U.S. Trade with Developing Countries: Policy, Programs and Trends : Policy, Programs and Trends [1 ed.] 9781616684082, 9781607411222

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Copyright © 2010. Nova Science Publishers, Incorporated. All rights reserved. U.S. Trade with Developing Countries: Policy, Programs and Trends : Policy, Programs and Trends, Nova Science Publishers, Incorporated, 2010. ProQuest Ebook Central,

Copyright © 2010. Nova Science Publishers, Incorporated. All rights reserved. U.S. Trade with Developing Countries: Policy, Programs and Trends : Policy, Programs and Trends, Nova Science Publishers, Incorporated, 2010. ProQuest Ebook Central,

MONETARY, FISCAL AND TRADE POLICIES SERIES

U.S. TRADE WITH DEVELOPING COUNTRIES: POLICY, PROGRAMS AND TRENDS

Copyright © 2010. Nova Science Publishers, Incorporated. All rights reserved.

No part of this digital document may be reproduced, stored in a retrieval system or transmitted in any form or by any means. The publisher has taken reasonable care in the preparation of this digital document, but makes no expressed or implied warranty of any kind and assumes no responsibility for any errors or omissions. No liability is assumed for incidental or consequential damages in connection with or arising out of information contained herein. This digital document is sold with the clear understanding that the publisher is not engaged in rendering legal, medical or any other professional services.

U.S. Trade with Developing Countries: Policy, Programs and Trends : Policy, Programs and Trends, Nova Science Publishers, Incorporated, 2010. ProQuest Ebook Central,

MONETARY, FISCAL AND TRADE POLICIES SERIES Challenges of the Post-Communist Financial-Currency Policy Avtandil Silagadse and Micheil Tokmazishvili 2009. ISBN: 978-1-60741-150-5 Measuring the Economy: GDP and NIPAs Kemal Sahin (Editor) 2009 ISBN: 978-1-60741-199-4 Trade Policy in A Globalizing World Yuki Watanabe and Haruto Yamashita (Editors) 2009 ISBN: 978-1-60456-830-1 (Hardcover) Trade Policy in A Globalizing World Yuki Watanabe and Haruto Yamashita (Editors) 2009 ISBN: 978-1-60876-443-3 (Online Book)

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U.S. Trade with Developing Countries: Policy, Programs and Trends Kalan R. Geisler (Editor) 2009. ISBN: 978-1-60741-122-2

U.S. Trade with Developing Countries: Policy, Programs and Trends : Policy, Programs and Trends, Nova Science Publishers, Incorporated, 2010. ProQuest Ebook Central,

MONETARY, FISCAL AND TRADE POLICIES SERIES

U.S. TRADE WITH DEVELOPING COUNTRIES: POLICY, PROGRAMS AND TRENDS

KALAN R. GEISLER

Copyright © 2010. Nova Science Publishers, Incorporated. All rights reserved.

EDITOR

Nova Science Publishers, Inc. New York

U.S. Trade with Developing Countries: Policy, Programs and Trends : Policy, Programs and Trends, Nova Science Publishers, Incorporated, 2010. ProQuest Ebook Central,

Copyright © 2009 by Nova Science Publishers, Inc. All rights reserved. No part of this book may be reproduced, stored in a retrieval system or transmitted in any form or by any means: electronic, electrostatic, magnetic, tape, mechanical photocopying, recording or otherwise without the written permission of the Publisher. For permission to use material from this book please contact us: Telephone 631-231-7269; Fax 631-231-8175 Web Site: http://www.novapublishers.com NOTICE TO THE READER The Publisher has taken reasonable care in the preparation of this book, but makes no expressed or implied warranty of any kind and assumes no responsibility for any errors or omissions. No liability is assumed for incidental or consequential damages in connection with or arising out of information contained in this book. The Publisher shall not be liable for any special, consequential, or exemplary damages resulting, in whole or in part, from the readers’ use of, or reliance upon, this material. Any parts of this book based on government reports are so indicated and copyright is claimed for those parts to the extent applicable to compilations of such works. Independent verification should be sought for any data, advice or recommendations contained in this book. In addition, no responsibility is assumed by the publisher for any injury and/or damage to persons or property arising from any methods, products, instructions, ideas or otherwise contained in this publication. This publication is designed to provide accurate and authoritative information with regard to the subject matter covered herein. It is sold with the clear understanding that the Publisher is not engaged in rendering legal or any other professional services. If legal or any other expert assistance is required, the services of a competent person should be sought. FROM A DECLARATION OF PARTICIPANTS JOINTLY ADOPTED BY A COMMITTEE OF THE AMERICAN BAR ASSOCIATION AND A COMMITTEE OF PUBLISHERS.

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LIBRARY OF CONGRESS CATALOGING-IN-PUBLICATION DATA U.S. trade with developing countries : policy, programs and trends / Kalan R. Geisler. p. cm. Includes index. ISBN 978-1-61668-408-2 (E-Book) 1. United States--Commerce--Developing countries. 2. Developing countries--Commerce-United States. I. Geisler, Kalan R. HF4055.U7 2009 382'.097301724--dc22 2009027056

Published by Nova Science Publishers, Inc.    New York

U.S. Trade with Developing Countries: Policy, Programs and Trends : Policy, Programs and Trends, Nova Science Publishers, Incorporated, 2010. ProQuest Ebook Central,

CONTENTS Preface Chapter 1

Chapter 2

U.S. Trade with Developing Countries: Trends, Prospects, and Policy Implications William H. Cooper U.S. Trade and Investment Relationship with Sub-Saharan Africa: The African Growth and Opportunity Act and Beyond Danielle Langton

1

19

Chapter 3

Millennium Challenge Account Curt Tarnoff

Chapter 4

World Trade Organization Negotiations: The Doha Development Agenda Ian F. Fergusson

75

Trade Promotion Authority (TPA): Issues, Options, and Prospects for Renewal J. F. Hornbeck and William H. Cooper

97

Chapter 5

Chapter 6

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vii

Chapter 7

Chapter 8

Trade Capacity Building: Foreign Assistance for Trade and Development Danielle Langton U.S. Trade Preference Programs Provide Important Benefits, but a More Integrated Approach Would Better Ensure Programs Meet Shared Goals United States Government Accountability Office International Trade: The United States Needs an Integrated Approach to Trade Preference Programs United States Government Accountability Office

Index

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47

121

149

221 233

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PREFACE This book focuses on U.S. trade building with developing countries; a heterogeneous group of low and middle-income countries that have become an increasingly significant factor in U.S. trade flows and trade policy over the last two or more decades. The growth of developing countries' economies and foreign trade presents the United States with opportunities and challenges. The imports from many developing economies provide U.S. consumers with an ever widening range of choices of products at lower prices, raising real incomes and contributing to a higher U.S. standard of living. A number of the developing countries have also become robust markets for U.S. exports because of rapid economic growth and trade liberalization. This book describes trade with developing countries, which also raises a set of virtually unique issues regarding labor rights, environment protection and intellectual property rights that have become fixtures on the U.S. trade agenda. This book also describes trade capacity building and discusses the history of Trade Capacity Building (TCB)in foreign assistance. There is also a discussion of legislation affecting TCB, including appropriations and legislative restrictions on foreign assistance. Chapter 1 - Developing countries, a heterogeneous group of low- and middle-income countries, have become an increasingly significant factor in U.S. trade flows and trade policy over the last two or more decades. Their influence is reflected in the issues on the trade agenda of the 110th Congress: the possible renewal of fast track trade authority/Trade Promotion Authority; implementing legislation for free trade agreements; re-authorization of trade adjustment assistance (TAA) for workers and firms; review and possible reauthorization of Generalized System of Preferences and other trade preference programs; and oversight of the Doha Development Agenda (DDA) round negotiations in the WTO. The growth of developing countries’ economies and foreign trade presents the United States with opportunities and challenges. The imports from many developing economies provide U.S. consumers with an ever widening range of choices of products at lower prices, raising real incomes and contributing to a higher U.S. standard of living. A number of the developing countries have also become robust markets for U.S. exports because of rapid economic growth and trade liberalization. At the same time, many U.S. workers are competing with an expanding pool of lowerwage labor from India, China, and other developing countries. Such competition induces U.S.-based firms to reduce costs by using labor-saving technology, moving production offshore, or shutting down, forcing workers to adjust. Even workers in the high-end services sector are feeling the pressures of competition from some developing countries.

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Kalan R. Geisler

Trade with developing countries also raises a set of virtually unique issues regarding labor rights, environment protection, intellectual property rights, among others, that have become fixtures on the U.S. trade agenda. At the same time, developing countries are challenging U.S. policies on trade remedies, high tariffs on wearing apparel and other importsensitive products, pricing of medicines, and the temporary entry of foreign workers. If current trade trends hold, developing countries can be expected to account for increasing shares of U.S. exports and imports and for world trade. As a result, these opportunities and challenges will likely continue, if not expand. The analysis of U.S. trade trends also exposes a significant divide among groups of developing countries. Some countries, such as China, South Korea, Mexico and Chile, have made great strides and, are expanding their role in U.S. and world trade. Others including most of Africa, many in South Asia, and some in Latin America, lag behind or are losing shares of U.S. and world trade. These differences suggest that effective U.S. trade policy may need to differentiate among the various groups of developing countries. These differences could play a role in how the United States proceeds on trade preferences, regional and bilateral trade agreements, and multilateral negotiations in the WTO. This report will be updated as events warrant. “Developing Countries,” a heterogeneous group of low- and medium-income economies, are making an increasingly strong impact on U.S. foreign trade and investment and world trade. This impact is both economic and political and is likely to increase. Developing countries have been shaping U.S. trade patterns, trade policy priorities and policies. They are re-shaping the international trading system, asserting greater influence at bilateral and multilateral trade negotiations, and challenging the United States and other developed countries to reappraise long-held policies. At the same time, developing countries’ advancement on the international trade stage has forced them to confront the challenges of international competition and the responsibilities that come with membership in the international trade community: Developed countries are demanding that developing countries jettison economic policies that protect domestic markets for local producers and workers. The growing role of some developing countries in U.S. and world trade raises sensitive policy issues for Members of Congress as they consider legislation to implement trade agreements, to monitor Administration enforcement of agreements and of trade laws, and to develop policies. Many of the U.S. free trade agreements (FTAs) in place or that are under negotiation are with developing countries. Furthermore, the United States has been engaged with the other 149 members of the World Trade Organization (WTO) in the Doha Development Agenda (DDA) round of negotiations. The vast majority of the WTO members are developing countries who are using the strength of their large numbers to influence the agenda and the pace of the negotiations. The DDA negotiations are now indefinitely stalled because of, among other reasons, conflicts between developed and developing countries on agricultural trade. Congressional interests and the congressional legislative agenda are filled with issues pertaining to trade with developing countries. The U.S. Generalized System of Preferences (GSP) program and other trade preference programs are subject to periodic reviews and renewals. Some Members of Congress have suggested that the Congress needs to re-examine the rationale for these programs and their eligibility criteria in light of the rapid economic advancements that some developing countries have made. In addition, the Congress has recently considered and passed legislation implementing FTAs with developing countries and will probably consider a number of others in the near future. Congressional debate and final

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Preface

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action over these measures will likely be influenced by the perception of the role that developing countries play in U.S. trade. The purpose of this report is to assist the Congress in assessing and developing U.S. foreign trade and economic policies by examining the role that developing countries are playing in trading with the United States. The report will be updated as determined by events. Chapter 2 - Following the end of the apartheid era in South Africa in the early 1990s, the United States sought to increase economic relations with sub-Saharan Africa. President Clinton instituted several measures that dealt with investment, debt relief, and trade. Congress required the President to develop a trade and development policy for Africa. The economic challenges facing Africa today are serious. Unlike the period from 1960 to 1973, when economic growth in sub-Saharan Africa was relatively strong, since 1973 the countries of sub-Saharan Africa have grown at rates well below other developing countries. There are some signs of improvement, but problems such as HIV/AIDS and the debt burden are constraining African economic growth. In May 2000, Congress approved a new U.S. trade and investment policy for sub-Saharan Africa in the African Growth and Opportunity Act (AGOA; Title I, P.L. 106-200). U.S. trade with and investment in sub-Saharan Africa have comprised only 1-2% of U.S. totals for the world. AGOA extends preferential treatment to imports from eligible countries that are pursuing market reform measures. Data show that U.S. imports under AGOA are mostly energy products, but imports to date of other products have grown. AGOA mandated that U.S. officials meet regularly with their counterparts in sub-Saharan Africa, and six of these meetings have been held. AGOA also directed the President to provide U.S. government technical assistance and trade capacity support to AGOA beneficiary countries. Government agencies that have roles in this effort include the U.S. Agency for International Development, the Assistant U.S. Trade Representative for Africa (established by statute under AGOA), the Overseas Private Investment Corporation, the Export-Import Bank, the U.S. and Foreign Commercial Service, and the Trade and Development Agency. In addition to bilateral programs, the United States is a member of several multilateral institutions that provide trade capacity building. In AGOA, Congress declared that free-trade agreements should be negotiated, where feasible, with interested sub-Saharan African countries. Related to this provision, negotiations on a free-trade agreement with the Southern African Customs Union, which includes South Africa and four other countries, began in June 2003, but were suspended in April 2006. Several topics may be important to the 110th Congress in the oversight of AGOA and in potential legislation amending the act. These issues concern expanding the number of beneficiary countries which use AGOA benefits; diversifying AGOA exports away from primary commodities such as oil; making trade capacity building more effective for AGOA beneficiaries; and strengthening the link between poverty reduction and trade in Africa. This product will be updated periodically. Chapter 3 - In a speech on March 14, 2002, President Bush outlined a proposal for a major new U.S. foreign aid initiative. The Millennium Challenge Account (MCA) is managed by the Millennium Challenge Corporation (MCC) and provides assistance, through a competitive selection process, to developing nations that are pursing political and economic reforms in three areas: ruling justly, investing in people, and fostering economic freedom. The MCC differs in several respects from past and current U.S. aid practices:

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the competitive process that rewards countries for past and current actions measured by 17 objective performance indicators; the pledge to segregate the funds from U.S. strategic foreign policy objectives that often strongly influence where U.S. aid is spent; and the requirement to solicit program proposals developed solely by qualifying countries with broad-based civil society involvement. As announced by the President in March 2002, the initial plan had been to fund the MCC annually at $5 billion by FY2006, but this figure has not yet been reached. The Administration has sought a combined $12.8 billion for the MCA program, FY2004-FY2008, while Congress appropriated $7.5 billion, or less than two-thirds of the total sought. FY2009 funding is currently provided under the terms of a continuing resolution (H.R. 2638/P.L. 110329), which provides foreign aid spending at the level in the FY2008 Consolidated Act ($1.54 billion). The resolution expires on March 6, 2009. Congress authorized the MCC in P.L. 108-199 (January 23, 2004). Since that time, the MCC’s Board of Directors has selected 27 eligible countries during the period from FY2004 through FY2008 (another, The Gambia, was suspended in 2006) and approved 18 Compacts with Madagascar (April 2005), Honduras June 2005), Cape Verde (July 2005), Nicaragua (July 2005), Georgia (September 2005), Benin (February 2006), Vanuatu (March 2006), Armenia (March 2006), Ghana (August 2006), Mali (November 2006), El Salvador (November 2006), Mozambique (July 2007), Lesotho (July 2007), Morocco (August 2007), Mongolia (September 2007), Tanzania (September 2007), Burkina Faso (June 2008), and Namibia (July 2008). MCA implementation matters continue to unfold, including the relationship of MCA and USAID, sectors chosen, and the impact of rising costs on country programs. A growing question raised by some Members of Congress concerns the level of funding to support MCC programs. Some fear that insufficient funds might force the MCC to reduce the number of recipients or the size of the grants. Others, however, support reductions in MCC budget requests, believing that the slower-thananticipated pace of Compact agreements means that the Corporation has enough resources. This report will be updated as events unfold. Chapter 4 - Talks continue in the World Trade Organization’s (WTO) Doha Development Round of multilateral trade negotiations. The negotiations, which were launched at the 4th WTO Ministerial in 2001 at Doha, Qatar, have been characterized by persistent differences between the United States, the European Union, and developing countries on major issues, such as agriculture, industrial tariffs and nontariff barriers, services, and trade remedies. Depending on the outcome, some U.S. industries may gain access to foreign markets, and others may see increased competition from imports. Likewise, some U.S. workers may be helped through increased access to foreign markets, but others may be hurt by import competition. The negotiating impasse put negotiators beyond the reach of agreement under U.S. trade promotion authority (TPA), which expired on July 1, 2007. With the deadline passed, the parties are now attempting to make progress in the negotiations in the hope that the 110th Congress will extend TPA. During the second half of 2007, the chairmen of the agriculture, industrial, and rules negotiating groups released new draft texts and revisions to those texts

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have been made in the course of 2008. Yet, trade ministers again failed to reach a breakthrough at an eight day negotiating ministerial held in Geneva in July 2008. Agriculture has become the linchpin of the Doha Development Agenda. U.S. goals are substantial reduction of trade-distorting domestic support; elimination of export subsidies, and improved market access. Some had looked to a potential Doha Round agreement to curb trade-distorting domestic support as a catalyst to change U.S. farm subsidies in the 2007 farm bill, but this source of pressure for change dissipated with the continued Doha impasse. In addition, Members of Congress likely will carefully scrutinize any agreement that may require changes to U.S. trade remedy laws. Three issues are among the most important to developing countries, in addition to concessions on agriculture. One issue, now resolved, pertained to compulsory licensing of medicines and patent protection. A second deals with a review of provisions giving special and differential treatment to developing countries. A third addresses problems that developing countries are having in implementing current trade obligations. Chapter 5 - On July 1, 2007, Trade Promotion Authority (TPA — formerly known as fast track), expired. TPA is the authority Congress grants to the President to enter into certain reciprocal trade agreements (FTAs), and to have their implementing bills considered under expedited legislative procedures, provided he observes certain statutory obligations in negotiating them. TPA allows Congress to exercise its constitutional authority over trade, while giving the President added leverage to exercise his authority to negotiate trade agreements by effectively assuring U.S. trade partners that final agreements are given swift and unamended consideration. TPA reflects years of debate, cooperation, and compromise between Congress and the Executive Branch in finding a pragmatic accommodation to the exercise of each branch’s respective authorities. The core provisions of the fast track legislative procedures have remained unchanged since first enacted in 1974, although Congress has expanded trade negotiation objectives, oversight, and presidential notification requirements. While early versions of fast track/TPA received broad bipartisan support, renewal efforts became increasingly controversial as fears grew over real and perceived negative effects of trade, and as the trade debate became more partisan in nature, culminating in a largely party-line vote on the 2002 renewal. Any debate on TPA renewal would likely center on the broad effects of trade on the United States, with an emphasis on numerous specific issues that may be given greater weight in th future: labor, environment, and public health provisions; stricter enforcement of trade agreements; enhanced trade adjustment assistance programs; and revisions to the role of Congress in trade policy making. Bilateral agreements with Panama, Peru, Colombia, and South Korea were signed in time to be considered under the 2002 TPA. The House and Senate passed implementing legislation for the Peru FTA, which President Bush signed into law on December 14, 2007. The President sent implementing legislation for the Colombia FTA to Congress on April 8, 2008, but the House passed a rule suspending the application of parts of the expedited legislative procedures for this bill alone. The protracted World Trade Organization (WTO) Doha Round of multilateral negotiations are still incomplete and may yet result in the remaining key trade agreement that could compel Congress to consider extending or renewing TPA. Some observers also suggest that TPA is important to support future bilateral FTA negotiations, particularly given that many countries appear ready to continue pursuing FTAs irrespective of U.S. trade policy. Key Members of the House and Senate, however, have

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signaled that TPA renewal is not at the top of the legislative agenda and will require considerable deliberation before it can be passed. Congress has many options in dealing with TPA: take no action; extend temporarily; revise and renew; grant permanent authority; or devise some hybrid solution. How this issue plays out depends on a host of political and economic variables. This report will be updated as events warrant. On July 1, 2007, Trade Promotion Authority (TPA — formerly known as fast track) expired, and with it the authority that Congress grants to the President to enter into certain reciprocal trade agreements, and to have the legislation needed to implement them considered under expedited legislative procedures. Although the President has the authority under the Constitution to negotiate free trade agreements (FTAs), typically implementing legislation and thus congressional action are required to bring them into force. The United States Trade Representative (USTR) completed bilateral trade agreement negotiations with Peru, Colombia, Panama, and South Korea prior to TPA expiration. Congress approved the Peru FTA. The President sent implementing legislation for the Colombia FTA to Congress on April 8, 2008, but the House passed a rule suspending the application of parts of the expedited legislative procedures for this bill alone and has taken no further action on it. (See footnote 19 on p. 12.) A Doha Round agreement and any future bilateral FTAs cannot be considered under TPA’s expedited procedures unless those procedures are renewed by Congress. For over 30 years, Congress has granted the President TPA/fast track, agreeing to consider trade implementing legislation expeditiously and vote on it without amendment, provided the President meets certain statutory negotiating objectives and consultation requirements. TPA strikes a delicate balance by allowing Congress to exercise its constitutional authority over trade, while giving the President additional negotiating leverage by effectively assuring trade partners that a final agreement will be given swift and unamended consideration by Congress. Earlier incarnations of TPA, although controversial, were adopted with substantial bipartisan majorities. Over time, however, trade negotiations have become more complex, Congress has insisted on tighter oversight and consultation requirements, and the trade debate has become more partisan in nature, making congressional renewal of TPA, if anything, even more controversial. The Democrats’ assumption of control in the 110th Congress may also affect prospects for TPA renewal by shifting trade policy priorities, as seen in the “New Trade Policy for America,” a bipartisan position crafted jointly by congressional leadership and the Bush Administration. The “New Trade Policy” framework incorporates important changes, some with broad social implications, that have already altered the language of recently signed FTAs with Peru, Colombia, Panama and South Korea. Among important changes from previous FTAs, signatories must now: adopt as fully enforceable commitments the five basic labor rights defined in the United Nations International Labor Organization’s (ILO) Fundamental Principles and Rights at Work and its Follow-up (1998) Declaration; adhere to numerous multilateral environmental agreements (MEAs); and accept pharmaceutical intellectual property rights (IPR) provisions that could hasten that country’s access to generic drugs. The expiration of TPA raises the central question of whether, when and in what form TPA should be renewed, including to what degree if any, provisions of the “New Trade Policy America” might be incorporated. Some have argued that TPA should be renewed to cover, at a minimum, the World Trade Organization’s (WTO) Doha Development Agenda (DDA) round multilateral agreement, if it can be concluded, and perhaps also potential future bilateral FTAs. The DDA negotiations, however, are bogged down and pending FTA

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Preface

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negotiations appear dormant. In addition, the House Democratic Leadership has signaled that TPA is not at the top of its legislative agenda, indicating that a quick resolution to the TPA debate seems unlikely to occur. This report presents background on the development of TPA, a summary of the major provisions under the recently expired authority, and a discussion of the issues that have arisen in the debate over TPA renewal. It also explores the policy options available to Congress and will be updated as the congressional debate unfolds. Chapter 6 - Trade capacity building (TCB) is a form of development assistance provided by the United States and other donors to help developing countries participate in and benefit from global trade. In addition to helping developing countries negotiate and implement trade agreements, TCB includes development assistance for agricultural development, customs administration, business training, physical infrastructure development, financial sector development, and labor and environmental standards. Some experts believe that TCB is necessary for developing countries to adjust to trade liberalization and achieve trade-led economic growth. In FY2007, the United States obligated about $1.4 billion in TCB worldwide. The U.S. Agency for International Development (USAID) funds and implements the majority of U.S. TCB programs. In FY2005, the Millennium Challenge Corporation (MCC) began to fund TCB activities, and in FY2006 and FY2007 it overtook USAID as the agency with the highest TCB obligations. Other agencies also provide TCB, including the U.S. Department of Agriculture, the Department of Commerce, the Treasury Department, the Department of Labor, and the U.S. Trade and Development Agency (USTDA). The United States also contributes to multilateral funds for TCB, and it contributes to multilateral development banks such as the World Bank, which also provide TCB programs. Congress has played a key role in TCB by providing funding through appropriations legislation. In the 109th Congress, the House passed a measure to create a Trade Capacity Enhancement Fund in the 2007 Foreign Operations Appropriations Bill (H.R. 5522), but this measure was not included in the Senate bill. The 110th Congress directed the administration to use at least $550 million of foreign aid appropriations for TCB in the Consolidated Appropriations Act of 2008 (P.L. 110-161). TCB may become a key part of the 110th Congress’ discussions on potential free trade agreements (FTAs) with developing countries, renewal of trade promotion authority (TPA), and U.S. involvement in the Doha round of WTO negotiations. The 110th Congress may also be interested in using TCB to increase the effectiveness of trade preference programs initiated through legislation such as the African Growth and Opportunity Act (AGOA). In the past, Congress has passed legislation restricting the use of foreign assistance for certain activities promoting trade in developing countries. While TCB generally has tradepromoting motivations, any resulting increased import competition could also raise Congressional concern. This report describes trade capacity building and discusses the history of TCB in foreign assistance. It also provides an overview of U.S. bilateral TCB assistance, as well as multilateral and bilateral TCB assistance from other donors. There is also a discussion of legislation affecting TCB, including appropriations and legislative restrictions on foreign assistance. Finally, this report highlights some of the policy issues concerning TCB. This report will be updated as events warrant.

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Chapter 7 - U.S. trade preference programs promote economic development in poorer nations by providing export opportunities. The Generalized System of Preferences, Caribbean Basin Initiative, Andean Trade Preference Act, and African Growth and Opportunity Act unilaterally reduce U.S. tariffs for many products from over 130 countries. However, three of these programs expire partially or in full this year, and Congress is exploring options as it considers renewal. GAO was asked to review the programs’ effects on the United States and on foreign beneficiaries’ exports and development, identify policy trade-offs concerning these programs, and evaluate the overall U.S. approach to preference programs. To address these objectives, we analyzed trade data, reviewed trade literature and program documents, interviewed U.S. officials, and did fieldwork in six countries. Chapter 8 - U.S. trade preference programs promote economic development in poorer nations by providing duty-free export opportunities in the United States. The Generalized System of Preferences, Caribbean Basin Initiative, Andean Trade Preference Act, and African Growth and Opportunity Act unilaterally reduce U.S. tariffs for many products from over 130 countries. However, two of these programs expire partially or in full this year, and Congress is exploring options as it considers renewal. This testimony describes the growth in preference program imports since 1992, identifies policy trade-offs concerning these programs, and evaluates the overall U.S. approach to preference programs. The testimony is based on two recent studies on trade preference programs, issued in September 2007 and March 2008. For those studies, GAO analyzed trade data, reviewed trade literature and program documents, interviewed U.S. officials, and did fieldwork in six trade preference beneficiary countries.

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In: U.S. Trade with Developing Countries Editor: Kalan R. Geisler

ISBN: 978-1-60741-122-2 © 2009 Nova Science Publishers, Inc.

Chapter 1

U.S. TRADE WITH DEVELOPING COUNTRIES: TRENDS, PROSPECTS, AND POLICY IMPLICATIONS *

William H. Cooper

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SUMMARY Developing countries, a heterogeneous group of low- and middle-income countries, have become an increasingly significant factor in U.S. trade flows and trade policy over the last two or more decades. Their influence is reflected in the issues on the trade agenda of the 110th Congress: the possible renewal of fast track trade authority/Trade Promotion Authority; implementing legislation for free trade agreements; re-authorization of trade adjustment assistance (TAA) for workers and firms; review and possible re-authorization of Generalized System of Preferences and other trade preference programs; and oversight of the Doha Development Agenda (DDA) round negotiations in the WTO. The growth of developing countries’ economies and foreign trade presents the United States with opportunities and challenges. The imports from many developing economies provide U.S. consumers with an ever widening range of choices of products at lower prices, raising real incomes and contributing to a higher U.S. standard of living. A number of the developing countries have also become robust markets for U.S. exports because of rapid economic growth and trade liberalization. At the same time, many U.S. workers are competing with an expanding pool of lowerwage labor from India, China, and other developing countries. Such competition induces U.S.-based firms to reduce costs by using labor-saving technology, moving production offshore, or shutting down, forcing workers to adjust. Even workers in the high-end services sector are feeling the pressures of competition from some developing countries.

*

This is an edited, reformatted and augmented version of a Congressional Research Service Publication RL 33945, dated March 28, 2007.

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2

William H. Cooper

Trade with developing countries also raises a set of virtually unique issues regarding labor rights, environment protection, intellectual property rights, among others, that have become fixtures on the U.S. trade agenda. At the same time, developing countries are challenging U.S. policies on trade remedies, high tariffs on wearing apparel and other importsensitive products, pricing of medicines, and the temporary entry of foreign workers. If current trade trends hold, developing countries can be expected to account for increasing shares of U.S. exports and imports and for world trade. As a result, these opportunities and challenges will likely continue, if not expand. The analysis of U.S. trade trends also exposes a significant divide among groups of developing countries. Some countries, such as China, South Korea, Mexico and Chile, have made great strides and, are expanding their role in U.S. and world trade. Others including most of Africa, many in South Asia, and some in Latin America, lag behind or are losing shares of U.S. and world trade. These differences suggest that effective U.S. trade policy may need to differentiate among the various groups of developing countries. These differences could play a role in how the United States proceeds on trade preferences, regional and bilateral trade agreements, and multilateral negotiations in the WTO. This report will be updated as events warrant. “Developing Countries,” a heterogeneous group of low- and medium-income economies, are making an increasingly strong impact on U.S. foreign trade and investment and world trade. This impact is both economic and political and is likely to increase. Developing countries have been shaping U.S. trade patterns, trade policy priorities and policies. They are re-shaping the international trading system, asserting greater influence at bilateral and multilateral trade negotiations, and challenging the United States and other developed countries to reappraise long-held policies. At the same time, developing countries’ advancement on the international trade stage has forced them to confront the challenges of international competition and the responsibilities that come with membership in the international trade community: Developed countries are demanding that developing countries jettison economic policies that protect domestic markets for local producers and workers. The growing role of some developing countries in U.S. and world trade raises sensitive policy issues for Members of Congress as they consider legislation to implement trade agreements, to monitor Administration enforcement of agreements and of trade laws, and to develop policies. Many of the U.S. free trade agreements (FTAs) in place or that are under negotiation are with developing countries. Furthermore, the United States has been engaged with the other 149 members of the World Trade Organization (WTO) in the Doha Development Agenda (DDA) round of negotiations. The vast majority of the WTO members are developing countries who are using the strength of their large numbers to influence the agenda and the pace of the negotiations. The DDA negotiations are now indefinitely stalled because of, among other reasons, conflicts between developed and developing countries on agricultural trade. Congressional interests and the congressional legislative agenda are filled with issues pertaining to trade with developing countries. The U.S. Generalized System of Preferences (GSP) program and other trade preference programs are subject to periodic reviews and renewals. Some Members of Congress have suggested that the Congress needs to re-examine the rationale for these programs and their eligibility criteria in light of the rapid economic advancements that some developing countries have made. In addition, the Congress has recently considered and passed legislation implementing FTAs with developing countries and will probably consider a number of others in the near future. Congressional debate and final

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U.S. Trade with Developing Countries

action over these measures will likely be influenced by the perception of the role that developing countries play in U.S. trade. The purpose of this report is to assist the Congress in assessing and developing U.S. foreign trade and economic policies by examining the role that developing countries are playing in trading with the United States. The report will be updated as determined by events.

DEVELOPING COUNTRIES AND THEIR ROLE IN U.S. AND WORLD TRADE The category “developing countries” includes economies representing many levels of economic development. However, they share one important quality: they are generally technology receivers rather than technology innovators, and so their economies still have room to “catch up” with industrialized countries through the increased application of technology-based production. Some of the developing countries have been more successful in “catching up” than others, leading to wide gaps in economic welfare among them. For the purposes of this report, developing countries include all countries except Australia, New Zealand, Europe, Japan, Canada, and the United States. The term also excludes the former Soviet republics and the former communist states in Central and Eastern Europe.1

Trends in Developing Countries Trade with the United States Developing countries have accounted for growing shares of U.S. exports and imports of goods over a 20-year span. Data presented in the table below (Table 1) illustrate this trend. Table 1. Share of U.S. Exports and Imports, 1985-2006 (percentages) 1985

1995

2000

2006

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Country Group

Developing Countries of which: Asia of which: NIEs ASEAN China India Latin America of which: Mexico Africa of which: Sub-Saharan Africa LDCs OPEC

Exp

Imp

Exp

Imp

Exp

Imp

Exp

Imp

32.8

34.5

44.5

44.2

44.5

49.0

47.0

54.7

12.6 7.5 3.6 1.8 0.8

16.4 11.3 4.3 1.1 0.7

23.4 12.7 6.8 2.0 0.6

26.9 11.0 8.4 6.1 0.8

20.3 10.8 6.0 2.0 0.5

28.1 9.2 7.2 8.2 0.9

23.7 9.4 5.5 5.3 1.0

32.5 5.9 6.0 15.5 1.2

14.0

13.6

16.5

14.0

21.8

17.2

21.5

17.9

6.2 3.1

5.5 3.5

7.9 1.7

8.4 2.1

14.2 1.4

11.1 2.3

12.9 1.8

10.7 4.4

1.7

2.8

0.9

1.7

0.9

1.9

1.2

3.2

1.1 5.0

0.8 5.9

0.4 3.3

0.6 4.5

0.4 2.5

0.9 5.5

0.6 3.9

1.3 7.9

Source: CRS calculations using U.S. Department of Commerce data.

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From 1985 to 2006, developing countries accounted for an increasing share of U.S. exports, 32.8% in 1985 versus 47.0% in 2006. Similarly, developing countries are becoming more significant as sources of U.S. imports. Developing countries accounted for 34.5% of U.S. imports in 1985 and 54.7% of U.S. imports in 2006. However, the data clearly show that the trends are not consistent across developing country sub-groups. For example, Asian developing countries (all Asian countries except Japan) have accounted for much of the growth. They increased their share of U.S. exports from 12.6% in 1985 to 23.7% in 2006, and their share of U.S. imports rose from 16.4% in 1985 to 32.5% in 2006. Until recently, the four so-called East Asian Newly-Industrialized Economies (NIEs) (Hong Kong, South Korea, Singapore, and Taiwan) had been an important contributor to this growth, but their influence is declining. They accounted for 7.5% of U.S. exports and 11.3% of U.S. imports in 1985, and 9.4 % of U.S. exports and 5.9% of U.S. imports in 2006. The shares of U.S. trade accounted for by the 10 members of ASEAN were growing in the 1980s and early 1990s but are also in decline.2 Their shares of U.S. exports had been as high as 6.8% and of imports as high as 8.4% in 1995. They declined to 5.5% of exports and 6.0% of imports in 2006. Among East Asian economies and developing economies in general, China has made by far the most significant impact on U.S. trade during the last twenty years. It accounted for 1.8% of U.S. exports in 1985 and 5.3% in 2006 for 1.1% of U.S. imports in 1985 and 15.5% in 2006. The trends suggest that the patterns of U.S. trade with East Asia are shifting from the East Asian NIEs and ASEAN to China. India, a huge Asian economy, accounts for only a small part of U.S. trade (0.9% of U.S. exports and 1.1% of U.S. imports), a level of shares that has not changed appreciably over the past two decades. Latin America has also increased in importance, accounting for 14.0% of U.S. exports in 1985 and 21.5% in 2006, and for 13.6% of U.S. imports in 1985, increasing to 17.9% in 2006. However, the shift is largely the result of Mexico’s surge as a U.S. trade partner. In 1985, 6.2% of U.S. exports went to Mexico, a share that rose to 12.9% in 2006. Similarly, the share of U.S. imports coming from Mexico increased from 5.5% in 1985 to 10.7% in 2006. Among the regional groups, the African countries, particularly those of sub-Saharan Africa, have largely stagnated in importance as U.S. trading partners. In 1985, U.S. exports to sub-Saharan Africa accounted for 1.7% of total U.S. exports in 1985 and for 1.2% in 2006. In 1985, U.S. imports from the sub-Saharan African countries increased modestly as a share of total U.S. imports from 2.8% in 1985 to 3.2% in 2006. However, 81% of U.S. imports from Sub-Saharan Africa is oil mostly from Nigeria and Angola. The United Nations identifies 50 countries as the poorest countries or “leastdeveloped countries” (LDCs). This group, many of them located in Africa, have consistently accounted for very small shares of U.S. trade. In 1985 they accounted for 1.1% of U.S. exports and 0.8% of U.S. imports, and in 2005 for 0.6% of U.S. exports and 1.3% of U.S. imports. The members of the Organization of Petroleum Exporting Countries (OPEC) are another important subcategory of developing countries. Their shares of U.S. trade have remained fairly constant, with shares of U.S. imports reaching a high of 7.9% in 2006 but largely dependent on world oil prices. Their share of U.S. exports declined from 5.0% in 1985 to 3.9% in 2006. U.S. exports to developing countries are dispersed over a range of product categories, primarily manufactured goods: electronic products, computers and components, and autos and

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U.S. Trade with Developing Countries

parts. For agricultural exporters, developing countries are a significant market. In 2006, they bought 56% of total U.S. agricultural exports. The leading U.S. imports from developing countries are crude oil, electrical machinery and computers and components.3 The product composition of U.S. trade changes somewhat depending on the subgroup of developing countries. In 2006, more than 60% of U.S. imports from the LDCs were oil (more than 70% came from Angola). Other leading U.S. imports from the LDCs consisted of textiles and apparel, with agricultural products and natural resources much further behind. In contrast, more than 90% of U.S. imports from the more advanced newly industrializing economies of East Asia consisted of more technology-advanced products, such as electrical machinery, other machinery, and cars.4 The trade patterns between the United States and the advanceddeveloping countries suggest intra-industry trade and trade where the developing countries are part of a international production supply chain. Developing countries have not made the same inroads in terms of U.S. foreign investment as they have U.S. trade. In 2005 (latest data available), 72% of U.S. foreign direct investment went to Australia, Canada, Europe, and Japan. The Latin American countries accounted for 8%, the Middle East for 1%, and Asia for 9%. Developing countries are even a much less important source of foreign direct investment in the United States (FDIUS). In 2005, Europe, Canada, Japan, and Australia accounted for 93% of these investments. The developing countries of Asia account for 1% and other developing countries and some Carribean islands accounted for the remainder.5

Developing Countries and World Trade Developing country trends in trade with the United States are mirrored in the trends of their trade with the world as a whole. Table 2. Share of World Exports and Imports, 1985-2004 (percentages)

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Country Group Developing Countries of which: Asia of which: NIEs China ASEAN India Latin America of which:

1985

1995

2000

2006

Exp

Imp

Exp

Imp

Exp

Imp

Exp

Imp

25.4

23.2

27.6

28.8

31.6

28.7

33.5

30.4

15.6 5.8 1.4 3.7 0.5

15.1 5.3 2.1 3.3 0.8

21.0 10.2 2.9 6.2 0.6

21.4 10.6 2.5 6.8 0.7

23.8 10.3 3.9 6.7 0.7

20.8 9.8 3.4 5.6 0.8

25.8 9.7 6.4 6.1 0.8

23.5 9.0 6.1 5.4 1.0

4.9

3.3

4.0

4.1

5.1

5.1

4.8

4.0

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William H. Cooper Table 2.(Continued) Country Group Mexico Africa of which: Sub-Saharan Africa LDCs Major Oil Exporters

1985

1995

2000

2006

Exp

Imp

Exp

Imp

Exp

Imp

Exp

Imp

1.4

0.9

1.5

1.5

2.6

2.8

2.1

2.1

4.2

3.7

2.2

2.5

2.3

2.0

2.5

2.2

2.6

2.1

1.5

1.6

1.5

1.3

1.6

1.4

0.7

1.0

0.5

0.7

0.6

0.7

0.6

0.7

8.8

5.9

4.6

3.4

6.3

3.1

6.2

3.5

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Source: CRS calculations based on data published by UNCTAD.

Table 2 shows that developing countries as a group have been making inroads in world trade. From 1985 to 2004 (latest data available), they increased their shares of world exports from 25.4% to 33.5% and their shares of world imports from 23.2% to 30.4%. However, the data also show that not all groups of developing countries have experienced the same level of economic integration. The East Asian countries have been the leaders with the four East Asian NIEs among the primary drivers of trade growth in the region. Their shares of world exports climbed from 5.8% to 9.7% (but had been as high as at 10.3% in 2000 before declining), and their shares of world imports increased as well from 5.3% to 9.0 %, although they had reached as high as 10.6% in 1995. Similarly, the ten ASEAN-member countries have experienced robust trade growth with their shares of world exports having risen from 3.7% to 6.1%, and their shares of world imports having grown from 3.3% to 5.4%, from 1985 to 2004. However, China’s emergence on the world trade scene has overshadowed the others with the fastest pace of world trade growth. In 1985, China’s share of world exports and imports stood at 1.4% and 2.1%, respectively, and 6.4% and 6.1%, respectively, in 2004. Other categories of developing countries have exhibited less robust trade growth. Other Asian countries have not faired as well as the East Asian countries. For example, India’s shares of world exports and imports have remained virtually unchanged during the period, according to the data in Table 2. The shares of world trade of the Latin American countries as a group have also remained virtually stagnant during the period, although Mexico’s shares have grown modestly. The African countries, particularly the sub-Saharan African countries, have fared the worst of all as a group. Their rate of participation in world trade has been low and has been declining. In 1985, the sub-Saharan African shares of world exports and imports stood at 2.6% and 2.1%, respectively, but at 1.6% and 1.4% in 2004.

Causes of the Trends Specialists and other observers have cited a range of reasons for the disparity in the rates of developing countries’ participation in trade. The most successful developing countries have adopted policies of economic integration with the rest of the world with an emphasis on

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U.S. Trade with Developing Countries

7

export-led growth. The East Asian countries are the most vivid example. The four East Asian NIEs are largely credited with launching these efforts in the 1970s,which resulted in their economies taking off in the 1980s and continuing to grow in the 1990s, albeit with some bumps along the way. Other East Asian countries have followed; for example, Thailand and Malaysia. China is the most recent and largest example of an economy that has moved to become more integrated in the world economy. Such cases are not confined to East Asia. Chile and Mexico have emerged as a successful export-oriented economies. India has also recently undertaken economic reforms to become more integrated with the rest of the world. Among the less successful developing countries are ones that have followed import substitution economic development strategies of discouraging imports by imposing high tariffs and other trade barriers, and trying to develop domestic production of all goods. These policies have proved to be highly costly and have inhibited economic growth.6 Analysts have also concluded that the most successful developing economies are those that have built successful manufacturing sectors, while a number of the less successful countries are highly dependent on the production of primary goods such as food, agricultural products, and natural resources. The 50 LDCs are dependent on average on just three primary commodities for 70% of their total exports. Some LDCs are dependent on a single commodity for their exports. This is a matter of concern because commodity markets tend to be very volatile. In addition, commodities account for decreasing shares of world trade, making it more difficult for commodity-dependent countries to gain a foothold in world trade.7 Furthermore, many of the least developed countries do not have the sufficient infrastructure—customs offices and procedures, transportation facilities, communications infrastructure—to conduct large amounts of trade. The adjustment costs from trade liberalization might also be too great for smaller, less diversified economies. Some developed countries have responded with trade-capacity building assistance as part of efforts to promote trade liberalization and economic growth in these countries.8

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U.S. TRADE POLICY TOWARD DEVELOPING COUNTRIES U.S. trade policy toward developing countries is evolving. For many years, the policy largely consisted of trade preference programs extended conditionally and unilaterally to various groups of developing countries. While those programs are still in place, U.S. trade policy is clearly shifting with successive presidential administrations. The Bush Administration especially has negotiated bilateral and regional reciprocal trade agreements with a decided emphasis on trade with developing countries. Observers have also pointed out that U.S. trade policy toward developing countries is ambiguous—on the one hand encouraging trade liberalization through trade preference programs and free trade agreements, while on the other hand applying high import tariffs on products in which developing countries are more likely to have a comparative advantage: labor-intensive goods and semifinished goods that contain raw materials.

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U.S. Trade Preference Programs

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U.S. trade preference programs have been important vehicles for U.S. trade policy toward developing countries. These programs also reflect the ambiguity of U.S. policy.

The Generalized System of Preferences The broadest and oldest program is the Generalized Systems of Preferences (GSP). The U.S. GSP program was first enacted on January 1, 1976, as part of an effort to encourage economic growth in developing countries by extending preferences in the form of low or no tariffs on the imports from certain developing countries. The program was partially in response to developing countries’ criticism that high tariffs on their products prevented their producers from competing on world markets. Originally considered a temporary, 10-year program, U.S. GSP has been renewed on eight occasions, most recently through December 31, 2008, in section 8802 of P.L. 109-432. While covering a broad spectrum of products of developing countries, the statutory authority for the GSP program requires countrybeneficiaries to adhere to a number of criteria, among them protection of specified labor rights and protection of intellectual property rights. In addition, the statute provides for the “graduation” of countries that exceed a per capita income level and the graduation of products that exceed competitive-need limits. Also, certain import-sensitive goods are excluded from coverage, including some watches, footwear, glass products, and electronic products.9 Some critics of the program have charged that the exclusions limit the program’s effectiveness by disqualifying labor-intensive products which make up the a major part of the production profile of beneficiary countries. As evidence, they point out that only a small portion of imports from beneficiary countries enters the United States under GSP. In 2005, for example, only 9.6% of U.S. imports from GSP-eligible countries entered the United States under the GSP program.10 (See Table 3 below.) Another criticism of the U.S. GSP program has been that only a few countries have been able to take advantage of its benefits. In 2005, 83.9% of GSP-covered imports were from only 10 countries.11 It is also important to note that GSP has automatic competitive need limits (CNL) for beneficiary developing countries (BDCs) (but not for least-developed BDCs), or a level above which the preference is no longer extended, absent a CNL waiver, while the other preference programs have no such limits. This is an important distinction between it and the other preference programs, and is, perhaps, one of the reasons that the percentage of total trade entering under GSP (although the broadest program) has remained relatively static and that the preference may be used less than the others. Table 3. U.S. Imports from GSP Beneficiary Countries, 2005 (Millions of Dollars) 1. Total Imports 2. MFN Duty Free 3. Imports Under GSP 4. GSP Share of Total Imports

278,029 109,317 26,747 9.6%

Source: CRS calculations based on U.S. Department of Commerce data compiled by the United States International Trade Commission.

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The African Growth and Opportunity Act The United States provides more extensive tariff preferences to targeted groups of developing countries under three regional preference programs. The African Growth and Opportunity Act (Title I of the Trade and Development Act of 2000 — P.L. 106-200) provides tariff preferences for the imports from 38 (as of 2007) eligible sub-Saharan African countries in addition to those provided under GSP. Congress has amended the program three times since it originally went into effect on October 1, 2000: in 2002 to clarify coverage of some textile and apparel products; in 2004 to expand the benefits of the program and to extend the its effective period to 2015; and in 2006, to extend some textile and apparel provisions to 2012 that would have expired in 2007. In 2005, $32.7 billion in imports entered the United States under the AGOA program — 69.6% of total U.S. imports from those countries.12 However, imports from Nigeria accounted for $22.5 billion or 68.8% of the total imports under AGOA, and most of the imports from Nigeria consisted of petroleum and petroleum products. In addition, $5.4 billion in imports from the AGOA beneficiary countries entered the United States under the GSP program (see Table 4).13 Table 4. U.S. Imports from AGOA Beneficiary Countries, 2005 (Millions of Dollars) 1. Total Imports 2. MFN Duty Free 3. Imports Under GSP 4. Imports Under AGOA 5. AGOA’s Share of Total Imports

$47,003 8,122 5,403 32,743 69.7%

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Source: CRS calculations based on U.S. Department of Commerce data compiled by the United States International Trade Commission.

The Andean Trade Preference Act The Andean Trade Preference Act (ATPA) which went into effect on December 4, 1991, provided preferential tariff treatment to certain imports from Bolivia, Colombia, Ecuador, and Peru. The preferences were part of a U.S. effort to encourage these developing countries to diversify their economies away from illegal drug production. The original program expired on December 4, 2001, but was reauthorized retroactively under the Andean Trade Promotion and Drug Eradication Act (ATPDEA) (Title XXXI of the Trade Act of 2002, P.L. 107-210). Under P.L. 109-432, its current authorization expires on June 30, 2007.14 In 2005, 57.1% of imports from ATPA beneficiary countries entered the United States under the program (see Table 5). Table 5. U.S. Imports from ATPA Countries, 2005 (Millions of Dollars) 1. Total Imports 2. MFN Duty Free 3. Imports Under GSP 4. Imports Under ATPA 5. ATPA’s Share of Total Imports

$20,060 6,604 448 11,464 57.1%

Source: CRS calculations based on U.S. Department of Commerce data compiled by the United States International Trade Commission.

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Caribbean Basin Initiative (CBI) Under the Caribbean Basin Economic Recovery Act (CBERA) also knows as the Caribbean Basin Initiative (CBI), the United States extends tariff preferences that go beyond preferences under GSP to certain imports from 24 eligible countries in the Caribbean region. The original program went into effect on January 1, 1984, and was due to expire on September 30, 1995. It was revised and made permanent under the Caribbean Basin Economic Recovery Act of 1990 (P.L.101-382). Furthermore, the Congress enacted the Caribbean Basin Trade Partnership Act (CBTPA) on May 18, 2000 (P.L. 106-200) to respond to the devastation wrought by Hurricanes Georges and Mitch in 1998. The CBTPA provides for more trade preferences on a more extensive range of imports from the region including textiles and apparel but is scheduled to end on September 30, 2008, or on the date that the Free Trade Area of the Americas agreement is completed, whichever is earlier. Table 6 below provides data on the impact of the CBI and CBTPA programs in U.S. trade in 2005. The data indicate that the CBTPA has added substantially to the tariff preferences for U.S. trading partners in the region. The significance of CBI/CBTPA will diminish as the DR-CAFTA (see discussion below) is implemented since the larger CBI beneficiaries are participants in that arrangement. Table 6. U.S. Imports from CBI/CBTPA Beneficiary Countries, 2005 (Millions of Dollars) 1. Total Imports 2. Imports MFN Duty Free 3. Imports Under GSP 4. Imports Under CBI 5. Imports Under CBTPA +CBI 6. CBTPA/CBI Share of Total Imports

$31,814 11,648 465 3,564 12,337 38.7%

Source: CRS calculations based on U.S. Department of Commerce data compiled by the United States International Trade Commission.

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Free Trade Agreements (FTAs) The United States entered into its first bilateral free trade agreement (FTA) in 1985 with Israel and into its largest FTA in 1994 with Canada and Mexico — the North American Free Trade Agreement (NAFTA). While the United States launched FTA negotiations with three countries during the Clinton Administration — Jordan, Chile, and Singapore — U.S. interest in FTAs has surged under the Bush Administration as part of its “competition in liberalization” trade strategy.15 In addition, agreements have been signed (but not entered into force) with Oman, Colombia, and Peru. Negotiations with Panama have been completed, but an agreement has not yet been signed. Negotiations are underway with South Korea and Malaysia. They were launched with members of the South African Customs Union (SACU), Thailand, Ecuador, and the United Arab Emirates (UAE) but are now dormant. Of the seven FTAs that have entered into force since 2001, only one agreement has been with a nondeveloping country (Australia).

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In terms of trade with developing countries, the emphasis on FTAs signifies a decided shift in U.S. policy and strategy from unilateral trade preferences to reciprocal agreements. For developing countries, FTAs provide the opportunity to negotiate for greater access to U.S. markets and provide a forum to raise concerns about U.S. trade policy and practices; for example, anti-dumping practices. Similarly, the United States has been seeking increased market access in developing countries, reduced barriers to foreign investment, especially in financial services and professional services, and greater protection of intellectual property rights (IPR). Both the United States and its trade agreement partners have used the FTAs also to achieve non-commercial foreign policy objectives, such as solidifying alliances. FTAs are reciprocal agreements, meaning that the partners negotiate on an equal basis, at least ostensibly. Consequently, while the United States has demanded that developing trade countries improve IPR protection as a condition for preferential treatment in its market, some developing country partners have demanded increased access for textiles and apparel or other markets deemed sensitive by U.S. policymakers as a condition for preferential treatment for U.S. exporters. Critics have argued that the United States needs to shift the emphasis of FTAs from developing countries to larger trade partners, such as Japan and the EU, where the benefits of FTAs might be greater. The United States also employs bilateral and regional trade and investment framework agreements (TIFAs) with a number of developing countries. Under a TIFA, the participating countries agree to establish a council as a forum to discuss ways to facilitate mutual trade and investment. In some cases, a TIFA is considered a step toward launching FTA negotiations.

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World Trade Organization (WTO) The United States has promoted developing countries’ membership and participation in the WTO. Along with increasing trade flows, many developing countries have been exerting stronger political influence in the WTO. Of the 150 WTO members, 107, or 71%, are developing countries. Because of WTO rules of procedures, the developing countries are able to exert institutionally a disproportionally larger degree of influence in the WTO than their participation in world trade flows might dictate. The WTO makes decisions by consensus, which means that any one member-country can block a decision. Developing countries’ participation in the General Agreement on Tariffs and Trade (GATT)/WTO has evolved over time. Up until the 1990s, most developing countries did not consider GATT to be an institution that would be sympathetic to their economic concerns, and they largely worked through U.N. organizations.16 For that matter, the highly protectionist trade policies that many developing countries were following would not have been congruent with GATT principles and rules fostering trade liberalization. Developing countries increased their activity most noticeably during the Uruguay Round (1986-1994) as they began to put their imprint on agreements that emerged from the round, including the establishment of the WTO. This trend matched the economic restructuring that many developing countries were undertaking to integrate their economies with the rest of the world and that is reflected in their growing shares of world and U.S. trade. The developing countries’ voice in the WTO has never been stronger than in the Doha Development Agenda round and in events leading up to the launch of that round. In late 1999, the WTO trade ministers had gathered in Seattle for the third WTO Ministerial and their main

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agenda item was to reach agreement on the launching of a new round of WTO negotiations. However, the large group of developing countries, themselves rather diverse and promoting different agendas, had nevertheless united against the scope and content of a proposed new round. The Seattle meeting collapsed, and some experts assert the concerns of the developing countries not being addressed was an important factor in that failed meeting. Developing countries were especially concerned that the mechanism for establishing the agenda for the round did not allow them a sufficient opportunity to promote issues of interest to them.17 The negotiations were eventually launched at the fourth ministerial in November 2001 in Doha, Qatar, as the Doha Development Agenda (italics added) round, to reflect the intention of the WTO members to focus on the concerns of developing countries. The negotiations moved very slowly. At the fifth ministerial in Cancun, they came to a standstill when the members could not agree on how to proceed. Among the major participants was the G-20 group of developing countries, led by Brazil and India. At Cancun and since that meeting, the G-20 has emerged as a major force, on par with the United States and the EU in setting the agenda and pace of the negotiations.18 One of the problems of WTO participation for many developing countries is that it is costly to initiate and carry through with disputes in the WTO.

ISSUES IN U.S. TRADE WITH DEVELOPING COUNTRIES The emergence of developing countries as an important factor in U.S. trade has generated a range of policy issues that, while not unique to developing countries, arise more often in U.S. trade with them. The issues described below do not constitute an exhaustive list but, nevertheless, represent the most prevalent issues that have emerged in U.S. bilateral and multilateral negotiations with developing countries. Some of the issues are developing country challenges to the United States; that is, changes to U.S. laws and practices. Others are U.S. challenges to developing countries. The issues generally cut across U.S. trade relations with most developing countries at all levels of economic development.

