The Generalized System of Preferences (GSP) was proposed by the United Nations Conference on Trade and Development (UNCTAD) in the 1960s as a way to promote economic growth in developing countries. GSP allows developing countries to enjoy import tariff “preferences” (tariff elimination or reduction) when shipping certain goods to industrialized nations. Because these preferences are applied only to developing countries, however, GSP is inconsistent with article I of the General Agreement on Tariffs and Trade (GATT). Article I is commonly referred to as the most-favored-nation (MFN) clause. Therefore, in 1971, the GATT organization granted a 10-year waiver of article I and made it permanent in 1979. The United States implemented its GSP Program in 1976. The program grants duty-free preferences to certain designated items from eligible countries, although there are restrictions on GSP benefits. Legislative provisions prevent certain products and countries from ever receiving eligibility. Benefits for eligible items may be restricted based upon (1) a product’s “import sensitivity,” that is, the degree to which a foreign product will compete with and negatively affect a U.S. product; or (2) the competitiveness of certain beneficiary developing countries (BDCs) in exporting specific items to the United States. Countries may be completely removed from the program if they no longer meet various eligibility requirements, such as by exceeding a specific gross national product (GNP) per capita level or failing to provide internationally recognized worker rights. In 1992, $35.7 billion in GSP-eligible imports entered the United States from beneficiary developing countries. About $16.7 billion, or 47 percent, of these imports actually received GSP duty-free entry. The U.S. GSP Program provided benefits to 145 developing countries and territories as of March 1994 and included 4,578 items on the U.S. Harmonized Tariff Schedule (HTS). Over the years, GSP programs have been introduced by numerous nations; 16 programs are currently in effect. The two other major GSP programs, those of the European Union (EU) and Japan, are structured quite differently from the U.S. system and were considered more complex by UNCTAD and foreign officials we interviewed. The GSP concept was first proposed by UNCTAD in the mid-1960s. According to an UNCTAD official, UNCTAD’s GSP developers were strong advocates of the idea that “trade, not aid” was an effective way for industrialized nations to assist developing countries. GSP was viewed as a way to promote economic growth and industrialization in developing countries through, for example, increased foreign investment and exports of manufactured goods. This would allow beneficiary countries to earn foreign exchange and interact on a global scale. Another UNCTAD official added that GSP was viewed as a particularly effective “assistance program” because it rewarded competitiveness and encouraged increased participation in international trade based on market demands. UNCTAD fully endorsed the GSP concept in 1968 and completed it by passing a resolution in UNCTAD’s Special Committee on Preferences in 1970. As originally envisioned by UNCTAD, GSP was to follow three primary principles: (1) GSP was to be “generalized,” meaning that all “donor” countries that granted GSP benefits were to implement basically the same GSP program; (2) GSP was to be “nonreciprocal,” with donor countries exacting no concessions from benefiting nations in return for the tariff preferences; and (3) GSP was to be “nondiscriminatory” so that every eligible developing country would enjoy the same benefits as every other eligible developing country. According to an UNCTAD official, none of these goals has been met: each of the 16 donor countries (including the EU) has adopted its own separate version of a GSP scheme; demands for reciprocity have clearly been made through imposition of eligibility obligations such as U.S. “country practice” requirements related to worker rights and intellectual property rights (IPR) (discussed in ch. 5); and discrimination among developing countries exists within schemes. Granting GSP tariff preferences to developing countries is inconsistent with the GATT’s article I MFN provision because it excludes developed countries. Therefore, during the creation of GSP, the contracting parties to GATT determined that the authority for the GSP Program would have to be in the form of a GATT waiver to the MFN clause. The waiver, which was granted in 1971 for 10 years, authorized each industrial country to establish its own GSP program, provided that these programs benefited all “developing countries.” However, it was left to each industrial country to define what it considered to be a “developing country.” Thus, although the GATT waiver established the GSP framework, a great deal of individual discretion was left to each nation implementing a GSP program. The 10-year GATT waiver would have expired in 1981. However, as part of the Tokyo Round negotiations, the contracting parties to GATT entered into a new derogation, or exception, from the MFN principle of article I in 1979, this time on a permanent basis, in a declaration entitled “Differential and More Favorable Treatment, Reciprocity, and Fuller Participation of Developing Countries.” This declaration, commonly referred to as the “enabling clause,” stated that “ontracting parties may accord differential and more favorable treatment to developing countries, without according such treatment to other contracting parties. . .,” notwithstanding the provisions of the GATT MFN clause. According to a GATT official, this permanent waiver makes GSP autonomous and outside the GATT legal system. He stated that GSP beneficiaries have no formal legal recourse under GATT to seek changes in GSP programs over historically contentious GSP issues. These issues include, for example, the U.S. practice of maintaining “differential treatment,” or unequal product coverage, among GSP countries. A developing country may, however, apply to GATT for consultations as provided for in the enabling clause. The GATT official said that GSP programs have been employed in a more restrictive manner in the last few years, with a trend toward discretionary removal of GSP benefits for certain products from specific countries. However, for political reasons, no developing country has yet requested a consultation. The GATT official added that the country practice provisions currently in U.S. GSP law may be contrary to the spirit of the enabling clause due to their nontrade nature. However, in granting the GSP waiver from GATT, no guidelines, principles, or other criteria were provided on how to structure a GSP program. Further, the areas addressed in country practice provisions have been outside the purview of issues currently addressed by GATT. The official said that, essentially, the waiver provided donor countries with a carte blanche that allows them to implement this unilateral “gift” as they see fit. The GSP Program Director said he did not concur with the categorical nature of some of the statements made by the GATT official. He said that by ratifying the GATT enabling clause, countries have agreed that their GSP programs would grant “generalized, nonreciprocal, and nondiscriminatory preferences.” Interpretation of these terms is unclear. However, one interpretation has been that the intention of this provision is to prevent GSP donors from using GSP to obtain explicit tariff concessions, especially “reverse preferences.” Moreover, the provision could be interpreted as involving explicit obligations, subject to GATT dispute settlement procedures. Aside from the autonomy of GSP from GATT rules, an official within the Office of the U.S. Trade Representative (USTR) said that the GATT enabling clause itself establishes a foundation to justify a previously mentioned, historically controversial aspect of the U.S. GSP Program: maintaining “differential treatment,” or unequal product coverage, among BDCs. This provision of the U.S. program, which allows the President selectively to remove GSP eligibility for certain items from particular countries that ship these items competitively, has been criticized by some BDCs. They note that GSP was meant to be a nondiscriminatory program. Such removal is commonly referred to as “product graduation.” According to USTR’s General Counsel (in October 1992), GSP is meant to temporarily assist developing countries to progressively become full GATT participants. USTR points out that one provision in the enabling clause speaks to the possible improved ability of developing countries to make “contributions or negotiated concessions or take other mutually agreed action” under the provisions of GATT as their economies develop and their trade situations improve. When a particular industry in a developing country has become sufficiently advanced so as to be globally competitive, it no longer needs GSP benefits to compete with industries in developed countries. With respect to that competitive industry, the developing country is expected to participate “fully” in GATT. This process envisions differentiation or product graduation—removing GSP benefits for items from particular BDCs that export the articles competitively, while maintaining benefits on these items for other BDCs. A GATT official agreed with this analysis, stating that because product graduation deals specifically with trade in goods, it is possible for USTR to interpret this section of the enabling clause in this manner. He added, however, that USTR could not “invoke” this argument on a legal basis within GATT since no direct link exists between this provision of the enabling clause and the GSP Program. The U.S. GSP Program is administered by the GSP Subcommittee, a staff-level working group of the interagency Trade Policy Staff Committee (TPSC). Agency representatives from the Departments of Agriculture, Commerce, the Interior, Labor, State, and the Treasury are on the GSP Subcommittee. TPSC comprises officials from these agencies at the office director level. TPSC, in turn, reports to the Trade Policy Review Group (TPRG), the policy-making body composed of subcabinet level officials. All three groups are chaired by USTR. The GSP Subcommittee administers an annual review process for petitions to add products to or remove products from GSP coverage, as well as petitions related to country eligibility. The GSP annual review is a 13-month cycle, with petitions submitted by June 1 and triggering a two-stage decision cycle. In the first stage, a decision is made on which petitions to accept for review; in the second stage, the accepted petitions are fully reviewed and a decision is made on which petitions to grant or deny for GSP coverage. All GSP eligibility changes go into effect on the following July 1. The GSP Program has undergone several changes since its implementation that tend to limit benefits available under the program. Legislative restrictions on eligible products and countries have been added. As a result of the program’s restrictions on benefits, not all imports that are technically eligible under the program actually receive duty-free entry. The U.S. GSP Program was originally authorized by title V of the 1974 Trade Act (P.L. 93-618, Jan. 3, 1975), codified in title 19 of the U.S. Code (U.S.C.). The program became operational on January 1, 1976, and provides duty-free entry for designated items from eligible developing countries and territories. According to the 1974 act, the GSP Program was meant to provide fair and reasonable access to products of less-developed countries in the U.S. market. Statutory restrictions placed on product eligibility indicate that the need to protect domestic producers and limit use of the program by competitive countries was also to be recognized in administering the program. The 1974 Trade Act allows the President to designate BDCs, as well as specific articles, as eligible under the program. He must consider several factors when making country designations, such as the effect of GSP preferences on the economic development of BDCs and the anticipated impact of granting GSP on U.S. domestic producers. The 1974 act enumerated several factors that automatically eliminate countries from consideration for GSP eligibility, such as whether a country is communist (unless certain criteria are met); is a member of the Organization of Petroleum Exporting Countries (OPEC); or has expropriated U.S. property without compensation, negotiation, or arbitration. Some additional, discretionary factors to be considered in granting (or maintaining) GSP status for a country include the country’s level of economic development and the country’s provision of equitable and reasonable access to its markets. The 1974 Trade Act contains several provisions that limit potential product benefits available under the program. Items such as most textiles, footwear, and other import-sensitive articles are statutorily prohibited from GSP eligibility. Further, items that are granted eligibility can later be restricted from actually receiving duty-free entry in many ways. For example, GSP has a “rule of origin” requirement. This requirement states that at least 35 percent of the content and processing of an item shipped under GSP must have come from the shipping BDC in order to receive duty-free entry. The item must also be shipped directly from the BDC to the United States. In addition, as previously mentioned (see pp. 21-22), the 1974 act provides for “graduation,” or the permanent removal of GSP benefits, under the section that allows the President to withdraw, suspend, or limit preferences at any time for any article or beneficiary country. Finally, the program contains a “competitive need limit” (CNL) exclusion provision, which is the temporary removal of GSP preferences for a particular item from a particular BDC. This provision automatically suspends GSP preferences if, in any 1 calendar year for any individual item, a beneficiary country ships above a statutorily determined import level. Benefits can be reinstated subsequently if the BDC’s exports fall below the legislated limits. (These limitations are further discussed in ch. 3.) When GSP was reauthorized by the Trade and Tariff Act of 1984 (P.L. 98-573, Oct. 30, 1984), some of the program’s benefits were reduced, and the program became more reciprocal in nature. The 1984 act states that GSP is intended to promote the economic development of BDCs and notes that trade, rather than aid, is a more effective way of achieving this goal. The 1984 legislation also points out that the amended GSP law is meant to provide trade and development opportunities for BDCs without adversely affecting U.S. producers and workers and “to integrate developing countries into the international trading system with its attendant responsibilities in a manner commensurate with their development.” U.S officials whom we interviewed reinforced this last idea, pointing out that GSP has an increased focus as a leveraging tool that can be used to encourage desired behaviors in beneficiary countries in exchange for continued GSP benefits. As a result, the 1984 act’s eligibility criteria for countries and products under GSP are stricter. For example, a country must now have taken or be taking steps to afford internationally recognized worker rights in order to be eligible for GSP. The provision of adequate and effective protection of intellectual property by beneficiaries is also assessed in determining whether to grant (or maintain) GSP eligibility. Further, a GNP per capita eligibility limit was enacted, excluding countries that exceed the ceiling. The 1984 law also required the administration to conduct a general review of the GSP Program, and, based upon that review, to identify products from individual countries that could be considered sufficiently competitive. Results of the review were published in 1987. Many sufficiently competitive items shipped from specific BDCs were identified and are now subject to reduced statutorily defined CNL import levels. However, at the same time, the amended law gave the President the authority to waive these CNL exclusions if a country exceeds the legislated limits. The value of imports under the U.S. GSP Program has grown substantially over the years. In 1978, soon after the program was implemented, GSP-eligible imports (all imports from BDCs that are technically eligible to receive GSP duty-free access) amounted to $9.7 billion in 1978 dollars.Fifty-three percent of this amount ($5.2 billion) actually received GSP duty-free entry into the United States. By 1992, the value of GSP-eligible imports was $35.7 billion, with 47 percent of this amount ($16.7 billion) actually entering duty free under GSP. An additional $2.9 billion (8 percent of eligible imports) received duty-free access through other programs. Forty-five percent of the GSP-eligible imports that entered the United States in 1992 were actually assessed MFN tariffs due to the legislative reasons stated earlier (see pp. 23-24). Table 1.1 shows that as of March 1994, 119 independent countries and 26 nonindependent countries and territories were eligible for the U.S. GSP Program. The most recent countries to be designated as eligible were Kazakhstan and Romania, which were granted GSP status in February 1994. Russia, which was granted GSP eligibility status on September 30, 1993, had exports to the United States of $46.2 million in goods that would have been eligible for GSP benefits in 1992. All former Soviet republics combined (excluding Estonia, Latvia, and Lithuania, which have already been designated as GSP beneficiary countries) shipped $56.9 million in goods to the United States that would have been eligible in that year. As of January 1, 1994, half of the items at the 8-digit level of the U.S. HTS (4,578) were eligible for GSP out of the 9,219 total items. According to an UNCTAD GSP official, there are 16 GSP programs throughout the world (which includes 1 program for all 12 member states of the EU) that have been introduced over a number of years. The EU and Japan introduced their GSP programs in 1971, East European countries throughout 1972, Australia and Canada in 1974, and the United States in 1976. The GSP Program of the EU is quite different from that of the United States and was generally considered to be more complicated by foreign officials and industry representatives with whom we met. The program is divided into four product areas for eligible countries: industrial, textile (including items subject to the Arrangement Regarding International Trade in Textiles for some countries), agricultural, and steel products. For agricultural items, tariffs are eliminated or reduced. Specified items in all other areas enjoy total duty-free entry. Some items are subject to fixed duty-free amounts, or tariff quotas beyond which MFN rates are automatically reinstated. For other items, MFN duties may be reintroduced once a duty-free import tariff ceiling amount is met, based on an exchange of information between the member states and EU authorities. GSP access is reinstated at the end of the calendar year for all items. The amount eligible for preferential entry often varies by product and beneficiary country for specific items (though not for agricultural products, which are subject to global reduced-duty amounts). An UNCTAD official told us that the EU has been waiting until the completion of the Uruguay Round of multilateral trade negotiations before it renews its GSP Program. The Japanese GSP Program, which has been extended to the year 2001, is also structured very differently from the U.S. system. This system was cited as complex by eligible beneficiary country officials we interviewed. The Japanese program comprises a positive list of agricultural items that are eligible for GSP, and a negative list of industrial goods (including textiles) that are ineligible. Similar to the EU’s GSP, the Japanese program provides for duty-free as well as reduced-duty access under GSP. Reduced duties apply to both agricultural and industrial items. Import ceilings apply to some industrial products (though not agricultural goods) and may lead to a reinstatement of MFN tariff rates; imported products posing no threat or injury to Japan’s domestic industry can continue to receive GSP preferences even after a country exceeds ceiling levels. Japan has adopted a graduation policy, whereby a particular country can lose its GSP benefits for a specific product when the beneficiary is viewed as internationally competitive. From a beneficiary’s perspective, Australia’s GSP program has been mentioned by UNCTAD officials as straightforward and simple. They explained that Australia’s GSP scheme includes almost every item on its tariff schedule, with all developing countries receiving a tariff reduction of 5 percentage points. Australia’s average tariff is around 10 percent, so the program offers a duty preference of about 50 percent. At the request of Senators Harris Wofford and Byron Dorgan and Representatives Steve Gunderson, William Hughes, Collin Peterson, and David Obey, we analyzed (1) benefits provided to beneficiary developing countries, (2) limitations on GSP imports, (3) administration of the program for adding or removing products from GSP coverage, and (4) administration of program provisions requiring that countries follow certain intellectual property and worker rights practices. To assess the benefits and limitations experienced from the GSP Program, we obtained, through the Office of the U.S. Trade Representative, computer tapes of data on GSP imports. These data are maintained by the Department of Commerce’s Bureau of the Census. We did not verify the accuracy of these data. We examined data for 1989-92. We also assessed overall imports by GSP-eligible countries using data from the COMPRO system maintained by the Census Bureau. All dollar amounts in this report are current dollar figures, unless otherwise noted. The database figures we analyzed contained specific semiannual information on the amount (U.S. dollars) of GSP-eligible imports. These imports were categorized in the data by those imports that received GSP duty-free entry (with flags identifying those that entered duty free due to competitive need limit waivers), those that were dutied (with flags identifying imports dutied due to graduation or competitive need limits), and those that were eligible for GSP but instead entered the United States duty free under another preferential option. In order to determine imports dutied because of administrative exclusions, we subtracted those imports specifically tagged as dutied due to graduation or competitive need limits from the total dutied imports figure for each of the 4 years of data. We compiled data to identify the top country exporters for each year, as well as the top products that were shipped. We estimated U.S. duties forgone figures due to the GSP Program by multiplying the GSP duty-free amount that entered for each product by its MFN tariff rate and then adding these amounts together. We frequently consulted USTR and International Trade Commission (ITC) officials to discuss the accuracy of our methodologies and data. To assess the degree to which BDC representatives and others believe they are benefiting from or experiencing restrictions in using the U.S. GSP Program, we interviewed BDC government officials and business representatives in six case study countries: Brazil, Thailand, Malaysia, the Dominican Republic, Hungary, and Turkey. We also interviewed Mexican embassy officials in Washington, D.C. During early 1993, we discussed the program with several U.S. businesses, primarily importers, many of whom contacted us after learning about this study from the American Association of Exporters and Importers, or business associations representing importers. We also reviewed documents submitted to ITC by U.S. companies that were, or could have been, in competition with GSP imports in 1991. To analyze concerns related to the administration of the program for adding or removing products and examine whether the program was generally well structured, we interviewed a broad spectrum of participants in the GSP process. These participants included GSP Subcommittee officials; former GSP officials; ITC officials; U.S. embassy and foreign government officials in our six case study countries as well as Mexican embassy officials in the United States; and UNCTAD, GATT, and USTR officials in Geneva, Switzerland. We also interviewed trade experts, academics, and industry and trade association representatives in the United States and the six case study countries. We reviewed GSP and ITC interagency documents, including certain case study petition files. We examined 45 cases out of 175 considered in the 1991 GSP Program review and 1991 Special Review for Central and Eastern Europe, with our selection based on the cases (1) being designated by USTR as controversial (and thereby being elevated from the GSP Subcommittee to the TPSC and TPRG), (2) being filed by petitioners in our six case study countries, or (3) resulting in recommendations for differential treatment. We also attended USTR, ITC, and congressional GSP hearings. We did not review U.S. Customs’ administration of imports under the program. To determine the President’s authority for allowing differential treatment of BDCs through permanent product graduation under U.S. GSP law and the U.S.’ GATT obligations, our Office of General Counsel obtained and reviewed a written explanation of such legal authority from USTR’s Office of General Counsel. We interviewed GSP officials and examined the GSP statute and the legislative history of the program. We also interviewed GATT officials to obtain their views on this issue. To analyze concerns about the administration of country practice provisions and the amount of leverage available from the GSP Program, we interviewed a broad spectrum of GSP participants in the United States, in the six case study countries, and at UNCTAD and GATT in Geneva. In addition, we interviewed representatives of the major IPR and worker rights advocacy groups in the United States that have participated in the GSP Program. These included, for IPR, the International Intellectual Property Alliance (IIPA), the Motion Picture Association of America (MPAA), and the Pharmaceutical Research and Manufacturers of America (PRMA); and for worker rights, the American Federation of Labor-Congress of Industrial Organizations (AFL-CIO), the International Labor Rights Education and Research Fund (ILRERF), and Human Rights Watch. In the Dominican Republic, we interviewed representatives of MPAA and the Dominican Cable Operators Association, as well as representatives of a pharmaceutical manufacturers’ group. We interviewed representatives of labor groups and the free trade zone owners’ association; we also visited three factories in a free trade zone. In Malaysia and Thailand, we interviewed representatives of labor groups and manufacturers’ associations. We also examined data on overall country practice petition results since 1984, as well as eight cases in the 1990-92 annual reviews. We selected these cases based on (1) our finding that they were filed against one of our six case study countries and (2) our desire to obtain a cross-section of IPR and worker rights cases. The cases selected were not a statistically representative sample. We performed our review from May 1992 to May 1994 in accordance with generally accepted government auditing standards. USTR, on behalf of the administration, provided written comments on a draft of this report. USTR comments are presented and evaluated in chapters 4 and 5 and are reprinted in appendix III. USTR also suggested technical changes and clarifications that, to the extent we deemed appropriate, have been incorporated into the report. In addition, ITC provided us with technical comments on the section in chapter 4 that addresses ITC’s role in the GSP Program. We considered these comments and revised the report as appropriate. The primary goal of the GSP Program is to assist BDCs in strengthening their economic development by granting preferential tariff access to the U.S. market. This preferential access can help BDCs to realize benefits, such as increased production and exporting of industrial goods, greater foreign investment in their countries, and increased foreign exchange earnings. However, it is not possible to measure the extent to which these objectives have been realized specifically because of GSP. The impact of GSP cannot be isolated from other factors, such as foreign assistance or internal policies adopted by BDCs that promote increased commercial activity and stable economic growth. Though the impact of GSP on BDC economies cannot be accurately determined, it is possible to examine the GSP Program as a part of total U.S. trade and assess the level and composition of duty-free access to the U.S. market provided to BDCs by the GSP Program. These figures serve as an indicator of the value of the GSP Program to developing countries. GSP duty-free imports into the United States in 1992 were $16.7 billion. This figure was less than half of the $35.7 billion in imports that were eligible to receive GSP preferences and amounted to 3 percent of total U.S. imports. U.S. import duties forgone on GSP imports were almost $900 million in 1992. In that year 3,370 eligible items shipped to the United States received GSP duty-free entry on some shipments; 9 percent of these items had MFN tariff rates of at least 10 percent. The value of the difference between GSP zero tariff preferences and MFN tariff rates (i.e., duties forgone) would decrease if the MFN tariff reductions achieved under the Uruguay Round of multilateral trade negotiations are enacted. Imports under the GSP Program are dominated by a handful of countries. Mexico, which was removed from the program upon the implementation of the North American Free Trade Agreement (NAFTA) on January 1, 1994, accounted for 44 percent of all GSP-eligible imports and 29 percent of all GSP duty-free imports in 1992. The top 10 exporting countries of GSP duty-free items in 1992, including Mexico, Malaysia, Thailand, Brazil, and the Philippines, accounted for 85 percent of the value of all duty-free shipments from the 127 countries that shipped eligible items under the program. For the 1989 and 1990 GSP annual reviews, which we reviewed, top shipping countries also submitted the majority of petitions to grant GSP status to new products. From a product perspective, GSP duty-free import values are dominated by industrial articles. The legislative exclusion of textile goods from GSP eligibility was an issue of concern raised by foreign officials we interviewed. Finally, numerous items that were eligible to receive GSP benefits actually entered the United States duty free or partially duty free under alternative programs or provisions. In 1992, imports receiving GSP duty-free entry constituted 47 percent of all imports that were eligible under the program. This proportion is a slight increase from 1989, when GSP duty-free imports were 41 percent of all eligible imports. The benefit of not having to pay duties under the GSP Program is referred to as “duties forgone.” In 1992, this amount was almost $900 million. In that year, 3,370 items, including 302 with MFN tariff rates of 10 percent or higher, received some duty-free entry. The advantage of these duties forgone would decrease if the Uruguay Round market access commitments, which would require the United States to lower its MFN tariff rates, are enacted. GSP imports are a small component of overall U.S. imports, as shown in table 2.1. The value of GSP duty-free imports increased steadily between 1989 and 1992, as can be seen in table 2.1, though their share of total U.S. imports has remained small. Eligible imports grew by 46 percent overall from 1989 to 1992, which was much faster than the 27-percent growth in total U.S. imports from beneficiary countries during that period. Over these years, GSP duty-free imports under the program grew even faster, by 67 percent. In 1992, 33 percent of the almost $110 billion in imports from GSP beneficiaries were eligible for GSP. As shown in table 2.2, the share of eligible imports that received GSP duty-free entry increased somewhat, from 41 percent in 1989 to 47 percent in 1992. It should also be noted that in 1992, of total U.S. imports from the BDCs, duty-free shipments under GSP accounted for 15 percent. Mexico’s participation in the GSP Program was terminated when NAFTA was implemented on January 1, 1994. Because Mexico was the largest shipper under the program in 1992, we examined the structure of the GSP Program with Mexico data excluded. Since a high proportion (67 percent) of Mexico’s GSP-eligible shipments were dutied in that year, the program’s coverage changes significantly if that country’s figures are removed. For 1992, GSP-eligible imports without Mexico would have been $20.2 billion, dutied imports from BDCs would have been $5.7 billion, and GSP duty-free imports would have been $12 billion. Therefore, as shown in figure 2.1, without Mexico a higher proportion, 59 percent, of eligible imports would have received GSP duty-free entry, while 28 percent of imports would have been subject to duties. Dutied imports with Mexico Other duty-free imports without Mexico GSP duty-free imports without Mexico Note 1: With Mexico: GSP-eligible imports were $35.7 billion, with GSP duty-free imports at $16.7 billion, dutied imports at $16.1 billion, and other duty-free imports at $2.9 billion. Note 2: Without Mexico: GSP-eligible imports would have been $20.2 billion, with GSP duty-free imports at $11.9 billion, dutied imports at $5.7 billion, and other duty-free imports at $2.6 billion. Table 2.3 shows that as GSP duty-free imports increased between 1989 and 1992, duties forgone by the United States under the GSP Program increased as well, from an estimated $569 million in 1989 to $894 million in 1992. Duty-free imports grew by 11 percent in 1990 from the 1989 level, and then increased by 23 percent and 22 percent in 1991 and 1992, respectively. Duties forgone followed a similar pattern, but at slower rates, growing 11 percent in 1990 compared to 1989, and then increasing by 19 percent and 20 percent in the following years, respectively. Since the level of duty-free imports increased more quickly over this period than did duties forgone, it is apparent that the average tariff savings and the associated advantage provided by the program have decreased. The average tariff that would apply to all duty-free imports in the absence of GSP fell slightly, from almost 5.7 percent in 1989 to just over 5.3 percent in 1992. The level of duties forgone will now likely be smaller than in past years due to the removal of two BDCs. In 1992, duties forgone attributable to GSP imports from Mexico and Israel (which is being removed from the program over a 2-year period ending July 1, 1995) amounted to an estimated $243 million and $26 million, respectively. This $269 million was 30 percent of total duties forgone for the year. In 1992, 3,370 GSP-eligible items had some shipments that entered the United States GSP duty free. The top item responsible for duties forgone was raw cane sugar, with duties forgone estimated at $29.5 million. Other top items and their duties forgone included telephone sets ($26.7 million), tequila ($17.2 million), precious metal jewelry ($15.5 million), and cordless handset phones ($12.3 million). Certain items shipped under GSP have high MFN tariff rates. Of the 3,370 items that received some GSP duty-free preferences, 302 of them (9 percent) had MFN tariff rates of 10 percent or higher, and 44 of these 302 items had MFN rates of 20 percent or more. The highest MFN tariff rate was an estimated 81.4 percent for undenatured ethyl alcohol for beverages. The 302 items accounted for 19 percent of the total value of duties forgone. The Congressional Budget Office calculates the revenue loss from the GSP Program to the United States by estimating duties forgone and then applying a standard 25-percent offset. This offset, which is employed in estimating costs for all programs or initiatives that reduce customs duties, recognizes that imports will decrease in cost. This reduction will, assuming a constant GNP, put incomes at higher levels than if MFN duties were in force. As a result, government direct tax revenues (corporate, individual, and payroll) will also be higher. Therefore, the overall cost of the GSP Program is considered lower than the actual value of duties forgone. The advantage of duty preferences for GSP (and other preferential programs) will erode if the results of the Uruguay Round of multilateral trade negotiations under GATT are enacted. Specifically, as a result of tariff negotiations, the United States will have lower committed or “bound” MFN tariff levels. The United States already has a comparatively low average tariff level; the average tariff on all goods subject to duties that were imported into the United States in 1991 was 5.3 percent. As a result of the Uruguay Round, U.S. tariffs are expected to fall on average by around one-third. The United States has agreed to largely eliminate tariffs for GSP-eligible items such as pharmaceuticals, toys, and furniture. The Director of the GSP Program has estimated that if the results of the Uruguay Round are enacted, the trade-weighted average tariff for GSP goods will decrease from around 5.5 percent to about 3 percent once all tariff reductions are implemented. This would mean that tariffs for GSP-eligible goods will be reduced by an estimated 48 percent over 10 years, according to the Office of Management and Budget (OMB). An OMB official said that 95 percent of these tariff reductions would be phased in within the first 5 years and around 25 percent during the first year. Finally, although GSP duty-free exports are a small component of trade for GSP beneficiaries, these countries still enjoy strong duty-free market access to the United States, as can be seen by examining the combined results of GSP with exports that enter the United States from BDCs under an MFN tariff rate of zero. As of January 1, 1994, 1,420 items at the 8-digit level of the U.S. HTS had MFN rates of zero. We analyzed the top 50 imports from all GSP beneficiaries (at the 8-digit U.S. HTS level) in 1992 that accounted for $56.3 billion, or over half (51 percent), of total imports to the United States from BDCs. Of this amount, around $1.8 billion, or 3 percent of the total value of the top 50 imports, received GSP duty-free entry. In addition, another $14.8 billion (26 percent) entered MFN duty free. Therefore, almost 30 percent of these imports entered the United States duty free for these two reasons. Furthermore, several GSP countries are able to further augment their duty-free access through other preferential or reciprocal arrangements, described later in this chapter (see p. 44). As previously noted (see pp. 34-37) and as shown in figure 2.2, Mexico was the dominant BDC in terms of the value of imports shipped to the United States under the GSP Program. In 1992, Mexico accounted for $15.6 billion of GSP-eligible imports to the United States, or 44 percent of all such imports from GSP countries. While the $4.8 billion in GSP duty-free imports from Mexico accounted for 29 percent of all such imports, that country also had 65 percent of the GSP imports into the United States that were dutied. Other top duty-free shippers that accounted for the majority of shipments under the program included Malaysia, Thailand, and Brazil. Table I.1 in appendix I (see p. 129) shows in more detail that the program’s GSP-eligible imports are clearly dominated by just a few countries. The top 10 shipping countries accounted for 87 percent of all eligible imports in 1992, and the top 25 countries accounted for 97 percent. For the year, GSP-eligible imports came from 127 countries. The percentages of imports of GSP duty-free goods from the top shipping countries were similar. For the top four GSP countries shipping duty-free items (other than Mexico), these duty-free imports into the United States accounted for around 20-30 percent of each country’s total shipments to the United States in 1992. In contrast, Venezuela, the ninth largest GSP duty-free beneficiary, had GSP duty-free shipments equal to only 4 percent of that country’s total shipments to the United States. The ratio of GSP duty-free shipments to total shipments for each BDC that received GSP duty-free entry in 1992 is listed in table I.2 in appendix I (see pp. 130-133). The top-shipping BDCs have dominated the process of petitioning to add products eligible for GSP preferences. GSP exporters that ranked among the top 20 shippers of GSP duty-free goods had submitted all of the 81 petitions granted in the 1989 and 1990 review cycles. These petitioners had the highest percentage of duty-free shipments of any BDC after GSP status was granted for about half or more of the new items that BDCs exported. Our analysis also showed that granting eligibility to items did not ensure that they would be shipped by the petitioner or any other BDC, or that GSP export values would increase. These figures related to product additions are discussed in more detail in appendix II (see pp. 146-147). The industrial and other goods contained in chapters 25-96 of the U.S. HTS accounted for 90 percent of all GSP duty-free imports in 1992. Most of the value of GSP-eligible and duty-free imports comes from industrial goods concentrated in a few chapters of the U.S. HTS. In 1992, imports under U.S. HTS chapter 85 (electrical machinery and equipment, etc.) had the highest import value of any one chapter, with $10.9 billion in GSP-eligible imports. These imports received GSP duty-free entry on $3.7 billion in shipments. As shown in figure 2.3, this amount accounted for 22 percent of all GSP duty-free imports for 1992. More complete information is provided in table I.3 of appendix I (see pp. 134-145). Chapter 84 (Nuclear reactors and machinery, etc.) 8% Chapter 94 (Furniture and bedding, etc.) 5% Chapter 95 (Toys, etc.) 4% Chapter 87 (Vehicles other than railway, etc.) Agricultural items included in chapters 1-24 accounted for almost $3.8 billion (11 percent) of all GSP-eligible imports in 1992. Of this amount, 43 percent received GSP duty-free entry into the United States. This percentage is slightly lower than the overall average of GSP-eligible goods that received duty-free access (47 percent). U.S. HTS chapter 17 (sugars and sugar confectionery) had the highest level of agricultural imports receiving duty-free entry, at about $387 million. The top five items having the highest value in GSP duty-free shipments in 1992 were auto seat parts ($373 million), telephone sets ($315 million), precious metal jewelry ($239 million), raw cane sugar ($225 million), and display units for automatic data processing equipment ($215 million). These items had duty-free shipments totaling $1.37 billion, or 8 percent of total duty-free shipments under GSP. Textile items were cited by BDC officials as an area where BDCs have potential for improved GSP utilization: about 15 percent or more of the total exports of several BDCs comprised textiles and clothing in 1991. Textile and apparel articles are largely precluded from receiving GSP benefits due to a statutory exclusion that prevents items subject to textile agreements from receiving GSP benefits (see fn. 13 on p. 27). Total U.S. imports of BDC textile and apparel items in U.S. HTS chapters 50-63 amounted to $14.7 billion in 1992. This amount equaled 13 percent of total U.S. imports from BDCs. At the same time, GSP-eligible imports of these same items totaled $461 million, or 1 percent of total GSP-eligible imports into the United States. Other duty preference options exist for GSP beneficiaries that replace some duty-free benefits that could have been realized under the GSP Program: many items that are eligible under the GSP Program instead receive tariff preferences through alternative means. These options include the Caribbean Basin Economic Recovery Act (CBERA), the U.S.-Israel Free Trade Agreement (FTA), and the Andean Trade Preference Act (ATPA). BDCs can also ship items under U.S. HTS chapter 98, subchapter II (“9802”) or utilize the temporary duty suspensions contained in U.S. HTS chapter 99, subchapter II (most of which recently expired). In 1992, $2.9 billion (8 percent) of the $35.7 billion in imports that were eligible for GSP entered the United States under a duty preference provision other than GSP. When this amount is combined with the $16.7 billion that entered duty free under GSP, the data show that 55 percent of all GSP-eligible goods received duty-free entry. While many BDCs ship under GSP, the preponderance of benefits provided by the program’s duty elimination are concentrated toward the relatively small number of more advanced or larger BDCs that can produce and export goods that meet U.S. market demands. In addition, GSP is furthering developmental goals in that industrial products, rather than agricultural products, dominate duty-free imports. A number of factors limit the level of duty-free benefits that BDCs receive under the GSP Program. In 1992, 45 percent of the $35.7 billion in GSP-eligible imports did not receive duty-free entry. During recent years, administrative program provisions, such as the requirement for a certain percent of domestic content in exported products or for direct shipment of goods from the BDC to the United States, have increasingly become the factor that excludes GSP-eligible imports from receiving duty-free preferences. Administrative exclusions accounted for 56 percent of all exclusions in 1992, up from 31 percent in 1989. However, the removal of Mexico, which accounted for the majority of these exclusions, from the program is one factor that may alter this trend. Some import-sensitive items, such as textiles and footwear, are legislatively prohibited from receiving GSP eligibility. For those items that are granted GSP eligibility, the GSP law permits improvements in BDC competitiveness to limit duty-free imports for specific products from particular countries. Such exclusions include discretionary permanent “product graduation” or removal from the program of a product shipped by a particular BDC, as well as legislated annual import ceilings for individual items beyond which GSP preferences will automatically be suspended for a country. Product graduations have accounted for only a very small proportion of all exclusions. The statutory ceilings, called “competitive need limits” or CNL, were responsible for the majority of exclusions from GSP duty-free entry during 1989 and 1990, but had lost some importance by 1992. As a result of the 1989 GSP annual review, a policy was adopted that makes it easier for products from more economically advanced BDCs that are excluded under CNL to regain GSP status. However, CNL exclusions for certain countries have grown quickly in recent years. In 1992, all CNL exclusions were responsible for 42 percent of total exclusions. Although the overall value of shipments excluded from GSP due to CNL declined between 1989 and 1992, foreign officials we interviewed cited CNL as the main obstacle to obtaining GSP duty-free entry for eligible articles. Further, BDC officials we interviewed said that CNL exclusions actually result in a reduced ability to export to the United States, although items are excluded because the United States believes a BDC is competitive in exporting them. In examining two cycles of CNL exclusions, we found an immediate loss of market share once a CNL was implemented in a majority of cases for the country involved (though no causal link was identified). If BDCs are unable to produce and export eligible items, then they cannot participate in the program. Conversely, if a country is found to be competitive overall or sufficiently developed, then it can be permanently removed from the GSP Program. Such removal has been applied to several countries and in some cases has proven controversial. As shown in sable 3.1, there are several reasons why GSP-eligible imports into the United States did not actually receive GSP duty-free entry. The prominence of the different types of exclusions from GSP duty-free entry has changed between 1989 and 1992, with administrative exclusions now dominating limitations under the program. Administrative exclusions can occur for reasons such as a failure to meet program requirements on product domestic content (rule of origin) or on direct shipment of an item from a GSP country to the United States. Inadequate customs paperwork can also lead to this type of exclusion. In 1989, administrative exclusions amounted to $3.8 billion and accounted for 31 percent of all exclusions. By 1992, they had grown substantially to over $9 billion to become the primary reason (56 percent) for exclusions from GSP duty-free entry in that year. Some trade experts and U.S. officials we interviewed commented on one type of administrative exclusion as being in need of change—domestic content or “rule of origin” requirements. Title 19 U.S.C., subsection 2463(b), establishes specific criteria (rules of origin) that articles must meet in order to be eligible for GSP preferences. These criteria are in place to determine an imported good’s “legal nationality.” Under these rules, GSP duty-free entry is allowed only if the cost or value of materials produced in the beneficiary country, plus the direct costs of processing in the country, equals at least 35 percent of the appraised value of an article upon its entry into the United States. Product components from a third country must be “substantially transformed” into new and different constituent materials, of which the eligible article is composed, in the exporting BDC before they can be considered part of this 35-percent domestic content rule. For the GSP Program there is no measurable definition of the term substantially transformed, and the determination as to whether such a requirement has been met is made on a case-by-case basis that involves subjective judgment. In addition, goods must be imported directly from the beneficiary country into the customs territory of the United States to obtain the duty preference (although entrepôt trade may be allowed in some instances). There has been criticism of this type of rule of origin requirement, with U.S. officials we interviewed claiming that BDCs may have no predictable (i.e., clear) way of knowing before shipment whether foreign components will be considered to have been substantially transformed and can be included as part of the 35-percent domestic content. Therefore, some U.S. officials and one trade expert have suggested that the GSP Program should adopt a different rule of origin approach, similar to that of NAFTA, where substantial transformation is clearly defined by changing a product’s tariff classification. Under NAFTA, goods containing imported materials from outside the free trade area are generally considered NAFTA originating if the foreign materials undergo processing or assembly in North America sufficient to result in a specified change in the HTS tariff classification. Under this tariff-shift rule, depending on the good involved, NAFTA requires non-NAFTA components to be in a predetermined different HTS chapter, heading, subheading, or tariff item than the final product if the final product is to receive the agreement’s preferential duty treatment. Therefore, North American exporters know whether they have met NAFTA rule of origin requirements before shipments are sent. In January 1994, the U.S. Customs Service proposed adopting a change of tariff classification system that would affect GSP and other preferential programs (though the 35-percent rule would remain independent) and was collecting public comments on this possibility until early April. U.S. government officials and a trade expert we interviewed said that the NAFTA approach is clear and leaves little doubt as to whether a partially non-NAFTA item has been substantially transformed and will, therefore, qualify as having sufficient North American content. However, some contend that an attempt to create such a system for the GSP Program could lead to disagreements over what constitutes adequate transformation or could result in an overly protective scheme. An ITC official also pointed out that a tariff classification change system would require massive paperwork for BDC companies where documentation would be involved at every stage of transformation in order to substantiate the required change. Such a process could make compliance with rule of origin requirements difficult and discourage BDCs from using the GSP Program. Another issue was raised about the current rule of origin system related to U.S. source content of GSP items. Currently, the GSP Program does not allow for U.S. components of BDC items shipped to be considered in any way in meeting domestic content requirements (unless substantially transformed). Private sector officials expressed concern over this situation and suggested that U.S. component input be included as counting toward the 35-percent requirement. In 1992, Mexico accounted for 67 percent of all administrative exclusions. Foreign and U.S. government officials told us that they believed Mexico’s large proportion of such exclusions could possibly be attributed to high levels of imports that were eligible for GSP but instead were shipped under HTS chapter 98, subchapter II (“9802”), which provides for partial tariff elimination. These items were not shipped under GSP presumably because they could not meet GSP’s 35-percent domestic content rule of origin or simply because 9802 was the preferred option. The dutiable value of all GSP-eligible goods imported under 9802 is categorized as an administrative exclusion. In 1991, Mexico was the largest beneficiary of 9802. However, in that year $7 billion of dutiable U.S. imports from Mexico were shipped under 9802. Restrictions on GSP benefits have been enacted due to the need to balance benefits provided to BDCs with concerns over the impact on domestic interests. Further, these restrictions draw upon a recognition that GSP benefits to a BDC are meant to be temporary. The restrictions are based upon the import sensitivity of domestically produced items that would compete with GSP imports and the level of competitiveness of BDC GSP exports. Some goods are statutorily prohibited from ever obtaining GSP eligibility due to the sensitivity of specific domestic sectors to