U.S. Trade Preference Programs: Lessons for Europe from the U.S. Struggle to Get It Right

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Economic Policy PaPEr SEriES 2010

U.S. TradE PrEfErEncE ProgramS:

lESSonS for EUroPE from ThE

U.S. STrUgglE To gET iT righT

laUra m. BaUghman



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U.S. rade Preference Programs: Lessons forEurope from the U.S. Struggle to Get It Right

Economic Policy Paper Series

December 2010

L M. B

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U.S. rade Preference Programs: Lessons for Europe from the U.S. Struggle to Get It Right iii

Executive Summary

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U.S. rade Preference Programs: Lessons for Europe from the U.S. Struggle to Get It Right 1

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Introduction

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Politics diminishes

ability of preferenc

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development.



he German Marshall Fund of the United States2

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Overview of U.S. Preference Programs

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Caribbean Preference Programs (CBERA/

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Andean Preference Programs (ATPA/ATPDEA)

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apparel, the first ef

was too restrictive t

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had to be amended




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Chart 1: U.S. Imports under U.S. Preference Programs, by Program

NOE: D HOPE v

S: U.S. C B




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Current Program Utilization and Proposed

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Chart 2: Total U.S. Imports under All U.S. Preference Programs, 1976-2008

(Share of total dutiable imports)

S: U.S. C B




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Preferences for Afghanistan and Pakistan.

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•Philippines: The SAVE Act. “Sv O

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Significant opposition

resulted in the scopeof the benefits being

uite limited — so much

so that the view of

many U.S. consumers

is that the proposal is

ultimately unworkable.




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Are U.S. Preference Programs Working?

3

successful preference

program must meet

the needs of two

constituencies: those

who grow, make, and

export goods in the

beneficiary developing

country, and their

customers.




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w U.S. FA

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Inconsistent Requirements for Eligibility

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1. One Program Covering All Products

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2. Clear Country Eligibility Requirements

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Proposals for Reform of

U.S. Preference Programs4

Something had to b

done to improve the

ability of preferenc

programs to suppo

meaningful and

sustained developm

in beneficiary coun




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3. A Simple Rule of Origin for All Products

,

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4. Simple, Clear Product “Graduation” Processes

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w,

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v CBA v

w v

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v, w

k , -S

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wk

k v

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BDC, w w v

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BDC v (

v)

WO D Dv R

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x .

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C v k

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Dv A WO,

v w

v , k w w v

v v

7 C A BDC v x w k j q x v w v , .

Additional

recommendations

include working

collaboratively with

African governmen

regional institutions

nongovernmental

organizations, and

businesses.




w — v . Iv U.S.

k v

v v .

U w x v

w v

v.




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v. U,

EU’

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U.S. A ,

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v

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Lessons for Europe

5

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w M

C

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I

L Oz U N

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U EU vw

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w , x,

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— z v

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Under the Treaty of

Lisbon, the prefere

reform debate over

EU GSP scheme co

prove to be as heat

as that in the Unite

States.




v E M P (MEP).

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x, B

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I v, w

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In a political

environment, it goes

without saying that the

policy outcome will be

less than optimal.




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w GSP

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v — EU

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P w w

GSP .




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C

-- w

w w. w v q

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I w ïv x

v

U S EU. W

k—

Conclusion

6

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U.S.

w

v . x E

U v

z k

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Appendix:

Comparison of U.S. Preference Programs

GSP ATPA/ATPDEA AGOABenefits

Duty-free treatment for 131 eligible beneficiary

developing countries/territories (BDCs)

Benefits

Duty-free treatment for Bolivia, Colombia, Peru,

Ecuador (Bolivia suspended from benefits)

Benefits

Duty-free treatment for 38 eligible BDCs in

sub-Saharan Africa

Product Coverage

All products EXCEPT:

•Most textile and apparel articles

•Most footwear, handbags, luggage, flat

goods, work gloves, and leather wearing

apparel

• Certain watches & parts

•Above-quota imports of certain agricultural

products subject to tariff rate quotas (TRQs)• Import-sensitive electronic articles

• Import-sensitive steel articles

• Import-sensitive semimanufactured and

manufactured glass products

Affects >3,400 eligible products (out of

>10,500 total)

Product Coverage


• Nonqualifying textile and apparel articles


products subject to TRQs

• Canned tuna

• Rum and tafia

• Sugars, syrups, and sugar-containing

products above TRQ levels• Certain import-sensitive footwear

These products can be EXCLUDED if found to

be import-sensitive:

• Tuna in pouches

• Leather products

• Other footwear

• Petroleum & petroleum products

•Watches & watch parts

Affects >5,700 eligible products (out of

>10,500 total)

Product Coverage


• Non-qualifying textile or apparel products or

those that exceed specified caps



• Certain steel products

• Canned peaches and apricots

•

Dehydrated garlic

Affects “substantially all” products (>10,500)

