing countries are mostly attributable  to middle-income developing countries. The share of low-income and LDCs  remains small.
Turning to preference imports specifically, we also find that preference  programs have generally contributed to the increasing shares of developing  countries in U.S. imports, particularly imports from low-income developing  countries. However, imports under U.S. preference programs only  accounted for about 5 percent of total U.S. imports in 2006. Total U.S.  preference imports grew from $20 billion in 1992 to $92 billion in 2006.  Most of this growth in U.S. imports from preference countries has taken  place since 2000, when preference imports grew faster than overall U.S.  imports. Whereas total U.S. preference imports grew at an annual rate of  0.5 percent from 1992 to 1996, the growth quickened to an annual rate of 8  percent from 1996 to 2000, and 19 percent since 2000, which also suggests  an expansionary effect of program changes that increased product  coverage and liberalized rules of origin for LDCs under GSP in 1996 and  African countries under AGOA in 2000.
subsections: section_title: A Few Countries Dominate U.S. Preference Imports, but Lower- Income Countries Have Garnered a Growing Share
paragraphs: While U.S. preference imports remain concentrated in a few countries,  overall the poorer countries’ share of preference imports has risen recently.  As can be seen from figure 2, the top 5 suppliers under preference  programs in 2006 accounted for 58 percent of preference imports, and the  top 10 suppliers accounted for 77 percent of preference imports. Among  the top 10 suppliers, two countries—Nigeria and India—are low-income,  and six countries—Angola, Ecuador, Colombia, Thailand, Peru, and the  Dominican Republic—are lower middle-income countries. The top 25  preference beneficiaries accounted for over 95 percent of U.S. preference  imports.
Nevertheless, as figure 3 shows, the poorest countries have been more  successful in increasing their shares in total U.S. imports under preferences  than they have been in increasing their share of overall U.S. imports. The  year 2000 marks the beginning of gains in preference imports for low- income countries and declines in the share of middle-income developing  countries. By 2006, imports from low-income countries had risen to 38  percent of U.S. preference imports. Within the middle-income grouping, the  share of upper middle-income countries has generally declined since 1992,  while that of lower middle-income countries rose, then moderated; in 1996,  lower middle income countries share surpassed that of the upper middle  income countries. The share of U.S. preference imports from the least- developed countries was 17 percent in 2006, versus nearly zero until 1996— the year of major revisions in GSP.
While our analysis shows that the LDC’s share of U.S. preference imports  has risen, the extent of their trade and reliance on preferences (as  measured by the share of preference imports in total imports) varies  considerably. Three LDCs—all oil exporters—rank among the leading  suppliers of total imports into the United States under preference programs  (Angola, Chad, and Equatorial Guinea) as shown in table 3. Other LDC  exporters to the United States, such as Lesotho, Madagascar, and Haiti are  also extensive users of preference programs and have the opportunity to  export apparel under AGOA or an expanded CBI. In contrast, several of the  top 10 LDC exporters such as Bangladesh, Cambodia, Liberia, Niger, Nepal,  and Guinea do not have the opportunity to export textiles and apparel  under GSP and do not rely on preferences to support their exports to the  United States. Overall, 34 of the 46 eligible LDCs barely used preference  programs for their exports to the United States.
section_title: Fuels and Apparel Dominate Preference Imports, but Overall Imports Have Diversified Somewhat
paragraphs: The growth in imports from developing countries is accompanied by  significant changes in the product mix of U.S. imports from preference- eligible countries. Notably, the rapid rise in fuel imports since 1996 is the  defining feature of U.S. imports under preference programs. Fuels were  less than 1 percent of U.S. imports from preference countries in 1996 but, in  2006, account for nearly 60 percent of U.S. preference imports from  preference-eligible countries. Figure 4 also highlights the importance of  apparel in the growth of U.S. preference imports up to 2005. After the phase  out of global quotas on textiles and apparel in 2005 and the entry into force  of the Dominican Republic-Central America-United States Free Trade  Agreement (CAFTA-DR) for several CBI nations during 2006, however,  these imports under preference programs declined somewhat.
In 2006, fuels comprised 94 percent of all imports under AGOA, nearly 70  percent of ATPA/ATPDEA imports, but only 27 percent each of GSP and  CBI/CBTPA imports. Apparel imports represent about 6 percent of total  preference imports but represent over 30 percent of U.S. imports under  CBI, 10 percent of ATPA imports, and just 3 percent of AGOA imports (see  app. V). Figure 5 further breaks down trends in nonfuel, nonapparel  imports under preference programs. Notably, after 1993, when the North  American Free Trade Agreement (NAFTA) was implemented, Mexico lost  GSP eligibility, and global agreements to eliminate tariffs in certain sectors  such as electronics and information technology were effectuated by the  United States, imports under preferences of machinery and electronics— initially the largest product category—declined, but increased somewhat  after 2000. Four product areas show increases. The year 2000 changes in  U.S. preference programs (the implementation of AGOA, CBTPA, and  enhancements in ATPA) appear to have contributed to growing imports of  agriculture; textiles, leather, and footware; glassware, precious metals and  stones, and jewelry; and chemicals, plastic, wood, and paper.
An important goal of trade preferences concerns helping developing  countries diversify the range of products that they produce and export. Our  analysis shows that total U.S. imports from all preference-eligible countries  remain quite concentrated when countries are grouped by their preference  program eligibility. However, when viewed over time, imports from  preference-eligible countries appear to have become somewhat more  diversified since 1992.
Our analysis of diversification of total U.S. imports from preference-eligible  countries is shown in figure 6. Using a widely used measure of trade and  commodity concentration, we constructed an index to show a value of 0  when products are extremely concentrated and a value of 1 when products  are most diversified. Consequently, a high value of this index indicates a  relatively diversified import/export product mix. In figure 6, the relative  level of diversification among the programs is indicated by the height of the  line, and the change in the level of diversification over time is shown by the  trend in the line from 1992 to 2006.
Looking first at the diversification level of each program, we see that U.S.  imports from those countries that qualify for GSP only, and those that  import to the United States under CBI, have the most diverse profile.  Conversely, imports from countries eligible for the AGOA, GSP-LDC, and  ATPA show a relatively less diverse profile. This finding can be seen as  broadly consistent with the concentration of imports under these  preference programs in fuels and apparel products.
Second, looking at the trend in the diversification index over time, we find  that all country groups, except CBI, which already was the most  diversified, show a modest increase in diversification over time. The  highest rate of increase in diversification (as measured by the rate of  increase of the lines in fig. 6), is noticeable for imports from countries  eligible only for GSP. AGOA countries, which are the least diversified, have  shown relatively little change over time. It is also important to note that  determination of diversification at such a high level of aggregation still  allows for significant diversification within each broad product group.
A key factor that can determine the impact of trade preference programs  on economic development is the ability of developing countries to take  advantage of global trading opportunities. The existence of a preferential  tariff is of little use in countries without the ability to produce goods  desired by importers, at competitive prices. This ability to produce and  trade competitively on world markets, which is termed “trade capacity,” is  generally related to having the appropriate economic conditions and  institutions that help to attract investment and enhance efficiency. Yet,  many developing countries lack of trade capacity prevents them from  taking full advantage of opportunities to export goods and services.
The lack of trade capacity is due to inadequate economic, legal, and  governmental infrastructure. Poor networks of roads, small and outdated  ports, inadequate supplies of energy and other utilities, rigid financial  institutions, inefficient or corrupt customs bureaus, and poorly educated  citizens are some of many obstacles that can make production and  exporting difficult and more costly. For example, in Haiti, an apparel  manufacturer located in a government-owned industrial park told us they  did not have reliable public sources of electricity or water. Therefore, they  had to pay for backup electricity generators and trucked-in water to  operate their factories. In addition, entrepreneurs in developing countries  may have little access to information about markets and export standards  or to affordable financing that would enable them to set up a successful  export business.
Even countries that have developed industries to produce items with  strong global markets, with or without the assistance of preferences, may  need to improve their trade capacity. For example, mineral commodities  such as oil, or agricultural products such sugar and soybeans, are an  important source of export income to many developing countries.  However, developing a greater diversity of export industries requires new  skills, technologies, and investment.
section_title: Country Visits Highlight Importance Attached to Preferences, Despite Diversity of Recipients
paragraphs: While the impact of trade preferences on the development of beneficiary  countries remains a subject of debate among economists and other  analysts, our fieldwork in several beneficiary countries indicates the  diverse range of countries being served, and most countries emphasized  their view that U.S. trade preferences are important to their trade and  development objectives. The countries include several whose efforts to use  U.S. preferences are at nascent stages and several that achieved notable  success.
We chose to visit Haiti and Ghana because they are among the poorest  beneficiaries and ones where mechanisms to take advantage of recently  expanded benefits under newer preference programs—HOPE and AGOA—  are being put in place. Overall, the people we met in Haiti and Ghana  expected their countries will increase their use of the preferential access to  the U.S. market, but urged continued U.S. commitment and patience.  Following are illustrative observations from our fieldwork in these  countries:   In-country officials and business representatives in Haiti see  preferences as a much-needed engine for creating jobs in the short-term,  attracting investment in the medium-term, and fostering growth over the  longer-term. Haitian officials recognize Haiti must confront the daunting  challenges of repairing its damaged infrastructure and international  image and improving security in order to be able to effectively take  advantage of the opportunities offered by the HOPE program. Haiti’s  base of entrepreneurs with experience in the apparel industry and  geographic proximity to the United States are assets that may help the  country use the new access provided by HOPE and thereby convince  Congress to reenact it in 2011.
Ghanaian authorities have put in place policy reforms and are pursuing  trade promotion initiatives to encourage the private sector to take  advantage of export opportunities provided under AGOA. Authorities  noted that hosting the annual AGOA forum among government, private  sector, and civil society increased the program’s visibility in the country.  However, many of the Ghanaian business people we met were still in the  initial stages of exporting to the United States. Additionally, Ghana  National Chamber of Commerce officials told us many potential  beneficiaries of the program, particularly agricultural producers, are  still unfamiliar with the full range of opportunities available under  AGOA, and see the program as being primarily targeted to the textile  and apparel industry. Like Haiti, Ghana lacks such essential capacity as  reliable energy supply and cost-competitive transportation. Yet, both  governments were mobilizing and were receiving considerable on-site  and other resources from various U.S. government and multilateral  agencies to develop customs and port facilities, and navigate U.S. rules  and requirements, etc.