the effects of imports. These items are listed in 19 U.S.C., subsection 2463(c), and include certain textile and apparel articles and watches, as well as footwear, handbags, luggage, flat goods, work gloves, and leather wearing apparel that were not eligible for GSP on April 1, 1984. This subsection also excludes import-sensitive electronics, steel, and glass items. These exclusions are not captured in GSP data because they are not eligible for the program in the first place. Excluded textile articles were named by foreign officials we interviewed as a sector in which BDCs could benefit greatly from tariff preferences, as discussed in chapter 2. Further, any article determined to be “import-sensitive in the context of the Generalized System of Preferences” is ineligible for the program. This criterion lacks any clear definition and, as such, GSP Subcommittee members noted, allows for flexibility in administering a program that involves thousands of items in the U.S. HTS. Decisions are open to individualized considerations during the annual decision-making process, discussed in chaper 4. Articles that are granted eligibility under GSP can also be restricted from actually receiving GSP duty-free entry entirely or with respect to specific countries. According to USTR’s General Counsel (as of October 1992), 19 U.S.C., sections 2461 and 2464, can limit benefits available under the GSP Program once specific countries are deemed to be competitive in exporting specific items. Title 19 U.S.C., section 2461(4), allows the President to grant GSP benefits while keeping in mind “the extent of the beneficiary developing country’s competitiveness with respect to eligible articles.” Title 19 U.S.C., subsection 2464(a)(1), gives the President discretionary authority to “withdraw, suspend or limit the application of duty-free treatment accorded under 19 U.S.C., section 2461, with respect to any article or with respect to any country.” These provisions allow either for the permanent removal of countries (country graduation), or the removal of items from particular countries (product graduation), from GSP eligibility status. In 1981, the administration committed itself to fully utilizing product graduation policy. Product graduation is more common than the graduation of an entire country and has been controversial because it does not treat all BDCs uniformly (see pp. 20-22). USTR documents state that product graduation determinations are made after considering, among other things, the competitiveness of the BDC involved, as well as the effect of GSP treatment on U.S. interests. However, the GSP Director told us that the focus for these decisions rests on the former: an acknowledgement that a BDC’s industry is competitive, making GSP preferences no longer necessary. Permanent product graduations come about as a result of petitions submitted during the annual review process (typically by competing U.S. interests), or by precluding specific BDCs from GSP eligibility on newly designated articles. Trade experts and U.S. government officials we interviewed said that this surgical approach of graduating specific items for particular countries has increasingly become a preferred tool for the GSP Program. They said it recognizes the competitive capabilities of certain BDCs and might allow for a more even distribution of benefits among countries. One former GSP Program official told us that BDC representatives were previously openly hostile to product graduation, due to its discriminatory nature, when the United States initially committed to use it in the early 1980s. However, she said that BDCs are now accepting the credibility and usefulness of this approach, as well as the intended temporary nature of benefits under GSP. A former GSP Program director told us that since the 1989 graduation of the four Asian “newly industrializing economies” (NIE) that had dominated the program, the pressure to use product graduation to target exclusions toward competitive BDCs has been greatly diminished. Compared to other types of exclusions, permanent product graduationsdo not pose much of a barrier for GSP countries. As shown in table 3.1, exclusions from GSP benefits due to product graduations amounted to $293 million in 1989 and were $276 million in 1992. Product graduations have remained constant at 2 percent of total exclusions every year between 1989 and 1992. Only a few countries have been graduated for specific products. In 1992, countries shipping affected articles were Mexico (three items dutied on almost $156 million in U.S. imports); Brazil (five items dutied on almost $68 million); two of the four eligible republics of the former Yugoslavia; Venezuela; and Israel. Title 19 U.S.C., subsection 2464(c), allows for the suspension, often temporary, of GSP preferences for shipments of a particular item from a particular country that are defined as competitive. U.S. government officials say that these restrictions are in place because BDCs exporting at high levels tend to be more industrialized and have better export-oriented development strategies; therefore they do not need assistance to be competitive. In order to define competitiveness, the subsection enumerates specific annual import levels for any GSP-eligible item that, if exceeded in 1 calendar year by a beneficiary country, will lead to the suspension of GSP duty-free preferences for shipments of the item by the BDC that exceeded the limit. These levels equal 50 percent of total U.S. imports of an item or an absolute import value that changes from year to year. This type of exclusion is referred to as a competitive need limit. Following a statutorily mandated general review of the GSP Program that ended in January 1987, some CNL exclusions were made more restrictive. USTR reviewed itemized GSP imports from BDCs and determined which ones had “a sufficient degree of competitiveness” (relative to other BDCs). These particular articles shipped from individual BDCs are now subject to reduced CNL levels. These lower levels equal 25 percent of total U.S. imports of the item, or an absolute value. Though CNL exclusions occur much more frequently and involve more countries than product graduations, they are not necessarily permanent. A country whose exports of a CNL-excluded item subsequently fall below the percentage or value levels that initially led to the CNL exclusion may have the item “redesignated” as eligible for GSP duty-free preferences, according to 19 U.S.C., subsection 2464(c)(5). Until 1989, U.S. policy was to graduate—through failing to redesignate—products from more economically advanced BDCs. Beginning in 1989, this policy was eased, and redesignation decisions for all BDCs are now made on the same basis. These decisions are at the discretion of the President. Numerous redesignations have subsequently been made, as discussed on page 58. In addition, 19 U.S.C., subsection 2464(c)(3), states that GSP benefits can be reinstated (a waiver can be granted) for items subject to CNL restrictions. Waivers can be granted for parties that submit a petition during the annual review process. For items subject to reduced and regular CNL, a petitioned waiver can be granted for either just the lower, more restrictive limits, or for both the lower and upper limits. A waiver will remain in effect until the President determines that it is no longer warranted due to changed circumstances. In deciding whether to grant a petition for a CNL waiver, the President shall give “great weight” to accessibility to the BDC’s markets for U.S. goods and services, as well as the extent to which the BDC provides reasonable and effective protection of U.S. intellectual property rights. A CNL waiver may also be granted when total U.S. imports of a product are small, or de minimis. In 1992, the level of imports for a particular good to become eligible for a de minimis waiver was $11.8 million. All CNL waivers are automatically granted for items that were not produced in the United States on January 3, 1985, and for all items shipped from the 35 BDCs that have been designated as least developed countries by USTR (see p. 26 for a listing). Foreign business representatives we interviewed expressed concern about the unpredictable nature of CNL exclusions, under which a country will lose GSP for a certain item with only a few months’ prior notice. After the exclusion, a BDC has no way of knowing when, or even if, GSP eligibility will be reinstated through a waiver or redesignation. A former GSP director agreed with foreign and U.S. officials we interviewed that USTR’s 10-month “warning list” of items that are approaching CNL limits (using data through October and published in the Federal Register in January of the next calendar year) is essentially useless as a tool to alert countries to potential CNL problems so that action can be taken to avoid the exclusion (though it is useful as an informational source). This situation is further compounded by the lack of data on GSP exports by beneficiary countries themselves. For example, as of 1992, Brazil, the program’s fourth largest user, maintained no official data on its exports to the United States under GSP (although a computerized trade data system is being developed that would capture GSP exports). An official from the Ministry of Industry, Commerce, and Tourism told us that the Brazilian government relies on UNCTAD for data on its GSP exports to the United States. Foreign company representatives in affected industries we interviewed said that they experience immediate production and export planning problems once they learn that their article will lose GSP. Foreign government officials said that businesses also experience long-term planning problems. Further, one foreign businessman noted that not only is future planning disrupted by a loss of GSP, but past planning efforts that were aimed at initially entering the U.S. market are lost. Foreign industry officials we interviewed said that the effect on profitability due to a lost tariff differential of just a few percentage points can be very great. A Brazilian economist working for the United Nations (U.N.) noted that the impact could be particularly strong for undifferentiated items where price is the primary factor that distinguishes the beneficiary’s product in the U.S. marketplace. Suggestions were offered to soften the perceived severe impact of CNL exclusions. Foreign and UNCTAD officials we spoke with suggested that a longer adjustment period should be granted to businesses to plan for the tariff change and to find potential alternate markets before CNL exclusions are implemented. One point made by BDC government and industry officials was that CNL exclusions should be based on sustainable GSP export performance, rather than on only 1 year’s data. Unusual circumstances in 1 year that trigger a CNL exclusion may not be typical or indicative of an industry’s capability to export at competitive levels over the long run from a specific country. For example, a representative of one Brazilian sector (rods/bars of copper-zinc base) explained that the industry found itself subject to a CNL export percentage exclusion in 1991 even though its exports to the United States had not changed significantly from previous years. However, exports to the United States from other countries had decreased, and so the Brazilian industry’s proportion of U.S. imports of the item had exceeded the CNL percentage level. A former GSP Program director questioned these requests for increased leniency before exclusions are implemented, pointing out that BDCs should be taking a more active role in reducing the impact of CNL exclusions. He noted that BDCs should act to avoid CNL exclusions altogether. BDC governments should more closely monitor U.S. import statistics to determine which industries may be at future risk of exceeding competitive need limits. The BDC government could then alert industry representatives, who could file for a CNL waiver during the annual review process before any CNL level was even exceeded. The industry would then be unaffected by any future CNL exclusion if the waiver were granted. Another former GSP Program official suggested that once a product from a BDC exceeds CNL levels for a certain number of years, U.S. policy should be to completely graduate the item for the country involved. This action would add an element of predictability to the process of reducing GSP benefits for specific countries. Some foreign government officials and an industry official we interviewed referred to CNL exclusions as the major barrier to receiving benefits from the program; however, as discussed previously (see pp. 47-48), we found that the majority of exclusions from duty-free entry were due to administrative reasons in 1991 and 1992. In 1989, total CNL exclusions accounted for the largest share (66 percent) of all exclusions and were valued at $8.2 billion. Reduced CNL, which affected primarily Mexico and Brazil, accounted for 17 percent of total CNL exclusions. By 1992, total CNL exclusions had dropped to $6.7 billion (42 percent of total exclusions), with 13 percent of all CNL exclusions due to reduced CNL. One Brazilian trade association official suggested that the reason for the decreased level of CNL exclusions may be that companies simply stopped shipping the items subject to CNL or graduation limitations because of a lost crucial competitive edge. This situation would make CNL exclusions appear relatively less serious than they actually were, when compared to other types of exclusions. (This argument could also be made for permanent product graduations.) Our analysis, based on exclusions in force in 1992, concluded that the assertion that countries completely stopped shipping CNL-excluded items was mistaken, at least for that year. At the end of 1992, although 245 product/BDC pairs were officially excluded from GSP eligibility, 225 (92 percent) items had been shipped by the affected country despite a lack of GSP duty-free benefits. Instead, the recent proportional decrease in the importance of CNL relative to other exclusions over the years can be attributed to the fact that (1) administrative exclusions have increased substantially and (2) fewer items are now subject to continued CNL limitations for key countries, primarily Mexico and Brazil, because of an eased redesignation policy adopted as part of the 1989 annual review. Following implementation of this policy, the value of CNL exclusions for these countries has decreased. Mexico and Brazil accounted for the majority of CNL exclusions in 1989 and 1990 (with Mexico continuing to account for over half of all CNL exclusions in 1991 and 1992), and the size of their CNL exclusions has, to a large degree, dictated the importance of CNL in the program overall over time. The number and value of Mexican and Brazilian CNL exclusions were greatly reduced by 1992. As shown in figure 3.1, Mexico and Brazil had a smaller share of total CNL exclusions in that year when compared to 1989. At the end of 1989, Mexico was officially subject to exclusions for 285 items. Following implementation of the eased redesignation policy, Mexico had 209 items that were returned to GSP-eligible status in 1990. By the end of 1992, Mexico was officially subject to limitations for 91 products. Similarly, at the end of 1989, Brazil had 132 items that were officially excluded from receiving GSP preferences. As with Mexico, Brazil had many items (90) that regained GSP eligibility after the redesignation policy was altered. At the end of 1992, Brazil was officially excluded from GSP duty-free entry for 55 items, most of which were eligible for redesignation. Just as the eased redesignation policy has allowed items to return to GSP status, so, too, have CNL waivers lessened the impact of CNL exclusions in recent years. Items entering with CNL waivers have increased in value and proportion, from $533 million (2 percent of eligible imports) entering GSP duty free under waivers in 1989, to $2.5 billion (7 percent of eligible imports) in 1992. As seen in figure 3.2, the two countries that benefited most from CNL waivers in 1992 were Mexico and Malaysia. Mexico was the primary beneficiary, with $1.1 billion entering duty free under waivers (45 percent of all waiver benefits). While Malaysia had $593 million in imports to the United States dutied under CNL in 1992, $906 million entered duty free under CNL waivers. However, Thailand and Brazil, in addition to being two of the countries most affected by CNL exclusions, shipped no items that benefited from CNL waivers. The reduced size of CNL exclusions may not last. While smaller CNL restrictions for Mexico (in particular) and Brazil have resulted in a reduced importance for CNL exclusions in the program overall, other top shipping countries, such as Malaysia and Thailand, have had very different experiences. These two countries had growth rates in GSP duty-free shipments of about 31 and 27 percent, respectively, between 1991 and 1992. However, they had even higher increases in shipments to the United States dutied under CNL that year. Thailand had about $845 million in GSP imports enter the United States dutied because of CNL in 1992, an increase of 33 percent from 1991. Malaysia reached a level of $593 million in shipments to the United States dutied under CNL in 1992, a 245-percent increase from 1991. This growth was largely due to increased levels of exports of the same excluded items over time, rather than an increase in the number of items excluded. For example, Malaysia’s CNL exclusions in 1992 were attributable to just six products. Malaysia and Thailand now rank ahead of Brazil for imports entering the United States subject to duties due to CNL exclusions. Continued rapid growth in these CNL exclusions, combined with the graduation of Mexico, could result in an increased relative impact of CNL on the GSP Program. Due to the concern expressed about CNL exclusions by foreign business and government officials, we examined exports to the United States of (1) the affected BDC, (2) other BDCs, and (3) ineligible countries following a CNL exclusion. BDC company officials we interviewed said that a loss of GSP tariff preferences means a decreased ability to compete for sales. However, some U.S. officials said that BDCs are competitive without GSP if they are exporting beyond the statutory limits and that CNL exclusions provide increased opportunities for other BDCs. We examined data on 57 CNL product exclusions that took effect in 1990 (40 items) and 1991 (17 items) to assess the import position for the affected BDC, other BDCs, and non-GSP countries. Many of these exclusions were applied to Mexico. Our analysis showed that the results were mixed. Following the CNL exclusion, the affected BDC experienced a reduced competitive position, measured as a loss in U.S. import market share, in about 65 percent of the cases for both sets of exclusions by July 1992. The range of this share loss varied widely, from a few percentage points to a 100-percent loss. There was no pattern of share loss or gain for certain types of products. However, the excluded country was actually able to maintain or increase its import market share in up to 35 percent of the cases after the exclusion. Further, subsequent redesignations or CNL waivers softened the impact of lost import market share for about half of the 25 items excluded in 1990 that regained GSP status in 1991. The amount of GSP duty-free shipments before the CNL exclusion did not appear to be predictive of the impact the exclusion would have on the particular BDC. In addition, our analysis showed that the import market share lost by excluded BDCs was somewhat more likely to accrue to non-GSP countries, although other BDCs also improved their share, and often for the same items as non-GSP countries. In cases where the excluded BDC lost share, non-GSP countries increased their import market share for over 70 percent, while remaining BDCs increased their share for over 60 percent, of the items. In addition to the legislative prohibition of eligibility for certain items, there are other reasons for limited use of the GSP Program that are not captured in data. It is possible that GSP is not used as much as it might be because exporters simply are not familiar with GSP, particularly in countries that are not large users of the program. For example, a U.S. government official in Turkey, as well as a Turkish government official, said that the Turkish government does an inadequate job of informing Turkish exporters about the opportunities provided by the GSP Program. A business representative in Brazil said that smaller firms in that country do not even know that the program exists. In addition, some U.S. government officials and GSP experts we interviewed told us that they believe an important limitation on GSP participation is that many BDCs cannot produce and export items that are eligible under the program. This conclusion led to varying opinions by these officials on the appropriate country focus of the GSP Program. Some U.S. government officials said that there is little that the United States can do to increase use of the program for many countries. They explained that the United States should realize that domination of the program by the few countries that can produce and export is to be expected. A former GSP director pointed out that too many people mistakenly view the GSP Program as a traditional aid program, believing that if the U.S. government removes benefits from some countries, it can allocate more to other countries. He said that such an action simply is not possible with the GSP Program, where the benefits of tariff preferences are not transferable to countries that are not strong producers or exporters of the GSP-eligible goods shipped by a graduated country. For example, our analysis of CNL exclusions showed that, in the short run, other BDCs were often able to increase their U.S. import market shares when certain BDCs were excluded from receiving GSP preferences for particular items. However, these increases in market share occurred for remaining BDCs that were already shipping the affected articles. This conclusion suggests that the universe of remaining eligible BDCs that could benefit in the short run from an exclusion, whether it is a CNL, product graduation, or country graduation exclusion, is limited to those countries that are already shipping the relevant articles. The impact in the long run for all remaining BDCs is not clear. In opposing the views just mentioned, some U.S. government and trade experts said that the program should refocus its efforts to assisting and promoting growth in the less developed BDCs, rather than leaving most GSP benefits to countries that are already on the road to industrialization and would export regardless of the GSP Program. They saw the original intention of the GSP Program as one of working to improve the economic condition of the developing countries that need an extra advantage to begin or increase exporting. They said that the largest, most competitive program beneficiaries should be completely removed, or graduated, from GSP eligibility. As with product graduations, 19 U.S.C., subsection 2464(a), allows the President to graduate an entire country on a discretionary basis after examining criteria in the law used to determine a country’s original eligibility status. Since the late 1980s, eight countries or economies have been graduated from the GSP Program (Bermuda, Brunei, Hong Kong, Mexico, Nauru, Singapore, South Korea, and Taiwan), and an additional country (Israel) is in the process of being removed from the program. According to some U.S. government officials and trade experts, complete graduation from the GSP Program is appropriate for countries that realize high exporting levels under the program (although most government officials interviewed felt that product graduation was a more effective way to deal with competitive GSP exporters.) They stated that strong exports indicate competitiveness, probable improved economic development, and a subsequent decreased need for tariff preferences. Further, they contended that graduation of competitive and dominating countries could provide improved exporting and market opportunities for the remaining BDCs. Some U.S. government and industry officials felt that current prominent GSP users, such as Malaysia and Thailand, should be graduated from the program. One U.S. official added that if graduation is not undertaken for top-shipping BDCs, then at the very least, these countries should be held to higher standards in areas such as intellectual property protection or BDC market access. The most visible use of country graduation occurred in January of 1989, when the four NIEs (Hong Kong, South Korea, Singapore, and Taiwan) were graduated from the GSP Program. This graduation came about because of (1) concern expressed about the dominant position these four countries held in the GSP Program (58 percent of all GSP-eligible imports and 54 percent of GSP duty-free imports in 1988) and (2) a determination that the economic development of these countries had reached a level that no longer justified their participation in the program. Formal criteria cited in making the decision to remove the NIEs, in addition to their GSP shipment levels, were GNP per capita, economic growth rates, and an ability to export manufactured items into the United States. While some hoped that the graduations would improve exporting opportunities under GSP for other BDCs, others argued that it would be just as likely that developed, non-GSP countries would increase their exports of these goods. The circumstances surrounding Singapore’s graduation were often singled out as unacceptable by trade experts we interviewed. Throughout most of the 1980s, Singapore did not protect U.S. (or any foreign) copyrighted goods. According to an official representing U.S. intellectual property interests, the U.S. government, pointing out the magnitude of financial losses to U.S. interests due to pirating of copyrighted U.S. works, informed Singapore that if copyright protection for U.S. goods were not soon provided, then that country would lose GSP benefits. Singapore, the fourth largest beneficiary under GSP, had duty-free shipments under the program of $1.3 billion in 1987. This industry representative pointed out that in order to protect U.S. copyrighted goods, Singapore needed to (1) pass a new copyright law and (2) either sign a multilateral convention to protect copyrighted works of other signatories (such as the Berne Convention for the Protection of Literary and Artistic Works) or enter into a bilateral agreement with the United States to afford reciprocal protection. Singapore passed a new copyright law in February 1987, and the United States and Singapore subsequently extended reciprocal copyright protection, through a bilateral agreement, in April of that year. With this newly enacted protection of U.S. copyrighted works, Singapore believed its status under GSP to be secure. However, just 9 months later, in January 1988, the United States announced that Singapore would be graduated entirely from the program beginning in 1989. Many U.S. intellectual property representatives were alarmed by this move, stating that it signaled bad faith on the part of the United States. One