Key Conditions for Eligibility Common to at least four Preference ProgramsBeneficiaries must not:

• Be a communist country

• Provide preferential treatment to other developed countries but not the United States

• Nationalize, expropriate, or seize U.S. property without compensation

•Aid or otherwise support international terrorism

Beneficiaries must:

•Afford or take steps to afford internationally recognized worker rights defined as the right of association; the right to organize and bargain

collectively; a prohibition on the use of any form of forced or compulsory labor; a minimum age for the employment of children; and acceptable

conditions of work with respect to minimum wages, hours of work, and occupational safety and health

•Meet its commitments to eliminate the worst forms of child labor, defined as all forms of slavery or similar practices like the sale or trafficking

of children, debt bondage and serfdom, or forced labor, including forced or compulsory recruitment of children for use in armed conflict; child

prostitution, the production of child pornography; use of a child for illicit activities like drug production and trafficking; and work that, by its nature

or the circumstances, could harm the health, safety, or morals of children

Beneficiaries should:

• Provide the U.S. access to its markets (including basic commodity resources) and assure the United States that it will not engage in unreasonable

export practices

• Have in place a system to fight corruption, or be a party to an anti-corruption treaty or convention




CBERA/CBTPA HOPE QIZsBenefits

Duty-free or reduced-duty treatment for

18 countries in the Caribbean region

(including Haiti)

Benefits

Enhanced CBPTA benefits for Haiti

Benefits

Duty-free benefits for products from “qualifying

industrial zones” in Egypt and Jordan

Product Coverage


• Nonqualifying textile/apparel products or

those that exceed specified caps

• Certain footwear

• Certain watches & parts

• Above-quota imports of certain agricultural


•

Canned tuna• Petroleum and products

Affects about 5,400 products (out of >10,500)

Product Coverage

Apparel and automotive wiring sets

Product Coverage

All products

Key Conditions for Eligibility Common to at least four Preference ProgramsBeneficiaries must not:

• Be a communist country

• Provide preferential treatment to other developed countries but not the United States

• Nationalize, expropriate, or seize U.S. property without compensation

• Aid or otherwise support international terrorism

Beneficiaries must:

• Afford or take steps to afford internationally recognized worker rights defined as the right of association; the right to organize and bargain

collectively; a prohibition on the use of any form of forced or compulsory labor; a minimum age for the employment of children; and acceptable

conditions of work with respect to minimum wages, hours of work, and occupational safety and health

• Meet its commitments to eliminate the worst forms of child labor, defined as all forms of slavery or similar practices like the sale or trafficking

of children, debt bondage and serfdom, or forced labor, including forced or compulsory recruitment of children for use in armed conflict; child

prostitution, the production of child pornography; use of a child for illicit activities like drug production and trafficking; and work that, by its nature

or the circumstances, could harm the health, safety, or morals of children


• Provide the U.S. access to its markets (including basic commodity resources) and assure the United States that it will not engage in unreasonable

export practices

• Have in place a system to fight corruption, or be a party to an anti-corruption treaty or convention




GSP ATPA/ATPDEA AGOAOther Eligibility Criteria

Beneficiaries must not:

• Be a developed country or member of the

European Union

• Be a member of a commodity cartel

• Have a per capita income that exceeds that

of a high income country as defined by the

World Bank (currently, $11,116)


• Provide adequate and effective protection of

intellectual property rights

• Reduce trade-distorting investment practices

and policies including export performance

requirements

• Reduce or eliminate barriers to trade in

services

Other Eligibility Criteria


• Fail to recognize or enforce binding arbitral

awards favoring U.S. citizens/business

entities

• Permit government-owned entity broadcasts

of U.S. copyrighted material without consent

or fail to work towards the provision of

adequate and effective protection of

intellectual property rights


of U.S. copyrighted materials without consent


• Reduce trade-distorting practices and

policies including export performance and

local content requirements

• Have laws and effectively enforce laws that

protect foreign intellectual property rights

and provide IPR protection that is consistent

with or greater than TRIPs requirements

•Abide by its WTO Agreement obligations

•Meet narcotics cooperation and

counternarcotics certification criteria

•Apply government procurement procedures

equivalent to those in the WTO’s GPA

•Meet narcotics cooperation and




• Be a member of a commodity cartel



entities

• Engage in activities that undermine U.S.

national security or foreign policy interests or

constitute gross violations of internationally

recognized human rights

Beneficiaries must have established, or be

making continual progress toward establishing:

