International Trade: The United States Needs an Integrated Approach to Trade Preference Programs
Published: 2008-06-12T00:00:00

Fast Facts:

Highlights:
section_title: Why GAO Did This Study
paragraphs: U.S. trade preference programs promote economic development in poorer nations by providing duty-free export opportunities in the United States. 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, two of these programs expire partially or in full this year, and Congress is exploring options as it considers renewal. This testimony describes the growth in preference program imports since 1992, identifies policy trade-offs concerning these programs, and evaluates the overall U.S. approach to preference programs. The testimony is based on two recent studies on trade preference programs, issued in September 2007 and March 2008. For those studies, GAO analyzed trade data, reviewed trade literature and program documents, interviewed U.S. officials, and did fieldwork in six trade preference beneficiary countries.
section_title: What GAO Found
paragraphs: Total U.S. preference imports grew from $20 billion in 1992 to $92 billion in 2006, with most of this growth taking place since 2000. The increases from preference program countries reflect legislation passed by Congress in 1996 and 2000 that enhanced preference programs and added new eligible products. Preference programs give rise to three critical policy trade-offs. First, preferences entail a trade-off to the extent opportunities for beneficiary countries to export products duty free must be balanced against U.S. industry interests. Some products of importance to developing countries, notably agriculture and apparel, are ineligible by statute as a result. Secondly, certain developing countries have been given additional preferential benefits for such import-sensitive products under regional programs. But some of the poorest countries, outside targeted regions, do not qualify. Third, Congress faces a trade-off between longer program renewals, which may encourage investment and undermine support for the likely greater economic benefits of broader trade liberalization, a key U.S. goal, and shorter renewals, which may provide opportunities to leverage the programs to meet evolving priorities. Trade preference programs have proliferated over time, becoming more complex, but neither Congress nor the administration formally considers 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 addressing some countries and issues. Disparate reporting makes it difficult to determine progress on programs' contribution to economic development in beneficiary countries.

section_title: Letter
paragraphs: I am pleased to be here today to discuss our work on U.S. trade preference  programs. Since the committee’s hearing last year on this subject, GAO  has completed two in-depth studies of U.S. preference programs for the  Finance Committee and the Committee on Ways and Means. Our findings  suggest that these programs do provide benefits to recipient nations, but it  is more challenging to determine programs’ contribution to economic  development in those nations. Our findings in those studies also support  the need to consider whether a more integrated approach would better  ensure programs meet shared goals.
This hearing is particularly timely, as a number of the preference programs  were or are still scheduled for expiration during the current calendar year.  We believe that this provides an opportunity for Congress and the  administration to review the progress and performance of these programs  as a group and begin to address some of the difficult questions that you  posed in the last hearing. In order to contribute to that discussion, I will  address three topics today. First, I will describe preference import trends.  Second, I will outline key policy trade-offs between various domestic and  foreign interests that are inevitable in the design of preference programs.  Finally, I will summarize our recent findings and recommendations  regarding the importance of considering the preference programs as a  group.
My remarks are based on the two studies of the preference programs that  we have published in the last year. In conducting the work for Congress,  we consulted with the Office of the U.S. Trade Representative (USTR) and  other executive agencies involved in implementing the programs, as well  as representatives from trade and development organizations who have  expertise and interest in the programs. In addition, we met with  government representatives from a number of the beneficiary nations,  including some of the larger beneficiaries such as Brazil, as well as poorer  nations such as Haiti and Ghana. 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: 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 3 decades. The purpose of these programs is to foster economic  development through increased trade with qualified beneficiary countries  while not harming U.S. domestic producers. Trade preference programs  extend unilateral tariff reductions to over 130 developing countries.  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). Special preferences for Haiti became part of CBI  with enactment of the Haitian Hemispheric Opportunity through  Partnership Encouragement (HOPE) Act in December 2006. The regional  programs cover additional products but have more extensive criteria for  participation than the GSP program. 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 the U.S. International Trade Commission  (ITC).
GSP—the longest standing U.S. preference program—expires December  31, 2008, as do ATPA benefits. At the same time, legislative proposals to  provide additional, targeted benefits for the poorest countries are pending.  U.S. trade preference programs are widely used, but some economists and  others have raised questions about them. Their concerns include the  potential for diversion of trade from other countries that these programs  can cause; the complexity, scope of coverage, duration, and conditionality  of these programs; and the potential opposition to multilateral and  bilateral import liberalization preferences can create.
section_title: U.S. Preference Imports Have Increased Sharply
paragraphs: U.S. imports from countries benefiting from U.S. preference programs  have increased significantly over the past decade. 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. 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. This accelerated  growth suggests an expansionary effect of increased product coverage and  liberalized rules of origin for LDCs under GSP in 1996 and for African  countries under AGOA in 2000.
