International Trade: Options for Congressional Consideration to Improve U.S. Trade Preference Programs
Published: 2009-11-17T00:00:00

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, identifies policy trade-offs, and summarizes the Government Accountability Office (GAO) recommendations and options suggested by a panel of experts on the African Growth and Opportunity Act (AGOA). The testimony is based on studies issued in September 2007, March 2008, and August 2009. For those studies, GAO analyzed trade data, reviewed trade literature and program documents, interviewed U.S. officials, did fieldwork in nine countries, and convened a panel of experts.
section_title: What GAO Found
paragraphs: Total U.S. preference imports grew from $20 billion in 1992 to $110 billion in 2008, with most of this growth taking place since 2000. The increases from preference program countries primarily reflect the addition of new eligible products, increased petroleum imports from some African countries, and the rapid growth of exports from countries such as India, Thailand, and Brazil. Preference programs give rise to three critical policy trade-offs. First, 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. Second, some developing countries, such as Bangladesh and Cambodia, are not included in U.S. regional preference programs; however, there is concern that they are already competitive in marketing apparel to the United States and that giving them greater duty-free access could harm the apparel industry in Africa and elsewhere. Third, Congress faces a trade-off between longer preference program renewals, which may encourage investment, and shorter renewals, which may provide leverage to encourage countries to act in accordance with U.S. interests such as trade liberalization. GAO reported in March 2008 that preference programs have proliferated and become increasingly complex, which has contributed to a lack of systematic review. Moreover, we found that there was little to no reporting on the impact of these programs. In addition, GAO solicited options from a panel of experts in June 2009 for improving the competitiveness of the textile and apparel sector in AGOA countries. Options they suggested included aligning trade capacity building with trade preference programs, modifying rules of origin to facilitate joint production among trade preference program beneficiaries and free trade partners, and creating non-punitive and voluntary incentives to encourage the use of inputs from the United States or its trade preference partners to stimulate investment in beneficiary countries.

section_title: Letter
paragraphs: I am pleased to be here today to discuss our work on U.S. trade preference  programs. Over the last 2 years, GAO has completed three in-depth studies  on U.S. preference programs for this Committee and the Senate  Committee on Finance. We believe this hearing provides an opportunity  for Congress and the administration to review the progress and  performance of these programs as a group and consider potential  opportunities to improve them. As a number of the preference programs  are scheduled to expire by the end of the current calendar year, this  discussion will allow for consideration of some of the difficult questions  that have been posed in the past by members of this Committee.
In order to contribute to that discussion, I will address three topics. First, I  will provide some background on the programs and on recent import  trends. Second, I will outline some of the key trade-offs between various  domestic and foreign interests that are inevitable in the design of  preference programs. Finally, I will summarize some of the  recommendations we have provided regarding preferences programs as  well as some of the options that experts suggested to GAO that we  included in our most recent report to Congress on the African Growth and  Opportunity Act.
My remarks are based on the three studies noted above, and informed by  our on-going work in fulfillment of a congressional mandate on the Haiti  Earned Import Allowance Program. We conducted our work on the cited  studies from March 2007 to July 2009 in accordance with generally  accepted government auditing standards and GAO’s quality assurance  framework, as applicable. 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,  Congress has expanded trade preference programs 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 the United States Trade Representative (USTR), they include the  Departments of Agriculture, Commerce, Homeland Security, Labor, State,  and Treasury, as well as the U.S. International Trade Commission (ITC).
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 $110 billion in 2008. Most of this  growth in U.S. imports from preference countries has taken place since  2000. This accelerated growth suggests an expansionary effect of  increased product coverage and liberalized rules of origin for least- developed countries (LDC) under GSP in 1996 and for African countries  under AGOA in 2000. In particular, much of the growth since 2000 is due to  imports of petroleum from certain oil producing nations in Africa,  accounting for 79.5 percent of total imports from Sub-Saharan Africa in  2008. For example, in that same year, U.S. imports from the oil producing  countries of Nigeria grew by 16.2 percent, Angola by 51.2 percent, and the  Republic of Congo by 65.2 percent.
There is also evidence that leading suppliers under U.S. preference  programs have “arrived” as global exporters. For example, based on a  World Trade Organization (WTO) study in 2007, the three leading non-fuel  suppliers of U.S. preference imports—India, Thailand, and Brazil—were  among the top 20 exporters in the world, and were also major suppliers to  the U.S. market. Exports from these three countries also grew faster than  world exports as a whole. However, these countries have not reached  World Bank “high income” level criteria, as they range from “low” to  “upper middle” levels of income.
GSP—the longest standing U.S. preference program—expires December  31, 2009, as do ATPA benefits. At the same time, legislative proposals to  provide additional, targeted benefits for the poorest countries are pending.
section_title: Critical Policy Trade- offs among U.S. Consumers, Producers, and Foreign Beneficiaries Are Inherent in Preference Programs
paragraphs: Preference programs entail a number of difficult policy trade-offs. For  example, the programs are designed to offer duty-free access to the U.S.  market to increase beneficiary trade, but only to the extent that access  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 in preference program coverage 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 not included in 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.
A second, related, trade-off 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 representatives 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. free trade  agreement partners Mexico and those in CAFTA, as well as those in the  Andean/AGOA regions.