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Labor Rights and Wages Perhaps no issue has dominated debate on U.S. trade policy over the past decade more than the role of trade liberalization in employment and wages. The issue results from the increased role of U.S. trade with lower-wage developing countries and the concern that U.S. workers are forced to compete in a “race to the bottom” as U.S. companies are induced to close down or to reduce the wages of or lay off workers and move production facilities to lower-wage countries. Labor and trade as an issue has gained more attention recently as economic studies have focused on the growing income gap in the United States; that is, even though the U.S. economy continues to grow robustly, more of the rewards from that growth are going to more highly-paid workers, to higher-income households, and to multinational corporations. Many economists attribute the growing gap to advances in technology that improve labor productivity and increase demand for high-skilled labor, while diminishing demand for low-skilled labor. They also attribute a modest role to trade liberalization and globalization.19 Other economists attribute a larger role to increased trade with lowwage labor

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countries and the emergence of large pools of low-wage labor in China and India that cause a compression of wages in developed countries, including the United States. One study shows that over the past twenty years, income inequality in the United States has been rising suggesting a correlation with the rise in trade with developing countries. In addition, they point to more intra-industry trade between the United States and developing countries where U.S. companies shift production to countries with lower wage labor.20 Trade policy responses and proposals in the United States have varied. For example, some observers argue that trade plays a limited role, if at all, in employment and wages, and therefore, no trade policy response is required. Others have suggested that the government should provide a safety net to workers who lose their jobs or experience a decrease in wages because of trade. This safety net might be in the form of an enhanced trade adjustment assistance (TAA) program or wage insurance. Others have proposed that the United States needs to boost the level of education to better prepare U.S. workers to compete in the global economy. Some Members of Congress have argued that lower wages persist in developing countries in part because of the lack of labor rights protection and have called for enforceable internationally-accepted labor standards to be part of U.S. trade agreements with the governments of developing countries. Developing countries, on the other hand, consider demands for labor rights provisions in trade agreements as a form of protectionism. They argue that their workers’ wages are lower because their economies have an abundance of unskilled labor and that low wages reflect the lower level of economic development. This issue will likely be part of the expected debate over the renewal of the trade promotion authority/fast track procedures during the 110th Congress and debate over implementing bills for FTAs.21

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IPR Protection Congress and the Administration have made foreign government protection of the rights of U.S. holders of copyrights, trademarks, and patents a priority in trade negotiations and trade agreements, including FTAs. While not exclusively an issue with developing countries, the problem primarily occurs with those countries because they have not developed a sufficient body of laws or do not adequately enforce the laws they do have. U.S. producers of IP products argue that they not only lose revenues because of the sale of pirated products but also lose control over the qualityof the product that bears their brand name or trademark. Developing countries argue that they do not have the infrastructure to combat piracy, and that legally produced goods would be prohibitively expensive for their residents to produce or sell. Each year the Office of the United States Trade Representative issues a Special 301 report that identifies trading partners that fail to protect U.S.-origin IPR.22 Of the 13 countries that the USTR placed on its “priority watch list,” 11 were developing countries, and the other two were former Soviet states.23

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Access to Affordable Medicines For many developing countries, especially the LDCs, access to affordable medicines to combat infectious diseases — HIV/AIDS, tuberculosis, malaria, and others — has been a major issue in their trade relations with the United States and other developed countries. They claim that the prices demanded by pharmaceutical companies are beyond the means of those in need. The pharmaceutical companies respond that the high costs are required for the companies to recoup the research and development costs they have incurred. Some pharmaceutical companies have made their drugs available to developing countries that face health emergencies but have done so largely on an ad hoc basis. In December 2005, WTO members adopted, as an amendment to the Trade- Related Aspects of Intellectual Property Rights (TRIPS) agreement, a provision allowing the use of compulsory licenses for the production of generic pharmaceuticals for certain infectious diseases where the developing country lacks the domestic capacity to manufacture those medicines. In essence, it allows a developing country facing a health crisis to issue a compulsory license for the production of a generic drug in a third country that has the production capacity and then to import that medicine. The provision allows for compensation for the patent holder and restricts the use of the medicine for domestic use and for a limited period of time. However, for various reasons use of the system of compulsory licenses has been modest and developing countries have complained that developed countries arenot putting the procedures in place for it to be used.24

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Tariffs and Nontariff Barriers Developing countries raise the issue of high U.S. tariff and non-tariff barriers on products in which they have a comparative advantage, for example, textiles and apparel and certain agricultural products. They claim that these barriers limit their ability to export to the U.S. market. Particularly, developing countries cite high tariffs on textiles and apparel. One study points out that 62.7% of the value of apparel imports from developing countries face “peak” U.S. tariffs (tariffs of 10% or greater). Wearing apparel production is largely labor-intensive and therefore advantageous for many developing countries with an abundance of low-wage labor to produce and export.25 Developing countries have raised this issue during bilateral negotiations on free trade agreements.26 Developing countries frequently complain about high U.S. tariffs, non-tariff barriers, and subsidies on some agricultural products. U.S. quotas and high out-ofquota tariffs on sugar have been an issue in U.S. FTA negotiations with sugarproducing developing countries.27 One study has estimated that tariffs, quotas, and subsidies provide U.S. agricultural producers with the protection equivalent to an average tariff of 19.9%. The study also notes that the United States is by no means the most protectionist in this category, as the tariff equivalents for other industrialized countries, are much higher: Canada 52.3%; European Union 46.4%; and Japan 82.1%.28 At the same time, the United States asserts that developing countries maintain high tariffs and non-tariff barriers on some agricultural products and manufactured goods and barriers to trade in services, such as banking, insurance, and professional services. The United States has

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pressed the developing countries to reduce these barriers that could offer expanded markets for U.S. exporters but also improve the efficiency of developing economies.

U.S. Trade Remedy Practices Many developing countries complain that antidumping actions that the United States and other developed countries initiate against their products are protectionist and unduly affect them. A number of developing countries are part of an informal group in the WTO called “Friends of Antidumping.” In the Doha Development Agenda round, they have proposed that developed countries extend “special and differential treatment” to developing countries when initiating antidumping actions against their products, such as raising the de minimis threshold for AD action, that is the level of dumping below which no action is to be taken.29 Developing countries have also raised the issue with the United States as part of FTA negotiations, pressing for special treatment under the FTAs. South Korea has been doing so. Congress has gone on record opposing any agreement that weakens antidumping laws or any other U.S. trade remedy statute. This position is contained in a statute authorizing trade promotion authority/fast track as a principal negotiating objective: ... to preserve the ability of the United States to enforce rigorously its trade laws, including the antidumping, countervailing duty, and safeguard laws, and avoid agreements that lessen the effectiveness of domestic and international disciplines on unfair trade ...30 A rather strong bipartisan consensus in Congress supports this principle. The Bush Administration allowed the possibility of changes in trade remedy laws to be put on the table in the Doha Development Agenda, arguing that doing so was necessary in order to get developing countries to launch the negotiations. Many Members of Congress have criticized this step.

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Effectiveness of Trade Preference Programs Many developing countries argue that while trade preference programs, such as GSP, are well-meaning on the surface, in practice they do not provide much benefit because of exceptions made for import-sensitive products. These products tend to be ones in which developing countries have or could have a comparative advantage. For example, U.S. law prohibits GSP coverage for certain textile and apparel, watches, import-sensitive electronic products, import sensitive steel articles, footwear, leather apparel, and import-sensitive manufactured glass products. Developing countries also argue that benefits of tariff preference programs are eroding because the United States and other developed countries have been entering into free trade agreements that eliminate tariffs among FTA partners. In addition, various rounds of multilateral negotiations under the GATT and WTO have lowered tariffs for all members and thus have been eroding the effectiveness of trade preference programs for developing countries.

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TRENDS AND POLICY IMPLICATIONS Developing countries have become an increasingly significant factor in U.S. trade over the last two or more decades, and this influence is reflected in the issues on the trade agenda of the 110th Congress: the possible renewal of trade promotion authority (TPA) (or fast track trade authority); implementing legislation for FTAs; reauthorization of trade adjustment assistance (TAA) for workers and firms; review and possible re-authorization of GSP and other trade preference programs; oversight of the Doha Development Agenda (DDA) round negotiations in the WTO; and other issues. The growth of developing countries’ foreign trade presents the United States with opportunities and challenges. The imports from many developing economies provide U.S. consumers with an ever widening range of choices of products at lower prices, raising real incomes and contributing to a higher U.S. standard of living. A number of the developing countries have also become robust markets for U.S. exports. At the same time, U.S. workers are competing with a growing pool of lowerwage labor from India, China, and other developing countries. Some U.S.-based firms are induced to use labor-saving technology, to move production offshore, or to shut down their operations completely. Even workers in the services sector, such as computer programmers, are feeling the pressures of competition from some developing countries. Many economists argue, however, that in the long run that trade affects the composition of jobs but not employment levels. Trade with developing countries also raises a set of virtually unique issues regarding labor rights, environment protection, and intellectual property rights, among others, that have become fixtures on the U.S. trade agenda. At the same time, developing countries are challenging U.S. trade policies on trade remedies, high tariffs on wearing apparel and other import-sensitive products, pricing of medicines, and the temporary entry of foreign workers, among other issues. If current trade trends hold, developing countries can be expected to account for increasing shares of U.S. exports and imports and of world trade. As a result, these opportunities and challenges will likely continue, if not expand. The analysis of U.S. trade trends also exposes a significant divide among groups of developing countries. Some countries, such as those in East Asia, Mexico, and Chile, have made great strides, and are expanding their role in U.S. and world trade. Others including most of Africa, many countries in South Asia, and some in Latin America, lag behind or are losing shares of U.S. and world trade. These differences suggest that an effective U.S. trade policy needs to differentiate among the various groups of developing countries. These differences could play a role in how the United States proceeds on trade preferences, regional and bilateral trade agreements, and multilateral negotiations in the WTO.

END NOTES 1

Even though many of them would fall under the definition, they are excluded to maintain analytical consistency over a time period that stretches across the Cold War and post Cold War periods. In addition, the impact of these countries on international trade and investment remains minimal at this time.

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17

The members of ASEAN (Association of Southeast Asian Nations) are: Brunei, Cambodia, Indonesia, Laos, Malaysia, Myanmar (Burma), Philippines, Singapore, Thailand, and Vietnam. 3 Calculations based on U.S. Department of Commerce data. 4 Calculations based on data from the U.S. Department of Commerce. 5 CRS calculations based on data from the Bureau of Economic Analysis. 6 Spero, Joan Edelman and Jeffrey A. Hart. The Politics of International Economic Relations. St. Martin’s Press. New York. 1996. p. 231-234. 7 An OECD study points out that primary commodities such as food and raw materials are income inelastic, that is, as national incomes rise, a country’s population spends a declining share of its income on them. In addition, raw materials account for a declining share of production. OECD. The Development Dimensions of Trade. Paris. 2001. p. 134. 8 For more analysis of the trade capacity building program, see CRS Report RL33628, Trade Capacity Building: Foreign Assistance for Trade and Development, Danielle Langton. 9 For more information on the U.S. GSP program, see CRS Report RL33663, Generalized System of Preferences: Background and Renewal Debate, by Vivian C. Jones. 10 However, if measured against dutiable imports, that is, imports that would not otherwise enter duty free under most-favored-nation (MFN) or normal trade relations (NTR) tariff rates, GSP covered imports accounted for 15.9% of total imports from GSP-beneficiary countries. 11 CRS calculations based on Commerce Department data from USITC database. 12 This turns out to be of the dutiable imports from those countries. 13 CRS calculations based on data collected by the U.S. Department of Commerce, U.S. Census Bureau. 14 For more information about the Andean trade preference programs, see CRS Report RL30790, The Andean Trade Preference Act: Background and Issues for Reauthorization, by J.F. Hornbeck. 15 Along with Australia (2005), the United States and entered into bilateral FTAs with Jordan (2001), Singapore, (2004), Chile (2004), Morocco (2006), and Bahrain (2006). It has also signed the DR-CAFTA with the Dominican Republic and five Central American countries. To date the agreements with El Salvador (2006), Honduras (2006), Nicaragua (2006) and Guatemala (2006) have gone into effect while the implementation of agreements with Costa Rica and the Dominican Republic are pending. 16 Michalopoulos, Constantine. Developing Countries in the WTO. Palgrave. New York. 2001. pp. 2, 152-153. 17 Ibid. p. 3. 18 Bhagwati, Jaddish. “From Seattle to Hong Kong.” Foreign Affairs, Special Edition: Freer Trade?, 2005. The G-20 consists of Argentina, Bolivia, Chile, China, Colombia, Costa Rica, Cuba, Ecuador, Egypt, El Salvador, Guatemala, India, Mexico, Nigeria, Pakistan, Paraguay, Peru, Philippines, South Africa, Thailand, and Venezuela. 19 See for example, The Federal Reserve Board. Remarks by Chairman Ben. S. Bernanke Before the Greater Omaha Chamber of Commerce, Omaha, Nebraska. February 6, 2007. [http://www.federalreserve.gov]. 20 See for example, Roach, Stephen S. Special Economic Study: The Politicization of the U.S.-China Trade Relationship. February 13, 2007. pp. 7-9. 21 For more discussion on TPA/fast track and labor rights issues, see CRS Report RL33743, Trade Promotion Authority (TPA): Issues, Options, and Prospects for Renewal, by J. F. Hornbeck and William H. Cooper, and CRS Report RL33864, Traded Promotion Authority (TPA) Renewal: Core Labor Standards Issues, by Mary Jane Bolle. 22 Special 301 refers to a statutory requirement under section 182 of the Trade Act of 1974, as amended, that the USTR annually identify those countries that are the egregious offenders of denying IPR protection and against which the United States could take action. In practice, the USTR has also identified countries which do not fit the category of most egregious offenders but bare serious monitoring on its annual “priority watch list”; and those that require less serious watching, 23 The 13 countries were China, Russia, Argentina, Belize, Brazil, Egypt, India, Indonesia, Israel, Lebanon, Turkey, Ukraine, and Venezuela. 24 For more information, see CRS Report RL33750, The WTO, Intellectual Property Rights, and the Access to Medicines Controversy, by Ian F. Fergusson. 25 Cline, William R. Trade Policy and Global Poverty. Center for Global Development and the Institute for International Economics. June 2004. pp. 112-113. 26 See, for example, the U.S. negotiations with South Korea. CRS Report RL33435, The Proposed South KoreaU.S. Free Trade Agreement (KORUS FTA), William H. Cooper and Mark E. Manyin. 27 See, for example, the negotiations and agreement on CAFTA. CRS Report RL31870, The Dominican RepublicCentral America-United States Free Trade Agreement (DR-CAFTA), by J. F. Hornbeck. 28 Cline, op.cit. p. 123. 29 For more information on the antidumping issue in the WTO, see CRS Report RL32810, WTO: Antidumping Issues in the Doha Development Agenda, by Vivian C. Jones. 30 Trade Act of 2002, Section 2102(b)(14).

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In: U.S. Trade with Developing Countries Editor: Kalan R. Geisler

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Chapter 2

U.S. TRADE AND INVESTMENT RELATIONSHIP WITH SUB-SAHARAN AFRICA: THE AFRICAN GROWTH AND OPPORTUNITY ACT AND BEYOND

*

Danielle Langton

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SUMMARY Following the end of the apartheid era in South Africa in the early 1990s, the United States sought to increase economic relations with sub-Saharan Africa. President Clinton instituted several measures that dealt with investment, debt relief, and trade. Congress required the President to develop a trade and development policy for Africa. The economic challenges facing Africa today are serious. Unlike the period from 1960 to 1973, when economic growth in sub-Saharan Africa was relatively strong, since 1973 the countries of sub-Saharan Africa have grown at rates well below other developing countries. There are some signs of improvement, but problems such as HIV/AIDS and the debt burden are constraining African economic growth. In May 2000, Congress approved a new U.S. trade and investment policy for sub-Saharan Africa in the African Growth and Opportunity Act (AGOA; Title I, P.L. 106-200). U.S. trade with and investment in sub-Saharan Africa have comprised only 1-2% of U.S. totals for the world. AGOA extends preferential treatment to imports from eligible countries that are pursuing market reform measures. Data show that U.S. imports under AGOA are mostly energy products, but imports to date of other products have grown. AGOA mandated that U.S. officials meet regularly with their counterparts in sub-Saharan Africa, and six of these meetings have been held. AGOA also directed the President to provide U.S. government technical assistance and trade capacity support to AGOA beneficiary countries. Government agencies that have roles in this effort include the U.S. Agency for International Development, the Assistant U.S. Trade *

This is an edited, reformatted and augmented version of a Congressional Research Service Publication RL 31772, Updated October 28, 2008.

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Representative for Africa (established by statute under AGOA), the Overseas Private Investment Corporation, the Export-Import Bank, the U.S. and Foreign Commercial Service, and the Trade and Development Agency. In addition to bilateral programs, the United States is a member of several multilateral institutions that provide trade capacity building. In AGOA, Congress declared that free-trade agreements should be negotiated, where feasible, with interested sub-Saharan African countries. Related to this provision, negotiations on a free-trade agreement with the Southern African Customs Union, which includes South Africa and four other countries, began in June 2003, but were suspended in April 2006. Several topics may be important to the 110th Congress in the oversight of AGOA and in potential legislation amending the act. These issues concern expanding the number of beneficiary countries which use AGOA benefits; diversifying AGOA exports away from primary commodities such as oil; making trade capacity building more effective for AGOA beneficiaries; and strengthening the link between poverty reduction and trade in Africa. This product will be updated periodically.

INTRODUCTION All of us share a common vision for the future of Africa. We look to the day when prosperity for Africa is built through trade and markets.

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— President George W. Bush to delegates at the African Growth and Opportunity Forum in Mauritius, January 15, 2003 As reflected in the above statement by President Bush, a key element in U.S. policy toward Africa is the potential benefit from improved commerce between the two regions. This interest in increasing bilateral commerce began after the end of the apartheid era in South Africa in the early 1990s. In 1993, Congress approved the end of anti-apartheid restrictions, and later that year Commerce Secretary Ron Brown led a business delegation to South Africa. With the end of apartheid, President Clinton instituted numerous measures to help the region and increase U.S. trade and investment there. In 1994, he announced a $600 million aid and investment package for South Africa. In 1997, he proposed the Partnership for Economic Growth and Opportunity in Africa, which offered different levels of economic benefits to countries in sub-Saharan Africa (SSA), depending on their economic reform measures. At the same time, Congress was developing legislation that sought to improve U.S.Africa trade relations. In the 1994 legislation to implement the Uruguay Round multilateral trade agreements (P.L. 103-465), Congress directed the Administration to develop and implement a comprehensive trade and development policy for the countries of Africa. Disappointed with the Administration’s first report under this provision, some Members developed legislation to authorize a new trade and investment policy for sub-Saharan Africa. In May 2000, Congress approved such legislation in the African Growth and Opportunity Act (AGOA; Title I, P.L. 106- 200). AGOA offers trade preferences and other economic benefits to countries in SSA that meet certain criteria, including progress towards a market economy, respect for the rule of law, and human and worker rights.

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U.S. Trade and Investment Relationship with Sub-Saharan Africa

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TUNISIA MOROCCO Canary Islands ALGERIA

WESTERN SAHARA

CAPE VERDE

LIBYA

EGYPT

MAURITANIA MALI

NIGER

ERITREA CHAD SUDAN

DJIBOUTI

NIGERIA

ETHIOPIA

CAMEROON

CENTRAL AFRICAN REPUBLIC SOMALIA

EQUATORIAL GUINEA SAO TOME & PRINCIPE

UGANDA

REPUBLIC GABON OF DEMOCRATIC CONGO REPUBLIC OF THE ANGOLA CONGO

KENYA RWANDA BURUNDI

TANZANIA

COMOROS

ANGOLA ZAMBIA ZIMBABWE MOZAMBIQUE

MADAGASCAR

NAMIBIA BOTSWANA

SOUTH AFRICA

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Figure 1. Africa Source: Map Resources. Adapted by CRS. (K.Yancey 6/21/04)

Both the executive and legislative branches continue to consider ways in which to improve trade relations between the United States and SSA. In 2002, the Congress amended AGOA to further increase market access for products from SSA.1 The Administration began free-trade negotiations with the South African Customs Union (Botswana, Namibia, Lesotho, South Africa, and Swaziland) in June 2003. In 2004 Congress passed legislation further amending AGOA, extending its benefits beyond the original deadline and clarifying certain provisions. This legislation also included directives to the President on investment initiatives and technical assistance. Congress passed legislation in December 2006 which further amends AGOA, to extend certain provisions concerning textile and apparel imports to 2012.2 This report presents perspectives on African economic trends and provides an overview of U.S. trade and investment flows with SSA. It discusses the provisions of AGOA and the changes that have occurred since its enactment. It concludes with a brief discussion of issues of congressional interest.

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PERSPECTIVES ON THE SUB-SAHARAN AFRICAN ECONOMY

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Historical Perspectives The historical pattern of contemporary Africa’s economic growth provides insights to help understand Africa’s current economic situation and policy options. Between 1960 and 1973, which is the period immediately following independence in most African countries, economic growth was reasonably strong in much of sub-Saharan Africa (SSA). The subsequent two decades were, however, a period of stagnation or decline for most countries.3 The causes of Africa’s slow and stagnant economic growth have been a source of debate among development economists. Analysts have cited poor governance, political instability, geographic features, and historical conditions such as colonialism as different reasons for Africa’s economic malaise. Whatever the underlying cause, Africa’s slow growth and stagnation have been attributed to slow accumulation of both human and physical capital, dependence on single commodity exports, low productivity growth and pressures from high population growth rates.4 Most African countries experienced a sharp decline in their growth trends at some point between 1973 and 1980, followed by persistent stagnation until the early 1990s. Average SSA per-capita GDP reached its minimum point in the mid 1990s, and still had not recovered to 1970s levels in 2005.5 High economic growth volatility is a common feature in SSA countries’ historical trends. A recent World Bank study finds that SSA has experienced more growth volatility than other regions, resulting in dampened investments and obscuring periods of good performance for some countries. This volatility has been caused by conflict, poor governance, and fluctuating world commodity prices. The authors of the study contend that reducing volatility is at least as important as promoting growth.6 Recent data demonstrate that many African countries have made a modest recovery since about 1994, but the growth rates for the remainder of the 1990s tended to remain far below the first postcolonial phase.7 For the four decades as a whole, SSA’s average per capita income growth of 0.9 percent lagged behind that of other developing countries by 1.5% and approximately 3% below that of the high performing African (Botswana and Mauritius) economies.8 Individual African countries have shown widely divergent economic growth performance. A recent study found that in a group of 36 African countries, 22 countries exhibited reasonably robust growth before the long period of stagnation. The remaining 14 either experienced sharp growth fluctuations or showed persistent stagnation at growth rates below 1.5 percent throughout the last three decades. In this study, the high growth rates achieved by Botswana and Mauritius stand out.9 The consequence of the long period of stagnation for a large number of African economies, combined with high population growth rates, is that little or no progress has been made in raising the standards of living in these countries. Many African countries have experienced a decrease in the standard of living.10 Between 1960 and 1994, out of 35 SSA countries for which comparable data exist, 16 suffered at least 20% loss in income per capita measured in 1985 constant US dollars. Most of the losses were registered after 1975.11 In contrast to SSA, developed countries have sustained a remarkably steady per capita growth of approximately 2% for about 100 years, and some newly industrializing countries have

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maintained income growth rates above 3% for nearly three decades, thus enabling them to gain significant ground on the industrialized countries.12

Current Perspectives

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Economic Growth Forecast According to the World Bank, Sub-Saharan Africa’s resilient economic growth performance over the past decade suggests that it may have achieved a milestone in its quest for sustained growth. SSA’s economic performance from 1995 to 2005 “reverses the collapses in 1975-1985 and the stagnations in 1985-1995.”13 Its growth has averaged 4.0% between 2000 and 2005, compared with less than one percent during the early 1990s. In 2006, GDP expanded by 5.6% in SSA. Also, the growth seen in the current period is less volatile and more evenly distributed among African countries than in the past. Twenty-two countries (out of a total 48 Sub-Saharan African countries) have had average growth rates of 4% or greater during the past five years, as compared with only four countries in the first half of the 1990s. In 2006, half of the SSA countries experienced growth of 5% or more. This improved economic performance may reflect many factors, including better governance, increased trade flows, strong commodity prices, rising aid flows, and debt forgiveness.14 Despite these promising trends, most African countries will reportedly not be able to meet the Millennium Development Goal (MDG) of halving poverty by 2015 without doubling their rate of growth.15 The World Bank forecasts that sub-Saharan Africa will achieve a real GDP growth rate of 5.8% in 2007 and 2008. The growth rate for the entire world is estimated to be 4.0% in 2006, and is forecasted to be 3.3% in 2007. For all developing countries, economic growth is forecasted to be 6.7%, with the fastest growth in Asia.16 Investment and Growth Challenges Despite the region’s improved economic performance, the economic challenges facing Africa remain enormous. African countries are vulnerable to volatile weather conditions, commodity prices, and political events in parts of the continent. Many economies in Africa depend on one or two commodity exports, which leaves them vulnerable to exogenous factors. They are also said to generate too little savings and attract too little investment. According to the UN Economic Commission for Africa, Africa must devote at least 25% of its GDP to investment to achieve sustainable growth.17 Yet, World Bank figures indicate that gross domestic investment (public and private) in Africa only accounted for 19% of GDP in 2005.18 Net foreign direct investment (FDI) at $11.3 billion was the equivalent of 2% of GDP in 2004. While FDI worldwide remains stable, FDI flows to Africa as a percentage of flows to developing countries as a whole have fallen from approximately 25% in 1970 to 5% in 2004.19 GDP growth is positive for Africa as a whole, but average population increases of 2.7% in the 1990s have caused per capita GDP to fall during much of the period. SSA’s real per-capita income was $572 in 2005 compared with $590 in 1980.20

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HIV/AIDS The HIV/AIDS pandemic is also straining African economies and threatens to curtail future economic growth. The point estimate of SSA’s incidence of HIV/AIDS was 6.1% in 2005, and ten countries in southern Africa had incidence rates of over 10%. Botswana, long considered one of the region’s most successful economies, had an incidence rate of 24.1%, which is even lower than its peak of 37.3% in 2003. Life expectancy in Botswana has fallen to 35 years, and for the region as a whole, it has fallen to 47 years. Only Swaziland had a higher HIV/AIDS incidence rate than Botswana in 2005, at 33.4%. The pandemic not only diverts resources from investments in productive resources and social services to care for the sick and dying, but it also erodes human capital by striking some of the most productive members of society: skilled workers, teachers, and professionals.21 Debt The debt burden carried by SSA countries has been identified as a drag on the economies of the region. At the end of 2005, the states of SSA owed foreign creditors a total of $212.9 billion.22 While SSA’s debt is comparable to other regions in terms of absolute amount, per capita share ($291 per head), or debt service as percentage of export earnings (6%), its debt burden has been considered onerous because of its high ratio of debt to income.23 Africa’s total debt was equal to 66% of its income in 2002. As of late 2007, Africa’s total debt stood at about 20% of its income.24 This debt reduction is reportedly the result of debt relief initiatives by the international community. Observers, such as World Bank president Robert Zoellick, acknowledge that the debt relief initiative has been successful in reducing the debt of several African countries, but they are concerned about the future debtsustainability of low income countries in SSA because of new debts being incurred to non-western countries, particularly China.25

U.S.-AFRICA TRADE AND INVESTMENT TRENDS

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U.S. Trade with Sub-Saharan Africa The United States conducts a small share of its total trade with sub-Saharan Africa. In 2007, the United States exported $13.9 billion to sub-Saharan Africa, or 1.3% of total U.S. global exports of $1,046 billion. The United States imported $66.9 billion from the region, or 3.4% of its total imports of $1,943 billion. Total trade (exports plus imports) between the United States and sub-Saharan Africa more than quadrupled between 1990 and 2007, from $17 billion to $81 billion. However, U.S. trade with sub-Saharan Africa as a share of total U.S. trade did not increase as dramatically from 1990 to 2007, from 1.9% in 1990 to 2.7% in 2007. Although U.S. trade with sub-Saharan Africa is small compared with major trading partners, it is comparable to U.S. trade with several other developing regions. For example in 2007, the United States traded $87.1 billion (exports plus imports) with the Andean Pact countries (Bolivia, Colombia, Ecuador, Peru, and Venezuela), $81 billion with the countries of sub-Saharan Africa, $70.7 billion with the countries of South Asia (Bangladesh, Brunei Darussalam, Cambodia, India, Laos, Macau, Mongolia, Myanmar, Nepal, Pakistan, Sri

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Lanka, and Vietnam), $63.1 billion with the Mercosur countries (Brazil, Argentina, Uruguay and Paraguay), and $41.2 billion with the countries of the U.S. - Central American and Dominican Republic Free Trade Agreement (CAFTA-DR; Costa Rica, El Salvador, Guatemala, Honduras, Nicaragua, and the Dominican Republic).26 Most U.S. trade with sub-Saharan Africa is with a small number of countries. Eighty-one percent of U.S. imports from the region were from three SSA countriesin 2007: Nigeria (49%), Angola (18%), and South Africa (14%). Exports were similarly concentrated, with 66% of U.S. exports to three countries: South Africa (38%), Nigeria (19%), and Angola (9%). The remaining countries each accounted for less than 6% of U.S. exports to the region. (See Figures 2 and 3.)

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Figure 2. U.S. Imports from Sub-Saharan Africa, 2007

Figure 3. U.S. Exports to Sub-Saharan Africa, 2007 Source: U.S. International Trade Commission data website at [http://dataweb.usitc.gov].

Natural resources dominate U.S. imports from sub-Saharan Africa. Nearly all U.S. imports from the region in 2007 were either energy products (81%), which were almost

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exclusively petroleum, or minerals and metals (8%) (see Figure 4). Nigeria was the largest African and fourth-largest overall oil supplier to the United States. It supplied 60% of U.S. petroleum imports from the region, which accounted for 9% of total global U.S. oil imports. Angola supplied another 23% of U.S. petroleum from the region, and the Democratic Republic of Congo supplied 6%. Other petroleum exporters from the region included Chad, Gabon, and Equatorial Guinea, supplying between three and four percent of U.S. oil imports from Africa. The most important U.S. mineral/metal imports from Africa were platinum, followed by diamonds.

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Figure 4. U.S. Imports from Sub-Saharan Africa by Product Category, 2007

Figure 5. U.S. Exports to Sub-Saharan Africa by Product Category, 2007 Source: U.S. International Trade Commission data website at [http://dataweb.usitc.gov/]

Despite the continued dominance of natural resource products in U.S. imports from subSaharan Africa, there has been some growth in the diversity of products imported. Transportation equipment imports from Africa, mainly automobiles from South Africa, increased in value from $76 million in 1998 to $605 million in 2004. These imports dropped to $295 million in 2005, possibly because of the appreciation of the South African rand. In 2007, U.S. imports of vehicles from SSA were back up to $578 million. The value of apparel

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imported from SSA has shown a similar trend, from $523 million in 1998 to $1,757 million in 2004. In 2005 this figure declined to around $1,460 million, and declined further to $1,291 million in 2006, as a result of the end of the world quota regime for apparel and textiles per the WTO Agreement on Textiles and Clothing (ATC).27 In 2007, apparel imports from SubSaharan Africa held steady at $1,294 million. U.S. exports to sub-Saharan Africa were more diverse. Machinery and mechanical appliances was the leading export sector in 2007 (25% of U.S. exports to the region), followed by transportation equipment (22%), cereals (8%) and electrical machinery (6%). Mining equipment parts was the leading export item, followed by automobiles and wheat. (see Figure 5 above). The United States is among sub-Saharan Africa’s major trading partners. In 2005, China was the leading industrial supplier to SSA for the first time with 7.7% of the market, followed by Germany (6.7%), France (6.2%), and the United States (5.9%).28 The United States was the most important single country destination for exports from SSA, purchasing 29.6% of the region’s exports, followed by China (10.9%) and the United Kingdom (7.1%).29 The European Union accounted for 31.3% of SSA’s imports and 34.4% of its exports, a decline from the two previous years.30

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U.S. Investment in Sub-Saharan Africa Similar to trade, U.S. investment in Sub-Saharan Africa is a very small percent of worldwide U.S. total investment. At year-end 2006, the stock of U.S. direct investment in sub-Saharan Africa was $13.75 billion, or less than 1% of the $2,384 billion in total U.S. direct investment abroad.31 U.S. capital outflows to Africa (including North Africa) doubled from 2005 to 2006, from about $1 billion to $2 billion, though they are still below the 2003 peak of $2.7 billion.32 U.S. investment in Africa is heavily toward natural resources: 47% of total U.S. investment in Africa (excluding Egypt) is in the mining sector (including petroleum), compared to 13% in manufacturing, 22% in holding companies, and 5% in wholesale trade. About 8% of total U.S. investment in the mining sector worldwide is in Africa (excluding Egypt). Four countries accounted for 72% of the stock of U.S. direct investment in sub-Saharan Africa at the end of 2006. For the second year in a row, Equatorial Guinea surpassed South Africa as the leading location for U.S. direct investment in sub-Saharan Africa, representing 31% of the total for the region. Nearly all U.S. investment in Equatorial Guinea was in petroleum. Equatorial Guinea was followed by South Africa, Angola, and Mauritius, which represented 8%, 8%, and 5%, respectively, of the stock of U.S. direct investment in the region.33 Angola and Equatorial Guinea are petroleum exporters, while the primary exports of South Africa and Mauritius to the United States are precious metals and apparel, respectively. For the first time in four years, the stock of U.S. investment in Nigeria was below $1 billion, at $339 million. In recent years, the United States has been the leading source of foreign direct investment in sub-Saharan Africa. According to the United Nations Conference on rade and Development, the United States accounted for more than 37% of totalflows to sub-Saharan Africa from developed countries during the period 1996-2000, followed by France (18%) and the United Kingdom (13%).34

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AGOA: AN UPDATE In May 2000, Congress approved legislation, the African Growth and Opportunity Act (AGOA; Title I, Trade and Development Act of 2000; P.L. 106-200), to assist the economies of sub-Saharan Africa and to improve economic relations between the United States and the region. This section examines the major provisions of AGOA, related legislative initiatives, and other developments since enactment.

Beneficiary Countries and Trade Benefits

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Subtitle A of AGOA authorized the President to designate sub-Saharan African countries as beneficiary countries eligible to receive duty-free treatment for certain articles that are the growth, product, or manufacture of that country. It directed that in designating a beneficiary country, the President must determine that the country (1) has established, or is making continual progress toward establishing a marketbased economy and is taking other designated actions; (2) does not engage in activities that undermine U.S. national security and foreign policy interests; and (3) does not engage in gross violations of internationally recognized human rights or provide support for international terrorism. Subtitle B of AGOA describes trade-related benefits that are available to AGOA-eligible countries. Among these benefits is preferential duty-free treatment for certain articles under the U.S. Generalized System of Preferences (GSP). The GSP program is a unilateral trade preference regime that allows certain products from designated developing countries to enter the United States duty-free. Certain categories of articles (see box) are identified in statute as ineligible for this duty-free treatment, because they are “import sensitive.” AGOA provides that the President can grant GSP duty-free treatment to all of these articles except one category (see box, textiles and apparel). First, however, after receiving advice from the International Trade Commission, the President must determine that an article is not importsensitive in the context of imports from AGOA beneficiaries. These additional articles qualifying for GSP duty-free treatment have to be the growth, product, or manufacture of an AGOA beneficiary country, and they must meet the GSP rules of origin as amended under AGOA. AGOA beneficiaries are exempt from certain limits under the GSP program on allowable duty-free imports (“competitive need limitation”). “Import-sensitive” articles that are ineligible for preferences under GSP: Textile and apparel articles which were not eligible articles for purposes of this subchapter on January 1, 1994, as this subchapter was in effect on such date. Watches, except those watches entered after June 30, 1989, that the President specifically determines, after public notice and comment, will not cause material injury to watch or watch band, strap, or bracelet manufacturing and assembly operations in the United States or the United States insular possessions. Import-sensitive electronic articles.

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Footwear, handbags, luggage, flat goods, work gloves, and leather wearing apparel which were not eligible articles for purposes of this subchapter on January 1, 1995, as this subchapter was in effect on such date. Import-sensitive semi-manufactured and manufactured glass products. Any other articles which the President determines to be import-sensitive in the context of the Generalized System of Preferences.

Textiles and Apparel AGOA also allows duty-free and quota-free treatment for textiles and apparel under any of the following conditions:

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Apparel must be assembled in one or more AGOA beneficiary countries from U.S. fabric that was made from U.S. yarns and cut in the United States; Apparel must be assembled in one or more AGOA beneficiary countries from U.S. fabric that was made from U.S. yarns. The apparel must be cut in an AGOA country and assembled using U.S. thread; or Apparel must be assembled in one or more AGOA beneficiary countries from fabric made in one or more AGOA beneficiary countries from yarn made in the United States or an AGOA beneficiary country. These imports were limited under AGOA to 1.5% of all U.S. imports (in aggregate square meter equivalents) in FY2001, increasing to 3.5% over eight years. (This limit was later amended; see Amendments to AGOA below.) For an apparel product of a less developed AGOA beneficiary country (defined as having a per capita gross national product less than $1,500 in 1998 as measured by the World Bank), that product qualifies for duty-free and quota-free treatment through September 30, 2004 (this deadline was later extended to 2007 and then 2012, see Amendments to AGOA, below), regardless of the country of origin of the fabric. The square meter equivalents cap on products under this category is 3.5% of all U.S. imports. To receive the duty-free and quota-free treatment for textile and apparel products as described above, beneficiary countries must adopt an efficient visa system to prevent unlawful transshipment. They also must work with the U.S. Customs Service to report exports and prevent illegal trade. AGOA provided that the Secretary of Commerce must monitor for surges in imports, with the possible withdrawal of duty-free treatment if imports surge beyond a certain level.

Developments Following Enactment of AGOA AGOA was enacted on May 18, 2000. On October 2, 2000, President Clinton recognized the first AGOA beneficiary countries. He identified 34 out of the 48 sub-Saharan African countries as eligible for AGOA benefits. On December 21, 2000, he granted GSP duty-free treatment to more than 1,800 items from AGOA-eligible countries. These items were selected after public review, advice from the International Trade Commission, and interagency review and recommendation. (These 1,800 items are in addition to about 4,600 items already dutyfree under GSP.)

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During 2001, the Administration declared that 12 AGOA countries had met the additional requirements for duty-free and quota-free treatment for apparel and textiles. Ten of the 12 countries qualified for the provisions for less-developed countries (LDCs) (see the fourth bullet on the preceding page). Early in 2001, in response to interim regulations that the U.S. Customs Service had issued in October 2000 (65 Fed. Reg. 59,668), some legislators protested that the interim regulations denied duty-free benefits for knit-to-shape articles, contrary to what they said was the intent of the act.35 AGOA requires that the President monitor and report annually on the progress of each country in meeting the terms for AGOA-eligibility. Under this requirement, President Bush has made, at the end of each year, annual designations of the countries eligible for AGOA benefits for the following year. The last such designation was in June 2007, when President Bush designated Mauritania as eligible for AGOA benefits.

Amendments to AGOA Congress passed legislation to amend AGOA four times since its initial passage. In 2002, Congress amended AGOA for the first time through the Trade Act of 2002 (P.L. 107-210). An important change pertained to the cap that AGOA had set on imports of apparel assembled in an AGOA country from fabric made in an AGOA country (see the third bullet under Textiles and Apparel above). The Trade Act of 2002 doubled this cap, increasing it to 7% in FY2008. The act, however, left the cap unchanged at 3.5% under the special rule for lesserdeveloped countries. The act also allowed Namibia and Botswana to qualify for the special rule for lesser-developed countries, even though their per capita incomes exceed the limit set under AGOA. The Trade Act of 2002 specifically extended AGOA benefits to knit-to-shape articles and to garments cut in both the United States and an AGOA beneficiary country (“hybrid cutting”). It also made a correction to extend AGOA benefits to merino wool sweaters knit in AGOA beneficiary countries. The Trade Act included other related provisions. It stated that U.S. workers could be found eligible for trade adjustment assistance, if U.S. production shifted to an AGOA beneficiary country and other conditions were met.36 It authorized $9.5 million to the Customs Service for textile transshipment enforcement, and specified that two permanent positions be assigned to South Africa for AGOA enforcement and additional travel funds be allocated for verification in sub-Saharan Africa. It also required that $1.317 million of the Customs Service budget be spent on programs to help sub-Saharan African countries develop visa and anti-transshipment systems. In July 2004, Congress amended AGOA further through the AGOA Acceleration Act of 2004 (P.L. 108-274). This legislation extended the deadline for AGOA benefits to 2015, and it also extended the special rule for LDCs from September 2004 to September 2007. It further stipulated that the cap on the volume of allowable U.S. apparel imports under this rule would be decreased starting in the year beginning September 2004, with a major reduction in the year beginning October 2006 (from 2.9% to 1.6%). The rationale behind this change was to encourage fabric production and vertical integration of the apparel industry in Africa. For apparel imports meeting the yarn forward rules of origin, the cap is to remain at 7% until the expiration of the benefits in 2015. The legislation also clarified certain apparel rules of origin to reflect the intent of Congress. Apparel articles containing fabric from both the United States and AGOA beneficiary countries were specifically allowed, as

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were otherwise eligible apparel articles containing cuffs, collars, and other similar components that did not meet the strict rules of origin. There was also clarification that ethnic printed fabric would qualify for duty free treatment, as long as the fabric met certain standards regarding its size, form, and design characteristics. In addition, apparel articles containing fabrics and yarns recognized in the North American Free Trade Agreement (NAFTA) as being in short supply in the United States were declared as eligible for duty free treatment, regardless of the source of such fabric and yarns. The legislation also increased the maximum allowable content of non-regional or non-U.S. fibers or yarns in AGOA eligible apparel imports, otherwise known as the de minimis rule, from 7% to 10%. The AGOA Acceleration Act included a number of directives for the President. One such directive was to provide agricultural technical assistance by assigning U.S. personnel to at least 10 AGOA beneficiary countries, to help exporters meet U.S. technical standards for agricultural imports. Another directed the President to develop policies to encourage investment in agriculture and agricultural processing, as well as investment in infrastructure projects aimed at improving transportation and communication links both within Africa and between Africa and the United States. There was also a directive to foster improved relationships between African and U.S. customs and transportation authorities. An additional directive was to encourage technical assistance and infrastructure projects to assist in the development of the ecotourism industry in sub-Saharan Africa. Finally, another directed the President to conduct a study on each beneficiary country, identifying potential sectors for growth, barriers to such growth, and how U.S. technical assistance can assist each country in overcoming these barriers. In December 2004, the Miscellaneous Trade and Technical Corrections Act of 2003 (P.L. 108-429) was passed, which contained a technical correction to the AGOA Acceleration Act. The legislation also allowed Mauritius to qualify for the special rule for LDCs for the one year beginning October 1, 2004, with a cap of 5% of total eligible imports under this rule. Congress passed the Africa Investment Incentive Act of 2006 in December 2006 (Title VI of P.L. 109-432). This act extends the special rule for LDCs which allows textiles and apparel quota- and duty-free access to the U.S. market regardless of the source of materials used, as long as assembly takes place within an AGOA-eligible LDC. The special rule for LDCs would have expired in 2007, but this act extends it to 2012 and increases the cap on square meter equivalents under this rule back to the initial level of 3.5%. This act also contains an “abundant supply” provision stipulating that if a certain fabric is determined by the U.S. International Trade Commission to be available in commercial quantities in AGOA beneficiary countries, then the special rule will no longer apply to apparel and textiles containing that particular fabric.

Current Beneficiaries At present, 41 sub-Saharan African countries are designated as AGOA-eligible. Of the 41 countries that may receive trade benefits, 26 have met the additional requirements to receive duty-free treatment for their textile and apparel products, and of those, 24 qualify for the special rule for lesserdeveloped countries (all but South Africa and Mauritius). See Table 1 for a list of sub-Saharan African countries and their status under AGOA.

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Danielle Langton Table 1. Country Status under AGOA (as of October 28, 2008) Status

Countries

Not Designated as Eligible (7 countries)

Central African Republic; Côte d’Ivoire; Equatorial Guinea; Eritrea; Somalia; Sudan; Zimbabwe.

AGOA Eligible Only; Not Eligible under Apparel Provision (15 countries)

Angola; Burundi; Comoros; Republic of the Congo; Democratic Republic of Congo; Djibouti; Gabon; The Gambia; Guinea; Guinea-Bissau; Liberia; Mauritania; Sao Tome and Principe; Seychelles; Togo. Mauritius; South Africa

AGOA Eligible, Eligible for Apparel Provision, Special Rule Does Not Apply (2 countries) AGOA Eligible, Eligible under Apparel Provision, and Special Rule Applies (24 countries)

Botswana; Benin; Burkina Faso; Cameroon; Cape Verde; Chad; Ethiopia; Ghana; Kenya; Lesotho; Madagascar; Malawi; Mali; Mozambique; Namibia; Niger; Nigeria; Rwanda; Senegal; Sierra Leone; Swaziland; Tanzania; Uganda; Zambia

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Source: AGOA website maintained by the U.S. Department of Commerce and USTR at [http://www.agoa.gov].

AGOA Trade Trends Imports under AGOA have comprised an increasingly significant share of all U.S. imports from sub-Saharan Africa, and are growing. In 2007, AGOA imports (including imports allowed under GSP) were $51.1 billion, or 76% of total U.S. imports from subSaharan Africa of $66.9 billion. Considering the AGOA-eligible countries only, rather than the entire region, U.S. imports under AGOA were 79% of all U.S. imports from those countries in 2007. From 2006 to 2007, total AGOA imports (including GSP) grew by 16%.37 Imports under AGOA have been predominately energy-related products. This sector accounted for 93% of AGOA imports in 2007, which is similar to previous years. Not surprisingly, since petroleum is by far the major product imported under AGOA, Nigeria, a leading oil producer, is the major import supplier under AGOA. Nigeria supplied 59% of AGOA imports in 2007, and together with Angola (23%) accounted for 82% of all AGOA imports last year (including GSP). In comparison, 18 AGOA-eligible countries each exported less than $1 million under AGOA (including GSP), as a group accounting for 0.01% of all AGOA imports. Five of these countries (Benin, Burundi, Guinea-Bissau, Mauritania, and Seychelles) exported nothing under AGOA. The other 14 countries in this group were Burkina Faso, Cape Verde, Djibouti, Gambia, Guinea, Liberia, Mali, Mozambique, Niger, Rwanda, Senegal, Sao Tome & Principe, Seychelles, Sierra Leone, and Zambia.

United States-Sub-Saharan Africa Trade and Economic Cooperation Forum Under AGOA, the President was required to establish within a year of enactment, after consultation with Congress and the other governments concerned, a United States-sub-

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Saharan Africa Trade and Economic Cooperation Forum (hereafter called the Forum). The act stated that the President was to direct certain top officials to host the first Forum meeting with their counterparts from AGOA- eligible countries and countries attempting to meet AGOA eligibility requirements.38 The purpose of the Forum meeting is to “discuss expanding trade and investment relations between the United States and sub-Saharan Africa and the implementation of [AGOA] including encouraging joint ventures between small and large businesses.” AGOA also required the President to encourage non-governmental organizations and the private sector to hold similar annual meetings, and it required the President to instruct U.S. delegates to the Forum to promote a review of HIV/AIDS in each sub-Saharan African country and the effect on economic development. It required the President to meet, to the extent practicable, with heads of governments of sub-Saharan African countries at least every two years to discuss expanding trade and investment relations, and the first such meeting should be within one year of enactment. AGOA was enacted May 18, 2000, and almost a year later, on May 16, 2001, President Bush established the Forum and announced plans for its first meeting in Washington in October 2001. The first Forum was held October 29-30, 2001, in Washington, D.C. President Bush addressed the Forum and announced several initiatives: (1) a $200 million Overseas Private Investment Corporation (OPIC) support facility to give U.S. firms access to loans, guarantees, and political risk insurance for investment projects; (2) a regional office of the Trade and Development Agency (TDA) in Johannesburg to help attract new investment; and (3) the Trade for African Development and Enterprise Program, initially funded at $15 million, to establish regional hubs to help African businesses in the global market. (These initiatives were implemented; see later sections.) The second Forum was held January 13-17, 2003, in Port Louis, Mauritius. In a videotaped message, President Bush announced that he would ask Congress to extend AGOA beyond its 2008 deadline. He also outlined other U.S. support for Africa, including assignment of U.S. agricultural officials to the regional business hubs established after the first Forum; a FY2004 budget request for a 50% increase in development assistance; and an additional $200 million over five years for education and teacher training to the region. The third Forum was held December 9-10, 2003, in Washington, DC. The fourth Forum took place in Dakar, Senegal, from July 18-20, 2005. President Bush addressed the fourth Forum through videotaped remarks, and he announced the African Global Competitiveness Initiative, which was to provide $200 million over the next five years to improve the competitiveness of African countries and build their capacity to trade. The fifth Forum was held June 6-7, 2006, in Washington, DC. The sixth forum was held in Accra, Ghana, July 1819, 2007. For the first time, the sixth Forum combined all three sectors (government, private, and civil society) into one meeting.

Technical Assistance and Capacity-Building AGOA legislation directed the President to target U.S. government technical assistance and trade capacity building in AGOA beneficiary countries (Sec. 122). This mandate includes assistance to both government and non-governmental actors. The act directs the President to target technical assistance to governments — (1) to liberalize trade and exports; (2) to

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harmonize laws and regulations with WTO membership; (3) to engage in financial and fiscal restructuring, and (4) to promote greater agribusiness linkages. The act also includes assistance for developing private sector business associations and networks among U.S. and sub-Saharan African enterprises. Technical assistance is also to be targeted to increasing the number of reverse trade missions, increasing trade in services, addressing critical agricultural policy issues, and building capabilities of African states to participate in the World Trade Organization, generally, and particularly in services. In FY2007, the United States reported obligating approximately $505 million in trade capacity building (TCB) assistance to subSaharan Africa, up from $401 million in 2006. The Millennium Challenge Corporation (MCC) accounted for about $376 million (74%) of FY2007 TCB assistance for SSA, with $240 million obligated in Ghana and another $136 million in Mali.39

U.S. Agency for International Development (USAID) AGOA’s mandate to encourage trade related technical assistance is primarily implemented by USAID through the African Global Competitiveness Initiative (AGCI), a Presidential Initiative which supplanted the Trade for African Development and Enterprise (TRADE) initiative in 2006. The TRADE initiative had supplanted the Africa Trade and Investment Policy Program (ATRIP), which operated from 1998 to 2003. These initiatives are generally used to focus activities around a common goal, but there are AGOA-related activities that are funded by other initiatives within USAID. USAID funds various technical assistance programs throughout Africa aimed at improving trade within the region and between the region and the United States. USAID supports regional efforts through its regional missions and the four Regional Hubs for Global Competitiveness (Trade Hubs), located in Ghana, Senegal, Kenya, and Botswana. USAID bilateral missions support projects in individual African countries. The missions and hubs work on improving trade policy both regionally and within country governments. They also have programs to improve trade infrastructure, such as in transportation and energy, and they have enterprise development programs which often target specific industries, such as handicrafts and shea butter. As mentioned above, AGOA encourages the establishment of private sector linkages between U.S. and SSA businesses. To this end, USAID funds an international business linkage program, South African International Business Linkages (SAIBL), which is implemented by the Corporate Council on Africa. SAIBL assists black-owned South African companies to prepare business plans, achieve International Standards Organization (ISO) certification, participate in U.S.- led trade delegations, attend trade shows in the United States, and identify public and private sector export financing. It also assists U.S. firms by identifying trade and investment opportunities in South Africa, by steering U.S. firms to appropriate government and private sector contacts, and by identifying sources of financing. USAID used to fund a similar linkage program for West Africa, the West African International Business Linkages (WAIBL), but it no longer funds this program. The regional trade hubs implement many of the same types of activities as SAIBL, except that they focus more on promoting trade in general and not just exports to the United States. Assistant U.S. Trade Representative for Africa (AUSTRA) Sec. 117 of AGOA supported the creation of this position to serve as the “primary point of contact in the executive branch for those persons engaged in trade between the United

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States and sub-Saharan Africa,” and the chief adviser to the U.S. Trade Representative (USTR) on trade and investment issues pertaining to Africa. This position previously had been established by President Clinton in 1998. One primary function of AUSTRA is to make the yearly determinations as to which countries are eligible for AGOA benefits generally, and also its special textile and apparel benefits. The AUSTRA also sponsors projects for WTO training for SSA trade negotiators, provides support for the Trade Advisory Committee on Africa, and maintains the [http://www.agoa.gov] website. The AUSTRA produced the AGOA Competitiveness Report, which was submitted to Congress on July 13, 2005. Mandated by the AGOA Acceleration Act of 2004, this report provides an analysis of potential economic growth sectors in Africa, barriers to growth in those sectors, and recommendations for U.S. technical assistance to assist in overcoming those barriers.40

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Overseas Private Investment Corporation (OPIC) Since the enactment of AGOA, Sub-Saharan Africa has been one of OPIC’s stated priorities. At the end of 2005, 15% of OPIC’s total portfolio was in the region. As of September 2006, OPIC’s exposure in the region was over $1.8 billion. In FY2006, OPIC supported 14 projects in SSA, or 20% of the year’s 70 projects in total. OPIC has focused on projects to strengthen the region’s basic financial infrastructure and housing sectors.41 OPIC works in Africa and globally through three basic products including political risk insurance, finance (loan guarantees and direct loans), and investment funds. In 2005, OPIC provided $250 million in financing to establish two private equity investment funds in Africa. The first of these new funds is managed by Emerging Markets Partnership (EMP), and it targets infrastructure investments and related industries in Africa. The second fund, Ethos Fund V, aims to promote the expansion of medium-sized enterprises in Sub-Saharan Africa, emphasizing South Africa and the manufacturing and services sectors. These funds are in addition to three funds currently supported by OPIC, which are the $20 million Africa Growth Fund, the $110 million Modern Africa Growth and Investment Fund, and the ZM Africa Investment Fund. As initially planned, all three of these latter funds are currently divesting their assets. Export-Import Bank (Ex-Im) AGOA expressed the sense of Congress to continue to expand the bank’s financial commitments to its loan, guarantee and insurance programs to African countries. The legislation also commended the Bank’s sub-Saharan Africa Advisory Committee for its work in fostering economic cooperation between the United States and SSA. This committee was reauthorized to September 30, 2011 (P.L. 109-438).42 The 2006 legislation reauthorizing the Bank also requires the Bank to report annually on its efforts to improve its working relationship with the African Development Bank and other African institutions.43 The Ex-Im Bank does not finance imports into the United States. However, it does provide loans and guarantees for U.S. exports to the region, some of which can be used to manufacture goods eligible for import to the United States under AGOA. This financing can cover manufacturing equipment, the purchase of U.S. fabric, yarn, and thread necessary for eligibility under AGOA textile provisions, or other raw materials or components used for manufacturing. Ex-Im operates in all 48 SSA countries, although Bank activity and eligibility for specific programs vary according to risk factors. In FY2007, Ex-Im Bank authorized 127 transactions totaling about $424 million in 18 SSA countries. According to its estimates, Ex-

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Im Bank covered approximately 3.1% of the total $14.1 billion of U.S. exports to SSA. By contrast, Ex-Im typically covers about 1% of U.S. exports worldwide.44 In FY2006, Africa accounted for about 2.8% of the total authorizations of the Bank. At the end of the fiscal year, Ex-Im Bank’s exposure in SSA was about $2.5 billion, or 4.3% of its total global exposure.45 By contrast in FY2002, Africa accounted for 2.3% of the loan guarantees and 5% of the medium-term insurance instruments supported by the Bank with a total exposure of $3.2 billion.46 In order to increase its lending activities in Africa, the Bank began its Africa Pilot Program (STIPP) in 1999 to provide short-term export credit to sub-Saharan African countries, many of whom are not eligible for other Ex-Im financial instruments. This program was initially funded at $100 million. Ex-Im also announced in 2000 a pilot program to provide export credits to African countries to purchase U.S. HIV/AIDS medicines.47 This program allows countries to extend payment of these pharmaceutical purchases to five years from standard repayment terms of six months. These export credits have covered two contracts valued at $15 million for medicines and HIV detection equipment to Nigeria and Togo.48 In addition, the Bank reported that as a result of Paris Club sovereign debt restructuring negotiations, it had entered into agreements to restructure or to forgive public sector debt obligations totaling $92 million with eight sub-Saharan African nations in FY2002. These agreements wrote-off all of the Bank’s public sector debt exposure in Mozambique, Tanzania, and Uganda.49

U.S. and Foreign Commercial Service (USFCS) In Sec. 125 of AGOA, Congress found that USFCS presence in SSA had been reduced since the 1980s and that the level of staffing in 1997 (seven officers in four countries) did not “adequately service the needs of U.S. businesses attempting to do business in sub-Saharan Africa.”50 Accordingly, the legislation required the posting of at least 20 USFCS officers in not less than 10 countries SSA by December 31, 2001 “subject to the availability of appropriations.”51 USFCS was instructed by Congress to open offices in Ghana and Senegal, with the stipulation that additional funds would be added to its overall budget. According to a USFCS official, these additional funds never materialized. Presently, USFCS has nine officers in six SSA countries: Côte d’Ivoire, Ghana, Kenya, Nigeria, Senegal, and South Africa. Commercial Service officers seek to facilitate the development of markets for U.S. exporters in the countries where they are stationed. Officers assisting U.S. exporters provide evaluations of potential business partners in the country, facilitate U.S. business contacts with local firms, identify potential local distributors or agents of U.S. exports, provide local financing options, and arrange partner background checks. Commercial Service officers also prepare the Country Commercial Guides which chronicle the business environment of the country. Sec. 125(c) of the legislation directs the International Trade Administration (ITA) to develop an initiative (a) to identify the best U.S. export prospects to the region; (b) to identify tariff and non-tariff barriers that impede U.S. exports to Africa; (c) undertake discussions with African states to increase market access for these goods and services. This activity is being carried out by the ITA in its Market Access and Compliance Unit (MAC). The Unit states that U.S. firms face entrenched tariff and other trade barriers in many African countries, and that its current staff of nine staffers is not adequate to cover the SSA region. In FY2003,

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MAC was given budget authority to add four analysts and negotiators to address these issues.52

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Trade and Development Agency (TDA) Although not tasked with specific directives in AGOA, the TDA contributes to trade capacity building in Africa by funding project planning studies, including feasibility studies, training programs and orientation visits (reverse trade missions in which foreign government officials visit U.S. manufacturers). TDA targets activities that could generate significant U.S. export potential, that could facilitate access to natural resources important to the United States, and that are a priority for host nations and international development efforts. In FY2006, TDA obligated funds for 62 projects in SSA for a total of $10.6 million, or approximately 22% of its program expenditures.53 Multilateral Initiatives In addition to domestic agency programs, the United States participates in several multilateral institutions that provide trade capacity building in Africa and other developing country regions. The World Bank and regional development banks all provide trade capacity building assistance, mainly in the form of loans. The Integrated Framework (IF) is the main multilateral initiative in trade capacity building. It is a process that assists Least Developed Countries (LDCs) to integrate trade issues into their national development strategies. The IF process begins with a diagnostic study of trade challenges and opportunities in the LDC, and is meant to result in better targeted and coordinated assistance by all donors. Six international institutions collaborate on the IF, including the International Monetary Fund (IMF), the International Trade Center (ITC), the United Nations Conference on Trade and Development (UNCTAD), the United Nations Development Program (UNDP), the World Bank, and the WTO. The IF is funded by an IF Trust Fund, composed of voluntary contributions from multilateral and bilateral donors. Total contributions to this trust fund equaled $49.66 million as of March 2007, of which the United States contributed $800,000.54 As of November 2007, 23 of the 29 LDCs which have completed the IF trade diagnostic process were in sub-Saharan Africa. An additional six SSA countries (out of 11 total) have started the diagnostic process, and three more (out of five total) are under consideration to begin the IF process. Several issues have been raised with regard to the IF. The IF was established partly to achieve greater donor coordination, and it is not yet clear whether it will have this effect. In many countries, coordination is an ad hoc activity, achieved as a result of personal relationships rather than through institutional coordination. Thus far, IF work has centered on preparing strategies for trade capacity building, and there has been little coordinated implementation of these strategies.55 Another concern is that the IF process has raised expectations among the participating LDCs, and these expectations may not be fulfilled by the IF process.