industry official stated that Singapore still resents and raises this issue, which has made current intellectual property discussions with that country more difficult. A former USTR official we interviewed countered that the decision to graduate Singapore was made based on overriding trade and economic factors entirely apart from IPR, and, under the political climate of the time, the country would have been removed regardless of the status of its IPR regime. Although the graduation of the four Asian NIEs had a great impact on the overall GSP Program figures and saw the imports of GSP-eligible goods from the four NIEs decrease, the action appears to have had an unclear effect on the level of GSP-eligible exports of the remaining BDCs, as shown in table 3.2. In 1988, the last year of program eligibility for the four Asian NIEs, total GSP-eligible imports to the United States from all BDCs amounted to almost $50 billion. Over $18 billion received GSP duty-free entry. The NIEs shipped almost $29 billion, or 60 percent, of eligible imports, and $9.85 billion of this amount received duty-free entry. Once the NIEs were graduated, GSP-eligible imports from BDCs dropped by over 50 percent, to $24.4 billion in 1989, while duty-free imports fell by 45 percent, to $10 billion. The four NIEs accounted for almost 19 percent of total U.S. imports of GSP-covered articles in 1988. This U.S. import market share dropped upon graduation to about 16 percent in 1989 and reached a low of just over 13 percent in 1992. With the NIEs now among their ranks, non-GSP countries increased their share of GSP-eligible U.S. imports in 1989 to over 86 percent, from about 68 percent in 1988. This share has been decreasing slightly ever since. All GSP-eligible countries increased their share of U.S. imports of eligible items every year following the graduations, rising from almost 14 percent in 1989 to 17 percent in 1992. However, it is difficult to conclude that the modest increase in U.S. import market share of imports from GSP-eligible countries was specifically due to the NIEs’ 1989 graduations, since these BDCs had increased their portion of eligible imports even before the graduations. Further, the NIEs had been losing U.S. import market share before the graduations occurred. An evaluation of country graduation done through the U.N.’s Economic and Social Commission for Asia and the Pacific in 1992 suggested, as did our analysis, that the trade impact on the graduated countries was negative. The evaluation also claimed that remaining Asian GSP-eligible countries realized an influx of foreign direct investment after the NIEs’ graduation at the expense of the four NIEs. The U.N. study stated that other Asian BDCs were able to increase imports to the United States somewhat because of the NIE graduations. However, these countries maintained internal production and regulatory barriers that have kept them from fully exploiting any increased opportunities provided by the removal of the NIEs from the program. Officials from some of the program’s current top user countries told us that they did not believe their countries had been able to benefit more from GSP after the NIE graduations. Some U.S. government officials said that they do not believe country graduation based on economic development will be used again any time soon. They pointed out that there are not likely to be cases as clear-cut as the Asian NIEs in the near future. A U.S. Department of Agriculture (USDA) official pointed out that even Mexico is not yet at the development level of the Asian NIEs. Other top-ranking users of the program, such as Brazil, have such disparate development levels within the countries themselves that it could be counterproductive to the BDC development goals of the GSP Program to graduate an entire country, including sectors that use GSP and are located in underdeveloped regions of the country. Title 19 U.S.C., subsection 2464(f), mandates that no country may continue to receive GSP preferences if it exceeds a specific GNP per capita level. The GNP per capita ceiling for GSP eligibility in 1984 was $8,500, and increases in this amount are pegged to growth in U.S. GNP. The GNP per capita ceiling in 1992 was $10,647. In 1988, Bahrain, Bermuda, Brunei, and Nauru were removed from GSP eligibility due to their having per capita GNPs that were over the legislated limit. Bahrain was reinstated in 1990, after an analysis of revised national income data and a subsequent determination that the country had in fact not exceeded the statutory GNP per capita limit. Having a high GNP per capita level was the stated reason for graduating Israel over a 2-year period, to be completed in July 1995. The Bahamas, a current BDC, has a GNP per capita (1991 GNP per capita of $11,720) over the legislated limit. Nearly half of GSP-eligible imports did not receive duty-free entry in 1992. Although administrative exclusions have accounted for the majority of total exclusions in recent years, it is probable that with Mexico’s removal from the program, along with the rapid growth in competitive need limit exclusions for top shippers such as Malaysia and Thailand, competitive need limits will again become the primary type of exclusion. The BDCs we visited have legitimate concerns over CNL. The premise behind the automatic CNL exclusions—that a BDC’s industry is a competitive exporter once these levels are reached and so no longer needs GSP—can be questioned. Only 1 year of data is used in order to trigger an exclusion, during which time external factors that may have little to do with a specific BDC industry’s competitiveness can affect U.S. import levels. While CNL exclusions are intended to remove products that are considered competitive, our data indicated that a loss of GSP due to CNL was often followed by a decrease in import market share. Further, unlike product graduation, domestic interests have no input into this process, and no U.S. government judgment is made concerning particular items and their competitiveness. The implementation of a CNL exclusion can be disruptive and destabilizing for the BDC industry and U.S. importers affected. GSP duty-free preferences are lost for at least a year, unless the industry has the foresight to apply for a waiver a year before it is needed. Once a CNL exclusion is triggered, the industry has only a few months’ notice to prepare for the loss of GSP duty elimination. This circumstance undermines the program’s intent of fostering economic growth and stability for BDCs. It is possible that granting a longer period before CNL exclusions take effect could counteract these problems. For example, after a BDC’s industry exceeds the CNL, the industry could be granted an additional 1-year period during which the BDC industry could apply for a waiver and a second year of data would be collected. At the end of this additional year, a decision would be made whether to grant the waiver or, if the data show an import situation consistent with the first year for the industry, to deny it and allow the CNL exclusion to take effect. Any domestic concerns over whether to extend duty-free preferences with a waiver could be assessed on a case-by-case basis during the additional year. For example, product graduation could be applied to BDC items that are found to be exported competitively as a result of examining domestic concerns. Product graduation, while currently accounting for a small percentage of exclusions, is an effective way of targeting competitive BDC products for exclusion from GSP. Concerned U.S. producers, at their request, can receive relief from imports that they consider competitive. Further, product graduation is executed in a targeted manner that does not disrupt a country’s less competitive industries, as can happen when an entire BDC is graduated. However, once a certain overall level of country development is reached, country graduation is appropriate. GSP rules of origin cause problems due to the lack of predictability. BDC shippers cannot be sure that their products will meet the rules and qualify for GSP. In addition, the current rule states that at least 35 percent of the product must originate or be substantially transformed within the BDC and does not allow for any consideration of U.S. source material in meeting this requirement. NAFTA, and the Canadian Free Trade Agreement before it, has rules of origin largely based on an imported product’s change of U.S. HTS tariff heading from its constituent parts. This system has generally proven to be simpler and surer to administer and allows exporters to know their eligibility status before shipping. However, it may be more difficult for BDCs to comply with the paperwork requirements associated with a change in tariff classification system. In addition, some items utilize provisions of trade law (U.S. HTS heading 9802) that allow the U.S.-origin content of certain goods to reenter the United States duty free. Therefore, it seems inconsistent to U.S. interests to disqualify items from entering GSP duty free because they have significant U.S. input that precludes the items from attaining 35-percent BDC content. In considering whether to reauthorize the GSP Program, Congress may wish to consider altering the competitive need limit process in order to allow for a more thorough assessment of the competitiveness of the affected imports by, for example, extending the amount of time before exclusions under CNL are implemented. This would allow for a more thorough assessment of the competitiveness of the affected imports and allow affected industries more time to adjust. Congress may also wish to consider whether to alter the GSP rules so that items are not penalized for having U.S. content. For example, any U.S.-origin value of a shipped item could be subtracted from the total value of the item before the 35-percent BDC origin value added is calculated. The GSP Program has a generally well-structured administrative process for consideration of petitions to add or remove products from GSP coverage. The interagency structure of the GSP Subcommittee and its consensus decision-making process is designed to ensure that the program’s goals are balanced to provide benefits to BDCs while taking care not to unduly harm domestic interests. The annual petition review process, with clearly delineated procedures and time frames, provides an effective means for management of the program. The GSP review process is transparent up to the decision-making point. It provides interested parties with the opportunity to petition for changes and for a public hearing on these petitions. It allows all parties to know who is petitioning or opposing a petition and the evidence they have presented to support their position, as well as an opportunity to rebut opposing views. A number of specific issues were raised in our interviews, however, about certain aspects of the administrative process. Decision-making criteria, such as the “import sensitivity” of a product or the achievement of “sufficient competitiveness” in the U.S. market, that are provided in the GSP statute are undefined. Such criteria are difficult to articulate or quantify, requiring case-by-case judgments. This difficulty was the source of much of the controversy in the product petitions we reviewed. While most petitions were not controversial and were routinely decided based on economic merit, we found that the more controversial the case and the higher in the trade policy structure it was elevated, the more other policy factors became determinative. Another issue raised related to the transparency of the reasoning behind decisions on whether to grant or deny a product petition. USTR makes no public statement, although by regulation it must respond in writing to a written request for information by the petitioner. During the 1991 Special Review for Central and Eastern Europe, the administrative waiver of the rule that 3 years must pass before a product addition petition is refiled caused much controversy. The waiver created the perception among affected domestic industries that the program had been politicized, and they questioned the credibility of the program. Finally, the GSP Subcommittee has occasionally accepted petitions that did not contain information required in the regulations. Although the regulations allow such an action if the petitioner made a good faith effort to obtain the missing information, domestic producers felt they were disadvantaged because often very little information was available to oppose a petition. A fundamental issue was also raised about providing differential treatment to BDCs under a generalized system. Specifically questioned was whether differential treatment was legal under the U.S.’ GATT obligations, and whether the President had statutory authority and discretion to make such differential decisions. “Differential treatment” means that imports of a particular product from a particular BDC lose GSP eligibility if such imports are deemed to be sufficiently competitive. Such decisions (“permanent product graduations”) are made at the discretion of the President. We found that the GSP statute provides the President with full authority to differentiate between countries as well as to make product designations on a differential basis. Further, the practice is not inconsistent with U.S. obligations under GATT because the GSP Program is exempt from GATT obligations, according to a GATT official. (See also ch. 1.) The GSP law requires ITC advice on the probable economic impact of granting GSP duty-free treatment to a product. Most of the GSP Subcommittee members we spoke to said that this advice is valuable to the interagency decision-making process as an impartial analysis of the likely economic effects on U.S. producers and consumers. However, U.S. industry officials expressed some concern that the usefulness of ITC advice might be limited by outdated information used in ITC analyses. U.S. industry officials also complained that USTR’s classifying as confidential ITC’s assessment of probable economic effect undercuts program transparency. USTR’s annual review of product eligibility focuses on petitions to add or remove items, which petitioners must submit by the June 1 deadline. At that time, USTR launches a two-stage decision cycle. In the first stage, June 1 to about mid-July, a decision is made on which petitions to accept for review. In the second stage, late July to around the end of the following April, the accepted petitions are reviewed and a decision is made on which petitions should be granted and which denied. GSP eligibility changes go into effect on July 1. This GSP decision-making time frame and the broad outlines of the review process are stipulated in the GSP regulations. GSP petitions are reviewed by members of the interagency GSP Subcommittee. One agency takes the lead on each petition, providing a written report and recommendation on each. Generally, the Departments of Commerce and Agriculture review the largest number of petitions because they have the relevant industry sector expertise. However, GSP officials repeatedly stressed that the recommendation of the lead agency is not always followed. The GSP Subcommittee deliberates on each case and makes its decisions by consensus. Decisions are made by consensus because the GSP Subcommittee tries to balance the basic program objective of assisting developing countries against possible harm to domestic industries. The GSP Subcommittee includes the various government agencies that are integral to achieving this balance of interests. ITC and GSP agency officials told us that generally, USTR, State, and the Treasury support free trade and enhancing assistance to BDCs, while Agriculture, Commerce, and the Interior represent their particular domestic constituencies. Labor, while concerned with product petitions, is more focused on worker rights petitions (discussed in ch. 5). The need for consensus forces the GSP Subcommittee to balance the diverse views and interests of its members. In the first stage of the annual review, which begins on June 1, the GSP Subcommittee has a 6-week period in which to decide which petitions to accept for full review. It checks that none of the petitions had been submitted and denied in the past 3 years and that none of the products already had duty-free status under MFN. It reviews import statistics for the prior 3 years and the first quarter of the current year to identify growth rates and trends over time. The recommendation of the lead agency is considered, together with views of other members. At the end of the 6-week period, the GSP Subcommittee makes its consensus recommendations, which are submitted for approval to TPSC and TPRG and then forwarded for the President’s final decision. The decision on which petitions to accept for full review is published in the Federal Register. This notification also announces the hearing schedule and invites interested parties to testify or submit written statements. The second stage of the GSP decision-making process, the full interagency review of accepted petitions, begins in mid-July and ends the following April. USTR requests economic impact advice from ITC, as mandated by GSP law. The GSP Subcommittee and ITC hold separate hearings to receive public comment. USTR makes a point of ensuring that the public comment process and hearings are as “transparent” as possible by making petitions and all submissions by interested parties publicly available in the USTR reading room. It allows all parties to know who is petitioning or opposing a petition and the evidence they have presented to support their position, as well as an opportunity to rebut opposing views. USTR will also accept subsequent written submissions by interested parties right up to the point at which the GSP Subcommittee’s recommendations are due. The GSP Subcommittee does not officially solicit advice on petitions from either Industry Sector Advisory Committees or Agricultural Technical Advisory Committees as a part of the review process, according to the GSP Deputy Director. However, he said that such advice would be welcome at GSP hearings or during the review process and that members of these advisory committees have testified at hearings and sent written comments in the past. After its review of petitions is completed and a consensus is reached, the GSP Subcommittee makes its recommendations in a draft TPSC paper that is circulated among TPSC members for their approval. Because the agencies are encouraged to take positions and resolve differences at the GSP Subcommittee level, disputes are generally settled there, according to subcommittee members. However, if consensus is not reached by the GSP Subcommittee, TPSC will meet to resolve disputes. GSP Subcommittee members noted that no agency agrees on all recommendations, but that they operate on a consensus basis. The subcommittee’s draft TPSC paper is a package, and is approved as a package, even though an agency may not agree on all the individual cases. Depending on how strong an agency’s opposition is, it may go along with the group consensus or fight certain recommendations at the TPSC or the TPRG level. The members of TPRG are generally political appointees at the under secretary level, or their representatives. TPRG is chaired by a deputy U.S. Trade Representative. TPRG focuses on resolving areas of disagreement and is considered to be “the end of the line” in resolving disputes over petitions. According to the GSP Director, no problems have been elevated to the cabinet level. The TPRG recommendation is sent for approval to the U.S. Trade Representative, who in turn sends the decision package to the President. The White House has its own deliberations on any contentious issues. Under the GSP statute, the President has the ultimate authority to decide GSP petitions. The GSP Subcommittee, TPSC, or TPRG can only recommend; the decision is the President’s. White House staff may request additional facts from USTR. However, according to the GSP Director, they normally defer to the recommendations of TPRG as forwarded to the White House by the U.S. Trade Representative. Then the President makes the decision for each petition, leaving no written explanation behind. According to the GSP Deputy Director, no voting record is available for the GSP Subcommittee, TPSC, or TPRG. The decision process is consensus based and, for the GSP Subcommittee and TPSC, the members usually vote on a package, not on individual petitions. We compiled information on decisions made on petitions filed in the 1989-91 annual reviews and the two special reviews in 1989 and 1991. Table 4.1 shows petition results in these five reviews. In the 1990 and 1989 annual reviews and the 1989 Andean special review, about 50-60 percent of the petitions were granted to add or remove items, or to waive competitive need limits. Approvals dropped to 35 percent in the 1991 annual review because all petitions submitted by Mexico were denied in order not to undercut ongoing NAFTA negotiations. However, without the petitions related to Mexico, 67 percent of the cases were granted. In the 1991 Central and East European special review, 80 percent of the cases were granted. However, the number of petitions granted should also be looked at in the context of the potential import value of the items. For example, the 74 items granted and added in the 1991 special review had imports valued at $19 million from the target Central and East European countries and $52 million from all GSP beneficiaries in 1991, the year before the inclusion of these items in GSP. In contrast, while only 23 new items were granted and added in the 1991 annual review, their imports in 1991 reached a value of over $400 million, of which one item (oriental tobacco) alone had imports valued at $248 million. Therefore, though far more items were granted and added in the 1991 special review, the potential value of GSP shipments was far greater as a result of the 23 items added in the 1991 annual review. Most interested parties we interviewed were generally satisfied with the administrative structure of the GSP Program in regard to product petition cases, although some specific concerns were raised about program administration, particularly by some U.S. producers. A positive assessment of GSP was provided over a broad spectrum of “interested parties”—foreign government officials, UNCTAD officials, U.S. and foreign business representatives, trade experts, and trade association officials—whom we interviewed. We found that there was a general view that the GSP Subcommittee has done a good job in administering the program for product petitions. The exception to this opinion was in the U.S. agricultural sector, where there were mixed views, and the chemical sector, where there were negative views. UNCTAD officials knowledgeable about GSP praised the U.S. program as being the most transparent and among the simplest of GSP programs worldwide. Many foreign government officials and business representatives, as well as U.S. business representatives, believed that the U.S. program was fairly and transparently administered and gave them adequate opportunity to present their views on product cases of interest to them. However, some U.S. agricultural and chemical producers had negative views, asserting that the GSP Program’s duty-free imports could harm the competitiveness of their companies. Such concern was expressed by agricultural sectors such as the dairy and cheese industry, wine producers, and California pear growers. A number of specific issues were raised, however, pertaining to program administration. We analyzed concerns that were raised about the GSP process relating to decision-making criteria, decision-making based on economic merit or policy considerations, transparency of the reasoning used in decisions, waiver of the 3-year rule, and completeness of petitions. Statutory criteria for decision-making in GSP cases, such as “import sensitivity” and “sufficient competitiveness,” are not defined. Some foreign government officials, business representatives, and petitioners noted that a lack of objective criteria allows the GSP Subcommittee to interpret GSP provisions subjectively and makes it difficult for petitioners to assess the strength of their cases, detracting from the transparency of the program. The GSP statute, in section 2463(c), provides that the President may not designate any article as an eligible article that he determines to be import sensitive in the context of GSP. (The GSP statute is found in title V of the Trade Act of 1974, as amended.) However, the statute does not define import sensitivity in the GSP context. In section 2464(c)(2)(B), the statute provides that the reduced competitive need limits provision will apply if, after a general review, the President determines that “a beneficiary developing country has demonstrated a sufficient degree of competitiveness (relative to other beneficiary developing countries) with respect to any eligible article . . . .” Again, no definition of what constitutes “sufficient competitiveness” is provided. According to GSP officials, ITC officials, and trade experts, such definitions are difficult to articulate or quantify. They run the risk of being so broad as to be meaningless or so narrowly and rigidly defined as to be limiting. What is import sensitive or sufficiently competitive is essentially a judgment that needs to be made on a case-by-case basis for each product and beneficiary country. The records of the interagency deliberations and public hearing briefs provided ample evidence that, even when the same data were used, differing parties could arrive at vastly different judgments. And in most cases, opposing parties were not in agreement on the data, let alone the economic impact. Many of the GSP Program experts that we interviewed said that although well-defined and articulated GSP criteria would be nice to have, they did not believe such definitions were feasible. Further, they feared that an attempt to statutorily define these criteria would result in rigid, narrowly focused definitions that could hamper achieving program objectives. The GSP Subcommittee has, however, developed its own informal guidelines for use in its decision-making process. According to the GSP Director, some key factors the GSP Subcommittee considers in determining import sensitivity include (1)the current share of the U.S. market accounted for by imports, both from GSP and non-GSP countries; (2)growth trends, both of imports and of U.S. production, consumption, and exports; (3)the current tariff levels; (4)the overall health of the U.S. industry and trends in U.S. industry performance; (5)the international competitiveness of imports from GSP countries, in terms of factors such as price and quality; and (6)the extent to which GSP imports could be expected to displace imports from non-GSP countries, as opposed to U.S. production. However, the GSP Subcommittee has not formalized these guidelines or made them publicly available. A related issue raised by some domestic industries was whether the GSP Subcommittee assessed injury or threat of injury to U.S. industry when considering a product petition. The GSP Director said that the subcommittee does not directly consider injury or threat of injury during its deliberations. The concept of injury or