This article is about the Generalized System of Preferences (GSP), a unilateral tariff waiver program marketed as helping developing countries grow. More recently, as Congress considers renewal of the program, the marketing has switched to “facilitating supply chain shifts out of China”. This is narrative creation completely untethered to reality.
GSP is best understood with an appreciation of how it came to be a subset of today’s global trade rules regime. Part I of this article discusses the political origins of “trade and development” policy. Part II looks at how GSP was pushed by transnational creditors without the participation or support of developing countries. Part III goes over Congress’ creation of GSP. Part IV notes what is now plain, that the United States is better suited as a recipient of trade and development policy than a purveyor. Part V explains how renewing GSP will do nothing to lessen reliance on China.
PART I: ORIGINS OF "TRADE AND DEVELOPMENT"; PRE-CURSOR TO GSP
“The rich rules over the poor, and the borrower is the slave of the lender.” Proverbs 22:7
Early 20th Century: U.S. trade policy pivots from independence & protection to ensuring foreign nations can repay U.S. debts.
Thanks to protective tariffs, America had become the largest industrial nation in the world by 1900, producing a quarter of the world’s output.
This meant foreign nations and businesses were increasingly running up U.S. debts. Most of this debt was credit extended by U.S. businesses to purchasers abroad. World War I sent this into overdrive. At the conclusion of the war, the Governor of the Federal Reserve Board gave a speech titled “The Problems of the United States as a Creditor Nation” warning that as of April 1917, roughly fourteen billion was likely owed to U.S. lenders.
Creditors in America (banks and multinational enterprise) were increasingly worried about foreign borrowers’ ability to repay dollar-denominated debt. So they began to champion lower U.S. tariffs to promote imports, so that more dollars would flow overseas and in turn, the banks and multinationals’ loans could hopefully be repaid.
The creditors already had a champion in the U.S. House. Earlier, in 1912, the Republican vote had been split when Teddy Roosevelt ran as an independent, resulting in a Democrat sweep of the general election. This was a coup for Democrat Tennessee Congressman, Cordell Hull, “Father of the Income Tax”. Hull attacked tariffs because he viewed them as making it harder for U.S. lenders to be repaid. With Democrats controlling Congress after 1912, Hull and President Wilson drastically slashed tariffs and introduced an income tax with the Revenue Act of 1913.
(Yes: the reason you pay income tax is because big banks thought more imports, more off-shoring was in their interest!)
However due to the war in Europe, off-shoring was negated. And foreign debt to the United States, private and public, continued to surge.
As Hull had hoped, imports did surge right after the war in 1920, leading to ruin for many farmers. The U.S. Tariff Commission reported that 1920 saw “the greatest price decline that has occurred in many years. Agricultural prices in particular were falling precipitously in the face of great surpluses which came upon the market after the war.” Fortunately, President Harding was elected with an all-GOP Congress in 1920. Protective tariffs for agriculture were restored with the Emergency Tariff of 1921. The following year, Congress passed the Fordney–McCumber Tariff Act of 1922, bringing back protective tariffs on most goods. America would prosper:
- Gross National Product from 1923 to 1928 grew roughly three percent annually;
- The national war debt by was shrunk 34 percent;
- By 1927 the unemployment rate was 3.3 percent, and 98 percent of the population paid no income tax.
During this time Cordell Hull was, unfortunately, still ascendant. He became Chair of the Democratic National Committee. He attacked the cancellation and settlements of debts owed to U.S. lenders by war-torn Europe, complaining that they would wind up costing U.S. lenders over three billion dollars. In September 1924, the Dawes Plan went into effect, wherein Wall Street banks lent $200 million to Germany for redevelopment of its industrial base. As the State Department explains: “U.S. financier J. P. Morgan floated the loan on the U.S. market, which was quickly oversubscribed. Over the next four years, U.S. banks continued to lend Germany enough money to enable it to meet its reparation payments to countries such as France and the United Kingdom. These countries, in turn, used their reparation payments from Germany to service their war debts to the United States.”