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Regional Cooperation and Free Trade Agreements

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AGOA declares the policy position that free trade agreements (FTAs) should be negotiated, where feasible, between interested countries in SSA and the United States in order to serve as a catalyst for increasing trade and investment. Regional economic agreements among SSA countries are also encouraged in AGOA. Discussion of potential partners for free-trade agreements has revolved around South Africa and SACU, but several other regional groupings may prove to be partners for future trade agreements with the United States. The Southern African Development Community (SADC), the Common Market for Eastern and Southern Africa (COMESA), the East African Community (EAC), and the West African Economic and Monetary Union (WAEMU) have all taken steps to begin the process of economic integration, either through trade liberalization or through steps to promote monetary union. While these groups are being encouraged in their attempts at regional integration, they are not immediate prospects for FTAs with the United States. Background on these groups appears in an Appendix.

Southern African Customs Union FTA (SACU)56 On November 4, 2002, USTR Robert B. Zoellick notified Congress that negotiations would be initiated with the members of the Southern African Customs Union (SACU). These negotiations began in June 2003, and were postponed indefinitely in April 2006. The United States and SACU reportedly could not agree on the scope of the negotiations. Currently, the United States and SACU are continuing talks for a Trade and Investment Cooperation Agreement (TICA), which may lead to an eventual FTA. The scope of the TICA is undefined, and may focus on some of the “behind the border” issues from the FTA negotiations, such as intellectual property rights and investment issues. The United States does not have a TICA with any other country or group. A TICA may proceed without extension of Trade Promotion Authority (TPA)57, because it does not include the market access provisions of an FTA. SACU is a customs union composed of South Africa, Botswana, Lesotho, Namibia, and Swaziland. The original SACU agreement dates from the colonial government in 1910 and was renegotiated with the apartheid government in 1969. A new agreement to more fully integrate the smaller states into decision-making for the area, which was previously dominated by South Africa, was signed on October 21, 2002. The agreement is characterized by free movement of goods within SACU, a common external tariff, and the common revenue pool which is apportioned among the member states. A large degree of economic integration exists among the SACU states because of the agreement, perhaps contributing to the U.S. decision to negotiate an FTA with SACU, rather than just South Africa. However, South Africa is the dominant economy of the region, accounting for 87% of the population, and 92 % of the gross domestic product of the customs area. U.S. merchandise exports to SACU totaled $4.6 billion in 2006, led by aircraft, vehicles, construction and agricultural equipment, and computers. U.S. merchandise imports from SACU totaled $8.4 billion, and were composed of minerals such as platinum, diamonds, titanium, iron and steel, textiles and apparel, vehicles, and automotive parts.58

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U.S. Trade and Investment Framework Agreements (TIFA) As of September 2007, the United States has negotiated TIFAs with Ghana, Liberia, Mauritius, Mozambique, Nigeria, Rwanda, and South Africa, and with the COMESA and WAEMU regional arrangements. Generally, TIFAs commit the signatories to expand trade of goods and services, to encourage private sector investment, and to resolve problems and disputes through consultation and dialogue. To facilitate these objectives, the signatories of each agreement have established a Council on Trade and Investment to provide a venue for consultation on trade issues of interest or concern to the parties, and to work toward the removal of impediments to trade and investment flows. TIFAs are often considered to be first steps to the negotiation of free trade agreements. U.S. Bilateral Investment Treaties (BIT) As of September 2007, the United States has signed BITs with Cameroon, Republic of the Congo (Brazzaville), Democratic Republic of Congo (Kinshasa), Mozambique, and Senegal. The goals of the BIT are to protect U.S. investments abroad, and to encourage market oriented domestic policy in host countries. Generally, BITs ensure national treatment for U.S. investments, limits on expropriations, free repatriation of funds, limitations on the imposition of trade distorting or inefficient practices on U.S. investments-including requirements in hiring, and the right of submission of investment disputes to international arbitration. These treaties are promoted by the U.S. government as a method of encouraging the development of international law and trade standards within the partner country.

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New Partnership for Africa’s Development (NEPAD). NEPAD is a key policy vehicle of the African Union (AU), whose leaders formulated and adopted the initiative in July 2001. Described by its proponents as a multi-sector, sustainable development policy framework, NEPAD seeks to reduce poverty, increase economic growth, and improve socio-economic development prospects across Africa. Major NEPAD aims are to attract greater investment and development aid to Africa, reduce the continent’s debt levels, and broaden global market access for African exports. NEPAD emphasizes increased democratization, political accountability, and transparency in governance in African states as primary means of achieving its goals.59 European Union Activity By way of comparison, the European Union (EU) has also been active in promoting trade between itself and the countries of sub-Saharan Africa. The EU-South Africa Agreement on Trade, Development, and Cooperation entered into force on January 1, 2000. This agreement creates a freetrade area between the participants during a 12-year asymmetric transition period. The EU pledges to remove tariffs on 95% of imports from South Africa during a 10year period with most products granted duty-free status in 2002. South Africa will remove duties on 86% of its tariff lines during a 12-year period with most eliminations occurring between 2006-2012. Notably, the agreement does not provide tariff relief to several important South African agricultural exports, nor to aluminum. The Cotonou Agreement, signed in Cotonou, Benin between the European Union and 71 African, Caribbean, and Pacific nations (ACP) in February 2000, extends non-reciprocal, duty-free access for industrial and processed agricultural goods to the EU market granted by

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the 4th Lomé Convention to the end of 2007. The extent of the duty-free access conferred by Cotonou was subsequently enhanced in March 2001 by the “Everything but Arms” initiative, which granted LDCs tariff-free access to all goods, except for sugar, rice, and bananas, for which products a tariffrate quota system will be maintained during a phase-out period ending in 2009. Provisions of the Cotonou Agreement call for the negotiation of trade liberalization agreements with regional economic partnerships that could include the regional African groupings discussed in the Appendix. Preliminary negotiations on the Regional Economic Partnership Agreements (EPAs) began on September 27, 2002 and were supposed to conclude before the expiration of the Cotonou Agreement on December 31, 2007. Many African countries opposed signing EPAs because that would mean opening up their markets to EU imports. In the end, a temporary compromise was reached: most African countries signed “interim EPAs” to keep their EU trade preferences as they were under the Cotonou Agreement.

AGOA: CURRENT AND FUTURE CHALLENGES Several issues may be important to Congress in the oversight of AGOA. These issues concern the termination of the WTO Multi Fibre Agreement, the diversification of beneficiary country and industry participants, the continued eligibility of certain countries for AGOA benefits, the HIV/AIDS epidemic, and the participation of U.S. small business in AGOA.

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Termination of the Multi Fibre Agreement. Article 2 of the WTO’s Agreement on Textiles and Clothing (ATC) terminated the worldwide system of quotas for textile and apparel trade on January 1, 2005. Observers expressed concern that this would spell the end of the African apparel assembly industry, because African producers would be unable to compete on world markets without the quota-free advantage. Over the past three years, apparel exports under AGOA have declined, but the industry has not been completely decimated. One reason is that the United States uses safeguard measures to prevent market disruptions from heavy imports of textile and apparel from China. Another explanation is that the United States still imposes tariffs averaging 18% on most apparel articles, which gives AGOA beneficiaries an advantage.60 Diversification of AGOA Exports. While textile and manufacturing industries make up a growing part of U.S. imports under AGOA, these imports are dwarfed by AGOA imports from the petroleum and mining sectors. These industries are highly capitalized and do not provide extensive employment opportunities for African workers. AGOA benefits are also concentrated in few countries with 89% of 2005 AGOA imports originating in Nigeria, Angola, and Gabon. Moreover, several AGOA-eligible countries export very little under the program. If a goal of the program is to increase African country participation, it may be achieved through targeted trade capacity building and technical assistance. Agriculture is an important source of income for African workers, and increasing agriculture exports under AGOA may help raise incomes and spur economic growth. African countries may

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also begin to export light manufactures, with improved capacity, infrastructure, and policies to encourage investment. Eligibility Standards. A country’s eligibility for AGOA benefits may become a subject of controversy. Some observers feel that the President must strictly enforce eligibility requirements to ensure continued adherence to reforms. However, others have cited the unpredictability of a country’s AGOA benefits from year to year as a source of investment risk, and have suggested minimum eligibility terms of greater than the current one year. Another suggestion includes allowing Congress to override the President’s decision to terminate AGOA benefits through legislation. Several countries have been considered candidates for losing AGOA eligibility. In December 2003, the President declared Eritrea and the Central African Republic to be ineligible for AGOA. In December 2004, Cote d’Ivoire was declared ineligible as well. Lesotho, which is considered an AGOA success story, has been the subject of persistent complaints from indigenous labor groups regarding working conditions in newly developed textile plants. Swaziland has received warnings from the State Department that its human rights record does not meet AGOA eligibility requirements. Several countries have questionable commitment to privatization and tariff reform.

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HIV/AIDS. The HIV/AIDS pandemic is destabilizing the economies of Africa and threatens any progress achieved by AGOA as additional income is spent, not to raising living standards, but to treat a population afflicted with the disease. Due to the disease, life expectancy is falling in several AGOA eligible countries and in the region as a whole. Even with the advantages that AGOA preferences confer, investors may be deterred from the region by high medical costs, by constant replacement of workers stricken with the disease and the attendant training costs, and by the destabilizing risks associated with a society containing a large, dying population. Small Business Participation. Small business accounts for about 55% of the U.S. GDP, and employs a large portion of American workers. U.S. small businesses, however, only participate in limited trade with Africa, and reportedly very few in the small business community know about AGOA. Some observers have noted that U.S. small businesses may benefit from AGOA, and in the process help provide avenues for diversifying African exports. Small business is also important in Africa, and increased partnership may result in better participation on both continents. The U.S. government may become involved in increasing awareness of AGOA among the small business community, and providing opportunities for partnership.

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APPENDIX: REGIONAL ECONOMIC INTEGRATION AMONG SUB-SAHARAN AFRICA NATIONS Southern African Development Community (SADC) This group is composed of the nations of Angola, Botswana, Democratic Republic of Congo, Lesotho, Madagascar, Malawi, Mauritius, Mozambique, Namibia, South Africa, Swaziland, Tanzania, Zambia, and Zimbabwe. Originally formed by front-line states to lessen economic dependence on the apartheid regime in South Africa, the group expanded to include South Africa in 1994. The 1996 Protocol on Trade committed each signatory to remove duties and non-tariff barriers to SADC members within 12 years, to provide national treatment for each other’s goods, to bind existing tariffs at current levels. The economic dominance of South Africa makes economic integration of the SADC region more problematic. South Africa accounts for 82% of the GDP of the region, and it comprises 62% of the region’s intra-SADC imports and 70% of the SADC region’s exports.61 With per-capita income at approximately $3,000, it dwarfs the average per-capita income of many of the other states. In addition, smaller states within SADC are concerned about their lack of economic competitiveness as their home markets are opened up to goods from South Africa. The reliance of many governments on duty revenue has also become a source of concern in implementing reductions of tariff barriers.

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Common Market for Eastern and Southern Africa (COMESA). Founded in 1982 as the Preferential Trade Area of Eastern and Southern Africa, current member states of the COMESA include Angola, Burundi, Comoros, Democratic Republic of Congo, Djibouti, Egypt, Eritrea, Ethiopia, Kenya, Libya, Madagascar, Malawi, Mauritius, Rwanda, Seychelles, Sudan, Swaziland, Uganda, Zambia and Zimbabwe. On October 31, 2000, nine states of COMESA (Djibouti, Egypt, Kenya, Madagascar, Malawi, Mauritius, Sudan, Zambia and Zimbabwe) launched a free trade area that eliminated tariffs on goods originating in the member states. These states have also worked towards establishing coordinated policies in other areas such as rules-of-origin, dispute settlement, applications of safeguard measures, and uniform customs procedures. The group agreed on a common external tariff in May 2007, and intends to launch a customs union at the end of 2008. The goal of monetary union by 2025 is expected to be advanced by the introduction of limited currency convertibility and improved coordination of fiscal and monetary policy during this time period.

East African Community (EAC) Comprised of Kenya, Uganda, and Tanzania, this organization seeks to revive historic tariff-free trade that had been established among the three British colonies in 1923. However, this cooperation broke down in the 1970s due to widespread transhipments and the varied

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economic paths of its participants. The three countries re-established the community in 1999 and have made plans for an asymmetric tariff schedule, in which Kenya will immediately reduce its tariff to zero, while Uganda and Tanzania will have four years in which to reciprocate. The outlook for this grouping is also complicated by a dominant country presence. Most industrial trade in the bloc originates from Kenya, and there is little bilateral trade between Tanzania and Uganda. Nonetheless, two neighboring countries, Rwanda and Burundi, have been invited to join.

West African Economic and Monetary Union (WAEMU) This grouping was originally created to administer the CFA franc (Communauté financière africaine), a currency formerly tied to the French franc prior to its disappearance in 2000 (it is still backed by the French treasury). Its members are Benin, Burkina Faso, Côte d’Ivoire, Mali, Niger, Senegal, Togo, and Guinea-Bissau, the sole nonfrancophone member. The member states have espoused the long-term goal of a full economic union with a common market, macroeconomic convergence, regulatory harmonization, and a common investment policy. A preferential tariff arrangement was concluded for member states in 1995, and a customs union with a common external tariff of 22% became operational in 2000. While the WAEMU countries have achieved a relatively high degree of integration, it has been reported that intramember trade has not greatly expanded. As in other areas, regional conflicts have interrupted the consolidation of economic gains.

END NOTES 1

Section 3108 of the Trade Act of 2002, P.L. 107-210. Section 6002 of the Tax Relief and Health Care Act of 2006, P.L. 109-432. 3 A. Hoeffler, “The Augmented Solow Model and the African Growth Debate,” CSAE, University of Oxford, March 2000. 4 For a further discussion of African economic development, see CRS Report RL32489, Africa: Development Issues and Policy Options, by Raymond W. Copson. 5 Jorge Saba Arbache and John Page, “Patterns of Long Term Growth in Sub-Saharan Africa.” World Bank, November 2007. 6 Jorge Saba Arbache and John Page, “More Growth or Fewer Collapses? A New Look at Long Run Growth in SSA.” World Bank, October 2007. 7 The Economist, May 13-19, 2000. 8 L. Pritchett, “Patterns of Economic Growth: Hills, Plateaus, Mountains, and Plains,” World Bank Paper, July 1998 (hereafter, Pritchett); [http://www.worldbank.org/wbi/attackingpoverty/ events/Turkey_0199/pritch.pdf]. 9 Pritchett, p. 18. 10 W. Easterly, “Why Is Africa Marginal in the World Economy?,” In G. Maasdrop, ed., Can South and Southern Africa Become Globally Competitive Economies? (New York: St Martin’s Press, 1996), pp. 19-30. 11 D. Rodrik, “Where Did All the Growth Go? External Shocks, Social Conflict and Growth Collapses,” mimeo, London School of Economic and Political Science, August 1998. 12 Pritchett, p. 12. 13 The World Bank, Africa Development Indicators 2007, October 2007. 14 The World Bank, Global Development Finance, 2006 and 2007. 15 C. Patillo, S. Gupta, and K. Carey, “Growing Pains,” Finance & Development. (International Monetary Fund: March 2006). 16 The World Bank, Global Development Finance, 2007. 17 United Nations, Economic Report on Africa 2002, pp. 37.

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Gross domestic investment is now labeled gross fixed capital formation by the World Bank, but the definition remains the same. From World Bank, African Development Indicators 2007, October 2007. 19 World Bank, World Development Indicators Online, October 11, 2006. 20 World Bank, African Development Indicators 2007, October 2007. 21 See CRS Report RL33584, AIDS in Africa, by Nicolas Cook. Data from World Bank, African Development Indicators 2007. 22 International Monetary Fund, World Economic Outlook Database, October 2007. 23 Ibid., and World Bank, World Development Indicators Online, October 16, 2006. 24 International Monetary Fund, World Economic Outlook Database, October 2007. 25 “Zoellick Says Pros and Cons to Chinese Lending in Africa,” Agence France Presse, December 18, 2007. 26 Regional trade figures from World Trade Atlas. Although the other regions include fewer countries than subSaharan Africa, most U.S. trade with sub-Saharan Africa is concentrated in a small number of countries. 27 See “Termination of the Multi Fibre Agreement,” above. 28 Office of the U.S. Trade Representative, 2007 Comprehensive Report on U.S. Trade and Investment Policy Toward Sub-Saharan Africa and Implementation of the African Growth and Opportunity Act, May 2007, p. 23. Data were derived from the International Monetary Fund, Direction of Trade Statistics 2006. 29 Ibid. 30 Ibid. 31 U.S. Department of Commerce, Bureau of Economic Analysis, International Economic Accounts, at [http://www.bea.gov/international/di1usdbal.htm]. 32 Ibid. 33 Ibid. 34 United Nations Conference on Trade and Development. World Investment Report 2002: Transnational Corporations and Export Competitiveness, p. 51. 35 On March 6, 2001, the Chairman and Ranking Member of the House Ways and Means Committee and 8 other Members from both parties wrote to the Secretary of the Treasury saying that the U.S. Customs Service interpretation of benefits for knit-to-shape articles was “wrong.” See, Text: Ways and Means AGOA Letter to O’Neill, Inside U.S. Trade, March 9, 2001. 36 For more information, see CRS Report RS22718, Trade Adjustment Assistance for Workers (TAA) and Alternative Trade Adjustment Assistance for Older Workers (ATAA), by John J. Topoleski. 37 Data from the International Trade Commission website, at [http://dataweb.usitc.gov]. 38 Representatives from appropriate sub-Saharan African regional organizations and government officials from other appropriate countries in sub-Saharan Africa also could be invited. 39 USAID Trade Capacity Building Database, [http://www.qesdb.cdie.org/tcb/index.html]; see also CRS Report RL33628, Trade Capacity Building: Foreign Assistance for Trade and Development, by Danielle Langton. 40 See AGOA Competitiveness Report, [http://www.ustr.gov/assets/Document_Library/ Reports_Publications/2005/asset_upload_file604_7857.pdf]. 41 Report of the Overseas Private Investment Corporation on the Host Country Development and U.S. Economic Effects of OPIC-Assisted Projects, Fiscal Year 2006. Submitted pursuant to Section 240A of the Foreign Assistance Act of 1961, as amended, March 2007. 42 Export-Import Bank Reauthorization Act, 12 U.S.C. 635(b)(9)(B)(iii). 43 CRS Report RL33440, Export-Import Bank: Reauthorization, by James K. Jackson. 44 Ex-Im Bank Africa Update, January 2008. 45 Ex-Im Bank, 2006 Annual Report. 46 Ex-Im Bank, 2002 Annual Report. 47 See “Short-Term Africa Pilot Program,” [http://www.exim.gov/africa-i/afr02fac.html]. 48 Conversation with Export-Import Bank Official, February 6, 2003. 49 Ex-Im, 2002 Annual Report, p. 39. 50 AGOA, Sec. 125(a)(4). 51 AGOA, Sec. 125(b). 52 International Trade Administration, “Budget Estimates FY2003,” Exhibit 13, p. 65; Conversation with ITA official, March 6, 2003. 53 U.S. Trade and Development Agency, 2006 Annual Report. 54 See the Integrated Framework website, [http://www.integratedframework.org]. 55 Susan Prowse, “Mega-Coherence: The Integrated Framework,” Trade and Aid: Partners or Rivals in Development Policy. Cameron May: 2006. 56 For more information, see CRS Report RS21387, United States - Southern African Customs Union (SACU) Free Trade Agreement: Background and Potential Issues, by Danielle Langton. 57 For more information on TPA renewal, see CRS Report RL33743, Trade Promotion Authority (TPA): Issues, Options, and Prospects for Renewal, by J. F. Hornbeck and William H. Cooper. 58 U.S. International Trade Commission data website, at [http://dataweb.usitc.gov].

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This paragraph was prepared by Nicolas Cook, Analyst in African Affairs. For more information, see CRS Report RS21353, New Partnership for Africa’s Development (NEPAD), and CRS Report RS21332, The African Union, both by Nicholas Cook. 60 For more information on the ATC, see CRS Report RL34106, U.S. Clothing and Textile Trade with China and the World: Trends Since the End of Quotas, by Michael F. Martin. 61 Beverly M. Carl, Trade and the Developing World in the 21st Century (Ardsley, NY: Transnational Publishers, 2001), p. 205.

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Chapter 3

MILLENNIUM CHALLENGE ACCOUNT

*

Curt Tarnoff SUMMARY In a speech on March 14, 2002, President Bush outlined a proposal for a major new U.S. foreign aid initiative. The Millennium Challenge Account (MCA) is managed by the Millennium Challenge Corporation (MCC) and provides assistance, through a competitive selection process, to developing nations that are pursing political and economic reforms in three areas: ruling justly, investing in people, and fostering economic freedom. The MCC differs in several respects from past and current U.S. aid practices:

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the competitive process that rewards countries for past and current actions measured by 17 objective performance indicators; the pledge to segregate the funds from U.S. strategic foreign policy objectives that often strongly influence where U.S. aid is spent; and the requirement to solicit program proposals developed solely by qualifying countries with broad-based civil society involvement. As announced by the President in March 2002, the initial plan had been to fund the MCC annually at $5 billion by FY2006, but this figure has not yet been reached. The Administration has sought a combined $12.8 billion for the MCA program, FY2004-FY2008, while Congress appropriated $7.5 billion, or less than two-thirds of the total sought. FY2009 funding is currently provided under the terms of a continuing resolution (H.R. 2638/P.L. 110329), which provides foreign aid spending at the level in the FY2008 Consolidated Act ($1.54 billion). The resolution expires on March 6, 2009. Congress authorized the MCC in P.L. 108-199 (January 23, 2004). Since that time, the MCC’s Board of Directors has selected 27 eligible countries during the period from FY2004 through FY2008 (another, The Gambia, was suspended in 2006) and approved 18 Compacts *

This is an edited, reformatted and augmented version of a Congressional Research Service Publication RL 32427, Updated October 8, 2008.

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with Madagascar (April 2005), Honduras June 2005), Cape Verde (July 2005), Nicaragua (July 2005), Georgia (September 2005), Benin (February 2006), Vanuatu (March 2006), Armenia (March 2006), Ghana (August 2006), Mali (November 2006), El Salvador (November 2006), Mozambique (July 2007), Lesotho (July 2007), Morocco (August 2007), Mongolia (September 2007), Tanzania (September 2007), Burkina Faso (June 2008), and Namibia (July 2008). MCA implementation matters continue to unfold, including the relationship of MCA and USAID, sectors chosen, and the impact of rising costs on country programs. A growing question raised by some Members of Congress concerns the level of funding to support MCC programs. Some fear that insufficient funds might force the MCC to reduce the number of recipients or the size of the grants. Others, however, support reductions in MCC budget requests, believing that the slower-thananticipated pace of Compact agreements means that the Corporation has enough resources. This report will be updated as events unfold.

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MOST RECENT DEVELOPMENTS FY2009 funding for the MCC is currently provided under the terms of a continuing resolution (H.R. 2638/P.L. 110-329), which allows foreign aid spending as provided in the FY2008 Consolidated Appropriations Act (P.L. 110-161). The resolution expires on March 6, 2009. The MCC received $1.54 billion in the FY2008 Consolidated Appropriations Act. On September 18, 2008, 38 Members of Congress signed a letter addressed to House Appropriations Committee leadership supporting an FY2009 MCC funding level at least at the subcommittee-passed level of $1.54 billion. On September 17, 2008, the MCC Board discussed “the possibility” of providing an additional $100 million to the existing $295 million Compact with Georgia. The Board was responding to a September 4, 2008, $1 billion Administration aid initiative for Georgia, of which the MCC was a component. On July 17, 2008, the Senate Appropriations Committee reported S. 3288, the FY2009 State/Foreign Operations appropriations (S.Rept. 110-425), providing $254 million to the MCC, a cut of 86% from the Administration request, and $1.3 billion less than FY2008. On July 16, 2008, the House State/Foreign Operations Subcommittee approved its version of the FY2009 appropriations, providing $1.5 billion for the MCC, a 33% cut from the Administration request and the same level as in FY2008.

OVERVIEW In a speech on March 14, 2002, President Bush outlined a proposal for a new program that would represent a fundamental change in the way the United States invests and delivers economic assistance. The MCA is based on the premise that economic development succeeds best where it is linked to free market economic and democratic principles and policies, and where governments are committed to implementing reform measures in order to achieve such goals. The MCA concept differs in several fundamental respects from past and current U.S. aid practices:

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the competitive process that rewards countries for past actions measured by 17 objective performance indicators; the pledge to segregate the funds from U.S. strategic foreign policy objectives that often strongly influence where U.S. aid is spent; and the requirement to solicit program proposals developed solely by qualifying countries with broad-based civil society involvement. The proposal also differed in the size of the original $5 billion commitment, an aim never even approximately met. Congress authorized the new initiative in January 2004 (Division D of P.L. 108-199) and has closely followed its implementation. As the program evolves, the 111th Congress, like its predecessor, will continue to debate MCA funding issues and conduct oversight hearings on operations of the Corporation.

MCA BACKGROUND1 The Millennium Challenge Account (MCA), managed by a new Millennium Challenge Corporation (MCC), provides assistance, through a competitive selection process, to developing nations that are pursing political and economic reforms in three areas:

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Ruling justly — promoting good governance, fighting corruption, respecting human rights, and adhering to the rule of law. Investing in people — providing adequate health care, education, and other opportunities promoting an educated and healthy population. Economic freedom — fostering enterprise and entrepreneurship and promoting open markets and sustainable budgets. Country selection is based largely, but not exclusively, on a nation’s record measured by 17 performance indicators related to the three categories, or “baskets.” Countries that score above the median on half of the indicators in each of the three areas qualify. Emphasizing the importance of fighting corruption, the indicator for corruption is a “pass/fail” test: should a country fall below the median on the corruption indicator, it will be disqualified from consideration unless other, more recent trends suggest otherwise. (See Table 5 below for a complete list of the 17 performance indicators.) Administration officials, since announcing the MCA initiative in 2002, have said that the selection process would be guided by, but not necessarily bound to the outcomes of the performance indicators. Missing or old data, general trends, and recent steps taken by governments might also be taken into account when annual decisions are made. Eligibility to receive MCA assistance, however, does not necessarily result in an aid grant. Once selected, countries are required to submit program proposals — referred to as MCA Compacts — that have been developed through a broad-based, national discussion that includes input from civil society. The focus of program submissions may vary among countries in size, purpose, and degree of specificity, and are evaluated by the Corporation for, among other things, how well the Compact supports a nation’s economic growth and poverty

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reduction goals. Only those Compacts that meet the MCA criteria will be funded. It is expected that successful Compacts will support programs lasting three to five years, providing a level of resources roughly equivalent to the largest providers of assistance in the country. In most cases, this will likely result in a significant increase of U.S. economic assistance to MCA participant countries. To manage the new initiative, the Administration proposed and Congress authorized the creation of a Millennium Challenge Corporation (MCC), an independent government entity separate from the Departments of State and the Treasury and from the U.S. Agency for International Development (USAID). The MCC plans for an eventual staff of about 300. It is led by a CEO confirmed by the Senate. The current CEO is Ambassador John Danilovich.2 A Board of Directors oversees operations of the MCC and makes the country selections. It is chaired by the Secretary of State and composed of the Secretary of the Treasury, the USAID Administrator, the U.S. Trade Representative, the Corporation’s CEO, and four individuals from the private sector drawn from lists of proposed nominees submitted by Congressional leaders.3 The decision to house the MCA in a new organization was one of the most debated issues during early congressional deliberations of the President’s foreign aid initiative. The Administration argued that because the MCA represents a new concept in aid delivery, it should have a “fresh” organizational structure, unencumbered by bureaucratic authorities and regulations that would interfere in effective management. Critics, however, contended that if the MCA was placed outside the formal U.S. government foreign aid structure, it would lead to further fragmentation of policy development and consistency. Some believed that USAID, the principal U.S. aid agency, should manage the MCA, while others said that the MCA should reside in the State Department where more U.S. foreign policy entities have been integrated in recent years. At least, some argued, the USAID Administrator should be a member of the MCC Board, which had not been proposed in the initial Administration request. It appears that the MCC’s status will remain unchanged under Secretary Rice’s realignment of foreign aid authorities, announced on January 19, 2006. Henrietta Holsman Fore, the USAID Administrator, also serves concurrently in the newly created State Department position of Director of Foreign Assistance. While gaining policy and budget authority over nearly all USAID and State Department foreign aid ograms, the Director plays a more limited role in other agency activities, by developing an overall U.S. government development strategy and providing “guidance” to foreign aid programs delivered through other agencies like the MCC.

MCC IMPLEMENTATION From the time the MCC Board of Directors held its initial meeting to establish the program and agree to Corporation by-laws on February 2, 2004, procedures and policies have continued to evolve. Program implementation moves chronologically through a number of steps: candidate countries are identified, criteria are formulated, Compact and thresholdeligible countries are selected, programs are developed and proposed, and those approved are funded and carried out. Elements in this process are discussed below.

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Selection of Candidate Countries The selection of initial candidate countries is fairly straightforward and based on the authorizing statute. Countries must fall into specific economic categories determined by their per capita income status (as defined and ranked by the World Bank). During the first year of the program, in FY2004, MCA participation was limited to the poorest nations that were eligible to borrow from the World Bank’s International Development Association; there were 74 of these. The list expanded in FY2005 to include all low-income countries (adding another 13 nations). Beginning in FY2006 and beyond, all low- and lower- middle-income countries (with per capita incomes between $1,785 and $3,705 in FY2009) compete for MCC resources (a total of 93 countries in FY2009). However, lower-middle-income countries may receive only a quarter of MCA assistance in any year. In addition to the income ceiling, countries may be candidates only if they are not statutorily prohibited from receiving U.S. economic assistance. In FY2009, 11 countries were excluded for this reason. Most had been barred in prior years as well.4 One, Mauritania, excluded in FY2009 because of a military coup, had been selected as the one new threshold program-eligible country in FY2008 and will thereby lose its eligibility. In August 2008, the MCC transmitted to Congress its annual notification of candidate countries, listing 64 low-income countries and 29 lower-middle-income countries (See Table 4A and Table 4B). There was one new entry to the low-income candidates: Kosovo, now an independent state. Bosnia and Herzegovina is a new entry in the lower-middle-income group, and Thailand returns following democratic elections. Georgia and Vanuatu have moved from low-income to lower-middleincome status. Three previously lower-middle-income countries are no longer candidates: Jamaica, Belarus, and Suriname have graduated to middle-income status.

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Country Selection Criteria and Methodology The choice of criteria on which to base the eligibility of countries for threshold and Compact programs is one of the most important elements in MCC operations (See Table 5 for Performance Indicators). They are a key statement of MCC development priorities and ultimately determine which countries will receive U.S. assistance. Perhaps of equal significance, the current indicators themselves have become prominent objectives of some developing countries in what Board CEO Danilovich has called the “MCC effect.”5 Countries seeking eligibility are moving on their own to enact reforms and take measures that would enable them to meet MCC criteria. The criteria and the methodology for applying them have evolved over time. Pursuant to reporting requirements set in the MCC legislation, each year the Corporation sends to Congress an overview of the criteria and methodology that would be used to determine the eligibility of the candidate countries in that fiscal year. The criteria have been altered and refined, sometimes dramatically, over time. While the MCC legislative authorities broadly match criteria proposed by the Administration, lawmakers included four additional matters on which to evaluate a country’s performance. These relate to the degree to which a country:

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recognizes the rights of people with disabilities; respects worker rights; supports a sustainable management of natural resources; and makes social investments, especially in women and girls. For each of these, the MCC has sought to use supplemental data and qualitative information to inform its decisions on Compact eligibility. The latter two factors have led to the development of new indicators. With regard to the requirement added by Congress regarding social investments in women and girls, at first the MCC reported it would draw on girls’ primary enrollment rates to supplement the four social investment performance indicators. But in FY2005, an indicator measuring girls’ primary education completion rates replaced a broader measure used in FY2004 that did not disaggregate primary education graduation by gender. Beginning with the FY2005 selection process, the MCC lowered the inflation rate threshold from 20% to 15%, making it somewhat more difficult to pass this test (only 6 of the 63 candidate countries failed this test for FY2004). For FY2006, the Corporation added a new indicator — the Cost of Starting a Business — that replaced the Country Credit Rating, a measure that was used in the FY2004 and FY2005 evaluation process. The Corporation believed that not only did the new indicator have a strong correlation with economic growth, but that it was a measurement that might encourage governments to take action in order to improve their scores. Since the initial use of the indicator Days to Start a Business, MCA candidate countries had introduced many business start-up reforms, the results of which were reflected in a lowered median for this category. MCC officials hoped that adding an indicator for the Cost of Starting a Business would stimulate additional policy improvements. They believed that the Country Credit Rating indicator was not as well linked to policy reforms and that it had a greater income bias than other MCC indicators. Efforts to develop a measurement to assess a country’s commitment to policies that promote sustainable management of natural resources as required by Congress led to the adoption of two new indicators, first used as supplemental information in determining FY2007 MCA eligibility and then integrated with all the other indicators beginning with the FY2008 eligibility process. The Natural Resources Management index is a composite of indicators: whether the country is protecting at least 10% of its biomes, the percentage of population with access to sanitation and clean water, and child mortality levels. It has been placed in the Investing in People basket, raising the number of those indicators to five. The Land Rights and Access index looks at whether land tenure is secure and access to land is equitable, and the number of days and cost of registering property. It has been placed in the Economic Freedom basket. That basket remains at six indicators, because, beginning in FY2008, the MCC collapsed the Days to Start a Business and Cost of Starting a Business indicators into one Business Start-Up indicator. In addition to adding or refining indicators, the Corporation has also modified its principal that, in selected cases, countries must score above the median in order to pass a hurdle, with a rule that scores at the median will represent a passing grade. This comes into play especially for those indicators (civil liberties, political rights, and trade policy) where performance is measured on a relatively narrow scale of 1-5 or 1-7. A number of countries fall exactly on the median of these indicators and the methodology change allowed the MCC to make a more refined determination of whether a country passes or fails these hurdles.

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In December 2006, Ambassador Danilovich announced that the MCC would apply gender analysis to all aspects of the MCC program, including country selection and Compact development and implementation.

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Selecting Eligible Countries Shortly after release of the performance criteria, the MCC publishes a scorecard, showing where each candidate country’s performance falls in relation to the other candidate countries in its peer group (i.e., lower income countries “compete” with other lower income countries and lower-middle income countries with other lowermiddle income countries). Some time later, the MCC Board meets to select its list of countries eligible to apply for Compact assistance. A review of the history of MCC selections suggests that the Board is guided by, but not entirely bound to, the outcome of the performance indicator review process; Board members can apply discretion in their selection. Performance trends, missing or old data, and recent policy actions might come into play during selection deliberations. For example, in its first year, FY2004, the MCC selected 16 countries. The selection reflected decisions that both strictly followed the performance indicator outcomes and applied Board discretion to take into account other factors. Ten of the countries complied with the stated criteria: performing above the median in relation to their peers on at least half of the indicators in each of the three policy “baskets” and performing above the median on corruption. The Board also examined whether a country performed substantially below average on any single indicator and whether their selection was supported by supplemental information. Each of the 10 countries also passed these additional tests. For 10 other countries, however, some discretion was applied by the Board. In three cases, countries which met the criteria but fell significantly below average on one indicator were still selected by the Board due to recent policy changes or positive trend lines. Cape Verde, for example, scored poorly on the Trade Policy indicator, but the Board took into account the country’s progress towards joining the World Trade Organization and implementing a value added tax that will reduce reliance on import tariffs. Lesotho did not score well on the measurement for Days to Start a Business. The MCC Board, however, took note of Lesotho’s creation of a central office to facilitate new business formation and saw positive performance on other factors related to business start-ups. Sri Lanka scored far below the median on Fiscal Policy, but the most recent trends suggested that the government was making progress in reducing its budget deficit. For three other countries — Bolivia, Georgia, and Mozambique — the Board deviated from a strict application of the selection criteria because of evidence that the governments were taking corrective actions in the deficient areas. Bolivia fell at the median (as opposed to above the median) on the corruption indicator, something that would eliminate it from consideration. The Board, however, noted that President Mesa, who took office in October 2003, had created a cabinet position to coordinate anti-corruption activities and an office to investigate police corruption. Georgia, with a newly elected government that had created an anti-corruption bureau and taken other steps to fight corruption, was also selected despite scoring below the median on corruption and three other “ruling justly” indicators. Mozambique, which failed on corruption and each of the four “investing in people”

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indicators, was chosen based on supplemental data that was more current than information available from the primary data sources. This evidence, the Board felt, demonstrated Mozambique’s commitment to fighting corruption and improving its performance on health and education. On the other hand, the MCC Board chose not to select four countries that technically met the performance criteria but fell substantially below the median on one or more indicator. In each of these cases, the Board did not believe that the government was taking any action to improve its performance. Although Bhutan, Mauritania, and Vietnam passed the corruption hurdle and half of the “ruling justly” indicators, they scored very low on the measurements for Political Rights and Civil Liberties, and in Vietnam’s case, on the Voice and Accountability indicator. A fourth country — Guyana — was also not selected despite passing the necessary hurdles. It scored particularly low on the Fiscal Policy measurement.6 As the candidate pool has expanded in succeeding years while funding levels failed to meet expectations, the Board has become increasingly more selective. Many outside the MCC support the approach of keeping the number of new participants to a few so that future Compacts can be larger and emphasize “transformational” development opportunities as the MCA program originally envisioned. For FY2005, the Board did not select 10 countries that met the criteria, including Bhutan, Vietnam, Guyana, Burkina Faso, China, Djibouti, Egypt, Nepal, the Philippines, and Swaziland. The Corporation offered little explanation as to why these countries were not chosen.7 It appeared, however, that scoring “substantially below” — perhaps in the lowest 25th percentile — on an indicator had become a defacto criteria for exclusion. For example, the Corporation’s CEO Paul Applegarth commented that the Philippines, a country that passed 13 of the 16 indicators, did not qualify because Manilla scored “substantially below” the median on tests for health xpenditures and fiscal policy, and that more recent trends indicated the fiscal policysituation was deteriorating further.8 Each of the other nine nations that met the minimum qualifications but were not selected also had one score in the 25th percentile, although the Corporation has not commented on whether this was the reason for not choosing them. Another Board departure in the FY2005 selection process was to avoid using its discretionary authority to qualify countries that did not meet the minimum performance indicators. For FY2004, the Board chose three nations — Bolivia, Georgia, and Mozambique — that did not pass the so-called “hard-hurdle” of corruption. The latter two again qualified despite falling below the median on corruption, while Bolivia did not require an exemption after the median dropped below its score with the addition of new countries. For FY2005, five nations — Malawi, Moldova, Paraguay, Tanzania, and Ukraine — passed the required number of performance indicators, except corruption. Although Malawi, Paraguay, and Tanzania are Threshold Countries, none of the five were chosen for full MCA status. In FY2006, the Board did not choose eight countries in the low-income group that qualified and did not use its discretionary powers to select any new nations that failed to meet the minimum requirements.9 Bhutan, China, and Vietnam passed enough hurdles but did not qualify, as was the case the previous two years, based on very low scores on political rights and civil liberties. Kiribati, the Philippines, and India were not selected most likely because some of their scores were substantially below the median. India also presents a challenging case for the Board in that, despite qualifying, it is a country with a significantly large poor population which would require a sizable MCA Compact in order to produce a reasonable

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degree of impact on poverty reduction. It is also a nation with the means to attract capital and investment from other sources. Egypt, also not selected, falls into a somewhat different category as the second largest recipient of annual U.S. assistance based on a strategic rationale. The reason for not selecting Uganda, despite having passed 12 of the 16 indicators and not falling significantly below the median on the other 4, is less obvious. In its first year of choosing among lower-middle-income countries, the Board’s approach was less clear. A number of analysts had argued that especially given the less-than-anticipated budget available to the MCC, the Board should refrain from selecting any lower-middleincome countries (LMICs), at least in the FY2006 round.10 Of the eight LMICs (out of 32 total) that passed sufficient performance hurdles, the Board chose two to participate in FY2006. In addition, the Board also selected Cape Verde, a country that passed only two of the six economic performance indicators and therefore, did not technically qualify.11 It appears, however, that the Board could have decided to select none of the lower-middleincome nations by using criteria it had applied consistently in the two previous rounds. Moreover, it was not clear why the Board chose the two that did qualify and excluded others. All eight LMICs that passed the performance indicator test fell significantly below the median on at least one of the indicators. El Salvador and Namibia, the two that were selected, both had low scores on fiscal policy. El Salvador also scored well below the median on the costs of starting a business, while Namibia also did poorly on days to start a business and immunization rates. The other six that were not chosen — Brazil, Bulgaria, Jordan, Samoa, Thailand, and Tunisia — also performed substantially below the median in at least one area, although Jordan was selected to participate in the Threshold program. What separated these latter six from El Salvador and Namibia, however, was not explained by the Board. Although the Gambia was selected in FY2006, its eligibility for MCA assistance was suspended by the MCC Board on June 16, 2006, because of “a disturbing pattern of deteriorating conditions” in half of the 16 conditions that are used to determine Sheila Herrling, Steve Radelet, and Sarah Rose, “Will Politics Encroach in the MCA FY2007 Selection Round? The Cases of Jordan and Indonesia,” Center for Global Development, October 30, 2006, [http://www.cgdev.org]. candidate countries. Among the problems cited in this case were human rights abuses, restrictions on civil liberties and press freedom, and worsened anti-corruption efforts. On November 8, 2006, the MCC Board added three new countries to the list of those eligible for FY2007 MCA grants — Moldova, Jordan, and Ukraine. Even prior o the selection, the possible choice of Jordan had come in for severe criticism.Freedom House, the organization whose annual Index of Freedom is drawn upon for two of the “Ruling Justly” indicators, had urged the MCC Board to bypass countries that had low scores on political rights and civil liberties. It argued that countries like Jordan that fall below 4 out of a possible 7 on its index should be automatically disqualified. Jordan, however, did well on three of the other indicators in this category. Several development analysts further argued that Jordan should not be selected, because the MCA is not an appropriate funding source. They assert that Jordan, already is one of the largest recipients of U.S. aid, has access to private sector capital, and is not a democracy.12 In selecting Jordan, the MCC Board appears not to have been swayed by these arguments. Another concern expressed by observers regarding the FY2007 selection process was that four of eleven current Compact countries — Ghana, Benin, Madagascar, and Cape Verde — would fail if measured under FY2007 indicators. While it was not expected that existing

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Compact funding would be withdrawn as it is based on eligibility in previous years, some had hoped the Board would send a signal of disapproval of such lapses. However, the MCC Board did not address this issue at the November 2006 candidate selection meeting. Table 1. Compact-Eligible Countries: FY2008 Low-Income Countries Benin Malawia Bolivia Mali Burkina Faso Moldova East Timor Mongolia Georgia Mozambique Ghana Nicaragua Honduras Philippinesa Lesotho Senegal Madagascar Tanzania Vanuatu Lower-Middle-Income Countries Armenia Morocco El Salvador Namibia Jordan Ukraine

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a.

New for FY2008.

Country Selection — FY2008 On March 11, 2008, the MCC Board added the Philippines to the list of countries eligible to apply for a Compact. It joins 24 countries, previously selected on December 12, 2007. Of these, Malawi is the only other new entry. Two countries that had appeared in the past were absent in the 2008 list. Sri Lanka is left out because of the resurgent civil strife that would make a Compact problematic, and Cape Verde for more complicated reasons. Under the recent changes in the qualifying indicators, Cape Verde would not have been eligible for the third year in a row, and, as a lower-middle income country, is more strictly judged. Nonetheless, according to the MCC, 12 of the 24 countries that made the cut did not meet the FY2008 criteria, five of them failing the control of corruption indicator. One reason that the MCC has re-selected these countries is that they are viewed as maintaining or improving their performance rather than adopting policies contrary to the criteria. This approach is taken because countries following reasonable policies may fall behind the performance criteria when other countries are improving faster — thereby raising the bar. They may also fail when new criteria are introduced which countries have not had an opportunity to address and when institutions measuring performance refine or revise their indicators.

MCA Compacts and Program Proposals Once declared as eligible, countries may prepare and negotiate program proposals with the MCC. Only those Compact proposals that demonstrate a strong relationship between the

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program proposal and economic growth and poverty reduction will receive funding. Not all qualified MCA countries may submit successful Compact proposals. While acknowledging that Compact proposal contents likely will vary, the Corporation expects each to discuss certain matters:

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a country’s strategy for economic growth and poverty reduction, impediments to the strategy, how MCA aid will overcome the impediments, and the goals expected to be achieved during implementation of the Compact; why the proposed program is a high priority for economic development and poverty reduction and why it will succeed; the process through which a public/private dialogue took place in developing the proposal; how the program will be managed, monitored, and sustained after the Compact expires; the relationship of other donor activities in the priority area; examples of projects, where appropriate; a multi-year financial plan; and a country’s commitment to future progress on MCA performance indicators. The Corporation did not set hard deadlines for Compact submissions in order to allow countries adequate time to conduct a national dialogue over the contents of the program proposal. Proposals are developed by a country with the guidance of and in consultation with the MCC. Sometime during the proposal development process, the MCC may provide socalled pre-Compact development grants to assist the country’s efforts. Among other things, grants may be used for design studies, baseline surveys, technical and feasibility studies, environmental and social assessments, ongoing consultations, fees for fiscal and/or procurement agents, and the like. For example, in December 2007, the MCC provided Burkina Faso with a pre-Compact development grant of $9.4 million, not counted as part of the final Compact. Once a proposal is submitted, the MCC conducts an initial assessment, then, on the basis of that assessment, launches a due diligence review that closely examines all aspects of the proposal, including costs and impacts. At the same time, MCC staff work with the country to refine program elements. Finally, the MCC negotiates a final Compact agreement prior to its approval by the MCC Board. The Compact is signed but does not enter into force until supplemental agreements on disbursements and procurement are reached.13 The MCC signed its first Compact, with Madagascar, on April 18, 2005, an event that was followed by four other signings in 2005 — with Honduras, Cape Verde, Nicaragua, and Georgia. In 2006, six more agreements were signed: Benin, Vanuatu, Armenia, Ghana, Mali and El Salvador. In 2007, four Compacts were signed — with Mozambique, Lesotho, Morocco, Mongolia. In 2008, three, with Tanzania, Burkina Faso, and Namibia have been signed. The case of Madagascar is a good example of how the Compact process is expected to take shape. Elements of the design, negotiation, and completion of the Madagascar Compact met several of the key criteria of the MCA process. Discussions regarding the scope and purpose of the MCA grant occurred at the regional and national level in Madagascar that included broad representation of civil society. Management and oversight of the Compact is handled by a new entity, MCA-Madagascar, whose Steering Committee include government and nongovernment officials. Both of these steps underscore the “country-ownership” and

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broad participatory nature of MCA programs. The Compact also includes fiscal accountability requirements concerning audits, monitoring, and evaluation that support the transparency concept of the MCA. While the $110 million MCA grant was fully obligated when the Compact entered into force, resources will be transferred periodically following a determination that performance continues satisfactorily. This funding plan emphasizes the MCA principles of accountability and results.

Compact Descriptions The 18 Compacts agreed up to this point are described below (also see Table 3). In addition to individual Compact components noted in each description, Compact totals include administrative and monitoring costs. Madagascar The Madagascar Compact is a four-year, $110 million program, focusing on rural agriculture development and poverty reduction. Specifically, the project has three objectives: 1) to increase land titling and land security ($36 million); 2) to expand the financial sector and increase competition ($36 million); and 3) to improve agricultural production technologies and market capacity in rural areas ($17 million). According to the MCC, the Compact is designed to assist Madagascar’s rural poor, which account for 80% of the nation’s impoverished population, and generate income by expanding opportunities to own land, to access credit, and to gain technical training in agriculture and market identification.

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Honduras The five-year, $215 million MCA Compact with Honduras focuses on two objectives — rural development and transportation. The rural development project, representing $72.2 million of the Compact, will assist small and medium-size farmers enhance their business skills and to transition from the production of basic grains to horticultural crops, such as cucumbers, peppers, and tomatoes. According to the MCC, these vegetable crops will generate about $2,000 to $4,000 in annual income per hectare, compared with roughly $500 for basic grains. The project intends to provide farmers with the appropriate infrastructure and necessary training for producing and marketing these different crops. The transportation project, totaling $125.7 million of the Compact, will improve the major highway linking Honduran Atlantic and Pacific ports, and major production centers in Honduras, El Salvador, and Nicaragua. Rural roads will also be upgraded, helping farmers transport their goods to markets at a lower cost. Specific results sought in the Compact are: double productivity in 15,000 hectares in rural areas expand access to credit for farmers by over 20% upgrade the major road that links Honduras with commercial centers upgrade about 1,500 kilometers of rural roads

Cape Verde The MCC and Cape Verde have signed a five-year, $110 million Compact focused largely on improving the country’s investment climate, transportation networks, and

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agriculture productivity. The program’s goal is to increase the annual income in Cape Verde by at least $10 million. The Compact evolves around three projects: Private Sector Development — with $7.2 million and additional participation with the International Finance Corporation, the project aims to remove constraints to private sector investment. Infrastructure — the project will invest $78.7 million in road and bridge construction to help link the nine inhabited islands and improve transportation links to social services, employment opportunities, local markets, and ports and airports. Watershed Management and Agriculture Support — by investing $10.8 million to increase the collection, storage, and distribution of rainfall water, the project hopes to increase agricultural production and double the household income of farmers.

Nicaragua The five-year, $175 million Compact with Nicaragua will focus on the promoting economic growth primarily in the northwestern region of the country where potential opportunities exist due to the area’s fertile land and nearby markets in Honduras and El Salvador. The Compact has three components: 1) to strengthen property registration ($26.5 million); 2) to upgrade primary and secondary roads between Managua and Leon and to provide technical assistance to the Ministry of Transportation ($92.8 million); and 3) to promote higher-profit agriculture activities, especially for poor farmers, and to improve water supply in support of higher-value sustainable agriculture.

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Georgia The $295 million, five-year agreement with Georgia focuses on reducing poverty and promoting economic growth in areas outside of the capital where over half the population lives in poverty. The Compact is divided into two projects. The first and the largest component ($211.7 million) concentrates on infrastructure rehabilitation, including roads, the north-south gas pipeline, water supply networks, and solid waste facilities. The Enterprise Development Project ($47.5 million) will finance an investment fund aimed at providing risk capital and technical assistance to small and medium-sized businesses, and support farmers and agribusinesses that produce commodities for the domestic market. The program expects to: reduce in the incidence of poverty by 12% in the Samtskhi-Javakheti region; provide direct benefits to 500,000 people and indirectly benefit over 25% of Georgia’s population; reduce the travel time by 43% to Tbilisi, the capital, from regional areas, thereby cutting transportation costs for farmers, businesses, and individuals needing health and other social services; and lower the risk of a major gas pipeline accident and improve the reliability of heat and electricity to over one million Georgians.

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On September 17, 2008, the MCC Board discussed “the possibility” of providing an additional $100 million to the existing $295 million Compact with Georgia. The Board was responding to a September 4, 2008, $1 billion Administration aid initiative for Georgia, of which the MCC was a component. The additional funds would likely be directed at road projects, water and sanitation facilities, and a natural gas storage facility.

Armenia The five-year, $236 million Compact concentrates on the agricultural sector, investing in the rehabilitation of rural roads ($67 million) and improving irrigation ($146 million). The program anticipates that it will benefit about 750,000 people, 75% of Armenia’s rural population, by improving 943 kilometers of rural roads and increasing the amount of land under irrigation by 40%. Misgivings have been raised both prior to and during implementation of the Armenia Compact. In September 2005, the MCC expressed concerns with Armenian officials regarding slippage on two of the governance indicators and matters raised by international groups concerning political rights and freedoms in the country. Moreover, the MCC Board delayed final approval of the Compact following the November 27, 2005, constitutional referendum, after allegations of fraud, mismanagement, limited access by the press, and abuse of individuals were raised. In signing the Compact on March 27, 2006, the MCC issued a cautionary note, signaling that Armenia must maintain its commitment to the performance indicators or risk suspension or termination of the Compact. On March 11, 2008, the MCC issued a warning that assistance might be suspended or terminated in response to the government’s actions, including the imposition of a state of emergency and restrictions on press freedoms.14

Vanuatu

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The $65.7 million, five-year Compact targets improvements broadly in multiple types of infrastructure, including roads, wharfs, an airstrip, and warehouses. The objective is to increase the average per capita income by 15%, by helping rural agricultural producers and providers of tourism-related goods and services. The Compact further aims to help strengthen Vanuatu’s Public Works Department in order to enhance capacity to maintain the country’s entire transport network.

Ghana The five-year $547 million Compact focuses on agriculture and rural development. Poverty rates in the three targeted geographic areas are above 40%. The agriculture component ($241 million) will provide training for farmer-based organizations, improve irrigation, provide greater access to credit, and rehabilitate local roads. The transport component ($143 million) will seek to reduce transport costs to farmers by improving key roads, such as the one between the capital and the airport, and an important ferry service. Rural development programs ($101 million) will construct and rehabilitate education, water, and electric facilities, among other activities.

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Benin Benin, one of the world’s poorest countries with the lowest Human Development Index ranking of any MCC Compact nation, has been approved for a $307 million, five year program focused on four sectors: Land rights, reducing the time and cost of obtaining property title; Financial services, helping micro, small, and medium-sized businesses; Justice reform, assisting the judicial systems capacity to resolve business and investment claims; and Market access, improving the Port of Cotonou. The Compact’s goal is to benefit five million people, bringing 250,000 of the population out of poverty by 2015.

Mali The five-year $461 million Compact emphasizes an increase in agricultural production and expansion of trade. About half the funds ($234.6 million) will support a major irrigation project, including modernization of infrastructure and improvements in land tenure. Improvements in the airport ($89.6 million) will target both passenger and freight operations. An industrial park project located at the airport ($94.6 million) will assist agro-processing and other industry.

El Salvador The five-year $461 million Compact will address economic growth and poverty reduction concerns in El Salvador’s northern region where more than half the population lives below the poverty line. Education as well as water and sanitation, and electricity supply ($95.1 million); support for poor farmers and small and medium-sized business ($87.5 million); and transportation, including roads ($233.6 million) are the chief elements of program.

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Mozambique The five-year $506.9 million Compact, like most other Compacts, targets specific districts, in this case the less prosperous North of the country. The Compact has four components. Water and sanitation services will be improved ($203.6 million), a major road will be rehabilitated ($176.3 million), land tenure services will be made more efficient ($39.1 million), and steps will be taken to protect existing coconut trees, improve coconut productivity, and support diversification to other cash crops ($17.4 million). The long-term objective is to reduce the projected poverty rate by more than 7%.

Lesotho The five-year $362.6 million Compact has three elements. A water sector project ($164 million) will focus on both industrial, supporting garment and textile operations, and

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domestic needs. It will also support a national watershed management and wetlands conservation plan. A health project ($122.4 million) will seek to strengthen the health care infrastructure, including renovation of up to 150 health centers, improved management of up to 14 hospital out-patient departments, construction and equipping of a central laboratory, and improved housing for medical staff and training for nurses. A private sector development project ($36.1 million) will address a wide range of legal and administrative obstacles to increased private sector activity, including development of land policy and administration authority, implementation of a new payments and settlement system, and improvement of case management of commercial courts.

Morocco The five-year, $697.5 million Compact has multiple components, all aimed at increasing private sector growth. These include efforts to increase fruit tree productivity ($300.9 million), modernize the small-scale fisheries industry ($116.2 million), and support artisan crafts ($111.9 million). In addition, the Compact will fund financial services to microenterprises ($46.2 million) and will provide business training and technical assistance aimed at young, unemployed graduates ($33.9 million).

Mongolia The most significant part of the five-year $285 million Compact intends to stimulate economic growth by refurbishing the rail system, including infrastructure and management ($188.38 million). In addition, the Compact will support improvements in the property registration and titling system ($23.06 million) and the vocational education system ($25.51 million). The Compact will also attempt to reform the health system to better address noncommunicable diseases and injuries, which are rapidly increasing in the country ($17.03 million).

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Tanzania The five-year, $698 million Compact will focus on three key economic infrastructure issues. A transport sector project ($373 million) will improve major trunk roads, select rural roads, general road maintenance capabilities, and upgrade an airport. An energy sector project ($206 million) will lay an electric transmission cable from the mainland to Zanzibar, will construct a small hydroelectric plant at Igamba Falls, and will rehabilitate the existing distribution system to unserved areas. A water sector project ($66 million) will expand a clean water treatment facility serving the capital, reduce water loss in the capital region, and improve the water supply in Morogoro, a growing city.

Burkina Faso The five-year, $480.9 million Compact has four elements. A rural land governance project ($59.9 million) will focus on improving legal and institutional approaches to rural

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land issues, including registration and land use management. An agriculture project ($141.9 million) will target water management and irrigation, diversified agriculture, and access to rural finance in specific regions of the country. A roads project ($194.1 million) will improve rural roads. The education effort ($28.8 million) will build on the country’s MCC threshold program and construct additional classrooms and provide daily meals to children. The education project will be administered by USAID.

Namibia The five-year, $304.5 million Compact will focus on education, tourism, and agriculture. The education project ($145 million) will improve school infrastructure and training, vocational and skills training, and textbook acquisition. The tourism project ($67 million) will target management and infrastructure in Etosha National Park, the premier wildlife park in Namibia, and build ecotourism capacity in the country. The agriculture project ($47 million) will focus on land management, livestock support, and production of indigenous natural products.