We picked Brazil and Turkey to visit because these countries have  successfully used U.S. trade preferences to export a diverse range of  relatively sophisticated manufactured goods. The two countries were also  of interest because both Brazil and Turkey rely on their own government  and government-affiliated business associations to promote awareness of  GSP, with limited assistance from U.S. agencies such as USAID. Both  expressed a continued need for preferences, even though their overall  economies are growing, and they are among the leading developing country  users of U.S. preferences. Following are illustrative observations from our  fieldwork in these countries:   The government and private sector officials we met in Brazil  emphasized that GSP benefits both nations. Information provided GAO  shows that more than 90 percent of the value of what Brazil ships to the  United States under GSP are raw materials and intermediate or capital  goods, some produced by U.S.-affiliated multinationals. Upon arrival in  the United States, these intermediate goods are destined for further  processing and/or incorporation into U.S. manufactured goods such as  cars and power generators. Officials at Brazil’s Commerce and  Development agencies have stepped up efforts to promote awareness  and use of GSP, seeing it as a valuable tool for helping its poorest  regions and boosting participation by smaller businesses in export  markets. An analysis by Brazil’s Commerce Ministry shows that Brazil  has had more success in exporting manufacturing goods under GSP and  that more than 80 percent of the products Brazil exports to the United  States under GSP would otherwise face relatively low tariffs (facing MFN tariffs set at or below 5 percent). Yet, the loss of such privileges  in competitive need limitations (CNL) decisions has caused actual or  likely business contraction and layoffs at two companies on GAO’s  schedule of visits (in the automotive part and copper wire industry).  The people we met said such preferences are particularly important  now as they face intense competition from China, which has displaced  them in traditional industries such as leather footwear (which is  excluded by statute from the GSP program). Ironically, China’s rise has  also coincided with a run-up in demand and prices for Brazil’s  commodities, boosting the country’s total exports but disadvantaging  its manufactured goods because the Brazilian currency has  appreciated.
Turkey also has been buffeted by rising commodity prices in sectors  such as jewelry. It has been successful in exporting a diverse range of  manufactures to the United States under GSP, ranging from stone slabs  to steel, and says continuing to do so is vital to its competitiveness. As in  Brazil, the Turkish business representatives we met with said that profit  margins are so thin in the highly competitive U.S. market they serve that  even small preference margins make the difference between being able  to sell or being forced to exit entirely. Indeed, Turkey wishes to widen  the list of eligible products (e.g., hazelnuts) and expressed concerns  over losing GSP access for products such as jewelry and marble that  officials indicate have exceeded, or are likely to exceed, CNLs. They  attributed exceeding CNLs in part to rising commodity prices, levels of  aggregation in the U.S. tariff schedule that are too high for certain  products, and the related issue of importer use of broader versus more  specific categories to enter goods to avoid complications in customs  classification and clearance.
Colombia and Kazakstan were selected for high use, as well as their  involvement in ongoing liberalization: Colombia, through a free trade  agreement with the United States, and Kazakstan, as a result of its efforts to  join the WTO. Following are illustrative observations from our fieldwork in  these countries:   Colombia dominates the ATPA program, and exports to the United  States accounted for 20 percent of Colombia’s overall exports in 2006.  Relying on ATPA for more than half (54 percent) of its exports to the  United States that year, Colombia has attained success in steadily  increasing its exports in all but 2 years since the program’s inception in  1991, particularly since the program was expanded in 2002. Yet the  range of products it exported under preferences is considerably  narrower than that supplied by Brazil or Turkey. To diversify away from  coca production and spur participation in international trade, Colombia  has pursued improved security, political stabilization, and economic  diversification in the years since Plan Colombia was implemented in  2000 and the Andean Trade Preference Program was expanded in 2002.  The Department of State and USTR credit Colombia’s efforts and these  programs, as well as strong internal and external demand, with  revitalizing Colombia’s economy. Colombian business sector spokesmen  and government officials with whom we met generally underscored the  important role trade preferences have played in allowing certain  sectors, notably cut flowers, to compete in the U.S. market; however,  they also noted that their country needs to move beyond trade  preferences. In March 2007, Colombia’s trade minister publicly stated  that his country has effectively exhausted the utility of U.S. trade  preferences and is eager to consummate a comprehensive free trade  agreement with the United States. This not only will assure continued  preferential access to the U.S. market for Colombia’s exports, on which  it depends, but provide additional access and involve reciprocal  liberalization and rule-of-law changes in such areas as investment and  IPR that may help it attract additional investment and innovation.
Kazakhstan’s resource-driven economy is also booming based largely on  its vast oil, gas, and minerals reserves, which together make up about  two-thirds of its economic output. Its exports to the United States  reached $1 billion in 2006, of which half was imported using GSP  preferences. The country’s development goals include managing its  mineral wealth, integrating into the world economy, and diversifying its  exports. Despite its goal of becoming a hub for East-West business,  Kazakhstan faces many challenges associated with the legacy of the  Soviet era, such as legal structures that make business formation and  trade difficult and a business mentality of dependence on government  subsidies. Geographically, Kazakhstan is challenged in trading with the  United States, although opportunities for integrating regionally with the  European Union are great. The major goal of Kazakhstan’s trade policy  at present is WTO accession. Awareness and interest in the U.S. GSP  program was rather limited. In fact, exports of several major products  reached CNL limits, and the country did not seek a waiver for its  producers. The major GSP export in 2006, copper cathodes, turned out  to be more likely a one-time event prompted by factors other than GSP  preferences (the normal or MFN tariff rate on this product is just 1  percent). A major producer of the country’s leading preference export  told us he sells the commodity at world prices and does not depend on  preferences or focus on the U.S. market, due to strong demand and  transportation linkages elsewhere.
section_title: Fundamental Program Trade-offs Balance Foreign and Domestic Benefits
paragraphs: Preference programs balance two key trade-offs. First, programs offer  duty-free access to the U.S. market to increase beneficiary trade, to the  extent that it does not harm U.S. industries. Product exclusions, country  graduation, and product import limits are tools to make this trade-off,  although their use has raised concerns that nonbeneficiary countries may  gain U.S. market share from a beneficiary’s loss of preferences. Second,  policymakers face a trade-off between longer or permanent program  duration, which may encourage investment, and shorter renewal periods,  which may provide leverage to achieve other policy goals. Finally, the  preference programs balance these trade-offs against a backdrop of  increasing global trade liberalization. Although multilateral trade  liberalization is a primary U.S. trade objective and would be beneficial to  most developing countries, liberalization dilutes the marginal value of the  preferences to beneficiaries. This may affect their willingness to participate  in reciprocal trade liberalization. However, economic studies suggest that  the negative effects of preference erosion are outweighed by other factors,  most notably the benefits for developing countries associated with open  markets.
subsections: section_title: Product Exclusions Shield Domestic Industries but Limit Magnitude of Preferences to Beneficiaries
subsections: section_title: Statutory Product Exclusions Affect Products of Importance to Developing Countries
paragraphs: A basic policy trade-off is the extent to which preference programs benefit  businesses in beneficiary countries versus those in the United States. As  described in appendix III, U.S. preference programs provide duty-free  treatment for a little over half of the 10,500 U.S. tariff lines, in addition to  those that are already duty-free on an MFN basis for all countries. But, they  also exclude many other products from duty-free status, including some  that developing countries are capable of producing and exporting. The  extent of product exclusions, therefore, may directly affect the ability of  some developing countries to use and benefit from the preferences.
Some product exclusions were established in preference legislation to  protect sensitive U.S. industries from import competition. The GSP statute,  for example, prohibits various “import-sensitive” categories of products  from being designated as eligible. These include most textiles, apparel,  watches, footwear, handbags, luggage, flat goods, work gloves, and leather  apparel; import-sensitive electronics, steel, and glass products; and “any  other articles which the President determines to be import-sensitive in the  context of the Generalized System of Preferences.” In addition,  agricultural products subject to a tariff-rate quota are not eligible under  GSP for duty-free treatment if such imports exceed the in-quota quantity.  The regional preference programs exclude some of these products as well.  U.S. tariffs on a number of these excluded products tend to be high.
The GSP statutes provide some discretion for the administration to  determine which items within some of these product categories are not  import-sensitive. Specifically, for electronic, steel, and manufactured and  semimanufactured glass products, USTR and ITC officials told us that the  President may determine which of these items are eligible for GSP benefits,  based on advice from the ITC about import sensitivity. The administration  has at times self-initiated such a determination for individual products, but  the officials told us it has reexamined eligibility for large numbers of  products only within the context of extending new benefits to subsets of  countries, namely for LDCs in 1996 and for AGOA suppliers in 2000. More  often, it makes determinations for individual products based on petitions  filed by interested parties. There is no discretion for administrative product  additions for the other product categories specifically excluded by law  from GSP eligibility. However, the statutory language for each of these  other product categories is based on business conditions as of specific  dates—January 1, 1994, for textiles and apparel; June 30, 1989, for watches;  and January 1, 1995, for footwear, handbags, luggage, flat goods, work  gloves, and leather apparel. We note that U.S. industries have changed in  the intervening years, and these statutory provisions may not be up-to-date.  For example, in comments to USTR on the GSP program in 2006, the  Footwear Distributors and Retailers of America stated that imports now  account for 99 percent of U.S. footwear sales and urged that the footwear  exclusion be removed from the GSP legislation.
According to USTR officials, the initial GSP statute provided that the  President could not designate as eligible those “textile and apparel articles  which are subject to textile agreements.” Certain handcrafted wall  hangings, clothing, and other hand-loomed articles were not covered by the  Multi-Fiber Arrangement. In the late 1970s, the agencies administering  GSP sought to provide commercial opportunities for handicraft producers  of nonimport-sensitive items in interested beneficiary countries. Based on  an interagency review, the President determined in 1981 that U.S. imports  of certain wall hangings, pillow covers, and carpets and textile floor  coverings that had been certified as handmade by the beneficiary country  could enter under GSP. USTR officials told us that since that time 15 GSP  beneficiaries have entered into such certified textile handicraft  agreements; however, by 2007, all but two of the items originally covered  by the presidential determination have become MFN duty-free. As noted  above, no textile and apparel items can be added to GSP eligibility if they  were not on the GSP-eligible tariff list as of January 1, 1994.
Studies indicate that even when GSP product exclusions have been  liberalized within the context of GSP for LDCs or the regional programs,  remaining limits on product eligibility can affect the ability of beneficiary  countries to use and benefit from U.S. preference programs. One recent  study examined the expansion of tariff lines under AGOA. In agriculture,  the study noted, AGOA appears to have liberalized nearly all products,  altlhough a substantial portion of agricultural tariff lines are still subject to  tariff-rate quotas and, as a result, are not, in effect, fully liberalized.  Products not fully liberalized include certain meat products, a large  number of dairy products, many sugar products, chocolate, a range of  prepared food products, certain tobacco products, and groundnuts  (peanuts), the latter being of particular importance to some African  countries. The study noted that, in manufacturing, AGOA liberalized  additional tariff lines, but the increase is most notable for those countries  granted apparel benefits. According to the study, key products that remain  excluded are textile products, certain glass products, and certain  headwear.