This was replaced by the Young Plan in 1929, named after its Chairman Owen D. Young, the head of General Electric and a member of the Dawes committee as well. This plan called for another loan of $300 million from Allied creditors, and Germany’s reparations of 121 billion gold marks (almost $29 billion) payable over 58 years.
In 1929, when the U.S. stock crash hit, and U.S. banks pulled their loans from Germany. Prioritizing Germany’s debt obligations played a significant role in the Nazi’s rise to power.
Hull, and his companions around the world who put creditors ahead of producers, helped not only helped lay the foundation for the Great Depression, but exacerbated it. Formal Federal Reserve Chairman Ben Bernanke and other leading economic historians have “largely blamed that catastrophe on the international gold standard.”
Nonetheless, with the Depression in full effect, Democrats swept Congress and the Presidency in 1932. Hull, who was now U.S. Senator, became F.D.R.’s Secretary of State.
In 1934, Hull enjoyed his greatest coup since the Income Tax. He succeeded in having Congress delegate its constitutional authority on tariffs to the President through an amendment to the 1930 Tariff Act, titled “Promotion of Foreign Trade”. In the subsequent decade, Cordell Hull, now Secretary of State, entered into 29 trade agreements, each one cutting U.S. tariffs globally and on a non-reciprocal basis. This insanity is worth stressing: when Hull cut a tariff on a particular product per one of those agreements, the tariff on that product was cut for the whole world, not just the other country.
Insane, yes, unless you’re singularly focused on ensuring foreign borrowers can earn dollars by exporting to the United States to repay their lenders.
The GATT, Bretton Woods, and the World Bank: formalizing the global “Trade and Development” scheme.
At the end of World War II, the United States held roughly two-thirds of the available world gold reserves, and U.S. firms were operating globally. Exporting dollars became so important that the U.S. Department of Commerce was actively restraining U.S. exports and promoting imports so that foreign nations could accumulate U.S. dollars to repay debts.
The United States also led the development of global agreements and institutions to structure trade and development in the few years after the war:
The GATT: Hull’s 29 trade agreements were merged into one mega agreement known as the General Agreement on Tariffs and Trade (GATT) in 1947, which locked in wildly asymmetric tariff rates we still have today. The plan was sold on the premise that all nations in the GATT would gradually eliminate tariffs. This has not happened, nor was it ever in the cards, as we’ll see in Part II below. Seventy-six years later, the United States still has the lowest of all GATT/WTO bound average tariff rates at 3.4%, while most WTO Members enjoy over ten times our average bound tariff rate.
Bretton Woods: The United States would revert to a modified gold standard, and other nations’ currencies were fixed to the U.S. dollar. It also birthed the World Bank, which began operations in 1946, making loans to developing countries.
In addition, half of Germany’s foreign debts (to both public and private lenders) were forgiven per the London Debt Accords.
The group Debt Justice points out that regrettably, this arrangement was unique for Germany, and that following the debt cancellation, “Germany experienced an ‘economic miracle’ with large scale reconstruction, and high rates of growth in income and exports.” Debt Justice also observes that “54 countries are in debt crisis, with external debt payments helping to prevent the provision of decent public services and the meeting of basic public needs.”
PART II: DEVELOPING COUNTRIES WANT TARIFFS; GSP CONCEIVED OF BY MULTINATIONAL CEOs
Early 20th Century: U.S. trade policy pivots from independence & protection to ensuring foreign nations can repay U.S. debts.
Brazil, India, China, South Africa, and other large developing economies were original members of the GATT in 1947. Nonetheless, leaders in these nations increasingly viewed existing economic relations with the West with skepticism. Mao Zedong scorned the GATT, and China left completely in 1950 following its communist revolution. Skepticism was not limited to communists and totalitarians, it was widespread in the developing world during the 1950s and into the 1960s as well as developed nations.
In a 1954 conference to revise the GATT, Australia’s government charged that GATT “favored advanced industrial countries over those dependent mainly on the export of raw materials.” France believed “that tariffs must be kept up to ‘equalize’ social security burdens”, a plain, common sense proposition opposed by Britain and the United States.