“Threshold” Countries and Programs

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In order to encourage non-qualifying countries to improve in weak areas, the MCC will help governments that are committed to reform to strengthen performance so that they would be more competitive for MCA funding in future years. Congress provided in authorizing legislation that not more than 10% of MCA appropriations could be used for such purposes, stating that the funding could be made available through USAID. Subsequent foreign operations appropriations have made 10% of new MCA appropriations available for this Threshold assistance.15 According to the Threshold Program Policy guidance issued by the Corporation,16 the program will assist countries make policy reforms and institutional changes in areas where they failed to meet the MCA performance criteria. Those countries deemed eligible for the program must submit concept papers identifying: where and why the country failed to pass specific indicators; proposals for policy, regulatory, or institutional reforms that would improve the country’s performance on these indicators; and types of assistance, over a two-year maximum period, required to implement these reforms. If the Corporation, in consultation with USAID, determines that the concept paper shows sufficient commitment to reform and a promise of success, the country will prepare a Threshold Country Plan that specifically establishes a program schedule, the means to measure progress, and financing requirements, among other considerations. USAID has been charged with overseeing the implementation of Threshold Country Plans, including working with countries to identify appropriate implementing partners such as local, U.S., and international firms; NGOs; U.S. government agencies; and international organizations. Like regular MCA Compacts, funding is not guaranteed for each country selected for the Threshold Program, but will be based on the quality of the Country Plan.

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Currently, 21 countries are eligible for threshold assistance. To date, the threshold programs of 20 countries totaling more than $445 million have been approved by the MCC Board — Albania, Tanzania, Burkina Faso, Malawi, Moldova, Philippines, Zambia, Jordan, Indonesia, Ukraine, Paraguay, Kenya, Uganda, Guyana, Kyrgyz Republic, Yemen (program postponed on October 26, 2007, pending review), Sao Tome and Principe, Peru, Niger, and Rwanda. The only country that is eligible but has not yet been awarded threshold program support is East Timor. Mauritania was made eligible in 2007, but cannot be offered a program due to aid prohibitions on governments deposed by a coup. Also, in December 2007, the MCC Board invited three countries — Albania, Paraguay, and Zambia — to submit proposals for follow-on threshold programs (stage II) as their initial threshold programs will expire this year. In September 2008, the MCC Board approved a $16.4 million stage II program for Albania. MCC officials indicate that Zambia will not likely require the stage II program as it now passes the corruption indicator the program was meant to address. Funding levels for threshold programs differ, most recently ranging from $8.7 million for Sao Tome and Principe to $35.6 million for Peru. Of the 20 programs, 15 seek to improve country scores on the corruption indicator. Several countries have multiple objectives. Indonesia and Peru, for example, target both corruption and immunization indicators. Albania’s first program focuses on corruption and improvements in its business environment. The Burkina Faso program is designed to improve girls’ primary education, targeting areas of the country with the lowest primary completion rates.

SELECT ISSUES

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Role of USAID and the Future of Agency Programs in MCA Countries How USAID would participate in the MCA initiative has been a continuing concern of Congress and various policy analysts. Legislation authorizing the MCC requires the Corporation’s CEO to coordinate and consult with USAID and directs the Agency to ensure that its programs play a primary role in helping candidate countries prepare for MCA consideration. USAID maintains missions in most of the eligible countries and might be expected to support MCC programs, through contracting, procurement, and monitoring tasks. Although USAID is the chief implementor on behalf of the MCC of threshold programs, its role in other aspects of MCC activities is not clear. Another question is how USAID will adjust its own programs in MCA countries. ThenUSAID Administrator Natsios told the House Appropriations Committee on May 13, 2004, that the Agency would not withdraw from or cut programs in MCA countries, but would not increase spending either. He said, however, that USAID would work to ensure that its programs operate in an integrated way with MCA-funded activities. Nonetheless, some critics continue to express concern that MCA funding is not always additive, as had been the pledge, but will substitute for portions of previous USAID bilateral development aid programs. The FY2008 budget request offered a look at how funding levels might be affected by MCA Compacts. With the exceptions of new entries Lesotho, Mozambique, and Morocco, in Compact countries where there had been a bilateral economic assistance program, that assistance would be reduced under the FY2008 budget plan from FY2006 levels. In its

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FY2008 report on the State/Foreign Operations bill (H.Rept. 110-197), the House Appropriations Committee made note of this trend and expressed the view that MCC aid should be “a complement,” not a substitute, to the current aid program.

Compact Sectors One feature of the first series of Compacts drew particular attention. Most of the early Compacts included a similar sector concentration, focusing on agriculture and transportation infrastructure projects. While these activities are well justified, the similarity across Compacts surprised some observers. Given the wide diversity of conditions in each of the countries, plus the Corporation’s willingness to support all types of programs, many had expected to see a greater degree of variation among the Compacts. Some believe that social sectors, including those in health and education, should be receiving greater attention in Compact design. Others had expected greater variety in aid delivery mechanisms, and are concerned that the MCC is reluctant to approve sector grants and other types of budget support assistance. While there can be greater accountability risks associated with this kind of aid, countries that qualify for MCA support are selected because they have already demonstrated stronger performance in managing resources and fighting corruption.17 As more Compacts are signed, some diversity in programs is creeping in — three of the more recent ones, in Lesotho, Mozambique, and Tanzania, feature a water and sanitation component. The Morocco Compact includes microcredit and artisan crafts support among its projects. Burkina Faso and Namibia have education components.

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Compact Size A second closely examined characteristic of the early Compacts was the dollar size of the grants; or, more specifically, the lower-than-anticipated funding level for the first several Compacts. While Administration officials said repeatedly that Compacts would be funded at various levels depending on the nature and potential impact of the proposal, the presumption was that the MCA grant would represent a sizable increase in U.S. assistance to the eligible country. In order to realize its potential as a “transformational” aid program and to provide sufficient incentives to countries requesting “breakthrough” projects, the MCC said that the size of its grants must place MCA assistance among the top aid donors in a country.18 Some had estimated that once the Corporation’s budget reached $5 billion, each Compact would be supported with annual resources in the $150-$200 million range.19 These levels could vary up or down depending on many factors, such as the number of people living in poverty, the size of the economy, and the scope of the proposed projects. Most of the first several Compacts, however, did not meet the anticipated financial allocation thresholds. Madagascar’s four-year, $110 million Compact roughly doubled U.S. assistance to the country, but did not place MCA assistanceamong the top donors. France was the largest bilateral donor, disbursing on average $189 million per year, 2001-2004. The European Commission’s aid program, 2001-2004, averaged $82 million per year, while the World Bank’s International Development Association was Madagascar’s largest source of concessional assistance of about $209 million lent in each of 2001 through 2004.20 The $110

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million Compact for Madagascar is also not very large relative to the country’s population. Of the 16 qualified countries for FY2004, Madagascar had the fourth largest population (16.4 million), and might have been expected to receive one of the larger MCA grants given its population size and its per capita income ($230, second lowest among the 16 MCA countries). For Honduras (a $215 million MCA program over five years), Georgia ($295 million over five years), and Armenia ($236 million over five years), the United States was the top bilateral donor without the MCA program, and will likely remain in that position as MCA are disbursed. But the MCA Compact for Honduras called for only a slightly higher annual amount ($43 million) than U.S. economic assistance provided ($34 million) at the time, while Georgia’s Compact will average only about three-fourths and the Armenia Compact only about two-thirds of the annual level of recent American aid. While these are not insignificant amounts of new resources, they are far less than Administration officials had suggested previously.21 In contrast, the early five-year Compacts with Cape Verde ($110 million), Benin ($307 million), and Vanuatu ($66 million) represented a substantial investment by the United States, relative to the size of recent American aid and the size of their economies. USAID, which last provided direct bilateral assistance to Cape Verde in the mid-1990s, does not maintain a mission presence, allocating small amounts of aid through regional programs. The Compact’s $22 million annual average places the United States second to Portugal, Cape Verde’s former colonial power, as the leading donor, and represents more than a quarter of total bilateral development aid grants from all sources compared with figures for 2003 and 2004. Likewise, the United States does not maintain a bilateral program with Vanuatu, limiting direct aid through the Peace Corps. The $13 million annual average of the Vanuatu program places the United States as the country’s top aid donor, along with Australia. In Benin, USAID manages an annual bilateral economic aid program of about $15 million, compared with the $61 million annual size of the MCC Compact. The Compact likely places the MCC as the top aid donor, together with France, for Benin.22 This issue has been a priority of Ambassador Danilovich since his September 27, 2005 confirmation hearing to be the MCC’s new CEO. He noted that the MCC was “meant to create transformative programs,” and to do so he said that “future Compacts will generally need to be larger than those signed thus far.” Ambassador Danilovich cautioned, however, that with limited resources but larger Compacts, fewer countries will receive funding if MCC is to achieve its transformational goal.23 Since assuming the CEO position, he has moved the MCC towards larger Compacts and placing the MCC as the largest donor in recipient countries.

Speed of Implementation A recurrent criticism of the MCC, especially in Congress, is the slow speed of implementation, reflected largely by the limited amount of disbursements made to date. As perhaps the leading cause of cuts in MCC funding from the Administration request and of threatened rescissions from amounts already appropriated, this view has had severe consequences for the MCC (see below). As of the end of June 2008, of the $7.5 billion

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appropriated for the MCC, only $727 million, or 10%, has been disbursed. More than $6.5 billion, however, had been obligated by mid-September 2008. There are some good reasons for this spending rate. The MCC is a new experiment, and it has taken considerable time to develop methods of operation, including settling on the rules of eligibility and the requirements of Compact proposals. Further, the countries themselves are responsible for developing proposals, and they have problems common to most developing countries in managing complex programs to meet donor requirements of accountability. The GAO found that for five signed Compacts in Africa — with Madagascar, Cape Verde, Benin, Ghana, and Mali — the process of going from eligibility to compact signature took between 12 and 31 months. Four of these compacts entered into force about five months after compact signature.24 Once launched, Compacts may be slow to get underway. For two in their third year — Madagascar and Cape Verde — disbursements have been slow, only 27% and 16%, respectively, of planned disbursements had been made by end of March 2008. Among the causes are delays by these Compact countries in filling managerial positions. The nature of many of the Compacts is also responsible for the delays. Typically, infrastructure projects are slow to disburse funds, the majority of activity in the first few years being the design and planning of projects rather than actual construction. Whatever the causes, the MCC has responded to the criticisms by arguing that projected annual Compact disbursements by 2009 will top $1 billion. The MCC is also attempting to shift its organizational focus from the early emphasis on Compact development to Compact implementation. In October 2007, it announced a reorganization aimed at facilitating implementation.

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Compact Impact The purpose of the MCA is to reduce poverty by supporting economic growth, but some observers have complained about the lack of measurable results to date. There are some possible reasons for this, most prominently the slow speed of Compact implementation noted above. As a result, it will likely be some time before a serious analysis of actual impacts can be undertaken. A recent GAO report highlighted a related concern, that, in the case of Vanuatu, projected impacts have been overstated. The GAO noted that the MCC estimated a rise from 2005 per capita income in Vanuatu of about 15% ($200) by 2015 when, in fact, the data suggest it would rise by 4.6%. Although the MCC states that the Compact would benefit 65,000 poor, rural inhabitants, the data, according to the GAO, do not establish the extent of benefit to the rural poor. Further, the MCC projections assume continued maintenance of projects following completion, whereas the experience of previous donors is that such maintenance has been poor.25 The MCC response is that, although there may be varying views on the degree of benefit, both agencies agree that the underlying data show that the Compact will help Vanuatu address poverty reduction.26 In lieu of results from the Compacts, MCC officials have pointed to the impact made by the MCC process itself. Under the so-called MCC effect, many countries are said to be establishing reforms in an effort to qualify under the 17 indicators. Yemen

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has been cited in this regard, because, following its suspension from the threshold program in 2005, it approved a number of reforms to address indicators where its performance had lapsed (and subsequently was reinstated). Both the House and Senate approved resolutions in 2007 (H.Res. 294 and S.Res.103) noting the role the MCC played in encouraging Lesotho to adopt legislation improving the rights of married women.

Rising Costs The majority of Compact projects support construction of economic infrastructure, primarily roads and water and sanitation systems. In the past year, costs for the machines and material necessary for these activities have been rising worldwide. At the same time, the U.S. dollar has depreciated significantly. As a result, MCC projects are faced with having less funding than envisioned to meet the agreed-on objectives. The MCC reports that at least six projects are expected to be scaled-back from the original plans or may be supplemented by financing from other sources.

Funding Issues

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In each year since the MCA was established, the MCC proposal was by far the largest increase sought by the Administration in the Foreign Operations appropriations bill and viewed by many observers as one of the most vulnerable items in an increasingly difficult budget environment. In each year as well, its enacted appropriation has been well below the President’s request. Supporters of the MCC are disturbed by this trend, reflected again in the congressional funding level for FY2008, well below the Administration request. They argue that countries that have gone through the whole process of seeking eligibility and designing and refining a proposal are likely to seek funding elsewhere if they have to wait long for MCC funding to become available. Further, the socalled MCC effect, which encourages countries to reform on their own in order to meet eligibility requirements, is likely to be lost if fewer Compacts are offered annually. Table 2. MCA Appropriations: FY2004-FY2009 (in $ billions)

Request

FY2004 1.300

FY2005 2.500

FY2006 3.000

FY2007 3.000

FY2008 3.000

FY2009 2.225

Appropriation

0.994

1.488

1.752

1.752

1.486a

1.544b

a. Original appropriation was $1.544 million. $58 million was rescinded in P.L.110-252. b. Funding availability under continuing resolution (P.L. 110-329) effective through March 6, 2009.

MCA Request and Congressional Action for FY2009 On February 4, 2008, the Administration requested $2.225 billion for the MCA in its FY2009 budget, a 44% increase over the FY2008 appropriation.

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On July 16, 2008, the House State/Foreign Operations Subcommittee approved its version of the FY2009 appropriations, providing $1.5 billion for the MCC, a 33% cut from the Administration request and the same level as in FY2008. On July 17, 2008, the Senate Appropriations Committee reported its version of the FY2009 State/Foreign Operations appropriations (S.Rept. 110-425), providing $254 million to the MCC, a cut of 86% from the Administration request, and $1.3 billion less than FY2008. The committee explained the cut as a “temporary pause” in signing of new Compacts to allow for an evaluation of MCC programs. It noted the small Compact disbursement rate (4% of total Compact funding at the time) and the lack of tangible results to date as factors in support of this step. The committee stated its intention to support future Compacts “if current country compacts are shown to be cost effective and achieving results.” Its proposed funding level would allow for two threshold stage 2 agreements, continued due diligence and pre-compact support, and administrative costs to maintain the MCC. The MCC argues that the proposed cut would undermine Compact country faith in the MCC process and warns that several countries in the pipeline, including the Philippines, Jordan, Senegal, Malawi, Timor Leste, and Moldova, would be negatively affected. On September 18, 2008, 38 Members of Congress signed a letter addressed to House Appropriations Committee leadership supporting an FY2009 MCC funding level at least at the subcommittee-passed level of $1.54 billion. FY2009 funding for the MCC is currently provided under the terms of a continuing resolution (H.R. 2638/P.L. 110-329), which allows foreign aid spending as provided in the FY2008 Consolidated Appropriations Act (P.L. 110-161). The resolution expires on March 6, 2009. The MCC received $1.54 billion in the FY2008 Consolidated Appropriations Act. However, in line with OMB guidance, the MCC is assuming a $1.49 billion budget. According to the MCC, this amount will be sufficient to fund three Compacts of a projected six in the pipeline — Jordan, Moldova, Senegal, Malawi, Philippines, and Timor-Leste.

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Authorizing Legislation and MCC Reform Many observers anticipate that an MCC reauthorization measure will be considered in the 111th Congress. A previous effort, in the 109th Congress (2006), was reported by the House International Relations Committee (H.R. 4014, H.Rept. 109-563), but received no further consideration. It would have made a number of policy modifications to the original legislation and would have authorized MCC appropriations (“such sums as may be necessary”) for fiscal years 2007 through 2009. The requirement of an authorization of foreign aid programs has been routinely waived in annual Foreign Operations appropriations bills, as the FY2009 Continuing Resolution measure did in the case of currently unauthorized foreign aid programs, including the MCA (section 113). On September 26, 2008, H.R. 7165 (Payne) was introduced and referred to the House Foreign Affairs Committee. It addresses several existing restrictions in the authorizing statute. The bill would allow a Compact to exceed 5 years in length, but no more than 10, if the Board determines it cannot be completed in 5. It allows concurrent Compacts (more than one at the same time), and permits follow-on (subsequent) Compacts, if the Board determines that a prior Compact has met its objectives. The bill would also allow regional Compacts, involving two or more countries.

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Armenia

Mar. 27, 2006

$2,640

31.1%

83

$58.0

$236 5 years

Benin

Feb. 22, 2006

$570

73.7%

163

$14.2

$307 5 years

Burkina Faso

July 14, 2008

$430

71.8%

176

$0.0

$481 5 years

Cape Verde

July 4, 2005

$2,430

NA

102

$0.0

$110 5 years

El Salvador

November 29, 2006

$2,850

40.5%

103

$24.0

$461 5 years

Georgia

Sept. 12, 2005

$2,120

25.3%

96

$58.0 ($0.7)

$295 5 years

Ghana

August 1, 2006

$590

78.5%

135

$41.1 ($0.3)

$547 5 years

Honduras

June 13, 2005

$1,600

44.0%

115

$27.7 ($0.8)

$215 5 years

Lesotho

July 23, 2007

$1,000

56.1%

138

$3.0 ($6.4)

$362.6 5 years

Madagascar

April 18, 2005

$320

85.1%

143

$26.0

$110 4 years

Compact Focus

Compact Size (millions)

FY06 US Econ. Aid (millions)b

Human Development Index Rankinga

Population Living Below $2 p/day (%)

GNI per capita

Compact Signed

Country

Table 3. Status of MCA Compacts

-Agriculture/ irrigation -Rural roads -Land and property -Financial services -Judicial improvement -Port rehabilitation - Rural land governance - Agriculture - Roads - Education - Agriculture - Transport/ roads - Private sector -Education -Transport/ roads -Small business/farm development Infrastructure /gas - Transport/ roads - Agriculture/ business -Agriculture -Transport -Rural Development -Agriculture -Transport/ roads -Water sector -Health sector -Private sector - Land titling/ Agriculture - Financial sector

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Millennium Challenge Account

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Compact Focus

Compact Size (millions)

FY06 US Econ. Aid (millions)b

Human Development Index Rankinga

Population Living Below $2 p/day (%)

GNI per capita

Compact Signed

Country

Table 3. (Continued)

Mali

November 13, 2006

$500

90.6%

173

$38.1

$460.8 5 years

Mongolia

October 22, 2007

$1,290

74.9%

114

$6.6

$285 5 years

Morocco

August 31, 2007

$2,250

14.3%

126

$18.9

$697.5 5 years

Mozambique

July 13, 2007

$320

78.4%

172

$44.9 ($148.4)

$506.9 5 years

Namibia

July 28, 2008

$3,360

55.8%

125

$7.1 ($51.5)

$305 5 years

Nicaragua

July 14, 2005

$980

79.9%

110

$24.1 ($0.1)

$175 5 years

Tanzania

February 17, 2008

$400

89.9%

159

$57.3 ($176.5)

$698 5 years

Vanuatu

March 2, 2006

$1,840

NA

120

$0.0

$66 5 years

-Irrigation -Transport/ airport -Industrial park -Transport/rail -Property Rights -Voc Ed -Health - Agriculture/ Fisheries -Artisan Crafts -Financial Serv/ Enterprise Support -Water and Sanitation Transportation -Land Tenure/ Agriculture - Education - Tourism - Agriculture - Land titling/ Agriculture - Transport/ roads -Transport/ roads and airport -Energy -Water -Transport rehab -Public Works Dept.

Sources: Population Living Below $2 Per Day — data from the World Bank, World Development Report, 2007; Gross National Income per capita — 2007 data from the World Bank, World Development Indicators 2008. Human Development Index Rank — from UNDP, Human Development Report, 2007/08. MCC Information: Millennium Challenge Corporation. a. The Human Development Index (HDI) is compiled by the U.N. Development Program and is published annually in the UNDP Human Development Report. It is a composite index that measures the average achievements in a country in three basic dimensions of human development: a long and healthy life, as measured by life expectancy at birth; knowledge, as measured by the adult literacy rate and the combined gross enrolment ratio for primary, secondary, and tertiary schools; and a decent standard of living, as measured by GDP per capita in purchasing power parity (PPP) U.S. dollars. The most recent report (2007/08) evaluates 177 countries, with number 1 having the best HDI and number 177 scoring the worst in the Index. b. U.S. Economic Aid is defined here as Child Survival/Health, Development Assistance, Economic Support Fund, and FREEDOM Support Act. Figure in parenthesis is HIV/AIDS Initiative.

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Curt Tarnoff Table 4A. MCA Low-Income Candidate Countries — FY2009 Africa Benin (C) Burkina Faso (TC) (C) Burundi Cameroon Central African Rep Chad Comoros Congo, Dem Rep of Congo, Rep of Djibouti Eritrea Ethiopia Gambia Ghana (C) Guinea Guinea-Bissau Kenya (TC) Lesotho (C) Liberia Madagascar (C) Malawi (TC) Mali (C) Mozambique (C) Niger (TC) Nigeria Rwanda Sao Tome&Principe (TC) Senegal Sierra Leone Somalia Tanzania (C) (TC) Togo Uganda (TC) Zambia (TC)

East Asia/Pacific Cambodia East Timor Indonesia (TC) Kiribati Laos Mongolia (C) Papua New Guinea Philippines (TC) Solomon Islands

Latin America Bolivia Guyana (TC) Haiti Honduras (C) Nicaragua (C) Paraguay (TC)

Vietnam

South Asia Afghanistan Bangladesh Bhutan India Nepal Pakistan Sri Lanka

Mid-East Egypt Yemen

Eurasia Kyrgyz Rep. (TC) Moldova (TC) Tajikistan Turkmenistan

Europe Kosovo

Table 4B. MCA Lower-Middle-Income Candidate Countries — FY2009

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Africa Angola Namibia (C) Swaziland

East Asia/Pacific Marshall Islands Samoa Thailand El Salvador(C) Tuvalu Vanuatu (C) South Asia Maldives

Eurasia Armenia (C) Azerbaijan Georgia (C) Ukraine (TC)

Latin America Colombia Ecuador El Salvador(C) Guatemala Peru (TC) Mid-East Algeria Jordan (TC) Morocco (C) Tunisia Europe Albania (TC) Bosnia/Herzegovina Macedonia

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Millennium Challenge Account Table 5. MCC Performance Indicators for FY2008 Ruling Justly

Voice and Accountability Source: World Bank Institute [http://www.worldbank.org/wbi/governa nce]

Investing in People Public Primary Education Spending as % of GDP Sources: UNESCO and National governments Primary Girls’ Education Completion Rate Source: UNESCO

Government Effectiveness Source: World Bank Institute [http://www.worldbank.org/wbi/governa nce]

Public Expenditure on Health as % of GDP Source: World Health Organization (WHO)

Rule of Law Source: World Bank Institute [http://www.worldbank.org/wbi/governa nce]

Immunization Rates: DPT and Measles Source: World Health Organization (WHO) Natural Resource Management: EcoRegion Protection, Access to Clean Water and Sanitation, Child Mortality Sources: Columbia Center for Int’l Earth Science Info Network (CIESIN) and Yale Center for Env. Law and Policy (YCLEP)

Control of Corruption Source: World Bank Institute [http://www.worldbank.org/wbi/governa nce]

Civil Liberties Source: Freedom House [http://www.freedomhouse.org/template .cfm?page=15&year=2006]

Inflation Source: IMF World Economic Outlook Fiscal Policy Source: National governments and IMF World Economic Outlook Trade Policy Source: The Heritage Foundation, Index of Economic Freedom [http://www.heritage.org/research/ features/index/] Regulatory Policy Source: World Bank Institute [http://www.worldbank.org/wbi/g overnance]

Business Start-Up: Days and Cost of Starting a Business Source: World Bank [http://www.doingbusiness.org]

Land Rights and Access Source: Int’l Fund for Agricultural Development (IFAD) and Int’l Finance Corporation

Political Rights Source: Freedom House [http://www.freedomhouse.org/template .cfm?page=15&year=2006]

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Economic Freedom

END NOTES 1

For a more in-depth discussion of the original MCA proposal and issues debated by Congress in 2003, see CRS Report RL31687, The Millennium Challenge Account: Congressional Consideration of a New Foreign Aid Initiative, by Larry Nowels. 2 Replacing Paul Applegarth who resigned on August 8, 2005. 3 The private sector Board members are Alan Patricof, co-founder of a venture capital corporation; Lorne Craner, President of the International Republican Institute; former Senate Majority Leader William Frist; and Kenneth Hackett, President and CEO of Catholic Relief Services. The latter is a reappointment, permitted a two-year term; the others are serving their first three-year terms. 4 Various types of aid restrictions applied to these countries. For several — Mauritania, Sudan, Cote d’Ivoire, — U.S. aid was blocked because an elected head of government had been deposed by a military coup. For Uzbekistan, legislation banned assistance to the central government. Aid restrictions imposed on nations not cooperating in counternarcotics efforts (Burma), that are on the terrorist list (Sudan, Syria, North Korea, Iran), or in arrears on debt owed the United States (Syria, Sudan, Zimbabwe) also applied. Notwithstanding these restrictions, each country remained eligible for humanitarian assistance from the United States.

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5

MCC Public Outreach Meeting, February 15, 2007. For a complete statement regarding the Board’s rationale, see Report on the Selection of MCA Eligible Countries for FY2004, found at [http://www.mcc.gov], “Congressional Reports.” 7 The MCC’s authorizing legislation (section 608(d)) requires the Corporation’s CEO to provide justification to Congress regarding only those countries declared as eligible for MCA assistance and for those selected for Compact negotiation. Otherwise, there is no statutory requirement for the MCC to comment on its decisionmaking process, including the rationale for not selecting specific countries. 8 Comments by Paul Applegarth at a State Department Foreign Press Center Briefing, November 9, 2004. 9 Georgia and Senegal were selected despite not passing the necessary hurdles, but both had been chosen in FY2004 and FY2005. 10 See, for example, Steve Radelet, Kaysie Brown, and Bilal Siddiqi, “Round Three of the MCA: Which Countries are Most Likely to Qualify in FY 2006?” Center for Global Development, October 27, 2005. 11 Cape Verde had been classified as an eligible low-income country in FY2004 and signed a Compact in July 2005. The Cape Verde case, however, also points out a limitation in using the system of 16 performance indicators. For two of the economic categories, no data are available for Cape Verde, resulting in a failing score on those hurdles. 12 Freedom House, “Millennium Challenge Corporation Should Hold Countries to Higher Standards of Democratic Governance,” November 2, 2006 [http://www.freedomhouse.org]; Sheila Herrling, Steve Radelet, and Sarah Rose, “Will Politics Encroach in the MCA FY2007 Selection Round? The Cases of Jordan and Indonesia,” Center for Global Development, October 30, 2006, [http://www.cgdev.org]. 13 Details on each of the negotiated Compacts can be found at the MCA website: [http://www.mcc.gov]. 14 See letters of John Danilovich to Armenia President Robert Kocharyan on December 16, 2005 and March 11, 2008 on MCC website. 15 Initially, assistance for Threshold countries was authorized only for FY2004. 16 Found at [http://www.MCC.gov]. 17 James Fox and Lex Rieffel, The Millennium Challenge Account: Moving Toward Smarter Aid. The Brookings Institution, July 14, 2005, p. 24. 18 See, for example, Millennium Challenge Corporation FY2005 Budget Justification, p. 7. Found at [http://www.mcc.gov/about/reports/congressional/budgetjustifications/budget_ justification_fy05.pdf]. 19 Prepared statement of Steve Radelet, Senior Fellow at the Center for Global Development, before a hearing of the House International Relations Committee, April 27, 2005. 20 Organization for Economic Cooperation and Development (OECD), Geographical Distribution of Financial Flows to Aid Recipients, 2000/2004: 2006 edition. 21 For example, USAID Administrator Natsios remarked in an October 22, 2002 speech at the American Embassy in London that “we estimate in most countries the MCA will provide funding 5 to 10 times higher than existing levels” of U.S. assistance. 22 Geographical Distribution of Financial Flows to Aid Recipients, 2000/2004: 2006 edition. 23 Prepared statement of John J. Danilovich, before the Senate Committee on Foreign Relations, September 27, 2005. 24 Government Accountability Office, Millennium Challenge Corporation: Progress and Challenges with Compact in Africa, Testimony, June 28, 2007, GAO-07-1049T. 25 Government Accountability Office, Millennium Challenge Corporation: Vanuatu Compact Overstates Projected Program Impact, July 2007, GAO-07-909. 26 Testimony of Rodney Bent before the House Committee on Foreign Affairs, Subcommittee on Asia, the Pacific, and the Global Environment, July 26, 2007. Copyright © 2010. Nova Science Publishers, Incorporated. All rights reserved.

6

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Chapter 4

WORLD TRADE ORGANIZATION NEGOTIATIONS: THE DOHA DEVELOPMENT AGENDA *

Ian F. Fergusson

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SUMMARY Talks continue in the World Trade Organization’s (WTO) Doha Development Round of multilateral trade negotiations. The negotiations, which were launched at the 4th WTO Ministerial in 2001 at Doha, Qatar, have been characterized by persistent differences between the United States, the European Union, and developing countries on major issues, such as agriculture, industrial tariffs and nontariff barriers, services, and trade remedies. Depending on the outcome, some U.S. industries may gain access to foreign markets, and others may see increased competition from imports. Likewise, some U.S. workers may be helped through increased access to foreign markets, but others may be hurt by import competition. The negotiating impasse put negotiators beyond the reach of agreement under U.S. trade promotion authority (TPA), which expired on July 1, 2007. With the deadline passed, the parties are now attempting to make progress in the negotiations in the hope that the 110th Congress will extend TPA. During the second half of 2007, the chairmen of the agriculture, industrial, and rules negotiating groups released new draft texts and revisions to those texts have been made in the course of 2008. Yet, trade ministers again failed to reach a breakthrough at an eight day negotiating ministerial held in Geneva in July 2008. Agriculture has become the linchpin of the Doha Development Agenda. U.S. goals are substantial reduction of trade-distorting domestic support; elimination of export subsidies, and improved market access. Some had looked to a potential Doha Round agreement to curb trade-distorting domestic support as a catalyst to change U.S. farm subsidies in the 2007 farm bill, but this source of pressure for change dissipated with the continued Doha impasse. In addition, Members of Congress likely will carefully scrutinize any agreement that may require changes to U.S. trade remedy laws. *

This is an edited, reformatted and augmented version of a Congressional Research Service Publication RL 32060, Updated August 18, 2008.

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Three issues are among the most important to developing countries, in addition to concessions on agriculture. One issue, now resolved, pertained to compulsory licensing of medicines and patent protection. A second deals with a review of provisions giving special and differential treatment to developing countries. A third addresses problems that developing countries are having in implementing current trade obligations.

BACKGROUND

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The World Trade Organization (WTO) is the principal international organization governing world trade. It has 152 member countries, representing over 95% of world trade. It was established in 1995 as a successor institution to the General Agreement on Tariffs and Trade (GATT). The GATT was a post-World War II institution intended to promote nondiscrimination in trade among countries, with the view that open trade was crucial for economic stability and peace. Decisions within the WTO are made by member countries, not WTO staff1, and they are made by consensus, not formal vote. High-level policy decisions are made by the Ministerial Conference, which is the body of political representatives (trade ministers) from each member country. The Ministerial Conference must meet at least every two years. Operational decisions are made by the General Council, which consists of a representative from each member country. The General Council meets monthly, and the chair rotates annually among national representatives. The United States was an original signatory to the GATT and a leading proponent of the GATT’s trade-liberalizing principles. It continues to be among the countries urging further discussions on opening markets to trade. Although decisions in the WTO are made by consensus, the United States has a highly influential role shaping decisions in the institution befitting its status as the largest trading nation in the world. Periodically, member countries agree to hold negotiations to revise existing rules or establish new ones. These periodic negotiations are commonly called “rounds.” The broader the negotiations, the greater the possible trade-offs, and thus theoretically the greater the potential economic benefits to countries. The multilateral negotiations are especially important to developing countries, which might otherwise be left out of more selective agreements. It must be remembered, however, that trade liberalization also results in job losses and other economic dislocations as well.

What Began at Doha? On November 9-14, 2001, trade ministers from member countries met in Doha, Qatar for the fourth WTO Ministerial Conference. At that meeting, they agreed to undertake a new round of multilateral trade negotiations.2 Before the Doha Ministerial, negotiations had already been underway on trade in agriculture and trade in services. These on-going negotiations had been required under the last round of multilateral trade negotiations (the Uruguay Round, 1986-1994). However, some

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countries, including the United States, wanted to expand the agriculture and services talks to allow trade-offs and thus achieve greater trade liberalization. There were additional reasons for the negotiations. Just months before the Doha Ministerial, the United States had been attacked by terrorists on September 11, 2001. Some government officials called for greater political cohesion and saw the trade negotiations as a means toward that end. Some officials thought that a new round of multilateral trade negotiations could help a world economy weakened by recession and terrorism-related uncertainty. According to the WTO, the year 2001 showed “...the lowest growth in output in more than two decades,” and world trade actually contracted that year.3 In addition, countries increasingly have been seeking bilateral or regional trade agreements. As of November 1, 2007, 385 regional trade agreements have been notified to the GATT/WTO, 197 of which are currently in force.4 There is disagreement on whether these more limited trade agreements help or hurt the multilateral system. Some experts say that regional agreements are easier to negotiate, allow a greater degree of liberalization, and thus are effective in opening markets. Others, however, argue that the regional agreements violate the general nondiscrimination principle of the WTO (which allows some exceptions), deny benefits to many poor countries that are often not party to the arrangements, and distract resources away from the WTO negotiations.5 With the backdrop of a sagging world economy, terrorist action, and a growing number of regional trade arrangements, trade ministers met in Doha. At that meeting, they adopted three documents that provided guidance for future actions. The Ministerial Declaration includes a preamble and a work program for the new round and for other future action. This Declaration folded the on-going negotiations in agriculture and services into a broader agenda. That agenda includes industrial tariffs, topics of interest to developing countries, changes to WTO rules, and other provisions. The Declaration on the TRIPS Agreement and Public Health presents a political interpretation of the WTO Agreement on Trade-Related Intellectual Property Rights (TRIPS).6 A document on Implementation-Related Issues and Concerns includes numerous decisions of interest to developing countries.7 Especially worth noting is how the role of developing countries changed at the Doha Ministerial. Since the beginning of the GATT, the major decision-makers were almost exclusively developed countries. At the preceding Ministerial Conference (Seattle, 1999), developing countries became more forceful in demanding that their interests be addressed. Some developing countries insisted that they would not support another round of multilateral negotiations unless they realized some concessions up-front and the agenda included their interests. Because of the greater influence of developing countries in setting the plan of action at Doha, the new round became known as the Doha Development Agenda. At the Doha meeting, trade ministers agreed that the 5th Ministerial, to be held in 2003, would “take stock of progress, provide any necessary political guidance, and take decisions as necessary,” and that negotiations would be concluded not later than January 1, 2005. With the exception of actions on the Dispute Settlement Understanding, trade ministers agreed that the outcome of the negotiations would be a single undertaking, which means that nothing is finally agreed until everything is agreed. Thus, countries agreed they would reach a single, comprehensive agreement containing a balance of concessions at the end of the negotiations.

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Progress of the Negotiations: The Search for Modalities

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Negotiations have proceeded at a slow pace and have been characterized by lack of progress on significant issues, and persistent disagreement on nearly every aspect of the agenda. A few issues have been resolved, notably in agriculture. However, the first order of business for the round, the negotiation of modalities, or the methods and formulas by which negotiations are conducted, still remain elusive four years after the beginning of the round.

The Cancun Ministerial An important milepost in the Doha Development Agenda round was the 5th Ministerial Conference, which was held in Cancún, Mexico on September 10-14, 2003. The Cancún Ministerial ended without agreement on a framework to guide future negotiations, and this failure to advance the round resulted in a serious loss of momentum and brought into question whether the January 1, 2005 deadline would be met.8 The Cancun Ministerial collapsed for several reasons. First, differences over the Singapore issues seemed irresolvable. The EU had retreated on some of its demands, but several developing countries refused any consideration of these issues at all. Second, it was questioned whether some countries had come to Cancun with a serious intention to negotiate. In the view of some observers, a few countries showed no flexibility in their positions and only repeated their demands rather than talk about trade-offs. Third, the wide difference between developing and developed countries across virtually all topics was a major obstacle. The U.S.-EU agricultural proposal and that of the Group of 21, for example, show strikingly different approaches to special and differential treatment. Fourth, there was some criticism of procedure. Some claimed the agenda was too complicated. Also, Cancun Ministerial chairman, Mexico’s Foreign Minister Luis Ernesto Derbez, was faulted for ending the meeting when he did, instead of trying to move the talks into areas where some progress could have been made. At the end of their meeting in Cancun, trade ministers issued a declaration instructing their officials to continue working on outstanding issues. They asked the General Council chair, working with the Director-General, to convene a meeting of the General Council at senior official level no later than December 15, 2003, “...to take the action necessary at that stage to enable us to move towards a successful and timely conclusion of the negotiations.” The Cancun Ministerial did result in the creation of the so-called Derbez text. Ministerial chairman Derbez invited trade ministers to act as facilitators in Cancun and help with negotiations in five groups: agriculture, non-agricultural market access, development issues, Singapore issues, and other issues. The WTO Director-General served as a facilitator for a sixth group on cotton. The facilitators consulted with trade ministers and produced draft texts from their group consultations. The Ministerial chairman compiled the texts into a draft Ministerial Declaration9 and circulated the revised draft among participants for comment. The Derbez text was widely criticized at Cancun and it was not adopted, but in the months following that meeting, members looked increasingly at this text as a possible negotiating framework. On agriculture, the Derbez text drew largely on both the U.S.-EU and Group of 21 proposals. It included a larger cut from domestic support programs than the U.S.EU proposal made, contained the blended tariff approach of the U.S.-EU proposal but offered better terms for developing countries, and provided for the elimination of export subsidies for products of particular interest to developing countries. On the Singapore issues, it included a

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decision to start new negotiations on government procurement and trade facilitation, but not investment or competition.

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The WTO Framework Agreement The aftermath of Cancun was one of standstill and stocktaking. Negotiations were suspended for the remainder of 2003. However, in early 2004, then-U.S. Trade Representative (USTR) Robert Zoellick offered proposals on how to move the round forward.10 The USTR called for a focus on market access, including an elimination of agricultural export subsidies. He also said that the Singapore issues could progress by negotiating on trade facilitation, considering further action on government procurement, and possibly dropping investment and competition. This intervention was credited at the time with reviving interest in the negotiations, and negotiations resumed in March 2004. On July 31, 2004, WTO members approved a Framework Agreement that includes major developments in the most contentious and crucial issue — agriculture.11 Because of the importance of agriculture to the Round, the Framework, which provides guidelines but not specific concessions, was regarded as a major achievement. With a broad agreement on agriculture and on other issues, negotiators were given a clearer direction for future discussions. However, the talks settled back into a driftless stalemate, where few but the most technical issues were resolved. The Hong Kong Ministerial The stalemate in 2005 increased the perceived importance of the 6th Ministerial in Hong Kong as potentially the last opportunity to settle key negotiating issues that could produce an agreement by 2007, the de facto deadline resulting from the expiration of U.S. trade promotion authority. Although a flurry of negotiations took place in the fall of 2005, WTO Director-General Pascal Lamy announced in November 2005 that a comprehensive agreement on modalities would not be forthcoming in Hong Kong, and that the talks would “take stock” of the negotiations and would try to reach agreements in negotiating sectors where convergence was reported. The final Ministerial Declaration of December 18, 2005, reflected areas of agreement in agriculture, industrial tariffs, and duty-free and tarifffree access for least developed countries (see sectoral negotiations section below for details). Generally, these convergences reflect a step beyond the July Framework Agreement, but fall short of full negotiating modalities.12 Deadlines were established at Hong Kong for concluding negotiations by the end of 2006. These deadlines included an April 30, 2005 date to establish modalities for the agriculture and NAMA negotiations. Further deadlines set for July 31, 2006, include the submission of tariff schedules for agriculture and NAMA, the submission of revised services offers, the submission of a consolidated texts on rules and trade facilitation, and for recommendations to implement the “aid for trade”language in the Hong Kong declaration. On April 21, 2006, WTO Director-General Pascal Lamy announced there was no consensus for agreement on modalities by the April 30 deadline. Trade negotiators likewise failed to reach agreement at a high-level meeting in Geneva on June 30-July 1, 2006. It was agreed at those meetings, however, that Director-General Pascal Lamy would undertake a more proactive role as a catalyst “to conduct intensive and wide-ranging consultations” to achieve agricultural and industrial modalities.13 Prior to the summit, Lamy for the first time in his tenure suggested the outline of a possible compromise.

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Known as the “20-20-20 proposal,” the offer (1) called on the United States to accept a ceiling on domestic farm subsidies under $20 billion, (2) proposed the negotiations use the G20 proposal of 54% as the minimum average cut to developed country agricultural tariffs, and (3) set a tariff ceiling of 20 for developing country industrial tariffs. This suggestion was roundly criticized by all sides and was not adopted at the Geneva meetings.14 At the G-8 summit of leading industrialized nations in St. Petersburg, the leaders pledged a “concerted effort” to reach an agreement on negotiating modalities for agriculture and industrial market access with a month of the July 16 summit.

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Suspension Despite the hortatory language of the G-8 Ministerial Declaration, the talks were indefinitely suspended less than a week later by Director- General Lamy on July 24, 2006. The impasse was reached after a negotiating session of the G-6 group of countries (United States, EU, Japan, Australia, Brazil, and India) on July 23 failed to break a deadlock on agricultural tariffs and subsidies. The EU blamed the United States for not improving on its offer of domestic support, while the United States responded that no new offers on market access were put forward by the EU or the G-20 to make an improved offer possible. Members of Congress praised the hard-line position taken by U.S. negotiators that additional domestic subsidy concessions must be met with increased offers of market access.15 Following the July 2006 suspension, several WTO country groups such as the G-20 and the Cairns Group of agricultural exporters met to lay the groundwork to restart the negotiations. While these meeting did not yield any breakthrough, Lamy announced the talks were back in “full negotiating mode” on January 31, 2007. Key players in the talks such as the G-4 (United States, European Union, Brazil, India) conducted bilateral or group meetings to break the impasse in the first months of the year. In April 2007, G-6 negotiators (G-4 plus Australia and Japan) agreed to work towards concluding the round by the end of 2007. Subsequently, a G-4 summit in Potsdam, Germany collapsed in acrimony on June 21, 2007 over competing demands for higher cuts in developed country agricultural subsidies made by developing countries and developed country demands for greater cuts in industrial tariffs in developing countries. Current Engagement Despite the Potsdam setback, the chairs of the agriculture and industrial market access (NAMA) negotiating groups put forth draft modalities texts on July 17, 2007. These texts, represent what the chair of each committee, as facilitators of the talks, believe is the basis for a balanced level of concessions based on the Doha Declaration and subsequent agreements. Revisions to these texts were circulated on February, May, and July 2008 based on committee level negotiation s held in Geneva. Despite the criticism these texts received from nearly all quarters, they have served to continue the engagement of the various parties in Geneva at a time when many have predicted the demise of the round. Negotiators met in Geneva between July 21-29, 2008 in what was described as a ‘makeor-break’ summit to reach agreement based on the texts prepared during the spring. Once again, however, trade ministers failed to reach agreement with the talks foundering on a “special safeguard mechanism” (SSM) for agriculture products (see section on agriculture below). In the aftermath of the talks, there was a palpable sense of disappointment as many sticking points reportedly had been resolved. D-G Lamy claimed after the talked broke up

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that convergence had been reacked on 18 of 20 issues. Summing up this effort, Brazilian President Lula da Silva reportedly said, “We swam an entire ocean only to drown as we were reaching the beach.”16 However, other obstacles in the agriculture, NAMA, and intellectual property rights talks may have been raised had the negotiations continued.17 If negotiators are not able to achieve a breakthrough, there may be several consequences for multilateral trade liberalization. First, the negotiation of bilateral and regional free trade agreements may accelerate. In the wake of the 2006 suspension, the United States, the EU, Brazil, and India all announced plans to concentrate on additional bilateral liberalization. A second consequence may be the increased use of the WTO’s dispute settlement function. If a political solution to disagreements among members cannot be agreed through negotiations, some practices like agricultural subsidies may be challenged in dispute settlement. An increased reliance on dispute settlement may, in turn, put stress on the WTO as an institution if the decisions rendered are not implemented or are not perceived as being fairly decided. A further consequence may be the loss of agreements already made at the negotiations. A third consequence of a prolonged impasse may be the withdrawal of offers already on the table. Such development-oriented proposals such as aid-for-trade, duty-free and quota-free access for least developed countries, or trade facilitation may languish due to the stalemate in the negotiations. Other negotiating proposals currently on the table may not be reflected in future government policy, such as in U.S. farm legislation, or the mid-course review of the EU’s common agriculture policy in 2008. The 2006 negotiating impasse put negotiators beyond the reach of agreement under U.S. trade promotion authority (TPA), which expired on July 1, 2007. Thus, the parties are seeking to make progress in the negotiations in the hope that the 110th Congress may extend TPA. Possible Congressional consideration of TPA extension legislation may provide a venue for a debate on the status of the Round and the prospects for reaching an agreement consistent with principles set forth by Congress in granting TPA.

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Significance of the Negotiations Trade economists argue that the reduction of trade barriers allows a more efficient exchange of products among countries and encourages economic growth. Multilateral negotiations offer the greatest potential benefits by obliging countries throughout the world to reduce barriers to trade. The gains to the United States and to the world from multilateral trade agreements have been calculated in the billions of dollars. For example, a recent study by the International Trade Commission found that if the tariff cuts from the Uruguay Round were removed, the welfare loss to the United States would be about $20 billion.18 A study by the University of Michigan found that if all trade barriers in agriculture, services, and manufactures were reduced by 33% as a result of the Doha Development Agenda, there would be an increase in global welfare of $574.0 billion.19 Other studies present a more modest outcome predicting world net welfare gains ranging from $84 billion to $287 billion by the year 2015.20 Multilateral negotiations are especially important to developing countries that might otherwise be left out of a regional or bilateral trade agreement. Developing country blocs can improve trade and economic growth among its members, but the larger share of benefits are

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from the trade agreements that open the markets of the world. Multilateral trade negotiations are also an exercise in international cooperation and encourage economic interdependence, which offers political benefits as well. When a country opens its markets, however, increased imports might cause economic dislocations at the local or regional level. Communities might lose factories. Workers might lose their jobs. For those who experience such losses, multilateral trade agreements do not improve their economic well-being. Also, if a country takes an action that is not in compliance with an agreement to which it is a party, it might face some form of sanction. Further, some oppose WTO rules that restrict how a country is permitted to respond to imports of an overseas product that employs an undesirable production method, for example a process that might use limited resources or impose unfair working conditions. Thus, while multilateral trade agreements have been found to offer broad economic benefits, they are opposed for a variety of reasons as well.

THE DOHA AGENDA Doha Round talks are overseen by the Trade Negotiations Committee (TNC), whose chair is Director-General Pascal Lamy. The negotiations are being held in five working groups and in other, existing bodies in the WTO. Selected topics under negotiation are discussed below in five groups: market access, development issues, WTO rules, trade facilitation, and other issues.21

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Market Access Agriculture The Uruguay Round Agreement on Agriculture called for continued negotiations toward “...the long-term objective of substantial progressive reductions in support and protection....” By early 2001, WTO members had achieved some preliminary work in those sectoral negotiations, and later that year, agriculture was wrapped into the broader Doha agenda. Agriculture has become the linchpin in the Doha Development Agenda.22 U.S. goals in the new round were elimination of agricultural export subsidies, easing of tariffs and quotas, and reductions in trade-distorting domestic support. The Doha Ministerial Declaration included language on all of these three pillars of agricultural support. It stated that the members committed to “comprehensive negotiations aimed at substantial improvements in market access; reductions of, with a view to phasing out, all forms of export subsidies; and substantial reductions in trade distorting support.” The course of the negotiations in the lead up to Cancun were influenced by the reform of the EU’s Common Agricultural Policy (CAP). A major issue for the EU was whether or not to approve separation (“decoupling”) of payments to farmers based on production. Those types of payments are among the most trade-distorting (“amber box”). On June 26, 2003, EU agriculture ministers approved a reform package that included partial decoupling for certain products. The action was seen by many as a positive step for advancing the trade negotiations.23

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The EU reform largely addressed one of the three pillars of agricultural reform — domestic support — but did little in a second pillar — market access. In the WTO negotiations on market access, the United States and the Cairns Group have supported a leveling, or harmonizing, of tariff peaks, or high rates. In comparison, the EU and Japan want flexibility to cut some items less than others to arrive at an average total rate cut. Another difficulty is “geographical indications,” or the protection of product names that reflect the original location of the product. An example is the use of “Bordeaux wine” for wines from the Bordeaux region only. Europeans, joined by India and some other countries, want a mandatory registry of geographical indications that would prevent other countries from using the names. The United States and other countries refuse to negotiate a mandatory list, but will accept a voluntary list with no enforcement power. While the EU has said that it will not accept an agriculture agreement without a geographical registry, it reportedly has lowered expectations to achieving a registry for wines and spirits.24 Developing countries view reform in agricultural trade as one of their most important goals. They argue that their own producers cannot compete against the surplus agricultural goods that the developed countries, principally the EU and the United States, are selling on the world market at low, subsidized prices. Some African countries also are calling for an end to cotton subsidies, claiming that such subsidies are destroying markets for the smaller African producers. The July 2004 Framework Agreement provided a basis for which to continue the agriculture talks. On domestic support, subsidies are to be reduced by means of a “tiered” or “banded” approach applied to achieve “harmonization” in the levels of support. Subsidizing countries will make a down-payment of a 20% reduction in levels of support in the first year of the agreement. Tariff reduction will utilize a tiered formula with a harmonization component, but with some exceptions for “import sensitive products.” The European Union finally agreed to the elimination of export subsidies, considered a major negotiating goal of the United States. While there was no breakthrough at the December 2005 Hong Kong Ministerial, members agreed to eliminate export subsidies, and “export measures with equivalent effect” by 2013, a date favored by the European Union (EU). Members agreed to cut domestic support programs with a three band methodology. As the largest user of domestic agricultural subsidies, the EU was placed in the highest band. The United States and Japan were placed in the second band and lesser subsidizing countries were placed in the third band. However, the actual percentage cuts that these bands represent remain subject to negotiation. Members also renewed a commitment to achieve a tariff cutting formula by April 30, 2006. This deadline was not met. In the parallel negotiations on cotton, members agreed to eliminate export subsidies for cotton and to provide duty-free and quota-free access for LDC cotton producers by year-end 2006. Members also agreed to reduce domestic support for cotton in a more ambitious manner than for other agricultural commodities as an “objective” in the ongoing agricultural negotiations. Talks to reach modalities proved unsuccessful at the July 23, 2006 meeting of the G-6 countries in Geneva and the negotiations were suspended thereafter. Sources of the stalemate in the Geneva talks included U.S. concerns about the magnitude of deviations from market access commitments stemming from the so-called “3-S flexibilities”: sensitive products, special products, and the special safeguard mechanism. While each of these flexibilities was incorporated into the 2004 July Framework Agreement as negotiating modalities that would

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allow countries to exempt certain products from the banded tariff formula, the United States contends that the scope envisioned by some countries for these modalities would unacceptably diminish the overall market access gains from the agreement.25 Conversely, the United States was under pressure at the meeting from the EU and the G-20 group represented by Brazil and India to improve its subsidy reduction offer, but the United States put no new offer on the table. The United States insisted that it will not improve its offer on domestic subsidy reduction unless the EU improves considerably its market access offer and the G-20 countries show a willingness to open their markets not only to agricultural products but to industrial products and services as well. These dynamics continued in 2007 discussions. In July 2007, WTO Agriculture committee chairman Crawford Falconer submitted a draft modality paper to address the divergent negotiating positions of the parties. As a result of committee-based negotiations in Geneva, revisions to this draft were made in February, May and July 2008, the latter of which became the basis for negotiations at the WTO summit in July 21-29 2008. Some of the headline figures from the draft modalities26 include a reduction of U.S. trade-distorting domestic support of 66% or 73% for a total of $13.0-$16.4 billion and a reduction in European domestic support of 75% or 85% to $22.7 billion - $38.1 billion. The Falconer draft would cut U.S. and Japanese subsidies by equal percentages, resulting in a final cap on Japan’s overall trade-distorting support (OTDS) of $12.3-$15.6 billion. The United States publicly offered to cap OTDS at $14.5 billion on July 25, 2008, during the negotiating summit, conditional on accepting the Lamy compromise package then on the table. While actual U.S. expenditures likely have declined in the past few years due to higher commodity prices, this has not been reflected in the U.S. negotiating position. The EU has set a 70% reduction as its upper bound. The G-20 group of developing countries, though, has demanded a reduction yielding an $11 billion cap in U.S. OTDS. Developed country tariffs would be cut in a tiered formula in equal increments over five years: a 70% reduction for tariffs currently above 75%27, a 64% cut for tariffs currently between 50% and 75%, a 57% cut for tariffs currently between 20% and 50% and a 50% cut for tariffs between 0 and 20%. In addition, the draft stipulates a minimum tariff cuts of 54% for developed countries, after application of the formula and other exceptions. Developing countries would be able to cut 2/3 of the amount of cuts agreed by developed countries from bands with higher thresholds in equal instalments over eight years. While developed countries would have to cut 70% from tariffs currently above 75% (their highest tariff band), developing countries would have to cut [43.6% or 48.2%] on all tariffs above 130%, 42.7% on tariffs between 80% and 130%, 38% for tariffs between 30% and 80%; and 33.3% on tariffs between 0% and 30%. The draft modalities also proposes that countries may designate 4-6% of their agricultural tariff lines as sensitive, and thus subject to lower cuts. Developing countries would be allowed to claim 1/3 more tariffs lines as sensitive. The draft reaffirmed the Hong Kong Ministerial commitment to eliminate export subsidies by 2013 and seeks elimination of the agriculture state trading enterprises by 2013. The July 2008 WTO summit ultimately broke down over the particulars of a special safeguard mechanism (SSM), a proposal to allow developing countries to raise duties beyond bound levels in instances of import surges or price depressions.28 The concept of an SSM for developing countries had been a part of the Doha Round modalities since the July Framework Agreement of 2004, the controversy revolved around the trigger level and the resulting level of tariff increase. The Lamy proposal of July 25 posited an SSM that could be triggered on a

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40% surge above the level of base imports by imposing safeguards of 15% of the bound rate. This level, broadly the position of the United States, was not acceptable to India and several other developing countries, which sought a trigger of 10-15% surge above base imports and a safeguard increase of 30% beyond the bound tariff. The United States also insisted on a ceiling on the safeguard duties so that their imposition would not breach the existing (preDoha) bound rates.29

Services Along with agriculture, services were a part of the “built-in agenda” of the Uruguay Round.30 The General Agreement on Trade In Services (GATS), which was concluded in that Round, directs Members to “...enter into successive rounds of negotiations, beginning not later than five years from the date of entry into force of the WTO Agreement [January 1, 1995]...[to achieve] a progressively higher level of liberalization.” Those negotiations began in early 2000. Negotiating guidelines and procedures were established by March 2001. Under the request-offer approach being used, countries first request changes in other countries’ practices, other countries then respond by making offers of changes, and finally the countries negotiate bilaterally on a final agreement. The Doha Ministerial Declaration recognized the work already undertaken and reaffirmed the March 2001 guidelines as the basis for continuing the negotiations. It directed participants to submit initial requests for specific commitments by June 30, 2002 and initial offers by March 31, 2003. The services talks are going slowly. By July 2005 the WTO had received 68 initial commitment offers representing 92 countries (the EU represents 25 members) and 24 offers remained outstanding from non-LDC members (55 if LDCs are included). Only 28 revised offers were tendered by November 2005, although the July Framework stipulated a March 31, 2005 deadline. All members were to have submitted their initial offers by March 31, 2003. Many have decried the poor quality of offers, many of which only bind existing practices, rather than offer new concessions and excluded some sectors entirely. At Hong Kong, members committed to submit a second round of revised offers by July 31, 2006, and to submit a final schedule of commitments by October 31, 2006. In order to expedite the negotiating process, members also agreed to employ plurilateral requests to other members covering specific sectors and modes of supply to be completed by February 28, 2006. In response to this deadline, twenty-one plurilateral requests concerning 17 sectors and 4 modes of supply were submitted, and 4 rounds of discussions have been held concerning them. In addition, six rounds of bilateral request-offer meetings have been held among the participants since the end of 2005. To some members including the United States, the talks have not yielded adequate offers of improved market access. Consequently, various methods have been advocated to break the stalemate in negotiations, from calls to prepare a services modalities text to the convening of a signaling conference. A draft services negotiating text, released prior to the July 2008 miniministerial, called for countries “to the maximum extent possible” respond to requests with “deeper and/or wider commitments... commensurate with levels of development, regulatory capacity, and national policy objectives.”31 While much of the activity during the July 21-29, 2008 Geneva talks continued to concern agriculture and industrial market access, participants did hold a signaling conference on July 26 on the types of additional offers of services

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liberalization countries would be willing to make provided an agreement was reached in the agriculture and NAMA talks. One area of controversy is so-called “Mode IV” services. Mode IV relates to the temporary movement of business persons to another country in order to perform a service onsite. Developing countries want easier movement of their nationals under Mode IV. They claim that the services negotiations have centered on the establishment of businesses in other countries, which has been a focus of developed countries, while there has been no negotiation on Mode IV, which would help them. Developed countries, especially the United States, have opposed discussions on Mode IV services trade. Congress might oppose easier entry for business persons, based on Senate approval of a resolution (S.Res. 211) in the 108th Congress expressing the sense of the Senate that future U.S. trade agreements and implementing legislation should not contain immigration-related provisions. Mode IV services will be a difficult issue to resolve. Fifteen countries have joined a plurilateral request for Mode IV services liberalization to the United States and other developed countries. At the abovementioned signaling conference, the United States and the EU reportedly signaled increased flexibility on allowing more services professionals access to their markets.32

Non-Agricultural Market Access (NAMA) In the Doha Declaration, trade ministers agreed to negotiations to reduce or eliminate tariffs on industrial or primary products, with a focus on “tariff peaks, high tariffs, and tariff escalation.”33 Tariff peaks are considered to be tariff rates of above 15% and often protect sensitive products from competition. Tariff escalation is the practice of increasing tariffs as value is added to a commodity. The talks are also seeking to reduce the incidence of nontariff barriers, which include import licensing, quotas and other quantitative import restrictions, conformity assessment procedures, and technical barriers to trade. The sectoral elimination of tariffs for specific groups has also be forwarded as an area of negotiation. Negotiators accepted the concept of less than full reciprocity in reductions for developing and least-developed countries. Doha negotiators agreed to reach modalities for the reduction or elimination of tariffs and non-tariff barriers by the end of May 2003. This deadline was, as were subsequent ones, not met. NAMA issues were not discussed at Cancun, and there was no agreement on the draft texts proposed for consideration at that Ministerial. The July 2004 Framework Agreement adopted the use of a non-linear tariff reduction formula applied on a line-by-line basis, (i.e. one that it can work towards evening out or harmonizing tariff levels), and the Hong Kong Ministerial did agreed to use a Swiss formula. The Ministerial did not agree on coefficients, however, and these have become the subject of continuing negotiations. The July 2004 Framework Agreement also agreed that tariff reductions would be calculated from bound, rather than the applied, tariff rates. Negotiators are also grappling with the concept of “flexibility,” or the nature and extent of developing country-special and differential treatment, as it relates to formula cuts. In addition to longer implementation times, the July Framework Agreement allows for less than formula cuts for a certain (undetermined) amount tariff lines, keeping a percentage of tariff lines unbound, or not applying formula cuts for an (undetermined) percentage of tariff lines (the so-called Paragraph 8 flexibilities). At Hong Kong, negotiators did agree to provide tariff-free and quotafree access for LCDs by 2008. However, this agreement provides the

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caveat that 3% of tariff lines can be exempted as sensitive products such as textiles, apparel, and footwear. The April 30, 2006 deadline, like so many before, was breached without agreement on the NAMA formula or on other issues. The end of June Geneva summit also failed to reach agreement on NAMA modalities. The United States, Canada, and Switzerland proposed a 5 percentage point differential between the Swiss formula coefficients of developed and developing countries, which is consistent with the EU proposal of a 10 coefficient for developed countries and a 15 coefficient for developing countries. A group of developing countries known as the NAMA-11 proposed that the differential should be at least 25 percentage points.34 The NAMA talks have been increasingly linked to the agricultural talks, with some movement on one becoming increasingly linked to progress in the other. Developing countries have been unwilling to commit on NAMA without agreement on agriculture, but now some developed countries are tying further agriculture progress to NAMA. This linkage has come be known as the “exchange rate” between the two negotiations. A June 2007 G-4 meeting in Potsdam, Germany faltered in part over the rejection by Brazil of a U.S. proposal of a 10-25 spread for developed and developing country coefficients, a proposal that was a clear break from either country’s stated positions.35 A draft modality paper was released on July 17, 2007 authored by Don Stephenson, the NAMA negotiating chairman. Based on continuing committee level negotiations in Geneva, revisions to this text were issued in February, May, and July 2008. This paper sought to reconcile the positions of the parties to move the negotiations forward; as such, it faced mostly criticism from the diverse negotiating groups. Following the July 2008 Ministerial, the chairman revised his text again to reflect areas of “convergence” in the negotiations, while admitting that not all members accepted this convergence.36 The following discussion reflects this convergence while retaining the brackets to indicate that these figures do not represent an agreement. For the Swiss tariff reduction formula, the draft called for a coefficient of 8 for developed countries and a range of coefficients of either [x=20][y=22][z=25] for developing countries depending on which ‘Paragraph 7’ flexibility each country availed themselves. This scenario would allow developing countries choose one of the following flexibilities based on the coefficient x or y they chose for the tariff reduction formula: (1) apply less than formula cuts for up to [14% for x][10% for y]of tariff lines provided that the cuts applied are no less than half the formula cuts and that the tariff lines do not exceed [16% for x][10% for y] of the value of a member’s non-agricultural imports, or (2) keep tariff lines unbound or not applying formula cuts for [6.5% for x] [5% for y ]of tariff lines provided they do not exceed [7.5% for x][5% for y]of the value of a member’s non-agricultural imports. Countries choosing coefficient z, which would lead to the lowest tariff cuts under the formula, would not avail themselves of these flexibilities. The use of these flexibilities has been further complicated by the so-called ‘anticoncentration clause,’ which provides that the flexibilities available to developing countries shall not be used to exclude full chapters of the harmonized tariff schedule (HS) from full formula reductions. Both the United States and the EU have been adamant that the flexibilities should not be used in a way to exclude whole industrial sectors from formula cuts, as reflected in the 2 digit HS chapter. Meanwhile, developing countries have opposed expanding the anti-concentration clause beyond the level of full chapters, as agreed by all members at the Hong Kong Ministerial. The August 2008 convergence text set full formula

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tariff reductions as a minimum of 20% of national tariff lines in each HS chapter or 9% of the value of imports of the Member in each HS chapter. Both the United States and the EU have favored using sectoral tariff elimination as a supplemental modality for the NAMA negotiations. Negotiations have been heated on which products to cover and the extent of participation (i.e. whether developing countries or LDCs would be able exempt themselves from commitments). Proposals have been made for sectoral negotiations in the automotive and related parts; bicycles and related parts; chemicals; electronics/electrical products; fish and fish products; forest products; gems and jewelry; hand tools; industrial machinery; open access to enhanced health care; raw materials; sports equipment; toys; and textiles, clothing and footwear. The United States has insisted that major developing countries participate in the sectorals, while developing countries have countered that the negotiating mandate makes such negotiations voluntary. The latest compromise language stipulates that countries would declare their intention to participate in at least two sectoral negotiations, without prejudging that member’s decision to join in the sectoral initiative resulting from those negotiations. Those developing countries that did join, however, would be eligible to receive a higher coefficient in the Swiss formula. As noted above, the industrial market access talks also encompass negotiations on the reduction of non-tariff barriers (NTBs). The draft text includes several sectoral proposals concerning NTBs for chemical products; electronics; electrical safety and electromagnetic compatibility; labeling of textiles, clothing, footware, and travel goods; and automotive products. The text also includes a proposal for a mechanism to resolve disputes over specific NTBs as they arise.

