US ‘trade as aid’ needs flexibility on labor and the environment

Tomorrow, the Senate Finance Committee will hold hearings on updating the Generalized System of Preferences (GSP). It is a “trade as aid” tariff preference for developing countries, but the program expired in 2020. 

The hearings are clearly meant to whip up support for its renewal. But they are probably not worth the candle unless Congress takes a new approach to GSP’s conditionality. 

GSP renewal bills have called for strict language on getting “beneficiary” countries to comply with labor and environmental standards. But the program is at risk of disuse and isn’t the source of leverage it once was. 

To encourage beneficiaries to improve labor and environmental standards, the legislation should allow firm- and industry-level reviews to supplement country-wide assessments. Such an approach would “pull” labor and environmental standards higher, rather than “push” developing countries out of the program entirely. This would help keep GSP from sliding into irrelevance. 

GSP was included in the 1974 Trade Act and launched in 1976. The program extends tariff-free access to 3,500 goods imported from designated developing countries. This isn’t a free lunch, however. GSP comes with conditions. The most politically salient of the 15 “eligibility” criteria concerns labor and environmental standards. 

Over the past few years, Congress has taken up several GSP renewal bills, like the Generalized System of Preferences and Miscellaneous Tariff Bill Modernization Act of 2021 and the American Worker and Trade Competitiveness Act. One of the main points of emphasis has been to insist on “effective” implementation and enforcement of labor and environmental standards, which sets a higher bar than the phrase “taking steps to” implement or enforce found in previous legislation, for example. 

Adding this tougher language requires new thinking on how to conduct reviews of beneficiaries’ compliance. Otherwise, foreign exporters will abandon GSP.   

GSP is already underutilized, and more conditions will make things worse. Average utilization on a country-product-year basis is only 60 percent. For some of the poorest beneficiaries, like Ghana, Lesotho and Sierra Leone, it’s just 27 percent, 38 percent and 36 percent respectively.  

This underutilization owes to the fact that GSP’s margin of preference, relative to U.S. most-favored nation rates at the World Trade Organization, averages a mere 2.4 percent, per my assessment of WTO data. As a result, exporters in developing countries have little incentive to use the program, given the risk of having their country suspended. GSP’s margin of preference ranges from a low of 0 percent to a high of 35 percent.  

Even if foreign exporters can access the larger reward of a preference margin closer to 35 percent, the problem is that a beneficiary’s compliance with labor and environmental standards is typically assessed countrywide and not at the firm or industry level. This disincentivizes foreign exporters from aspiring to do better when their government either cannot or will not act. 

Back in 2012, the United States International Trade Commission surveyed the evidence on whether tariff preferences improved developing countries’ compliance with labor standards. Two findings stood out: First, ratifying International Labour Organization conventions does not improve standards, and second, foreign exporters selling to end-users in rich nations abide by higher standards than import-competing firms in the same countries. 

Taken together, these findings suggest that GSP should put greater emphasis on trade as a “pull” factor at the firm and industry level, particularly where the preference margin is low, rather than just focus on sanctioning as a “push” factor at the country level. 

Congress wouldn’t have to look far to find a template for evaluating compliance with labor standards at the firm or industry level. Section 307 of the Tariff Act of 1930 works this way. Acting on petitions, U.S. Customs and Broder Protection looks into allegations against firms and industries and can issue a withhold release order that stops and seizes imports for noncompliance. 

Since 2016, and especially after the Uyghur Forced Labor Disclosure Act of 2020, more withhold release orders have covered whole geographies. Yet, especially where GSP’s preference margin is small, this targeting of firms and industries is likely to do more to upgrade beneficiaries’ labor standards than focusing only on government legislation.  

A similar approach could be taken on environmental standards. Consider, for example, the European Union’s Regulation on Deforestation-Free Products, which covers trade in cattle, cocoa, coffee, palm, rubber, soya and wood. The regulation requires foreign exporters to submit “due diligence” statements on risk assessments, which are then shared along the supply chain. 

Traceability is confirmed via geolocation data, for example, and reviewed by EU national authorities. There are also provisions to address matters on a countrywide basis when necessary. 

Beneficiaries are rightly concerned that labor and environmental standards are protectionist. Moreover, compliance costs can be especially burdensome for small exporters, which generally lack the capacity of large ones. 

But with low-cost blockchain technologies and artificial intelligence making it easier to audit supply chains, Congress should assist foreign exporters in rolling out these technologies. This would help to offset the view that GSP’s labor and environmental standards are Trojan horses of protectionism.

Marc L. Busch is the Karl F. Landegger Professor of International Business Diplomacy at the Walsh School of Foreign Service, Georgetown University, and a global fellow at the Wilson Center’s Wahba Institute for Strategic Competition. Follow him on X @marclbusch.