A related trade-off involves deciding which developing countries can enjoy  additional preferential benefits for products excluded for most preference  recipients. One controversy concerns a few LDCs in Asia that are not  included in the U.S. regional preference programs, although they are  eligible for GSP-LDC benefits. Two of these countries—Bangladesh and  Cambodia—have become major producers and exporters of apparel to the  United States and have complained about the lack of duty-free access to  this country for their goods. For example, Cambodian trade and industry  officials argue that it is not fair that many LDCs enjoy preferential access to  the U.S. apparel market through the regional preference programs, while  Cambodia does not. In comments filed with USTR on possible U.S.  proposals at WTO to provide duty-free, quota-free access to least- developed countries, some African and other beneficiary countries, as well  as certain U.S. industries, have opposed the idea. African private sector  spokesmen have raised concerns that giving preferential access to  Bangladesh and Cambodia for apparel might endanger the nascent African  apparel export industry that has grown up under AGOA, while other non- LDC developing countries have expressed similar concerns about their  own industries. U.S. textile manufacturers have also protested that the  possible expansion of apparel benefits to these countries would threaten  their textile sales to Latin American clothing producers under the regional  preference programs and free trade agreements. However, numerous U.S.  importing industries, such as retail groups, are strongly in favor of these  proposals.
section_title: Country and Product Graduation Aim to Focus Benefits on Poorest Countries but May Not Achieve That Objective
paragraphs: Over the 30-year life of the GSP program, questions about which countries  should benefit and how more benefits could be directed to poorer  countries have been raised repeatedly. The concerns relate to the original  intention that preference programs would confer temporary trade  advantages on developing countries, which would eventually become  unnecessary as the countries became more competitive. The GSP program  has mechanisms to limit duty-free benefits by “graduating” countries that  are no longer considered to need preferential treatment, based on income  and competitiveness criteria. The U.S. government has used two  approaches to graduation: outright removal of a country from GSP  eligibility, and the more gradual approach of ending duty-free access for  individual products from a country.
Once a country’s economy reaches a “high income” level, as indicated by  World Bank measures of gross national income per capita, the statute  governing GSP requires that the country be graduated from this program.  Fifteen countries have been graduated since 1995 on that basis, including,  most recently, Antigua and Barbuda, Bahrain, and Barbados in January  2006. Since 1995, nine other countries at high and upper-middle income  levels were removed from GSP eligibility because they joined the European  Union—most recently, Bulgaria and Romania in December 2006. Program  regulations also allow the United States to remove a country from GSP  after a review has found it to be “sufficiently developed or competitive.”  Four countries or customs territories were graduated on this basis in  1989—Singapore, South Korea, Taiwan, and Hong Kong. Under the regional  programs, there are no mechanisms to graduate countries that have  reached a more advanced level of development. However, in the last 2  years, five Central American/Caribbean countries were removed from GSP  and CBI/CBTPA when they entered free trade agreements with the United  States.
More commonly, the United States uses import ceilings—CNLs—to end  GSP duty-free status for individual products from individual countries if  imports reach a certain level. The rationale given by USTR for these limits  is that they indicate a country has become a “sufficiently competitive”  exporter of the product and that ending preferential benefits in such a case  may allow other GSP-eligible countries to expand their access to the U.S.  market. The value of trade from GSP beneficiaries that is ineligible for  duty-free entry because of the CNL ceiling is substantial. We identified $13  billion in imports in 2006 that could not enter duty-free under GSP due to  CNL exclusions—over one-third of the trade from GSP beneficiaries  potentially subject to the CNL ceiling.
Although the intent of country and product graduation is to redistribute  preference benefits more widely among beneficiary countries, some U.S.  and country officials with whom we met observe that GSP beneficiary  countries will not necessarily benefit from another country’s loss of  preference benefits. The benefits cannot be “transferred” directly from one  country to another; rather, preferences are a marginal advantage that can  make a country’s product competitive only if other factors make it nearly  competitive. In fact, the loss of a tariff preference to a given country may  give an advantage to a country that is not a beneficiary of U.S. trade  preference programs. In the countries we visited, we repeatedly heard  concerns that China, or sometimes other countries, would be most likely to  gain U.S. imports as a result of a beneficiary’s loss of preferences.
As part of an overall review of the GSP program in 2005 and 2006, USTR  officials reviewed trade and development indicators for large users of the  GSP program to determine whether they could be considered sufficiently  competitive in terms of trade in eligible products and, therefore, should no  longer be designated as GSP beneficiaries. USTR officials said there are  inherent tensions between the program’s statutory economic development  and export competitiveness goals. They noted that some of the  beneficiaries USTR reviewed were very competitive in certain industries  but nevertheless had large numbers of poor people. Agency officials told  us that it was important to conduct the overall review in a manner  consistent with U.S. WTO obligations under the GATT’s Enabling Clause,  which enables developed WTO members to give differential and more  favorable treatment to developing countries.
section_title: Efforts to Remove Preferences for Competitive Products Have Raised Concerns
paragraphs: Efforts to target benefits to the poorest countries have resulted in the  removal of preferences from products important to some U.S. businesses.  In 2007, the President revoked eight CNL waivers as a result of legislation  passed in December 2006. Consequently, over $3.7 billion of trade in 2006  from six GSP beneficiaries lost duty-free treatment. Members of the  business community and members of Congress raised concerns that the  revocation of these waivers would harm U.S. business interests while  failing to provide more opportunities to poorer beneficiaries. A bill  regarding sanctions on Burmese gems, which passed the House of  Representatives in December 2007, had included a GSP provision that  would have reinstated the CNL waivers for gold jewelry from Thailand and  India and would have required the President to review the other revoked  waivers. The bill also would have provided for the President to reinstate  the other waivers unless ITC determined that the loss of a waiver would  neither reduce the current level of U.S. imports of the article from the  beneficiary nor benefit countries that are not part of GSP.
section_title: Periodic Program Renewal Preserves U.S. Leverage but May Discourage Long-term Investments
paragraphs: Policymakers also face a trade-off in setting the duration of preferential  benefits in authorizing legislation. Preference beneficiaries and U.S.  businesses that import from them agree that longer and more predictable  renewal periods for program benefits are desirable. However, some U.S.  officials believe that periodic program expirations can be useful as leverage  to encourage countries to act in accordance with U.S. interests.
Private sector and foreign government representatives have complained  that short program renewal periods discourage longer-term productive  investments that might be made to take advantage of preferences, such as  factories or agribusiness ventures. They would like to see preference  programs become permanent or have a longer duration. The private sector  Coalition for GSP (Coalition) cites the frequent lapses in GSP between 1993  and 2001, with authorization periods ranging from 10 to 27 months (and  gaps between expiration and legislative renewal of 1 to 15 months), as  hindering long-term investment in beneficiary countries. Both USTR and  the Coalition have attributed the relatively greater growth in GSP use after  2002 to the stability provided by a 5-year program reauthorization at that  time. Business people say that predictable program rules and a longer  program renewal period are important to them in making business plans  and investment decisions in developing countries with confidence when  they are based on preference benefits. For example, officials in the  Colombian flower industry told us that ATPA’s short time frame and  frequent renewals made it difficult to attract investment needed to enable  them to compete with other international cut-flower producers. They said  investors need certainty about preference benefits for at least 10 years to  amortize and project return on investment. Members of Congress have  recognized this argument with respect to Africa and, in December 2006,  Congress renewed AGOA’s third-country fabric provisions until 2012;  AGOA’s general provisions had previously been renewed until 2015.
On the other hand, short-term program renewals give Congress more  opportunities to respond to changing events and political priorities.
Threatening to let benefits lapse can be used as a way to pressure countries  to act on an issue. While acknowledging the need for U.S. vigilance in  pursuit of its commercial interests, officials at USTR and Labor told us  short-term program renewal can have other adverse consequences, such as  creating uncertainty for investors and importers interested in using the  program. From their perspective, the discretion the administration  exercises over continuation of program benefits offers sufficient leverage  to achieve policy goals, based on the country’s desire to maintain benefits  and the possibility of removing benefits administratively through reviews  of country conformity with eligibility requirements.
Nevertheless, a recent instance involving ATPA has provided U.S. officials  an opportunity to engage with beneficiary countries in the context of  program expiration. ATPA was extended for 6 months in December 2006,  again for 8 months in June 2007, and for 10 more months on February 29,  2008. These short renewal periods reflected interest in hastening  congressional consideration of the free trade agreements with Peru and  Colombia and concern about policies adopted by Bolivia and Ecuador that  have negatively affected foreign investors. After the most recent ATPA  extension, the administration said the extension would provide time to  implement the Peru free trade agreement and for Congress to pass the  Columbia free trade aggreement. The administration also said it expected  to see significant progress with respect to Bolivia and Ecuador’s treatment  of foreign investors.
section_title: Global and Bilateral Trade Liberalization Diminishes Margin of Preferences but Is Valuable in Its Own Right
paragraphs: Global and bilateral trade liberalization is a primary U.S. trade policy  objective, based on the premise that increased trade flows will support  economic growth for the United States and other countries. However,  international movement toward lowering tariffs and other trade barriers  has an unavoidable effect on the marginal value of trade preferences to  beneficiaries. Because of this, beneficiary countries’ desire to keep their  preferential advantages may generate some internal resistance to  multilateral liberalization. As some countries make unilateral decisions to  liberalize their national trade policies, and as others enter into bilateral and  regional trade agreements that result in lower tariffs among trading  partners, countries that rely on preferential margins find the advantages  they gain from preferences fading away.
The erosion of the value of trade preferences poses yet another trade-off.  All of the preference programs include provisions to encourage countries  to move into reciprocal and liberalized trading relationships. Indeed, a  number of countries that were former beneficiaries of preference programs  have gone on to conclude free trade agreements with the United States, and  some have joined the ranks of newly industrialized nations. However,  members of Congress and some administration officials have raised  concerns that some preference beneficiaries are placing their interests in  trade preference programs above the broader interest in multilateral  liberalization, which the United States has traditionally advocated. They  note that, in an effort to maintain their preference benefits, some  beneficiary countries have created roadblocks at WTO in the Doha Round  of negotiations. This was confirmed by U.S. agency officials we  interviewed. The assurance of continued preferential access to the U.S.  market has at times, created a disincentive to negotiation of reciprocal free  trade agreements. For example, officials at Commerce and Labor told us  that the extension of AGOA preferences during the negotiations toward a  free trade agreement with members of the Southern African Customs  Union may have contributed to the suspension of those negotiations since  countries were already granted broad access to the U.S. market. In the past,  spokesmen for countries that benefit from trade preferences have told us  that any agreement reached under the Doha framework must, at a  minimum, provide a significant transition period to allow beneficiary  countries to adjust to the loss of preferences. Additionally, they questioned  whether it is even fair to expect certain countries, such as small-island  states, to survive without some trade preference arrangements under any  deal that may be reached through WTO negotiations.