Development Issues

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Three development issues are most noteworthy. One pertains to compulsory licensing of medicines and patent protection. A second deals with a review of provisions giving special and differential treatment to developing countries. A third addresses problems that developing countries were having in implementing current trade obligations.

Access to Patented Medicines A major topic at the Doha Ministerial regarded the WTO Agreement on Trade-Related Aspects of Intellectual Property Rights (TRIPS).37 The issue involves the balance of interests between the pharmaceutical companies in developed countries that held patents on medicines and the public health needs in developing countries. Before the Doha meeting, the United States claimed that the current language in TRIPS was flexible enough to address health emergencies, but other countries insisted on new language. Section 6 of the Doha document Declaration on the TRIPS Agreement and Public Health (TRIPS Declaration), recognized that “...WTO Members with insufficient or no manufacturing capabilities in the pharmaceutical sector could face difficulties in making effective use of compulsory licensing under the TRIPS Agreement.” In Section 6, the trade ministers instructed the WTO TRIPS Council “...to find an expeditious solution to this problem and to report to the [WTO] General Council before the end of 2002.”

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On December 16, 2002, then-TRIPS Council chairman Eduardo Perez Motta produced a draft that would allow countries that lack the manufacturing capacity to produce medicines to issue compulsory licenses for imports of the medicines. All WTO members approved of the chairman’s draft except the United States. The U.S. position, representing the interests of the pharmaceutical industry, was that the chairman’s draft did not include enough protections against possible misuse of compulsory licenses. The United States sought a limit on the diseases that would be covered by the chairman’s text, but other countries refused this initiative. The United States decided to oppose the chairman’s draft and unilaterally promised not to bring a dispute against any least-developed country that issued compulsory licenses for certain medicines. One concern of the pharmaceutical industry was that the medicines sent to the developing country might be diverted instead to another country. To address this problem, it was suggested that the medicines be marked so that they can be tracked. Another concern was that more advanced developing countries might use the generic medicines to develop their own industries. For this problem, it was proposed that countries voluntarily “opt-out,” or promise not to use compulsory licensing. On August 30, 2003, WTO members reached agreement on the TRIPS and medicines issue. Voting in the General Council, member governments approved a decision that offered an interim waiver under the TRIPS Agreement allowing a member country to export pharmaceutical products made under compulsory licences to least-developed and certain other members. An accompanying statement represented several “key shared understandings” of Members regarding the Decision, including the recognition that the decision should be used to protect public health and not be an instrument to pursue industrial or commercial policy objectives, and the recognition that products should not be diverted from the intended markets. The statement listed a number of countries that either agreed to opt out of using the system as importers or agreed that they would only use the system in national emergencies or extreme urgency. At the 2005 Hong Kong Ministerial, members agreed to a permanent amendment to incorporate the 2003 Decision, which will become effective when it is ratified by two-thirds of the member states. To date, 43 countries (including the 27 members of the EU) have ratified the agreement.

Special and Differential (S&D) Treatment In the Doha Ministerial Declaration, the trade ministers reaffirmed special and differential (S&D) treatment for developing countries and agreed that all S&D treatment provisions “...be reviewed with a view to strengthening them and making them more precise, effective and operational.” In the Declaration, the trade ministers endorsed the work program on S&D treatment presented in another Doha document, Decision on Implementation-Related Issues and Concerns (Implementation Decision). That document called on the WTO Committee on Trade and Development to identify the S&D treatment provisions that are already mandatory and those that are non-binding, and to consider the implications of “...converting [S&D] treatment measures into mandatory provisions, to identify those that Members consider should be made mandatory, and to report to the General Council with clear recommendations for a decision by July 2002.” It also called for the Committee on Trade and Development “to examine additional ways in which S&D treatment provisions can be made more effective, to consider ways...in which developing countries...may be assisted to make best use of [S&D] treatment provisions.”

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The negotiations have been split along a developing-country/developed-country divide. Developing countries wanted to negotiate on changes to S&D provisions, keep proposals together in the Committee on Trade and Development, and set shorter deadlines. Developed countries wanted to study S&D provisions, send some proposals to negotiating groups, and leave deadlines open. Developing countries claimed that the developed countries were not negotiating in good faith, while developed countries argued that the developing countries were unreasonable in their proposals. At the December 2005 Hong Kong Ministerial, members agreed to five S&D provisions for LDCs, including the tariff-free and quota-free access for LDC goods described in the NAMA section.

Implementation Issues Developing countries claim that they have had problems with the implementation of the agreements reached in the earlier Uruguay Round because of limited capacity or lack of technical assistance. They also claim that they have not realized certain benefits that they expected from the Round, such as increased access for their textiles and apparel in developedcountry markets. They seek a clarification of language relating to their interests in existing agreements. Before the Doha Ministerial, WTO Members resolved a small number of these implementation issues. At the Doha meeting, the Ministerial Declaration directed a two-path approach for the large number of remaining issues: (a) where a specific negotiating mandate is provided, the relevant implementation issues will be addressed under that mandate; and (b) the other outstanding implementation issues will be addressed as a matter of priority by the relevant WTO bodies. Outstanding implementation issues are found in the area of market access, investment measures, safeguards, rules of origin, and subsidies and countervailing measures, among others.

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Trade Facilitation The first WTO Ministerial Conference, which was held in Singapore in 1996, established permanent working groups on four issues: transparency in government procurement, trade facilitation, trade and investment, and trade and competition. These became known as the Singapore issues. These issues were pushed at successive Ministerials by the European Union, Japan and Korea, and opposed by most developing countries. The United States was lukewarm about the inclusion of these issues, indicating that it could accept some or all of them at various times, but preferring to focus on market access. In 2001, the Doha Ministerial Declaration called for further clarification on the four Singapore issues to be undertaken before the 5th Ministerial in 2003 (at Cancún), and for negotiations to be launched on the basis of a decision taken by explicit consensus at the 5th Ministerial. At Cancún, deadlock over the Singapore issues was a contributing factor in the breakup of that summit. After further negotiations during 2004, a compromise was reached in the July 2004 Framework Agreement: three of the Singapore issues (government procurement, investment, and competition) were dropped and negotiations would begin on trade facilitation. Trade facilitation aims to improve the efficiency of international trade by harmonizing and streamlining customs procedures such as duplicative documentation requirements,

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customs processing delays, and nontransparent or unequally enforced importation rules and requirements. The talks have thus far revolved around the scope and obligations of the new disciplines. Member countries have tabled proposals dealing with freedom of transit, fees and formalities, and administrative transparency. These proposals are reportedly being reviewed, refined, and drafted into legal provisions that will form the basis of a negotiating text. Discussions have also occurred concerning the technical assistance and trade capacity building needed by developing countries to implement any subsequent agreement. Developing countries are in the process of assessing their own trade facilitation status, and what it will take to bring them up to international standards with the help of customs experts from organizations such as the World Bank and the World Customs Organization. Developed countries, including the United States and the European Union, favor the negotiation of a concrete rules-based system with appropriate accountability, while some developing countries prefer optional guidelines with “policy flexibility.” Although negotiations have proceeded in a constructive manner, no major breakthroughs in trade facilitation were announced at Hong Kong Ministerial and no date has been set for beginning text-based negotiations. No negotiating document has, thus far, been tendered.

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WTO Rules Rules Negotiations The Doha Round negotiations included an objective of “clarifying and improving disciplines” under the WTO Agreements on Antidumping (AD) and on Subsidies and Countervailing Measures (ASCM).38 The United States sought to keep negotiations on trade remedies outside of the Doha Round, but found many WTO partners insistent on including them for discussion. U.S. negotiators did manage to insert language asserting that “...basic concepts, principles and effectiveness of these Agreements and their instruments and objectives” would be preserved. However, Congressional leaders were highly critical of this concession by U.S. trade negotiators.39 The Doha Ministerial Declaration also called for clarifying and improving disciplines on fisheries subsidies, and both the Ministerial Declaration and the Implementation Decision have special provisions on trade remedies and developing countries. In addition to trade remedies, the Declaration calls for clarifying and improving WTO disciplines and procedures on regional trade agreements. The Declaration identified two phases for the work on trade remedies: “In the initial phase of the negotiations, participants will indicate the provisions, including disciplines on trade distorting practices, that they seek to clarify and improve in the subsequent phase.” No deadlines were set for these phases. The United States has primarily been on the defensive in the rules talks. Many countries have attacked the use of antidumping actions by the United States and other developed nations as disguised protectionism. However, many developing countries are now using antidumping actions themselves, which may goad some countries to reexamine the necessity for discipline. Most of the proposals on trade remedies focus on providing more specificity or restrictions to the AD/ASCM Agreements in terms of definitions and procedures. Yet, no agreements have been reached, even on what is to be negotiated. The leading proponents of such changes have been a group of 15 developed and developing countries known as the “Friends of Antidumping” (Brazil, Chile, Colombia, Costa

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Rica, Hong Kong, Israel, Japan, Mexico, Norway, Singapore, South Korea, Switzerland, Taiwan, Thailand, and Turkey; though not all countries sign onto every proposal). They have made numerous proposals, and in essence their proposals would reduce the incidence and amount of duties. Many of their proposals would require a change in U.S. laws. Although the EU is a major user of trade remedies and not a member of the “Friends” group, it has agreed with some of the group’s proposals. The United States itself has sought some changes in the WTO rules, submitting papers on antidumping proposals on issues such as transparency, foreign practices to circumvent a duty order, and the WTO standard used by dispute panels in reviewing national applications of trade remedy laws. The United States also has submitted proposals on subsidies, such as expanding a list of prohibited subsidies and imposing disciplines on support to sales of natural resources. The Rules negotiations Chair, Guillermo Valles Galmés, released a draft modalities paper on November 30, 2007. A key feature of this draft was language allowing the use of zeroing in certain antidumping (AD) calculations.40 The draft is widely seen as a concession to the United States, the only country that now employs the zeroing methodology, which has faced several adverse Appellate Body decisions over the practice. While the United States expressed disappointment that the text did not go far enough in legitimizing the practice, several countries including the “Friends of Antidumping” group and others were harshly critical of the draft text as rolling back Appellate Body decisions on zeroing.41 Meanwhile, House Ways and Means Chair Rangel, Trade Subcommittee Chair Levin, Senate Finance Chair Baucus and Senator Rockefeller wrote to USTR Schwab charging that the draft text would violate language in trade promotion authority to avoid agreements that would weaken U.S. antidumping and unfair trade remedy legislation.42 The November 2007 draft modalities paper also put forth a proposed modality on fisheries subsidies. The proposal would ban some subsidies outright such as those boost fishing capacity or encourage over-fishing. Exceptions would be allowed for subsidies associated with operations of fisheries management programs and for certain special and differential treatment for developing countries, provided that they adopt fisheries management programs. The extent of this special treatment and the treatment of subsidies for small-scale fishing in both developed and developing countries remain topics for debate.43

Dispute Settlement At the end of the Uruguay Round, trade ministers called for a full review of WTO dispute settlement rules and procedures within four years after entry into force of the agreement establishing the WTO. That deadline, January 1, 1999, passed without a review being completed.44 At Doha, trade ministers continued to call for a review of dispute rules. The Ministerial Declaration directed that negotiations be held on improvements and clarifications of the Dispute Settlement Understanding (DSU). They stated that the negotiations should be based on work done so far and on any additional proposals. They set a deadline of May 2003. They directed that these DSU negotiations would be separate from the rest of the negotiations and would not be a part of the single undertaking. Members are examining nearly all of the 27 Articles in the DSU. In early April 2003, the chair of the working group circulated a framework document that included over 50 proposals. There was some dissatisfaction that the document needed more focus. On May 16, 2003, the

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chair issued another text that was accepted by most countries. The United States and the EU favored additional reforms that were not a part of the text. For example, the United States has called for open public access to proceedings, and the EU had sought a roster of permanent dispute panelists.

Environment The Ministerial Declaration included several provisions on trade and environment. Among the provisions, the trade ministers agreed to the following: (1) negotiations on the relationship between existing WTO rules and trade obligations in multilateral environmental agreements (MEAs); (2) procedures for the exchange of information between MEA Secretariats and WTO committees, and the criteria for granting observer status; and (3) the reduction or elimination of trade barriers to environmental goods and services. Concerning the third negotiating objective, the United States and the European Union unveiled a two-tiered tariff elimination proposal on November 30, 2007. The first tier would be the elimination on tariffs on 43 goods and services directly related to climate change mitigation such as wind-turbine parts, solar collectors, and hydrogen fuel cells. All countries would be obliged to take on this mandate, although certain phase-in periods are contemplated for developing and least-developed countries. The second phase would be the creation of a plurilateral Environmental Goods and Services Agreement (EGSA) that would liberalise 153 additional environmental-related goods and services among developed and advanced developing countries. However, this proposal has been criticized by several developing countries. Brazil has decried the omission of biofuels from the list, as well as biofuel production equipment. India has questioned the inclusion of certain ‘dual-use’ goods, those that also have non-environmental uses.45

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CONGRESSIONAL ROLE Although the executive branch conducts trade negotiations in the WTO, the Congress has constitutional responsibility for regulation of U.S. foreign commerce. As part of this constitutional role, Congress conducts oversight of the negotiations. Oversight might be in the forms of hearings or meetings with executive branch officials. Members often communicate their positions through public statements and letters. In the spring of 2007, for example, a bipartisan group of 58 Senators wrote to President Bush to caution against further concessions in the agricultural talks and to press for increased market access for U.S. farm exports.46 Trade Promotion Authority expired on July 1, 2007. In the Trade Act of 2002 (P.L. 107210), Congress prescribed trade objectives for U.S. negotiators in the Doha Development Agenda and in other trade negotiations. These objectives gave direction to negotiators on U.S. priorities. Congress also outlined requirements that the executive branch must meet, as a condition for expedited procedures for legislation to implement trade agreements, including those reached in the Doha Development Agenda. Among the conditions for expedited legislative procedures, the executive branch must consult with Congress at various stages of the negotiations, notify Congress before taking specified actions, and submit reports as outlined.

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Expedited procedures would apply to any trade agreement entered into (signed) before July 1, 2005. A two-year extension to that deadline was written in to the 2002 Act if the President requested the extension and Congress did not disapprove it. This request was requested by the President on March 30, 2005, and Congress took no action to disapprove it by the June 30, 2005 deadline. Thus, TPA was extended until July 1, 2007, when it expired. The Administration may ask the 110th Congress to renew or extend TPA to consider a future Doha Round agreement. Congress may use such a request as an opportunity to assess the prospects for completion of a Doha Round agreement and to evaluate the Administration’s compliance with Congress’ trade negotiating objectives as set forth in the original TPA.

END NOTES

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1

The WTO staff is based in Geneva and numbers about 625 with a budget of approximately $152 million in 2007. The organization is headed by a Director-General, currently Pascal Lamy of France. 2 For information on the results of the Doha Ministerial Conference, see CRS Report RL31206, The WTO Doha Ministerial: Results and Agenda for a New Round of Negotiations, coordinated by William H. Cooper. 3 World Trade Organization (WTO), Annual Report 2002. p. 10. 4 WTO, Report (2007) of the Committee on Regional Trade Agreements to the General Council, (WT/REG/18), December 3, 2007. 5 For a discussion of the effect of free-trade agreements, see CRS Report RL31356, Free Trade Agreements: Impact on U.S. Trade and Implications for U.S. Trade Policy, by William H. Cooper. 6 See CRS Report RS21609, The WTO, Intellectual Property Rights, and the Access to Medicines Controversy, by Ian F. Fergusson. 7 The Ministerial Declaration (WT/MIN(01)/DEC/1), the Declaration on the TRIPS Agreement and Public Health (WT/MIN(01)/DEC/2), and the Implementation-Related Issues and Concerns (WT/MIN(01)/DEC/17) are available through the WTO home page at [http://www.wto.org/]. 8 For more detailed information on the Cancún Ministerial, see CRS Report RS21664, The WTO Cancún Ministerial, by Ian F. Fergusson; and General Accounting Office. Cancun Ministerial Fails to Move Global Trade Negotiations Forward; Next Steps Uncertain. Report to the Chairman, Committee on Finance, U.S. Senate, and to the Chairman, Committee on Ways and Means, House of Representatives. GAO-04-250. January 2004. 9 WTO document JOB(03)/150/Rev.2. 10 “Zoellick Letter to Trade Ministers,” Inside U.S. Trade, January 16, 2004. 11 See CRS Report RL32645, The Doha Development Agenda: The WTO Framework Agreement, coordinated by Ian F. Fergusson. 12 The final Ministerial Declaration (WT/MIN(05)/DEC), December 18, 2005 is available at [http://www.wto.org/english/thewto_e/minist_e/min05_e/final_text_e.pdf]. For more information, see CRS Report RL33176, The World Trade Organization: The Hong Kong Ministerial, coordinated by Ian F. Fergusson. 13 Bridges Weekly Trade News Digest, Special Update, July 3, 2006. [http://www.ictsd.org]. 14 “Lamy Outline of Possible Deal Meets U.S. Criticism As Talks Begin,” Inside U.S. Trade, June 30, 2006. 15 “Congress Blames EU for Doha Failure”, WTO Reporter, July 25, 2006. 16 “Doha: Close But Not Enough,” Bridges Weekly Trade News Digest, August 7, 2008; Washington Trade Daily, August 13, 2008. 17 “Schwab Says An SSM Breakthrough Alone May Not Have Saved Round,” Inside U.S. Trade, August 1, 2008. 18 U.S. International Trade Commission. The Impact of Trade Agreements: Effect of the Tokyo Round, U.S.-Israel FTA, U.S.-Canada FTA, NAFTA, and the Uruguay Round on the U.S. Economy. Publication 3621. August 2003. 19 Brown, Drusilla K., Deardorff, Alan V. and Robert M. Stern. Computational Analysis of Multilateral Trade Liberalization in the Uruguay Round and Doha Development Round. Discussion Paper No. 489. School of Public Policy. The University of Michigan. December 8, 2002. 20 Thomas W. Hertel and Roman Keeney, “What is at Stake: The Relative Importance of Import Barriers, Export Subsidies and Domestic Support,” in Anderson and Martin, eds., Agricultural Trade Reform in the Doha Agenda (Washington: World Bank, 2005); and Kym Anderson, Will Martin, and Dominique van der Mensbrugge, “Doha Merchandise Trade Reform: What’s At Stake for Developing Countries,” July 2005, available at [http://www.worldbank.org/trade/wto]. The different outcomes in these studies are due

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substantially to differing assumptions concerning liberalization resulting from the Doha Round as well as from differences in the econometric models themselves. For example, the World Bank studies do not attempt to quantify services liberalization. 21 For a detailed ‘state of play’ of the DDA following the Hong Kong Ministerial, see CRS Report RL33176, The World Trade Organization: The Hong Kong Ministerial, coordinated by Ian F. Fergusson. 22 CRS Report RS22927, WTO Doha Round: Implications for U.S. Agriculture, by Randy Schnepf and Charles Hanrahan. 23 See Buck, Tobias, Guy de Jonquieres and Frances Williams. “Fischler’s New Era for Europe’s Framers: Now the Argument Over Agriculture Moves to the WTO.” Financial Times. June 27, 2003. 24 “European Commission Lowers Expectations on Geographic Indications,” Inside U.S. Trade, October 5, 2007. 25 CRS Report RS22927, WTO Doha Round: Implications for U.S. Agriculture, by Randy Schnepf and Charles Hanrahan, pp. 4-5. 26 All figures refer to the July 2008 draft modality, “Revised Draft Modalities for Agriculture,” (TN/AG/W/4/Rev.3), July 10, 2008. 27 The 70% figure represents a convergence reached during the negotiating sessions from the 66%-73% range in the July 2008 Falconer draft. See Chairman’s Falconer’s “Report to the Trade Negotiating Committee,” [Job(08)/95], August 11, 2008. [http://www.wto.org/english/tratop_e/agric_e/chair_texts08_e.htm] 28 The SSM should not be confused with the Special (Agriculture) Safeguard (SSG) currently available to all countries under the Uruguay Round Agriculture Agreement, the continuance of which is also a topic in the present negotiations. 29 For all the various permutations and proposals relating to the SSM, see the WTO Factsheet “An Unofficial Guide to Agricultural Safeguards,” August 5, 2008, [http://www.wto.org/english/tratop_e/agric_e/ssm_explained_4aug08_e.pdf] 30 See CRS Report RL33085, Trade in Services: The Doha Development Agenda Negotiations and U.S. Goals, by William H. Cooper. 31 “Elements Required for the Completion of the Services Negotiations: Note by the Chairman,” (Job08/79), July 17, 2008. 32 “U.S., EU Cite Moves in 'Signaling' Talks On Services; India Likes 'Mode 4' Openings,” International Trade Reporter, July 31, 2008. 33 For a detailed account of the NAMA negotiations, see CRS Report RL33634, The World Trade Organization: The Non-Agricultural Market Access Negotiations, by Ian F. Fergusson. 34 Bridges Weekly Trade News Digest, Special Update, July 3, 2006. 35 “G-4 Ministerial Talks Collapse; U.S., EU Blames Brazil and India over NAMA,” Inside U.S. Trade, June 22, 2007. 36 “Market Access for Non-Agricultural Products,” August 12, 2008 [Job(08)/96]. 37 See CRS Report RL33750, The WTO, Intellectual Property Rights, and the Access to Medicines Controversy, by Ian F. Fergusson. 38 See CRS Report RL32810, WTO: Antidumping Issues in the Doha Development Agenda, by Vivian C. Jones. 39 “Zoellick Stance on Trade Remedy in WTO Provokes Criticism.” Inside U.S. Trade.November 13, 2001. 40 In determining dumping margins, zeroing refers to a calculation whereby only goods sold in the export market at less than the domestic market price are counted; goods sold in the export market at higher than domestic price are assigned a value of zero, thus tending to increase the dumping margin. “Draft Consolidated Texts of the AD and SCM Treaties,” November 30, 2007, (TN/RL/W/213). 41 “U.S. Defends Rules Language on Zeroing,” Washington Trade Daily, December 13, 2007. 42 “Key Democrats, Administration Lay Out Objections to Rules Text,” Inside U.S. Trade, December 14, 2007. 43 (TN/RL/W/213), Annex VII; “Members Remain Divided on Fisheries Draft Text”, Bridges Trade BioRes, April 4, 2008. 44 See CRS Report RS20088, Dispute Settlement in the World Trade Organization: An Overview, by Jeanne Grimmett. 45 “EU, US Call for Eliminating Trade Barriers to Climate-Friendly Goods and Services,” Bridges Weekly, December 5, 2007 (www.ictsd.org); “U.S.- EU Environmental Goods, Services Proposal Faces Stiff Opposition,” Inside U.S. Trade, December 7, 2007. 46 Letter to President Bush, April 12, 2007, [http://finance.senate.gov/press/Bpress/2007press/prb041607a.pdf].

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In: U.S. Trade with Developing Countries Editor: Kalan R. Geisler

ISBN: 978-1-60741-122-2 © 2009 Nova Science Publishers, Inc.

Chapter 5

TRADE PROMOTION AUTHORITY (TPA): ISSUES, OPTIONS, AND PROSPECTS FOR RENEWAL *

J. F. Hornbeck and William H. Cooper

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SUMMARY On July 1, 2007, Trade Promotion Authority (TPA — formerly known as fast track), expired. TPA is the authority Congress grants to the President to enter into certain reciprocal trade agreements (FTAs), and to have their implementing bills considered under expedited legislative procedures, provided he observes certain statutory obligations in negotiating them. TPA allows Congress to exercise its constitutional authority over trade, while giving the President added leverage to exercise his authority to negotiate trade agreements by effectively assuring U.S. trade partners that final agreements are given swift and unamended consideration. TPA reflects years of debate, cooperation, and compromise between Congress and the Executive Branch in finding a pragmatic accommodation to the exercise of each branch’s respective authorities. The core provisions of the fast track legislative procedures have remained unchanged since first enacted in 1974, although Congress has expanded trade negotiation objectives, oversight, and presidential notification requirements. While early versions of fast track/TPA received broad bipartisan support, renewal efforts became increasingly controversial as fears grew over real and perceived negative effects of trade, and as the trade debate became more partisan in nature, culminating in a largely party-line vote on the 2002 renewal. Any debate on TPA renewal would likely center on the broad effects of trade on the United States, with an emphasis on numerous specific issues that may be given greater weight in th future: labor, environment, and public health provisions; stricter enforcement of trade agreements; enhanced trade adjustment assistance programs; and revisions to the role of Congress in trade policy making.

*

This is an edited, reformatted and augmented version of a Congressional Research Service Publication RL 33743, Updated July 24, 2008.

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Bilateral agreements with Panama, Peru, Colombia, and South Korea were signed in time to be considered under the 2002 TPA. The House and Senate passed implementing legislation for the Peru FTA, which President Bush signed into law on December 14, 2007. The President sent implementing legislation for the Colombia FTA to Congress on April 8, 2008, but the House passed a rule suspending the application of parts of the expedited legislative procedures for this bill alone. The protracted World Trade Organization (WTO) Doha Round of multilateral negotiations are still incomplete and may yet result in the remaining key trade agreement that could compel Congress to consider extending or renewing TPA. Some observers also suggest that TPA is important to support future bilateral FTA negotiations, particularly given that many countries appear ready to continue pursuing FTAs irrespective of U.S. trade policy. Key Members of the House and Senate, however, have signaled that TPA renewal is not at the top of the legislative agenda and will require considerable deliberation before it can be passed. Congress has many options in dealing with TPA: take no action; extend temporarily; revise and renew; grant permanent authority; or devise some hybrid solution. How this issue plays out depends on a host of political and economic variables. This report will be updated as events warrant. On July 1, 2007, Trade Promotion Authority (TPA — formerly known as fast track) expired, and with it the authority that Congress grants to the President to enter into certain reciprocal trade agreements, and to have the legislation needed to implement them considered under expedited legislative procedures. Although the President has the authority under the Constitution to negotiate free trade agreements (FTAs), typically implementing legislation and thus congressional action are required to bring them into force. The United States Trade Representative (USTR) completed bilateral trade agreement negotiations with Peru, Colombia, Panama, and South Korea prior to TPA expiration. Congress approved the Peru FTA. The President sent implementing legislation for the Colombia FTA to Congress on April 8, 2008, but the House passed a rule suspending the application of parts of the expedited legislative procedures for this bill alone and has taken no further action on it. (See footnote 19 on p. 12.) A Doha Round agreement and any future bilateral FTAs cannot be considered under TPA’s expedited procedures unless those procedures are renewed by Congress. For over 30 years, Congress has granted the President TPA/fast track, agreeing to consider trade implementing legislation expeditiously and vote on it without amendment, provided the President meets certain statutory negotiating objectives and consultation requirements. TPA strikes a delicate balance by allowing Congress to exercise its constitutional authority over trade, while giving the President additional negotiating leverage by effectively assuring trade partners that a final agreement will be given swift and unamended consideration by Congress. Earlier incarnations of TPA, although controversial, were adopted with substantial bipartisan majorities. Over time, however, trade negotiations have become more complex, Congress has insisted on tighter oversight and consultation requirements, and the trade debate has become more partisan in nature, making congressional renewal of TPA, if anything, even more controversial. The Democrats’ assumption of control in the 110th Congress may also affect prospects for TPA renewal by shifting trade policy priorities, as seen in the “New Trade Policy for America,” a bipartisan position crafted jointly by congressional leadership and the Bush Administration.1 The “New Trade Policy” framework incorporates important changes, some with broad social implications, that have already altered the language of recently signed FTAs with Peru, Colombia, Panama and South Korea. Among important changes from previous

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FTAs, signatories must now: adopt as fully enforceable commitments the five basic labor rights defined in the United Nations International Labor Organization’s (ILO) Fundamental Principles and Rights at Work and its Follow-up (1998) Declaration; adhere to numerous multilateral environmental agreements (MEAs); and accept pharmaceutical intellectual property rights (IPR) provisions that could hasten that country’s access to generic drugs. The expiration of TPA raises the central question of whether, when and in what form TPA should be renewed, including to what degree if any, provisions of the “New Trade Policy America” might be incorporated. Some have argued that TPA should be renewed to cover, at a minimum, the World Trade Organization’s (WTO) Doha Development Agenda (DDA) round multilateral agreement, if it can be concluded, and perhaps also potential future bilateral FTAs. The DDA negotiations, however, are bogged down and pending FTA negotiations appear dormant. In addition, the House Democratic Leadership has signaled that TPA is not at the top of its legislative agenda, indicating that a quick resolution to the TPA debate seems unlikely to occur. This report presents background on the development of TPA, a summary of the major provisions under the recently expired authority, and a discussion of the issues that have arisen in the debate over TPA renewal. It also explores the policy options available to Congress and will be updated as the congressional debate unfolds.

A BRIEF HISTORY OF TPA TPA is the product of many years of debate, cooperation, and compromise between Congress and the Executive Branch. At its foundation lie the respective constitutional powers granted to Congress and the President, as well as the pragmatic realization that a certain cooperative flexibility is needed if the United States is to negotiate trade agreements credibly. The evolution of TPA to date shows, among other things, that the Congressional-Executive partnership on trade policymaking can be strained as it adjusts to evolving political and economic conditions and shifting priorities of the two Branches.

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The U.S. Constitution and Foreign Trade The U.S. Constitution assigns express authority over foreign trade to Congress. Article I, section 8, gives Congress the power to “regulate commerce with foreign nations ...” and to “... lay and collect taxes, duties, imposts, and excises....” In contrast, the Constitution assigns no specific responsibility for trade to the President.2 Under Article II, however, the President has exclusive authority to negotiate treaties and international agreements and exercises broad authority over the conduct of the nation’s foreign affairs. Both legislative and executive authorities come into play in the development and execution of U.S. trade agreements and trade policy.

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The Evolution of the Congressional-Executive Partnership

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For roughly the first 150 years of the United States, the Congress exercised its authority over foreign trade by setting tariff rates on all imported products. The tariff was the main trade policy instrument and primary source of federal revenue. Early congressional trade debates pitted Members from northern manufacturing regions, who benefitted from protectionist tariffs, against those from largely southern raw material exporting regions, who lobbied for low tariffs. During this period, the President’s primary role in setting trade policy was to use his foreign affairs authority to negotiate, bring into force, and implement (with the advice and consent of the Senate) general bilateral treaties of friendship, commerce, and navigation. These treaties provided most-favored-nation (MFN) treatment to the goods of the parties to those treaties with United States; that is, reductions in tariffs on imports from one trade partner would apply to imports from all other countries with which the United States had such trade agreements.3 Two legislative events occurred in the 1930s that radically changed the shape and conduct of U.S. trade policy. The first was the “Smoot-Hawley” Tariff Act of 1930 (P.L. 71361), which set prohibitively high tariff rates in response to U.S. producers seeking protection during the height of the Great Depression. The tariffs led to retaliatory tariffs from the major U.S. trading partners, severely restricting trade, thus deepening and prolonging the effects of the depression. The damaging effects of Smoot-Hawley inspired the second major trade legislative event in the 1930s. Congress, with the guidance and encouragement of Secretary of State Cordell Hull, himself a former Senator, developed and enacted the Reciprocal Trade Agreements Act of 1934 (RTAA; P.L. 73-316). The RTAA authorized the President to negotiate reciprocal agreements that reduced tariffs within pre-approved levels. The tariffs were applied on an MFN basis. Under the RTAA, Congress authorized the president to implement the new tariffs by proclamation without additional legislation. The RTAA is important for several reasons: For the first time, Congress expressly delegated to the President major trade negotiating authority. In so doing, it is argued, Congress aimed to lessen the protectionist pressure on itself.4 The Smoot-Hawley tariff was the last general tariff legislation passed by Congress. While still on the books, the Smoot-Hawley tariffs are only applied to imports from those few countries, namely Cuba and North Korea, not receiving MFN status, now called normal trade relations status (NTR) in U.S. trade laws. While delegating some authority, Congress in no way surrendered its trade authority. Congress subjected the tariff negotiating authority to periodic review. Congress renewed presidential reciprocal trade authority eleven times until 1962 through trade agreement extension acts. General tariff levels declined and their significance as a trade barrier lessened.5 In addition, with the establishment of the General Agreement on Tariffs and Trade (GATT) in 1948, the major forum for trade negotiations shifted from bilateral to multilateral negotiations, and trade negotiations were eventually expanded beyond tariffs.6 Under the Trade Expansion Act of 1962, Congress granted the President authority for five years to negotiate the reduction or elimination of tariffs and expanded its role in the process by requiring the President to submit for congressional review a copy of each

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concluded agreement and a presidential statement explaining why the agreement was concluded. It allowed the President to negotiate the GATT Kennedy Round (1963-1967), the last round in which tariff reduction was the primary focus of trade negotiations. Along with a number of tariff reduction agreements (which Congress authorized the President to implement by proclamation), the GATT countries reached agreements in two areas related to non-tariff barriers (NTBs), that is, laws and rules other than tariffs that are used to restrict imports. The first was a customs valuation agreement that would have required the United States to eliminate the American Selling Price method of pricing goods at the border. The second was an antidumping agreement that would have required changes in U.S. antidumping practices.7 Because U.S. adherence to these agreements required changes in U.S. law or regulations beyond tariff modifications, many in Congress concluded that the President had exceeded his authority. In fact, Congress passed a resolution in 1966 opposing “nontariff commitments” made by the Johnson Administration that had not been approved by Congress, setting up the debate that would eventually be resolved with the creation of the fast track authority for trade agreements.8

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The Creation of Fast Track Trade Authority The results of the Kennedy Round made evident that non-tariff barriers would increasingly dominate the agenda of future multilateral trade agreements, and would require changes in U.S. law if the United States were to adhere to them. Congressional concern over presidential encroachment on its legislative authority prompted Congress to seek a legislative remedy. After the expiration of the tariff modification authority in the Trade Expansion Act of 1962, the Administration sought new authority to negotiate the Tokyo Round in the GATT, which Congress granted in the Trade Act of 1974 (P.L. 93-618). As before, the act provided the President with the authority to negotiate and implement the reduction and elimination of tariffs within certain parameters. To address the issue of agreements that required changes in U.S. law beyond tariff modifications, the act stipulated that non-tariff barrier agreements entered into under the statute could only enter into force if Congress passed implementing legislation. It was argued that subjecting implementing legislation to ordinary congressional debate and amendment procedures would defeat the purpose for delegating trade negotiating authority to the President in the first place — to reduce the parochial pressures implicit in trade policymaking. Many Members also recognized that trade partners would not be willing to negotiate agreements that would be subject to unlimited congressional debate and amendments. As stated in the Senate Finance Committee report accompanying the Trade Act of 1974: The Committee recognizes ... that such agreements negotiated by the Executive should be given an up-or-down vote by the Congress. Our negotiators cannot be expected to accomplish the negotiating goals ... if there are no reasonable assurances that the negotiated agreements would be voted up-or-down on their merits. Our trading partners have expressed an unwillingness to negotiate without some

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J. F. Hornbeck and William H. Cooper assurances that the Congress will consider the agreements within a definite timeframe.9

As a solution, Congress agreed that each Chamber would suspend its ordinary legislative procedures and give trade agreements expedited treatment, which became known as “fast track.” The relevant committees would be given limited time to consider implementing bills. Once they reached the floor, the implementing bills would be subject to time-limited debate and no amendments. In exchange, Congress required the Executive Branch to consult with relevant committees during the negotiations and to notify Congress 90 calendar days before signing an agreement. The act also provided for the accreditation of 10 Members of Congress as advisers to the U.S. delegation of negotiators. (The Trade Act of 1962 had provided for five such advisers.) Thus, fast track for trade agreements was born! With the trade “negotiating” authority and the “fast track” provisions of the Trade Act of 1974, the United States participated in the Tokyo Round (1973-1979). As expected, this round resulted in a number of agreements on NTBs, such as government procurement practices, product standards, customs regulations, and rules for administering antidumping and countervailing duty procedures. The Trade Agreements Act of 1979 (P.L. 96-39) was the first trade agreement bill implemented by Congress under fast track procedures.

Subsequent Renewals of Fast Track Trade Authority

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The core provisions of the fast track procedures have remained virtually unchanged since they were first enacted. (The next section of this report examines fast track procedures and the trade agreements authority in more detail.) These provisions are ensconced in sections 151154 of the Trade Act of 1974, as amended, and are not subject to sunset provisions. The ability to use them, however, is subject to time limits, and Congress has revised them over the years. The initial grant of trade “negotiating” authority and the authority to enact tariff modifications by proclamation under the Trade Act of 1974 were in effect for five years ending on January 2, 1980. A residual presidential authority to proclaim tariff modifications expired January 2, 1982.

The Trade Agreements Act of 1979 Along with implementing the Tokyo Round agreements, the Trade Agreements Act of 1979 extended for eight years, until January 2, 1988, the presidential authority to enter into agreements on non-tariff barriers but made no other changes to the original authority. The act did not extend presidential tariff modification authority. The Trade and Tariff Act of 1984 This act amended the Trade Act of 1974 to provide for the negotiation and implementation of bilateral free trade agreements that both reduce or eliminate tariffs and address non-tariff barriers. Congress was taking into account the U.S.-Israel and U.S.-Canada FTAs that were under consideration. The legislation waived for the U.S.-Israel FTA the requirement of 90-day notification to Congress prior to entering the agreement. However, for negotiations with other countries, it required the President to notify the House Ways and Means Committee and the Senate Finance Committee of his intention to begin FTA

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negotiations 60 days prior to entering the negotiations and provided for denial of fast track consideration if either Committee disapproved of the negotiation within 60 days after receiving the notification. The act also required that agreements that lead to tariff modifications beyond a certain threshold be subject to congressional approval via implementing legislation.

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Omnibus Trade and Competitiveness Act of 1988 (OTCA) The OTCA extended the president’s authority to enter into trade agreements before June 1, 1993, but extended the application of fast track procedures only for agreements entered into before June 1, 1991. Legislation for agreements entered into after that date, but before June 1, 1993, could be approved under fast track procedures, if the President requested an extension of such authority and it was not disapproved by either the House or the Senate. (The President requested the extension, which survived proposed House and Senate resolutions of disapproval.) The OTCA also provided that Congress could withhold a trade agreement from fast track consideration, by passing resolutions of disapproval, if it determined that the USTR had failed to consult with Congress adequately during the trade negotiations. Under the OTCA provisions, Congress passed implementing legislation for the North American Free Trade Agreement (NAFTA) in 1993 (P.L. 103-182). However, negotiations under the Uruguay Round of the GATT were not going to finish in time to meet the June 1, 1993 expiration deadline. Congress, therefore, passed H.R. 1876, signed by the President on July 2, 1993 (P.L. 103-49), extending the authority and implementing procedures until April 16, 1994, for the Uruguay Round agreements. The votes reflected strong congressional support for extending the authority in the House (295-126) and in the Senate (76-16). The law did not change any other aspects of the fast track authority. A Hiatus After the fast track authority expired on April 16, 1994, Congress did not approve new authority until the Trade Act of 2002 (H.R. 3009; P.L. 107-210). The eight-year period was the longest hiatus since fast track was initially approved in 1974. In 1997, both the Senate Finance and the House Ways and Means Committees reported out legislation to renew fast track. House Republican leaders pulled it before a floor vote at the request of the Clinton Administration because it lacked sufficient support in the House. In September 1998, the House voted on fast track authority legislation, but the bill failed to pass (180-243). Several reasons may explain the failure of the Clinton Administration and Congress to get fast track procedures re-authorized. For one, although both the Republican congressional leadership and the Clinton Administration wanted fast track authority, the two sides could not agree on how labor and environmental issues should be addressed in trade agreements negotiated under renewed authority. Republicans wanted limited coverage while the Clinton Administration and many Democrats in Congress preferred broader coverage. In addition, the WTO failed to launch a new round of negotiations at the 1999 Ministerial meeting in Seattle, and therefore, no major trade negotiations were underway that might have made the adoption of a fast track statute a political priority.

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The Bipartisan Trade Promotion Authority Act of 2002 In 2001, President Bush requested a renewal of fast track authority, which was renamed in the legislation “trade promotion authority (TPA),” in part to counter a negative connotation associated with the fast track name. The renewed authority is contained in the Bipartisan Trade Promotion Authority Act (BTPAA) of 2002, which was enacted as Title XXI of The Trade Act of 2002 (P.L. 107-210). The structure of TPA is consistent with previous negotiating authority. It includes environmental and labor provisions as “principal negotiating objectives,” but does not mandate the inclusion of minimal enforceable labor standards in trade agreements.10 The lack of a mandate to include such standards was the source of much of the opposition from labor groups and many Members of Congress. The act also created a new mechanism for congressional consultation, the Congressional Oversight Group (COG), to operate in addition to the congressional trade advisors that have been appointed under previous versions. (A more detailed discussion of the notification and consultation requirements appears in the next section.) The original House version of the BTPAA (H.R. 3005) passed by one vote (215-214), largely along party lines, with Republicans mostly supporting the bill and Democrats largely opposing it. The legislation was combined in the Senate with the renewal of Trade Adjustment Assistance (TAA), the Andean Trade Preference Act (ATPA), and the Generalized System of Preferences (GSP). It passed 66 to 30. The conference report on the final bill, H.R. 3009, the Trade Act of 2002, was adopted by the House (215-212) and Senate (64-34).11 Under the 2002 version of TPA, Congress approved implementing legislation for FTAs with Chile, Singapore, Australia, Morocco, the Dominican Republic, the Central American countries, Bahrain, Oman, and Peru. In addition, the United States signed FTAs with Colombia, Panama, and South Korea just before TPA expired on July 1, 2007. The United States is also interested in FTA negotiations with Malaysia, Thailand, the United Arab Emirates, and the members of the South African Customs Union (SACU), which are currently suspended and would have to be taken up under some future TPA authority for legislation to considered under expedited procedures. The United States and more than 150 other members of the WTO are also engaged the Doha Development Agenda (DDA), a protracted round of multilateral negotiations set to revise and expand rules for conducting trade in agriculture, manufactured goods, and services, with an emphasis on meeting the needs of developing countries.12 Although many argue that TPA is necessary for the U.S. bargaining position to remain credible, others note that TPA is not required to complete the negotiations (as the example of the Uruguay Round discussed above suggests). Should a breakthrough be made on an agreement that the U.S. Congress would approve, Congress could extend TPA exclusively for the Doha Round at any time. Most observers acknowledge that the Doha Round probably makes the most compelling argument for TPA extension at this time.

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THE ELEMENTS OF TPA Through TPA, in its various iterations, Congress has sought to achieve four major goals in the context of supporting trade negotiations: (1) to define its trade policy priorities and to have those priorities reflected in trade agreement negotiating objectives; (2) to ensure that the Executive Branch adheres to these objectives by requiring periodic notification and consultation; (3) to define the terms, conditions, and procedures under which trade agreement implementing bills will be approved; and (4) to reaffirm Congress’s overall constitutional authority over trade by placing limitations on the trade agreements authority. These four goals, and some important procedural precedents that fall outside the formal legal TPA process, are examined below.

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Negotiating Objectives Congress exercises its trade policy role, in part, by defining trade negotiation objectives in TPA legislation. In the 2002 TPA, Congress made clear that trade is an important aspect of U.S. foreign economic and security policy because it generates broad benefits for the United States and the global economy. To take the fullest advantage of these benefits, Congress, drawing on its constitutional authority and historical precedent, defined the objectives that the President is to pursue in trade negotiations. Although the Executive Branch has some discretion over implementing these goals, they are definitive statements of U.S. trade policy that the Administration is expected to honor, if it expects the trade legislation to be considered under expedited rules. For this reason, trade negotiating objectives stand at the center of the congressional debate on TPA. Congress establishes trade negotiating objectives in three categories: (1) overall objectives; (2) principal objectives; and (3) other priorities. These begin with broadly focused goals that encapsulate the “overall” direction trade negotiations are expected to take, such as enhancing U.S. and global economies. Principal objectives are far more specific and provide detailed goals that Congress expects to be integrated into trade agreements, such as reducing barriers to various types of trade (e.g., goods, services, agriculture, electronic commerce); protecting foreign investment and intellectual property rights; encouraging transparency, fair regulatory practices, and anti-corruption; ensuring that countries protect environment and labor conditions and rights; providing for an effective dispute settlement process; and protecting the U.S. right to enforce its trade remedy laws. Objectives also include an important obligation to consult Congress, discussed in detail below. In the past, language defining trade negotiating objectives has been highly contested, contributing to the 2002 renewal controversy in which TPA passed virtually along partisan lines and by only the narrowest of margins.13 This controversy reflects the importance of TPA negotiating objectives as a template for future trade agreements negotiated under these guidelines. For example, if the language of a TPA objective is highly contentious, it stands to reason that the same issue may prove even more acerbic when a specific trade agreement is brought before Congress for approval. The labor provisions, which are emphasized repeatedly in all three groups of negotiating objectives, provide the best illustration. In particular, the decision not to include minimal enforceable standards anywhere in TPA caused acrimonious

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debate over both TPA and the FTAs that later adopted the TPA language on labor. This issue was perhaps most evident in the debate on the Dominican Republic-Central America-United States Free Trade Agreement (CAFTA-DR). Because the structure of trade agreements mirrors TPA objectives, and highly disputed agreements based on those objectives brought before Congress under TPA have so far survived, often narrowly, all challenges from opponents, the vote on renewing TPA/fast track is among the most critical trade votes Congress takes. In part for this reason, key Members of the 110th Congress have indicated a preference for proceeding cautiously in pursuing TPA renewal.

Notification and Consultation The trade agreements authority is extended to the President provided he consults regularly with Congress, including the Congressional Oversight Group (COG) created in the 2002 trade act, whose members are accredited as official advisors to the trade negotiation delegations. Notification and consultation requirements have been expanded in each renewal of authority. Most of these requirements are found in their own section within the TPA statute. The timing of these notifications is detailed in the time line presented in Appendix A. First, the President must conduct certain notifications and consultations before negotiations begin that include: notifying Congress in writing of his intention to enter into negotiations at least 90 calendar days prior to commencing negotiations; consulting with the House Ways and Means, Senate Finance, other relevant committees, and the COG on the nature of the negotiations; and providing special consultations on agriculture, import sensitive agricultural products, fishing and textile industry tariffs, and other issues.

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The president must also conduct specific notifications and consultations before (and after) agreements are entered into (signed), to include: notifying Congress in writing of his intention to enter into an agreement at least 90 calendar days prior to doing so; consulting with House Ways and Means, Senate Finance, other relevant committees, and the COG with respect to the nature of the agreement, how it achieves the purposes defined in TPA, and any potential effects it may have on existing laws; notifying the revenue committees at least 180 calendar days prior to entering into the agreement of any potential changes to U.S. trade remedy laws that may be required; submitting private sector advisory committee reports to Congress, the President, and the USTR no later than 30 calendar days after notifying Congress of his intention to enter into an agreement;14 providing the U.S. International Trade Commission (USITC) with trade agreement details at least 90 days before entering into an agreement; and presenting the USITC report on the impact of the agreement on the U.S. economy to Congress no later than 90 calendar days after the President enters into the agreement.

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The congressional consultation process is an important part of TPA. It reflects Congress’s ongoing interest in ensuring that trade policy remains under the purview of the legislative branch by establishing in law opportunities to affect the nature and direction of trade negotiations. The effectiveness of the consultation process, however, has been questioned. The Government Accountability Office (GAO) evaluated this process based on multiple interviews with current and former congressional staff and executive branch employees. It found that from 2002 to 2007, the USTR had conducted “extensive” consultations with Members and staff of Congress on all FTAs that were to be presented to Congress for approval under TPA.15 A majority of congressional staff, however, indicated that despite the frequency and high quality of information conveyed, the meetings with USTR officials often did not allow for sufficient time to provide input into the negotiation process, were often cast more as briefings than true consultations that imply an exchange of views, and did not always include last minute changes to draft FTA texts. In short, there was ongoing concern expressed that the congressional consultation process may need to be amended to allow for greater congressional input into the crafting of FTAs.16

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Trade Agreements Authority and Implementation As discussed above, when the statutory authority to negotiate trade agreements was limited to reducing tariffs, the trade agreement was implemented by presidential proclamation and without further congressional action, provided the tariff rate reductions were within legislatively pre-approved limits. This process changed when trade negotiations were expanded to include non-tariff barriers (NTBs). These more complex agreements led Congress to tighten its control over trade policy by establishing fast track trade negotiating authority. As set out in the Trade Act of 1974, NTB agreements could enter into force for the United States only with passage of implementing legislation.17 At the heart of what is now called TPA are the expedited rules for moving such trade implementing legislation through Congress, which have been used for nearly all reciprocal trade agreements.18 Importantly, the fast track procedures are rules of the House and Senate. Either House may change them at any time with a majority vote.19 Congress makes these expedited procedures available for a trade implementing bill provided the President uses the trade agreements authority granted to him to the satisfaction of Congress, first by entering into agreements that meet TPA’s overall and principal negotiating objectives, and second by satisfying the notification and consultation requirements. In addition, under the “trade agreements authority” section, Congress requires that the President: as mentioned above, at least calendar 90 days prior to signing the agreement, notify Congress of his intention to do so (to provide opportunity for congressional input before the agreement is signed, at which point it can no longer be changed); within 60 calendar days of signing the agreement, provide Congress with a list of required changes to U.S. law needed for the United States to be in compliance with the agreement, and; on a day Congress is in session, send a copy of the final legal text of the trade agreement, a draft implementing bill, statement of administrative action proposed to implement

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J. F. Hornbeck and William H. Cooper the agreement, and supporting statements on how the agreement meets congressional objectives, changes existing agreements, and serves the purpose of U.S. commercial interests.

As an important caveat, the TPA expedited procedures are extended only to implementing bills with provisions limited to those “necessary or appropriate” to implement the trade agreements, either repealing or amending existing laws, or providing new statutory authority. This requirement presumably limits the implementing bill to provisions related to the pending trade agreement, although the meaning of “necessary or appropriate” has been subject to debate. Should these requirements be fulfilled to the satisfaction of Congress, it has agreed to follow certain expedited legislative procedures. In effect, these rules require that Congress must act on the bill sent over by the White House, and in other ways represent a significant departure from ordinary legislative procedures. The rules are defined below (see Appendix B for greater detail) and involve: mandatory introduction of the implementing bill in both Houses of Congress and immediate referral to the appropriate committees (House Ways and Means, Senate Finance, and possibly others);20 automatic discharge from House and Senate Committees after a limited period of time; limited floor debate; and no amendment, meaning that Congress must vote either up or down on the bill, which passes with a simple majority.

