On Tuesday, September 8th, a standing room-only crowd gathered at the Montlake Library to hear Congressman Jim McDermott and Kimberly Ann Elliott of the Center for Global Development discuss opening markets for the poor by reforming and expanding trade preferences.
The United States currently provides special access to its markets to products from developing countries through a few different trade preference programs. The program that reaches the most countries is called the Generalized System of Preferences, or GSP, and this program covers the fewest products and has the most restrictions. It has been in place since the 1970s and needs to be renewed by Congress every few years- in fact, it expires at the end of 2010, so if Congress doesn’t act, many countries will lose their special access to the U.S. market. Other trade preference programs are for specific geographic regions, which are the African Growth and Opportunity Act (AGOA), the Andean Trade Preference Act (ATPA), and the Caribbean Basin Initiative (CBI). There are also special trade preferences for Haiti.
Under AGOA, African least developed countries (LDCs) get the most product coverage and the most flexible rules of origin of any U.S. trade preference program. As Kim Elliott pointed out in her presentation, AGOA covers about 98% of products for African LDCs, and includes flexible rules of origin on apparel items, which is where AGOA has had the greatest economic impact. She noted that the main omission from AGOA is in the area of agricultural goods, where African countries are still subject to U.S. quotas in a number of key products, not to mention competition from subsidized U.S. cotton. Agriculture is very important to African economies, with about 60-70% of the workforce directly involved in agricultural production. AGOA was initially passed in 2000, and is set to expire in 2015 unless Congress renews it.
Kim Elliott’s presentation included the recommendations and findings of the CGD Working Group on Trade Preference Reform. They have five main recommendations:
- Expand coverage to all products from all least developed countries. The reason for expanding coverage to all products is that even when only 3% of products are excluded (as in the current Doha agreement), countries have room to leave out all of the products in which an LDC is most competitive. The Working Group found that allowing 100% product access to all LDCs would have a minimal effect on competing producers in rich countries – LDCs account for less than 1% of non-oil imports in rich countries.
- Relax restrictive rules of origin. Rules of origin can prevent developing countries from taking advantage of preferential market access, because they are often vague and opaque, and commonly stipulate that all inputs must come from one country. Poor countries must be able to source inputs globally, as they do not have the capacity (or the market size) to vertically integrate their industries. They also do not have the resources to wade through heavily bureaucratized processes to prove origin.
- Make trade preferences permanent and predictable. Investors need to know that the market access will last long enough for them to get a return on their investment. Without this guarantee, they will not invest in a country. Most poor countries need foreign investment to spur growth.
- Promote cooperation between countries giving and receiving preferences. This includes trade capacity building to help countries improve their infrastructure to promote export growth, and identifying other non trade barriers to exports, such as difficulty meeting technical standards for imports. Kim Elliott pointed out that African agriculture is a good example of this- African agricultural exporters have a difficult time meeting U.S. sanitary and phyto-sanitary standards, so they export very little to the United States. These same exporters are able to meet European standards, which are no less strict than U.S. standards from a safety perspective, but for some reason they are easier for Africans to meet. 18% of European agricultural imports come from Africa, where less than 2% of U.S. agricultural imports do.
- Encourage advanced developing countries to implement trade preference programs that adopt the above principles. Advanced developing countries such as Brazil, China, Turkey, and India have recently announced trade preference programs for LDCs. These programs would have greater impact if they adopted the above principles.
Congressman McDermott added his thoughts on why better market access for LDCs is important- and what else is needed to make market access work. He said that it is important to help poor people from all developing countries, not just those from a certain geographic region. During the question & answer session, he remarked that trade and development are complex, and when large projects or policy changes are undertaken without an appreciation of the complexity involved, unintended consequences may arise. He offered the example of building dams in developing countries without regard for the potential consequences- something that was problematic in Ghana and elsewhere. Congressman McDermott has been working on trade preferences for developing countries for many years- he is the author of AGOA, which he first introduced in 1995 and it took five years to pass Congress and get signed into law. He has since introduced the New Partnership for Trade Development Act of 2009, which includes some provisions similar to the CDG working group’s recommendations.