Buy Non-American

When recent scandals erupted over trade preferences that the U.S. gave to foreign countries, it put two countries in the spotlight. In South Asia, Bangladesh voiced discontent with America’s decision to cancel import privileges — a decision precipitated by a fire and collapse of a factory in Dacca. Ecuador, on the other hand, renounced all existing preferences to protest Edward Snowden’s prosecution. Since the country is willing to provide refuge for Snowden, it fears that Washington might use trade preferences as a measure of political pressure. Renouncing preferences would help them to avoid bargaining on principles, which Ecuador considers humiliating. In terms of sales volume, these two countries only modestly contribute to the American trade preferences system that applies to the majority of countries worldwide. Lenta.ru investigates this system in order to understand the reasons America might have to sponsor production expansion in foreign economies.

Procedures for granting favorable trade conditions to certain countries, based on economic or political reasons, have existed in the U.S. for a long time. In the beginning of the 20th century, America had a strong domestic market; its demand was hardly fulfilled by local suppliers. Consequently, the largest economy of the world prioritized export and protection of domestic products far less than European countries.

After World War II, America opened up its market to quite a few countries — defeated, liberated, allied or dependent. What was at issue was of course not the abolition of duty tariffs but their substantial reduction. To a large extent, it was the availability of the American market, large enough to accommodate everyone’s produce, which made German, Japanese, Korean, Taiwanese and even Chinese economic miracles possible. America became the largest market for these export-oriented economies.

When many of those countries’ economies expanded enough to challenge and compete with America’s local producers, the U.S. put in place measures to protect its local market. The poorly developed industry and agriculture of third world countries and their negligible sales volume were by no means threatening the U.S. economy. Granting trade preferences to these countries allowed Washington not only to strengthen its political influence but also to obtain cheap raw materials for local producers.

The U.S. approved the Trade Act in 1974, a document which went into effect in 1976 under the name of the Generalized System of Preferences (GSP). Since then, more and more countries were falling under the influence of the GSP; the range of products intended for free trade was expanding, too. Even though the least developed countries obtained trade preferences first, the system currently includes many economically well-off countries — and about 5,000 different products.

America’s trade balance for 2012 revealed a $540 billion deficit, $19 billion less than the year before. Export volume totaled $2.19 trillion, while import volume amounted to $2.73 trillion. China and Canada remained America’s most important trade partners, but for all that, the U.S. recorded a trade deficit with both those countries.

The U.S. imports more than $1 billion in ferrous alloy free of duty, which makes it the most extensively imported material. America also imports $939 million in units and modules for automobile industry, $883 million in tires and $738 million in jewelry. Other products extensively imported into the U.S. duty-free include crude oil, aluminum sheets, pipes and optical fiber.

Overall import of duty-free products into the U.S. amounted to $19 billion in 2012, with duty charges not received totaling up to $800 million. Is that a little or a lot? It’s virtually nothing if compared to America’s overall import volume, which exceeds $2 trillion per year, but a lot in terms of importance for the privileged countries that gained an important impetus to the development of various industries due to the access to the large American market.

Last year, major beneficiaries of the preference system were exclusively big economies: India, whose duty-free exports to the U.S. amounted to $4.5 billion; Thailand with $3.7 billion; and Brazil with $2.3 billion. Beneficiaries also include countries like Bolivia with $128 million and the Democratic Republic of the Congo with $94 million. For poor countries like the two mentioned above, exporting their products to U.S. duty-free is a great opportunity and crucial to their economies, since it enables them to obtain currency by selling products on external markets.

Interestingly, Russia appears on the list of beneficiary countries, too — it was put on the list in the 1990s. In 2012 ratings, Russia took ninth place among duty-free trade leaders. Russian companies that made use of trade preferences have sold $544 million in products to the U.S. Even though this amount is ridiculously low compared to Russia’s overall foreign trade volume, in the rating of duty-free trade leaders Russia outperformed, for example, Argentina, which was deprived of all trade preferences after Cristina Kirchner’s government took a number of measures limiting trade freedom.

There are several other trade preference programs in the U.S. apart from the Generalized System of Preferences. Lately, a couple of similar systems were established on the regional level. For instance, AGOA, the African Growth and Opportunities Act, came into effect in 2001. The overall volume of imports from African countries falling under this act, which was originally valid until 2008 but has recently been extended to 2016, amounts to $70 billion. The Andean Trade Preference Act and Caribbean Basin Initiative, which is based on similar principles as AGOA, grants privileges to the countries of South America and Caribbean islands.

Of course, the U.S. is not the only country that grants special privileges to some of its partners beyond the World Trade Organization (WTO) — and it is worth mentioning that the legitimacy of such special relations is occasionally discussed in the WTO. Such preference systems are the most well-established and extensively used in America, mostly to America’s own advantage, since American manufacturers cannot produce a sufficient supply of imported goods. Besides, active import creates additional work for Americans; what is at issue is not even thousands but tens of thousands of work places.

For all that, countries that create competition and challenge American producers are treated in a radically different way. It suffices to mention the “Buy American” campaign launched when the financial crisis was at its height in 2009 or the endless trade wars with China over dozens of products. When it is crucial, the U.S. is prepared to actively defend its local producers.