Congressional Procedures Outside TPA

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In addition to the expedited procedures defined in TPA, Congress, with the effective consent of the Executive Branch, has followed certain procedures during the consideration of trade agreement implementing bills that, although not formally defined in TPA, have been integrated into the process of congressional approval of trade agreements. Three in particular stand out:

Side Agreements and Letters Outside of formal TPA statutory requirements, Congress has insisted on additions or clarifications to trade agreements. This insistence has resulted, at times, in side agreements and letters. Side agreements are additional obligations accepted by all parties after the original trade agreement has been signed. The most notable examples are the environment and labor side agreements of NAFTA.21 Side letters serve as clarifying devices usually applied to a very specific issue and that can be used to assuage a particular congressional concern. Side letters are typically addressed from and to the top trade negotiating representative (e.g. the USTR, trade minister, or equivalent.) Side agreements and letters accompany the agreement, but neither changes its text and both require official signatures of all the negotiating parties to come into force.

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Hearings and Mock Markups Congress has insisted on reviewing the negotiated trade agreement prior to the implementing bill being introduced. This is done first in hearings before the House Ways and Means, and Senate Finance Committees, as well as possibly other interested committees. The Ways and Means, and Finance Committees typically follow with an informal or “mock” markup on an informal draft version of the implementing bill, which is sent over by the White House along with a draft of the final text of the trade agreement. The informal mockup is, in effect, a test run of congressional response to the trade bill. Because it is only an informal draft bill, there is no real legislation to “mark up,” but the meetings afford Committee Members an opportunity to comment on the draft trade agreement, as well as the informal draft implementing legislation, and offer amendments that serve as important signals to the Administration of changes to the implementing bill they would like to see made. The two revenue committees may also decide to hold a mock conference to reconcile any differences in their mock markups. Although the agreement at this point has already been concluded, a clarification or “translation” of key points that do not alter the basic agreement can be made in the final implementing bill.22 The Administration, however, can exercise discretion in accepting suggested changes from Congress. For example, while the committees offered many changes to the CAFTA-DR agreement that the Bush Administration tried to accommodate, the Administration declined to include the language of an amendment unanimously supported by the Senate Finance Committee with respect to the U.S.-Oman FTA implementing legislation, citing TPA’s own requirement that only legislation “necessary or appropriate” to implement the agreement be included. The Oman bill passed, but a new bipartisan call for better consultation prior to the President entering into a trade agreement arose because of dissatisfaction with both the Oman FTA and the TPA process.23

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Informal Agreements Some Members of Congress have also relied on promises from the Administration to address issues raised in mock markups. These often relate to special interests and concerns, and their fulfillment relies on a measure of good will between Congress and the Administration. In the case of the CAFTA- DR implementing bill, for example, the Bush Administration made accommodations to sugar, textile, and labor interests to secure congressional support.24

Limiting Trade Agreements Authority Congress adopted TPA rules on pragmatic grounds as self-limiting conditions to prevent trade implementing bills from being delayed or obstructed by congressional procedures that can either keep a bill from moving out of committee, or delay it on the floor of the House or Senate with extended debate. Trade agreements can also be the product of a fragile consensus between trade partners, and TPA procedures were designed to protect such a consensus from unraveling due to congressional amendments that would change the basic agreement. In crafting TPA, however, Congress did not agree to surrender its constitutional authority over

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trade matters and wrote into TPA a number of provisions that can limit the use of the expedited procedures.

Sunset Provision Each renewal of the trade agreements authority has provided the use of expedited procedures for trade agreement implementing bills for a limited time. The 2002 statute made these procedures available for trade agreements entered into before July 1, 2007. Importantly, however, the act provides no deadline for submitting implementing legislation for the agreement if it is entered into before the July 1 deadline. Extension Disapproval TPA legislation requires that the President request an extension of the TPA authority after a certain period of time. The extension is granted unless either House of Congress adopts a disapproval resolution. Such a resolution of disapproval may not be considered unless it is reported out of either the House Ways and Means or Senate Finance Committee. Although such resolutions have been reported out of committee in the past, none has been passed in either House of Congress. This process is a reminder to the Executive Branch that the availability of expedited legislative procedures is a congressional prerogative that can be denied if Congress becomes dissatisfied with how the President has conducted trade agreement negotiations.

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Procedural Disapproval The requirement that the President fulfill consultation and reporting obligations also helps preserve the congressional role on trade agreements by giving Congress the opportunity to influence the agreement before it is finalized. Should Congress determine that the President has failed to meet these requirements, it may decide that the implementing bill is not eligible to be considered under TPA rules. It would implement this decision by adopting a joint “procedural disapproval” resolution in both Houses of Congress. Withdrawal of Expedited Procedures The Trade Act of 1974, as amended, provides that the expedited procedures for consideration of trade implementing bills are enacted as rules of procedures for each House, “with the full recognition of the constitutional right of either House to change the rules (so far as relating to the procedure of that House) at any time.”25 That is, Congress reserves its constitutional right to withdraw or override the fast track rule, which can take effect with a vote by either House of Congress.26 This summary suggests that in addition to binding rules, the long-term success of TPA rests on a cooperative spirit and partnership between the Legislative and Executive Branches of government, and by extension, between the two major political parties.27 Many have noted that the sense of such cooperation was absent under the previous TPA, placing a strain on the trade legislative process in recent years. In fact, a bipartisan agreement on TPA has been absent since at least 1993, as evident in the eight-year lapse during the Clinton Administration and the highly partisan passage of the 2002 TPA renewal. The current dissatisfaction with TPA results from philosophical differences that have developed, in part, along partisan lines and raises the distinct possibility that TPA, now lapsed once again, may not be renewed.

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ISSUES FOR CONGRESS

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TPA expired on July 1, 2007, and is currently not available for the potentially most important trade agreement still under negotiation, the WTO multilateral Doha Development Round, as well as any future bilateral FTAs. President Bush formally requested TPA renewal on January 31, 2007, and the congressional response ranged from immediate support to deferred consideration of approval and outright opposition. Currently, the Democratic Leadership has signaled that TPA renewal is not a priority for the immediate legislative agenda.28 Reluctance to take up TPA renewal rests with a number of concerns. First, increasingly Congress is focused on addressing the negative effects of trade policy and, more broadly, “globalization.” Job displacement, falling wages, the growing income gap in the United States (and developing countries), and the U.S. trade deficit all reinforce an overall sense that the costs and benefits of trade are not being distributed equally and that legislative policy responses in this area should be paramount. Congress has responded by insisting on significant changes to bilateral FTAs and introducing new trade adjustment assistance bills. Importantly, each of the issues mentioned above has causes and potential policy responses rooted as much or more in domestic as international economic policies, complicating both the social equity and the trade policy debates.29 Second, many Members are also displeased with the perceived inadequate enforcement of trade obligations undertaken by China and other U.S. trade partners. It has been further suggested that the United States reprioritize the list of potential bilateral FTA countries, with perhaps a new emphasis on Japan, the European Union, and other large economies. Insisting on linking revised trade priorities to TPA renewal may be another way for Congress to exercise its authority over trade policy. Third, the Democratic leadership has indicated that TPA renewal will require lengthy deliberations to craft a new model for future U.S. trade policy, one likely to incorporate the key provisions of the “New Trade Policy of America,” among others. There is no perceived need to rush consideration of such a complex issue at this time, particularly given the slow pace at which the Doha Round is progressing. The continuing debate on TPA renewal, shaped by these and other factors, may focus on a number of specific issues, reflecting unresolved concerns over the TPA process in general and trade policy issues of particular interest to Congress.

The Need for TPA A recurring question is whether TPA is really necessary. One way to explore this issue is to consider the alternatives. First, given the breadth and scope of modern trade accords, executive agreements are generally an insufficient means for fully implementing trade agreements where the amendment, repeal, or enactment of new laws is required. Second, the treaty approach presents two problems: the high hurdle of a two-thirds vote of approval in the U.S. Senate and lack of House action for an agreement involving revenue.30 Further, Congress has long considered U.S. trade agreements to be non-self-executing, that is, requiring implementing legislation if existing law is insufficient to carry out agreement obligations.31

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Because legislative action involving both Houses of Congress is needed, the options appear limited to either a TPA approach, or relying on ordinary rules of procedure to consider trade implementing legislation. To date, the challenge of representing the diverse interests of numerous economic stakeholders has several times led Congress back to the idea of using a carefully structured, time-limited grant of trade agreements authority, subject to implementing legislation being considered under streamlined legislative rules, despite the fact that a strategically important, but commercially insignificant FTA with Jordan was approved without TPA. Some of the debate over the “need” for renewal may hinge on how important Congress perceives it is for the United States to continue trade negotiations in a world that will continue to integrate irrespective of U.S. policy.

The Role of Congress If the success of TPA were to be measured simply by the number of trade agreements that have been approved and implemented under its authority, then it might be argued that TPA has proven its merit. Many Members of Congress, however, have complained that in recent years the TPA process has failed, demonstrating that binding congressional rules of procedure are not sufficient to guarantee a consensus position or a cooperative working arrangement on trade.32 Such criticism is largely, but not exclusively, made along partisan lines. Complaints point to multiple problems: (1) trade negotiation objectives that do not include all key concerns of Congress (e.g., enforceable labor standards) and are open to interpretation by the Executive Branch; (2) an Executive Branch consultation process, including the COG, denounced as superficial and unresponsive to congressional input; (3) the passage of widely unpopular FTAs negotiated under TPA authority; and (4) ineffectiveness of procedures for deterring the use of TPA (e.g., the extension disapproval resolution and repeal of fast track rules) because power has at times been held closely through partisan control of committee chairs.33 In short, there has been a growing sense for the need to rekindle trust between the Administration and Congress, as well as ensure greater bipartisan cooperation within Congress on trade matters.

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Trade Policy Issues Many specific trade issues are likely to emerge in the course of congressional debate over TPA renewal. The current congressional debate and those over recent trade agreements point to numerous issues: labor, environment, and public health standards; trade adjustment assistance; trade remedy laws; and the temporary entry of service providers known as “Mode4.”

Labor Standards Perhaps the single most contentious specific trade issue for TPA renewal, particularly in the House, has been the treatment of labor standards. They have been included as negotiating objectives in fast track/TPA authority since the Omnibus Trade and Competitiveness Act of 1988. The partisan differences were evident in two competing bills offered during the 2002

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renewal, and they are still reflected today.34 H.R. 3009, introduced by then-House Ways and Means Committee Chairman Thomas, was eventually enacted as the Bipartisan Trade Promotion Authority Act of 2002. It established principal negotiating objectives for labor standards that include the following: to ensure that a party does not fail to enforce effectively its own labor laws; to recognize that parties retain the right to exercise discretion in the allocation of enforcement resources for those laws; to strengthen the capacity of U.S. trading partners to promote respect for core labor standards; and to ensure that labor protections do not arbitrarily or unjustifiably discriminate against U.S. exports or serve as disguised trade barriers. H.R. 3019, as introduced by then-House Ways and Means Committee Ranking Member Rangel (now Chairman), would have gone further, requiring that each country’s labor laws include ILO core labor standards that would be enforceable with trade sanctions, equal to those applied to commercial and other disputes under a trade agreement. Replacing the “does not fail to effectively enforce its own laws” language with mandatory adherence to ILO core labor standards has been a major difference to be resolved. Enforcing such adherence through trade sanctions is a second major difference. Congressional leaders and the Bush Administration have attempted to bridge these differences through the mandatory framework included in the “New Trade Policy for America.” The first legislative test of this compromise language was congressional implementing legislation for the bilateral FTA with Peru, approved by Congress in December 2007. Language reflecting key elements of the compromise framework is also contained in proposed FTAs with Colombia, Panama, and South Korea. The next question is whether such language might be incorporated into a new TPA.

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Environment and Public Health The “New Trade Policy for America” also provided the basis for key changes to environment and public health commitments in bilateral FTAs that may also be germane to a new TPA. It calls for signatory countries to U.S. FTAs to adopt and enforce multiple multilateral environmental agreements (MEAs) in support of international policies designed to address global warming and other hazards. Changes to patent and data exclusivity provisions in intellectual property rights chapters hold out the promise for developing countries that sign an FTA with the United States to have potentially quicker access to generic medicines. Trade Adjustment Assistance A major congressional response to those who do not benefit from trade liberalization is trade adjustment assistance (TAA). In the past, the program has focused primarily on workers and has been funded and administered through the U.S. Department of Labor. Other programs also exist, including a small one for firms administered by the U.S. Department of Commerce. Because the effects of “globalization” and particularly trade liberalization, both positive and negative, can be far reaching, there is a growing interest in developing more comprehensive and effective alternatives to TAA programs, which Congress has not conceptually changed since created in the Trade Expansion Act of 1962 (P.L.87-794). This concept might include expanding the program to the services sector or other groups negatively affected by “globalization,” and has been identified as a key legislative initiative in the “New Trade Policy for America.”

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Trade Remedy Laws Congress has repeatedly expressed a bipartisan interest in ensuring that trade negotiations do not hinder or restrain the use of U.S. trade remedy laws. Specifically, in the previous TPA, Congress required trade agreements: ... to preserve the ability of the United States to enforce rigorously its trade laws, including the antidumping, countervailing duty, and safeguard laws, and avoid agreements that lessen the effectiveness of domestic and international disciplines on unfair trade ... It can be understood in light of the institutional responsibility Congress has had toward safeguarding the interests of constituents.35 Despite such a clear message from Congress, the Bush Administration included trade remedy laws as part of the Doha Round, arguing that doing so was necessary to get developing countries to join the negotiations. Many Members of Congress subsequently criticized this step. Individual U.S. trading partners have also demanded that trade remedy laws be part of U.S. bilateral FTA negotiations.

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Temporary Entry of Service Providers (“Mode 4”) The temporary movement of service providers (to the home country of the buyer of the services), known in the WTO as “Mode-4,” has been a contentious issue in various trade negotiations, particularly the Doha Round negotiations on services. Several developing countries, especially India, have criticized the United States for not providing greater latitude in the temporary movement of professional services providers to the United States. Mode-4 is also an issue of congressional jurisdiction. In July 2003, during congressional consideration of the implementing bills for the U.S.-Chile and U.S.- Singapore free trade agreements, some Members of the House and Senate Judiciary Committees objected to the inclusion of changes in U.S. visa policies to allow increases in the quotas of workers entering the United States. They argued that changes in visa rules must be separate from trade legislation that is considered by Congress under expedited (fast track) procedures. Compromises were reached to allow the two bills to be voted on, but not without bipartisan warnings from both Committees that changes in visa policy should no longer be part of bilateral or multilateral trade agreements.36

OPTIONS FOR CONGRESS With the expiration of TPA on July 1, 2007, Congress has a number of options with respect to its possible renewal. Four that span the spectrum are discussed below.

No TPA Renewal Congress at present does not appear ready to extend or renew TPA. Although the lack of TPA may delay action on future reciprocal trade agreements, many sectorspecific and other more narrowly targeted agreements have been concluded in the past without TPA. The United States has also launched trade negotiations prior to having TPA authority in place. Both

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situations suggest that the conduct of U.S. trade negotiations can continue in some form without TPA. Still, trade partners may be reluctant to negotiate with the United States without TPA since the agreement would be subject to ordinary legislative procedures and amendment by Congress. Therefore, one question that Congress faces is whether there are potential trade agreements outstanding that may compel consideration of TPA extension or renewal.

Extend TPA Temporarily Congress could extend the current TPA with few or no revisions long enough to allow the United States to complete a specific agreement. This approach might be favored by those who are reluctant to renew the authority, but do not want to hinder the completion of agreements that they view as potentially beneficial to the United States. For example, Congress extended the authority for 10 months in 1993 to complete the Uruguay Round agreements, and could do so again for the Doha Round.37 In as much as labor and environment provisions are not being contemplated as part of the Doha negotiations, Congress could extend TPA for the sole purpose of concluding the multilateral agreement, perhaps without compromising the concerns of those Members who support stronger labor, environment, public health, and other provisions in bilateral FTAs.

Renew TPA Authority Under this option, Congress could grant the President new authority with or without major changes in its structure, and without restricting it to specific agreement negotiations. Such an approach would give more time to complete pending trade negotiations and allow for the opportunity to launch new negotiations. In so doing, this option would provide the President with the flexibility to implement a complex trade negotiating agenda. Congressional action on this approach implies, however, that a political agreement could be struck on the overall framework of trade agreements objectives and negotiating priorities among a majority in Congress, and between Congress and the President.

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Grant Permanent TPA Authority Some trade policy experts have suggested that Congress could grant the President a form of permanent fast track/TPA.38 The proponents of this option envision a two-tier procedure: (1) Congress would enact into law permanent fast track procedures; and (2) before specific negotiations can begin, both Houses of Congress would have to pass a resolution approving the negotiations and objectives designed for the specific set of negotiations. Step (2) is designed to satisfy those who might be concerned that Congress could be surrendering its authority permanently. Supporters argue that the permanent authority would signal to trade partners that the United States is committed to trade liberalization over the long term. The prior approval procedure for specific negotiations might address the concern that this option could result in giving the President a “blank check” to negotiate FTAs with any country he chooses. One

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criticism of this approach is that Congress might not be willing to give “permanent” authority even with the required pre-approval process.

PROSPECTS FOR TPA RENEWAL The 110th Congress began the TPA renewal debate early, but then shifted focus to addressing the key issues of pending bilateral FTAs with Peru, Panama, Colombia, and South Korea. Each was signed in time to be considered under the 2002 TPA authority. The remaining outstanding case for a near-term renewal of TPA is the Doha Round, although the USTR continues to argue that the lack of TPA could delay future bilateral negotiations as well, and in any case, other countries will continue to negotiate trade agreements irrespective of U.S. policy. It falls to Congress to weigh the costs and benefits of when and if to consider TPA renewal as part of the U.S. trade policy agenda. The TPA decision will also have significant implications for defining the future of the congressional-executive relationship for the rest of the Bush Administration, and perhaps beyond. The outlook is far from clear, however, given the many controversies that surround TPA and the numerous factors that may influence Congress’s decision of how or if to act.

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APPENDIX A. TIMELINE FOR NEGOTIATION, CONGRESSIONAL CONSULTATION, AND LEGISLATIVE IMPLEMENTATION OF TRADE AGREEMENTS UNDER TPA

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APPENDIX B. A SHORT GUIDE TO THE EXPEDITED LEGISLATIVE PROCEDURES FOR PASSAGE OF TRADE IMPLEMENTING BILLS UNDER TPA39 I

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VI

Before the formal TPA expedited procedures come into play, the House Ways and Means and Senate Finance Committees typically hold “mock markups” on informal drafts of the implementing legislation, voting to approve or disapprove. The vote and any amendments to the draft legislation, however, are not binding on the Administration. These meetings provide the last opportunity to make recommendations to the Administration before it sends final implementing legislation to Congress, which initiates the expedited procedures. The President sends a final legal draft text of the trade agreement and a draft implementing bill (with supporting materials) to Congress on a day that it is in session. The draft bill may, or may not, reflect some or all of any amendments adopted by committees in the mock markup. Identical bills are subject to mandatory introduction in each House of Congress on the day received. The bills are referred to the House Ways and Means and Senate Finance Committees jointly, with others if jurisdiction warrants.40 Each committee has 45 in session days to report the bill or it is automatically discharged and the bill is placed on the appropriate calendar.41 An implementing bill subject to TPA procedures is likely to be a revenue bill, in which case the Constitution requires that the Senate ultimately act on the House bill. Under these conditions, the Senate Finance Committee has until the later of the 45th day of session after the Senate bill is introduced or the 15th day of session after the Senate receives the House bill. In each House, after the implementing bill is reported or discharged, any Member may offer a non-debatable motion to consider it. Debate is limited to 20 hours evenly divided between those for and against. The measure cannot be amended, and a motion or unanimous-consent request to suspend this restriction is not in order. If the chamber has not completed floor action by the 15th day after the bill is reported or discharged, any Member may bring it to a vote. A bill passes by simple majority under the statute. Whichever House acts second (typically the Senate assuming the bill is a revenue bill) considers and debates its own bill, but takes its final vote on the bill received from the other House (typically the House of Representatives).42 This procedure ensures that both Houses will ultimately act on the same measure, thereby clearing it to be presented to the President (without the need for conference). Once the implementing bill is signed, under its terms, the agreement enters into force for the United States by Presidential proclamation.

END NOTES 1

2

The May 10, 2007 compromise is available on the websites of the House Ways and Means Committee and the United States Trade Representative (USTR). Destler, I. M. American Trade Politics. Fourth Edition. Institute for International Economics. Washington, DC. 2005. p. 14.

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3

Shapiro, Hal and Lael Brainard. Trade Promotion Authority Formerly Known as Fast Track: Building Common Ground on Trade Demands More than Change. The George Washington International Law Review. vol 35. no. 1. p. 6. 2003. MFN, also known in U.S. law as normal trade relations (NTR) status, means that the United States would treat the imports from that trading partner no less favorably than the imports from other trading partners. 4 Destler, American Trade Politics, pp. 14-15 and Pastor, Robert A. Congress and the Politics of U.S. Foreign Economic Policy 1929-1976. University of California Press. Berkeley, 1980. pp. 79-80. 5 Shapiro and Brainard, Trade Promotion Authority Formerly Known as Fast Track, p. 11. 6 The General Agreement on Tariffs and Trade (GATT) went into effect in 1948 as a set of rules governing international trade. Over time, the number of GATT signatories grew and the body of rules were expanded in a series of negotiations called rounds. During the Uruguay Round, the signatories agreed to establish the World Trade Organization (WTO) to administer the GATT and other multilateral trade agreements. The WTO now has 149 members. 7 Destler, I. M. Renewing Fast-Track Legislation. Institute for International Economics. Washington, DC. September 1997. p. 6. 8 Destler, I. M., American Trade Politics, pp. 71-72. 9 U.S. Congress. Senate. Committee on Finance. Trade Reform Act of 1974; report...on H.R. 10710...(S.Rept. 931298) November 26, 1974. U.S. Govt. Print. Off., 1974. p. 107. Cited in CRS Report 97-41, Fast-Track Implementation of Trade Agreements: History, Procedure, and Other Options, by Vladimir N. Pregelj. 10 Devereaux, Charan, Robert Z. Lawrence, and Michael D. Watkins. Case Studies in US Trade Negotiation, Volume 1: Making the Rules. Institute for International Economics. Washington, DC. September 2006. p. 229. 11 For details on votes on this legislation, see CRS Report RS21004, Trade Promotion Authority and Fast Track Negotiating Authority for Trade Agreements: Major Votes, by Carolyn C. Smith. 12 For more information on current U.S. trade negotiations, see CRS Report RL33463, Trade Negotiations During the 110th Congress, by Ian F. Fergusson. 13 For a summary of bills authorizing TPA and trade agreements approved under its provisions, see CRS Report RS21004, Trade Promotion Authority and Fast-Track Negotiating Authority for Trade Agreements: Major Votes, by Carolyn C. Smith. 14 The private sector advisory system was established by Congress in 1974 to ensure that U.S. trade policy and negotiations benefit from, and reflect, a broad array of private sector U.S. interests. It consists of 27 committees and over 700 advisors, coordinated by the Office of the United States Trade Representative. USTR. 2006 Trade Policy Agenda and 2005 Annual Report of the President of the United States on the Trade Agreements Program. Washington, DC. March 2006. pp. 252-255. 15 United States General Accountability Office. Report to the Chairman, Committee on Finance. International Trade: An Analysis of Free Trade Agreements and Congressional and Private Sector Consultations under Trade Promotion Authority. GAO-08-59. November 2007. pp. 29 and 41-42 16 Ibid., pp. 29 and 43-46. 17 Under TPA, reciprocal FTAs and multilateral NTB agreements that go beyond tariff reductions are treated as congressional-executive agreements, which require the approval of both Houses of Congress. Such approval expresses Congress’ consent to bind the United States to the commitments of the agreement under international law. This type of agreement is distinguished from both the executive agreement, requiring only presidential action, and the treaty, requiring a two-thirds vote of the Senate. Because reciprocal trade agreements typically result in tariff rate (revenue) changes, the House of Representatives is necessarily involved. For a more detailed legal discussion, see CRS Report 97-896, Why Certain Trade Agreements Are Approved as Congressional-Executive Agreements Rather Than as Treaties, by Jeanne J. Grimmett; and Shapiro, Hal S. Fast Track: A Legal, Historical, and Political Analysis. Ardsley, NY, Transnational Publishers. 2006. p. 22. 18 The U.S.-Jordan free trade agreement is the exception. 19 Indeed, the House actually did just that on April 10, 2008, when it approved (224-195) H. Res.1092. That measure states that sections 151 (e)(1) and section 151 (f)(1) of the Trade Act of 1974 would not apply to H.R. 5724, the implementing legislation for the U.S.- Colombia FTA. Section 151 establishes the expedited (fasttrack) procedures. Section 151(e)(1) establishes the time limits for committee and floor consideration of the implementing bill. Section 151(f)(1) establishes the procedures for consideration of a motion in the House for consideration of the implementing bill. Other elements of the expedited procedures, for example, the prohibition on amendments to the implementing bill (section 151 (d)) would still apply to H.R. 5724. Also, H.Res. 1092 only applies to the U.S.- Colombia FTA implementing bill and not to implementing bills for other FTAs, such as Panama and South Korea, if and when the President submits them to Congress. 20 Additional referrals depend on whether there are provisions in the agreement that require changes in law under the jurisdiction of other committees.

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Interestingly, while Congress authorized funding for U.S. contributions and for participation in the administrative bodies created by the NAFTA side agreements, it did not expressly approve the agreements themselves. See 19 U.S.C. sections 3471-3472. 22 This idea is elaborated in: VanGrasster, Craig. Is the Fast Track Really Necessary? Journal of World Trade. Vol. 31, No. 2. April 1997. p. 106. 23 Inside Trade. Grassley Presses USTR To Improve Consultations on FTAs. July 7, 2006. 24 For details, see CRS Report RL31870, The Dominican Republic-Central America-United States Free Trade Agreement (CAFTA-DR), by J. F. Hornbeck. 25 Section 151(a)(2) of the Trade Act of 1974 (P.L. 93-618). 26 See Shapiro, Fast Track: A Legal, Historical, and Political Analysis, p. 28. 27 See Carrier, Michael A. All Aboard the Congressional Fast Track: From Trade to Beyond. George Washington Journal of International Law and Economics. Washington, D.C. 1996. 28 Brevetti, Rossella and Gary G. Yerkey. President Bush Calls on Congress to Renew Trade Promotion Authority. International Trade Reporter. February 1, 2007. p. 159 and Brevetti, Rossella. USTR, Paulson, Gutierrez Urge Renewing TPA, But Pelosi Says It Is Not a Legislative Priority. International Trade Reporter. July 5, 2007. 29 One suggested list of domestic policy options is presented in: Polaski, Sandra. U.S. Living Standards in an Era of Globalization. Policy Brief 53. Carnegie Endowment for International Peace. July 2007. 30 See Article 1, section 7, of the U.S. Constitution, which requires that all bills for raising revenue originate in the House. 31 See U.S. Congress. 103rd Cong., 2nd sess., House, Uruguay Round Agreements Act. (H.Rept. 103-826) October 3, 1994. p. 25. 32 Yerkey, Gary G. Renewal of TPA Seen as Highly Unlikely Next Year, Particularly if Democrats Triumph. International Trade Reporter. October 26, 2006. p. 1528. 33 Reuters. Bush’s Trade Authority Renewal: Dead on Arrival? October 19, 2006 and Vaughn, Martin, What If: Trade. The Congressional Daily. October 17, 2006. 34 Brevetti, Rossella. Rep. Rangel to Seek Bipartisan Plan To Renew Trade Promotion Authority. International Trade Daily. February 1, 2007. p. 158. 35 Pastor, Congress and the Politics of U.S. Foreign Economic Policy 1929-1976, pp. 56-58. 36 For more information on immigration issues and trade agreements, see CRS Report RL32982, Immigration Issues in Trade Agreements, by Ruth Ellen Wasem. 37 Some have argued that the circumstances at that time were different from what they are now because the trade authority had more support in Congress. 38 See for example, Destler, I. M. Renewing Fast-Track Legislation. Institute for International Economics. Washington. September 1997. pp. 41-43, and Mastel, Greg and Hal Shapiro. Fast Track Forever? The International Economy. Summer 2006. pp. 54-55. 39 Title XXI of the Trade Act of 2002 (P.L. 107-210) and section 151 of the Trade Act of 1974, as amended. 40 For example, the U.S.-Chile Free Trade Agreement implementing bill contained a provision affecting immigration law, requiring the bill to be referred to the House and Senate Judiciary Committees. 41 Cumulatively, the whole process can take as long as 90 in session days, potentially lasting many months. 42 In fact, the Senate can act, and has acted, on its own bill before receiving the House bill. In the case of the Chile FTA implementing bill, the Senate Finance Committee reported out first. When the House bill, which was identical, came over, it was put on the Senate calendar directly. For the CAFTA-DR bill, the Senate actually voted first on its own bill, necessitating a later (procedural) vote to substitute the (identical) language of the Senate bill into the House-passed bill when received. These proceedings in the Senate permitted final action to occur on the House measure, as constitutionally required.

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In: U.S. Trade with Developing Countries Editor: Kalan R. Geisler

ISBN: 978-1-60741-122-2 © 2009 Nova Science Publishers, Inc.

Chapter 6

TRADE CAPACITY BUILDING: FOREIGN ASSISTANCE FOR TRADE AND DEVELOPMENT *

Danielle Langton

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SUMMARY Trade capacity building (TCB) is a form of development assistance provided by the United States and other donors to help developing countries participate in and benefit from global trade. In addition to helping developing countries negotiate and implement trade agreements, TCB includes development assistance for agricultural development, customs administration, business training, physical infrastructure development, financial sector development, and labor and environmental standards. Some experts believe that TCB is necessary for developing countries to adjust to trade liberalization and achieve trade-led economic growth. In FY2007, the United States obligated about $1.4 billion in TCB worldwide. The U.S. Agency for International Development (USAID) funds and implements the majority of U.S. TCB programs. In FY2005, the Millennium Challenge Corporation (MCC) began to fund TCB activities, and in FY2006 and FY2007 it overtook USAID as the agency with the highest TCB obligations. Other agencies also provide TCB, including the U.S. Department of Agriculture, the Department of Commerce, the Treasury Department, the Department of Labor, and the U.S. Trade and Development Agency (USTDA). The United States also contributes to multilateral funds for TCB, and it contributes to multilateral development banks such as the World Bank, which also provide TCB programs. Congress has played a key role in TCB by providing funding through appropriations legislation. In the 109th Congress, the House passed a measure to create a Trade Capacity Enhancement Fund in the 2007 Foreign Operations Appropriations Bill (H.R. 5522), but this measure was not included in the Senate bill. The 110th Congress directed the administration to use at least $550 million of foreign aid appropriations for TCB in the Consolidated *

This is an edited, reformatted and augmented version of a Congressional Research Service Publication RL 33628, Updated February 5. 2008.

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Appropriations Act of 2008 (P.L. 110-161). TCB may become a key part of the 110th Congress’ discussions on potential free trade agreements (FTAs) with developing countries, renewal of trade promotion authority (TPA), and U.S. involvement in the Doha round of WTO negotiations. The 110th Congress may also be interested in using TCB to increase the effectiveness of trade preference programs initiated through legislation such as the African Growth and Opportunity Act (AGOA). In the past, Congress has passed legislation restricting the use of foreign assistance for certain activities promoting trade in developing countries. While TCB generally has tradepromoting motivations, any resulting increased import competition could also raise Congressional concern. This report describes trade capacity building and discusses the history of TCB in foreign assistance. It also provides an overview of U.S. bilateral TCB assistance, as well as multilateral and bilateral TCB assistance from other donors. There is also a discussion of legislation affecting TCB, including appropriations and legislative restrictions on foreign assistance. Finally, this report highlights some of the policy issues concerning TCB. This report will be updated as events warrant.

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INTRODUCTION Trade capacity building (TCB) can be broadly defined as development assistance aimed at helping countries build the physical, human, and institutional capacity to participate in global trade. It includes assistance to negotiate, implement, and benefit from trade agreements, such as agreements within the World Trade Organization (WTO), and regional and bilateral free trade agreements. Many experts consider TCB to be vital for developing countries to benefit from trade liberalization and to participate actively in the global economy. In turn, trade liberalization and participation in the global economy are considered important factors in promoting economic growth and poverty reduction. This report examines key issues in TCB, provides an overview of U.S. and international TCB programs, and explores Congressional involvement in TCB. TCB is provided by bilateral donors such as the United States, the European Commission, individual European countries, and Japan, Korea, and Canada. Multilateral institutions such as the World Bank, the Inter-American Development Bank (IDB), the World Trade Organization (WTO), and the United Nations also provide TCB. Direct recipients of TCB include government ministries, customs officials, business owners, local nongovernmental organizations (NGOs), and farmers. TCB can take the form of workshops, onthe-job training, data collection, feasibility studies, infrastructure upgrades, and efficiency improvements in procedures. Ideally, developing countries incorporate TCB needs in their national development plans, and TCB programs are planned in partnership between recipient and donor countries. The U.S. government provides TCB assistance to developing countries worldwide on a bilateral basis, and through contributions to multilateral organizations and established global TCB trust funds. The U.S. Agency for International Development (USAID) has historically provided the bulk of U.S. TCB assistance, but other agencies such as the U.S. Department of Agriculture (USDA), U.S. Department of Commerce, and U.S. Trade and Development

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Agency (USTDA) also provide such assistance. The Millennium Challenge Corporation (MCC) first provided TCB assistance in FY2005, and in FY2006 and FY2007 its TCB funding obligations surpassed those of USAID. U.S. TCB is not currently a discrete line item with its own budget; it is funded through several different initiatives within USAID and other agencies. In FY2007, U.S. government agencies reported obligating nearly $1.4 billion to TCB, of which over $1 billion was obligated by the MCC and USAID.1 According to the Organization for Economic Cooperation and Development (OECD), the United States allocated about 25% of its total official development assistance (ODA) to TCB between 2002 and 2005.2 Interest in TCB has grown in the donor community, both in the United States and abroad. As developing countries become more involved in trade negotiations, trade capacity becomes a higher priority issue for them and for donors. Developing countries from every region have entered free trade agreement (FTA) negotiations with the United States or the European Union. They have also been heavily engaged in the Doha round of WTO negotiations. In order to conclude the Doha round and other trade negotiations, developing country needs may require consideration, and that may include additional resources for TCB. Congress has several policy interests in TCB. First, TCB may be included in some potential free trade agreements (FTAs). The United States has concluded FTA negotiations with some developing countries, and Congress may be asked to consider implementing legislation for these potential FTAs. Congress also appropriates funds for TCB through USAID and other budgets. Congress may play a role in oversight of TCB programs, to ensure effectiveness and adherence to U.S. interests. TCB is also considered a compliment to U.S. trade preference programs such as the African Growth and Opportunity Act (AGOA), which Congress oversees. Finally, TCB is provided to developing countries through their participation in the WTO, and has been a topic of discussion in the Doha Development Agenda (DDA) round of negotiations.3 Congress may consider implementing legislation for a WTO agreement, and TCB could be important in that discussion.

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DEFINING TRADE CAPACITY BUILDING There is no set definition of TCB in trade and development public policy discourse. A narrow definition of TCB might include only assistance directly related to trade agreements, such as assistance to negotiate and implement such agreements. However, TCB is usually defined more broadly to include all types of development assistance that directly affect a country’s capacity to participate in trade. This broader definition of TCB is assumed for the purpose of this report (see the box on page 4 for elaboration on the various areas of TCB assistance). The assistance contained within the broad definition of TCB includes addressing the regulatory environment for business, trade, and investment, supply-side constraints such as low productive and entrepreneurial capacity, and inadequate physical infrastructure such as transport and storage facilities. The goals of TCB include overcoming adjustment costs from liberalized trade; offsetting high implementation costs of trade agreements; offsetting preference erosion from multilateral liberalization; offsetting lost tariff revenue; improving negotiating capacity; and addressing supply-side constraints that make it difficult for developing countries to compete in world markets.4

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A risk of defining TCB too broadly is that almost any assistance activity can be loosely defined as TCB. There are many areas of assistance that focus on domestic policy and capacity issues in a developing country, for example, business regulatory regimes, but also have direct consequences for trade. However, there are other areas of assistance, such as providing training to local microenterprises that are not likely to engage in international trade, where the linkage to trade is often not clear. In some cases, two similar projects in different countries can be similarly described on paper, but may be implemented with different objectives in mind. One project may be strongly trade-related, while another may not qualify strongly as TCB. This poses a problem when examining the aggregate TCB data. It is useful to know the total amounts of TCB assistance provided to different countries for summary purposes, but this data should be viewed as an inexact estimate of TCB, rather than as a definitive tool for measuring TCB assistance. Trade capacity building has some synonyms. It is also referred to as aid for trade or traderelated technical assistance (TRTA), especially within the context of the WTO. Some distinctions can be made between these terms, but since there is no agreement on them they are treated as interchangeable within this report.

Categories of TCB Most developing countries lack the physical, institutional, or human capacity to participate effectively in world trade. Physical capacity includes infrastructure essential to trade such as ports, roads, and storage facilities. Institutional capacity refers to the business and trade policy environment, in addition to the strength of the financial sector. Institutional capacity relates to the existence of effective administrative and regulatory regimes, including property rights and formal business registration procedures. Human capacity refers to the technical competence of individuals such as government officials, entrepreneurs, and producers to contribute to international trade. The box on the following page breaks down further the different categories of TCB.

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Areas of TCB Assistance Trade Facilitation: Improving the efficiency of international trade flows, through reducing the costs and time required for goods to cross borders. Mainly achieved through simplification and harmonization of fees and procedures. Customs Operation and Administration: Assistance to help countries modernize and improve their customs offices. Part of trade facilitation. Export Promotion: Includes assistance to increase market opportunities for developing country and transition economy producers. Business Services and Training: Includes support to improve business sector associations and networks, and to enhance the skills of business people in trade.

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Regional Trade Agreements (RTA): Includes assistance to an RTA, or to an individual country, to help an RTA facilitate trade. Human Resources and Labor Standards: Supports labor standards and worker rights enforcement; development of trade unions and dispute resolution mechanisms; workforce development; and elimination of child labor. Physical Infrastructure Development: Assistance to establish trade-related telecommunications, transport, ports, airports, power, water, and industrial zones. Trade-Related Agriculture Development: Support for trade-related aspects of the agriculture and agribusiness sectors. Environmental Sector Trade and Standards: Assistance to establish environmental standards or to promote environmental technology. Financial Sector Development and Good Governance: Support for financial sector work, capital markets, and monetary and fiscal policy. Competition Policy and Foreign Investment: Support for the design and implementation of antitrust laws, as well as investment laws and investor protections. Services Trade Development: Includes support to help developing countries and transition economies increase their services trade flows. WTO Awareness and Accession: Assistance to help countries benefit from membership in the WTO or understand the benefits of WTO membership. Also assistance to help countries in the WTO Accession process meet the requirements of accession.

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Specific WTO Agreements: Assistance that enables countries to better participate in, and benefit from, particular WTO Agreements. These agreements include Agreements on Trade in Goods; Agreement on Agriculture; Agreement on Sanitary & Phyto-Sanitary (SPS) Measures; Agreement on Technical Barriers to Trade (TBT); Agreement on Trade- Related Investment Measures (TRIMs); etc. Source: Adapted from TCB Category Definitions on the USAID TCB Database website.

WHY TRADE CAPACITY BUILDING? Trade capacity building is based on the premise that trade liberalization leads to economic growth for both developed and developing countries, but developing countries do not have the capacity to achieve trade-led economic growth without assistance. On a more basic level, TCB assumes that donors can have an impact on trade capacity in developing countries. TCB is often cited as an important complement to market access, which is believed to be necessary but insufficient for developing countries to increase participation in trade.

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Other reasons given for TCB are to offset preference erosion and the adjustment costs of trade liberalization.

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Market Access May Be Insufficient Increased market access through preferential treatment, trade agreements, and other programs may not be sufficient to increase developing countries’ participation in international trade. Beginning with the Generalized System of Preferences (GSP)5 in the 1970s, the United States and other developed countries have provided increased market access to products from developing countries through trade preference programs. Trade preference programs provide duty-free and/or quota-free access to certain products from certain developing countries, with stated limitations such as rules of origin. Despite the GSP and other trade preference programs such as the African Growth and Opportunity Act (AGOA),6 most developing countries have not substantially increased their trade globally or with the United States. Perhaps more importantly, many developing countries have not diversified their exports out of primary commodities. Low income developing countries have faired the worst: between 1990 and 2003, low income developing countries only increased their share of the global market for non-oil trade by one half a percentage point and least developed countries (LDC) have only maintained their market share. During the same time period, middle income countries increased their market share by about 14 percentage points.7 A few exceptions have occurred in countries that have attracted investments in textile and apparel manufacturing. Some critics blame the lack of trade growth on the preference programs themselves, arguing that the rules of origin are too stringent or that the programs exclude products in which developing countries have a competitive advantage.8 Also, the temporary nature of preference programs may add greater uncertainty to an already risky business environment, discouraging both foreign and domestic investment. Other experts believe that trade capacity is a more important factor than any of the above. It is broadly accepted that many developing countries have not benefitted from market access opportunities because of inadequate knowledge of these opportunities, non-competitive production capacity, lack of the necessary exporting infrastructure, inability to meet prevailing standards in high value export markets, and being crowded out of some markets by domestic support and export subsidies of developed countries.9 This view is not new: a 1980 Congressional Budget Office (CBO) report found that “actual exports depend on the ability of the economy to produce competitively, and preferences of the sort granted by GSP may not be sufficient to compensate for the differences in competitiveness among countries, or between U.S. producers and those in developing countries.”10

Trade Preference Erosion Trade preference erosion is a concern in the few countries where preference programs have had a significant impact, such as in Lesotho and Bangladesh, where booming apparel industries have increased incomes and employment. Trade preference erosion may cause a decline in the emerging apparel industries in these and other countries, because as trade liberalization occurs their margin of preference is reduced.11 The margin of preference is the difference between the cost of the duty and/or quota for most favored nation (MFN) exporters

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and the developing country exporters receiving preferential treatment. With a reduced margin of preference the developing countries may no longer be competitive with more developed, lower-cost producers (such as China). This prospect has prompted certain developing country WTO members to oppose tariff reductions in certain goods on the basis that it would diminish their preferences. TCB may mitigate the effects of trade preference erosion, by helping developing countries to increase their competitiveness in the industries in question and diversify into other areas. Some observers consider it to be more politically feasible than monetary compensation, which has been proposed by somedeveloping countries as a possible solution.

Adjustment Costs The United States and other donors may provide TCB to help developing country economies overcome adjustment costs and facilitate a smooth transition to liberalized trade. Adjustment costs occur when certain sectors of the economy are negatively affected by trade liberalization, even though the economy as a whole may benefit through increased growth. Trade may cause decreased production in the least efficient sectors of the economy and increased production in the more efficient sectors. During the transition period, land, labor, and capital resources that had been employed in the least productive sectors may become idle. This translates to land and capital investments losing value, and workers becoming unemployed. As production increases in the more efficient sectors of the economy throughout the transition, workers may find new jobs, and other resources are expected to regain value as they are put to use in growth sectors. In developing countries, this transition period can be especially slow and difficult, and may never really end. Certain regions, especially in rural areas, may not attract new industries to replace employment opportunities lost from the less efficient sectors. Therefore, TCB aims to help developing countries cope with this dislocation.

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THE HISTORICAL CONTEXT FOR TCB The development community was skeptical about using trade as a vehicle for economic growth and development in the 1960s and 1970s. At the time, import substitution industrialization (ISI), where developing countries limited imports of manufactured products to foster a domestic manufacturing sector, was the prevailing theory in trade and development. Aid was used to support industrialization, and not to foster trade. In the 1980s, after the apparent failure of ISI policies, there was a shift in mainstream development thinking to the view that removing barriers to trade and other market distortions would foster growth. As the expected gains from trade and economic reforms did not materialize, another shift in development thought took place in the late 1990s. The development agenda changed its focus to strengthening institutions that support markets and trade-led growth. Development experts recognized that liberalized trade was necessary but not sufficient for increased growth and poverty reduction.12 At the same time, capacity development became a popular term during the 1990s, reflecting the need for demand-driven assistance as opposed to assistance

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imposed from outside and based primarily on what donors were willing and able to provide.13 TCB grew from these ideas about trade and development. Since the beginning of U.S. development assistance in the 1950s, U.S. velopment programs have had elements of what we now refer to as TCB assistance. The types of TCB assistance provided, from agricultural development to transportation infrastructure, have changed based on the evolving focus of overall U.S. development assistance. The composition and focus of such assistance over the last 60 years have been determined mainly by changes in U.S. foreign policy, prevailing theories of development, and domestic administrative realities.14 TCB emerged as a concept in U.S. development assistance parlance around 1999, even though many of the programs included in TCB had been ongoing for years. Before TCB, the terms used for similar assistance were generally technical assistance or technical cooperation. The development of TCB as a concept brought some changes to the planning and implementation of TCB programs. In the past, these programs were conceived as general economic development programs, and not necessarily formed with a wider trade agenda in mind. More importantly, capacity building relies on a partnership with beneficiaries, involving a variety of actors, including government, private sector, and non-governmental organizations (NGOs).15 TCB programs are also meant to be planned in coordination with trade policy. With TCB on the agenda, trade officials, both in the United States and in developing countries, may have a greater influence on development policy than they did previously.

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OVERVIEW OF U.S. BILATERAL TRADE CAPACITY BUILDING According to the USAID Trade Capacity Building Database,16 U.S. government agencies obligated $1.4 billion in TCB assistance worldwide in FY2007. TCB is funded through a variety of U.S. agencies and budgets, and includes a variety of programs, from agricultural development to WTO accession. The United States began tracking its TCB assistance in 1999, and according to the TCB database it climbed steadily every year until FY2006, from $370 million in 1999 to $1.4 billion in 2006 and 2007. It is possible that this apparent fourfold increase over seven years is partly due to greater reporting of TCB assistance by the responsible agencies, as well as an inclination to include more activities within the definition of TCB. However, there has also been increased interest in TCB which may have led to greater funding for more programs. From FY1999 to FY2005, USAID funded the majority of TCB assistance. In 2005, it funded 52% of total U.S. government TCB assistance, about 66% in 2004, and around 70% in previous years. In FY2006, the MCC became the largest U.S. government funder of TCB, with $610.3 million or 44% of total U.S. TCB (as compared to $473.1 million from USAID). In FY2007, the MCC funded even more TCB: $775.4 million, or 55% of total U.S. TCB. The MCC first obligated funds for TCB in 2005. The United States provides TCB to a range of developing countries around the world, including potential FTA partners. In developing countries where the United States is negotiating an FTA, the Office of the United States Trade Representative (USTR) coordinates

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TCB assistance through TCB working groups, consisting of U.S. government interagency representatives and partner country government representatives. The CAFTA-DR TCB working group was the first such working group, and it met concurrently with the FTA negotiations. The working group was institutionalized as a committee in the text of the negotiated agreement. Since the passage of the agreement, the CAFTA-DR TCB committee will reportedly focus its work on coordinating TCB programs for implementing the agreement and addressing concerns regarding the transition to free trade.

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Figure 1. U.S. Trade Capacity Building Assistance (in millions of U.S. dollars) Source: CRS based on data from USAID TCB Database [http://qesdb.cdie.org/tcb/index.html].

Figure 2. U.S. Trade Capacity Building Assistance by Region (in millions of U.S. dollars) Source: CRS based on data from USAID TCB Database [http://qesdb.cdie.org/tcb/index.html].

As shown in Figure 2, TCB funding trends since 2004 have varied by region. The Middle East and North Africa region received much less TCB assistance in 2006 and 2007 than in the previous two years because of a decline in TCB assistance in 2006 to Iraq (from $101 million in 2005 to $3 million in 2007), Egypt (from $69 million in 2005 to $18 million in 2007), and the West Bank/Gaza (from $35 million in 2005 to $0 in 2007). The regions of Sub-Saharan Africa and the former Soviet Republics both saw a surge in TCB assistance in 2006 because of MCC-funded TCB activities: $276 million to Cape Verde and Benin in Sub-

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Saharan Africa; and $280 million to Armenia and Georgia in the former Soviet Republics. In FY2007 the former Soviet Republics received more typical levels of TCB assistance because the region had no new MCC compacts, whereas Ghana and Mali in Sub Saharan Africa signed new compacts, inflating the region’s TCB funding. The Latin America and aribbean region had a similarly high level of TCB assistance in 2005 and 2007, as a result of MCC funded assistance. No MCC funds for TCB were obligated to the Latin America and Caribbean region in 2006. TCB assistance is often provided on a regional level to improve efficiency and encourage regional economic integration. Some projects are also provided on a global level, or they may be recorded as global projects in the database while focusing on individual countries in different regions.

U.S. AGENCIES IN TRADE CAPACITY BUILDING A variety of U.S. agencies have a role in providing TCB assistance. All U.S. government TCB assistance is coordinated by a TCB Interagency Group, which is cochaired by USTR and USAID. The Interagency Group meets monthly to coordinate on general TCB issues including free trade negotiations, WTO issues, the Integrated Framework (IF), preference programs, and performance measures.

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Table 1. Largest Recipients of U.S. TCB Assistance since FY2005 (in millions of U.S. dollars) Ranka 1 2 3 4 5 6 10 11 16 19 21 33 39 52 74 111 NA NA NA NA

Country El Salvador Ghana Mali Colombia Afghanistan Central Americans Egypt Ukraine Georgia Nicaragua Peru Armenia Honduras Iraq Madagascar Romania Benin Cape Verde Vanuatu West Bank/Gaza

FY2007 389.4 248.2 137.6 49.8 27.7 21.3 17.6 16.5 11.89 9.0 8.8 6.3 5.1 2.9 1.2 0.1 0 0 0 0

FY2006 14.4 7.4 3.2 58.1 66.6 66.8 29.7 11.8 189.1 15.2 32.4 99.1 7.1 9.5 0.9 4.0 188.6 87.3 54.5 0

FY2005 14.5 6.9 5.1 50.6 50.4 34.4 68.8 27.7 5.0 132.7 10.9 5.1 202.1 101.3 58.3 27.9 0 0 0 35.4

a. Rank is by FY2007, out of 115 countries and regions that received TCB funding obligations in FY2007 (43 countries and regions received no TCB funding obligations in FY2007).

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Figure 3. U.S. Trade Capacity Building Assistance by Category (in millions of U.S. dollars) Source: CRS based on data from USAID TCB Database [http://qesdb.cdie.org/tcb/index.html].

Figure 4. Share of FY2007 TCB Funding

Figure 4 shows a breakdown of the different agencies’ shares of TCB funding in 2005. Some agencies implement TCB funded by other agencies, so Figure 5, which illustrates TCB assistance implementation rather than funding, shows a slightly wider distribution of TCB implementation across agencies. For example, the Department of Labor and the Department of Agriculture both fund their own programs and implement TCB activities funded by other agencies such as USAID and the State Department. This interagency cooperation is an example of agencies coordinating their activities through the Interagency Group. The “other” category represents a greater share of TCB program implementation, because many agencies

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with relatively small TCB programs are funded by other agencies. A low level of TCB funding by a particular agency may not be indicative of inconsequential involvement in TCB; some important TCB programs require less funding than others. Infrastructure development is inherently more expensive, and workshops are less expensive. One U.S. government office with a significant role in TCB is not included in the U.S. TCB database — that is USTR, which has an Office for Trade Capacity Building, but does not implement or fund any TCB programs. USTR exclusively plays a role in coordinating TCB. Negotiating offices within USTR occasionally advise TCB implementors when they are providing assistance related to a particular agreement or negotiation.

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Figure 5. Share of FY2007 TCB Implementation Source: CRS based on data from USAID TCB Database [http://qesdb.cdie.org/tcb/index.html].

The fact that TCB is provided by many different U.S. government agencies has been cited as both an advantage and a source of concern. On the advantage side, more agency involvement means greater support from a wider pool of expertise and funding options. In some cases expertise is at least as important as funding, and it can be helpful to have U.S. regulatory agencies understand TCB objectives. One example of this benefit is the U.S. Department of Agriculture’s Animal and Plant Health Inspection Service (APHIS). APHIS is primarily a regulatory agency with the responsibility of protecting U.S. agriculture from foreign pests and diseases. Obtaining clearance from APHIS has been notoriously difficult for agricultural producers from developing countries. Some have argued that bringing APHIS into TCB has not only benefitted developing countries by providing additional expertise, but has raised awareness of this problem within APHIS. The issue of regulatory agencies providing TCB has raised some concerns. Some observers caution that the mission of regulatory trade agencies, generally to protect the United States from potentially harmful imports, conflicts with that of TCB, generally to encourage imports from developing countries. This conflict of interest may result in either ineffective TCB or protection, or both. The other major concern about the variety of U.S. government agencies in TCB is that it can be difficult to coordinate activities across the agencies.

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Trade Capacity Building Table 2. Selected U.S. Agencies with TCB Programs, FY2006 and FY2007

Agency Millennium Challenge Corporation (MCC)

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U.S. Agency for International Development (USAID)

TCB Implementation (in millions) 2006 2007 $600.2

$757.1

Areas of TCB Assistance

transportation infrat-ructure, financial sector, trade facilitation, agrib-usiness, private sector capacity trade negotiations, implementation of trade agreements, legal reform, governance, private sector capacity, trade facilitation, financial sector, market standards, market information, agriculture, environment, labor, governance, competition policy, infrastructure, tourism, services training on trade-related topics, private sector development, governance, contributions to multilateral TCB funds, trade facilitation, labor, enviro nment, regional trade agreements reform and enforcement of labor laws agriculture, private sector capacity, WTO agreement on SPS

$488.6

$391.6

Department of State

$92.4

$71.8

Department of Labor Department of Agriculture Trade and Development Agency (USTDA)

$71.9

$62.5

$45.3

$15.8

$23.6

$23.3

infrastructure, private sector capacity, trade facilitation, environment

Department of the Treasury

$20.0

$18.4

financial sector, governance

Overseas Private Investment Corporation (OPIC)

$20.6

$27.2

infrastructure, private sector capacity, financial sector

Department of Commerce

$5.9

$16.8

Peace Corps

$2.3

$2.1

WTO accession and agreements, trade facilitation, legal reform, governance, competition policy private sector capacity, tourism

The U.S. Agency for International Development (USAID) TCB is one of the core strategies of USAID. The USAID strategy for TCB is laid out in its March 2003 document, “Building Trade Capacity in the Developing World.” According to this strategy document, the agency’s goal is to “increase the number of developing and transition countries that are harnessing global economic forces to accelerate growth and increase incomes.” USAID aims to achieve this goal by supporting participation in trade negotiations, implementation of trade agreements, and economic responsiveness to trade liberalization. The majority of USAID TCB programs focus on improving economic responsiveness to trade liberalization. Projects in this area include strengthening commercial laws and traderelated services in the public sector, as well as working with businesses and industries in the private sector to overcome supply-side constraints, such as access to finance,

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meeting international market standards, and obtaining market information. As the United States enters into more FTA negotiations with developing countries, USAID will likely respond to greater demand for assistance with participation in trade negotiations and implementation of trade agreements. USAID plans, funds, and implements TCB activities at both the agency and country levels. At the agency level, USAID targets TCB assistance toward countries where governments are committed to reform and openness, or where such governments are emerging, especially LDCs. When targeted in this way, projects are expected to have the greatest impact on incomes. At the country level, individual country needs vary greatly, and USAID field missions reportedly have the flexibility to respond to these individual TCB needs. In planning their TCB assistance, USAID field missions aim to consider a wide range of local trade and investment factors and take advantage of opportunities presented by initiatives such as FTA negotiations and the Integrated Framework for Technical Assistance to LDCs (IF). Most USAID TCB programs are funded through the agency’s Development Assistance (DA) account. Certain country missions may also fund TCB projects through the Economic Support Fund (ESF).

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Figure 6. USAID TCB Funding by Category, FY2003-2007 (in millions of U.S. dollars) Source: CRS based on data from USAID TCB Database [http://qesdb.cdie.org/tcb/index.html].

The Millennium Challenge Corporation (MCC) In 2006 and 2007, the MCC committed the largest amount of TCB assistance of any U.S. government agency.17 The MCC first offered TCB in FY2005, when it signed its initial compacts with recipient countries. The MCC operates differently than USAID and other agencies, in that it only provides assistance to a select group of developing countries based on criteria involving governance and economic reform measures. MCC-eligible countries must define their own development priorities and submit a proposal for projects, which may include trade-related projects that are considered TCB. These proposals form the basis for compacts, which are five-year funding obligations negotiated between the MCC and the

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eligible country government. The MCC will only disburse funds once the compact is approved and signed. The compact development process occurs outside the U.S. TCB interagency process, but there is some level of coordination since USTR sits on the MCC Board of Directors. Table 3. MCC Compacts and Elements of TCB Country

Total Compact

TCB in millions (Year)

TCB Elements

Armenia

March 2006

$235 million

$90.8 (FY2006)

agriculture, transport infrastructure

Benin

February 2006

$307 million

$188.6 (FY2006)

financial sector, infrastructure, legal reform, port operations

Cape Verde

July 2005

$110.1 million

$87.3 (FY2006)

El Salvador

November 2006

$460.9 million

$381.5 (FY2007)

Georgia

September 2005

$295.3 million

$179.0 (FY2006)

Ghana

August 2006

$547 million

$239.9 (FY2007)

Hondura

June 2005

agribusiness, financial sector, infrastructure, transport infrastructure business services, agribusiness, investment support, financial services, transportation infrastructure agribusiness, energy infrastructure, SME, transport infrastructure agribusiness, financial sector, legal reform, rural development, transport infrastructure agribusiness, financial sector, infrastructure, legal reform

Madagasca r

April 2005

Mali

November 2006

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Date of Compact

$215 million $109.8 million $460.8 million

$193.1 (FY2005) $52.5 (FY2005)

agribusiness, financial sector, small and medium enterprises (SME)

$135.6 (FY2007)

transportation infrastructure, agribusiness, business infrastructure

July 2005

$175 million

$123.4 (FY2005)

agribusiness, legal reform, rural development, transport infrastructure

March 2006

$65.7 million

$54.5 (FY2006)

transport infrastructure

In FY2005, the MCC committed TCB assistance to Honduras, Nicaragua, and Madagascar totaling about $369 million (as reported on the USAID TCB database). MCC TCB commitments in FY2006 totaled about $610 million and were made to more countries, including Armenia, Benin, Cape Verde, Georgia, and Vanuatu. In FY2007, the MCC obligated about $775 million in TCB funding to El Salvador, Ghana, Guyana, Honduras, Mali, Moldova, and Ukraine. About 70% of these commitments were for physical infrastructure development. The MCC may continue to provide high levels of TCB assistance as more eligible countries sign compacts, but the actual levels will depend on whether eligible countries include TCB as a key component in their proposals. New compacts were recently signed with Lesotho, Mongolia, Morocco, and Mozambique.