There is also some evidence that leading suppliers under U.S. preference  programs have “arrived” as global exporters. For example, the 3 leading  non-fuel suppliers of U.S. preference imports—-India, Thailand, and  Brazil—were among the top 20 world exporters and U.S. import suppliers  in 2007, and their exports in 2007 grew faster than world exports,  according to the World Trade Organization (WTO).
section_title: Critical Policy Trade- offs among U.S. Consumers, Producers, and Foreign Beneficiaries Are Inherent in Preference Programs
paragraphs: Preference programs entail three critical policy trade-offs. First, the  programs are designed to offer duty-free access to the U.S. market to  increase beneficiary trade, but only to the extent it does not harm U.S.  industries. U.S. preference programs provide duty-free treatment for over  half of the 10,500 U.S. tariff lines, in addition to those that are already duty- free on a most favored nation basis. But, they also exclude many other  products from duty-free status, including some that developing countries  are capable of producing and exporting. GAO’s analysis showed that  notable gaps remain, particularly in agricultural and apparel products. For  48 GSP-eligible countries, more than three-fourths of the value of U.S.  imports that are subject to duties (i.e., are dutiable) are left out of the  programs. For example, just 1 percent of Bangladesh’s dutiable exports to  the United States and 4 percent of Pakistan’s are eligible for GSP.  Although regional preference programs tend to have more generous  coverage, they sometimes feature “caps” on the amount of imports that  can enter duty-free, which may significantly limit market access. Imports  subject to caps under AGOA 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 second trade-off is related and involves deciding which developing  countries can enjoy particular preferential benefits. A few LDCs in Asia  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 exporters of apparel to the United  States and have complained about the lack of duty-free access for their  goods. 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. Certain U.S. industries have joined African nations in  opposing the idea of extending duty-free access for apparel from these  countries, arguing these nations are already so competitive in exporting to  the United States that in combination they surpass U.S. FTA partners  Mexico and CAFTA, as well as the Andean/AGOA regions, which are the  major export market for U.S. producers of textiles.
This same trade-off involves decisions regarding the graduation of  countries or products from the programs. It relates to the original  intention that preference programs would confer temporary trade  advantages on particular developing countries, which would eventually  become unnecessary as countries became more competitive. Specifically,  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. Since 1989, 28  countries have been graduated from GSP, mainly as a result of  “mandatory” graduation criteria such as high income status or joining the  European Union. Five countries in the Central American and Caribbean  region were recently removed from GSP and CBI/CBTPA when they  entered free trade agreements with the United States.
In the GSP program, the United States also pursues an approach of ending  duty-free access for individual products from a given country by means of  import ceilings—Competitive Needs Limitations (CNL). Over one-third of  the trade from GSP beneficiaries—$13 billion in imports in 2006—is no  longer eligible for preferences because countries have exceeded CNL  ceilings for those products. Although the intent of country and product  graduation is to focus benefits on those countries most in need of the  competitive margin preferences provide, some U.S. and beneficiary  country officials observe that remaining GSP beneficiaries will not  necessarily profit from another country’s loss of preference benefits. We  repeatedly heard concerns that China would be most likely to gain U.S.  imports as a result of a beneficiary’s loss of preferences. 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—notably Brazil, India, and Thailand—lost duty-free  treatment. Members of the business community raised concerns that  revocation of these waivers would harm U.S. business interests while  failing to provide more opportunities for poorer beneficiaries. GAO’s  analysis showed that China and Hong Kong were the largest suppliers of  the precious metal jewelry formerly eligible under GSP for duty-free  import by India and Thailand; Canada, Mexico, Japan, and China were the  leading competitors to Brazil’s motor parts.
Policymakers face a third 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. 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. 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 and AGOA’s general  provisions until 2015. 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 such as global and bilateral trade  liberalization. Furthermore, making preferences permanent may deepen  resistance to U.S. calls for developing country recipients to lower barriers  to trade in their own markets. 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. Spokesmen for countries that benefit from trade preferences  have told us that any agreement reached under Doha round of global trade  talks at the WTO must, at a minimum, provide a significant transition  period to allow beneficiary countries to adjust to the loss of preferences.
section_title: Proliferation of Preference Programs Has Led to a Need for a More Integrated Approach
paragraphs: Preference programs have proliferated over time. In response to differing  statutory requirements, agencies pursue different approaches to  monitoring the various criteria set for programs. The result is a lack of  systematic review and little to no reporting on impact.
subsections: section_title: Trade Preferences Have Proliferated, Creating a Complex Array of Programs, but Congress Still Considers Each Program Separately
paragraphs: U.S. trade preferences have evolved into an increasingly complex array of  programs. Congress generally considers these programs separately, partly  because they have disparate termination dates.
Many countries participate in more than one of these programs. Of the 137  countries and territories eligible for preference programs, as of January 1,  2007, 78 benefit from more than one program, and 34 were eligible for  more than two programs.
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 the focus has been on  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. As a result, until last year’s  hearing before this committee, congressional deliberations have not  provided for cross-programmatic consideration or oversight.