threat of injury does not arise in the GSP statute. Rather, the statute requires that the President base a decision regarding a product’s eligibility on whether it is import sensitive. However, the GSP Director stressed that import sensitivity clearly has a lower threshold than injury: if an industry is injured, it is import sensitive, but it can be import sensitive long before the industry is injured. In addition, GSP coverage is affected by other U.S. government trade actions, such as antidumping duties or duties levied to counteract foreign government subsidies. The difficulty in defining what is import sensitive or sufficiently competitive has direct implications for decision-making in GSP cases. According to current and former GSP Subcommittee members, most product petitions are not controversial and do not lead to strong opposition by domestic producers. GSP Subcommittee recommendations are routinely based on economic merit. However, when petitions are controversial, decision-making becomes more complex. Our review of 45 cases in the 1991 annual review and the 1991 Central and Eastern Europe special review indicated that the inability to reach consensus on what is import sensitive or sufficiently competitive is often at the heart of the interagency debate. And clearly, the more controversial the case and the higher it is elevated in the trade policy structure, the more other policy factors become determinative. BDC governments may use foreign policy leverage; Members of Congress weigh in for or against; and domestic producers and industry associations, as well as importers, may stress their view of the petition’s potential impact. A relatively small percentage of the cases in the 1991 annual review or the 1991 special review were controversial. GSP Subcommittee members emphasized that most petitions were not opposed by domestic producers and were decided based on their economic merits. Typically, from 80 to 130 petitions may be considered during the stage two full review (see table 4.1), and only a few are controversial. In the 1991 annual review and the 1991 special review, about 15 percent of cases were considered to be problematic enough to elevate to TPRG for resolution. In both reviews, the controversial cases included multiple petitions for various types of the same general product (i.e., four petitions on four different kinds of widgets). We examined the case study records and interagency documents to see how the decision-making process worked in cases that caused interagency controversy or were strongly opposed by a domestic industry. We found that in cases in which the GSP Subcommittee reached consensus that a product was not import sensitive and that the petition should be granted, but domestic producers were vehemently opposed, the petition was generally elevated to TPSC or TPRG for resolution. In cases in which the GSP Subcommittee was unable to reach consensus, it was usually because one or two agencies strongly dissented from the majority view. The stronger the dissent, the higher the case was elevated in the trade policy structure. Invariably, in these high-profile cases, there were deep divisions on what the economic impact would be, to what extent domestic producers were import sensitive, and what constituted a level of imports that would harm domestic industry. The recommendations of the GSP Subcommittee were at times reversed by TPSC or TPRG, and the President decided cases differently from the recommendations forwarded to him as well. In 14 of the 45 cases we studied, recommendations were reversed, with 5 by TPSC, 6 by TPRG, and 3 by the President. In most cases, the action was to reverse a petition approval to a denial. This reversal rate is not representative of the reversal rate for all cases because we specifically included all of the controversial cases in our case study analysis, and, according to the GSP Director, the 1991 special review had a higher number of controversial cases than normal. This selection of cases may account for a higher percentage of changed results than would be usual. Trade policy is generally acknowledged to be a part of foreign policy; it is also a function of domestic policy. The fact that the GSP Program sits at the juxtaposition of these two sometimes opposing forces is at the heart of the balancing act required of the GSP Subcommittee: to assist developing countries to increase exports to the U.S. market while not harming domestic producers. The easy decisions on petitions only happened when the product was not domestically produced or when the BDC only took market share away from developed country exports, resulting in a neutral impact for the domestic market. But where there were domestic producers who were likely to lose any notable degree of market share, then the debate over what level of imports causes harm was triggered. The debate became even more contentious when there were domestic importers who did want the benefit of duty-free entry of that product. Obviously, the domestic producer was not enthusiastic about any loss of market share, while domestic importers generally disputed estimates of harmful impact and stressed potential benefits to themselves, U.S. consumers, and the BDC producers. One of the problems related to perspective. ITC and the GSP Subcommittee looked at the big picture and at aggregate or economywide effects (“only 3 percent potential loss of U.S. market share”). The domestic producer whose plant may have been the one experiencing a hefty portion of the potential 3-percent sales loss took a strongly micro view (“losses of this magnitude may put me out of business and mean a loss of hundreds/thousands of local jobs”). In our case studies, the higher in the trade policy structure the controversial cases were elevated, the more other policy considerations assumed importance. GSP Subcommittee members and a GSP expert confirmed that when a petition becomes controversial and is elevated in the trade policy decision-making structure, economic merit becomes less determinative and other policy considerations become more determinative of the final decision. In the end the decision is made by the President, who is the ultimate arbiter of policy decisions. We believe this is in keeping with the tenor of the GSP statute, which gives the President broad discretion in decision-making. The GSP Program is highly transparent in terms of receiving public comments from all interested parties and holding public hearings on petitions accepted for full review. However, once the public comment and hearing process is completed and the interagency decision-making process begins, transparency largely ends. The decision-making process itself is confidential. Only the membership of the GSP Subcommittee is made public; the membership of TPSC and TPRG is not disclosed. The internal deliberations of the GSP Subcommittee, TPSC, TPRG, and the White House are kept confidential. The reason given by USTR is the desire to avoid pressure on individuals by foreign or domestic interests. Many parties we interviewed accepted this process but complained that there is no public statement explaining the decision made by the President. GSP regulations require that a written request by a petitioner for an explanation of a decision will receive a written response from the GSP office. The GSP Director stated that such requests are honored and noted that such responses are the only public information about decisions in product cases. Foreign participants in the GSP Program expressed concern that many parties were unaware of the reasoning for petition decisions and often did not know that they had a right to request and receive an explanation. Some said that they simply assumed petitions were denied due to protectionism—that domestic interests had prevailed. Likewise, a domestic agricultural industry association representative said that his membership generally has not gotten any feedback on decisions. He also noted that his association had lost very few cases and had not requested explanations. GSP regulations (15 C.F.R. 2007.0(a)(1)) state that a petition to add a product, once denied, cannot be refiled for 3 years. The rule was added in 1984 to preclude the filing of the same GSP petition year after year, which can unduly burden the GSP review process. Defending against repetitive petitions was also seen as an unacceptable burden for domestic producers. Our review indicated that the first waiver of the 3-year rule, during the 1991 Central and East European special review, was an administrative action that caused particular concern for domestic industries. The administration decision to rereview five cases that had been denied in the 1990 annual review just 97 days earlier created the perception in the affected industries that the GSP Program had been politicized. This perception undermined the credibility of the program and the sense of stability of those industries. The administration had decided as a matter of policy that it would examine every petition that it could legally accept in order to demonstrate its commitment to assisting the emerging democracies in Central and Eastern Europe. USTR officials advised Members of Congress and domestic industries on numerous occasions that this did not predispose the results of the special review; the administration just needed to take a comprehensive look as part of the President’s Trade Enhancement Initiative for the region. The affected domestic industries did not assume that the five rereviewed cases would again be denied. The industries had to mobilize and fund opposition in another review cycle, which they said they bitterly resented in the midst of the 1991 recession. In the end, as shown in table 4.2, the President decided to grant GSP status for two rereviewed cases and deny it for two others. One case was withdrawn by the original petitioner. Interviews with affected domestic industries, and information in hearing records, made it clear that the waiver of the 3-year rule undercut the credibility of the GSP Program and its image of fairness. Although the affected industries said they were sympathetic to U.S. assistance to the emerging democracies in Central and Eastern Europe, the waiver of the 3-year rule for GSP cases that had just been decided was not acceptable to them. The domestic industries said that GSP reauthorization should codify the 3-year rule and disallow waivers. In spring 1993, the U.S. Trade Representative assured Members of Congress that no cases would be rereviewed during the interval before program renewal. The Director of the GSP Program advised us that TPSC’s action was not a waiver of the 3-year rule, but its self-initiation of cases as allowed by the GSP regulations at 15 C.F.R. 2007.0(f). Subsection (f) states that TPSC “may at any time, on its own motion, initiate any of the actions described in paragraph (a) or (b) of this section” to request reviews of GSP eligibility for products and BDCs. He said that TPSC had erred in originally referring to its action as a waiver of the 3-year rule in the Federal Register notice announcing the special review. However, he also acknowledged that this action had the same effect as a waiver. The GSP Director’s position was that the 3-year rule applies to new petitions to add products and not to reviews self-initiated by TPSC. Therefore, the 3-year rule did not have to be waived and was not waived. It is our opinion that there is merit in the Director’s position that the “at any time” language in subsection (f) could overcome the 3-year rule in subsection (a). Further, the USTR General Counsel’s position is that USTR has the right to waive the 3-year rule, which is its own procedural rule, since the rule did not vest a right in a party, nor did it confer a substantive benefit. Thus, TPSC could have waived the 3-year rule. We believe there is merit in the General Counsel’s argument that TPSC could waive the 3-year rule since it is merely a procedural rule designed to reduce the possibility that articles would be subjected to repeated and overburdening review. Regulations, whether substantive or procedural, are generally considered to be either statutory (legislative), which have the effect of a statute and therefore bind the agency, or interpretive, which may or may not be binding on the agency. It would appear that 15 C.F.R. 2007.0(a)(1) is not a statutory regulation and therefore is not presumed to be binding. The GSP Subcommittee has on occasion accepted for review product-addition petitions that did not fully meet all the regulatory information requirements, if it believed the petition may have had merit and the petitioner had made a good faith effort to obtain the information. This acceptance helps BDCs that often do not have the resources to adequately prepare petitions. A subcommittee member told us the subcommittee felt that the BDC should at least have the benefit of a full review if it makes a good faith effort. This action is allowed under the GSP regulations and is consistent with the program’s objectives of assisting BDCs. The GSP Director stressed that the subcommittee looked at trade data from all BDCs, not just the BDC petitioning. He said that the purpose of the review is to look at all available information; there is no presumption that an item will get GSP coverage. Domestic producers, on the other hand, said that they had to protect their interests in regard to all relevant petitions, which was costly and time-consuming; they particularly resented having to do so in response to petitions that were not well developed. In addition, domestic producers complained that acceptance of incomplete petitions effectively shifted the burden of proof from the petitioner to those opposing the petition. Incomplete petitions are difficult to oppose because there may be few other sources of information on the BDC petitioner or other potential BDC suppliers. GSP product-addition petitions require detailed information such as (1) actual production figures and capacity utilization, and their estimated increase with GSP; (2) total exports, including principal markets, total quantity and value, and trends in exports; and (3) exports to the United States in terms of quantity, value, and price, and considerations that affect the competitiveness of these exports relative to exports by other beneficiary countries. Another major issue in the administration of the GSP Program was differential treatment of BDCs under the graduation policy. Specific questions raised by the requesters of this report were whether it is appropriate to restrict preferences for some BDCs under a generalizedsystem, whether such differential treatment is legal under the U.S.’ GATT obligations, and whether the President has statutory authority and discretion to make such differential decisions. The U.S. GSP Program is normally administered to extend the opportunity for benefits equally to all BDCs (consistent with the most-favored-nation principle of GATT). However, the program does provide for terminating duty-free entry for a particular product from individual BDCs when they are considered to be sufficiently competitive without the GSP benefit. This “permanent product graduation” is a major element of GSP graduation policy. Such decisions are made at the discretion of the President, based on recommendations of the GSP Subcommittee. It is our opinion that the GSP statute gives the President authority to make such decisions for differential treatment. “Differential treatment” refers to the exclusion of a particular beneficiary country for a particular product under GSP, at the discretion of the President. Such product graduation can take place as the result of (1) granting a petition requesting such a product graduation during an annual review, (2) excluding an individual BDC from GSP eligibility on products added to GSP coverage, and (3) denying a redesignation or waiver to BDCs eligible for reinstatement of GSP status on specific articles subject to a competitive need limit exclusion. GSP’s graduation policy considers: (1)the BDC’s developmental level; (2)the BDC’s competitive position in the product concerned; (3)the BDC’s practices relating to trade, investment, and worker rights; and (4)the overall economic interests of the United States, including the effect continued GSP treatment would have on the relevant U.S. producers, workers, and consumers. According to USTR officials, differential treatment of BDCs under GSP graduation policy is grounded in the international trade rules in GATT. As discussed in chapter 1 (see pp. 20-22), GSP itself is an exception to the GATT’s MFN treatment in providing temporary preferential tariff treatment for developing countries. Specifically, it was left to each donor country to define “developing country” for purposes of GSP eligibility. This discretion is viewed as the basis for permitting nongeneralized application of the GSP status. The idea that developing countries are to graduate from programs of preferential treatment as their economies develop is contained in the enabling clause specifically incorporating GSP into GATT in 1979. Thus, the enabling clause serves as the legal basis permitting differential treatment, both in allowing preferential GSP treatment for BDCs in the first place and also in limiting the extent of preferences granted. USTR’s General Counsel also stated that other GSP programs, such as those of the EU and Japan, similarly differentiate among developing countries with respect to particular products. UNCTAD and GATT officials agreed that GSP programs can differentiate among BDCs. They said that GSP is outside the GATT legal system and, as such, is a unilateral “gift” that the donor countries can structure as they wish. It is the position of the USTR General Counsel that there is a statutory basis for the President’s discretionary decisions differentiating between GSP-eligible products and countries in 19 U.S.C. sections 2461 and 2464(a)(1). Section 2461 states that the President “may” extend GSP coverage to “any eligible article” from a BDC. In taking any such action, the President is required to consider, among other things, the extent of the BDC’s competitiveness with respect to eligible articles (19 U.S.C. 2461(4)). Section 2464(a)(1) authorizes the President to limit an individual BDC’s GSP preference, stating that “he President may withdraw, suspend, or limit the application” of GSP duty-free treatment “with respect to any article or with respect to any country.” According to the USTR General Counsel, because the phrase uses the singular “country,” this provision authorizes the President to limit any one country’s participation in the GSP Program without limiting others. Further evidence of the President’s discretion to limit an individual country’s benefits is found in the legislative history of section 2461(4). The House Ways and Means Committee report, House Report 98-1090, states that Congress was authorizing the President to differentiate among countries as to their eligibility for GSP benefits with respect to particular articles based upon a country’s competitiveness. A country could be found competitive with respect to a certain article either on the basis of statutory criteria (the “competitive need limit” in section 2464(c)) or as an exercise of the President’s authority under section 2461. We believe that the GSP statute does provide the basis for differentiating among countries as well as making product designations on a differential basis. The GSP law requires ITC advice on the probable economic impact of the designation of a product as an eligible article to receive GSP duty-free treatment and whether the grant of a waiver of the competitive need limits would be likely to adversely affect any industry in the United States. ITC’s impartial advice is to balance the more partisan analyses of GSP agencies, petitioners, and U.S. producers. Based on a review of the ITC reports to USTR, a review of 45 case study records, and interviews with GSP and ITC officials, this advice is valuable to the interagency decision-making process as an impartial analysis of the likely economic effects on U.S. producers and consumers. However, some U.S. industry officials were concerned that the value of ITC advice might be limited by outdated information used in ITC analyses. U.S. industry officials also objected to USTR’s requirement that the economic impact advice be classified as confidential. The ITC role in the GSP Program is twofold: first, to provide USTR the best available information for each product being considered for GSP designation and, second, to provide its judgment of the likely economic impact on U.S. interests if GSP status is granted to the product under consideration. The Trade Act of 1974 requires that USTR obtain ITC advice on the probable economic effect of granting GSP eligibility before it changes the list of GSP-eligible articles. ITC is to consider the effect on U.S. industries producing like or directly competitive articles and on U.S. consumers. According to ITC and USTR officials, ITC does not make recommendations to USTR on whether a product petition should be granted or denied. ITC’s judgment as to the probable economic effect of GSP designation is considered along with other factors in USTR’s decision-making process. According to an ITC official, ITC plays a limited role in the first stage decisions on whether to accept petitions for review. An ITC technical person advises the GSP Subcommittee on tariff classification or nomenclature issues to help ensure that products are correctly classified at the appropriate 8-digit tariff line. ITC also provides USTR with preliminary import data for the previous 3 years. During the second stage of full review of product petitions, USTR officially requests ITC advice on the list of products accepted for review. ITC generally has about 3 months to hold public hearings, complete its analysis, and report back to USTR by November, according to an ITC official. ITC reports to USTR on GSP products have a standard digest of information for each product, including (1) product description, (2) U.S. market profile, (3) imports from GSP countries and share of U.S. consumption, (4) competitiveness profiles of GSP suppliers, (5) summaries of statements submitted by interested parties in support of or opposition to the petition, and (6) summary of probable economic effects. The sixth information block, providing ITC bottom-line advice on economic effect, is classified by USTR and is not made public; it is deleted from the public version of the ITC report. In it, ITC gives its judgment on (1) the effect on U.S. imports, including the extent to which GSP imports will likely substitute for other non-GSP countries’ imports or displace U.S. products; (2) the probable effect on U.S. industry; and (3) the probable effect on U.S. consumers. Most of the current and former GSP Subcommittee members we spoke to felt that the ITC economic impact advice was very valuable to the decision-making process. Although the advice was clearly considered to be only one factor in deciding a petition, several former subcommittee members said that it was valued as an impartial benchmark against which other more partisan analyses of economic impact could be assessed. An ITC official stated that the ITC standards for economic analysis under GSP are as stringent as for other tariff reduction advice, although ITC operates under a very short time frame in the GSP review cycle. While GSP law gives ITC 6 months to render its advice, in practice ITC does so within 90 days. ITC officials, GSP Subcommittee members, and former GSP directors confirmed that there is often conflicting advice coming from ITC and the GSP Subcommittee agencies. An ITC official said that this reflects the constitutent pressures on the agencies and that each agency—Agriculture, Commerce, etc.