•A market-based economy that protects

private property rights, incorporates an open

rules-based trading system, and minimizes

government interference in the economy

• The rule of law, political pluralism, and the

right to due process

• The elimination of barriers to U.S. trade and

investment, including national treatment, IPR

protection, and resolution of bilateral trade

and investment disputes

• Policies to reduce poverty, increase the

availability of health care and education,

expand infrastructure, promote development

of private enterprise, and encourage

formation of capital markets

Beneficiaries must also:

• Provide adequate and effective IPR

protection

• Reduce trade-distorting investment practices

and policies including export performance

requirements

• Reduce or eliminate barriers to trade in

services




CBERA/CBTPA HOPE QIZsOther Eligibility Criteria




entities


of U.S. copyrighted materials without consent


• Reduce trade-distorting practices and

policies including export performance and

local content requirements

• Have laws and effectively enforce laws that

protect foreign intellectual property rights

and provide IPR protection that is consistent

with or greater than TRIPs requirements

• Follow rules of international trade provided

for under multilateral Agreements

• Apply government procurement procedures

equivalent to those in the WTO’s GPA

• Meet narcotics cooperation and



The President must determine and Congress

must certify that Haiti has established, or is

making continual progress toward establishing:

•A market-based economy

• The rule of law, political pluralism, and the

right to due process, a fair trial, and equal

protection under the law

• The elimination of barriers to United

States trade and investment, including

by the provision of national treatment

and measures to create an environment

conducive to domestic and foreign

investment; the protection of intellectual

property; and the resolution of bilateral trade

and investment disputes

• Economic policies to reduce poverty,

increase the availability of health care and

educational opportunities, expand physical

infrastructure, promote the development

of private enterprise, and encourage the

formation of capital markets

• Does not engage in activities that undermine

United States national security or foreign

policy interests

• Does not engage in gross violations of

internationally recognized human rights

and cooperates in international efforts to

eliminate human rights violations

Haiti must establish a Labor Ombudsman

Office to oversee compliance with labor

conditions in HOPE, and start a program

that uses the ILO for technical assistance

to monitor the compliance with core labor

standards of apparel producers who want to

export to the U.S.; ILO must issue a report

every six months evaluating the progress of

each producer.


None




GSP ATPA/ATPDEA AGOARules of Origin

Eligible products must:

• be imported directly from a BDC into the

United States

• be wholly the growth, product, or

manufacture of a BDC or be substantially

transformed into a new or different article

in the BDC

• 35% of the value of the product must be

added in a single BDC or in a specified

association of eligible BDCs

No U.S. contented counts.

Rules of Origin

Eligible non-textile/apparel products must:


United States




in the BDC

• contain a minimum of 35% local content of

one or more CBTPA BDCs (or 20% if 15%

of the minimum content comes from the

United States)

Textile/apparel product rules:

• complicated requirements for the use of U.S.

or regional fabrics, yarns, cutting, thread

• some exceptions for short supply yarns/

fabrics, handmade, or folklore articles

Rules of Origin



United States




in the BDC

• contain a minimum of 35% local content

of one or more AGOA BDCs (or 20% if 15%


United States)






• exception for third country fabric usage by

LDCs, subject to caps




CBERA/CBTPA HOPE QIZsRules of Origin



United States




in the BDC

• contain a minimum of 35% local content of

one or more CBTPA BDCs (or 20% if 15%


United States)






Rules of Origin

Apparel imports from Haiti are duty free if at

least 50% of the value of inputs and/or costs

of processing are from any combination of U.S.

FTA and regional preference program partner

countries, subject to quantity caps.

Capped volumes of woven apparel permitted

when made with fabric from any country.

Automotive wire harnesses imported from

Haiti must contain at least 50% by value

of materials produced in Haiti, U.S. FTA, or

regional preference program countries to

qualify for duty-free treatment.

Rules of Origin

• A product must be wholly the growth,

product, or manufacture of the QIZ, or a new

or different article of commerce that was

grown, produced or manufactured in the QIZ

• The sum of the cost or value of the materials

produced in the QIZ, the West Bank, the

Gaza Strip, or Israel PLUS the direct costs

of processing operations in the QIZ, the

West Bank, The Gaza Strip, or Israel is not

less than 35% of the appraised value of the

goods (U.S. inputs can account for up to

15% of the appraised value in meeting the

35% value-added requirement)

• It must be imported directly from the QIZ

or Israel.

The agreement reached by Israel and the QIZ

partner country establishes the details of the

division of the 35% value added requirement.

For textile and apparel products, the rule of

origin is the so-called “Breaux-Cardin” rule, i.e.,

location of assembly for apparel. Products can

be shipped to the United States from either

Israel or the QIZ partner country.




GSP ATPA/ATPDEA AGOALoss of Benefits

A BDC can lose benefits if:

• It reaches the per capita income cut-off

($11,116)

• It no longer meets one or more of the other

eligibility criteria

• The President determines that the BDC’s

advances in economic development and

trade competitiveness warrant graduation

President can withdraw duty-free treatment for

any product that the President determines to

be import-sensitive in the context of GSP.