The oversight difficulties associated with this array of preference  programs and distinct timetables is compounded by different statutory  review and reporting requirements for agencies. Reflecting the relevant  statutory requirements, two different approaches—a petition process and  periodic reviews—have evolved to monitor compliance with criteria set  for various programs. We observed advantages to each approach, but  individual program reviews appear disconnected and result in gaps.
The petition-driven GSP reviews of country practices and product  coverage have the advantage of adapting the programs to changing market  conditions and the concerns of businesses, foreign governments, and  others. However, the petition process can result in gaps in reviews of  country compliance with the criteria for participation:    From 2001 to 2006, three-quarters of the countries eligible only for GSP did  not get examined at all for their conformity with eligibility criteria.
Long periods passed between overall reviews of GSP. USTR completed an  overall review of the GSP program in fall 2006. USTR completed the last  general review of the program approximately 20 years earlier, in January  1987.
The petition-driven review process also fails to systematically incorporate  other ongoing monitoring efforts. For example, the lack of review under  GSP provisions of any of the 26 preference beneficiary countries cited by  USTR in 2006 for having problems related to the adequate and effective  protection of U.S. intellectual property rights (IPR) makes it appear no  linkage exists between GSP and ongoing monitoring of IPR protection  abroad.
The periodic reviews under the regional programs offer more timely and  consistent evaluations of country performance against the criteria for  participation, but may still miss important concerns. For example,   11 countries that are in regional programs were later subject of GSP  complaints in the 2001 to 2006 period:    Although AGOA has the most intensive evaluation of country performance  against the criteria for participation, the GSP process later validated and  resulted in further progress in resolving concerns with AGOA beneficiaries  Swaziland and Uganda on labor issues.
The African country of Equatorial Guinea has been reviewed for AGOA  eligibility and found to be ineligible. Yet, Equatorial Guinea has not been  subject to a GSP country practice petition or reviewed under GSP. As a  result, Equatorial Guinea remains eligible for GSP and exported more than  90 percent of its $1.7 billion in exports duty free to the United States under  that program in 2006.
section_title: Only One Preference Program Directly Links to Capacity Building Efforts
paragraphs: Many developing countries have expressed concern about their inability to  take advantage of trade preferences because they lack the capacity to  participate in international trade. Sub-Saharan Africa has been the primary  focus of U.S. trade capacity-building efforts linked to the preference  programs, with the United States allocating $394 million in fiscal year 2006  to that continent. Although AGOA authorizing legislation refers to trade  capacity assistance, USTR officials noted that Congress has not  appropriated funds specifically for that purpose. However, USTR has used  the legislative language as leverage with U.S. agencies that have  development assistance funding to target greater resources to trade  capacity building. In other regions of the world, U.S. trade capacity  building assistance has less linkage to preference programs.
section_title: Separate Reporting and Examination Hinder Measuring Progress on Programs’ Contribution to Economic Development
paragraphs: Separate reporting for the various preference programs makes it difficult  to measure progress toward achieving the fundamental and shared goal of  promoting economic development. Only one program (CBI) requires  agencies to directly report on impact on the beneficiaries. Nevertheless, in  response to statutory requirements, several government agencies report  on certain economic aspects of the regional trade preference programs.  However, different approaches are used, resulting in disparate analyses  that are not readily comparable. Agencies do not regularly report on the  economic development impact of GSP. Moreover, there is no evaluation of  how trade preferences, as a whole, affect economic development in  beneficiary countries.
section_title: GAO Recommendations and Agency Response
paragraphs: To address the concerns I have summarized today, in our March 2008  report, GAO recommended that USTR periodically review beneficiary  countries that have not been considered under the GSP or regional  programs. Additionally, we recommended that USTR should periodically  convene relevant agencies to discuss the programs jointly. In response,  USTR is undertaking two actions. First, USTR will conduct a review of the  operation and administration of U.S. preference programs to explore  practical steps that might improve existing communication and  coordination across programs. Second, beginning with the Annual Report  of the President of the United States on the Trade Agreements Program  to be issued on March 1, 2009, the discussion of the operation of all U.S.  trade preference programs will be consolidated into its own section.
We also suggested that Congress should consider whether trade  preference programs’ review and reporting requirements may be better  integrated to facilitate evaluating progress in meeting shared economic  development goals. We believe that the hearings held by the committee  last year and again today are responsive to the need to consider these  programs in an integrated fashion and are pleased to be able to contribute  to this discussion.
Mr. Chairman, this concludes my prepared statement. I would be happy to  answer any questions that you or other members of the committee may  have.
section_title: GAO Contact and Staff Acknowledgments
paragraphs: For further information on this testimony, please contact Loren Yager at  (202) 512-4347, or by e-mail at yagerl@gao.gov. Juan Gobel, Assistant  Director; Kim Frankena, Assistant Director; R. Gifford Howland; Karen  Deans; Ernie Jackson; and Ken Bombara made key contributions to this  statement.
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