OTN UPDATE is the flagship electronic trade newsletter of the Office of Trade Negotiations (OTN), formerly the Caribbean Regional Negotiating Machinery (CRNM). Published in English, it is a rich source of probing research on and detailed analyses of international trade policy issues and developments germane to the Caribbean. Prepared by the Information Unit of the OTN, the newsletter focuses on the OTN, trade negotiation issues within its mandate and related activities. Its intention is to provide impetus for feedback by and awareness amongst a variety of stakeholders, as regards trade policy developments of currency and importance to the Caribbean.

http://www.crnm.org

The Andean Trade Promotion and Drug Eradication Act (ATPDEA) as well as the Generalized System of Preferences (GSP), two of six of the U.S.’s trade preference programs for developing countries, face an uncertain future. While both preference programs were scheduled to expire on December 31 2010, only the ATPDEA was allotted a short-term extension until February 12, 2011. The failure to renew an extension for the GSP has meant that the advantages to the beneficiaries of merchandise trade under this program have been suspended. As the deadline of the ATPDEA extension draws near, it is also unclear at this time how the ATPDEA or the GSP for that matter will be treated thereafter.

At one stage, a proposal was drafted within the US House of Representatives to extend both the GSP and the ATPDEA until June 30 2012. This proposal was articulated in the omnibus trade bill H.R 6517, also known as the Levin Bill, which passed in the House on December 15 2010 but floundered in the Senate.

One of the reasons that the proposal did not attract Congressional consensus is that the GSP program in particular had attracted negative attention from influential private sector interests groups. The latter have insisted that the GSP program presents a threat to American Jobs and can further hurt the economy – a politically weighted argument that would not go unheeded in the current U.S. financial climate. Specifically, Senator Jeff Sessions, the republican representative of Alabama, was not in favour of the extension of the GSP as proposed under the Levin Bill because it granted duty-free access to certain sleeping bags from Bangladesh that compete with a product made by one of his constituent companies Exxel Outdoors, which assembles sleeping bags in Alabama. In order to protect the interests of his constituent, Senator Sessions had pressed for an amendment to the Bill and ultimately the preference that would exclude certain types of Bangladeshi sleeping bags from the GSP.

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SPECIAL OTN Update

February 7, 2011

OTN UPDATE is the flagship electronic trade newsletter of the Office of Trade Negotiations (OTN), formerly the Caribbean Regional Negotiating Machinery (CRNM). Published in English, it is a rich source of probing research on and detailed analyses of international trade policy issues and developments germane to the Caribbean. Prepared by the Information Unit of the OTN, the newsletter focuses on the OTN, trade negotiation issues within its mandate and related activities. Its intention is to provide impetus for feedback by and awareness amongst a variety of stakeholders, as regards trade policy developments of currency and importance to the Caribbean.

http://www.crnm.org

From a policy perspective, any Congressional permeability to the pressure exuded by Exxel can have a destabilising effect on the future of the trade preference programs in the long term as any company which feels itself disadvantaged may seek to continuously develop exceptions under these programs that would protect its market interests.

On the other hand, the objection by Senator Sessions, illustrates a perennial conflict between trade preference programs and the competing interest of indigenous U.S. firms. While the preference programs can engender economic development in developing countries, in order to continue to be politically saleable, they would need to be perceived to be consistent with American policy goals. In recent times, one of those policy goals, which has been acutely politically sensitive, has been the creation of jobs for U.S. workers within the U.S. While there is a perception that the GSP and other trade preference programs displace American jobs, the displacement potential of trade preference programs is quite minimal as many of the countries that export to the U.S. under the GSP program are least-developing countries (LDCs) and the products imported into the U.S from LDCs account for less than 1% of total U.S non-oil imports. 1

Where adjustment costs exist as a result of the trade preference programs, such costs can be mitigated in part through the Trade Adjustment Assistance (TAA) program, which is designed to help trade-affected workers who have lost their jobs as a result of increased imports or shifts in production out of the

United States. As designed, the program extends income support and training for U.S workers. However, the benefits under the TAA were set to expire at the beginning of January 2011. Under the proposed Levin Bill, the extension of the GSP, the ATPDEA and the TAA were placed together as a package.

Along with the ATPDEA, an extension was secured for the TAA until February 12, 2011 as part of a package deal. At this time, disparate views on the TAA are also stymieing further progress necessary to secure a more permanent arrangement for both the ATPDEA and the TAA. For example, while some members of Congress may be willing to extend the ATPDEA, they have refused to advance an extension for the TAA unless the U.S. - Columbia free trade agreement (FTA), which has been regarded as problematic for the Obama Administration, is advanced.