As we have noted in previous reports, economic studies predict that global  trade liberalization, such as might be achieved in a new WTO agreement  from the Doha negotiations, would generally benefit most developing  countries. Moreover, with regard to preference erosion and its impact on  developing countries, some research has suggested that the negative  effects of preference erosion may be outweighed by other factors—in  particular, the benefits generated by more open trade on the part of  developing countries. For example, one recent study estimates that while  a small number of countries, particularly those that currently receive very  large benefits under existing preference schemes, could experience a loss  of market access, most countries would benefit from the expanded market  access due to reduced tariffs under the Doha Round. Another recent  study of the impact of preference erosion on development in the CBI  countries notes that preference erosion occurred steadily over the 15 years  of the study (1984 to 1998). While preference erosion was shown to have a  small negative impact on investment and growth in some countries in the  CBI region over the period studied, this effect may have been outweighed  by the positive effects of increased utilization of preferences. In addition,  the author finds the countries’ own trade reforms (openness) may have had  a larger impact on development than the trade preferences did.
section_title: Separate Approaches to Preference Programs Impede Assessing Whether They Are Meeting Shared Goals
paragraphs: Trade preference programs have proliferated over time, but Congress has  not considered U.S. trade preferences as a whole. In response to statutory  requirements, agencies pursue different approaches to monitoring  compliance with the various criteria set for programs, resulting in a lack of  systematic review. There are other differences in key aspects of the  preference programs, such the use of trade capacity building in  conjunction with opportunities provided under trade preference programs,  which is currently most prominent in AGOA. Finally, distinct approaches to  reporting and examining the programs limit the United States’ ability to  determine the extent to which U.S. trade preferences foster development in  beneficiary countries.
subsections: section_title: Trade Preferences Have Proliferated, Creating a Complex Array of Programs, but Congress Still Considers Each Program Separately
paragraphs: Over the years, Congress has set up a number of trade preference programs  to meet the overall goal of development, as well as specific regional  objectives. As a result, U.S. trade preferences have evolved into an  increasingly complex array of programs, with many countries participating  in more than one of these programs (see fig. 7). Congress generally  considers these programs separately partly because these programs have  disparate termination dates, and Congress has focused on issues pertaining  to individual programs when they have come up for renewal. Proposals  from the administration and members of Congress suggest further  additions to the preference programs are possible.
Of the 137 countries and territories eligible for preference programs, as of  January 1, 2007, 78 benefit from more than one (see fig. 8). The reason that  many countries benefit from more than one program is that the regional  preference programs have been added, as noted above, to further various  U.S. foreign policy objectives. The regional programs in effect expand the  preferences offered by GSP, but they result in overlap, with various  combinations of program eligibility for certain countries. Thus, of the 48  countries to which the President may grant AGOA eligibility, 39 are eligible  for AGOA, while 47 are eligible for GSP. The African country of Equatorial  Guinea, for example, is ineligible for AGOA, but eligible for GSP, and it  exported approximately $1.6 billion in fuel products to the United States  under that program in 2006. The 59 countries eligible for only the basic GSP  program, such as Argentina or Egypt, are neither LDCs nor part of a  regional preference scheme.
In the case of ATPA and CBI beneficiary countries, importers may choose  whether to enter products eligible for the regional program and GSP under  either one. Those importing goods from the Andean or Caribbean areas  tend to use ATPA or CBI instead of GSP, due to the more liberal rules of  origin and expanded product coverage for these programs. To a certain  extent, this has mitigated the uncertainty associated with GSP program  lapses.
While there is overlap in various aspects of trade preference programs,  each program is currently considered separately by Congress based on its  distinct timetable and expiration date. Typically, when Congress has  considered these programs for renewal, the focus has been on particular  issues relevant to specific programs, such as counternarcotics cooperation  efforts in the case of ATPA, or phasing out benefits for advanced  developing countries in the case of GSP. The oversight difficulties  associated with this array of preference programs and distinct timetables is  compounded by different statutory review and reporting requirements for  agencies. As explained in detail in the next section, in practice, these entail  distinct administrative structures and approaches that leave gaps in  assessment and use of tools known to be necessary to helping developing  countries participate in trade. Congressional deliberations have not  provided for cross-programmatic consideration or oversight. However, key  congressional leaders appear to want to use this year’s coincidence of  expiration dates for ATPA, CBI, and GSP to look more systematically at  preference programs and how they can be updated and improved.
section_title: Different Approaches Agencies Use to Monitor Compliance with Program Criteria Result in Disconnected Reviews
paragraphs: Two different approaches—a petition process and periodic reviews—have  evolved to monitor compliance with criteria set for various trade  preference programs. USTR officials explained that the mechanisms for  monitoring compliance with the criteria under specific programs reflect the  relevant statutory requirements for each. We observed advantages  associated with each approach, but individual program reviews appear  disconnected and result in gaps. The petition process under GSP and ATPA  offers certain benefits over the periodic reviews of all beneficiary countries  that take place under AGOA and CBI. These regional programs’ periodic  reviews, on the other hand, provide an opportunity to engage beneficiary  countries on areas of concern in a more consistent manner. Table 4  illustrates key administrative aspects of the trade preference programs,  including the type of reviews followed to determine compliance.
GSP reviews of product and country practice petitions have the advantage  of adapting the programs to changing market conditions and the concerns  of businesses, foreign governments, and others. Most petitions originate  outside the government, and agency officials, and NGO and private sector  representatives cited the value of the petition process in bringing forward  concerns related to intellectual property rights and workers’ rights. The  process also brings to bear the knowledge of NGOs and others about  problems in these areas and helps the government pursue credible cases.  Private sector and labor representatives also said that they appreciated the  petition process because it compels a formal decision from the government  on the merits of a complaint and draws public attention to an issue. The  process allows U.S. petitioners to seek and obtain resolution of trade- related concerns. For example, from 2001 through 2006, USTR conducted  an investigation on copyright piracy and enforcement in Brazil in response  to a petition filed under GSP by a coalition of seven trade associations  concerned about IPR violations in that country. The investigation resulted  in an agreement between the U.S. and Brazilian governments, hailed by the  petitioner, to increase antipiracy raids in well-known marketplaces,  establish antipiracy task forces at the state and local level in Brazil, and  enhance deterrence through criminal prosecutions, among other actions.
However, a petition-driven process also can result in a long time passing  between reviews of country compliance with the criteria for participation.  From 2001 to 2006, when the number of GSP beneficiaries ranged from 146  to 132, USTR considered petitions against 32 countries. While some of  these nations are reviewed under the regional preference programs,  approximately three-quarters of the countries eligible only for GSP did not  get examined at all for their conformity with eligibility criteria from 2001  through 2006. Long periods of time passed between overall reviews of GSP  as well. As mentioned earlier, USTR initiated an overall review of the GSP  program in October 2005. USTR completed the last general review of the  program more than 18 years earlier in January 1987. A U.S. official told us  that some of the countries reviewed frequently are not necessarily those  that perform the worst relative to the criteria for participation, but rather  those countries of most concern to particular groups, such as businesses or  NGOs. In this sense, U.S. government resources may be unduly invested in  performing repeated reviews of a country that is of particular concern to a  given interest group, while other countries with potential problems receive  substantially less scrutiny.
A second weakness is that the petition-driven review fails to systematically  incorporate other U.S. efforts in areas such as IPR protection and efforts to  counter trafficking in persons. The centerpiece of U.S. policy efforts to  increase IPR is the annual Special 301 process. USTR cites the GSP  process as a key part of its mission to promote IPR overseas. Moreover,  GAO reviewed the 2006 Special 301 report and found that over half of the  48 countries cited by USTR for concerns with respect to the provision of  adequate and effective protection of IPR in 2006 were U.S. preference  program beneficiaries. However, USTR did not accept any new petitions to  review beneficiaries against the IPR criteria for participation in 2006. USTR  officials observed to us that the placement of a country on the Watch List or  Priority Watch List did not constitute a USG finding that the country failed  to provide adequate and effective IPR protection. Rather, placement of a  country on these lists indicates that particular problems exist in the  country with respect to IPR protection, enforcement, or market access for  persons relying on intellectual property. Additionally, industry officials told  us that the administration has been reluctant to threaten removal of  countries from GSP for lack of compliance with IPR protection in recent  years, calling into question whether the leverage provided by the trade  preferences is put to effective use. While it is possible that the  administration may choose not to remove countries as a result of Special  301 designations, the lack of review, under the GSP provisions, of any of  the 26 countries cited makes it appear that no linkage exists between these  issues.
U.S. efforts to combat trafficking in persons is another area where criteria  for participation in trade preferences programs may have some bearing,  although USTR officials noted that there is not a specific link between the  preference program criteria and the Trafficking and Victims Prevention Act  of 2000. Both State and the Department of Justice cite Labor’s Findings on  the Worst Forms of Child Labor as among the U.S. government’s efforts to  combat trafficking in persons. State issues an annual report that analyzes  and ranks foreign governments’ compliance with minimum standards to  eliminate trafficking in persons. State also prepares an annual report that  discusses the status of internationally recognized worker rights within each  GSP beneficiary.
