Original by CPA Chief Economist Jeff Ferry published in Foreign Policy News
Early in June, the Senate passed its signature “China bill,” a wide-ranging piece of legislation intended to counter Beijing’s industrial rise and spur U.S. technological competitiveness. Included in the bill was a reauthorization of the longstanding Generalized System of Preferences (GSP), a tariff program designed to help developing countries.
As the House now takes up similar legislation, members of Congress should consider the growing body of economic research that shows why the GSP program—and trade liberalization more generally—can actually harm the developing countries it is intended to help. In fact, these programs often harm the poorest citizens in these countries. This is because trade liberalization programs often destabilize and disrupt traditional economic relationships in developing nations. This can lead to sudden price declines in agricultural goods or job loss for unskilled workers, causing hardship for the poorest of the poor in developing countries.
A ground-breaking paper by economist Petia Topalova looked at India after the trade liberalization of the early 1990s. She found that trade liberalization contributed to poverty due to the removal of tariffs on agricultural goods. This caused job losses in the poorest areas in India. Topalova noted that trade liberalization “led to an increase in [the] poverty rate and poverty gap in the rural districts where industries more exposed to liberalization were concentrated. The effect is quite substantial.”
Other economists have found that, contrary to expectations, the GSP program has led to increased trade deficits and economic loss for developing nations. A 2011 paper by economists Bernhard Herz and Marco Wagner looked at 184 countries from 1953 to 2006. They found that the GSP was not beneficial for the exports of developing countries in the long-run. Herz and Wagner attributed this to the distortionary effects created by the GSP program and the frequent, unpredictable changes in GSP regulations and products.
Herz and Wagner commented: “Our empirical results indicate that GSP type trade preferences are not an appropriate instrument to promote the economic development of low-income countries, but might cause negative distortions of their economic structure.”
Similarly, a research paper by Lederman and Özden evaluated several U.S. preferential trade agreements and found that the GSP program actually hurt exports for developing countries. This was not the case with free trade agreements, which often helped partner countries by allowing them to increase their exports to the U.S.
The complexity of the GSP program has limited its effectiveness, since it narrows the number of products that qualify. For instance, only 10 percent of all imports from developing countries to the U.S. fall under GSP. Imports are further restricted by requirements on the value, market share, and rules of origin for goods.
Significantly, countries have performed better after being removed from the GSP program. According to research by Özden and Reinhardt, countries subsequently tend to adopt more liberal or pro-growth trade policies. For example, after South Korea left the GSP program, it modified its economic policies and grew much faster. Overall, this research suggests that the GSP is not structured to best encourage economic growth in developing countries.
A study by two Mexican economists, Mauricio Rodriguez Abreu and Landy Sanchez Pena, found that in 2016, 22 years after NAFTA went into effect, the wage differential between U.S. and Mexican auto manufacturing workers had widened from five times to nine times, countering all expectations on the effects of NAFTA. Economist Gordon Hanson found in a 2003 paper that by increasing the return to skilled labor in Mexico, NAFTA had actually increased inequality in the country.
These surprising results show that trade liberalization measures—and especially the GSP program—often demonstrate results opposite to what was intended. The goal of alleviating poverty and encouraging economic growth is admirable. However, there is a considerable volume of economic research that finds these policies can be harmful to developing countries. Members of Congress should research the track records of international economic policies carefully before voting new programs into existence.