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U.S. Department of Labor The Bureau of International Labor Affairs (ILAB) of the U.S. Department of Labor (DOL) funds and implements programs to help developing countries adhere to international labor standards, especially with regard to child labor. ILAB partners with the International Labor Organization’s International Program on the Elimination of Child Labor (ILO/IPEC) to implement these programs in Africa, Asia, Europe, Latin America and the Caribbean. In FY2007, ILAB funded about $51 million in projects worldwide. In addition to ILAB-funded projects, in FY2007 ILAB implemented $12 million in projects funded by USAID and the State Department, providing labor technical assistance for the Dominican Republic-Central American Free Trade Agreement (DR-CAFTA). Meeting international labor standards is an important aspect of eligibility for trade preferences and FTAs with the United States and other developed countries. However, some observers argue that it does not directly help countries benefit from increased trade, and therefore they question the inclusion of labor activities in TCB.

Figure 7. U.S. Department of Labor: TCB Project Implementation by Year, FY1999-2007 (in millions of U.S. dollars) Source: CRS based on data from USAID TCB Database [http://qesdb.cdie.org/tcb/index.html].

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The U.S. Department of State The State Department has funded and implemented programs in a variety of TCB areas. In FY2007, the State Department funded $101 million and implemented $72 million in TCB projects globally. More than half ($47 million) of the funding for State Departmentimplemented projects went to two educational exchange programs, comprised of the $31 million Academic Exchange Program, and the $16 million International Visitors Leadership Program. Both of these exchange programs focused on trade-related topics such as international economics, trade law, financial markets, intellectual property rights, business development, and other trade topics. Another $19 million consisted of contributions to multilateral TCB programs, such as the WTO Global Trust Fund ($1 million); the United Nations Conference on Trade and Development (UNCTAD; $13 million); and the International Trade Center ($5 million). The remaining $6 million was distributed among global, regional, and bilateral TCB programs, of which about $4 million was committed to

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programs on customs operation and administration. The State Department funded about $29 million in TCB assistance implemented by other U.S. agencies.

Figure 8. Distribution of U.S. Department of State TCB Funding, FY2007 Source: CRS based on data from USAID TCB Database [http://qesdb.cdie.org/tcb/index.html].

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The Export-Import Bank The mission of the Export-Import Bank (Ex-Im Bank) is to assist in financing the export of U.S. goods and services to international markets. The Ex-Im Bank aims to accomplish its mission through providing pre-export financing, export credit insurance, loan guarantees, and direct loans. In 2007, the Ex-Im Bank reported providing about $4 million in funding for TCB programs, mainly in infrastructure and tourism development. In FY2005 the Ex-Im Bank committed nearly $50 million to TCB, of which $42 million went toward physical infrastructure development, primarily in the form of loans and other types of financing arrangements to help developing countries purchase infrastructure equipment from the United States. For example, the Ex-Im Bank provided about $15 million in financing to help Ethiopian Airlines purchase aircraft equipment from the United States.

The Department of Transportation In FY2007, the Department of Transportation (DOT) did not fund or implement any TCB activities. In FY2006 it implemented about $26 million in TCB assistance, which was almost entirely in the form of assistance to Afghanistan funded by USAID. This assistance included a $25 million project to improve the Kabul International Airport, and a $1 million project to rebuild the Afghanistan Civil Aviation System. In previous years (FY2003 to FY2005), the DOT implemented projects totaling between $1 million and $14 million per year in different

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regions of the world, funded by itself and other agencies including USAID, State, and USTDA.

The U.S. Trade and Development Agency The mission of the U.S. Trade and Development Agency (USTDA) is to advance economic development and U.S. commercial interests in developing and middle income countries. In pursuit of this mission, USTDA funds technical assistance, feasibility studies, orientation visits, and business workshops that support the development of a modern infrastructure and a fair and open trading environment. In 2007, USTDA reported funding and implementing about $23 million in TCB. About half of this TCB was in support of physical infrastructure development in the form of feasibility studies, training workshops, and technical assistance. The largest individual country recipients of TCB assistance from USTDA in 2007 were Burkina Faso ($1 million), Uganda ($1 million), and Vietnam ($1.1 million).

The U.S. Department of Agriculture The U.S. Department of Agriculture (USDA) provides most of its TCB through the Foreign Agriculture Service (FAS). In 2007, the USDA funded around $5.1 million and implemented around $15.8 million in TCB assistance. USAID funded about $11 million in projects that were implemented by USDA, and the Department of State funded another $6 million. About $8 million of the USDA-implemented activities were in the area of “traderelated agriculture,” which includes activities such as strengthening agricultural markets, support for agriculture technology development, improving environmental standards, biotechnology risk assessment, and technical assistance directly to producers. The next highest level of USDAimplemented activities was in technical assistance for developing countries to comply with WTO Sanitary and Phytosanitary (SPS) agreement, at nearly $3 million.

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Other U.S. Agencies Providing TCB Assistance Other U.S. government agencies provided smaller amounts of TCB Assistance, but were active in the TCB process. In FY2007, the U.S. Treasury Department provided advisors to various developing country governments in the areas of financial markets, budget management, debt management, tax administration, and financial law enforcement, implementing $18 million in TCB assistance. The Overseas Private Investment Corporation (OPIC) helps U.S. businesses invest in developing countries through financial instruments such as loans and political risk insurance. OPIC programs support profitable investments with development aims. In FY2007 OPIC implemented $27 million in TCB programs, mainly in the areas of physical infrastructure development and financial sector development. The Department of Commerce implemented about $17 million in TCB programs, including many by its Commercial Law Development Program (CLDP) in various

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areas of commercial legal development, as well as other programs by the Patent and Trademark Office and the National Institute of Standards and Technology. Most of Commerce’s TCB programs are funded by other agencies. The Department of Homeland Security implemented $3 million in TCB, mainly in the area of border security training for customs officials, funded by the State Department. The Peace Corps funded and implemented about $2 million in TCB assistance in 2006, mainly in e-commerce, business development, and tourism development. The Department of Energy implemented about $2 million in TCB assistance in the former Soviet Union republics, which was funded by the State Department. Other agencies have implemented programs totaling $4.7 million, including the Environmental Protection Agency ($2.1 million), the Federal Trade Commission ($0.6 million), Health and Human Services ($0.1 million), the Department of the Interior ($0.1 million), and the Department of Justice ($1.8 million).

TRADE CAPACITY BUILDING BY NON-U.S. DONORS Multilateral Trade Capacity Building

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TCB is provided by multilateral development banks such as the World Bank and the Inter-American Development Bank (IDB), and through multilateral funds managed by the WTO. TCB is also discussed in WTO negotiations. The WTO and the Organization for Economic Cooperation and Development (OECD) maintain a database of worldwide TCB activities, including multilateral and bilateral efforts.

The World Trade Organization Trade Capacity Building is commonly referred to as ‘Aid for Trade’ and ‘Trade-Related Technical Assistance’ (TRTA) within the WTO. Technical assistance is an important aspect of the WTO, because many developing country members need assistance in understanding, negotiating, and implementing WTO agreements. Developed countries have an incentive to provide such assistance, because it helps ensure that developing country members understand the negotiated agreements, and that they are able and willing to implement them. It may also encourage developing countries to reach agreement in multilateral trade negotiations such as the Doha round. The WTO provides TCB funded through its member-supported Doha Development Agenda (DDA) Global Trust Fund and through the separate Integrated Framework (IF), which the WTO participates in along with five other multilateral institutions. From January 2005 to September 2007, total contributions to the trust fund were about $47 million. Since the launch of the Doha round, the United States has contributed nearly $6 million to this fund; its most recent contribution was $1 million in April 2006. The WTO also serves as a forum for donors to hold each other accountable on TCB, and for developing countries to participate in the discussions. At the Hong Kong ministerial in December 2005, the United States pledged to double its spending on TCB to $2.7 billion by 2010, and other donors made similar pledges. The WTO is working with the OECD to monitor TCB globally, in order to provide an incentive for donors and developing countries to improve its effectiveness. As part of this effort, the United States and other member donor

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countries submit reports of bilateral TCB assistance to the WTO, which are then compiled and presented in a joint WTO/OECD Doha Development Agenda Trade Capacity Building Database.18 Technical assistance is also discussed as part of the WTO negotiations. Technical assistance that is specifically related to the various negotiating areas, such as trade facilitation, is discussed in the individual negotiating groups. In some negotiating areas, developing countries are explicitly not held responsible for upholding agreements that they do not have the capacity to implement, unless they are provided with adequate technical assistance. Discussions of cross-cutting issues related to technical assistance (such as whether to create a new fund for TRTA) take place in the Committee on Trade and Development, and within the newly formed Aid for Trade Task Force. The key objectives of the WTO’s Technical Cooperation and Training include enhancing beneficiary countries’ capacity to (1) address trade policy issues; (2) incorporate trade into national development and poverty reduction plans; (3) participate more fully in the multilateral trade system; (4) adjust to WTO rules and disciplines and implement obligations; and (5) exercise the rights of WTO membership.19 The WTO delivers TRTA in the form of courses, seminars, workshops, and conferences. In the past, critics have contended that the WTO provides too much superficial training to too many individuals. Perhaps in response to this criticism, the WTO drastically reduced the number of its TRTA activities: from 462 for 12,000 participants in 2005, to 206 activities for 7,400 participants in 2006. In 2002 the WTO reached an estimated 16,000 individuals through TRTA.20 The WTO provided $15.9 million in TRTA/TCB assistance in 2005.21

Aid for Trade Initiative The WTO Aid for Trade Task Force was established at the December 2005 Hong Kong ministerial conference. It was tasked with making recommendations to the WTO General Council on how to “operationalize” aid for trade, and how it might contribute most effectively to the DDA. The Task Force released its recommendations at a meeting of the WTO General Council on July 27, 2006, the same meeting where the General Council agreed to suspend the Doha round of negotiations. Despite the suspension of WTO negotiations, the Task Force recommended that countries continue to provide aid for trade, and that its recommendations still be implemented. They made this recommendation with the caveat that aid for trade “cannot be a substitute for the development benefits that will result from a successful conclusion to the DDA, particularly on market access.”22 At the October 2006 General Council meeting, WTO members reportedly agreed to endorse the recommendations of the Task Force.23 The recommendations of the Task Force include guidance on financing, defining, and overcoming some of the challenges associated with aid for trade. The Task Force recommends that aid for trade should be guided by the Paris Declaration on Aid Effectiveness, which focuses on key principles of country ownership, donor coordination, aligning aid to national development strategies, and monitoring and evaluation. The Task Force also recommends improving on the Integrated Framework (see next sub-section) and extending its needs-assessment process to developing countries that are not LDCs.24

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The Integrated Framework The Integrated Framework (IF) is a process that assists Least Developed Countries (LDCs) to integrate trade issues into their national development strategies. Two key goals of the IF are to better coordinate aid for trade globally and within countries (donor coordination); and to integrate aid for trade with general development assistance objectives. Six international institutions collaborate on the IF, including the World Bank, the WTO, the International Monetary Fund (IMF), the International Trade Center (ITC), the United Nations Conference on Trade and Development (UNCTAD), and the United Nations Development Program (UNDP). The IF is funded by an IF Trust Fund, composed of voluntary contributions from multilateral and bilateral donors. Total contributions to this trust fund equaled $49.7 million as of March 2007, of which the United States contributed $800,000. The first stage of the IF process is the development of a Diagnostic for a Trade Integration Study (DTIS), which is a lengthy study on an individual country identifying constraints to trade, sectors with the greatest export potential, and an action plan for integrating the country into the global trading system. The DTIS is produced collaboratively by beneficiary country government officials, economists from international institutions, and experts from bilateral donor countries including the United States. The DTIS includes an action plan, which is supposed to be integrated into the country’s national development strategy as part of the IF process. The national development strategy is usually the country’s Poverty Reduction Strategy Paper (PRSP), which is developed in partnership with the World Bank and IMF. Bilateral donors are expected to provide TCB to implement each country’s action plan, but small activities may be initially funded by the IF trust fund. According to the WTO, 47% of the IF’s budget has been used toward diagnostic activities and 53% has gone toward implementing priority assistance activities. Critics of the IF have said that it could be more effective if it included funding to implement more of the action plan, rather than leave the bulk of implementation funding up to bilateral donors. The IF steering committee is reportedly in the process of implementing the “Enhanced Integrated Framework,” which would raise extra money for more IF-implemented activities. Other concerns raised about the IF pertain to whether developing country officials and citizens are as involved in preparing the studies as they could be. Also, some observers believe that the IF should be extended to all developing country WTO members, and not just LDCs. As of November 2007, forty-five LDCs were at different stages of the IF process: 29 LDCs (23 from Sub-Saharan Africa) had completed their DTIS and national workshop to implement the action plan; eleven LDCs were in the process of developing a DTIS; and five had initial technical reviews under consideration.25 The World Bank The World Bank works on trade at both the global and country level. At the global level, the Bank conducts research and is involved in discussions on making the global trading system more supportive of development. At the country level, the Bank aims to build capacity in its member countries to (1) formulate and implement sound trade policy; (2) manage the adjustment costs of trade reform and external trade shocks; (3) participate effectively in international trade negotiations; and (4) develop appropriate regional trade policies. In 2005, the World Bank made global TCB commitments of about $121 million, including grants and loans (concessional and non-concessional). This amount is in addition to about $2.5 billion in

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infrastructure for transport, energy, and telecommunications. Most of the Bank’s TCB projects address export development, trade facilitation, and standards such as Technical Barriers to Trade (TBT) and SPS.26 The World Bank has been criticized by members of the non-governmental agency (NGO) and academic community for not defining clear TCB goals and policies, and not integrating TCB throughout its operations. The Bank is one of the six international institutions involved in the Integrated Framework.

Other Donor Bilateral Trade Capacity Building Many individual countries provide TCB through their own foreign assistance programs, and report such assistance to the OECD for inclusion in the joint OECD/WTO TCB database. Table 4 provides a summary of TCB assistance according to the OECD/WTO database. Data for the United States is included for the sake of comparison, as compiled by the OECD/WTO and not from the USAID database (therefore the numbers may not correspond exactly).

LEGISLATION ON TRADE CAPACITY BUILDING Congress has passed appropriations legislation providing funds and guidance for trade capacity building. Other legislation passed by Congress may restrict the provision of TCB, either by limiting which countries can receive certain types of funding or by limiting the types of activities in which foreign assistance may be provided.

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TCB Appropriations Funds are appropriated for TCB within the State and Foreign Operations Appropriations Act. The 110th Congress directed the administration to use at least $550 million of foreign aid appropriations for TCB in the Consolidated Appropriations Act of 2008 (P.L. 110-161). This amount must come from the following foreign aid accounts: Development Assistance (DA); Economic Support Fund (ESF); Assistance for Eastern Europe and Baltic States; Andean Counterdrug Programs; and Assistance for the Independent States of the Former Soviet Union, but does not include TCB from the MCC. There has been a slow and steady increase in funds allocated by Congress to TCB this way. In 2006, Congress recommended that at least $522 million should be made available for TCB assistance, of which $40 million ($20 million from DA and $20 million from ESF) were to be used for labor and capacity building activities relating to DR-CAFTA In previous years, Congress has designated somewhat lower amounts for TCB assistance. TCB was first included in Foreign Operations Appropriations in the FY2003 appropriations, with a total allocation of not less than $452 million, $159 million from DA, and $2.5 million from the U.S. Trade and Development Agency (TDA). In FY2004, the total allocation was not less than $503 million, of which $190 million from DA; and in FY2005 the total was $507 million, of which $194 million from DA. In FY2005 there was also an earmark of $20

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million from ESF to support TCB activities regarding labor and environment in the CAFTADR countries. Table 4. 2005 Commitments of TRTA/TCB by Donor, for Selected Donors (in millions of U.S. dollars)

Australia

Trade Policy and Regulations 13.4

Belgium Canada

0.7 14.5

32.6 3.4

0.3 3.9

50.8 28.3

84.4 50.1

Denmark

0.5

0.1

8.8

247.9

257.3

509.1

710.7

2.3

1,596.5

2,817.6

3.9 8.8 22.2 38.8

16.1 96.7 90.4 33.0

1.7 1.1 4.2 1.0

59.7 578.8 676.6 4,279.3

79.4 685.4 793.4 4,347.1

10.4

82.3

4.3

61.6

158.6

4.6 19.8 4.3

53.6 18.7 86.2

5.5 6.3 4.4

115.4 115.7 22.1

179.1 160.5 117.0

20.7

58.8

3.3

457.4

540.2

168.8

811.0

1.5

1,586.4

2,567.7c

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European Commission Finland France Germany Japan The Netherlands Norway Sweden Switzerland United Kingdom United States

Trade Developmenta

Trust Fund Contributions

Infrastructureb

0

0.6

14.5

28.5

Total

Source: 2006 Joint WTO/OECD Report on Trade-Related Technical Assistance and Capacity Building a. Some donors isolated the trade component of each activity, whereas others reported the whole activity marking it trade-related. The total amounts of TRTA/TCB in this category should therefore be treated with caution. (From the 2006 Joint WTO/OECD Report on Trade-Related Technical Assistance and Capacity Building.) b. Infrastructure includes all commitments to transport, energy and telecommunications, as such investments may have the potential to facilitate international trade. c. Does not correspond to total for 2005 from the USAID TCB database because the data was calculated differently.

In the 109th Congress, the House version of the FY2007 Foreign Operations, Export Financing, and Related Programs Appropriations Bill (H.R. 5522) would have included the creation of a Trade Capacity Enhancement Fund in the amount of $522 million, and an Office of the Director of Trade Capacity Enhancement within USAID. This new office would have been responsible for USAID’s TCB programs, as well as coordinating government-wide TCB programs of all U.S. agencies. These changes in the funding and management of TCB would have represented an initiative to make TCB a higher priority. They also prompted concerns about restricting the administration’s flexibility to allocate foreign aid and draining resources

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from other foreign assistance priorities. The Senate version of the bill did not include this new fund or office, and neither did any of the 2007 Continuing Resolution bills.

Legislative Limitations on TCB In the mid-1980s, Congress passed legislation restricting the use of foreign development assistance programs in response to problems in the U.S. farm economy. Some observers maintain that USAID developed policies that were more restrictive than necessary, as a result of the agency’s sensitivity to congressional criticism.27 One widely cited legislative restriction on USAID’s trade-related activities is known as the Bumpers Amendment, which was first introduced in the Urgent Supplemental Appropriations Act of 1986, (Section 209 of P.L. 99349). The Bumpers Amendment states that no U.S. development assistance funds may be used for agricultural development activities for a commodity that would compete with a commodity grown or produced in the United States. There are two exceptions to the Bumpers Amendment: (1) where the activity is designed to increase food security in developing countries and it would not have a significant impact in the export of agricultural commodities to the United States; and (2) in the case of a research activity intended primarily to benefit American producers. USAID officials have cited the Bumpers Amendment as restricting TCB assistance in agriculture, for example in the provision of assistance to West African cotton farmers. In addition to restrictions on agricultural assistance, there are other restrictions on U.S. foreign assistance that affect TCB assistance. One such restriction, originating in the FY1993 Foreign Operations Appropriations (Section 599 of P.L. 102-391), prohibits funds to be used as a financial incentive for a U.S. firm to relocate outside of the United States, to establish or develop an export processing zone (EPZ) in a foreign country, or for any project that would contribute to the violation of internationally recognized workers’ rights.28 Other restrictions affect aid to particular countries, such as in the Nethercutt Amendment (P.L. 109-102 Section 574), which restricts ESF assistance to countries that are a party to the International Criminal Court (ICC) and have not signed an Article 98 agreement.29 These statutory restrictions are catalogued and summarized by USAID.30

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POLICY ISSUES Motivations for Trade Capacity Building Trade capacity building is generally regarded as an activity taken on by the United States and other donors for altruistic purposes: to help developing countries benefit from trade and achieve poverty reduction. There are other possible motivations for TCB that are not as altruistic. One possible motivation is to create markets for U.S. exports. TCB might achieve this objective indirectly by increasing developing countries’ incomes, which would in turn would allow developing countries to import more goods from the United States. TCB can more directly create markets for U.S. exports by influencing developing countries’ policies (such as technical standards) to be more open to U.S. goods, and by promoting development

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in sectors that would likely require imports of intermediate products and capital goods from the United States. The U.S. Export-Import Bank facilitates this process, by providing loans to businesses in developing countries to import American capital goods such as factory equipment. Another possible motivation for providing TCB is to gain the cooperation of developing countries in trade negotiations, both bilateral and multilateral. By helping trade officials in developing countries understand the technical aspects of an agreement, they are more likely to complete negotiations and implement the agreement. Developing countries are also more likely to be agreeable in negotiations if they expect to receive assistance in implementing the agreement. An example of this can be found in the trade facilitation negotiations of the WTO Doha Round. At first, developing countries did not want trade facilitation to be part of the round at all. However, once they started receiving technical assistance in trade facilitation and technical assistance became part of the trade facilitation negotiations, the negotiations moved along more easily than other negotiating areas. Also, technical assistance in trade facilitation caused some countries to make unilateral trade facilitation reforms without any obligation under a WTO agreement. Critics of U.S. trade policy contend that TCB may be used to deflect attention from a failure of the United States and other donor countries to adopt pro-poor trade reform. They point to high U.S. tariffs on imports produced by developing countries and trade-distorting agricultural subsidies. Other critics believe that U.S. TCB is influenced more by political objectives than development goals. They note that Iraq was the third-largest recipient of U.S. TCB funds in 2005, after Honduras and Nicaragua, which both received the majority of their TCB assistance from the Millennium Challenge Corporation. Some observers have also questioned whether the administration uses TCB as a way to influence developing country trade policies without going through the trade negotiations process.

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Conflicting Interests Trade capacity building may conflict with some perceived U.S. interests. Building the negotiating capacity of developing countries may make reaching agreement easier, but it might also help them to negotiate more aggressively against U.S. positions. Also, assisting developing countries to be more competitive in world markets may help them to compete against U.S. businesses. However, the same argument can be made for the benefits of increased competition through TCB as through trade liberalization. Increased competition tends to increase firm productivity and may benefit both consumers and workers through decreased consumer prices and increased wages. As in trade liberalization, however, the benefits and losses associated with increased competition can be unevenly distributed in the economy, causing some regions and industries to suffer losses of jobs and incomes disproportionately. Although, one major difference with general trade liberalization is that most TCB recipients are poor countries that are not likely to provide major competition to U.S. business. Exceptions to this difference may be found in a few major agricultural and textile producers who receive TCB assistance.

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Challenges for Trade Capacity Building One major challenge for TCB as an area of foreign assistance is to coordinate assistance with the trade policy agenda, and to effectively integrate TCB assistance and trade into developing countries’ national development strategies. Changing trade policies, such as reducing trade barriers through a free trade agreement (FTA), may require new types of assistance to help developing countries benefit from trade. In this way, trade is not an end in itself but a tool for development. To fully utilize trade as a tool for development, it also needs to be considered in all aspects of development planning. Economic and social policies that have been considered separately from trade in the past may have an effect on a country’s competitiveness and ability to benefit from trade, therefore policymakers should have an appreciation for possible trade implications when they are making development plans. One possible challenge in integrating trade with development planning is that national development strategies are typically planned on a relatively long time-frame through processes such as the Poverty Reduction Strategy Paper (PRSP),31 while trade needs can change more quickly. As a result, there may be tension between responding to changing trade needs and long term development planning. Another major challenge for TCB is international donor coordination. TCB assistance is provided by a wide range of donors in a multitude of sectors, and there has been some overlap and duplication among donors. This overlap and duplication of efforts is not only wasteful, but it can cause confusion and make programs less effective. Demand-driven TCB assistance, where donors provide assistance based on the strategies and requests of recipient governments, has inherent benefits and may help facilitate donor coordination. For TCB assistance to be demand-driven, recipients need to be proactive in assessing and communicating their needs, and donors need to orient their assistance around those stated needs. One example of this has been in the TCB provided alongside the CAFTA-DR negotiations, where there was close communication between USAID, USTR, and the recipient governments in the context of the negotiations.32 There is concern that some TCB recipient countries may lack the capacity to assess and prioritize their needs, which would hinder achieving demand-driven assistance. TCB recipients have complained that they lack the capacity to coordinate the assistance they receive from various donors. It is especially difficult when the assistance comes in the form of multiple short-term projects rather than a long term strategy that is coordinated with national development plans. Some steps toward international donor coordination have reportedly been taken, notably through the OECD and the WTO. Donor coordination has been hampered because donor countries and organizations generally prefer to take credit for their efforts, and they tend to have different strategies and mechanisms for planning and implementing foreign assistance. This leads to assistance being supply-driven, that is, driven by what donor countries are able and willing to provide. According to experts, assistance must be driven by the partner country’s own needs, goals and strategies to be effective, rather than being driven by the donor country’s administrative priorities.33 OECD members agreed to implement this principle of foreign aid in the Paris Declaration on Aid Effectiveness.34 Evaluating the effectiveness of TCB is another challenge. The U.S. Government Accountability Office (GAO) issued a report in February 2005 which determined that the United States government does not effectively monitor and evaluate the effectiveness of TCB programs. It recommended that USAID and USTR work together to develop a strategy, in

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consultation with other U.S. agencies that provide TCB, for evaluating TCB effectiveness.35 USTR and USAID have responded to this recommendation, and are reportedly in the process of developing evaluation mechanisms. Measuring the effectiveness of TCB can be difficult, because meaningful indicators are not readily available. Changes in trade volumes and other high level indicators are not necessarily attributable to TCB. Trade volumes respond to many factors, of which TCB is just one and not as significant in the short term as economic factors such as commodity price fluctuations. Lower level indicators, such as the number of people trained in WTO negotiations, may be entirely attributable to TCB, but they do not say much about the effects of such training. According to the OECD, the most measurable and positive outcome of TCB has been in the awareness of WTO issues, participation in the Doha round negotiations, and the development of a national policy dialogue on trade among the various stakeholders in business, government, and civil society. The OECD finds that where this dialogue has been most robust, TCB has been most effective.36 This finding may be key in developing a framework for evaluating TCB. An ongoing challenge for U.S. TCB is that it is just one area in which the United States provides development assistance, and it must compete with other priorities for limited resources. Some of these other development priorities involve responding to emergencies where lives are at stake, such as aid in response to natural disasters, conflict situations, and severe health concerns. It may be difficult to argue for funding for TCB when other areas of assistance are needed to help people survive. TCB may not directly save lives, but it could in the long term reduce countries’ vulnerability in dire situations by helping to increase incomes and reduce poverty.

END NOTES

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1

Data was self-reported by U.S. government agencies and can be found on the U.S. Trade Capacity Building Database website, [http://qesdb.usaid.gov/tcb/index.html]. 2 Aid for Trade at a Glance 2007: 1st Global Review, Organization for Economic Cooperation and Development and the World Trade Organization. November 2007. 3 For more information on the Doha round negotiations, see CRS Report RL32060, World Trade Organization Negotiations: The Doha Development Agenda, by Ian Fergusson. 4 International Lawyers and Economists Against Poverty (ILEAP), “Aid for Trade — Why and How?” 5 See CRS Report 97-389, Generalized System of Preferences, by William H. Cooper. 6 AGOA (PL 106-200) was signed into law in 2000. See CRS Report RL31772, U.S. Trade and Investment Relationship with Sub-Saharan Africa: The African Growth and Opportunity Act and Beyond, by Danielle Langton. 7 Richard Newfarmer and Dorota Nowak,”The World Bank in Trade: The New Trade Agenda,” in Richard Newfarmer (ed), Trade, Doha, and Development: A Window into the Issues. World Bank. November 2005. 8 Bernard Hoekman and Susan Prowse, “Policy Responses to Preference Erosion: From Aid as Trade to Aid for Trade,” Presented at the international symposium Preference Erosion: Impacts and Policy Responses, Geneva, June 13-14, 2005. 9 International Lawyers and Economists Against Poverty (ILEAP), “Operational Modalities for the Aid for Trade Initiative,” Background Brief No. 11, April 2006. 10 Congressional Budget Office, Assisting the Developing Countries: Foreign Aid and Trade Policies of the United States, September 1980. 11 Bernard Hoekman, Will Martin, and Carlos A. Primo Braga, “Preference Erosion: The Terms of the Debate,” in Richard Newfarmer (ed), Trade, Doha, and Development: A Window into the Issues. World Bank. November 2005.

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12

Eric Miller, Achievements and Challenges of Trade Capacity Building: A Practitioner’s Analysis of the CAFTA Process and its Lessons for the Multilateral System, Occasional Paper 32. Inter-American Development Bank. October 2005. 13 Jan Ubels, Thomas Theisohn, Volker Hauck, Tony Land, From local empowerment to aid harmonization. Published by ECDPM, SNV, UNDP, 2005. 14 For more information about the history of U.S. foreign assistance, see Samuel Hale Butterfield, U.S. Development Aid — An Historic First: Achievements and Failures in the Twentieth Century. Praeger: Westport, CT, 2004. 15 Michel Kostecki, Technical Assistance Services in Trade-Policy: A contribution to the discussion on capacitybuilding in the WTO. International Center for Trade and Sustainable Development (ICTSD). 2001. 16 Unless otherwise noted, all figures and data in this section are compiled and calculated from the USAID Trade Capacity Building Database. This database provides self-reported data from U.S. agencies on their TCB activities. Agency officials include particular activities in the database at their own discretion. Therefore, the database may understate U.S. TCB assistance, but it probably does not overstate such assistance. Available online at [http://qesdb.cdie.org/tcb/index.html]. 17 For more information about the MCC, see CRS Report RL32427, Millennium Challenge Account, by Curt Tarnoff. 18 Available at [http://tcbdb.wto.org/index.asp?lang=ENG]. 19 2005 Joint WTO/OECD Report on Trade-Related Technical Assistance and Capacity Building, December 2005. 20 World Trade Organization Committee on Trade and Development, Technical Cooperation Audit Report for 2006, Note by the Secretariat. WT/COMTD/W/158, May 7, 2007. 21 2006 Joint WTO/OECD Report. 22 World Trade Organization Aid for Trade Task Force, Recommendations of the Task Force on Aid for Trade. WT/AFT/1. July 27, 2006. 23 “GC: Members Endorse Recommendations on Aid for Trade, SVEs,” Bridges Weekly Trade News Digest. Vol. 10, No. 33. October 11, 2006. 24 International Monetary Fund and the World Bank, Doha Development Agenda and Aid for Trade, August 9, 2006. 25 For more detailed information, see [http://www.integratedframework.org]. 26 2005 Joint WTO/OECD Report. 27 “Trade Associations and Foreign Aid: U.S. Commodity and Industry Interests and A.I.D. Trade Development Activities,” Agricultural Policy Analysis Project, Phase II, January 1991. Abt Associates, sponsored by the U.S. Agency for International Development. 28 This legislation developed out of a controversy where USAID had allegedly funded EPZs and other incentives for U.S. businesses to relocate overseas. See CRS Report 92-931 F, Foreign Aid’s Role in Private Sector Promotion in Developing Countries: The Controversy Over the U.S. Agency for International Development, by Erin Day (archived; available from the author). 29 An Article 98 agreement prevents the ICC from proceeding against U.S. personnel present in that country. See CRS Report RL31495, U.S. Policy Regarding the International Criminal Court, by Jennifer K. Elsea. 30 See “FY2007 Statutory Checklists: An Additional Help for ADS Chapter 202,” USAID. Revision Date: 4/5/2007, Responsible Office: GC, File Name: 202sac_040507_cd47. 31 The PRSP is a national development strategy designed in partnership with the beneficiary country, the World Bank, and the International Monetary Fund (IMF). 32 For more information about TCB in the CAFTA-DR negotiations, see Eric Miller, Achievements and Challenges of Trade Capacity Building: A Practitioner’s Analysis of the CAFTA Process and its Lessons for the Multilateral System, Occasional Paper 32. Inter- American Development Bank. October 2005. 33 Organization for Economic Cooperation and Development, The Development Dimension: Aid For Trade: Making it Effective. July 2006. 34 OECD, The Paris Declaration on Aid Effectiveness. March 2, 2005. 35 U.S. Government Accountability Office, Foreign Assistance: U.S. Trade Capacity Building Extensive, but Its Effectiveness Has Yet to be Evaluated. Report to Congressional Requesters. GAO-05-150. February 2005. 36 Organization for Economic Cooperation and Development, The Development Dimension:Aid For Trade: Making it Effective. July 2006.

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In: U.S. Trade with Developing Countries Editor: Kalan R. Geisler

ISBN: 978-1-60741-122-2 © 2009 Nova Science Publishers, Inc.

Chapter 7

U.S. TRADE PREFERENCE PROGRAMS PROVIDE IMPORTANT BENEFITS, BUT A MORE INTEGRATED APPROACH WOULD BETTER ENSURE PROGRAMS MEET SHARED GOALS *

United States Government Accountability Office WHY GAO DID THIS STUDY

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U.S. trade preference programs promote economic development in poorer nations by providing export opportunities. The Generalized System of Preferences, Caribbean Basin Initiative, Andean Trade Preference Act, and African Growth and Opportunity Act unilaterally reduce U.S. tariffs for many products from over 130 countries. However, three of these programs expire partially or in full this year, and Congress is exploring options as it considers renewal. GAO was asked to review the programs’ effects on the United States and on foreign beneficiaries’ exports and development, identify policy trade-offs concerning these programs, and evaluate the overall U.S. approach to preference programs. To address these objectives, we analyzed trade data, reviewed trade literature and program documents, interviewed U.S. officials, and did fieldwork in six countries.

WHAT GAO RECOMMENDS GAO recommends that USTR periodically review beneficiary countries that have not been considered under the regional programs. Additionally, USTR should periodically convene relevant agencies to discuss the programs jointly.

*

This is an edited, reformatted and augmented version of GAO-08-443 Report to the Committee on Finance, US Senate, Chairman Committee Ways and Means, and House of Representatives GAO-08-443 dated March 2008.

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Congress should consider whether trade preference programs’ review and reporting requirements may be better integrated to facilitate evaluating progress in meeting shared economic development goals. To view the full product, including the scope and methodology, click on GAO-08-443. For more information, contact Loren Yager at (202) 512-4347 or [email protected].

WHAT GAO FOUND

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Overall, trade preference programs have a small effect on the U.S. economy. Some U.S. industries have shared-production arrangements with foreign producers that depend on preference benefits, while others compete with preference imports. Preference programs are used to advance U.S. goals, such as intellectual property rights protection. Developing countries extensively use preferential access to boost exports to the United States. Preference imports have grown faster than overall U.S. imports, and recent changes in product coverage have expanded beneficiaries’ export opportunities. Gaps in duty-free access continue for sectors such as agriculture and apparel. Preference exports remain concentrated in a few countries and products, but trends indicate greater diversification and increased use by the poorest countries. Those GAO interviewed in beneficiary countries also stressed the benefits derived from preferences. Preference programs balance two key policy trade-offs. First, programs offer duty-free access to the U.S. market to increase beneficiaries’ trade, while attempting not to harm U.S. industries. Second, Congress faces a trade-off between longer program renewals, which may encourage investment, and shorter renewals, which may provide more opportunities to change the programs to meet evolving priorities. Finally, some beneficiary countries’ concerns over the eroding value of preferences must be weighed against the likely greater economic benefits of broader trade liberalization. Trade preference programs have proliferated over time, becoming more complex (as shown below), but neither Congress nor the interagency Trade Policy Staff Committee that manages the programs has formally considered them as a whole. Responsive to their legal mandates, the Office of the U.S. Trade Representative (USTR) and other agencies use different approaches to monitor compliance with program criteria, resulting in disconnected review processes and gaps in reporting on some countries and issues. Separate reporting and examination also hinder measuring programs’ contribution to economic development. March 7, 2008 Honorable Max Baucus Chairman Committee on Finance United States Senate The Honorable Charles B. Rangel Chairman Committee on Ways and Means House of Representatives

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Growth of Trade Preference Programs Source: GAO analysis of USTR documents on Generalized System of Preferences, African Growth and Opportunity Act, Andean Trade Preference Act, and Caribbean Basin Initiative.

In an effort to promote and achieve various U.S. foreign policy objectives, trade preference programs have expanded in number and scope over the past three decades. The purpose of these programs is to foster economic development through increased trade in qualified beneficiary countries while not harming U.S. domestic producers. The trade preferences, which reduce tariffs, or duties, for many products from eligible countries, are “nonreciprocal”—they are granted unilaterally, without requiring reciprocal liberalization for U.S. goods for countries receiving them. Currently, the United States offers the Generalized System of Preferences (GSP) and three regional programs, the Caribbean Basin Initiative (CBI), the Andean Trade Preference Act (ATPA), and the African Growth and Opportunity Act (AGOA). As we noted in our previous report on U.S. trade preference programs,1 these programs represent a small share of total U.S. imports, but they constitute a significant share of many beneficiary countries’ exports to the United States. Imports under U.S. preference programs have grown sharply since 2002. In 2006, imports through U.S. trade preference programs totaled approximately $92 billion—about 5 percent of total U.S. goods imports. However, while U.S. preference programs are widely used, concerns exist about perceived shortcomings in these programs. For example, frequent program lapses and renewals have created uncertainty about program availability, and questions have been raised about effectiveness. This year, three preference programs expire partially or in full; as a result, Congress is exploring options for improvements as it considers program renewal. At your request, in this report, we (1) describe how U.S. preference programs affect the United States, (2) review the effects of U.S. preference programs on foreign beneficiaries’ exports and development, (3) identify the trade-offs policymakers face with respect to U.S. preference programs, and (4) evaluate the overall U.S. approach to preference programs. To address these objectives, we reviewed and analyzed U.S. laws and regulations and authoritative international trade documents. We analyzed official U.S. trade data and we spoke with officials from agencies participating in the Trade Policy Staff Committee (TPSC)—including the Office of the U.S. Trade Representative (USTR)—and reviewed and analyzed documentation we received from the agencies. We conducted a literature search on

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the impacts of U.S. preference programs on the United States and on foreign beneficiaries. We attended the sixth AGOA Forum in Accra, Ghana, in July 2007. We also traveled to Brazil, Colombia, Haiti, Kazakhstan, and Turkey to meet with U.S. embassy officials, foreign officials, and industry groups using U.S. preference programs. We selected at least one country from each of the preference programs based on income levels according to the World Bank and United Nations and the spectrum of issues related to usage and capacity of each of the programs in-country (for more information on the how we selected these countries, see the full scope and methodology in app. I). We conducted this performance audit from March 2007 to February 2008 in accordance with generally accepted government auditing standards. Those standards require that we plan and perform the audit to obtain sufficient, appropriate evidence to provide a reasonable basis for our findings and conclusions based on our audit objectives. We believe that the evidence obtained provides a reasonable basis for our findings and conclusions based on our audit objectives.

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RESULTS IN BRIEF Overall, the effect of trade preference programs on the U.S. economy is small. Nevertheless, preference programs have economic effects on U.S. businesses, consumers, and the federal budget, and they provide an opportunity to advance U.S. trade and foreign policy. Effects on U.S. industries and individual businesses vary, as some have shared-production arrangements with foreign producers that depend heavily on duty-free preference benefits, while others compete with imports benefiting from preferences. U.S. consumers benefit to the extent that tariff savings result in lower prices on some products. Program costs include the loss of tariff revenues that would otherwise accrue to the U.S. Treasury. Preference programs have been used to advance U.S. foreign policy goals in areas such as intellectual property, labor, and human rights, as well as on broader market-oriented and democratic governance reforms. Periodic reviews under some of the programs provide the United States leverage to engage with governments and motivate policy change. By providing new opportunities, preferences can increase U.S. imports from developing countries and thus promote their economic development. Our analysis of U.S. tariff and trade data shows that U.S. trade preference programs now offer relatively extensive opportunities to many developing countries to increase their sales to the United States and have resulted in increased and somewhat more diversified U.S. imports from them. Gaps in product and associated duty-free coverage persist, continuing to limit beneficiaries’ export options, in sectors such as agriculture and apparel; however, some key products that would otherwise face high tariffs have been added to regional programs, increasing their likely benefit to development. Available preferences are highly used by most partners, particularly countries that have access to regional programs. Fuel now accounts for more than half of the value of preference trade, but expansion of programs also appears to have helped the poorest countries increase their share of total preference exports. Nevertheless, some countries lack capacity to take advantage of the available preference opportunities. For example, 34 of the 46 beneficiaries designated as “least-developed” barely used U.S. preferences in 2006. Nevertheless, those we met in the varied range of beneficiary countries visited stressed the

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benefits they derive from preferences and the importance of continuing them to their trade and development. The nature and evolution of the U.S. trade preference programs require trade-offs among competing policy goals. One key trade-off balances the programs’ goals of aiming to expand U.S. imports from developing countries and of not harming U.S. industries. Balancing this tension has, in some cases, resulted in products of importance to developing countries being excluded from preference programs. Attempts to target preferential trade opportunities to the poorest countries, while phasing out benefits to more competitive countries, may benefit countries other than those targeted. A second trade-off concerns the periodic renewal of program benefits. Private sector representatives have indicated that giving programs longer renewal periods or making them permanent would help beneficiaries attract the investment necessary to derive significant development benefits from the programs. However, program renewals offer an opportunity to engage with beneficiary countries on broader policy goals. Finally, the balancing of these trade-offs takes place against a backdrop of increasing global trade liberalization—a primary U.S. trade objective—which makes the benefits of preference programs less consequential to beneficiaries. Some developing countries have cited this concern in resisting liberalization, even though evidence suggests that, in many cases, there are greater economic benefits from trade openness compared with the costs associated with erosion of preferences. Separate approaches to preference programs impede assessing whether they are meeting their collective goal of economic development for beneficiary countries. Over time, trade preference programs have increased in number and complexity, but Congress and the interagency TPSC that manages the programs consider them separately. While following statutory requirements, agencies’ approaches to monitoring compliance with program criteria nevertheless result in disconnected review processes that are separate from ongoing U.S. efforts to protect intellectual property rights, such as the Special 301 Review, and to combat trafficking in persons; they also result in gaps in reporting on some countries. For example, the TPSC may not review countries under the preference programs that are not beneficiaries of a regional program against the eligibility criteria for a long period of time. Based on statutory directions and available resources, the U.S. government also pursues different approaches to trade capacity building in conjunction with the various trade preference programs, with AGOA having the clearest statutory direction. Different approaches agencies use to report on these programs impede an integrated assessment of progress made under U.S. trade preferences to foster development in beneficiary countries. As Congress deliberates on whether to renew the ATPA, Caribbean Basin Trade Partnership Act (CBTPA), and GSP programs this calendar year, it should consider whether a more integrated approach would better ensure programs meet shared goals. Specifically, Congress should consider which elements of the approaches used by agencies to administer these programs, such as petition-initiated compliance reviews or periodic assessment of all countries under certain programs, have benefits that may be applied more broadly to trade preference programs in general. Congress should consider streamlining various program reporting requirements to facilitate evaluating the programs’ progress in meeting their shared economic development goal. We are recommending in this report that USTR periodically review preference beneficiaries that have not otherwise been reviewed by virtue of their membership in the regional programs. Additionally, USTR should periodically convene the TPSC to discuss the

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programs jointly to determine what lessons can be learned from the various provisions concerning matters such as linkages to trade capacity building. USTR should also work through the TPSC and its associated agencies to consider ways to administer, evaluate, and report on preference programs in a more integrated manner to ensure the programs, as a whole, meet their shared goals. We provided draft copies of this report to USTR, the U.S. International Trade Commission (ITC), the Department of Homeland Security’s U.S. Customs and Border Protection Agency, the U.S. Agency for International Development (USAID), and the Departments of Agriculture, Commerce, Labor, State, and Treasury. USTR and the Departments of Agriculture, Labor, Commerce, Treasury, and State provided extensive technical comments on an interagency basis. Customs, Labor, State, and ITC also provided separate technical comments. We have incorporated these comments where appropriate. USTR indicated that it would report on the actions taken in response to the recommendations in a letter, within 60 days of public issuance of this report, as required under U.S. law.

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BACKGROUND The United States extends unilateral tariff reductions to over 130 developing countries through one general trade preference program (GSP) and three regional programs—CBI, ATPA, and AGOA (see table 1). The preference programs are tools that the U.S. government uses to assist countries in the developing world. At the United Nations Conference on Trade and Development (UNCTAD) in 1964, developing countries asserted that one of the major impediments to their accelerated economic growth and development was their inability to compete with developed countries in the international trading system; the developing countries argued that preferential tariffs would allow them to increase exports and foreign exchange earnings necessary to diversify their economies and reduce dependence on foreign aid. The rationale for trade preferences was that poorer countries need to develop industrial capacity for manufacturing in order to move away from dependence on imports and production of traditional commodities that could be subject to declining prices in the long term. It was argued that poorer countries also needed time to retain some protection to develop their “infant industries,” but that increases in exports would be necessary to help countries capture economies of scale in production and earn foreign exchange. In addition, it was evident that some provision for the elimination of preferences once the industries were firmly established was necessary. The argument was that trade preferences should be temporary, introduced for a period of no less than 10 years with respect to any given industry in any developing country. At the end of the 10-year period, preferences would be withdrawn unless it could be shown that special circumstances warranted their continuation. At the second UNCTAD conference in New Delhi in 1968, the United States joined other participants in supporting a resolution to establish a mutually acceptable system of preferences. In order to permit the implementation of the generalized preferences, in June 1971 the developed countries, including the United States, were granted a 10-year waiver from their obligations under the global trading system, now embodied in the World Trade Organization (WTO), to trade on a most favored nation (MFN)2 basis. Following the granting

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of this waiver, developed countries created their GSP programs, and Congress enacted the U.S. GSP program in January 1975. The United States maintained that GSP was a temporary program to advance trade liberalization in the developing world, but it recognized the need to address the legal basis for granting these preferences, in anticipation of the expiration of the waiver in 1981. An agreement was reached at the 1979 conclusion of the Tokyo Round of Multilateral Trade Negotiations, known as the “Enabling Clause,” which has no expiration date and replaces the waiver. Because the Enabling Clause applies to preference regimes that are “generalized, non-reciprocal, and non-discrimatory,” separate waivers have been sought for U.S. regional preference programs.3 Table 1. U.S. Trade Preference Programs

Enactment date

GSP

January1975 • Several amendments

131

CBIa • Caribbean Basin Economic Recovery Act (CBERA)

• August 1983

19

• Caribbean Basin Economic Recovery Expansion Act

• Amended August 1990

• Caribbean Basin Trade Partnership Act (CBTPA) • Haitian Hemispheric Opportunity through Partnership Encouragement (HOPE) Act ATPAb • Andean Trade Promotion and Drug Eradication Act (ATPDEA) AGOAc Copyright © 2010. Nova Science Publishers, Incorporated. All rights reserved.

Number of eligible countries, 2007

Program

• May 2000

9

• December 2006

1

December 1991 • Amended August 2002 May 2000 • Several amendments

4 4 39

Source: GAO. aCBI is a collection of several trade preference programs. It was initially established in 1983 through CBERA, Pub. L. No. 98-67, Title II, 97 Stat. 384 (1983) and expanded in 1990 by the Caribbean Basin Economic Recovery Expansion Act, Pub. L. No. 101-382, Title II, 104 Stat. 655. It was substantially expanded in 2000 by CBTPA, Pub. L. No. 106-200, Title II, 114 Stat. 275 (2000). The most recent change to CBI was made by the HOPE Act of 2006, Pub. L. No. 109-432, Div. D., Title V, 120 Stat. 3181 (2006). In this report, we at times describe HOPE separately from CBI to illustrate the key characteristics of HOPE. bPub. L. No. 102-182, Title II, 105 Stat. 1236, as amended. ATPA was substantially expanded in 2002 by ATPDEA, Pub. L. No. 107-210, Div. C. Title XXXI, 116 Stat 1023 (2002) and amended in 2006 by the Andean Trade Preferences Extension Act, Pub. L. No. 109-432, Div. D, Title VII, 120 Stat. 3194 (2006). cPub. L. No. 106-200, Title I, 114 Stat. 252 (2000), as amended.

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The GSP program seeks to accelerate economic growth and development in developing countries by providing access to the U.S. market. GSP establishes a basic level of product coverage common to all the preference programs. Over the years, Congress has also enacted a series of regional trade preference programs that have evolved to address U.S. foreign policy objectives beyond the shared general objective of promoting economic development. The regional programs expand on GSP to cover additional products that are not covered by GSP, including some apparel, footwear, and certain leather-related products. While regional programs may generally have more liberal conditions for product entry than GSP, these differences are more likely to affect products for which countries cannot receive GSP benefits (e.g., textiles and apparel). CBI was created to promote economic and political stability in the Central America and Caribbean region, to diversify exports, and to expand trade between those countries and the United States. ATPA was established to combat drug production and trafficking by providing sustainable economic alternatives to beneficiary countries in the Andean region of South America. AGOA was set up to facilitate Sub-Saharan Africa’s integration into the global economy. The regional preference programs have some eligibility criteria that overlap with GSP, but the regional programs also set forth additional eligibility criteria that are not part of the GSP statute. In order to be eligible for AGOA, a country must also be eligible for GSP. In addition, all preference programs contain certain common eligibility requirements, such as having national policies to ensure workers’ rights and protect intellectual property. Regional program beneficiary countries are subject to more extensive eligibility criteria than GSP beneficiary countries. For example, ATPA requires cooperation with U.S. counternarcotics and antiterrorism efforts, and AGOA requires that countries be making progress toward political pluralism and not commit gross violations of human rights. Eight agencies have key roles in administering U.S. trade preference programs. Led by USTR, they include the Departments of Agriculture, Commerce, Homeland Security, Labor, State, and Treasury, as well as ITC. USTR utilizes an interagency mechanism, the TPSC, and its associated subcommittees to consult and coordinate with these and other agencies such as USAID. This year, ATPA4, CBTPA,5 and GSP6, expire, and Congress will need to and explore the option of renewing these programs. At the same time, legislative proposals to provide additional, targeted benefits for the poorest countries are pending. In addition to examining the benefits trade preference programs provide, Congress will need to consider concerns by beneficiary and other developing countries, industry groups, and economic experts surrounding these programs. Such concerns include the potential for diversion of trade from other countries that these programs can cause; the complexity, scope of coverage, certainty, and conditionality of these programs; and the potential opposition to multilateral and bilateral import liberalization that preference programs can create.

PREFERENCE PROGRAMS HAVE SOME ECONOMIC EFFECTS ON THE UNITED STATES AND PROVIDE AN OPPORTUNITY TO ADVANCE U.S. FOREIGN POLICY The overall effects of trade preference programs on the U.S. economy are small, but preference programs have direct effects on U.S. businesses, consumers, and the federal

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budget. Effects on U.S. industries and individual businesses vary; some have sharedproduction arrangements with preference beneficiaries, while a few U.S. industries compete with imports benefiting from preferences. U.S. consumers have benefited from lower prices resulting from duty-free imports under trade preference programs, while tariff revenues to the U.S. Treasury have been lower because of foregone tariff revenues. In addition, preference programs serve as a tool to advance U.S. foreign policy objectives. Table 2. U.S. Preference Imports, 2006 Dollars in billions Total U.S. imports

Total preference importsa

Total: $1,845

$36 (AGOA) 33 (GSP) 13 (ATPA) 10 (CBI) $92

Percentage of U.S. imports 2% 1.8 0.7 0.5 5%

Source: GAO analysis of official U.S.trade statistics. a CBI includes CBTPA imports, and ATPA includes ATPDEA imports. Shares are based on dollar value of imports. Program values are based on preferences actually claimed upon entry.

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The Overall Effect of Trade Preference Programs on the U.S. Economy is Small Imports under preference programs represent a small share of total U.S. imports. As shown in table 2, U.S. preference imports across all programs accounted for about 5 percent of U.S. imports in 2006. In general, studies of the effects of preference programs on the U.S. economy find that the overall impact is small. For example, the ITC consistently finds in its biennial reports on ATPA7 and CBI8 that the impact of imports from these programs on the U.S. economy is minor. In the most recent ITC reports on ATPA and CBI, ITC reported again that the overall effect of imports from these programs on the U.S. economy continued to be negligible, representing only 0.09 percent and 0.10 percent, respectively, of the U.S. gross domestic product in 2005. Similarly, in January 2008, the Congressional Research Service concluded that the overall effects of GSP on the U.S. economy are relatively small and that the rate of increase of imports entering under GSP in the past 10 years is relatively flat, indicating that there may be little impact on the U.S. market as a whole by extending these preferences.9

Trade Preference Programs Have Direct Effects on Some U.S. Businesses, Consumers, and the Federal Budget Businesses Some U.S. industries and individual businesses have shared-production arrangements with foreign producers that depend heavily on duty-free preference benefits. Over the last two decades, U.S. producers of apparel have come to rely on “outward processing arrangements.”

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In such arrangements, U.S. factories focus on relatively capital-intensive operations, such as fabric production. Fabrics and components are then shipped to CBI, ATPA, or AGOA countries, where factories conduct the relatively labor-intensive business of assembling the finished garments. In addition, U.S. manufacturers and importers benefit from the lower cost of consumer goods and raw materials imported under preference programs, such as jewelry, leather, and aluminum imported through GSP. Furthermore, U.S. manufacturers also rely on and benefit from intermediate goods from preference beneficiary countries. For example, Brazil is a major user of GSP. In 2006, 10 percent of all nonfuel imports to the United States from all preference programs came from Brazil.10 Much of what Brazil ships to the United States under GSP are intermediate goods produced by U.S.-affiliated multinational companies. Once exported to the United States, these goods are further processed or incorporated into U.S.manufactured goods such as cars and power generators. Given the importance of these intermediate goods to domestic manufacturers, the Congressional Research Service reported that an expiration or modification of GSP would directly affect them, at least in the short term. Smaller U.S. businesses that regularly import inputs under a preference program may be especially affected by a lapse or expiration of the program because they rely on GSP’s duty savings to compete with much larger companies, and they are less able to adjust to increased costs. A wide range of U.S. companies submitted official comments to USTR on several countries during an overall review of GSP in 2006.11 For example, concerning GSP imports from Thailand, U.S. companies’ comments were overwhelmingly positive and supported continued preferential treatment for imports that included items such as jewelry, bottle-grade polyethylene terephthalate resin, motor vehicle tires, microwave ovens, ophthalmic lenses, televisions, cookware, golf equipment, and tuna. On the other hand, certain other U.S. industries compete with imports benefiting from preferences. For example, ITC estimates that U.S. methanol producers may have experienced displacement of between 5.2 percent and 10.1 percent of production, valued at $27.6 million to $54.2 million in 2006, because of methanol imports from CBI countries. ITC also found that U.S. asparagus, fresh cut roses, chrysanthemums, carnations, and anthuriums may have experienced displacement of more than 5 percent of the value of production in 2005 because of imports that receive ATPA preferences. However, product coverage of the preference programs is dynamic, based on statutory provisions. Based on thresholds added by the legislation passed by Congress in December 2006 when it extended the GSP program, the President removed GSP duty-free treatment for methanol from Venezuela. Copyright © 2010. Nova Science Publishers, Incorporated. All rights reserved.

.

Consumers U.S. consumers benefit to the extent that tariff savings result in lower prices on final products, as well as from the lower costs of intermediate goods. U.S. importers of goods who import duty-free components, parts, or materials under GSP maintain that the preference results in lower costs for these intermediate goods that, in turn, can be passed on to consumers. In a May 1, 2006, letter to the House Ways and Means and Senate Finance committees, a coalition of importers and retailers stated that if GSP were allowed to expire or its benefits were reduced, it “would impose a costly hardship on not only beneficiary countries but their American customers as well.” As part of biennial reviews of CBI and ATPA, ITC assessed the effects of these programs on the U.S. economy, industries, and consumers.12 Following are illustrative (not comprehensive) single-year examples extracted

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from the most recent ITC reports on CBI and ATPA, highlighting products where U.S. consumers benefited: ITC found that, in 2006, knitted cotton T-shirts provided the largest gain in consumer surplus13 ($63.7 million to $68.5 million) resulting exclusively from CBI tariff preferences. The price U.S. consumers would have paid for imports of such T-shirts from CBI countries would have been 12 percent higher without CBI. Men’s and boys’ woven cotton trousers or shorts provided the second-largest gain in consumer surplus ($56.7 million to $62.3 million). Without CBI, the import price of such woven cotton trousers or shorts from CBI countries would have been 15 percent higher. ITC found that, in 2005, men’s or boys’ knitted shirts provided the largest gain in consumer surplus ($30 million to $34 million) from lower prices and higher consumption resulting exclusively from ATPA tariff preferences.

