The Generalized System of Preferences

Far and away the most persuasive critique of the most recent round of proposed trade deals is that these agreements actually have relatively little to do with trade. Instead since all kinds of business regulations “affect” trade, you’ve got a lot of stuff about intellectual property rules, capital flows, privatization of government services, etc. It’s possible to make a case for these things, but you certainly can’t take the general “case for free trade” and then apply it across the board.

The issues surrounding the Generalized System of Preferences scheme really are classic trade matters. This is a program to allow (some) goods from (some) developing countries to enter the United States without the imposition of special “we don’t like foreign-made stuff” sales taxes. As Sallie James explains:

The program has benefits: some producers in some poor countries are able to sell more than they otherwise would in the U.S. market, and U.S. consumers benefit to the tune of hundreds of millions of dollars a year because of the tariff exemptions.

But the GSP still represents managed trade, and poorly managed at that. The program is designed so certain goods in which poorer countries tend to have a comparative advantage — textiles, for example — are excluded from the program, mainly because of the influence of the U.S. textile lobby. There are limits on how much of a particular product a beneficiary country can export duty-free, which means that truly efficient and competitve exporters are shut out. The very existence of the program has proved a stumbling block to (superior, if not first-best) multilateral trade liberalization, because GSP beneficiary countries don’t want reductions in general tariffs to erode their preferential access.

America’s habit of charging tariffs on imported textiles is particularly egregious. Clothing represents a larger share of consumption for poor people than for the rich. Consequently, I think most people understand that if I were to propose a special sales tax on clothing it would be an unusually regressive tax measure. By levying the special tales tax exclusively on foreign-made clothing we don’t eliminate the negative impact on poor Americans. We do, however, shift around who benefits. By taxing only foreign-made clothing, government revenue (which at least finances many programs that are important to poor people) declines and instead many of the benefits are captured by the owners and managers of US-based textile firms. To make things even worse, politically powerful well-heeled people have generally managed to make it the case that luxury goods are taxed more lightly than things ordinary folks buy.

Long story short, dropping tariffs on imported textiles is one of the easiest and most effective things we could do to help poor Americans while also improving the prospects for economic growth in the third world.