This trade-off concerning what countries to include also involves decisions  regarding the graduation of countries or products from the programs. The  original intention of preference programs was to provide temporary trade  advantages to 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, at  least 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 into free trade agreements with the United States. In addition to  country graduation, the United States GSP program also includes a  process for ending duty-free access for individual products from a given  country by means of import ceilings—Competitive Needs Limitations  (CNL). These ceilings are reached when eligible products from GSP  beneficiaries exceed specified value and import market share thresholds  (LDCs and AGOA beneficiaries are exempt). Amendments to the GSP in  1984 gave the President the power to issue (or revoke) waivers for CNL  thresholds under certain circumstances, for example through a petition  from an interested party, or when total U.S. imports from all countries of a  product are small or “de minimis.” In 2006 Congress passed legislation  affecting when the President should revoke certain CNL waivers for so  called “super competitive” products. In 2007, the President revoked eight  CNL waivers.
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 stated 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 the 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: Potential Areas of Improvement for U.S. Trade Preference Programs
subsections: section_title: Proliferation of Preference Programs Has Led to a Need for a More Integrated Approach
paragraphs: GAO found that preference programs have proliferated over time and have  become increasingly complex, which has contributed to a lack of  systematic review. In response to differing statutory requirements,  agencies involved in implementing trade preferences pursue different  approaches to monitoring the various criteria set for these programs. We  observed advantages to each approach but individual program reviews  appeared disconnected and resulted in gaps. For example, some countries  that passed review under regional preference programs were later subject  to GSP complaints. Moreover, we found that there was little to no  reporting on the impact of these programs. To address these issues, GAO  recommended that USTR periodically review beneficiary countries, in  particular those that have not been considered under GSP or regional  programs. Additionally, we recommended that USTR should periodically  convene relevant agencies to discuss the programs jointly.
In our March 2008 report, we also noted that even though there is overlap  in various aspects of trade preference programs, Congress generally  considers these programs separately, partly because they have disparate  termination dates. As a result, we 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.
In response to the recommendations discussed above, USTR officials told  us that the relevant agencies will meet at least annually to consider ways  to improve program administration, to evaluate the programs’  effectiveness jointly, and to identify any lessons learned. USTR has also  changed the format of its annual report to discuss the preference  programs in one place. In addition, we believe that Congressional hearings  in 2007 and 2008 and again today are responsive to the need to consider  these programs in an integrated fashion.
section_title: Experts Provided a Range of Options for Improving AGOA
paragraphs: In addition to the recommendations based on GAO analysis, we also  solicited options from a panel of experts convened by GAO in June 2009 to  discuss ways to improve the competitiveness of the textile and apparel  sector in AGOA beneficiary countries. While the options were developed  in the context of AGOA, many of these may be applicable to trade  preferences programs in general.
Align Trade Capacity Building with Trade Preferences Programs:  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. AGOA is the only preference program for  which authorizing legislation refers to trade capacity building assistance;  however, funding for this type of assistance is not provided under the Act.  In the course of our research on the textile and apparel inputs industry in  Sub-Saharan African countries, many experts we consulted considered  trade capacity building a key component for improving the  competitiveness of this sector.
Modify Rules of Origin among Trade Preference Program  Beneficiaries and Free Trade Partners: Some African governments  and industry representatives of the textile and apparel inputs industry in  Sub-Saharan African countries suggested modifying rules of origin  provisions under other U.S. trade preference programs or free trade  agreements to provide duty-free access for products that use AGOA textile  and apparel inputs. Similarly, they suggested simplifying AGOA rules of  origin to allow duty-free access for certain partially assembled apparel  products with components originating outside the region.
Create Non-Punitive and Voluntary Incentives: Some of the experts  we consulted believe that the creation of non-punitive and voluntary  incentives to encourage the use of inputs from the United States or its  trade preference partners could stimulate investment in beneficiary  countries. One example of the incentives discussed was the earned import  allowance programs currently in use for Haiti and the Dominican  Republic. Such an incentive program allows producers to export certain  amounts of apparel to the U.S., duty free, made from third-country fabric,  provided they import specified volumes of U.S. fabric. Another proposal  put forth by industry representatives was for a similar “duty credit”  program for AGOA beneficiaries. A simplified duty credit program would  create a non-punitive incentive for use of African regional fabric. For  example, a U.S. firm that imports jeans made with African origin denim  would earn a credit to import a certain amount of jeans from Bangladesh,  duty free. However, some experts indicated that the application of these  types of incentives should be considered in the context of each trade  preference program, as they have specific differences that may not make  them applicable across preference programs.
While these options were suggested by experts in the context of a  discussion on the African Growth and Opportunity Act, many of these  options may be helpful in considering ways to further improve the full  range of preference programs as many GSP LDCs face many of the same  challenges as the poorer African nations. Some of the options presented  would require legislative action while others could be implemented  administratively.
Mr. Chairman, thank you for the opportunity to summarize the work GAO  has done on the subject of preference programs. I would be happy to  answer any questions that you or other members of the subcommittee 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; Gezahegne Bekele; Ken Bombara; Karen Deans; Francisco  Enriquez; R. Gifford Howland; Ernie Jackson; and Brian Tremblay made  key contributions to this statement.
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