By Shushanik Hakobyan[1] (International Monetary Fund)

With rising US trade protectionism against its major trading partners, the Generalized System of Preferences or GSP, a long-running scheme of tariff exemptions meant to aid exporters in developing countries, may get less attention. While GSP imports account for about one percent of total US imports, they account for about ten percent of all imports from GSP beneficiaries with considerable heterogeneity across countries.[2] Since the early 1970s, the GSP has given a boost to these exporters by granting their products duty-free access to the US market thereby aiding the efforts to expand their industrial and exporting capacity. But as with any policy, the devil is in the details. Despite the benefits, uptake has been low due to a number of reasons, including a low margin of preference granted by GSP, uncertainty about the permanence of the GSP program, and the statutory caps on benefits designed to prevent “abuse” by successful exporters.[3] My research focuses on the latter and explores whether these caps are well-targeted and serve their designated purpose.[4]

One of the features of the US GSP, the so-called Competitive Needs Limits, or CNLs, act as caps on benefits by excluding exporters exceeding CNL thresholds. There are two criteria to identify country-product pairs that have exceeded CNLs: (1) imports exceeding a certain value threshold in a calendar year, set at $180 million in 2017, and increasing by $5 million every year; (2) import share of a country in a given product exceeding the percentage threshold set at 50 percent. Meeting either criteria triggers an automatic exclusion of a country-product pair from GSP in the following year. The range of imports that exceed these thresholds varies greatly in terms of value. For example, the eligibility of Indian exporters of gold necklaces and neck chains was revoked in 2008, following their exports reaching $266 million in the previous calendar year (the value threshold in 2007 was set at $130 million). Likewise, the Argentine exporters of green olives lost their GSP eligibility in 2008 after accounting for 66 percent of total imports of green olives into the US in 2007. It is worth noting that Argentina had not exported green olives in the previous five years prior to 2007.

There are three ways to avoid losing the GSP benefits due to the CNL. First, if total US imports of a given product are trivial, at most $23.5 million in 2017 (set to increase by $0.5 million every year), a de minimis waiver could be applicable. Second, the percentage threshold may be waived if a directly competitive product was not produced in the US on January 1, 1995 (504(d) waiver). Lastly, country-product pairs exceeding the value or percentage CNL may petition for a more “permanent” CNL waiver.

To evaluate the impact of these caps on exporters, I examine the universe of all country-product pairs that have been excluded for more than two years from GSP over the period of 1997-2010. There have been 202 country-product pairs that met the CNL criteria in this period and were excluded from the GSP, accounting for $7 billion in imports (in the pre-exclusion year) or about 31 percent of US imports claiming GSP on average over this period. I estimate country-product level regressions of the value and share of imports on a set of binary variables indicating the first, second and third year of exclusion.

I find that the CNL exclusions are associated with a continuous decline in exports and import shares for up to three years after the exclusion, leading to a 75 percent drop by the third year of exclusion relative to the pre-exclusion average. Similarly, import shares drop by 42 percentage points from an average of 63 percent prior to the exclusion. This drop is predominantly driven by exporters who meet the percentage threshold with lower valued exports. These results are robust to employing volume data instead of values. Furthermore, the effect is larger for products facing higher MFN tariff rates. By the third year of exclusion, the value of imports and import shares of exporters eligible for a de minimis waiver drop by 50 and 75 percent, respectively, relative to pre-exclusion averages. In contrast, the impact of CNLs on the largest country-product pairs that exceeded the value threshold is negligible.

A related question of interest is the potential impact of CNLs on imports from other GSP beneficiary countries. If CNL-affected countries are unable to continue exporting to the US, who fills the void — other GSP countries or non-GSP countries? I find that import shares rise considerably more for non-GSP countries. By the third year of exclusion, the share of imports from other GSP eligible countries increases by 7 percentage points from a pre-exclusion average of 7 percent, whereas the share of imports from non-GSP countries rises by 29 percentage points (pre-exclusion average share is 25 percent).

Arguably, CNLs do not serve their intended purpose of identifying exporters who no longer need the preferential market access and allowing other GSP beneficiary countries benefit more from the program. Instead, CNLs tend to target small exporters, forcing them to stop exporting to the U.S. altogether, and mostly benefit non-GSP exporters.

These findings call for tweaks to the design of the program. Two simple changes can be made to boost the utilization of the program. First, since percentage CNL fails to identify successful exporters, a more holistic approach that takes into account both the value of imports and market share is needed to accurately detect such exporters. Second, the analysis of exports over a longer period (instead of the statutory one year) could go in hand with the previous suggestion by capturing the export dynamics of given products. These simple changes would ensure a lasting market access for the countries whom the GSP scheme is intended to help.

References

Blanchard, E., and S. Hakobyan, (2015); “The U.S. Generalized System of Preferences in Principle and Practice,” The World Economy 38(3).

Hakobyan, S., (2015); “Accounting for Underutilization of Trade Preference Programs: U.S. Generalized System of Preferences,” Canadian Journal of Economics 48(2), 2015.

Hakobyan, S., (2017a); “Export Competitiveness of Developing Countries and U.S. Trade Policy,” The World Economy 40(7).

Hakobyan, S., (2017b); “GSP Expiration and Declining Exports from Developing Countries,” Working Paper, 2017.

Ornelas, E., (2016); “Special and Differential Treatment for Developing Countries,” in Handbook of Commercial Policy, Kyle Bagwell and Robert W. Staiger (eds.), Vol. 1B, Amsterdam, North-Holland: Elsevier.

Endnotes

[1] The views expressed in this column are those of the author and should not be attributed to the IMF, its Executive Board, its management, or its member country governments.

[2] See Ornelas (2016) for a general introduction to GSP, an aspect of special and differential treatment for developing countries under the World Trade Organization.

[3] See Blanchard and Hakobyan (2015), Hakobyan (2015, 2017b).

[4] See Hakobyan (2017a).