The lapse of the GSP and the indefinite status of the ATPDEA beyond February 12, 2011 have created some disturbances amongst the US business sector as well as for beneficiary developing countries. For American businesses, in particular, small businesses that rely on the importation of products under these programs, the loss of preferential access under these programs could imperil their competitiveness. On the other hand, without the preference programs, many of the export sectors from the beneficiary developing countries would experience challenges in remaining competitive in the U.S market and in remaining viable.

With respect to the GSP, this is not the first time that a lapse has occurred. International headlines have reflected that the mood even in beneficiary

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1See Trade Preference Program Reform: Questions and Responses for Congressional Staff, Center for Global Development. Available at http://www.cgdev.org/doc/Trade/CGD_Trade_Preference_Reform_Congressional_%20Q_and_A.pdf

OTN UPDATE is the flagship electronic trade newsletter of the Office of Trade Negotiations (OTN), formerly the Caribbean Regional Negotiating Machinery (CRNM). Published in English, it is a rich source of probing research on and detailed analyses of international trade policy issues and developments germane to the Caribbean. Prepared by the Information Unit of the OTN, the newsletter focuses on the OTN, trade negotiation issues within its mandate and related activities. Its intention is to provide impetus for feedback by and awareness amongst a variety of stakeholders, as regards trade policy developments of currency and importance to the Caribbean.

http://www.crnm.org

Opportunity Act, and the Caribbean Basin Economic Recovery Act.

The debate has so far been concentrated on identifying certain principles upon which the reform or improvement of the programs should be based. For example, taken together, the US preference programs create a complex system of differing rules of origin and product exclusions that make it challenging for beneficiary countries and importers to navigate. There is also a plethora of eligibility criteria requirements which differ across the programs and in some cases include conditionalities which are archaic and bear no relevance to current geo-political or economic considerations. It has been proposed that increased flexibility, simplification and harmonization of the programs’ rules of origin, product coverage and eligibility criteria are crucial elements that would make the market access of the beneficiary countries more meaningful and render the preference programs system more transparent and more attractive to importers.

It has also been proposed that the preference programs should have firm graduation provisions that would impel beneficiary countries to engage in a more reciprocal trading relationship when such countries have attained a certain level of development. However, with respect to graduation, finding appropriate optimal benchmarks for graduation would be an important consideration to ensure that beneficiaries are not graduated based on the performance of isolated indicators. Moreover, the ability of a former beneficiary country to participate in a reciprocal trade arrangement would depend on a number of variables including the institutional capacity of that country to enable the implementation of reciprocal commitments.

countries is that of ‘business as usual’ following the expiration of the program on December 31 2010.2 It appears that the expectation is that, following precedent, at some point the GSP will be reauthorized retroactively and that all duties paid will be reimbursed. However, it is not certain at this time that should the GSP be renewed that it will be implemented retroactively. 3

Even with the hope of retroactive renewal of the GSP, the lapse of the preferences would make it difficult for producers in beneficiary countries as well as US importers to plan ahead for the long term. In the case of ATPDEA, the scenarios would be similar and the unpredictability of the fate of the program could undermine the credibility of the program as an effective trade tool.

Reform of PreferencePrograms still pending Notwithstanding the above details, the future of the trade preference programs will be linked to their reform. Apart from the annual review process which is undertaken for trade preference programs, the performance, operation and potential reform of the preference programs have been the subject of debate. The debate has largely focused on an examination of how GSP operates in relation to the Andean Trade Preference Act, the African Growth

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2 See “It’s ‘business as usual’ for RP exporters amid US GSP renewal” U.S. News Las Vegas, January 13, 2011. Available at http://www.usnewslasvegas.com/business/its‐business‐as‐usual‐for‐rp‐exporters‐amid‐us‐gsp‐renewal/ 3 See GSP Expiration: Frequently Asked Questions. Available at http://www.ustr.gov/about‐us/press‐office/fact‐sheets/2010/december/gsp‐expiration‐frequently‐asked‐questions

OTN UPDATE is the flagship electronic trade newsletter of the Office of Trade Negotiations (OTN), formerly the Caribbean Regional Negotiating Machinery (CRNM). Published in English, it is a rich source of probing research on and detailed analyses of international trade policy issues and developments germane to the Caribbean. Prepared by the Information Unit of the OTN, the newsletter focuses on the OTN, trade negotiation issues within its mandate and related activities. Its intention is to provide impetus for feedback by and awareness amongst a variety of stakeholders, as regards trade policy developments of currency and importance to the Caribbean.

http://www.crnm.org

There is some political support from a range of interest groups for the reform of the trade preferences and it is likely that the openness of Congress to the reauthorization of such preferences for longer time frames would be linked to some extent to the completion of this reform process to the satisfaction of the divergent interest groups. However, the preference reform agenda has been suspended indefinitely because Congressional supporters have been expending all energies in frenzied attempts to revive the GSP and to obtain an extension for the ATPDEA.

