The Generalized System of Preferences (GSP) is a preferential tariff system that was designed to help developing countries grow their export industries.
GSP exempts certain members of the World Trade Organization (WTO) from rules that force all member nations to treat imports coming from all other member states equally. In effect, GSP provides duty-free treatment to goods of designated countries without giving the same benefits to rich countries.
The program, which was authorized under the Trade Act of 1974, currently affects more than 3,500 products from 120 developing countries/territories.
Supporters of the GSP say it benefits US businesses by giving them a source of low-cost parts outside of China. Despite support from lawmakers on both sides of the aisle, Congress failed to reauthorize the program before its expiration on December 31st, 2017.
Critics of the program argue that countries like India have long abused the system by ignoring the rules and that past administrations have failed to enforce those rules. “There’s nothing developing about India or China any more – 600 million people are in the middle class in India and that’s probably three or four times the size of our middle class,” argues Dan DiMicco, a trade adviser to President Trump.
Thanks to the GSP, developing countries saved more than $700 million on trade in 2016.
DiMicco has long argued that beneficiary countries are not living up to their end of the deal by providing US companies with reciprocal access. “It’s a one-way street. It’s not supposed to be a one-way street.”
India, for example, routinely blocks US imports through a combination of taxes, high tariffs, and corrupt bureaucracy. India is also starting to build up a trade surplus against the US like China once did. This needs to be nipped in the bud before it gets out of hand.
According to the Bureau of Economic Analysis, India has garnered more than $33 billion in trade surplus with the United States over the past year.
Bilateral trade between India and the US has doubled over the past 10 years, reaching $114 billion in 2016. Over the same period, the US trade deficit with India tripled to reach $27 billion.
There is plenty of room for India-America trade to grow, but it cannot be allowed to grow in the same lopsided way that China’s did.
As Huffington Post writers Ian Fletcher and Jeff Ferry point out, it is quite possible for India to do just as much economic damage to America as China did if it is not nudged towards the path of balanced trade. “The US simply cannot afford to have two giant Asian nations, with a combined population eight times its own, driving up its trade deficit year after year.” In addition, fair trade between India and the US would “set an extremely valuable precedent and serve as a standing rebuke to Beijing.”
Members of Congress have promised to address the issue in January. In the meantime, countries formerly affected by the GSP will have to pay duties until it is renewed. Last time, the process took nearly two years.
Like many of our trade deals, the Trump Administration has suggested the GSP program be renegotiated.
Trump pulled us out of the TPP last January, and the 11 remaining members are still trying to finalize an agreement. Trump has threatened to pull out of NAFTA, but has refrained from doing so. The sixth round of NAFTA negotiations will begin on January 23rd.
Author’s Note: It seems like President Trump plans to renegotiate all of America’s unbalanced trade agreements. Trump is excellent at negotiations, so we should get good deals.
Unfortunately, America has a history of allowing lopsided agreements in order to “help” developing countries. These deals come at the expense of American businesses and often backfire for the trading partner.
It’s fine to make the occasional concession to meet a political goal, but we have done that far too often. Trade should be fair for both sides. Free trade is best, but only when the markets are free on both sides. China is not a free state and free trade is not possible, so we have to make sure our tariffs and restrictions are equivalent.