—protects its constituents. This is part of the balancing act of the GSP process. Some agency officials, however, felt that the discrepancy between ITC and agency advice was due to the greater depth and breadth of agency expertise in individual commodities. ITC officials indicated that one reason for the divergence in analyses was that ITC looked at the potential impact of GSP imports on the overall U.S. industry. For instance, in agricultural products ITC did not consider the impact on any agricultural price support system. USDA, however, is concerned about this impact. An ITC official noted that USDA also does not want to give any competitive advantage to a foreign country. Even if the overall industry is not harmed, a particular company or region may be, and therefore USDA will oppose almost all petitions to grant GSP product status. Another ITC official said that when a conflict in analysis occurs, ITC has no vote, and the GSP agencies generally defer to the lead agency for that petition. Domestic producers expressed concern that ITC used outdated information in GSP investigations. Because ITC has used full-year data, there was a 10-month gap for current-year data when it gave USTR its report in November. By the time the petition was decided some 4 or 5 months later, another full year of data had become available, sometimes changing the picture significantly. Some U.S. industry representatives felt that this time lag undercut the usefulness of ITC advice. ITC has recently addressed this concern. It changed its practice of providing only full-year data in its GSP report for the 1993 annual review. It also included trade data for the first 9 months of the year. However, ITC and other GSP agency officials said that there will always be a time lag, due to the nature of the GSP review cycle. ITC officials also stated that trends in data are more important than monthly levels. They noted that TPSC can request updated data at any time and that industry sources are generally efficient in providing such updated data to USTR. The GSP agency officials reiterated that the ITC advice, although important, is only one factor in the decision-making process. Classification of the ITC economic impact assessment as confidential was also cited as a problem. This information is classified at USTR’s direction. We found that it was generally thought that ITC’s GSP advice was classified in order to preclude disclosure of business-confidential information. Several domestic industry representatives and a trade attorney disagreed with such a policy. They said that revealing the bottom-line conclusion—whether or not a product was import sensitive under GSP—would not threaten business-proprietary information such as profit margins or productivity of industry members: these need not be disclosed. They said this policy undercuts the transparency of the program. Several GSP Subcommittee members said that public disclosure of this information would jeopardize the validity of ITC investigations. They said that companies provide ITC with sensitive business information critical to the ITC analysis only because the companies know that it will be kept strictly confidential. Without this assurance, the quality and accuracy of future information disclosures would be undermined. ITC and GSP officials subsequently told us that concern for business-proprietary information was not the reason USTR classified the ITC economic impact advice as confidential. GSP officials said that there were several reasons for this policy. They said that the ITC probable economic effect advice under GSP is given pursuant to the same statutory basis as for trade negotiations. Confidentiality is necessary for such negotiations and historically has also been extended to GSP advice. The officials said another reason is that releasing ITC’s advice could unduly highlight this advice as being more significant than it is in the GSP review process. ITC advice has been valued for its impartiality but has been treated as only one factor in the GSP Subcommittee’s review. A final reason given is concern that revealing ITC’s advice could have a chilling effect on the impartiality of the ITC analysis, which is now shielded from outside pressures. The GSP Program has a generally well-structured administrative process for consideration of product petitions, including a highly transparent procedure for accepting public comments from all interested parties and holding public hearings on accepted petitions. However, this transparency largely stops once the interagency decision-making process begins. Decision-making criteria are not defined in the statute, and judgments are made on a case-by-case basis for each product and BDC, based on informal guidelines the GSP Subcommittee has developed. Although USTR is obligated to respond to written requests by petitioners to explain petition decisions, many parties were apparently unaware of this right. The waiver of the 3-year rule during the 1991 Central and East European special review undermined the credibility of the program with the affected domestic industries. They strongly supported adding the 3-year rule, and a provision disallowing waivers, to the GSP law during program reauthorization. We found merit in USTR’s position that the current regulations allow USTR to waive the 3-year rule or to self-initiate cases, which can have the same effect as a waiver. This situation presents a policy dilemma in which a choice must be made between fairness to the domestic producers and the administration’s desire to preserve this option. The GSP Subcommittee’s acceptance of petitions that do not contain information required in the regulations can place U.S. producers at a disadvantage because in many instances there are few independent sources of information on the BDC petitioner or other potential BDC suppliers. Domestic producers believe that acceptance of petitions that did not fully meet all the regulatory information requirements effectively shifted the burden of proof from the petitioner to those opposing the petition. In order to provide greater transparency to the GSP decision-making process and the GSP petition process, we recommend that the U.S. Trade Representative (1)make public the guidelines the GSP Subcommittee uses in analyzing product petitions, with the stipulation that the guidelines provide a framework for, but do not limit the extent of, the Subcommittee’s analysis; (2)indicate clearly in Federal Register notices of final decisions on GSP petitions that petitioners can write to request a written explanation of any decision; and (3)modify GSP regulations to specify a mandatory core of information required for acceptance of product petitions. If Congress considers whether or not to incorporate the 3-year rule, and a provision disallowing its waiver, in the GSP statute, it should recognize that the TPSC regulatory authority to self-initiate cases can have the same effect. Congress may wish to consider stipulating whether or not self-initiation of cases should be allowed where it would have the effect of waiving the 3-year rule. USTR did not agree with our recommendation that it make public the guidelines the GSP Subcommittee uses in analyzing product petitions. It agreed to indicate clearly in the Federal Register notices of final decisions on GSP petitions that petitioners can write to request a written explanation of any decision. Finally, in response to our draft recommendation that USTR accept only product petitions that include all required information, USTR responded that it was proposing to modify GSP regulations to specify a mandatory core of information that all petitions must contain to be accepted for review. We believe that this proposal, together with certain other proposals that enhance transparency of program decisions, could potentially address the concerns underlying our initial recommendation. As a result, we have revised our recommendation to support this course of action. USTR said that the administration’s GSP reauthorization proposal would clarify the type of information required in product petitions and would affirmatively require TPSC to consider import and production data from all principal beneficiaries in accepting petitions. However, USTR disagreed with our recommendation that it make public the guidelines used in analyzing product petitions. Instead, USTR reiterated its view that the indexes currently listed in the GSP regulations are all potentially relevant to determining import sensitivity. It maintained that no one group of indexes or “guidelines” would be applicable or appropriate in every case; thus, such a list of guidelines, unless it were quite broad and long, could be misleading. USTR said that the personal communication that occurs between the GSP Subcommittee, petitioners, and repondents is the best way in which such interested parties can obtain a better understanding of the various factors considered material in their case. We continue to believe that greater public knowledge and understanding of the guidelines used by the GSP Subcommittee in analyzing product petitions would contribute to better prepared and potentially more realistic petitions. It would also assist domestic producers in more effectively preparing evidence to oppose petitions. The administration’s response to our recommendation focuses to a greater degree on the information provided by petitioners. Our focus was on greater explication of the analytical framework used by the GSP Subcommittee, e.g., that its evaluation of a product is based on such factors as (a) the import-to-consumption ratio and (b) the extent to which GSP duty-free imports of a product could be expected to displace imports from non-GSP countries rather than U.S. production. These are factors that guide analysis; they are not information provided by petitioners. We believe that greater understanding and transparency of the analysis used in the decision-making process will be even more important in the future if the administration’s proposal to review product-addition petitions only every 3 years is implemented. In response to the administration’s concern, we modified our draft recommendation to clearly indicate that any discussion of factors used in the guidelines should not be considered as limiting the analysis. In its GSP renewal proposal, the administration has proposed specifying a mandatory core of information that all petitions must contain in order to be accepted for review. In addition, it has proposed affirmatively requiring TPSC to accept product-addition petitions only when there is “substantial information” demonstrating compliance with statutory criteria for product eligibility (whether provided by the petition or by TPSC agencies). TPSC would be required to provide this information, after its decision, upon request to any interested party. We believe that this proposal could potentially address the concerns underlying our draft recommendation by clarifying the information that is actually required and by requiring TPSC to be sure there is substantial information demonstrating product eligibility. Further, by subsequently providing this information to interested parties, potentially including agency-held information that previously would not have been released, this provision could increase program transparency. It may also alleviate domestic producers’ concerns that the burden of proof disproportionately falls upon them when incomplete petitions are accepted. We have, therefore, revised our recommendation to support this course of action. The Trade and Tariff Act of 1984 reauthorized the GSP Program but added stricter eligibility criteria for BDCs. These criteria stipulated that a BDC provide (1) adequate and effective protection of IPR and (2) internationally recognized worker rights. These so-called “country practice” criteria have remained very contentious. Developing countries have resented what they see as inappropriate conditions (“conditionality”) attached to a trade assistance program that had traditionally required no reciprocal action by BDCs. Advocates of these provisions, in turn, have maintained that the GSP Program’s objective of aiding economic development will not be adequately achieved without parallel development of adequate IPR and worker rights standards. We also found concern about how these country practice provisions have been implemented. In our estimation, adding country practice cases onto the existing GSP annual review process for product cases has not worked well because these two types of cases are fundamentally different. Treating them the same has led to administrative problems in the rigid annual review cycle. There have also been concerns about the program’s policies for accepting country practice petitions for review. Much of the controversy over the way in which country practice provisions have been administered is rooted in the differing expectations held by GSP officials, IPR advocates, and worker rights advocates. GSP Subcommittee members generally believe that the country practice provisions have been pursued and have provided leverage to get BDCs to initiate changes, to the best degree possible, given other trade and foreign policy concerns. However, IPR and worker rights advocates said they want country practice cases more vigorously pursued and sanctions more frequently exercised. Worker rights advocates are particularly concerned, especially since IPR advocates can pursue more powerful provisions in U.S. trade law. The GSP worker rights provision, however, is the linchpin for most worker rights provisions in other U.S. trade laws. These laws depend on GSP sanctions to trigger their own actions. IPR and worker rights advocates and GSP officials recommended changes to GSP administrative processes as part of the GSP Program’s reauthorization. All recommended disengaging country practice cases from the annual review process used for product petition cases. IPR and worker rights advocates also proposed strengthening their respective provisions. However, many U.S. government officials and trade experts indicated that the GSP Program can provide only a modest degree of leverage in encouraging BDC governments to change their practices. Further, the prospect during GSP renewal of additional country practice provisions being proposed, particularly for environmental protection purposes where there are no international standards, was generally held to be a mistake by those we interviewed who currently participate in the GSP Program. It was frequently pointed out that adding new provisions would reduce the leverage of existing provisions and put too high a price on GSP benefits for many BDCs. In addition, the successful conclusion of the Uruguay Round of GATT and its resulting tariff reductions would, if enacted, reduce the value of the tariff elimination provided by GSP. This tariff elimination would decrease GSP leverage, making it that much more difficult to add new requirements to country practice provisions. The GSP statute provides for a number of country practice provisions, which address issues such as market access, expropriation, and international terrorism, as well as IPR and worker rights. We have focused on the latter two provisions, which were the most contentious and the subject of the greatest number of petitions. Of the 113 country practice petitions filed in the annual reviews from 1985 through 1993, all but 14 (12 percent) were IPR or worker rights petitions. Of these cases, 11 were conducted in the General Review completed in 1987, all of which were worker rights cases. The IPR provision in the GSP statute, which lists factors determinative of whether to designate a country as a BDC, states that the President “shall take into account . . . the extent to which such country is providing adequate and effective means under its laws for foreign nationals to secure, to exercise, and to enforce exclusive rights in intellectual property, including patents, trademarks, and copyrights.” This IPR provision envisions that a BDC provides an adequate IPR regime and enforces it, but leaves application of the provision to the President’s discretion. The GSP statute does not define what constitutes “adequate and effective” IPR protection. The GSP Director said that USTR has interpreted this provision based on a well-developed intellectual property policy that relies on U.S. as well as international standards. He said USTR uses as guidelines the international standards that have already been set in international agreements on IPR and by the World Intellectual Property Organization (WIPO), which is a part of the U.N. structure. The Trade-Related Aspects of Intellectual Property Rights (TRIPs) agreement reached in the Uruguay Round of the GATT has now set a single international standard that the United States accepts as a minimum IPR standard, but not in all cases as an adequate standard. Application of the IPR provision in the GSP Program is also based on the level of development of a BDC. While less developed BDCs may be given more leeway on the minimum standard, the more advanced BDCs may be expected to go beyond these minimum international standards to meet the higher U.S. standard. There is also an IPR provision that provides that BDCs are ineligible for GSP designation under certain circumstances if such country “has nationalized, expropriated, or otherwise seized ownership or control of property, including patents, trademarks, or copyrights owned by a United States citizen or by a corporation, partnership, or association which is 50 percent or more beneficially owned by United States citizens,” or has taken certain steps that would have this effect. The worker rights provision in the GSP statute states that the President, in determining whether a developing country should benefit from GSP, “shall take into account . . . whether or not such country has taken or is taking steps to afford workers in that country (including any designated zone in that country) internationally recognized worker rights.” The statute defines internationally recognized worker rights as including (A) the right of association; (B) the right to organize and bargain collectively; (C) a prohibition on the use of any form of forced or compulsory labor; (D) a minimum age for the employment of children; and (E) acceptable conditions of work with respect to minimum wages, hours of work, and occupational safety and health. The worker rights criterion is one of “taking steps” to meet international standards, rather than being in full compliance with those standards. The international standards have been set by the International Labor Organization (ILO), which is part of the U.N. structure. Again, the President has great discretion in the application of the provision. The country practice provisions added to the GSP Program during program reauthorization in 1984 have been very contentious. The U.S. GSP Program is the only one to have such added “conditionalities”; developing countries have strongly opposed these provisions and regard them as penalties. The U.S. and foreign officials, trade experts, business representatives, trade association representatives, and academics we interviewed were divided on the inclusion of country practice provisions in the GSP Program; there were strong advocates of both points of view. In addition, we found more resistance to the worker rights provision than to the IPR provision’s being included in GSP. An UNCTAD official said that the application of country practice provisions was a misuse of reciprocity and pointed out that the United States was the only GSP donor with such conditionalities. He feared that the United States would be led to continue to add such provisions, because they are not technically illegal with respect to GATT. Another UNCTAD official noted that, by their nature, country practice provisions are too volatile because of the political nature of such leverage. He felt that such problems could better be handled through other U.S. laws, such as Section 301 of the 1974 Trade Act (see p. 113). In September 1992, 13 BDCs sent a joint letter to USTR conveying their views on the importance of renewing the GSP Program. Regarding country practice issues, they noted that they have a strong commitment to the reform of their economies into strong market economies and to participation in the multilateral trade negotiations to address outstanding issues. They saw country practice conditions in GSP as “(a) edundant because the issues they address are being dealt with at the Uruguay Round; and (b) ounter-productive because most developing countries are resolving these matters on their own initiative despite domestic opposition. Our Governments are in need of incentives, not penalties.” U.S. embassy officials in the six case study countries we visited had conflicting views on the worker rights and IPR provisions in the GSP legislation. Some felt that such conditionalities should not be attached to a trade measure or that better means exist to pressure BDCs to improve IPR and worker rights practices (e.g., treaty negotiations or Special 301 provisions (see p. 111)). Also, these officials generally agreed that the program should not hold BDCs to a U.S. standard. However, at the same time, many of these embassy officials also acknowledged that GSP’s country practice provisions had helped to raise the level of consciousness in their host countries about the importance of IPR and worker rights and had oftentimes resulted in some degree of improvements. There was a general feeling among many trade experts we interviewed, including some U.S. government officials, that the GSP country practice petitions went against the spirit of GATT, at a minimum, and were possibly in conflict with GATT. Others felt that while IPR and worker rights were important issues, they should be handled in another forum, not in GSP, which they felt should remain a trade assistance program as originally intended. Many pointed to the TRIPs negotiations in the Uruguay Round as negating the need for an IPR provision under GSP. To a significant degree, we also found a greater acceptance of IPR as a trade issue, in contrast to worker rights, which was not generally accepted as a trade issue by those we interviewed. Many of the officials and trade experts we talked to particularly questioned including the worker rights provision in the GSP Program. One trade expert commented that she had never understood how suspending GSP would help workers in that BDC. An academic expert on GSP said that BDCs see U.S. country practice provisions as interference in their internal affairs, with the U.S. dictating appropriate domestic policies. One reason why IPR has been accorded greater acceptance in trade policy circles than worker rights was offered by the GSP Director. He noted that trade policy historically is an arm of commercial policy. He pointed out that IPR advocates can point directly to dollars lost from piracy abroad, but that worker rights advocates have a more difficult time showing direct damage to U.S. commercial and trade interests from abuses of foreign workers’ rights. In addition, many U.S. commercial interests benefit from GSP duty-free benefits. Thus, he said it appears to many that the United States is being asked to take economic action that might harm its commercial/trade interests, as well as its bilateral political relationship, for benefits that are unclear at best. He noted that worker rights groups argue that the greater protection of worker rights abroad helps protect U.S. jobs, but said that this connection was again hard to demonstrate. It may be true that U.S. workers are being undercut by lower wages in developing countries, but it seemed clear that that would remain the case, by virtue of their lower level of development, even if bargaining rights, for example, were improved. This does not necessarily imply that it is not in the U.S. interest to promote those rights, only that a direct commercial benefit is difficult to demonstrate. IPR advocates responded to UNCTAD and BDC charges that the GSP IPR provision is a conditionality that is not trade related, stressing that IPR is a trade issue. They said that a fundamental problem they face in the developing world is that many BDCs do not accept that intellectual property is really property. The same government that would never consider expropriating a shoe factory will, however, allow pirating of computer software, videos, or pharmaceuticals. Intellectual property industries are very dependent on copyright, patent, or trademark protection. Their industries are based on innovation and have in common that all research and development costs are incurred up front, before a product is placed on the market, and the ensuing products can easily, quickly, and cheaply be copied or stolen by pirates. For example, the high level of research and development cost and risk faced by the pharmaceutical industry was highlighted in a February 1993 Office of Technology Assessment report, Pharmaceutical R&D: Costs, Risks and Rewards. This study found that the average cost to develop a new drug in the 1980s was roughly $194 million after taxes, in 1990 dollars. It also found that the research and development process took 12 years on average. Representatives of the International Intellectual Property Alliance, Motion Picture Association of America, and Pharmaceutical Research and Manufacturers of America all said that another critical factor is that respect for innovation and intellectual property is a key ingredient for development, the objective of the GSP Program. Economies that do not respect and protect IPR inhibit the development of domestic intellectual property industries or investment by foreign intellectual property industries. The PRMA representative gave the example of India, which he stated officially sanctions pharmaceutical piracy. He believed that lack of IPR protection was one reason that India had fallen behind other Asian countries. A 1990 study conducted for PRMA, “Benefits and Costs of Intellectual Property Protection in Developing Countries,” National Economic Research Associates, Inc., found a causal linkage between the presence of efficient property rights, including intellectual property rights, and economic modernization. IIPA, in turn, pointed out that intellectual property industries are large export earners for the United States, with over $36 billion in foreign sales in 1991. IIPA has estimated U.S. trade losses due to piracy of copyrighted works in 1992 at around $15 billion to $17 billion. This figure does not include losses to patent industries, including pharmaceuticals and high-technology firms, which could be substantial. Worker rights advocates also contended that worker rights are a trade issue. They believe that worker rights provisions are critical to the GSP Program in order to assure that economic development and increased exports do not come at the expense of abused workers. An AFL-CIO official said that the worker rights provision is needed because producers of goods imported into the United States under preferential terms should not enjoy benefits at the expense of exploited workers. A representative of the International Labor Rights Education and Research Fund (ILRERF) explained that its goal is to inject into U.S. trade policy a means to encourage broad-based development worldwide. Free trade is healthy only if it is not based on competition that degrades workers in the countries trying to obtain trade benefits. He said that a mechanism is needed to distribute the benefits of trade, which in this case means improved circumstances for workers through worker rights and good working conditions. The ILRERF official added that poor labor conditions or artificially low wages overseas also encourage U.S. companies to relocate to cut production costs, putting pressure on U.S. workers. He said that companies can even obtain negotiated concessions from U.S. workers simply by threatening to relocate to a foreign country. The position that country practice issues should be handled in multilateral forums has not succeeded in the case of worker rights. The U.S. government tried to get GATT members to consider worker rights issues under the Uruguay Round and could not generate any support, according to a U.S. government official. This official complained that even the U.S. proposal for a GATT study group was turned down. Advocates of labor issues are left with ILO as their only international forum. However, ILO conventions on international labor standards are voluntary and have no sanctions. The official said that BDCs like to point out that the United States has signed few ILO conventions. He said that ILO has issued over 170 binding labor conventions and that the United States has signed only 11 of them. However, he said that the reason for this situation was not any problem with the standards, but because labor issues in the United States fall largely under the authority of individual states. Country practice petitions are administered together with product petitions in the GSP Program’s annual review process. Based on our review of cases in the 1990 and 1991 annual reviews and the views of a variety of interested parties—including U.S. officials, IPR and worker rights advocates, and trade experts—this combined procedure does not appear to have been successful. Country practice cases are fundamentally different from product cases, and a number of administrative problems have resulted from trying to handle these cases simultaneously within the same procedural framework. When the country practice provisions relating to IPR and worker rights were added to the GSP statute in the 1984 renewal act, they were simply appended to the existing annual review process for product petitions (discussed in ch. 4). The same “annual review cycle” framework and interagency decision-making process has been used by the GSP Subcommittee in administering these petitions. The same filing and decision-making time frames have also been used. When cases could not be resolved in the 1-year cycle, the subcommittee simply “pended,” or held over, cases to the next review cycle, sometimes for 2 or 3 years. There were important administrative differences, however, between the country practice cases and product cases we reviewed. The most important difference was that resolution of a product case was an internal U.S. government decision. Whether a product received GSP duty-free benefits was based upon the information provided to the GSP Subcommittee and its recommendation on import sensitivity or competitiveness of the product (which must subsequently be ratified by TPSC, TPRG, and the President). Further, the impact of the petition was generally limited: whether BDCs would be able to ship frozen peas or alarm clocks duty free or not was usually of immediate