Twenty-seven of the 48 countries on the Tier 2 Watch List or in Tier 3 in the  June 2007 Trafficking in Persons report are preference beneficiaries. In  congressional hearings, members and a witness have cited concerns that  countries in Tiers 2 and 3 receive trade benefits. Preference beneficiaries  on the Tier 2 watch list include Argentina, Armenia, South Africa, Ukraine,  and India, and beneficiaries on the Tier 3 list include Algeria, Equatorial  Guinea, Uzbekistan, and Venezuela. At times, concerns in some of these  countries may have been addressed through the regional programs. For  example, the country reports contained in the 2007 Comprehensive Report  on U.S. Trade and Investment Policy Toward Sub-Saharan Africa and  Implementation of the African Growth and Opportunity Act cite concerns  in beneficiary countries with respect to child labor and trafficking in  persons, showing consideration of these issues in the eligibility  determinations. In other countries such as Venezuela, Algeria, and  Uzbekistan, the U.S. government has not received any petitions to initiate  an examination of performance against any of the GSP eligibility criteria  related to trafficking in persons in the last 5 years. Consequently, these  countries have not been reviewed against those criteria for participation.  As noted above, it is possible that the administration might choose not to  remove countries as a result of these reviews, but it appears that no linkage  between these issues exists, given the lack of official reviews.
subsections: section_title: Regional Program Reviews Ensure a More Systematic Look at Criteria for Participation but Are Resource-Intensive and Sometimes Miss Important Concerns
paragraphs: The periodic reviews under the regional programs offer more timely and  consistent evaluations of country performance against the criteria for  participation. Among the regional programs, AGOA has the most intensive  evaluation of country performance against the criteria for participation.  AGOA requires the President to determine annually whether Sub-Saharan  African countries are, or remain, eligible for the program. GAO found that,  between 2001 and 2007, the President terminated eligibility four times and  conferred eligibility eight times. Between 2001 and 2006, one country was  removed and reinstated for GSP, and another country was reinstated after  being removed in 1990. No country lost eligibility under the ATPA or CBI  programs.
The key difference between the AGOA review and the CBI and ATPA  reviews is that only AGOA requires a determination periodically as to  whether a country should remain a beneficiary. A USTR official testified  that AGOA’s annual review process has resulted in improved country  performance under the eligibility criteria. In July 2007, a senior USTR  official testified before the Subcommittee on Africa and Global Health of  the House Foreign Affairs Committee that the President had removed, or  threatened to remove, AGOA beneficiaries that did not meet the criteria for  participation. This official noted that some of these countries had taken  action to meet the criteria, and countries such as Liberia and Mauritania,  which had been ineligible, were now eligible. However, U.S. officials also  commented that the AGOA review is extremely time-consuming and  demands a considerable investment of staff resources, since each  beneficiary country must be reviewed on its performance on a range of  criteria, such as respect for the rule of law and poverty reduction efforts.  Moreover, these reviews must be updated on an annual basis.
Despite more regular and comprehensive reviews, 11 countries that are in  regional programs were later subject of GSP complaints in the 2001 to 2006  period. In several cases, the petition-based examination associated with the  GSP process validated and resulted in further progress in resolving  concerns with regional partners such as Guatemala, Swaziland, and  Uganda on labor issues. For example, in 2005, the American Federation of  Labor and Congress of Industrial Organizations filed a petition regarding  Uganda’s performance against workers’ rights criteria under GSP and  AGOA. The petition led to an interagency investigation that was closed  after Uganda enacted new legislation facilitating organization of unions,  among other things. A Labor official told us that these issues had not been  remedied under the AGOA review.
section_title: Only One Preference Program Links to Capacity Building Efforts but No Funding Provided
paragraphs: Many developing countries have expressed concern about their inability to  take advantage of global trading opportunities because they lack the  capacity to participate in international trade. The United States considers  the ability of these countries to participate in and benefit from the global  trading system key factors in promoting economic development, and has  provided trade capacity building (TCB) assistance, to help developing  countries more effectively take advantage of trade preferences, among  other purposes. However, we found agencies pursue different approaches  with regard to using TCB in conjunction with trade preference programs,  with AGOA having the strongest link.
AGOA requires the administration to produce an annual report on the U.S.  trade and investment policy for Sub-Saharan Africa and the implementation  of AGOA. The report includes information about trade capacity building  efforts undertaken in the region by U.S. agencies such as the Department of  Agriculture and USAID. Sub-Saharan Africa has also been the primary  focus of U.S. TCB efforts linked to the preference programs, with the  United States allocating $394 million in fiscal year 2006 to that continent. A  USTR official noted that linkage to TCB in AGOA’s authorizing legislation  was useful for USTR as leverage with U.S. agencies that have development  assistance funding to target greater resources that help developing  countries take advantage of opportunities provided by trade preferences.  In our field work and research, we observed USAID efforts to improve the  business and regulatory environments in Sub-Saharan Africa, including  preparing private sector enterprises to navigate U.S. import regulations,  coaching small businesses on access financial services for trade and  investment, and facilitating investments in trade-related infrastructure.
Several U.S. officials said that the annual AGOA Forum (Forum) also  contributed to the stronger linkage between TCB and trade opportunities  offered under the program. A USTR official told us that the Forum brings  USAID, Millennium Challenge Corporation, and other U.S. officials  together to focus on the program and that having agency leaders attend the  Forum makes a big difference in generating business interest in the region.  A USAID official told us that the Forum also provided the opportunity for  African entrepreneurs to interact directly with senior members of the U.S.  government. Although AGOA authorizing legislation refers to trade  capacity building assistance, USTR officials noted that Congress has not  appropriated funds specifically for that purpose.
In other regions of the world, U.S. trade capacity building assistance has  less linkage to trade preferences. For example, none of the other trade  preference programs direct the relevant agencies to convene regularly to  discuss how the program’s implementation affects trade opportunities.  Some agencies refer to trade programs in developing their assistance  efforts to non-African regions and countries. For example, USAID notes the  need for more resources in its strategic plan to improve the business  environment and enable local businesses to take advantage of HOPE.  Further, other U.S. trade initiatives link market access opportunities with  trade capacity building assistance, such as CAFTA-DR.
section_title: Separate Reporting and Examination Hinder Measuring Progress on Programs’ Contribution to Economic Development
paragraphs: Separate reporting for the various preference programs, while consistent  with statutory requirements, makes it difficult to measure progress toward  achieving the fundamental and shared goal of trade preferences, namely  economic development of beneficiaries. The effect of trade preferences on  beneficiary countries’ economic development is not assessed in a cross- programmatic manner that would examine progress made under  preference programs. U.S. agencies do prepare reports that attempt to  measure the effects on economic development of certain trade preference  programs, but not all. The law requires only one program to directly report  on impact on the beneficiaries. In addition, even when agencies report on  the economic effect of some of these programs, different approaches are  used, resulting in disparate analyses that are not readily comparable.
As noted earlier in this report, trade preferences are fundamentally  intended to promote development in beneficiary countries by providing  enhanced opportunities for their products to access the U.S. market. In its  2006 to 2011 strategic plan, USTR notes that one of its objectives is to apply  “U.S. trade preference programs in a manner that contributes to economic  development in beneficiary countries.” However, there is no formal cross- programmatic examination of the preference programs collectively. As  shown in table 4, USTR pursues different approaches to administering  these programs, and does not consider the preference programs jointly,  with respect to their performance. Moreover, there is no evaluation of how  trade preferences, as a whole, affect economic development in beneficiary  countries.
In response to statutory requirements, several government agencies report  on certain economic aspects of the regional trade preference programs and  their effects on specific countries or groups of countries, but these  agencies do not report on the economic development impact of GSP.  Agency officials noted that they strive to comply with statutory reporting  requirements and, through the TPSC, they coordinate with each other on  various aspects of administering these programs, including reporting. This  reporting, nevertheless, is done on a program-by-program basis. For  example, USTR has produced three reports to Congress on the operation of  ATPA. The ITC also issues biennial reports on ATPA’s impact on U.S.  industries and consumers and on drug crop eradication and crop  substitution. Additionally, USTR prepares a biennial report for Congress on  CBI that highlights increases in overall U.S. imports from the countries in  the program. Similarly, ITC reports on the CBI program’s impact on  beneficiaries on a biennial basis, the only report required by statute to  address the impact on the beneficiaries. Finally, USTR produces an annual  report on the implementation of AGOA that highlights trade and investment  trends in Sub-Saharan Africa. However, there is no comparable periodic  reporting on the effect of GSP on the economic development of countries  covered by that program. USTR officials told us that the vehicles they use  for reporting on the GSP program are the annual Report of the President of  the United States on the Trade Agreements Program and the annual Trade  Policy Agenda. Discussion of the GSP program in these documents focuses  on product coverage and country conformity with eligibility criteria, not on  the impact of benefits to beneficiary developing countries in terms of trade  growth or economic development.
Different approaches used to measure the effects of trade preference  programs on beneficiary countries, while consistent with statutory  reporting requirements, produce disparate data and analysis that are not  readily comparable to evaluate how these programs advance economic  development—their fundamental goal. For instance,   USTR’s report on the ATPA provides some examples that illustrate the  role of the program in promoting exports and development in each of  the four beneficiary countries and refers to analyses by the ITC and  Labor on some aspects of the economic impact of ATPA. On the other  hand, ITC reporting on the ATPA provides some material on exports and  economic diversification for countries under the program.
USTR’s reporting on CBI highlights overall and country-specific  increases in U.S. imports from countries in the CBI program. The report  includes discussions on individual countries, which generally do not  evaluate the impact of CBI on the exports or development of the  beneficiaries. The ITC reports on the impact of CBI examine how that  program affects those countries that have relatively large trade flows  with the United States. The trade profile for the region presented in this  report has shifted over time, with certain countries receiving more  emphasis in earlier reports while later iterations focus on others.
USTR’s comprehensive report on trade and investment in Sub-Saharan  Africa and the implementation of AGOA provides an overview of trade  and investment trends in participating Sub-Saharan countries, reviews  economic integration efforts at the regional and subregional level, and  discusses participation by AGOA countries in the WTO.
Finally, while there is no regular reporting on the economic impact of  GSP on beneficiary countries, in 1980, the administration prepared a  statutorily required report to Congress on the first 5 years of operation  of the GSP program. That report included an analysis of the impact of  the GSP on developing country economies. This appears to have been a  one-time report, and USTR officials confirmed that no further such  reports were prepared.
Thus, while there is an abundance of reporting on various aspects of the  economic effects of trade preference programs on beneficiary countries,  the analyses and data presented in these reports is typically quite dissimilar  and does not lend itself for use in evaluating the overall effects of trade  preferences.
section_title: Conclusions
paragraphs: Congress created these programs over the years to address compelling  trade and foreign policy objectives. The programs are important to  individual businesses and industries, both domestically and internationally.  Additionally, the criteria for participation associated with the programs  have served as an important tool to advance U.S. foreign and trade policy  objectives. The preference programs have evolved over time to  accommodate not only the general goal of trade-led development, but  regional interests, such as counternarcotics efforts in ATPA. Changes to the  preferences programs in the past have had an impact on beneficiaries’  trade profiles with the United States, by stimulating export growth to this  country. Much of the increased exports coincided with congressional  expansions of the programs in 2000 and 2002 to cover key products.
