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Thursday, September 30, 2010

Trade Preferences: Economic Issues and Policy Options

Vivian C. Jones, Coordinator
Specialist in International Trade and Finance

J. F. Hornbeck
Specialist in International Trade and Finance

M. Angeles Villarreal
Specialist in International Trade and Finance

Since 1974, Congress has created multiple trade preference programs designed to foster economic growth, reform, and development in less developed countries. These programs give temporary, non-reciprocal, duty-free U.S. market access to select exports of eligible countries. Congress conducts regular oversight of these programs, repeatedly revising and extending them. Two major issues face the 111th Congress: (1) the expiration of two preference programs by December 31, 2010; and (2) possible legislative action on broader reform of the preference programs based on comprehensive reviews in hearings held in both the House and the Senate earlier in this Congress.

Congress established five trade preference programs. The Generalized System of Preferences (GSP) applies to developing countries as a whole. In addition, there are four regional programs established in the Andean Trade Preference Act (APTA), the Caribbean Basin Economic Recovery Act (CBERA); the Caribbean Trade Partnership Act (CBTPA), the African Growth and Opportunity Act (AGOA), and the Haitian Opportunity through Partnership Encouragement (HOPE) Act. Both the GSP and the ATPA are scheduled to expire on December 31, 2010.

Unlike free trade agreements, trade preferences are unilateral, so developing countries do not have to provide reciprocal trade benefits to the United States. To qualify for tariff preferences, however, they must meet certain eligibility criteria, which vary by program. Examples include adopting internationally recognized worker rights, providing adequate protection of intellectual property rights, and operating an open market economy under established multilateral trade rules. In the 111
th Congress, the House Ways and Means and Senate Finance Committees have held hearings on the operation and impact of these programs. In the first session, Congress legislatively extended the GSP and ATPA for a one-year, ending December 31, 2010 (P.L. 111- 124). In the second session, it has extended provisions in the CBPTA and HOPE Act through September 30, 2020 in the Haiti Economic Lift Program Act of 2010 (P.L. 111-171). Other bills introduced include H.R. 1837 and S. 1665, which would extend ATPA to additional countries; and S. 1141 and S. 4101, which would expand product coverage for certain least-developed countries.

Trade preferences are permitted by the World Trade Organization (WTO) under the General Agreement on Tariffs and Trade (GATT) “enabling clause,” which allows members to provide more favorable treatment to developing countries. Other developed countries such as Canada, Japan, the European Union (EU), and Australia provide similar preferences. In the WTO Doha Development Agenda (DDA) round of multilateral trade negotiations, both developed and developing WTO members agreed to provide duty-free, quota-free (DFQF) preferential access to least-developed countries, subject to adoption of the agreement.

Evaluations of the benefits of trade preferences have been mixed. Many developing countries have used tariff preferences to enhance their competitiveness in certain industries, particularly apparel. In other countries, preferences are used to export major commodities such as petroleum products, which may be less supportive of long-term economic diversification and development. Meeting the needs of the least developing countries is a core policy issue that continues to drive the debate over the design of preference programs. Consumers and some U.S. industries and workers benefit from the additional trade, others compete directly with it, so perspectives on trade preferences vary despite their overall costs apparently being small.

This report discusses the major U.S. trade preference programs, their possible economic effects, stakeholder interests, and legislative options.

Date of Report: September 24, 2010
Number of Pages: 38
Order Number: R41429
Price: $29.95

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