concern only to those domestic and foreign industries. Country practice cases were fundamentally different in that they involved changes in the internal practices of another sovereign nation and triggered government-to-government negotiations or representations. While the GSP Subcommittee made its ultimate recommendation based on the information it received, the bilateral negotiations or representations that had been initiated by the filing of the petition were the real focus of the cases. Our review of cases and interviews with GSP officials indicated that in IPR cases, USTR’s IPR office generally takes the lead. The IPR negotiator works together with the State Department country desk officer and embassy officials in the BDC to pursue resolution of the petition issue. As needed, they get technical assistance from the U.S. Patent and Trademark Office. Often, they negotiate directly with counterparts in the BDC government and work together to develop acceptable standards in a new copyright or patent law. The U.S. IPR advocacy group will likely be closely involved in this process. USTR’s IPR negotiators will work with the GSP Subcommittee on how to use the GSP process and what options are available to them. In worker rights cases, until recently USTR has had no real role in resolving the issue giving rise to the petition. The main U.S. government actors have been (1) the State Department, through its embassy in-country, its country desk officer, and its Labor Advisory Office; and (2) the Labor Department’s International Labor Affairs Bureau. High-level representations are made by the U.S. Ambassador and senior government officials to counterparts in the country and to the BDC’s Ambassador in Washington. Worker rights advocacy groups were not generally involved in these representations. The worker rights review, unlike the IPR review, would not be limited to the petition issue only, but would be enlarged to scrutinize the overall labor regime of the BDC in light of the five internationally recognized worker rights criteria stated in the GSP law (see pp. 99-100). According to the GSP Director, the process used for worker rights cases has changed over the past year, and these cases have a higher priority now. As documented in our review of selected cases in the 1990 and 1991 annual reviews, the GSP Subcommittee did not previously get involved in working to resolve the substance of country practice cases. The Director said that this situation has changed, and the GSP Subcommittee is now taking the lead on worker rights cases due to the greater expertise developed over the years and the precedents set by cases reviewed to date. The subcommittee now also has greater interaction with worker rights advocates on cases. The particular problems that have resulted from administering country practice cases in a review process designed for product petition cases include (1) the rigidity of the annual review cycle and (2) the program’s policies for accepting petitions for review. The June 1 deadline for submission of all GSP petitions for consideration during the annual review cycle is considered by IPR and worker rights groups as too rigid for country practice cases. Since these cases involve international standards of behavior, rather than trade flows, events can precipitate crises at any time during the year. For this reason, IPR and worker rights groups believed that they should be able to file petitions at any time during the year when a crisis occurs and receive expedited review. According to worker rights groups, a particularly harsh, but telling, example of such a crisis for worker rights involved the case of Sudan. On June 30, 1989, a coup d’état overthrew the Sudanese government, and the new government immediately issued a decree to abolish labor unions and forbid strikes. Widespread cases of detention and abuse of trade unionists were reported. However, due to the GSP rules, Africa Watch and the AFL-CIO were not able to file a petition until 11 months later, on June 1, 1990. While Sudan was ultimately suspended from the GSP Program, the decision was not handed down until May 1991, at the conclusion of the 1990 annual review cycle. Sudan, therefore, continued to receive GSP benefits for almost 2 years after the coup. IPR groups concurred on the need for out-of-cycle filing when a crisis occurs. For instance, situations can arise when a major piracy production and export center is established in a BDC, flooding a region with pirated videos. In such situations, IIPA members want to have a means of quick response before too much damage is done in the marketplace. Waiting on the annual review cycle makes this quick response impossible as far as using GSP leverage. Another problem with the rigid annual review cycle concerns the need to continually hold over country practice cases to the next review cycle. Because country practice cases involve changes in the internal practices of another sovereign nation, triggering government-to-government negotiations or representations and usually requiring passage of national legislation, they generally take a long time to resolve. Out of 53 country practice cases accepted for full review before the 1993 annual review, 23 were held over to at least one subsequent annual review. The 41 cases that were completed by the start of the 1993 annual review took an average of 1.3 years to resolve. Of the 24 country practice cases reviewed in the 1993 annual review, 12 have been held over from previous years. The GSP Subcommittee has recently begun to address some of these concerns. For instance, although it has not accepted petitions out of cycle during the review year, the subcommittee did accept an IPR petition on Cyprus for expedited review in the 1993 annual review. IIPA filed the petition on June 1, 1993, the normal filing date, with the request that the review and actions to be taken be expedited. The review concluded that Cyprus’ GSP benefits should be suspended due to failure to adequately protect IPR. However, the suspension was deferred due to Cyprus’ intent to implement a new and greatly improved copyright law on January 1, 1994, according to USTR. A second general administrative issue concerns the lack of standards in the GSP law or regulations for accepting country practice petitions for review. To deal with this problem, the GSP Subcommittee has adopted internal policy guidelines for how it will consider petition requests. However, cases are complex and the outcome of policies may not always be clear or consistent. The GSP Director acknowledged that this situation has sometimes created confusion among GSP agencies and outside groups. Advocacy groups said that acceptance standards can be subjective and highly political. In particular, worker rights groups said that all petitions that are not legally “frivolous” should be accepted for review. They also said that they especially do not agree with two of the policies used in the decision whether to accept worker rights petitions for review: (1) the classification of a petitioned offense as a human rights rather than a worker rights problem and, therefore, outside the purview of the GSP Program; and (2) the “new information” standard used to deny consideration of petitions in subsequent years on a petition that has been denied, unless substantially new information is brought. In the annual reviews from 1985 through 1993, 113 country practice cases were filed, as shown in table 5.1. The GSP Subcommittee accepted 65 (58 percent) of these cases for full review, including 12 IPR, 46 worker rights, 3 expropriation, and 4 reinstatement petitions. Of the 61 annual review cases accepted for review that were filed to remove benefits and the 11 general review cases, 11 (15 percent) resulted in the BDC’s GSP benefits being suspended or removed. Four of these 11 BDCs were later reinstated; the 4 granted reinstatement petitions were filed by 3 BDCs that had been suspended for worker rights violations and 1 BDC for expropriation violations. IPR advocates, who filed relatively few cases under GSP, generally felt that the GSP Program had played a beneficial role in securing improved IPR protection in GSP beneficiary countries. A number of BDCs have improved their IPR laws as a result of GSP petitions. IPR advocates were less concerned about acceptance of petitions and more concerned about more “vigorous” use of the IPR provision, resulting in more BDCs being suspended for IPR violations. Worker rights advocates were far more concerned about acceptance of worker rights petitions and were generally very disappointed with the implementation of the provision under the GSP Program. Although they acknowledged that the provision had led to progress in a number of BDCs, it was apparent that the results had not met their expectations. Their main area of concern was with the standards for acceptance of petitions for review. They said that the GSP Subcommittee needed to articulate clear and specific standards for acceptance or rejection of petitions for full review. They said that all worker rights petitions should be accepted, as long as they were not legally frivolous. In 1990, 23 labor and human rights groups filed suit against the administration in the U.S. District Court for the District of Columbia. The parties to the lawsuit included almost every group that had filed a worker rights petition under the GSP Program. They charged that the administration had failed to enforce the worker rights provision. They lost their case in district court and their appeal in the U.S. Court of Appeals for the District of Columbia Circuit. However, the lawsuits were dismissed on the technical ground that the parties lacked standing to bring the lawsuits or that the particular court lacked jurisdiction to consider the lawsuit; the substance of the lawsuits was never addressed. One of the primary concerns labor groups have had about acceptance of petitions has been based on the GSP Program’s policy of distinguishing between human rights and worker rights violations. For instance, the murder of a trade union leader is classified as a human rights violation and is not accepted as the basis of a worker rights petition. Labor groups disagreed with this policy, stating that in most cases it is very clear that the reason a labor leader has been murdered was due to worker rights advocacy. GSP officials pointed out that in developing countries that have serious human rights problems, it is usually not possible to clearly establish the motivating cause for the violation. The GSP Director said that the policy line between human rights and worker rights has been a difficult one in some cases. Generally, the GSP Subcommittee looked for firm evidence that abuses against individuals were in some way related to their work as labor or union activists. This proves difficult in cases of widespread civil unrest or civil war. Moreover, it is difficult in such instances, where the perpetrating party is unclear, and where the government of the country may lack effective legal control over events, to determine the extent to which the government could take or was taking effective steps to prevent such abuses. However, he cited the recent case with Malawi, where a labor leader was imprisoned by the government for sedition, in which the GSP Program did have the clear evidence it needed. The GSP Subcommittee pursued the issue with the Malawi government, and the labor leader was finally released. Another policy that is controversial is the “new information” standard in the GSP regulations. This regulation states that in order to re-petition on a worker rights case that has been dismissed (whether not accepted for full review or reviewed and found insufficient to establish a GSP violation), substantial new information must be brought. The reasons for the regulation are similar to the reasons behind the 3-year rule for product addition petitions: to prevent repeated petitioning on the same issue that would harass the petitioned party and unduly burden the GSP review process. Country practice petitions can be refiled every year; there can be no 3-year rule because the IPR and worker rights practices of a BDC can change at any time. However, labor groups said that the new information standard undermines their effective use of the worker rights provision. If a BDC is found to be taking steps toward, but is not in compliance with, worker rights standards, this regulatory standard makes it difficult to revisit the situation when labor groups feel progress on those issues stopped as soon as the GSP pressure ended. Worker rights advocates said that the petition filed against Malaysia in 1988 is a good example of this problem with the new information standard. After the petition, which stated that Malaysia was suppressing unions in its electronics sector, was accepted for review, the Malaysian government announced an end to the ban on electronics unions. Later, a Malaysian government official clarified the announcement to indicate that only in-house unions would be permitted, even though unions in Malaysia are generally organized at the national level. The United States found Malaysia to be taking steps to improve its labor regime, and the case was concluded at the end of the review cycle in spring 1989. However, the U.S. Trade Representative noted in her April 1989 letter to the Malaysian Prime Minister informing him of this decision that much progress was needed. She also cited the fact that the government did not allow full freedom for workers to associate and form labor unions of their own choosing in certain export industries such as the electronics industry. Notwithstanding this admonition, subsequent petitions filed in 1990 and 1991 were rejected for review because of determinations that they failed to provide new information. During our visit to Kuala Lumpur in November 1992, the embassy official responsible for labor issues said that the embassy’s analysis had shown that the 1990 and 1991 petitions did not contain new information. He also confirmed that the embassy did not conduct any follow-up work to determine whether the Malaysian government had taken any corrective actions in the areas identified by the GSP Subcommittee. The AFL-CIO filed another petition on this issue in June 1993. The decision on whether to accept the petition for review was deferred until January 1994. USTR stated that additional time was needed to determine if a second review was warranted, or if worker rights progress had continued over the past several years. The GSP Director said that there had been a change in recent months to interpret the new information regulation more broadly. He said that the GSP Subcommittee has been more willing to accept petitions a second time. For example, the worker rights petition filed against the Dominican Republic in June 1989 resulted in a finding in April 1991 that the Dominican government was taking steps to improve worker rights by drafting a new labor law. Another petition was filed in June 1991, but was rejected because the Dominican government was still in the process of enacting the new labor law. However, 2 years later, in June 1993, a further petition was filed stating that the new law was not being adequately enforced. The GSP Director said that the GSP Subcommittee considered the new information that the Dominican Republic was not enforcing its new labor law and accepted the case for review. He also noted that GSP summary reports at the conclusion of reviews are now more explicit on worker rights cases. If the BDC is taking steps, the GSP Subcommittee notes the action and then goes on to record what additional steps the subcommittee expects. He said that this expectation is the “hook” for a new petition. There is an important difference in perspectives among GSP Subcommittee officials, IPR advocates, and worker rights advocates on the degree to which GSP leverage should be pursued in investigations and negotiations with BDC governments and, ultimately, used in actual sanctions. GSP officials generally said they feel that the country practice provisions have been used as much as possible to encourage improved BDC practices, given other foreign policy and trade concerns. In contrast, IPR and worker rights advocates generally said they want to see more cases accepted for review and more BDCs sanctioned through suspension from the GSP Program. However, the fact that worker rights advocates have reacted more strongly, to the point of filing suit against the administration, also reflects the relative standing of IPR and worker rights provisions in U.S. trade law. While IPR advocates have other, more powerful, trade law options available to them, worker rights provisions in other trade laws are linked to the exercise of GSP sanctions. Thus GSP sanctions are critical to worker rights advocates’ pursuit of other legal avenues. The GSP Program Director said that the country practice reviews have been worthwhile and have produced substantive results in many BDCs. Other GSP Subcommittee officials concurred, saying that the country practice provisions of the GSP Program have resulted in important improvements in some BDCs’ practices. In IPR cases, new copyright laws were passed in a number of countries, including Singapore, Indonesia, the Dominican Republic, and Malta. GSP leverage was also effectively used when Mexico enacted major IPR improvements in order to receive about $2 billion in competitive need limit waivers in June 1991. More recently, progress has been made in the cable signal piracy petitions filed by MPAA against the Dominican Republic and Honduras, although these cases remain incomplete. A third case filed against Guatemala was withdrawn in summer 1994 after an agreement was reached. In worker rights cases, the Central African Republic, Paraguay, and Chile were pointed out as BDCs that were suspended from GSP and later improved their practices and were reinstated. More recently, in December 1993, two new worker rights cases filed against Costa Rica and Paraguay were settled, and the AFL-CIO withdrew its petitions after new legislation was enacted. The GSP Director said that progress was also being made in El Salvador and Indonesia. Just as importantly, GSP officials said that these provisions have resulted in raising the consciousness of BDC governments on the importance of IPR and worker rights protections and are having a longer term impact as BDC development levels increase. Generally speaking, according to government officials, the approach they take in administering country practice provisions is that of using the GSP provisions to encourage improved IPR and worker rights practices by BDCs. While they are willing to use the leverage provided by GSP benefits to push hard for improvements, they do not want to have to actually exercise GSP sanctions to punish BDCs. Once sanctions are imposed, leverage is lost in encouraging future improvements in any of the country practice provisions. And, just as important for the administration, bilateral trade and foreign relations are damaged. It is for this reason, we found, that country practice cases are usually held over until a resolution can be worked out. Government officials stressed that they have to take a broad view of bilateral relations to balance competing interests. They said that they cannot afford to take a narrowly focused position, as many advocacy groups do, that country practice petitions should be pursued at all costs, no matter what the impact will be on the commercial and bilateral relationship with a BDC. A myriad of equally important objectives may be held in the balance at any given time. A notable example of such inherent constraints was with the 1988 worker rights petition against Syria, which was held over for 3 additional years while the Middle East hostage situation was going on. Only when that extremely sensitive situation was resolved was Syria suspended from the GSP Program in the summer of 1992. The GSP Program is only one of three trade law measures under which IPR issues can be pursued with U.S. trading partners, and the least forceful. The “big gun” is Section 301 of the 1974 Trade Act, followed by the Special 301 provision, and finally the GSP Program. The most egregious IPR cases have been pursued through these first two provisions, rather than through GSP. GSP’s main value for IPR advocates is as a first level of response, leaving negotiating room to increase the pressures with the threat or use of Section 301 and/or Special 301. Several IPR representatives told us that they preferred to use GSP when possible because it caused the least damage to bilateral trade relations. Section 301 of the Trade Act of 1974, as amended, provides a domestic procedure under which affected enterprises or individuals may petition the U.S. Trade Representative to initiate actions to enforce U.S. rights under trade agreements, or to respond to unjustifiable, unreasonable, or discriminatory foreign government practices that burden or restrict U.S. commerce. One of Section 301’s main uses has been to obtain more effective protection worldwide for U.S. intellectual property. Actions taken may include (1) suspension of bilateral trade agreement concessions; (2) imposition of duties, fees, or other import restrictions on products and services; and (3) entry into agreements with the subject country to eliminate the offending practice or to provide compensatory benefits for the United States. Actions may be instituted against any goods or economic sectors, without regard to whether the goods or economic sectors were the subject of the investigation. Special 301 focuses exclusively on IPR issues, unlike Section 301 cases. Here, Congress has expressed its clear intent that intellectual property issues warrant unique coverage. Special 301 requires USTR to identify countries that deny adequate and effective protection of intellectual property rights or that deny fair and equitable market access to U.S. persons relying on intellectual property protection. Special 301 can be used to pressure foreign countries to improve their IPR regimes and can ultimately be used to trigger mandatory expedited Section 301 investigations. The conclusion of the Uruguay Round of GATT, which, if enacted, would bring IPR under the international trading system for the first time, would also have ramifications for the GSP Program. Although the full implications are still being sorted out, it is believed that the GSP IPR provision may now become more important to advocacy groups. The Agreement on Trade-Related Aspects of Intellectual Property Rights reached in the GATT negotiations would establish improved standards for the protection of a full range of IPR and the enforcement of those standards both internally and at the border. The intellectual property rights covered by the agreement are copyrights, patents, trademarks, industrial designs, trade secrets, integrated circuits (semiconductor chips), and geographical indications. The TRIPs text is covered by the Uruguay Round Dispute Settlement Understanding, thus ensuring application of the improved dispute settlement procedures, including the possibility of imposing trade sanctions (such as increasing tariffs) if another GATT member violates TRIPs obligations. GSP may become more important in the future if the use of Section 301 and Special 301 is limited. Since most IPR areas would be covered by GATT, the unilateral use of the Section 301 and Special 301 process may be restricted. Petitioners may be required to go through GATT dispute settlement, rather than the United States taking unilateral action, to impose sanctions. According to the GSP Director, the critical policy question for USTR would be when petitioners not willing to go through dispute settlement would want to bring their cases instead to GSP, which is a unilateral program outside GATT commitments. USTR would have to make a difficult policy decision of determining which IPR cases to accept under GSP. It would have to establish whether or not cases involving areas covered by TRIPs should be encouraged to go to dispute settlement instead. Indeed, IPR industries are beginning to take the position that Section 301 and Special 301 still could be used for TRIPs-covered areas if the sanction employed is in an area not covered by GATT, such as GSP. An IIPA official agreed that the GSP IPR provision would be more important to IPR industries if TRIPs is enacted. He said that as more areas would be bound under GATT’s new World Trade Organization and IPR coverage would be brought under GATT, the United States’ unilateral use of Section 301 would be limited. Fewer areas outside of GATT would be available for the imposition of unilateral sanctions. Therefore, GSP is very useful because it is outside GATT. According to this official, GSP would be even more important because developing countries would have a 5-year transition period under the Uruguay Round GATT agreement before they would have to be in full compliance (except for pharmaceuticals and agrichemicals, where they would have 10 years). IIPA is very concerned that a number of BDCs were on the verge of taking action to protect intellectual property under bilateral commitments they had made. IIPA emphatically does not want to see these BDCs backslide and take advantage of the extra 5 years to provide IPR protection. As a result, the IIPA official saw great potential for bilateral engagement even though IPR should soon have GATT coverage. Legislation making trade conditional upon governments’ observance of worker rights has been attached to the following trade programs or provisions:(1) the Caribbean Basin Economic Recovery Act in 1983, (2) the GSP Program in 1984, (3) the Overseas Private Investment Corporation in 1985, (4) the Multilateral Investment Guarantee Agency in 1987, (5) Section 301 in the Omnibus Trade and Competitiveness Act of 1988 (P.L. 100-418), (6) the Andean Trade Preference Act in 1991, and (7) Section 599 of the fiscal year 1993 Foreign Operations Appropriations Act in 1992. However, only the GSP Program has a review and decision process to implement sanctions designed to enforce the worker rights provision. CBERA, the Overseas Private Investment Corporation, the Multilateral Investment Guarantee Agency, and ATPA do not have reviews, and their worker rights provisions are linked to GSP Program determinations. The Section 301 worker rights provision of the Omnibus Trade and Competitiveness Act of 1988 has never been used. Finally, the section 599 provisions restricting U.S. foreign assistance programs (primarily for the Agency for International Development) will likely have little impact on worker rights practices in Caribbean Basin countries. The result is that the worker rights provision of the GSP Program is the primary worker rights legislation available to advocacy groups, and action under GSP also triggers actions under most of the worker rights provisions in U.S. trade law. It is for this reason, to a large degree, that worker rights advocates have reacted so strongly to concerns about the implementation of the GSP worker rights provision. IPR and worker rights advocates, as well as GSP officials, have suggested modifications of the GSP administrative process for country practice provisions to be considered during renewal of the GSP Program. Advocacy groups have also proposed