However, U.S. trade preferences are neither administered nor evaluated on  a cross-programmatic basis. A lack of systematic evaluation limits any  judgment about the extent to which the collection of U.S. trade preference  programs has increased trade and fostered development in beneficiary  countries. While evaluations may occur to determine whether countries  should retain eligibility for preferences, such inquiries have not been made  regularly or in a consistent manner across the programs or beneficiary  countries. Two different approaches have evolved to monitor compliance  with criteria set for various trade preference programs, and we observed  advantages associated with each approach, but individual program reviews  result in gaps and appear disconnected from other on-going U.S.  government efforts, such as the Special 301 process. Further, the petition- driven process can result in a long time passing between reviews of country  compliance with the criteria for participation. There are also certain  practices, such as stronger links between preference benefits and trade  capacity building efforts in the AGOA program, that may be advantageous  to some of the other programs. A distinct reporting approach for each  program limits the United States’ ability to determine the extent to which  U.S. trade preference programs as a whole foster development in  beneficiary countries. However, the programs’ positive impact on  developing economies may be attenuated because the United States does  not extend preferential access to products that are important exports of  beneficiary countries and because the United States imposes complex  entry requirements for some products.
section_title: Matters for Congressional Consideration
paragraphs: As Congress deliberates on whether to renew the ATPA, CBTPA, and GSP  programs this calendar year, it should consider whether a more integrated  approach would better ensure programs meet shared goals. Specifically,  Congress should consider which elements of the approaches used by  agencies to administer these programs, such as petition-initiated  compliance reviews or periodic assessment of all countries under certain  programs, have benefits that may be applied more broadly to trade  preference programs in general. Congress should also consider  streamlining various program reporting requirements to facilitate  evaluating the programs’ progress in meeting their shared economic  development goal.
section_title: Recommendations for Executive Action
paragraphs: To ensure that these programs, as a whole, meet their shared goals, we  recommend USTR undertake the following two actions:  work through the TPSC and its associated agencies to consider ways to  administer, evaluate, and report on preference programs in a more  integrated manner, and  periodically convene the TPSC to discuss the programs jointly to  determine what lessons can be learned from the various provisions  concerning matters such as linkages to trade capacity building.
Additionally, to ensure that beneficiary countries are in compliance with  program criteria, we recommend that USTR should also periodically  review preference beneficiaries that have not otherwise been reviewed by  virtue of their membership in the regional programs.
section_title: Agency Comments and Our Evaluation
paragraphs: We provided a draft of this report to USTR; the Departments of Agriculture,  Commerce, Homeland Security, Labor, State, and Treasury; USAID and ITC.  USTR, and the Departments of Agriculture, Labor, Commerce, Treasury,  and State provided extensive technical comments on an interagency basis.  The Departments of Homeland Security, Labor, and State, and ITC also  provided separate technical comments. We have incorporated these  comments where appropriate. USTR indicated that it would report on the  actions taken in response to the recommendations in a letter, within 60  days of public issuance of this report, as required under U.S. law.
As agreed with your offices, unless you publicly announce the contents of  this report earlier, we plan no further distribution until 30 days from the  report date. At that time, we will send copies of this report to interested  congressional committees; the U.S. Trade Representative; the Secretaries  of Agriculture, Commerce, Homeland Security, Labor, State, and the  Treasury; the Administrator of USAID; and the Chairman of ITC. We also  will make copies available to others upon request. In addition, this report  will be available at no charge on the GAO Web site at http://www.gao.gov.
If you or your staff have any questions about this report, please contact me  at (202) 512-4347 or yagerl@gao.gov. Contact points for our Offices of  Congressional Relations and Public Affairs may be found on the last page  of this report. GAO staff who made major contributions to this report are  listed in appendix VI.
section_title: Scope and Methodology
paragraphs: In this report, we (1) describe how U.S. preference programs affect the  United States, (2) review the effects of the programs on exports and  development of foreign beneficiaries, (3) identify trade-offs facing the  programs, and (4) evaluate the overall approach to preference programs.
We followed the same overall methodology to complete objectives 1, 3, and  4. We reviewed and analyzed U.S. laws and regulations, authoritative  international trade reports/documents describing the impact of trade  preference programs on the United States, such as the biennial impact  studies from the U.S. International Trade Commission (ITC) on the  Caribbean Basin Initiative (CBI) and the Andean Trade Preference Act  (ATPA), and periodicals. We interviewed officials from agencies  participating in the Trade Policy Staff Committee—including the Office of  the U.S. Trade Representative (USTR); the Departments of Agriculture,  Commerce, Labor, State, and the Treasury; U.S. Customs and Border  Protection; and ITC— regarding the impact of preferences on the U.S.  economy. We also interviewed representatives of businesses that used the  preference programs and nongovernmental organizations (NGOs) that  have filed petitions under the programs. We reviewed academic, World  Trade Organization, and other research studies, on the effects of preference  erosion on developing countries. In addition, we analyzed the 2006 U.S.  government reports on the Special 301 process, the August 2007 report on  the Worst Forms of Child Labor, and finally, the 2007 State Department  report on Trafficking in Persons. For information on key features and use  of U.S. preference programs, we drew from findings from a previous GAO  report on U.S. preference programs, International Trade: An Overview of  Use of U.S. Trade Preference Programs by Beneficiaries and U.S.  Administrative Reviews (GAO-07-1209).
To review the effects of U.S. preference programs on exports and  development of foreign beneficiaries, we reviewed relevant academic,  government and other literature. Particularly useful were recent broad  reviews of the trade preferences literature found in (1) Bernard Hoekman  and Caglar Ozden, Trade Preferences and Differential Treatment of  Developing Countries (Cheltenham, UK, and Northampton, MA: Edward  Elgar Publishing, 2006) and (2) Caglar Ozden and Eric Reinhardt,  “Unilateral Preference Programs: The Evidence,” chapter 6, in Simon J.  Everett and Bernard Hoekman, eds., Economic Development and  Multilateral Trade Cooperation (Washington, D.C.: The World Bank and  Palgrave Macmillan, 2006). We also conducted extensive analysis of the  U.S. tariff schedule and U.S. trade data published by the ITC. Our analysis  focuses on 2006 data except where we engaged in analysis of historical  trends. We relied on the 2006 edition of the official U.S. tariff schedule from  the ITC to identify products (tariff lines) eligible for duty-free treatment  under one or more U.S. trade preference programs, as well as the countries  designated as eligible for each program. We also used ITC data to analyze  Census data trends in overall U.S. imports, imports from preference  beneficiaries, and imports actually entered under U.S. trade preference  programs and to compute measures such as program coverage and  utilization and the diversification of U.S. preference imports. More detailed  information about our data analysis is contained in appendix II.  Furthermore, we interviewed officials from the Office of the U.S. Trade  Representative; the Departments of Agriculture, Commerce, Labor, State,  and the Treasury; U.S. Customs and Border Protection; and ITC regarding  the effects of preferences on foreign beneficiaries.
In addition, we attended the sixth AGOA Forum in Accra, Ghana, in July  2007. We also traveled to Brazil, Colombia, Haiti, Kazakhstan, and Turkey  to meet with U.S. embassy officials, foreign officials, and industry groups  using U.S. preference programs to discuss the issues mentioned above. We  selected these countries based on representation on preference program  eligibility and income levels according to the World Bank and United  Nations (see table 5). Additionally, we chose to visit Haiti and Ghana  because they are among the poorest beneficiaries and ones where  mechanisms to take advantage of recently expanded benefits under newer  preference programs—Haitian Hemispheric Opportunity through  Partnership Encouragement (HOPE) and African Growth and Opportunity  Act (AGOA)—are being put in place. Also, Ghana was the site of the annual  AGOA Forum. We selected Brazil and Turkey to visit because these  countries have successfully used U.S. trade preferences to export a diverse  range of relatively sophisticated manufactured goods. We chose Colombia  and Kazakhstan because they are large users of preference programs and  are both undertaking broader liberalization efforts. Colombia has  completed a free trade agreement with the United States, and Kazakhstan  is trying to join the WTO.
In addition, we selected these countries to gain perspective on the  spectrum of issues related to usage and capacity of each of the programs in  country. Brazil is a top user of the Generalized System of Preferences  (GSP) program since the 1970s; Colombia is an extensive user of ATPA;  Ghana represents the African countries under AGOA that are dealing with  internal infrastructure issues that can limit their use of the preference  programs; Haiti is an historic user of CBI and is in the beginning stages of  implementing HOPE; Kazakhstan is an extensive user of GSP and is  undergoing high liberalization; and Turkey is also another high user of GSP  and exports sophisticated manufactured goods to the United States.
We conducted this performance audit from March 2007 to February 2008 in  accordance with generally accepted government auditing standards. Those  standards require that we plan and perform the audit to obtain sufficient,  appropriate evidence to provide a reasonable basis for our findings and  conclusions based on our audit objectives. We believe that the evidence  obtained provides a reasonable basis for our findings and conclusions  based on our audit objectives.
section_title: Additional Information on GAO Data Analysis
paragraphs: This appendix provides additional information relevant to the data analysis  contained in this report. It includes information about the data used,  definitions of program, product and country groupings, and definitions  relevant to various program measures used.
subsections: section_title: Data
paragraphs: We relied on the 2006 edition of the official U.S. tariff schedule  (Harmonized Tariff Schedule ) from the ITC to identify products  (tariff lines) eligible for duty-free treatment under one or more U.S. trade  preference programs, as well as the countries designated as eligible for  each program (beneficiaries or beneficiary countries). We considered any  country designated for benefits for all or part of 2006 to be beneficiaries.
We relied on official U.S. trade statistics for imports to analyze trends in  overall U.S. imports, imports from preference beneficiaries, and imports  actually entered under U.S. trade preference programs. Data for time series  are in constant 2006 U.S. dollars.
We made an adjustment for program and product groupings primarily  pertaining to apparel such that those apparel items normally classified  under HTS Chapters 61-63 eligible to enter duty-free under regional  preference programs if they meet specified rules of origin, as specified in  HTS Chapter 98, were identified and marked with a # sign. This accounts  for the R#, J#, and D# in the program groupings below.
section_title: Program Groupings
paragraphs: GSP: In terms of products, we defined products covered by GSP as the sum  of all tariff lines designated as A or A* in the 2006 U.S. tariff schedule. In  terms of countries, all countries that were designated as eligible for GSP at  any point in 2006 were considered beneficiaries.
GSP-least developed countries (LDC): In terms of products, we defined  products covered by GSP-LDC as all tariff lines designated as A+. In terms  of countries, all countries that were designated as eligible for GSP-LDC at  any point in 2006 were considered beneficiaries.