The Implications for CARICOM

The successful reform of the programs could enhance the overall credibility of the programs as trade development tools for developing countries. This boost to credibility could also assist U.S. consensus building amongst WTO members which will be necessary to obtain WTO waivers for most of the programs. However, increasingly, WTO members have been showing decreased tolerance for unilateral preferential programs. For example, prior to the renewal of the Caribbean Basin Economic Recovery Act (CBERA) WTO waiver in March 2009, attempts by the U.S. to secure a waiver were blocked because of objections raised by a number of WTO members.

While the renewal of CBERA’s waiver has secured unilateral market access for Caribbean beneficiary

countries until 2014, it is uncertain how the further renewal of the program’s waiver will be considered by the WTO membership thereafter. The reform of the preference programs has been especially concerned with improving the programs as a development tool for least developed countries. Within CARICOM, Haiti is the only LDC and efforts have been revamped to assist Haiti with its economic recovery through the HOPE II preference program. However, the World Bank classification of CARICOM countries as middle income and high income countries may not readily convince all WTO members that the region’s development needs served by the trade preference program should outweigh their own concerns related to their perception that US unilateral preferential trade regimes with the Caribbean, and other countries present unfair competition to their local producers.

The future of the Doha Round of negotiations may also have an impact. For some developed and developing countries, further tolerance of U.S trade preference programs may be contingent upon the extent to which the final deal of the Doha negotiations will be in sync with their own interests. At the same time, from the U.S perspective, there may be an underlying concern that the accessibility of its preference programs to advanced developing countries has the potential to compromise its interests in the Doha round. The idea is that unilateral access to the U.S. market may not be providing an incentive for advanced developing countries to make further market access concessions to developed countries such as the U.S.4

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4 See Opening Statement of Senator Chuck Grassley Hearing, “U.S. Preference Programs: Options for Reform” Tuesday, March 9, 2010. Available at http://finance.senate.gov/imo/media/doc/prg030910.pdf

OTN UPDATE is the flagship electronic trade newsletter of the Office of Trade Negotiations (OTN), formerly the Caribbean Regional Negotiating Machinery (CRNM). Published in English, it is a rich source of probing research on and detailed analyses of international trade policy issues and developments germane to the Caribbean. Prepared by the Information Unit of the OTN, the newsletter focuses on the OTN, trade negotiation issues within its mandate and related activities. Its intention is to provide impetus for feedback by and awareness amongst a variety of stakeholders, as regards trade policy developments of currency and importance to the Caribbean.

http://www.crnm.org

However, this is not to suggest that, should the U.S. reconsider the extension of its preference programs to secure its negotiating leverage in the multilateral arena, the Caribbean will be the target. Market interests aside, the Caribbean’s economic stability is still relevant to U.S geo-politics and security policy objectives. For this reason, the protection of its trade relationship with its Caribbean neighbours is still important to U.S objectives. The importance of the Caribbean-U.S. relationship was illustrated by the actions of Congress following the January 2010 earthquake which devastated the Republic of Haiti. The U.S. Congress promptly sought to implement measures that would support Haiti’s economic recovery. To revitalize one of Haiti’s key industries, the apparel industry, Congress enacted the Haiti Economic Lift Program (HELP) Act in May 2010. This key Federal legislation not only secured preferences for Haiti by extending the Haitian Hemispheric Opportunity through Partnership Engagement Act (HOPE Act) but it also extended preferences for all of the beneficiaries of the Caribbean Basin Trade Partnership Act (CBTPA) until 30 September 2020.

While that extension is advantageous for the CARICOM region, it is uncertain that the U.S will seek indefinitely to treat its trading relationship with CARICOM under the rubric of unilateralism rather than reciprocity.

In planning its longer-term economic and trading relationship with the U.S., the CARICOM region will have to consider the current challenges being experienced within the U.S Congress to preserve the authorization of the preference programs, particularly with regard to the GSP, and the reluctance of WTO members to facilitate WTO waivers. 5 The region will also need to reflect on its

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own experience with the CBI programs to determine the extent to which such arrangements fulfil its own needs and continue to be relevant to its evolving trade and economic policy.

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5 Some CARICOM CBI beneficiary countries have also utilized the preferences under the GSP. For further reading see “Eighth Report to Congress on the Operation of the Caribbean Basin Economic Recovery Act”, Office of the United States Trade Representative, December 31, 2009. Available at http://www.pdfchaser.com/Eighth‐Report‐to‐Congress‐on‐the‐Operation‐of‐the‐Caribbean‐Basin‐....html#