“Competitive Need Limits, CNLs.” GSPbenefits terminate for a particular product

imported from a BDC if the imports from the

BDC of that product during any calendar year: 1)

account for 50% or more of the value of total U.S.

imports of that product; or 2) exceed a certain

dollar value. Statute increases the dollar-value

limit by $5 million annually (the limit was $135

million in 2008, and is $140 million in 2009).

Waivers of CNLs. CNLs can be waived if

imports of the product from the BDC drop below

the CNL limit in a subsequent year and someone

files a petition for a waiver (waivers are not

automatic). A decision to grant a waiver depends

in large part on whether the country is providing

reasonable and equitable access to its market

for U.S. goods and services and reasonable and

effective protection of U.S. IPR. The percentage

provision is waived for certain GSP eligible

articles that were not produced in the United

States on January 1, 1995.

De minimis waiver: Provided when total

U.S. imports from all countries of a product

are small or “de minimis.” The de minimis level

is adjusted each year, in increments of $0.5

million (the 2008 level was $19 million, and

2009 level was $19.5 million). A de minimis

waiver is automatically considered for all BDCsthat exceeded the percentage competitive

need limitation for a product where total

imports from all countries for the preceding

year were below the de minimis level. Such

waivers cannot be requested by petition, but

public comments are accepted. Granting

such waivers is a discretionary decision of the

President.

(column continued on next page)

Loss of Benefits

[No per capita income cut-off.]

[No CNLs]

BDCs may lose benefits in whole or in part

if they no longer meet one or more of the

eligibility requirements.

Apparel products may lose benefits as a result

of a safeguard action.

Products subject to a Section 201 action lose

CBTPA duty-free treatment.

The President/ITC must conduct reviews every

2 years of each BDC and the economic impact,

including on U.S. employment, of the ATPDEA.

The Department of Labor must make annual

reports to Congress on the impact of ATPDEA

on U.S. labor.

Loss of Benefits


[No CNLs]

BDCs may lose benefits in whole if they are not

making “continual progress” in meeting one or

more of the eligibility requirements.



Annual review by President of BDC eligibility.




CBERA/CBTPA HOPE QIZsLoss of Benefits

No per capita income cut-off.]

[No CNLs]

BDCs may lose benefits in whole or in part

if they no longer meet one or more of the

eligibility requirements.



Products subject to a Section 201 action lose

CBTPA duty-free treatment.

Sugar and beef products may lose benefits if

BDCs do not have an acceptable stable food

production plan.

The President/ITC must conduct reviews every

2 years of each BDC and the economic impact,

including on U.S. employment, of the CBTPA.

Loss of Benefits


[No CNLs]

Haiti can lose benefits if it no longer meets one

or more of the eligibility criteria.

Loss of Benefits

Permanent




GSP ATPA/ATPDEA AGOA

Duration of waivers. A waiver remains

in effect until the President determines that

it is no longer warranted due to “changed

circumstances.” The statute also provides that

the President “should” revoke any waiver that

has been in effect for at least five years, if a

GSP-eligible product from a specific country

has an annual trade level in the previous

calendar year that exceeds 150% of the

annual dollar-value limit or exceeds 75% of all

U.S. imports.

Limitations on CNL waiver authority.

The total value of U.S. imports from allbeneficiary countries benefiting from the waiver

cannot exceed 30% of the total value of GSP

imports in a calendar year. Countries having

a per capita GNP greater than $5,000 or that

account for 10% or more of total GSP benefits

cannot be granted waivers, with an aggregate

value equal to more than 15% of GSP imports.

Extra Benefits for Least Developed

Countries

“Least developed countries” (LDCs) are

typically those defined by the United Nation as

least developed countries.

42 eligible LDCs get benefits for an additional1,434 products otherwise excluded from GSP.

LDCs are not subject to CNL limits.


Countries

N/A


Countries

LDCs are eligible for “third country fabric” rule,

which permits them to make apparel using

fabric or yarn from non BDCs and still qualify

for duty-free treatment. Total volume of this

trade is subject to caps.

Trade Capacity Building

None


None


Technical assistance provided for

Termination

Expires 12/31/2010

Termination

Expires 12/31/2010

Termination

Third country fabric rule expires 9/30/2012;

all benefits expire 09/30/2015

Source: The Trade Partnership from USTR, ITC, CRS documents; texts of legislation.

(continued)




CBERA/CBTPA HOPE QIZs


Countries

N/A


Countries

N/A


Countries

N/A


None


None


None

Termination

Expires 9/30/2020

Termination

CBTPA expires 9/30/2018, CBI is permanent

Termination

None



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U.S. Trade Preference Programs: Lessons for Europe from the U.S. Struggle to Get It Right

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