CBI: We defined this category to include products covered by CBI as E or  E*, and products covered by CBTPA as R or R#. In terms of countries, all  countries that were designated as eligible at any point in 2006 were  considered beneficiaries. It should be noted that some of the countries in  the 2006 sample have now lost eligibility for benefits under CBI due to the  entry into force of the Dominican Republic-Central America-United States  Free Trade Agreement (CAFTA-DR) as follows: Dominican Republic  (March 2007), El Salvador (March 2006), Guatemala (July 2006), Honduras  (April 2006), and Nicaragua (April 2006).
ATPA: We defined products covered by ATPA as J, J*, and products covered  by Andean Trade Promotion and Drug Eradication Act (ATPDEA) as J#, J+.  We defined countries as Bolivia, Colombia, Ecuador, and Peru.
AGOA: We defined products covered by AGOA as D, D#. We defined  countries covered by AGOA as all countries eligible for the program at any  point in 2006.
section_title: Product Groupings
paragraphs: In order to examine broad groups of products, we organized the HTS  product chapters into 12 sectors as follows: 1. Animal and plant products (HTS, chapters 1-15) 2. Prepared food, beverages, spirits, and tobacco (HTS, chapters 16-24) 3. Chemicals and plastics (HTS, chapters 25, 26, 28-40) 4. Wood and paper products (HTS, chapters 44-49) 5. Textiles, leather, and footwear (HTS, chapters 41-43, 50-60, 64-66) 6. Glassware, precious metals and stones, jewelry (HTS, chapters 68-71) 7. Base metals and articles of base metals (HTS, chapters 72-81 and 83) 8. Machinery, electronics, and high-tech apparatus (HTS, chapters 82, 84,  85, 90) 9. Aircraft, autos and other transportation (HTS, chapters 86-89) 10. Miscellaneous manufacturing (HTS, chapters 91-97) 11. Fuels (HTS, chapter 27) 12. Apparel (HTS, chapters 61-63)
With the exception of textiles and apparel, for figure 5, we use the more  aggregated groupings presented in our last report.
section_title: Country Groupings
paragraphs: We used the same sample of countries for analysis of import trends over  time. Specifically, we assigned each country to a country group based on  their eligibility and country income category in 2006. When time series  analysis was done, it is thus for “2006 program beneficiaries” and “2006  country income group” rather than the actual program beneficiaries or  actual income groups at earlier points in time. Numerous countries have  been removed from programs over the 1992-2006 period, mostly due to  attaining high-income status (e.g., Cyprus and Aruba), attaining overall  competitiveness (Malaysia), joining the European Union (e.g., Hungary and  Poland), or entering into a free trade agreement with the United States  (e.g., Mexico and Morocco). For additional information on eligibility for  programs by country, see appendix III of GAO-07-1209.
AGOA countries: Those countries designated as eligible for the AGOA  program at any point in 2006. All of these countries are eligible for GSP, and  some of these countries are eligible for GSP-LDC.
ATPA countries: Those countries eligible for ATPA at any point in 2006. All  of these countries are also eligible for ATPDEA and GSP.
CBI: Those countries designated as eligible for the Caribbean Basin  Economic Recovery Act (CBERA) at any point in 2006. Some of these  countries are also eligible for the Caribbean Basin Trade Partnership Act  (CBTPA) and GSP.
GSP-only countries: Those countries only designated as eligible for the  GSP program.
Country income groupings: We relied on World Bank data on country  income levels. We relied on United Nations designations of least-developed  countries and for data on country income when World Bank data was  unavailable.
section_title: Definitions
paragraphs: Covered products: We defined covered products as all items identified in  the 2006 U.S. tariff schedule as eligible for a preference program. We  defined products covered by GSP as the sum of all tariff lines designated as  A or A* in the U.S. tariff schedule. We defined products covered by GSP- LDC as all tariff lines designated as A+. We defined products covered by  CBI as E, E* and products covered by CBTPA as R, R#. We defined  products covered by ATPA as J, J*, and products covered by ATPDEA as J#,  J+. We defined products covered by AGOA as D, D#.
Eligible beneficiary(ies): We used the term eligible beneficiary for any  countries designated as eligible for a particular preference program. The  term eligible beneficiaries is used for all countries designated as eligible for  a particular program.
Country income category: We relied on World Bank data on country  income levels. We relied on UN designations of least-developed countries.
Dutiable products/imports: We defined dutiable products as all products  that were subject to most favored nation (MFN) tariffs that are greater than  zero in 2006. We defined the value of dutiable imports as total U.S. imports  minus total imports of MFN duty-free products.
Preference eligible imports: We defined preference eligible imports as the  value of imports of covered products from eligible beneficiaries.
Preference imports: We defined preference imports as the value of imports  actually entered under a given preference program or programs.
Preference margins: The difference between the otherwise applicable or  MFN tariff rate and the rate at which the product is eligible to enter under  U.S. preference programs. Most products covered by preferences enter  duty-free, but some products enter at reduced (nonzero) duties. We relied  on others’ estimates of U.S. preference margins, specifically those by a  team of ITC and World Bank economists given responsibility for preparing  estimates for U.S. programs as part of a multicountry study organized by  the World Bank.
section_title: Program Measures
paragraphs: Coverage: We considered coverage relative to two metrics: (1) the number  of lines in the U.S. tariff schedule and (2) the total value of imports of  covered products divided by the total value of imports of dutiable products  (i.e., dutiable imports) from each preference partner. (See above for  definitions of “covered products” and dutiable products.)
Utilization: We calculated this as a ratio of the value of preference imports  (imports actually entering under U.S. preferences) relative to (divided by)  the value of imports of covered products.
Program averages for these measures were calculated by: For coverage, summing the value of preference-eligible imports from all  partners and then dividing it by the sum of the value of dutiable imports  from all partners.
For utilization, summing the total value of preference imports from all  partners, and then dividing it by the total value of imports of covered  products from all partners, that is, the sum of each partner’s covered  products.
Country averages related to total preference program coverage and  utilization measures were calculated by: For coverage, summing the value of preference-eligible imports under all  programs for each partner, including adjusting to avoid double counting  where a product is covered by more than one program, and then dividing  by the value of dutiable imports from that partner.
For utilization, summing the value of preference imports from that  country actually entering under preferences, adjusting to avoid double  counting, and then dividing by the value of imports of covered products  from that country.
section_title: Diversification
paragraphs: ) where x represents the import/export value of the  ith commodity, X is the  country’s total imports/exports to the United States in 2006, where N is the  number of products. The index value (H*) ranges from 0 to 1. For example,  if the products are evenly distributed the value of the index would be 1, and  the more concentrated the product distribution, the closer the value is to 0.   It is observed that the index is a function of the mean and variance of the  value of imports/exports share in different commodity groups.
section_title: Coverage, Utilization, and Limitations of Preference Programs
paragraphs: To assess the opportunities extended to developing countries under U.S.  preference programs, we examined the scope of programs’ coverage by  beneficiary and product, the size of tariff cuts (or margins of preference),  and some eligibility conditions that can affect the ability of beneficiaries to  access program opportunities. We also examined the extent to which  countries are using the available opportunities.
subsections: section_title: Coverage of U.S. Preference Programs
paragraphs: Our analysis of U.S. tariff and trade data shows that duty-free coverage  under U.S. trade preference programs has increased over time. Considered  in combination, U.S. preference programs now extend duty-free status to  most of the product lines in the U.S. tariff schedule.   However, coverage  varies notably by program, beneficiary, and product. Because eligibility for  duty-free status is cumulative in that countries eligible for one preference  program may also be granted additional preferences depending on their  income and regional memberships, the potential duty-free access for  particular countries can vary substantially. Figure 9 shows that, as of 2006,  the countries eligible for GSP only were accorded duty-free access to 69  percent of the total number of tariff lines in the U.S. tariff schedule or 7,285  lines, composed of 3,879 MFN duty-free lines, and 3,406 additional lines  that are duty-free under GSP. All three of the subsequently enacted regional  programs, and their enhancements, improve upon GSP to varying degrees.  The expansion of GSP for LDCs in 1996 also increased the number of duty- free lines for LDC partners.
The proportion of tariff lines accorded duty-free status also varies by  product. Figure 10 shows the distribution of dutiable and duty-free lines by  product group. GSP alone offers relatively extensive duty-free coverage to  certain manufactured goods, such as chemicals and plastics; glassware,  precious metals, and jewelry; and machinery and electronics; where  coverage exceeds 40 percent of tariff lines. However, duty-free coverage is  much more limited for other product groups. Textiles, footwear, leather,  and apparel are product groups where duties still apply to the most and  highest percentage of lines, but where regional programs offer notable  improvements in coverage over GSP. For example, with AGOA’s enactment  and the enhancements of CBI and ATPA offered since 2002, 33 percent of  apparel lines are eligible to enter duty-free under regional programs, and 43  percent of apparel lines altogether (including MFN and GSP) have duty-free  access.
Coverage can also be examined relative to imports from beneficiary  countries using the ratio of preference eligible imports to total dutiable  imports from beneficiaries eligible for particular programs. Our analysis  (see table 6) shows that:  (1) countries eligible for only GSP have the least  coverage of partners’ dutiable imports—approximately 25 percent, (2)  regional programs and GSP for LDC’s have much higher coverage of  partners’ dutiable imports, and (3) country variations in coverage are wide.   For example, 35 GSP beneficiaries including Lebanon, Paraguay, Somalia,  and Zimbabwe have high coverage rates, exceeding 75 percent of the value  of their dutiable imports. Yet, 48 GSP beneficiaries such as Bangladesh,  Egypt, Pakistan, and Uzbekistan have low coverage rates (less than 25  percent of dutiable imports).
section_title: Preference Margins
paragraphs: The value and effectiveness of tariff preferences depends on the magnitude  of the tariff that would otherwise be imposed on imported products, often  referred to as the preference margin. Preferences can have an impact only  if there is a nonzero tariff that otherwise would apply in the U.S. market.  Moreover, if the MFN (normally applicable) tariff on a product is negligible,  the advantage provided by preferences can be so small as to become an  insignificant factor in trade decisions. A recent effort to quantify margins of  preferences across all U.S. preference programs by staff economists at the  ITC and the World Bank shows that preference margins are relatively high  for apparel products, as well as certain agricultural goods (melons, cut  flowers, frozen orange juice, raw cane sugar, and asparagus); they tend to  be relatively low for other products and fairly uniform among programs.   Specifically, the authors found the following:  Across member countries and all eligible U.S. nonagricultural imports,  AGOA preference margins were the highest on average (14 percent) in  2003. CBTPA preference margins ranked second with an average of 9  percent, and ATPA preference margins third with an average of 8  percent.