Raúl Prebisch was an Argentinian economist known for developing the Prebisch–Singer hypothesis, which formed the basis of economic dependency theory. In 1950, Prebisch became the executive director of the United Nations Economic Commission for Latin America and the Caribbean and released the influential study The Economic Development of Latin America and its Principal Problems, which argued for tariffs and other import restrictions to promote growth. Prebish challenged neoliberal economists and set out to prove what many know instinctively:
In April 1955, twenty-nine nations from Africa and Asia met for the first Asian-African Conference, also known as the Bandung Conference, in Bandung, Indonesia. (Pictured to the header of this article is a Plenary Meeting of the Economic Section, April 20, 1955.) The primary U.S. concern was China’s influence, and more broadly alignment between the developing nations and the Soviet Union.
Countering Communist influence became a major motivator in GATT expansion, and thus more countries were added in the 1950s, even if they had no interest in cutting tariffs. Notably, Japan was admitted to the GATT in 1955, but rejected U.S. overtures to liberalize their economy to global trade. Japan had already created their own national Development Bank to support domestic growth in industry and infrastructure.
More developed nation tariff cuts urged to get more dollars to developing countries to service their debts
As stated above, the United States prioritized getting dollars to foreign countries so they could make debt payments, and viewed promoting exports from those countries to the United States as an expedient route. However, there was still much opposition in the developed world to tariff cuts in many specific areas, particularly agriculture, where the import competition would be overwhelming from another developed country.
At the 12th GATT session in 1957, a “Panel of Experts” was constituted to report on measures for the “expansion of export earnings of the less-developed countries”. The experts recommended that developed countries cut tariffs on many specific commodities to promote export earnings of developing countries.
In November 1961, at a meeting of GATT Ministers, the United States took this report’s recommendations wholesale, and issued its “Proposal for a Declaration on Promotion of the Trade of Less-Developed Countries“. The Proposal noted that the views of developing nations were correct: “The export trade of the less-developed countries is not growing at a pace commensurate with the growth of their foreign exchange needs or with the growth of world trade generally.” It recommended the tariff cuts on the above mentioned products.
Congress created the United States Agency for International Development (USAID) with a large budget to dispense dollars overseas. And then the following year, passed the Trade Expansion Act of 1962, which launched the GATT Kennedy Round trade negotiations. In Title I of that Act, the “Purposes” section, the original lie about general reciprocity was removed; the new purpose was “to strengthen economic relations with foreign countries” and the need “to prevent Communist economic penetration.”
Multinational lenders convince U.S., Europe to jettison GATT’s main rule to keep developing countries servicing debt payments
The first commandment in the GATT is Article I: the “Most Favored Nation” (MFN) clause. While the GATT never offered tariff reciprocity, Article I’s MFN rule did command an equality of treatment. I.e., offer a tariff rate (e.g. 5%) for one GATT country, then every other GATT country is entitled to that same rate. Does it make any sense? No, it never has.
And yet it posed a problem for those insistent on further tariff cuts during the Kennedy Round of the 1960s. So the CEOs of large U.S. banks and multinationals came up with a plan. Why not jettison MFN for developing countries, so that developed countries could unilaterally cut tariffs for developing?
The CEOs behind the idea advanced it through the “Committee for Economic Development” (C.E.D.), which actually still exists today. In the summer of 1967, the group released a study titled “Trade Policy Toward Low-Income Countries”, with a presentation led by Emilio G. Collado, executive vice president of the Standard Oil Company.
Congress duly took its instructions. The Joint Economic Committee Subcommittee on Foreign Economic Policy held hearings the following year dedicated to U.S. policy toward developing countries. As Beth Baltzan, current Senior Advisor to the U.S. Trade Representative, has testified, the lead witnesses were the former Chairman of Bank of America, followed by the Chairman of United Fruit.
In June of 1971, the GATT’s Article I was amended to break the MFN requirement for developing countries. GSP was ready for its debut.
PART III: GSP CREATED; BANKS WIN, PRODUCERS LOSE
On August 8, 1974, President Nixon resigned. 127 days later, Congress sent the ominous Trade Act of 1974 to President Ford’s desk. (See here for other bad elements of this legislation).
