On April 22 and 23, the Senate Finance and House Ways and Means Committees approved legislation to renew the Generalized System of Preferences (GSP), a trade program that removes tariffs on nearly 5,000 products from 126 developing countries.
This is the second time in the 20 months since the program’s expiration that Congress will consider a bill to renew GSP. The legislation approved by the committees would reauthorize the program until just 2017 and refunds importers the duties they paid during the program’s lapse.
Renewal of this important trade program is long overdue. U.S. importers have been paying nearly $2 million per day in duties since the program expired on July 31, 2013. However, the proposed renewal period is too short and jeopardizes the viability and effectiveness of the program. Instead of retroactively reauthorizing the program and refunding importers for duties paid, Congress should extend the program for the long term.
The most recent attempts to renew GSP have been surrounded by controversy over budgetary offsets. GSP renewal around the time of expiration in July 2013 was blocked by concerns that proposals to pay for the program, an increase in customs user fees and changes to the corporate income tax, were simply budgetary gimmicks. As a result, efforts at reauthorization stalled throughout 2013 and 2014.
The most recent legislation, which will be considered by the House and Senate in the upcoming weeks as part of a larger trade package, retroactively renews GSP through December 31, 2017, and refunds duties paid during the 20 months of expiration.
Legislation on a retroactive renewal of GSP is nothing new. Since 1990, GSP has been renewed 11 times, eight of which have been retroactive—and for which importers received refunds for the duties paid during the lapsed periods. Most recently, these refunds occurred during the reauthorizations of 2001 and 2011, when GSP was renewed for five years and 21 months, respectively.
While the longest GSP renewal since 1990 occurred retroactively, retroactive renewal has generally not featured long extensions. Since retroactive renewal requires that importers be refunded for duties paid during the program lapse, this generally limits the revenue flexibility that Congress has to renew the program for a longer period of time. During the 1990s, Congress let GSP expire seven times, later renewing it in each case. Since each extension was retroactive, the real renewal period, from when the law was signed to when GSP expired again, was often shorter than one year. This combination of retroactive renewals and frequent, short renewal periods led to program uncertainty and an overall stagnation of GSP imports between reauthorizations in 1992 and 2001.
Long-Term Renewal Means Greater Program Usage
The uncertainty inherent in short-term renewals is clear from the statistics. Throughout its history, GSP has been renewed three times for periods greater than five years: in 1974, 1984, and 2001. The program was renewed for 10 years and 8.5 years in 1974 and 1984, respectively. In 2001, it was renewed for five years. While data on GSP imports is not available before 1989, it is clear that GSP imports increased substantially between 1989 and 1992. During this period, imports under the program increased by nearly 70 percent. Furthermore, after the 2001 renewal, GSP imports more than doubled. This strong import growth shows that program reliability and certainty seem to go a long way toward increasing overall GSP imports.
This is particularly clear when compared to GSP imports during the 1990s, when the program was renewed seven times in fewer than 10 years, often retroactively. Between the 1992 renewal and the 2001 expiration, GSP imports actually declined by 6 percent. This uncertainty, along with faults in other parts of the program’s design, has led to stagnation of GSP imports over the past few decades, particularly if excluding mineral oil products, which have been one of the largest components of imports.
GSP Applies to All Importers, Not Just Current Ones
The combination of retroactive renewal and short-term renewal periods has hurt GSP imports overall, and threatens the program’s viability and future utilization rates. Retroactive renewals that come at the expense of long-term renewals essentially favor current importers over future ones, a policy that does not promise to increase long-term utilization. If it comes to a trade-off between retroactive renewal (refunding importers for duties paid during the program lapse) and long-term renewal, Congress should choose the latter.
Balancing renewal in favor of long-term policy choices increases certainty not only for current and past GSP utilizers, but also for future importers who may wish to utilize the program, but question doing so because of its uncertain nature. Passing GSP and using the resources dedicated to refunding importers in order to extend the program for a longer term would be consistent with the guidelines originally set out by the GSP mandate: to promote economic development, trade, exports, and trade liberalization with developing countries.
Time for a Long-Term GSP Renewal
With proposed legislation to renew GSP through 2017 approaching consideration in the House and Senate, this Congress has the opportunity to start its trade policy agenda off on the right foot. As Congress moves forward, it should:
GSP has been at the center of U.S. economic engagement with the developing world for the past 40 years. It is vital that Congress renew this program for the long term to provide a dynamic and reliable trade program that best serves current and future importers and trade partners.—Ryan Olson is Research Associate in Economic Freedom in the Center for Trade and Economics, of the Institute for Economic Freedom and Opportunity, at The Heritage Foundation.