Nonapparel preference margins average 3 percent to 5 percent for  ATPA, CBTPA, and CBERA countries and show little variation across  countries within each program. AGOA nonapparel preference margins  are much higher—5 percent to 10 percent for more than half the  countries, and 10 percent to 20 percent for a few.
Average apparel margins under AGOA, CBTPA, and ATPA are two or  three times as high as those for nonapparel for nearly all preference  beneficiary countries.
Despite its importance in AGOA trade, average petroleum preference  margins by country did not exceed 2 percent, and most were well below  1 percent.
All in all, the authors conclude, while “the potential duty savings from all  U.S. preference programs represent a very small share of beneficiaries’  dutiable exports to the United States, countries in the CBTPA and those in  the AGOA-LDC program show duty savings exceeding 10 percent of their  dutiable exports to the United States.”  In fact, the potential duty savings  for 35 countries---all but 3 of whom qualify for regional programs—exceed  5 percent of the value of their dutiable exports to the United States. As a  result, they find that preferences are sufficiently important to 29 countries’  exports to warrant concern over the impact of preference erosion due to  multilateral and bilateral liberalization. At the same time, they note that  some of this liberalization has since occurred, with the phase-out of global  textile quotas in 2005.
section_title: Product Caps and Rules of Origin May Limit Use and Benefits
paragraphs: Conditions on product entry are also a significant factor affecting  opportunities and trade under U.S. preference programs. Two specific  conditions, “competitive need limits” and “rules of origin,” illustrate how  administration of program provisions, although addressing important  policy considerations, may affect the ability of beneficiary countries to  fully access the opportunities otherwise offered by U.S. preference  programs.  GSP places export ceilings or “competitive need limits” (CNL)   on eligible products for certain beneficiaries that exceed specified value  and import market share thresholds. (LDCs and AGOA beneficiaries are  exempt.)  Our analysis of 2006 data shows that some 37 percent of the  value of imports of GSP products from non-LDC, non-AGOA GSP  beneficiaries—or $13 billion of the $35 billion—were excluded from  entering duty-free under GSP largely due to CNLs. Researchers also warn  that rules of origin and related paperwork are often complex and can raise  costs. As a result, it may not be worth incurring the expense of compliance  to use preferences.
Rules of origin for U.S. trade preference programs typically specify a  minimum percentage value-added to the entering product that must come  from the beneficiary country in order to qualify for duty-free treatment.  However, some programs allow countries to “cumulate” inputs from other  countries or regions. More complex rules apply to some products, notably  apparel. The fact that U.S. Customs and Border Protection—the U.S.  agency charged with enforcing such rules when goods enter the United  States—used a 70-page PowerPoint presentation to train its officers on the  conditions associated with apparel access under U.S. preference programs  is illustrative of the complexity of such rules. For example, our meetings  with CBP and statements by Haitian textile industry groups indicate that  some of the rules of origin for HOPE are highly complex to administer and  use. Indeed, as recently as late November, 2007 industry sources had  indicated to us that HOPE has yet to become fully operational for Haiti to  benefit because of delays in issuing export visas, and the complicated  nature of HOPE rules of origin. Another possible indication of the impact of  rules of origin are the “fill rates” for each region’s quotas (known as “tariff  preference levels”). Within Africa, the LDCs that qualify for liberalized rules  of origin allowing “third country” (non.-U.S., non-AGOA) fabric and yarn to  be used in apparel and still qualify for duty-free entry under AGOA had  achieved a relatively high 43.3 percent “fill rate” for their quotas in 2006,  versus other African suppliers, which must use domestic African or U.S.  inputs, whose fill rate stood at 1.8 percent. Recent economic literature also  suggests that AGOA had some success in increasing export activity for  some countries, but the increased exports are mainly associated with the  liberalized apparel provisions.”  Yet others are concerned that without  requiring more Sub-Saharan African value-added (e.g., through local  sourcing and production), the trade, investment, and supply linkages to the  local economy that foster development and diversification may not accrue  to AGOA beneficiaries. As a result, the recent long-term extension of the  third country fabric provision was accompanied by a new requirement to  use fabrics deemed widely available for commercial use (i.e., in “abundant  supply”) in Africa. However, at a recent ITC hearing, a major U.S. jeans  manufacturer expressed concern that the limitations the law places on  their flexibility to source fabric is making them reluctant to continue  purchasing from African producers.
Our fieldwork revealed examples where complex rules-of-origin  requirements appear to be complicating preference trade. In Ghana, for  example, we met with a firm that decorates T-shirts with original designs,  using traditional African decorative techniques. This firm had been  importing plain white T-shirts from Honduras to decorate in Ghana and  then exporting them to the United States. We were surprised to learn that  the firm had to pay duty on the finished product exported to the United  States, since the inputs were exempt from tariffs under U.S. preferences  programs. For example, the plain white T-shirts manufactured in Honduras  would have entered the United States duty-free under CBI. The value-added  through the decorative process in Ghana would also be exempt from duties  under AGOA. However, because the T-shirt manufactured in Honduras did  not meet the rules of origin requirements for the AGOA program this  company was obliged to pay duty on the finished decorated shirts. The  company is now seeking to shift its T-shirt purchases to South Africa, or  another AGOA beneficiary, since this sourcing would enable them to  qualify for duty-free treatment under AGOA.
On the other hand, liberalizing quotas and rules of origin have been a  principal means by which the regional programs have been improved in  recent years. For example, CBTPA was enacted in 2000 to enhance the CBI  program, and temporarily eliminates tariffs and most quantitative  restrictions on certain products. The CBTPA liberalized rules of origin for  certain textiles and apparel in an effort to mitigate adverse effects on CBI  suppliers caused by diversion of production and U.S. trade to Mexico when  the North American Free Trade Agreement (NAFTA) entered into force.  The change in rules appears to have benefited CBI suppliers somewhat.  Notably, items entering under the CBTPA, such as cotton T-shirts and  trousers had become leading imports from Central America and the  Dominican Republic at the time the ITC assessed the impact of CAFTA-DR  in 2005. Yet, apparel and footwear were also the Central American sectors  expected to benefit most from further liberalization of U.S. access under  CAFTA-DR. Notably, CAFTA-DR attempted to sustain and encourage  subregional integration within the Americas by further loosening rules of  origin to allow “cumulation” (adding together the value) of inputs from  United States, CAFTA-DR, NAFTA, and CBI suppliers to meet its rules of  origin. Bringing such attempted improvements in opportunities to fruition  remains complex. In our visit to Haiti, for example, there was uncertainty  as to how CAFTA-DR will interact with Haiti’s new HOPE program. In  particular, concern was expressed over whether existing production- sharing operations between the Dominican Republic and Haiti would be  eligible for duty-free entry.
section_title: Utilization of Regional Programs Is Fairly High Compared with GSP but Varies by Partner
paragraphs: Our analysis of the share of preference eligible imports actually entering  under each preference program  shows that the benefit of U.S. preference  programs may vary considerably by program and partner.  Figure 11 shows  the 2006 utilization of U.S. preference programs where the “utilization rate”  is defined as the ratio of actual preference imports under each program to  eligible imports. As Figure 11 indicates, the utilization rate for the regional  preference programs offered by the United States is high, particularly  relative to the utilization of GSP. To some extent, low utilization of GSP  may reflect the fact that coverage across programs is relatively uniform for  many products, whereas program conditions and rules of origin vary. As a  result, countries that have access to both GSP and regional programs may  opt to use the regional programs.
The utilization rate for GSP or GSPLDC imports from all eligible partners  was 61 percent. The utilization rate for imports from countries eligible for  only GSP or GSPLDC was slightly higher, at about 75 percent. Countries  eligible for GSPLDC, with enhanced duty-free access, had a utilization rate  of 58 percent. Countries that were eligible for AGOA and CBI/CBTPA had  utilization rates of 77 percent and 47 percent, respectively. The four Andean  countries eligible for ATPA/ATPDEA had the highest utilization rate of 90  percent.
Our analysis of data for each program (see table 6) shows variation in  utilization of the programs across eligible countries in 2006. In brief, our  analysis finds the following:  GSP or GSPLDC—Analysis of GSP shows that low-income countries are  well represented among the top countries in terms of utilization rates, as  9 of the 35 countries with high utilization rates are designated low  income. The utilization rates of the leading GSP exporters to the United  States in terms of value vary widely, ranging from 99 percent  (Zimbabwe) to 9 percent (Chad).
AGOA—Nigeria uses AGOA for 96 percent of its exports to the United  States and dominates the share of U.S. imports under the program.  Other major suppliers are Angola, Chad, and Gabon. The program  appears to be highly utilized for exports of others with lesser-valued  imports, including Botswana, Cameroon, Cape Verde, Ethiopia, Kenya,  Lesotho, Madagascar, Mauritius, Mozambique, South Africa, Senegal,  Swaziland, Tanzania, and Uganda. Perhaps, as a reflection of  weaknesses in the trade capacities of some AGOA eligible countries, 12  of the 38 AGOA eligible countries (Benin, Burundi, Djibouti, Gambia,  Guinea-Bissau, Guinea, Liberia, Rwanda, Sao Tome and Principe,  Seychelles, Sierra Leone, and Democratic Republic of the Congo  (formerly Zaire) did not export under the program, though several did  export under GSP.
ATPA/ATPDEA—Most of the approximately $13.5 billion in U.S.  preference imports under ATPA/ATPDEA came from three beneficiaries.   However, utilization of the program by all beneficiary countries,  including Bolivia, is relatively high.
CBI/CBTPA—The CBI/CBTPA preference program is the most varied  regional program in terms of the development status of eligible  countries as seven of the countries eligible for CBI are high income, one  (Haiti) is low income, and the rest are middle-income countries.  However, Trinidad and Tobago—a high-income country—is the leading  supplier and has the highest utilization rate under this preference  program.
section_title: U.S. Imports and Global Exports from Least- Developed Countries
section_title: Preference Imports by Program and Product Group, 2006
paragraphs: Percentage of  total U.S.
section_title: GAO Contact and Staff Acknowledgments
subsections: section_title: GAO Contact
section_title: Staff Acknowledgments
paragraphs: In addition to the individual named above, the following persons made  major contributions to this report: Kim Frankena, Assistant Director; Juan  Gobel, Assistant Director; Ann Baker; Gezahegne Bekele; Ken Bombara;  Karen Deans; Etana Finkler; Richard Gifford Howland; Ernie Jackson;  Marisela Perez; and Celia Thomas. The team also benefited from the expert  advice and assistance of Martin de Alteriis, Susan Offutt, and Mark Speight.