Title V of the Trade Act of 1974 created GSP. Reflecting its international executive backers, the focus of GSP completely omitted any notion of concern for the citizens of what the bill still terms “Beneficiary Developing Countries”. Under the GSP system, the President was permitted to waive tariffs for developing nations of his choosing, and the criteria were tailored to how well the country treated foreign investors. Developing countries were expected to provide “reasonable access to the markets and basic commodity resources” and to not “withhold supplies of vital commodity resources from international trade”. (This was a year before Congress banned crude oil exports.)
GSP was opposed by domestic producers and labor groups, who understood correctly that they were being sacrificed for the marginal benefit of the largest banks and transnational enterprises. Countless domestic industries have been offshored and hollowed out by trade and development policies, but Bank of America enjoyed a “marginal” extra stick to hit Argentina with after the nation defaulted on debt the bank had acquired.
In 1984, a labor rights amendment was added to the GSP criteria. It had extraordinarily little effect. According to a 2001 study of all labor actions under GSP, 13 out of 120 beneficiary countries lost their GSP status, “several” of which undertook reforms to regain their status.
In 1985, the United States itself became a net-debtor nation.
GSP was never a permanently authorized program, and it last expired on December 31, 2020.
PART IV: RENEWING GSP WOULD BE THE HEIGHT OF ARROGANCE AND OBLIVIOUSNESS
By the metrics used for trade and development policy, the United States should now be on the receiving end, not a purveyor. As Ambassador Lighthizer, former U.S. Trade Representative, explains, international trade has been “slowly bleeding the country to death” for decades now.
In 2022, America’s biggest global export was crude oil at $116.7B. Add in “fuel oil“, “other petroleum products”, “natural gas liquids” and “gas-natural” for an additional $251.8B, totaling $368.5B. 17% of U.S. exports. Nothing comes close. We’re the gas station country now.
In 2023, America became a net food-importer, likely for the first time in our history. And simply looking at the trade balance hides how bad the situation is. Fruit and vegetable producers, ranchers who bring us meat, dairies that give us milk, fishermen who bring us seafood, they’re all being wiped out. But we’re excelling in soybeans and corn, exporting record amounts.
While GSP has expired, U.S. Customs and Border Protection (CBP) has enabled importers to nonetheless flag their imports as “GSP eligible”. This was done under the expectation that if GSP is renewed, tariff refunds will be awarded retroactively. This will result in a transfer of billions of dollars from the U.S. Treasury to U.S.-based importing entities (the importers of record).
If the goal is to help developing countries, why not use those billions of American taxpayer dollars to forgive debt instead? Why give it to the importers?
PART V: RENEWING GSP DOES NOTHING TO FIGHT CHINA
Importers claim renewing GSP will “facilitate supply chain shifts out of China.” This is false, because all the top products imported under GSP are also eligible for de minimis, which waives tariff collection and even basic import filing obligations for the whole planet, including China.
The same Brazilian, Indonesian, and Thai goods imported with GSP are already imported duty-free from China under de minimis. So, no producer sourcing from China will leave due to GSP, there is no financial incentive to do so.
In fact, renewing GSP would delight China. This is because the rules of origin for GSP are astonishingly weak; only 35 percent of the appraised value must be from the developing country. And getting to that 35 percent is very easy. “Research, development, design, engineering, and blueprint costs” count to the 35%, as do the labor costs of “supervisory, quality control, and similar personnel”. GSP’s rule of origin is incomparably weaker than USMCA’s detailed requirements.
For example, a Chinese firm could move basic final assembly to Cambodia, send one national to supervise the assembly operations, and on the basis of that supervisory salary, declare the merchandise as a Product of Cambodia eligible for U.S. duty free treatment.
Renewing GSP undermines other, more modern preferential tariff arrangements in our hemisphere including our CAFTA-DR trade agreement (Costa Rica, El Salvador, Guatemala, Honduras, Nicaragua, as well as the Dominican Republic.), as well as FTAs with Chile, Peru, Colombia, and Panama.
If Congress is serious about strengthening supply chains with friendly developing nations, the better immediate policy is to eliminate de minimis and raise tariffs on China.
Then, considering our precarious status, Congress should look to protective tariffs more broadly to promote the development we squandered by prioritizing creditors over producers.