substantive changes to further strengthen their respective provisions. IIPA has proposed two major administrative changes that it believes will significantly improve the administration of the GSP IPR provision. Under this proposal, administration of the GSP IPR provision would be disengaged from the current GSP annual review process and instead would track the Special 301 review process. Thus, GSP IPR petitions would be filed simultaneously with Special 301 petitions in February rather than in June as at present and would be considered within the context of Special 301 submissions and on a similar timetable. IIPA believes that since both petitions require review by USTR of the adequacy and effectiveness of a foreign country’s IPR protection, combining the two reviews would significantly reduce overlapping reviews and negotiations by USTR. The same underlying facts must be provided by the private sector in both cases. However, accepting the IIPA proposal would also mean making significant changes in the current administrative process for GSP IPR petitions. Special 301 does not require extensive submissions, and IIPA would like to see such procedural requirements dropped for GSP purposes as well. It would only be at the end of the review process, when USTR made a determination to sanction a country, that petitioners would make submissions and a public hearing would be held to permit all those affected by either the Special 301 or GSP sanctions to be heard. IIPA believes that this revised procedure would streamline the entire process for reviewing a country’s IPR practices without diminishing the independent functioning of either trade program. Although the IPR standard is the same for both GSP and Special 301 petitions and the IPR office at USTR leads both investigations, there are important differences as well. Fundamental differences in GSP and Special 301 petitions are reflected in the disparities in the functions of their hearings. Acceptance of a GSP petition for full review is a serious indication that there is an IPR problem. The GSP Subcommittee’s investigation establishes the extent of the problem, and negotiations are then undertaken to try to reach a resolution so that the BDC is not suspended, according to GSP officials. Public hearings are held immediately so that all sides to the issue can establish their positions and present evidence. Then at the conclusion of the annual review process, the President may (1) find that the BDC has met the standards of the law or has taken actions to meet the standard and concludes the review, (2) hold the case over to allow time to take actions, or (3) suspend the BDC from GSP benefits. In contrast, under Special 301, acceptance by USTR of a petition is tantamount to an indictment. The Special 301 process is designed to work in the following way: Countries are placed on the watch list or the priority watch list as a warning that matters are increasingly serious on IPR issues. When a country is designated a “priority foreign country” under Special 301, triggering a Section 301 investigation, there is no question of the seriousness of the matter and of its potential impact on bilateral relations. No hearings are held upon initiation of a Special 301 investigation because USTR immediately enters into consultations with the foreign government on the IPR issue. All parties are fully informed. Under Special 301, a hearing is only held if requested at the end of the investigation if the dispute cannot be resolved and USTR determines that it will take retaliatory measures. The purpose of the hearing is to allow affected parties to express their views on the impact of the proposed sanctions and the potential level of their losses, especially where another product sector is affected. Should the IIPA proposal be implemented, the likely result would be that GSP IPR reviews would be directly linked to Special 301. Currently, there is an indirect linkage, since there has been a Special 301 case that sanctioned a country by reducing GSP benefits. As a result of a Special 301 case on pharmaceuticals, India’s pharmaceutical exports no longer receive GSP treatment. However, by directly linking the GSP IPR provision to the Special 301 review process, GSP then becomes an instrument of Special 301 law. Given the impact that the GATT agreement reached in the TRIPs negotiations would have, as discussed previously (see pp. 114-115), such linkage would likely result in further making GSP the de facto preferred first-line sanction for Special 301 cases. IIPA has also proposed that GSP IPR petitions be permitted to be filed at any time when there are instances of piracy that (1) are unexpected and (2) have potential for causing severe harm to the copyright holder if the holder must wait for the annual filing procedure. This second proposal seems to be consistent with the intent of the IPR provision. In addition, there is certainly adequate precedent provided by past acceptance by the GSP Subcommittee of emergency product petitions. For example, in 1991 a petition on Malaysian vulcanized rubber thread exports was accepted for expedited consideration as an emergency petition. The GSP Program has recently taken steps in this direction: Under the 1993 annual review, USTR has accepted an IPR petition on Cyprus for expedited review, as mentioned previously (see p. 107). However, GSP has not yet accepted petitions outside the designated annual filing date of June 1. Both worker rights advocates and GSP officials recommended that the process for consideration of worker rights cases be separated from the annual review process designed for product cases. However, they had differing views on how worker rights cases should be administered once disengaged from the current annual review framework. Worker rights advocates also proposed various modifications they believed would substantively strengthen the worker rights provision. Worker rights advocates suggested that worker rights cases be reviewed separately from product cases and that a separate advisory panel of government labor experts should assess worker rights petitions. AFL-CIO and ILRERF officials said that product petition and worker rights investigations should be separated since they are very distinct issues with different scopes and implications. They also supported having a separate panel of labor experts advise USTR. The ILRERF official also believed that the Labor Department’s International Labor Affairs Bureau should administer worker rights cases rather than USTR. Human Rights Watch and ILRERF officials proposed that the petition-driven structure of the GSP review process be changed. They believed that U.S. government officials had the duty under the GSP law to determine compliance with worker rights standards, rather than to do nothing unless a petition was filed. The GSP Subcommittee could start with the State Department’s human rights reports, which include reporting on worker rights. GSP officials disagreed with this proposal, saying that all country practice reviews are petition driven in order not to undermine bilateral relations with a BDC. They said that it is difficult enough to address these sensitive issues bilaterally with a BDC when the petition is filed by a private party. If the government were to self-initiate cases, this action would constitute a very serious step for bilateral relations. Suggestions to modify the petition process for worker rights cases were also made by GSP officials. They believed that it would be beneficial to disengage the worker rights petition process from the annual review process for product petitions. A GSP official suggested that all worker rights petitions should be examined in a preliminary stage one review that would be extended to 4-6 months to allow time for adequate investigation. He said that often BDC governments are willing to resolve an issue before it becomes more controversial and politically more difficult. He said that in other instances, petitions are filed based on new laws being interpreted as anti-worker rights, but upon investigation, there really is no problem. Such cases could be settled in an extended stage one review, leaving the serious cases for a full stage two review that lasts for 9-12 months. The worker rights advocacy groups, including the AFL-CIO, ILRERF, and Human Rights Watch, all recommended strengthening the worker rights provision. All argued that it was important to accept petitions out of cycle when mandated by the urgency of events. They stressed the importance of accepting all petitions that are not frivolous, whether or not they are politically controversial. The worker rights advocacy groups also supported a proposal to use partial sanctions in worker rights cases. They see the current sanction—total suspension of the BDC from GSP—as too blunt an instrument in many cases. It is a sanction so potentially damaging to the relationship between the United States and the BDC that it becomes very difficult to actually use with BDC trading partners. They recommended employing a partial sanction in appropriate cases to target the industry involved in the worker rights abuses and to deny its GSP benefits, rather than having the BDC’s benefits totally suspended. The GSP Director agreed that the flexibility provided by a partial sanction could be helpful in worker rights cases. He also said that USTR believes that the discretion to take partial sanctions is already in the GSP law. At the same time, he cautioned that it may not be possible to use partial sanctions in many cases. He estimated that half or more of the worker rights problems have been found in the textile and apparel industry, which is not covered under GSP. However, in instances in which the worker rights abuses did occur in an industry covered by GSP, partial sanctions targeting that industry could potentially not only be useful, but also more equitable. Each worker rights advocacy group also had its own additional list of priority changes to strengthen the worker rights provision. These proposed changes included (1) enunciating clear and specific criteria for acceptance or rejection of petitions for review; (2) basing the definition of worker rights and human rights on ILO standards; (3) reducing the time that cases are held over; and (4) revising the new information standard in the regulations, as discussed previously. There is also a proposal to strengthen the language concerning “taking steps” in the current GSP statute to instead require compliance with all five ILO standards (see p. 99). GSP officials disapproved of a full compliance standard for the worker rights provision. They said that no developing country could possibly fully meet all five ILO worker rights standards. They also pointed out that while worker rights advocates say that they only want a standard that IPR advocates already have, the issue is not that simple. While the IPR standard calls for full compliance rather than just taking steps, IPR petitions under GSP are narrowly focused and call for resolution of a single issue, not full compliance with all IPR standards. GSP officials said that worker rights cases, in contrast, are handled differently, with all five ILO standards being scrutinized in a BDC. Another proposal is to add a sixth criterion to the worker rights provision, requiring BDCs not to discriminate on the basis of sex, race, or religion in the workplace. GSP officials dismissed such an eligibility criterion as too idealistic. They said that, clearly, no BDC can meet this standard. Many U.S. government officials and trade experts indicated that the GSP Program can provide only a modest degree of leverage in encouraging BDC governments to change their practices. They said that this leverage is greater with smaller countries that need GSP benefits more, and more limited with large BDCs, like Thailand or Malaysia, which benefit significantly from but do not depend on GSP. Leverage is also increased where GSP benefits are tied to other trade preference benefits, such as the Caribbean Basin Initiative (CBI). A former GSP Director pointed out that if articles considered to be critical to BDCs, such as textiles and apparel, were granted wider GSP eligibility, then the United States might gain stronger leverage from the program. A U.S. government official dismissed the idea of granting textiles and apparel GSP status as a political impossibility that would disrupt U.S. industries. However, the basic point remains that leverage is largely a function of the degree of benefits provided. It should also be noted that a certain amount of leverage is derived not so much from the prospect of losing GSP tariff elimination benefits, but from a desire by BDC governments to avoid international damage to their image and loss of foreign investment. As with human rights issues, other governments do not want the U.S. government to publicly declare that they are condoning piracy or are stifling creativity or innovation through inadequate copyright or patent laws. Moreover, BDC governments do not want a U.S. determination that they are not providing their workers with rights they should have. Governments do not want it pointed out that they are not enforcing their own laws. This sensitivity is, thus, the source of the controversy over these provisions in GSP, as well as the source of some degree of its leverage. But exercising this leverage exacts a price on the bilateral relationship. Almost everyone we discussed this issue with who currently participates in the GSP Program said that it would be a mistake to enact additional country practice provisions. It was frequently pointed out that adding new provisions would reduce the leverage of existing provisions and put too high a price on GSP benefits for many BDCs. In this regard, the prospect of adding environmental protection provisions to GSP was almost universally deemed a mistake. They said that there are no international standards, like WIPO standards for IPR or ILO standards for worker rights, by which to measure the adequacy of environmental protection actions, and it was considered inappropriate to hold developing countries to U.S. standards. Further, the successful conclusion of the Uruguay Round of GATT negotiations would, if enacted, decrease tariffs and, thus, also the value of GSP benefits. Many experts questioned the usefulness of adding country practice provisions when the available leverage in encouraging improved practices is decreasing. As one former GSP Director said, GSP is at the vulnerable end of U.S. trade policy because of its unilateral, nonreciprocal nature. It is essentially a gift given to developing countries. As such, GSP often serves as a vanguard for addressing special issues in U.S. trade law, since it is a small unilateral program easily altered without much opposition. He said there is no domestic constituency to support GSP, outside of the domestic importers who use it, many of whom are not organized to lobby for it. The former GSP Director said that it is important that GSP not fall subject to the “Christmas tree” effect during renewal, with too many country practice provisions added that will, in the end, reduce GSP’s overall effectiveness. Administration of country practice petitions within the review process designed for product petitions has not worked well. Country practice cases require a separate time frame and review procedures that better fit their different dynamics. The acceptance of emergency petitions for review out of cycle, as well as for expedited review, would improve the timeliness and, potentially, the effectiveness of these provisions. Criteria for accepting emergency petitions would have to be developed. There are no standards in the GSP statute or regulations for acceptance of country practice petitions for full review. The GSP Subcommittee has developed its own internal guidelines, which are used on a case-by-case basis but have not been made public. A public explanation of these guidelines would help petitioners in preparing better petitions and, in turn, would promote more efficient administration of the program. The regulations do have a standard requiring that resubmitted petitions contain new information. However, as currently administered, this standard has prevented further review of worker rights cases in which a BDC’s promised progress has stopped after the GSP review was concluded. Although the GSP Director said that the GSP Subcommittee is interpreting the new information standard more broadly in accepting petitions for a second review, this change did not extend to the types of cases raised here. Finally, the current sanction in GSP country practice cases is the total suspension of a BDC from GSP benefits. A partial sanction, in which a specific BDC industry sector is suspended from GSP rather than the entire BDC, would provide greater flexibility and, in some cases, would be more equitable. The controversy over the extent to which GSP leverage can and should be used goes to the heart of the policy debate over the compatibility of country practice provisions with the original objectives of the GSP Program. A workable balance needs to be maintained between using GSP as originally envisioned—as a measure to assist BDCs in furthering their economic development by enhancing exports and foreign investments—and its use to pursue other objectives in trade-related or nontrade areas. If greater emphasis is placed on country conditions, then care must be taken to balance the conditions imposed with the leverage created by the benefits provided. In order to improve the administration of country practice petitions, we recommend that the U.S. Trade Representative (1) review country practice petitions on a separate and more flexible time frame from product petitions that better fits their different dynamics; (2) accept emergency petitions for expedited review out of cycle, when warranted by events; (3) make public the guidelines used in deciding whether or not to accept country practice petitions for full review; (4) clarify the “new information” standard in the GSP regulations to indicate that failure of a BDC to fulfill the promises of progress that were instrumental in the decision to deny a petition would constitute substantial new information that could be the basis for acceptance of a petition; and (5) take all steps necessary to expand the range of sanctions that can be taken when BDCs have not met GSP country practice standards to include partial sanctions when appropriate. USTR, on behalf of the administration, generally agreed with our recommendations that it (a) review country practice petitions on a separate time frame from product petitions, (b) make public the guidelines used in deciding whether or not to accept country practice petitions for review, and (c) expand the range of sanctions to include partial sanctions. Its GSP reauthorization proposal includes a number of provisions that make modifications along these lines. USTR did not fully agree with our recommendation concerning the acceptance of emergency petitions for expedited review out of cycle when warranted by events. In response to our recommendation that it revise the “new information” standard to allow acceptance of petitions demonstrating a lack of promised progress, USTR said that its standard already allows for such an action. We have revised our draft recommendation to recommend that USTR clarify GSP regulations to indicate that failure by a BDC to fulfill the promises of progress that were instrumental in the decision to deny a petition would constitute substantial new information that could be the basis for acceptance of a petition. While noting that nothing in the regulations precludes it from accepting country practice petitions on an emergency basis, USTR said that such situations have been and should continue to be rare events. Its reasons were that (1) it is very difficult to show that a domestic interest is so seriously affected by a country practice that an emergency review is warranted and (2) country practice determinations are the result of careful review of a great volume of information and deliberation that are not consistent with the notion of “emergency” circumstances. We do not agree with USTR’s strong reluctance to accept country practice petitions on an emergency basis. First, there is no requirement in either the IPR or worker rights provisions in the GSP statute that direct and serious harm to U.S. interests be demonstrated. The focus of these provisions is entirely on whether the BDC in question is adequately meeting, or taking steps to meet, certain international standards. Thus, using such a test for acceptance of emergency petitions is not required. Second, while it may be true that it can be difficult to show direct and serious harm to a domestic interest in worker rights cases, this may not be the case in IPR petitions. If, for instance, a major regional video or software pirating center is set up, the copyright holders may suffer serious losses in that market. Should the U.S. industry provide solid evidence of such piracy, then there would be reason to initiate a review of whether the BDC is providing “adequate and effective” IPR protection, as required by the GSP statute. At that time, the necessary due deliberation and careful review of information, as well as government-to-government consultations to resolve the issue, could be fully undertaken. USTR did not believe that there is any need to revise the “new information” standard to allow acceptance of petitions demonstrating a lack of promised progress. Its position was essentially that such a revision is unnecessary because, when pertinent, progress in fulfilling past promises is already considered. USTR also pointed out, as discussed in our report, that the GSP Subcommittee has said that it now more clearly explains its rationale and expectations in finding a BDC to be “taking steps,” potentially making it easier for petitioners to justify the lack of expected progress as “new information.” While acknowledging that there can be disagreement about what constitutes “substantial new information” in any particular case, USTR said that the real issue is one of ascertaining the facts and determining their significance in relation to a previous finding of “taking steps.” In response to USTR’s comments, we have revised our recommendation to clarify that the “new information” standard already allows acceptance of petitions demonstrating a lack of promised progress. However, we believe that it would be beneficial for the GSP Program to explicitly point out in its regulations that failure by a BDC to fulfill promises of progress would constitute new information that could be the basis for acceptance of a petition. The concept of making progress to meet international standards is at the heart of GSP country practice provisions; it is especially critical for worker rights, given the “taking steps” language in the statute. Thus, such a clarification is needed precisely because making the judgment as to whether sufficient progress has occurred has been so controversial with worker rights advocates. The GSP Program is a trade preference program that aims to promote development of less industrialized countries through trade rather than aid. Most GSP benefits go to the relatively small number of more advanced or larger developing countries that can better meet U.S. market demands. These goods are by value predominantly industrial goods, rather than agricultural goods. At the same time, the exclusions built into the program provide U.S. industries with extensive protection against undue harm. In 1992, less than half of the eligible goods received duty-free treatment. The benefits of the GSP Program may be reduced in value in the near future. The tariff reductions negotiated in the Uruguay Round, if enacted, would reduce the value of GSP benefits by an estimated 40 percent. In addition, several major BDCs have been graduated, substantially reducing the level of imports under the program. However, the Uruguay Round agreement may provide potentially meaningful growth in GSP product coverage of textile and apparel articles. If the Uruguay Round results are enacted and the Multifiber Arrangement is phased out over 10 years, textile and apparel articles legislatively excluded from the program due to their MFA status may be considered for GSP eligibility. The United States has made GSP benefits conditional on compliance with certain trade-related or nontrade country practice conditions. The IPR and worker rights provisions are the most contentious of the existing eligibility conditions, but provisions targeting new issues such as environmental protection are also being proposed for consideration during program reauthorization. Many government officials and trade experts believed that the ability of the GSP Program to provide leverage to pursue additional objectives, however, is modest and would decrease as its benefits are reduced. Adding new provisions would further reduce the leverage to achieve the objectives of existing provisions. Furthermore, if too many conditions are imposed, beneficiary countries may feel the compliance burden is too great and give up all benefits, thereby eliminating the existing leverage in the program. A key consideration for Congress in deciding whether to reauthorize GSP is the leverage created by the program and the purposes for which that limited leverage should be used.

Summary: Pursuant to a congressional request, GAO reviewed the effectiveness of the U.S. Generalized System of Preferences Program (GSP), focusing on: (1) the benefits provided to beneficiary developing countries (BDC); (2) the limitations on GSP imports; (3) how products are removed from or added to GSP coverage; and (4) whether program provisions requiring that countries follow certain intellectual property and worker rights practices are enforced. GAO found that: (1) only a few of the more advanced or larger developing countries receive GSP benefits; (2) although imports from BDC have increased annually, overall imports from several GSP countries have decreased because of their economic graduation; (3) new General Agreement on Tariffs and Trade tariff reductions have reduced the value of GSP duty-free benefits and U.S. leverage to demand compliance with GSP requirements; (4) BDC believe that the GSP program has helped their economic development; (5) in 1992, GSP benefits totalled $16.7 billion and the United States lost nearly $900 million in foregone duties; (6) over the last few years, Mexico has received the most GSP benefits; (7) several GSP program provisions limit duty-free entry in specific cases; (8) administrative exclusions under GSP should diminish, since Mexico has graduated from the GSP program and competitive need limit exclusions have been increasing for other beneficiary countries; (9) although the administrative process for considering petitions to add or remove products from GSP coverage is generally effective and well-structured, opportunities exist to improve program administration through better information dissemination and strengthened product petition acceptance requirements; and (10) adding new provisions to strengthen intellectual property and worker rights during program renewal may place too many conditions on beneficiary countries for their continued program participation.