Time to Restrict GSP Benefits to Fight Trade Mercantilism

At the heart of the United States’ Generalized System of Preferences (GSP) lies a recognition that free trade supports economic growth in developing countries, and such trade can be mutually beneficial. However, with their duty-free access to U.S. markets comes the responsibility of abiding by free and fair trade practices. Yet, a number of the developing countries that benefit from the GSP—most notably Brazil, India, Indonesia, and Thailand—have enacted a broad range of trade barriers and other market distortions that hurt U.S. firms and workers, and contravene the GSP’s requirement that they provide reasonable and fair market access to U.S. firms and their goods and services. It is time for the U.S. government to remove the GSP benefits enjoyed by nations that utilize mercantilist trade policies, including those that enact modern barriers to trade, such as data localization.

Recent U.S. trade policy debates have focused on what trade enforcement tools the United States can use to pursue legitimate trade concerns while abiding by international and domestic trade laws, such as in the context of responding to Chinese innovation mercantilism. Denying certain nations GSP status should clearly be one of these. While the GSP only applies to a subset of developing countries, its duty-free access to U.S. markets represents a major benefit to many trading partners that clearly do not provide fair and reasonable market access or treatment of U.S. firms and their goods and services. Through this leverage, the United States should force these countries to roll back trade barriers and other distortions. In doing so, the goal is not the punitive removal of these benefits for developing countries, but to fully enact the rules already clearly set out as part of this program, which the beneficiary countries have long been aware of, as they have enjoyed the corresponding benefits without fulfilling their accompanying obligations.

To its credit, the Trump administration has already taken several steps in this direction, including GSP reviews of India, Indonesia, and Kazakhstan. In October 2017, United States Trade Representative (USTR) Robert Lighthizer announced his agency would step up GSP enforcement:

Countries receiving U.S. trade benefits must meet the eligibility criteria established by Congress.… By creating a more proactive process to assess beneficiary countries’ eligibility, the United States can ensure that countries that are not playing by the rules do not receive U.S. trade preferences. This sets the correct balance for a system that helps incentivize economic reform in developing countries and achieve[s] a level playing field for American businesses.

This report provides background on the GSP, its trade-related criteria, and GSP recipients engaged in systemic mercantilism. It makes the following recommendations:

• The United States should more directly link and be willing to use the trade issues raised in USTR reporting, especially the National Trade Estimates of Foreign Trade Barriers (NTE) report and the “Special 301” Report on intellectual property, to self-initiate reviews of whether GSP beneficiaries are breaching the program’s trade, market access, or intellectual property criteria.
• USTR should continue to expand the types of market-access issues it assesses to include technology and digital when evaluating whether a country provides fair and reasonable market access and working conditions to U.S. firms and their goods and services. This should include situations wherein countries require U.S. firms to only store data locally (i.e., data localization policies), such as in India and Indonesia.
• If USTR’s efforts to use GSP reviews to encourage trading partners to address trade issues within a reasonably short time period are unsuccessful, USTR should partially or fully suspend or withdraw that country’s access to GSP benefits—as this has clearly dragged on for far too long for many GSP beneficiaries. For instance, since 2009, Argentina, India, Indonesia, and Thailand have all been on USTR’s annual Special 301 Report’s Priority Watch List of countries with an especially poor record of protecting and enforcing intellectual property rights. Similarly, Brazil has regularly appeared on the second-tier Watch List, while Ukraine has been on the Priority Watch List more often than not.
• USTR should more strictly enforce the GSP’s “graduation” criteria (based on income status and trade competitiveness and development), starting with revoking Turkey’s access to the program.