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.