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Federal Budget In December 2006, the Congressional Budget Office (CBO) issued cost estimates associated with the extension of GSP, ATPA, and AGOA and the enactment of HOPE under the Tax Relief and Health Care Act of 2006,14 including the loss of tariff revenues that would otherwise accrue to the U.S. Treasury. In the multiyear review, CBO came to the following conclusions: Changes to the GSP program will result in an estimated reduction in revenues of $297 million in 2007 and of $992 million over the 2007 to 2009 period. This estimated reduction of revenue is due to the extension of GSP to December 31, 2008, and the new provisions concerning competitive need limit waivers. In addition, CBO estimated in its “Budget Outlook” for fiscal years 2007 to 2016 that revenue losses would amount to about $3.1 billion if GSP were extended to 2011. The extension of ATPA to June 30, 2007, was estimated to result in a decrease in revenues of $25 million in 2007. The most recent ATPA extension to December 31, 2008, will result in $119 million in reduced revenues in 2008 and 2009, according to a February 2008 CBO cost estimate. AGOA will result in an estimated reduction in revenues of about $2 million in 2007, $127 million over the 2007 to 2011 period, and $180 million over the 2007 to 2016 period. The enactment of HOPE will result in an estimated reduction of $4 million in 2007, and $28 million over the 2007 to 2011 period. Without econometric analysis, it may be difficult to determine whether, absent preferences, the same volume of goods would still be exported to the United States. If no or a reduced volume of exports occurs without the preferences, less tariff revenue would be foregone.

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Preference Programs Have Significance as a Tool to Advance U.S. Foreign Policy Preference programs have been used to advance U.S. foreign policy goals in areas such as intellectual property protection, labor, and human rights, as well as on broader marketoriented and democratic governance reforms. Some supporters of GSP and other nonreciprocal preferences believe that the country practice criteria that developing countries must meet if they are to qualify for GSP provide the United States with political leverage that can be used to support U.S. foreign and commercial interests. Periodic and petition-initiated reviews under the programs provide the United States the opportunity to engage with governments and motivate policy change. As we noted in our previous report,15 these reviews serve to encourage beneficiary countries to comply with country eligibility criteria, such as the extent to which the country is providing adequate and effective protection of intellectual property rights (IPR), taking steps to afford internationally recognized worker rights, and implementing its commitments to eliminate the worst forms of child labor. For example, GSP has annual reviews of country and product eligibility, based on petitions (requests) filed with USTR concerning GSP beneficiary countries and products by U.S. industry groups, governments, and nongovernmental organizations (NGOs) such as labor unions.16 According to USTR, the United States works with a beneficiary country during a country practice review before removing it from eligibility. Our review of agency records and meetings with officials and interest groups indicate that the leverage associated with preferences creates an opportunity to secure improvements in IPR and labor protections. Regional trade preference programs also serve important foreign policy interests. For example, ATPA complements counternarcotics efforts by providing opportunities for legal crops to be exported to the U.S. market, thus encouraging farmers to shift away from coca and heroin poppy production. Similar to GSP, ATPA also has an annual review of country eligibility practices, based on petitions filed against beneficiary countries by the public; this review has not resulted in the withdrawal or suspension of benefits from any ATPA country.

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BY PROVIDING NEW OPPORTUNITIES, PREFERENCES CAN INCREASE U.S. IMPORTS FROM DEVELOPING COUNTRIES AND THUS PROMOTE ECONOMIC DEVELOPMENT In assessing the effects of trade preferences on beneficiary country development, economists note that preferences are just one element of a complex economic development process and that isolating their direct impact is difficult. However, there is fairly wide agreement among economists that expanding trade promotes growth and development. If trade preferences lead to increased exports, and export earnings are used to expand industrialization and promote a more diverse economy, then preferences can contribute to the economic development of beneficiary countries.17 To shed light on the question of whether U.S. trade preference programs are helping countries develop, we look at the fundamental link between the programs and the trade activity of beneficiary countries, focusing on three key elements: (1) the extent and nature of the new opportunities provided under U.S. preference programs, (2) whether countries are fully using the available opportunities, and (3)

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whether U.S. imports from beneficiaries have grown and diversified. We also report countries’ perspectives on the benefits they derive from U.S. preferences, based on fieldwork. Overall, we find that U.S. trade preference programs have contributed to increased and more diverse trade for many developing country partners.

Opportunities Offered Beneficiaries under U.S. Preferences Have Expanded To assess the opportunities provided to beneficiary countries by U.S. preference programs, we examined the scope of programs’ coverage by beneficiary and product, the size of tariff cuts (or margins of preference), and some eligibility conditions that can affect the ability of beneficiaries to access program opportunities. Overall, we found that the opportunities for beneficiaries to export under preferences have expanded, but still have gaps (see detailed data and further discussion in app. III).

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Coverage As detailed in appendix III, product coverage, as measured by tariff lines eligible for duty-free treatment, is extensive for most U.S. preference programs, products, and partners. In 1996, the number of duty-free tariff lines offered under GSP was expanded to provide additional benefits to beneficiary least-developed countries (LDC). Enactment of the regional programs continued this expansion. But, as figure 1 shows, notable gaps remain in tariff lines available for duty-free import under preference programs, particularly in agricultural and textile and apparel products.

Figure 1. Product Groups with Most Dutiable Product Lines in U.S. Tariff Schedule, Taking Into Account All U.S. Preference Programs Source: GAO analysis of the Harmonized Tariff Schedule of the United States, 2006.

Moreover, in examining coverage by beneficiary countries’ trade with the United States in 2006, using the ratio of eligible to dutiable imports18 for each partner, we find wide variation in coverage even within programs. Our analysis finds that: (1) countries eligible for

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only GSP or GSPLDC have the least coverage of partners’ dutiable imports—approximately 25 percent, (2) regional programs and GSPLDC have much higher coverage of partners’ dutiable imports, and (3) country variations in coverage are wide. For example, 35 GSP or GSPLDC beneficiaries, including Lebanon, Paraguay, Somalia, and Zimbabwe, have high coverage rates, exceeding 75 percent of the value of their dutiable imports. Yet, 54 GSP or GSPLDC beneficiaries such as Bangladesh, Egypt, Pakistan, and Uzbekistan have low coverage rates (less than 25 percent of dutiable imports).

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Preference Margins The expansion of U.S. program coverage since 1996 appears to have increased the benefit of U.S. preferences by adding some key products under GSP-LDC and the regional programs that otherwise would face relatively high U.S. tariffs. A recent effort19 to quantify margins of preference (the difference between the preference rate and the otherwiseapplicable tariff rate) across all U.S. preference programs, including GSP, by staff economists at ITC and the World Bank finds that preference margins are relatively high for apparel products, as well as certain agricultural goods (melons, cut flowers, frozen orange juice, raw cane sugar, and asparagus);20 they tend to be relatively low for other products and fairly uniform among programs. Program Conditions Conditions on product entry are also a significant factor affecting opportunities and trade under U.S. preference programs. While the data on coverage and margins of preference suggest a degree of success in improving the benefits of U.S. preference programs, in general, recent assessments of the literature express some skepticism as to whether trade preferences, and GSP in particular, have had more than a very modest impact on the export performance, and hence the development, of eligible countries. In discussing factors that underlie the performance of preference programs, researchers Ozden and Reinhardt, for example, not only indicate that GSP often fails to cover products in which beneficiary countries have the greatest comparative advantage, such as agricultural products, but cite administrative features of the programs—notably, export ceilings and rules of origin—as key constraints on benefits.21 Nevertheless, conformity with such requirements can be vital to ensuring that benefits flow to the intended country—that is, the designated beneficiary country or countries, rather than countries that are ineligible for preferences. Two specific conditions—“competitive need limitations” and “rules of origin”—illustrate how administrative implementation of statutory provisions, although addressing important policy considerations, may affect the ability of beneficiary countries to fully access the opportunities otherwise offered by U.S. preference programs. GSP places export ceilings, or competitive need limitations (CNL), on eligible products from GSP beneficiaries that exceed specified value and import market share thresholds (LDCs and AGOA beneficiaries are exempt). Rules of origin for U.S. trade preference programs typically specify a minimum percentage value-added to the entering product that must come from the beneficiary country. However, more complex rules apply to some products, notably textiles and apparel. Our fieldwork revealed examples where complex rules-of-origin requirements appear to be complicating preference trade, for example, in Haiti and in Ghana. On the other hand, liberalizing quotas and rules of origin have been the principal means by which the regional

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programs have been liberalized or made more likely to permit imports in recent years, particularly on apparel products.

Utilization of Regional Programs Is Fairly High Compared with GSP but Varies by Partner The effectiveness of trade preference programs in expanding trade is also dependent on beneficiaries’ actual use of the preference opportunities offered. The utilization rate indicates the extent to which beneficiaries are taking advantage of the opportunities offered.22 Our analysis shown in appendix III finds that U.S. preference programs have fairly high utilization rates, but utilization varies by program and beneficiary. Although utilization of the regional preference programs is higher than utilization of GSP, to some extent, this lower utilization of GSP reflects the fact countries that have access to both GSP and regional programs often opt to use the regional programs. Our analysis of utilization across programs by beneficiary country finds substantial variation. For example, under AGOA, a number of countries, such as Nigeria, Angola, Chad, and Gabon have high utilization rates, but 12 of the 38 AGOA eligible countries did not export under the program.23

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Overall U.S. Imports from Developing Countries Have Risen, and Preference Imports Have Risen Even Faster The improved opportunities for market access provided by U.S. preference programs appear to have contributed to the rapid growth in U.S. imports from developing countries in recent years. The total dollar value of U.S. imports from both developed and developing countries has steadily grown since 1992, but developing countries have witnessed much faster growth since 2000. The developing countries’ share of total U.S. imports has increased, while the developed (high-income) countries’ share has declined. The overall gains by developing countries are mostly attributable to middle-income developing countries. The share of lowincome and LDCs remains small.24 Turning to preference imports specifically, we also find that preference programs have generally contributed to the increasing shares of developing countries in U.S. imports, particularly imports from low-income developing countries. However, imports under U.S. preference programs only accounted for about 5 percent of total U.S. imports in 2006. Total U.S. preference imports grew from $20 billion in 1992 to $92 billion in 2006. Most of this growth in U.S. imports from preference countries has taken place since 2000, when preference imports grew faster than overall U.S. imports. Whereas total U.S. preference imports grew at an annual rate of 0.5 percent from 1992 to 1996, the growth quickened to an annual rate of 8 percent from 1996 to 2000, and 19 percent since 2000, which also suggests an expansionary effect of program changes that increased product coverage and liberalized rules of origin for LDCs under GSP in 1996 and African countries under AGOA in 2000.

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A Few Countries Dominate U.S. Preference Imports, but Lower-Income Countries Have Garnered a Growing Share

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While U.S. preference imports remain concentrated in a few countries, overall the poorer countries’ share of preference imports has risen recently. As can be seen from figure 2, the top 5 suppliers under preference programs in 2006 accounted for 58 percent of preference imports, and the top 10 suppliers accounted for 77 percent of preference imports. Among the top 10 suppliers, two countries—Nigeria and India—are low-income, and six countries— Angola, Ecuador, Colombia, Thailand, Peru, and the Dominican Republic—are lower middleincome countries.25 The top 25 preference beneficiaries accounted for over 95 percent of U.S. preference imports.

Figure 2. The Top 25 Partners of U.S. Preference Programs, 2006 Source: GAO analysis of official U.S. trade statistics.

Nevertheless, as figure 3 shows, the poorest countries have been more successful in increasing their shares in total U.S. imports under preferences than they have been in increasing their share of overall U.S. imports. The year 2000 marks the beginning of gains in preference imports for low-income countries and declines in the share of middle-income developing countries. By 2006, imports from low-income countries had risen to 38 percent of U.S. preference imports. Within the middle-income grouping, the share of upper middle-

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income countries has generally declined since 1992, while that of lower middle-income countries rose, then moderated; in 1996, lower middle income countries share surpassed that of the upper middle income countries. The share of U.S. preference imports from the leastdeveloped countries was 17 percent in 2006, versus nearly zero until 1996—the year of major revisions in GSP.

Figure 3. U.S. Preference Imports by Beneficiary Income Levels in 2006 Source: GAO analysis of official U.S. trade statistics. Note: The data presented in this figure is for the current set of beneficiary countries. Income categories were assigned based on 2006 rankings by the World Bank or the United Nations. Each country’s income group remained constant for the period. In other words, if a country’s present income status was higher in 2006 than it was previously, it is not captured here.

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Reliance on Preference Programs among Least-Developed Countries Varies Considerably While our analysis shows that the LDC’s share of U.S. preference imports has risen, the extent of their trade and reliance on preferences (as measured by the share of preference imports in total imports) varies considerably. Three LDCs—all oil exporters—rank among the leading suppliers of total imports into the United States under preference programs (Angola, Chad, and Equatorial Guinea) as shown in table 3. Other LDC exporters to the United States, such as Lesotho, Madagascar, and Haiti are also extensive users of preference programs and have the opportunity to export apparel under AGOA or an expanded CBI. In contrast, several of the top 10 LDC exporters such as Bangladesh, Cambodia, Liberia, Niger, Nepal, and Guinea do not have the opportunity to export textiles and apparel under GSP and do not rely on preferences to support their exports to the United States. Overall, 34 of the 46 eligible LDCs barely used preference programs for their exports to the United States.26 Table 3. Leading LDC Exporters to the United States and Their Share under Preference Programs, 2006 Dollars in millions

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Country Angola Bangladesh Cambodia Chad Equatorial Guinea Haiti Lesotho Madagascar Liberia Niger Nepal Guinea Others Total LDC group

Total U.S. imports $ 11,514 3,268 2,188 1,905 1,718 496 408 281 140 124 99 92 568 $22,800

Ratio of preference program imports to total U.S. imports from country or country group 98.2% 0.6 0.2 89.1 90.7 76.7 94.2 82.4 0.0 0.0 4.0 0.2 24.4 69.0%

Source: GAO analysis of official U.S.trade statistics.

Fuels and Apparel Dominate Preference Imports, but Overall Imports Have Diversified Somewhat The growth in imports from developing countries is accompanied by significant changes in the product mix of U.S. imports from preference-eligible countries. Notably, the rapid rise in fuel imports since 1996 is the defining feature of U.S. imports under preference programs. Fuels were less than 1 percent of U.S. imports from preference countries in 1996 but, in 2006,

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account for nearly 60 percent of U.S. preference imports from preference-eligible countries. Figure 4 also highlights the importance of apparel in the growth of U.S. preference imports up to 2005. After the phase out of global quotas on textiles and apparel in 2005 and the entry into force of the Dominican Republic-Central America-United States Free Trade Agreement (CAFTA-DR) for several CBI nations during 2006, however, these imports under preference programs declined somewhat.

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Figure 4. Key Products in U.S. Preference Imports, 1992-2006 Source: GAO analysis of official U.S. trade statistics.

In 2006, fuels comprised 94 percent of all imports under AGOA, nearly 70 percent of ATPA/ATPDEA imports, but only 27 percent each of GSP and CBI/CBTPA imports. Apparel imports represent about 6 percent of total preference imports but represent over 30 percent of U.S. imports under CBI, 10 percent of ATPA imports, and just 3 percent of AGOA imports (see app. V). Figure 5 further breaks down trends in nonfuel, nonapparel imports under preference programs. Notably, after 1993, when the North American Free Trade Agreement (NAFTA) was implemented, Mexico lost GSP eligibility, and global agreements to eliminate tariffs in certain sectors such as electronics and information technology were effectuated by the United States, imports under preferences of machinery and electronics— initially the largest product category—declined, but increased somewhat after 2000. Four

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product areas show increases. The year 2000 changes in U.S. preference programs (the implementation of AGOA, CBTPA, and enhancements in ATPA) appear to have contributed to growing imports of agriculture; textiles, leather, and footware; glassware, precious metals and stones, and jewelry; and chemicals, plastic, wood, and paper.

Figure 5. U.S. Preference Imports: Nonfuel, Nonapparel Sectors Source: GAO analysis of official U.S. trade statistics.

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Diversification of Products Imported from Some Beneficiary Countries Has Increased Modestly An important goal of trade preferences concerns helping developing countries diversify the range of products that they produce and export. Our analysis shows that total U.S. imports from all preference-eligible countries remain quite concentrated when countries are grouped by their preference program eligibility. However, when viewed over time, imports from preference-eligible countries appear to have become somewhat more diversified since 1992. Our analysis of diversification of total U.S. imports from preference-eligible countries is shown in figure 6. Using a widely used measure of trade and commodity concentration, we constructed an index to show a value of 0 when products are extremely concentrated and a value of 1 when products are most diversified.27 Consequently, a high value of this index indicates a relatively diversified import/export product mix. In figure 6, the relative level of diversification among the programs is indicated by the height of the line, and the change in the level of diversification over time is shown by the trend in the line from 1992 to 2006. Looking first at the diversification level of each program, we see that U.S. imports from those countries that qualify for GSP only, and those that import to the United States under CBI, have the most diverse profile. Conversely, imports from countries eligible for the AGOA, GSP-LDC, and ATPA show a relatively less diverse profile. This finding can be seen as broadly consistent with the concentration of imports under these preference programs in fuels and apparel products. Second, looking at the trend in the diversification index over time, we find that all country groups, except CBI, which already was the most diversified, show a modest increase in diversification over time. The highest rate of increase in diversification (as measured by the rate of increase of the lines in fig. 6), is noticeable for imports from countries eligible only for GSP. AGOA countries, which are the least diversified, have shown relatively little change over time.28 It is also important to note that determination of diversification at such a high level of aggregation still allows for significant diversification within each broad product group.

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Developing Countries’ Ability to Use Preference Opportunities May Be Constrained by Limited Trade Capacity A key factor that can determine the impact of trade preference programs on economic development is the ability of developing countries to take advantage of global trading opportunities.29 The existence of a preferential tariff is of little use in countries without the ability to produce goods desired by importers, at competitive prices. This ability to produce and trade competitively on world markets, which is termed “trade capacity,” is generally related to having the appropriate economic conditions and institutions that help to attract investment and enhance efficiency. Yet, many developing countries lack of trade capacity prevents them from taking full advantage of opportunities to export goods and services.

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Figure 6. Diversification Index of U.S. Imports from Preference-Eligible Countries, 1992-2006

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Source: GAO analysis of official U.S. trade statistics.

The lack of trade capacity is due to inadequate economic, legal, and governmental infrastructure. Poor networks of roads, small and outdated ports, inadequate supplies of energy and other utilities, rigid financial institutions, inefficient or corrupt customs bureaus, and poorly educated citizens are some of many obstacles that can make production and exporting difficult and more costly. For example, in Haiti, an apparel manufacturer located in a government-owned industrial park told us they did not have reliable public sources of electricity or water. Therefore, they had to pay for backup electricity generators and truckedin water to operate their factories. In addition, entrepreneurs in developing countries may have little access to information about markets and export standards or to affordable financing that would enable them to set up a successful export business. Even countries that have developed industries to produce items with strong global markets, with or without the assistance of preferences, may need to improve their trade capacity. For example, mineral commodities such as oil, or agricultural products such sugar and soybeans, are an important source of export income to many developing countries. However, developing a greater diversity of export industries requires new skills, technologies, and investment.

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Country Visits Highlight Importance Attached to Preferences, Despite Diversity of Recipients

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While the impact of trade preferences on the development of beneficiary countries remains a subject of debate among economists and other analysts, our fieldwork in several beneficiary countries indicates the diverse range of countries being served, and most countries emphasized their view that U.S. trade preferences are important to their trade and development objectives. The countries include several whose efforts to use U.S. preferences are at nascent stages and several that achieved notable success. We chose to visit Haiti and Ghana because they are among the poorest beneficiaries and ones where mechanisms to take advantage of recently expanded benefits under newer preference programs—HOPE and AGOA— are being put in place. Overall, the people we met in Haiti and Ghana expected their countries will increase their use of the preferential access to the U.S. market, but urged continued U.S. commitment and patience. Following are illustrative observations from our fieldwork in these countries: In-country officials and business representatives in Haiti see preferences as a muchneeded engine for creating jobs in the short-term, attracting investment in the medium-term, and fostering growth over the longer-term. Haitian officials recognize Haiti must confront the daunting challenges of repairing its damaged infrastructure and international image and improving security in order to be able to effectively take advantage of the opportunities offered by the HOPE program. Haiti’s base of entrepreneurs with experience in the apparel industry and geographic proximity to the United States are assets that may help the country use the new access provided by HOPE and thereby convince Congress to reenact it in 2011. Ghanaian authorities have put in place policy reforms and are pursuing trade promotion initiatives to encourage the private sector to take advantage of export opportunities provided under AGOA. Authorities noted that hosting the annual AGOA forum among government, private sector, and civil society increased the program’s visibility in the country. However, many of the Ghanaian business people we met were still in the initial stages of exporting to the United States. Additionally, Ghana National Chamber of Commerce officials told us many potential beneficiaries of the program, particularly agricultural producers, are still unfamiliar with the full range of opportunities available under AGOA, and see the program as being primarily targeted to the textile and apparel industry. Like Haiti, Ghana lacks such essential capacity as reliable energy supply and cost-competitive transportation. Yet, both governments were mobilizing and were receiving considerable on-site and other resources from various U.S. government and multilateral agencies to develop customs and port facilities, and navigate U.S. rules and requirements, etc. We picked Brazil and Turkey to visit because these countries have successfully used U.S. trade preferences to export a diverse range of relatively sophisticated manufactured goods. The two countries were also of interest because both Brazil and Turkey rely on their own government and government-affiliated business associations to promote awareness of GSP, with limited assistance from U.S. agencies such as USAID.30 Both expressed a continued need for preferences, even though their overall economies are growing, and they are among

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the leading developing country users of U.S. preferences. Following are illustrative observations from our fieldwork in these countries: The government and private sector officials we met in Brazil emphasized that GSP benefits both nations. Information provided GAO shows that more than 90 percent of the value of what Brazil ships to the United States under GSP are raw materials and intermediate or capital goods, some produced by U.S.-affiliated multinationals.31 Upon arrival in the United States, these intermediate goods are destined for further processing and/or incorporation into U.S. manufactured goods such as cars and power generators. Officials at Brazil’s Commerce and Development agencies have stepped up efforts to promote awareness and use of GSP, seeing it as a valuable tool for helping its poorest regions and boosting participation by smaller businesses in export markets. An analysis by Brazil’s Commerce Ministry shows that Brazil has had more success in exporting manufacturing goods under GSP and that more than 80 percent of the products Brazil exports to the United States under GSP would otherwise face relatively low tariffs (facing MFN tariffs set at or below 5 percent).32 Yet, the loss of such privileges in competitive need limitations (CNL) decisions has caused actual or likely business contraction and layoffs at two companies on GAO’s schedule of visits (in the automotive part and copper wire industry). The people we met said such preferences are particularly important now as they face intense competition from China, which has displaced them in traditional industries such as leather footwear (which is excluded by statute from the GSP program). Ironically, China’s rise has also coincided with a run-up in demand and prices for Brazil’s commodities, boosting the country’s total exports but disadvantaging its manufactured goods because the Brazilian currency has appreciated. Turkey also has been buffeted by rising commodity prices in sectors such as jewelry. It has been successful in exporting a diverse range of manufactures to the United States under GSP, ranging from stone slabs to steel, and says continuing to do so is vital to its competitiveness. As in Brazil, the Turkish business representatives we met with said that profit margins are so thin in the highly competitive U.S. market they serve that even small preference margins make the difference between being able to sell or being forced to exit entirely. Indeed, Turkey wishes to widen the list of eligible products (e.g., hazelnuts) and expressed concerns over losing GSP access for products such as jewelry and marble that officials indicate have exceeded, or are likely to exceed, CNLs. They attributed exceeding CNLs in part to rising commodity prices, levels of aggregation in the U.S. tariff schedule that are too high for certain products, and the related issue of importer use of broader versus more specific categories to enter goods to avoid complications in customs classification and clearance. Colombia and Kazakstan were selected for high use, as well as their involvement in ongoing liberalization: Colombia, through a free trade agreement with the United States, and Kazakstan, as a result of its efforts to join the WTO. Following are illustrative observations from our fieldwork in these countries:

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Colombia dominates the ATPA program, and exports to the United States accounted for 20 percent of Colombia’s overall exports in 2006. Relying on ATPA for more than half (54 percent) of its exports to the United States that year, Colombia has attained success in steadily increasing its exports in all but 2 years since the program’s inception in 1991, particularly since the program was expanded in 2002. Yet the range of products it exported under preferences is considerably narrower than that supplied by Brazil or Turkey. To diversify away from coca production and spur participation in international trade, Colombia has pursued improved security, political stabilization, and economic diversification in the years since Plan Colombia was implemented in 2000 and the Andean Trade Preference Program was expanded in 2002. The Department of State and USTR credit Colombia’s efforts and these programs, as well as strong internal and external demand, with revitalizing Colombia’s economy. Colombian business sector spokesmen and government officials with whom we met generally underscored the important role trade preferences have played in allowing certain sectors, notably cut flowers, to compete in the U.S. market; however, they also noted that their country needs to move beyond trade preferences. In March 2007, Colombia’s trade minister publicly stated that his country has effectively exhausted the utility of U.S. trade preferences and is eager to consummate a comprehensive free trade agreement with the United States. This not only will assure continued preferential access to the U.S. market for Colombia’s exports, on which it depends, but provide additional access and involve reciprocal liberalization and rule-of-law changes in such areas as investment and IPR that may help it attract additional investment and innovation. Kazakhstan’s resource-driven economy is also booming based largely on its vast oil, gas, and minerals reserves, which together make up about two-thirds of its economic output. Its exports to the United States reached $1 billion in 2006, of which half was imported using GSP preferences. The country’s development goals include managing its mineral wealth, integrating into the world economy, and diversifying its exports. Despite its goal of becoming a hub for East-West business, Kazakhstan faces many challenges associated with the legacy of the Soviet era, such as legal structures that make business formation and trade difficult and a business mentality of dependence on government subsidies. Geographically, Kazakhstan is challenged in trading with the United States, although opportunities for integrating regionally with the European Union are great. The major goal of Kazakhstan’s trade policy at present is WTO accession. Awareness and interest in the U.S. GSP Page 35GAO-08-443 U.S. Trade Preference Programs program was rather limited. In fact, exports of several major products reached CNL limits, and the country did not seek a waiver for its producers. The major GSP export in 2006, copper cathodes, turned out to be more likely a onetime event prompted by factors other than GSP preferences (the normal or MFN tariff rate on this product is just 1 percent). A major producer of the country’s leading preference export told us he sells the commodity at world prices and does not depend on preferences or focus on the U.S. market, due to strong demand and transportation linkages elsewhere.

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FUNDAMENTAL PROGRAM TRADE-OFFS BALANCE FOREIGN AND DOMESTIC BENEFITS Preference programs balance two key trade-offs. First, programs offer duty-free access to the U.S. market to increase beneficiary trade, to the extent that it does not harm U.S. industries. Product exclusions, country graduation, and product import limits are tools to make this trade-off, although their use has raised concerns that nonbeneficiary countries may gain U.S. market share from a beneficiary’s loss of preferences. Second, policymakers face a trade-off between longer or permanent program duration, which may encourage investment, and shorter renewal periods, which may provide leverage to achieve other policy goals. Finally, the preference programs balance these trade-offs against a backdrop of increasing global trade liberalization. Although multilateral trade liberalization is a primary U.S. trade objective and would be beneficial to most developing countries, liberalization dilutes the marginal value of the preferences to beneficiaries. This may affect their willingness to participate in reciprocal trade liberalization. However, economic studies suggest that the negative effects of preference erosion are outweighed by other factors, most notably the benefits for developing countries associated with open markets.

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Product Exclusions Shield Domestic Industries but Limit Magnitude of Preferences to Beneficiaries Statutory Product Exclusions Affect Products of Importance to Developing Countries A basic policy trade-off is the extent to which preference programs benefit businesses in beneficiary countries versus those in the United States. As described in appendix III, U.S. preference programs provide duty-free treatment for a little over half of the 10,500 U.S. tariff lines, in addition to those that are already duty-free on an MFN basis for all countries. But, they also exclude many other products from duty-free status, including some that developing countries are capable of producing and exporting. The extent of product exclusions, therefore, may directly affect the ability of some developing countries to use and benefit from the preferences. Some product exclusions were established in preference legislation to protect sensitive U.S. industries from import competition. The GSP statute, for example, prohibits various “import-sensitive” categories of products from being designated as eligible. These include most textiles, apparel, watches, footwear, handbags, luggage, flat goods, work gloves, and leather apparel; import-sensitive electronics, steel, and glass products; and “any other articles which the President determines to be import-sensitive in the context of the Generalized System of Preferences.”33 In addition, agricultural products subject to a tariff-rate quota are not eligible under GSP for duty-free treatment if such imports exceed the in-quota quantity. The regional preference programs exclude some of these products as well. U.S. tariffs on a number of these excluded products tend to be high. The GSP statutes provide some discretion for the administration to determine which items within some of these product categories are not import-sensitive. Specifically, for electronic, steel, and manufactured and semimanufactured glass products, USTR and ITC officials told us that the President may determine which of these items are eligible for GSP

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benefits, based on advice from the ITC about import sensitivity. The administration has at times self-initiated such a determination for individual products, but the officials told us it has reexamined eligibility for large numbers of products only within the context of extending new benefits to subsets of countries, namely for LDCs in 1996 and for AGOA suppliers in 2000. More often, it makes determinations for individual products based on petitions filed by interested parties. There is no discretion for administrative product additions for the other product categories specifically excluded by law from GSP eligibility. However, the statutory language for each of these other product categories is based on business conditions as of specific dates—January 1, 1994, for textiles and apparel; June 30, 1989, for watches; and January 1, 1995, for footwear, handbags, luggage, flat goods, work gloves, and leather apparel. We note that U.S. industries have changed in the intervening years, and these statutory provisions may not be up-to-date. For example, in comments to USTR on the GSP program in 2006, the Footwear Distributors and Retailers of America stated that imports now account for 99 percent of U.S. footwear sales and urged that the footwear exclusion be removed from the GSP legislation. According to USTR officials, the initial GSP statute provided that the President could not designate as eligible those “textile and apparel articles which are subject to textile agreements.” Certain handcrafted wall hangings, clothing, and other hand-loomed articles were not covered by the Multi-Fiber Arrangement.34 In the late 1970s, the agencies administering GSP sought to provide commercial opportunities for handicraft producers of nonimport-sensitive items in interested beneficiary countries. Based on an interagency review, the President determined in 1981 that U.S. imports of certain wall hangings, pillow covers, and carpets and textile floor coverings that had been certified as handmade by the beneficiary country could enter under GSP. USTR officials told us that since that time 15 GSP beneficiaries have entered into such certified textile handicraft agreements; however, by 2007, all but two of the items originally covered by the presidential determination have become MFN duty-free. As noted above, no textile and apparel items can be added to GSP eligibility if they were not on the GSP-eligible tariff list as of January 1, 1994. Studies indicate that even when GSP product exclusions have been liberalized within the context of GSP for LDCs or the regional programs, remaining limits on product eligibility can affect the ability of beneficiary countries to use and benefit from U.S. preference programs. One recent study35 examined the expansion of tariff lines under AGOA. In agriculture, the study noted, AGOA appears to have liberalized nearly all products, altlhough a substantial portion of agricultural tariff lines are still subject to tariff-rate quotas and, as a result, are not, in effect, fully liberalized. Products not fully liberalized include certain meat products, a large number of dairy products, many sugar products, chocolate, a range of prepared food products, certain tobacco products, and groundnuts (peanuts), the latter being of particular importance to some African countries. The study noted that, in manufacturing, AGOA liberalized additional tariff lines, but the increase is most notable for those countries granted apparel benefits. According to the study, key products that remain excluded are textile products, certain glass products, and certain headwear. A related trade-off involves deciding which developing countries can enjoy additional preferential benefits for products excluded for most preference recipients. One controversy concerns a few LDCs in Asia that are not included in the U.S. regional preference programs, although they are eligible for GSP-LDC benefits. Two of these countries—Bangladesh and Cambodia—have become major producers and exporters of apparel to the United States and

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have complained about the lack of duty-free access to this country for their goods. For example, Cambodian trade and industry officials argue that it is not fair that many LDCs enjoy preferential access to the U.S. apparel market through the regional preference programs, while Cambodia does not.36 In comments filed with USTR on possible U.S. proposals at WTO to provide duty-free, quota-free access to least-developed countries, some African and other beneficiary countries, as well as certain U.S. industries, have opposed the idea. African private sector spokesmen have raised concerns that giving preferential access to Bangladesh and Cambodia for apparel might endanger the nascent African apparel export industry that has grown up under AGOA, while other non-LDC developing countries have expressed similar concerns about their own industries. U.S. textile manufacturers have also protested that the possible expansion of apparel benefits to these countries would threaten their textile sales to Latin American clothing producers under the regional preference programs and free trade agreements. However, numerous U.S. importing industries, such as retail groups, are strongly in favor of these proposals.

Country and Product Graduation Aim to Focus Benefits on Poorest Countries but May Not Achieve That Objective Over the 30-year life of the GSP program, questions about which countries should benefit and how more benefits could be directed to poorer countries have been raised repeatedly. The concerns relate to the original intention that preference programs would confer temporary trade advantages on developing countries, which would eventually become unnecessary as the countries became more competitive. The GSP program has mechanisms to limit duty-free benefits by “graduating” countries that are no longer considered to need preferential treatment, based on income and competitiveness criteria. The U.S. government has used two approaches to graduation: outright removal of a country from GSP eligibility, and the more gradual approach of ending duty-free access for individual products from a country. Once a country’s economy reaches a “high income” level, as indicated by World Bank measures of gross national income per capita, the statute governing GSP requires that the country be graduated from this program. Fifteen countries have been graduated since 1995 on that basis, including, most recently, Antigua and Barbuda, Bahrain, and Barbados in January 2006.37 Since 1995, nine other countries at high and upper-middle income levels were removed from GSP eligibility because they joined the European Union—most recently, Bulgaria and Romania in December 2006.38 Program regulations also allow the United States to remove a country from GSP after a review has found it to be “sufficiently developed or competitive.” Four countries or customs territories were graduated on this basis in 1989— Singapore, South Korea, Taiwan, and Hong Kong. Under the regional programs, there are no mechanisms to graduate countries that have reached a more advanced level of development. However, in the last 2 years, five Central American/Caribbean countries were removed from GSP and CBI/CBTPA when they entered free trade agreements with the United States.39 More commonly, the United States uses import ceilings—CNLs—to end GSP duty-free status for individual products from individual countries if imports reach a certain level.40 The rationale given by USTR for these limits is that they indicate a country has become a “sufficiently competitive” exporter of the product and that ending preferential benefits in such a case may allow other GSP-eligible countries to expand their access to the U.S. market. The value of trade from GSP beneficiaries that is ineligible for duty-free entry because of the CNL ceiling is substantial. We identified $13 billion in imports in 2006 that could not enter duty-

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free under GSP due to CNL exclusions—over one-third of the trade from GSP beneficiaries potentially subject to the CNL ceiling.41 Although the intent of country and product graduation is to redistribute preference benefits more widely among beneficiary countries, some U.S. and country officials with whom we met observe that GSP beneficiary countries will not necessarily benefit from another country’s loss of preference benefits. The benefits cannot be “transferred” directly from one country to another; rather, preferences are a marginal advantage that can make a country’s product competitive only if other factors make it nearly competitive. In fact, the loss of a tariff preference to a given country may give an advantage to a country that is not a beneficiary of U.S. trade preference programs. In the countries we visited, we repeatedly heard concerns that China, or sometimes other countries, would be most likely to gain U.S. imports as a result of a beneficiary’s loss of preferences. As part of an overall review of the GSP program in 2005 and 2006, USTR officials reviewed trade and development indicators for large users of the GSP program to determine whether they could be considered sufficiently competitive in terms of trade in eligible products and, therefore, should no longer be designated as GSP beneficiaries.42 USTR officials said there are inherent tensions between the program’s statutory economic development and export competitiveness goals. They noted that some of the beneficiaries USTR reviewed were very competitive in certain industries but nevertheless had large numbers of poor people.43 Agency officials told us that it was important to conduct the overall review in a manner consistent with U.S. WTO obligations under the GATT’s Enabling Clause, which enables developed WTO members to give differential and more favorable treatment to developing countries.44

Efforts to Remove Preferences for Competitive Products Have Raised Concerns Efforts to target benefits to the poorest countries have resulted in the removal of preferences from products important to some U.S. businesses. In 2007, the President revoked eight CNL waivers as a result of legislation passed in December 2006.45 Consequently, over $3.7 billion of trade in 2006 from six GSP beneficiaries lost duty-free treatment. Members of the business community and members of Congress raised concerns that the revocation of these waivers would harm U.S. business interests while failing to provide more opportunities to poorer beneficiaries. A bill regarding sanctions on Burmese gems, which passed the House of Representatives in December 2007, had included a GSP provision that would have reinstated the CNL waivers for gold jewelry from Thailand and India and would have required the President to review the other revoked waivers. The bill also would have provided for the President to reinstate the other waivers unless ITC determined that the loss of a waiver would neither reduce the current level of U.S. imports of the article from the beneficiary nor benefit countries that are not part of GSP.46

Periodic Program Renewal Preserves U.S. Leverage but May Discourage Long-term Investments Policymakers also face a trade-off in setting the duration of preferential benefits in authorizing legislation. Preference beneficiaries and U.S. businesses that import from them

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agree that longer and more predictable renewal periods for program benefits are desirable. However, some U.S. officials believe that periodic program expirations can be useful as leverage to encourage countries to act in accordance with U.S. interests. Private sector and foreign government representatives have complained that short program renewal periods discourage longer-term productive investments that might be made to take advantage of preferences, such as factories or agribusiness ventures. They would like to see preference programs become permanent or have a longer duration. The private sector Coalition for GSP (Coalition) cites the frequent lapses in GSP between 1993 and 2001, with authorization periods ranging from 10 to 27 months (and gaps between expiration and legislative renewal of 1 to 15 months), as hindering long-term investment in beneficiary countries. Both USTR and the Coalition have attributed the relatively greater growth in GSP use after 2002 to the stability provided by a 5-year program reauthorization at that time. Business people say that predictable program rules and a longer program renewal period are important to them in making business plans and investment decisions in developing countries with confidence when they are based on preference benefits. For example, officials in the Colombian flower industry told us that ATPA’s short time frame and frequent renewals made it difficult to attract investment needed to enable them to compete with other international cut-flower producers. They said investors need certainty about preference benefits for at least 10 years to amortize and project return on investment. Members of Congress have recognized this argument with respect to Africa and, in December 2006, Congress renewed AGOA’s third-country fabric provisions until 2012; AGOA’s general provisions had previously been renewed until 2015. On the other hand, short-term program renewals give Congress more opportunities to respond to changing events and political priorities. Threatening to let benefits lapse can be used as a way to pressure countries to act on an issue. While acknowledging the need for U.S. vigilance in pursuit of its commercial interests, officials at USTR and Labor told us shortterm program renewal can have other adverse consequences, such as creating uncertainty for investors and importers interested in using the program. From their perspective, the discretion the administration exercises over continuation of program benefits offers sufficient leverage to achieve policy goals, based on the country’s desire to maintain benefits and the possibility of removing benefits administratively through reviews of country conformity with eligibility requirements. Nevertheless, a recent instance involving ATPA has provided U.S. officials an opportunity to engage with beneficiary countries in the context of program expiration. ATPA was extended for 6 months in December 2006, again for 8 months in June 2007, and for 10 more months on February 29, 2008. These short renewal periods reflected interest in hastening congressional consideration of the free trade agreements with Peru and Colombia and concern about policies adopted by Bolivia and Ecuador that have negatively affected foreign investors. After the most recent ATPA extension, the administration said the extension would provide time to implement the Peru free trade agreement and for Congress to pass the Columbia free trade aggreement. The administration also said it expected to see significant progress with respect to Bolivia and Ecuador’s treatment of foreign investors.

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Global and Bilateral Trade Liberalization Diminishes Margin of Preferences but Is Valuable in Its Own Right Global and bilateral trade liberalization is a primary U.S. trade policy objective, based on the premise that increased trade flows will support economic growth for the United States and other countries. However, international movement toward lowering tariffs and other trade barriers has an unavoidable effect on the marginal value of trade preferences to beneficiaries. Because of this, beneficiary countries’ desire to keep their preferential advantages may generate some internal resistance to multilateral liberalization. As some countries make unilateral decisions to liberalize their national trade policies, and as others enter into bilateral and regional trade agreements that result in lower tariffs among trading partners, countries that rely on preferential margins find the advantages they gain from preferences fading away. The erosion of the value of trade preferences poses yet another trade-off. All of the preference programs include provisions to encourage countries to move into reciprocal and liberalized trading relationships. Indeed, a number of countries that were former beneficiaries of preference programs have gone on to conclude free trade agreements with the United States, and some have joined the ranks of newly industrialized nations. However, members of Congress and some administration officials have raised concerns that some preference beneficiaries are placing their interests in trade preference programs above the broader interest in multilateral liberalization, which the United States has traditionally advocated. They note that, in an effort to maintain their preference benefits, some beneficiary countries have created roadblocks at WTO in the Doha Round of negotiations. This was confirmed by U.S. agency officials we interviewed. The assurance of continued preferential access to the U.S. market has at times, created a disincentive to negotiation of reciprocal free trade agreements. For example, officials at Commerce and Labor told us that the extension of AGOA preferences during the negotiations toward a free trade agreement with members of the Southern African Customs Union47 may have contributed to the suspension of those negotiations since countries were already granted broad access to the U.S. market. In the past, spokesmen for countries that benefit from trade preferences have told us that any agreement reached under the Doha framework must, at a minimum, provide a significant transition period to allow beneficiary countries to adjust to the loss of preferences. Additionally, they questioned whether it is even fair to expect certain countries, such as small-island states, to survive without some trade preference arrangements under any deal that may be reached through WTO negotiations. As we have noted in previous reports, economic studies predict that global trade liberalization, such as might be achieved in a new WTO agreement from the Doha negotiations, would generally benefit most developing countries.48 Moreover, with regard to preference erosion and its impact on developing countries, some research has suggested that the negative effects of preference erosion may be outweighed by other factors—in particular, the benefits generated by more open trade on the part of developing countries.49 For example, one recent study estimates that while a small number of countries, particularly those that currently receive very large benefits under existing preference schemes, could experience a loss of market access, most countries would benefit from the expanded market access due to reduced tariffs under the Doha Round.50 Another recent study of the impact of preference erosion on development in the CBI countries notes that preference erosion occurred steadily over the 15 years of the

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study (1984 to 1998).51 While preference erosion was shown to have a small negative impact on investment and growth in some countries in the CBI region over the period studied, this effect may have been outweighed by the positive effects of increased utilization of preferences. In addition, the author finds the countries’ own trade reforms (openness) may have had a larger impact on development than the trade preferences did.

SEPARATE APPROACHES TO PREFERENCE PROGRAMS IMPEDE ASSESSING WHETHER THEY ARE MEETING SHARED GOALS Trade preference programs have proliferated over time, but Congress has not considered U.S. trade preferences as a whole. In response to statutory requirements, agencies pursue different approaches to monitoring compliance with the various criteria set for programs, resulting in a lack of systematic review. There are other differences in key aspects of the preference programs, such the use of trade capacity building in conjunction with opportunities provided under trade preference programs, which is currently most prominent in AGOA. Finally, distinct approaches to reporting and examining the programs limit the United States’ ability to determine the extent to which U.S. trade preferences foster development in beneficiary countries.

Trade Preferences Have Proliferated, Creating a Complex Array of Programs, but Congress Still Considers Each Program Separately

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Over the years, Congress has set up a number of trade preference programs to meet the overall goal of development, as well as specific regional objectives. As a result, U.S. trade preferences have evolved into an increasingly complex array of programs, with many countries participating in more than one of these programs (see fig. 7).

Figure 7. Growth of Trade Preference Programs Source: GAO analysis of USTR documents on Generalized System of Preferences, African Growth and Opportunity Act, Andean Trade Preference Act, and Caribbean Basin Initiative. Note: In this figure, we use CBI to refer to CBERA, the legislation initially establishing CBI. See notea to table 1.

Congress generally considers these programs separately partly because these programs have disparate termination dates, and Congress has focused on issues pertaining to individual

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programs when they have come up for renewal. Proposals from the administration and members of Congress suggest further additions to the preference programs are possible. Of the 137 countries and territories eligible for preference programs, as of January 1, 2007, 78 benefit from more than one (see fig. 8). The reason that many countries benefit from more than one program is that the regional preference programs have been added, as noted above, to further various U.S. foreign policy objectives. The regional programs in effect expand the preferences offered by GSP, but they result in overlap, with various combinations of program eligibility for certain countries. Thus, of the 48 countries to which the President may grant AGOA eligibility, 39 are eligible for AGOA, while 47 are eligible for GSP. The African country of Equatorial Guinea, for example, is ineligible for AGOA, but eligible for GSP, and it exported approximately $1.6 billion in fuel products to the United States under that program in 2006. The 59 countries eligible for only the basic GSP program, such as Argentina or Egypt, are neither LDCs nor part of a regional preference scheme. In the case of ATPA and CBI beneficiary countries, importers may choose whether to enter products eligible for the regional program and GSP under either one.52 Those importing goods from the Andean or Caribbean areas tend to use ATPA or CBI instead of GSP, due to the more liberal rules of origin and expanded product coverage for these programs. To a certain extent, this has mitigated the uncertainty associated with GSP program lapses. While there is overlap in various aspects of trade preference programs, each program is currently considered separately by Congress based on its distinct timetable and expiration date. Typically, when Congress has considered these programs for renewal, the focus has been on particular issues relevant to specific programs, such as counternarcotics cooperation efforts in the case of ATPA, or phasing out benefits for advanced developing countries in the case of GSP. The oversight difficulties associated with this array of preference programs and distinct timetables is compounded by different statutory review and reporting requirements for agencies. As explained in detail in the next section, in practice, these entail distinct administrative structures and approaches that leave gaps in assessment and use of tools known to be necessary to helping developing countries participate in trade. Congressional deliberations have not provided for cross-programmatic consideration or oversight. However, key congressional leaders appear to want to use this year’s coincidence of expiration dates for ATPA, CBI, and GSP to look more systematically at preference programs and how they can be updated and improved.53

Petition Process Responds to Concerns but Does Not Ensure Consistent Review or Systematically Incorporate Other U.S. Government Efforts GSP reviews of product and country practice petitions have the advantage of adapting the programs to changing market conditions and the concerns of businesses, foreign governments, and others. Most petitions originate outside the government, and agency officials, and NGO and private sector representatives cited the value of the petition process in bringing forward concerns related to intellectual property rights and workers’ rights. The process also brings to bear the knowledge of NGOs and others about problems in these areas and helps the government pursue credible cases.

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Figure 8. Countries Benefiting from Various Trade Preferences Programs, 2006 Source: GAO analysis of the Harmonized Tariff Schedule of the United States, 2006. Note: In the figure above, the CBTPA program is broken out because not all CBI countries are eligible for it. a Mauritania lost AGOA eligibility on Jan. 1, 2006, and regained AGOA eligibility on June 28, 2007. b Antigua and Barbuda, Bahrain, and Barbados were removed from GSP eligibility in January 2006 due to high per capita income. The United States–Bahrain Free Trade Agreement was implemented in July 2006. c The following countries were removed from eligibility for GSP, CBI, and CBTPA as Free Trade Agreements went into force: the Dominican Republic (March 2007), El Salvador (March 2006), Guatemala (July 2006), Honduras (April 2006), and Nicaragua (April 2006). d Bulgaria and Romania were removed from GSP eligibility in December 2006 when they became members of the European Union. e Haiti is also eligible for the Haitian Hemispheric Opportunity through Partnership Encouragement Act. f Under GSP, the Gaza Strip and the West Bank are listed as a single entity, although they are separately identified in U.S. trade data.

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Country review

GSP subcommittee of the TPSC

Petition proc-ess developed by regulation

Annual petition process

Reporting in GSP done via the USTR annual report

ATPA

Andean subcommitte e of the TPSC Caribbean subcommitte e of the TPSC AGOA implementation subcommitte e of the TPSC

No

Annual petition process and biennial general review Biennial general review

Biennial operational report

Biennial operational report

None

Annual eligibility determination

Annual report on U.S. Trade and Investment Policy toward Subaharan Africa and Implementation of GOAa

Multiple legislative directions to trade capacity building with spe-cific program linked to AGOA eligibility

CBI

AGO A

No

GSP petition process to determine product additions

Trade capacity building and related assistance tied to program

Product addition review

GSP

Reporting

Administrative mechanism

Table 4. Key Administrative Aspects of Trade Preferences Programs

Outreach missions to encourage greater beneficiary use of program None

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Source: GAO analysis of official USTR documents. a The 2007 Annual Report on AGOA was the sixth of eight required by law.

Private sector and labor representatives also said that they appreciated the petition process because it compels a formal decision from the government on the merits of a complaint and draws public attention to an issue. The process allows U.S. petitioners to seek and obtain resolution of trade-related concerns. For example, from 2001 through 2006, USTR conducted an investigation on copyright piracy and enforcement in Brazil in response to a petition filed under GSP by a coalition of seven trade associations concerned about IPR violations in that country. The investigation resulted in an agreement between the U.S. and Brazilian governments, hailed by the petitioner, to increase antipiracy raids in well-known marketplaces, establish antipiracy task forces at the state and local level in Brazil, and enhance deterrence through criminal prosecutions, among other actions. However, a petition-driven process also can result in a long time passing between reviews of country compliance with the criteria for participation. From 2001 to 2006, when the number of GSP beneficiaries ranged from 146 to 132, USTR considered petitions against 32

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countries. While some of these nations are reviewed under the regional preference programs, approximately three-quarters of the countries eligible only for GSP did not get examined at all for their conformity with eligibility criteria from 2001 through 2006. Long periods of time passed between overall reviews of GSP as well. As mentioned earlier, USTR initiated an overall review of the GSP program in October 2005. USTR completed the last general review of the program more than 18 years earlier in January 1987. A U.S. official told us that some of the countries reviewed frequently are not necessarily those that perform the worst relative to the criteria for participation, but rather those countries of most concern to particular groups, such as businesses or NGOs. In this sense, U.S. government resources may be unduly invested in performing repeated reviews of a country that is of particular concern to a given interest group, while other countries with potential problems receive substantially less scrutiny. A second weakness is that the petition-driven review fails to systematically incorporate other U.S. efforts in areas such as IPR protection and efforts to counter trafficking in persons. The centerpiece of U.S. policy efforts to increase IPR is the annual Special 301 process.54 USTR cites the GSP process as a key part of its mission to promote IPR overseas. Moreover, GAO reviewed the 2006 Special 301 report and found that over half of the 48 countries cited by USTR for concerns with respect to the provision of adequate and effective protection of IPR in 2006 were U.S. preference program beneficiaries. However, USTR did not accept any new petitions to review beneficiaries against the IPR criteria for participation in 2006. USTR officials observed to us that the placement of a country on the Watch List or Priority Watch List did not constitute a USG finding that the country failed to provide adequate and effective IPR protection. Rather, placement of a country on these lists indicates that particular problems exist in the country with respect to IPR protection, enforcement, or market access for persons relying on intellectual property. Additionally, industry officials told us that the administration has been reluctant to threaten removal of countries from GSP for lack of compliance with IPR protection in recent years, calling into question whether the leverage provided by the trade preferences is put to effective use. While it is possible that the administration may choose not to remove countries as a result of Special 301 designations, the lack of review, under the GSP provisions, of any of the 26 countries cited makes it appear that no linkage exists between these issues. U.S. efforts to combat trafficking in persons is another area where criteria for participation in trade preferences programs may have some bearing, although USTR officials noted that there is not a specific link between the preference program criteria and the Trafficking and Victims Prevention Act of 2000. Both State and the Department of Justice cite Labor’s Findings on the Worst Forms of Child Labor as among the U.S. government’s efforts to combat trafficking in persons.55 State issues an annual report that analyzes and ranks foreign governments’ compliance with minimum standards to eliminate trafficking in persons.56 State also prepares an annual report that discusses the status of internationally recognized worker rights within each GSP beneficiary. Twenty-seven of the 48 countries on the Tier 2 Watch List or in Tier 3 in the June 2007 Trafficking in Persons report are preference beneficiaries. In congressional hearings, members and a witness have cited concerns that countries in Tiers 2 and 3 receive trade benefits. Preference beneficiaries on the Tier 2 watch list include Argentina, Armenia, South Africa, Ukraine, and India, and beneficiaries on the Tier 3 list include Algeria, Equatorial Guinea, Uzbekistan, and Venezuela. At times, concerns in some of these countries may have

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been addressed through the regional programs. For example, the country reports contained in the 2007 Comprehensive Report on U.S. Trade and Investment Policy Toward Sub-Saharan Africa and Implementation of the African Growth and Opportunity Act cite concerns in beneficiary countries with respect to child labor and trafficking in persons, showing consideration of these issues in the eligibility determinations. In other countries such as Venezuela, Algeria, and Uzbekistan, the U.S. government has not received any petitions to initiate an examination of performance against any of the GSP eligibility criteria related to trafficking in persons in the last 5 years. Consequently, these countries have not been reviewed against those criteria for participation. As noted above, it is possible that the administration might choose not to remove countries as a result of these reviews, but it appears that no linkage between these issues exists, given the lack of official reviews.

Regional Program Reviews Ensure a More Systematic Look at Criteria for Participation but Are Resource-Intensive and Sometimes Miss Important Concerns The periodic reviews under the regional programs offer more timely and consistent evaluations of country performance against the criteria for participation. Among the regional programs, AGOA has the most intensive evaluation of country performance against the criteria for participation. AGOA requires the President to determine annually whether SubSaharan African countries are, or remain, eligible for the program. GAO found that, between 2001 and 2007, the President terminated eligibility four times and conferred eligibility eight times. Between 2001 and 2006, one country was removed and reinstated for GSP, and another country was reinstated after being removed in 1990. No country lost eligibility under the ATPA or CBI programs.57 The key difference between the AGOA review and the CBI and ATPA reviews is that only AGOA requires a determination periodically as to whether a country should remain a beneficiary. A USTR official testified that AGOA’s annual review process has resulted in improved country performance under the eligibility criteria. In July 2007, a senior USTR official testified before the Subcommittee on Africa and Global Health of the House Foreign Affairs Committee that the President had removed, or threatened to remove, AGOA beneficiaries that did not meet the criteria for participation. This official noted that some of these countries had taken action to meet the criteria, and countries such as Liberia and Mauritania, which had been ineligible, were now eligible. However, U.S. officials also commented that the AGOA review is extremely time-consuming and demands a considerable investment of staff resources, since each beneficiary country must be reviewed on its performance on a range of criteria, such as respect for the rule of law and poverty reduction efforts. Moreover, these reviews must be updated on an annual basis. Despite more regular and comprehensive reviews, 11 countries that are in regional programs were later subject of GSP complaints in the 2001 to 2006 period. In several cases, the petition-based examination associated with the GSP process validated and resulted in further progress in resolving concerns with regional partners such as Guatemala, Swaziland, and Uganda on labor issues. For example, in 2005, the American Federation of Labor and Congress of Industrial Organizations filed a petition regarding Uganda’s performance against workers’ rights criteria under GSP and AGOA. The petition led to an interagency investigation that was closed after Uganda enacted new legislation facilitating organization of unions, among other things. A Labor official told us that these issues had not been remedied under the AGOA review.

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Only One Preference Program Links to Capacity Building Efforts but No Funding Provided Many developing countries have expressed concern about their inability to take advantage of global trading opportunities because they lack the capacity to participate in international trade. The United States considers the ability of these countries to participate in and benefit from the global trading system key factors in promoting economic development, and has provided trade capacity building (TCB) assistance, to help developing countries more effectively take advantage of trade preferences, among other purposes. However, we found agencies pursue different approaches with regard to using TCB in conjunction with trade preference programs, with AGOA having the strongest link. AGOA requires the administration to produce an annual report on the U.S. trade and investment policy for Sub-Saharan Africa and the implementation of AGOA. The report includes information about trade capacity building efforts undertaken in the region by U.S. agencies such as the Department of Agriculture and USAID. Sub-Saharan Africa has also been the primary focus of U.S. TCB efforts linked to the preference programs, with the United States allocating $394 million in fiscal year 2006 to that continent. A USTR official noted that linkage to TCB in AGOA’s authorizing legislation was useful for USTR as leverage with U.S. agencies that have development assistance funding to target greater resources that help developing countries take advantage of opportunities provided by trade preferences. In our field work and research, we observed USAID efforts to improve the business and regulatory environments in Sub-Saharan Africa, including preparing private sector enterprises to navigate U.S. import regulations, coaching small businesses on access financial services for trade and investment, and facilitating investments in trade-related infrastructure. Several U.S. officials said that the annual AGOA Forum (Forum) also contributed to the stronger linkage between TCB and trade opportunities offered under the program.58 A USTR official told us that the Forum brings USAID, Millennium Challenge Corporation, and other U.S. officials together to focus on the program and that having agency leaders attend the Forum makes a big difference in generating business interest in the region. A USAID official told us that the Forum also provided the opportunity for African entrepreneurs to interact directly with senior members of the U.S. government. Although AGOA authorizing legislation refers to trade capacity building assistance, USTR officials noted that Congress has not appropriated funds specifically for that purpose. In other regions of the world, U.S. trade capacity building assistance has less linkage to trade preferences. For example, none of the other trade preference programs direct the relevant agencies to convene regularly to discuss how the program’s implementation affects trade opportunities. Some agencies refer to trade programs in developing their assistance efforts to non-African regions and countries. For example, USAID notes the need for more resources in its strategic plan to improve the business environment and enable local businesses to take advantage of HOPE. Further, other U.S. trade initiatives link market access opportunities with trade capacity building assistance, such as CAFTA-DR.

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Separate Reporting and Examination Hinder Measuring Progress on Programs’ Contribution to Economic Development Separate reporting for the various preference programs, while consistent with statutory requirements, makes it difficult to measure progress toward achieving the fundamental and shared goal of trade preferences, namely economic development of beneficiaries. The effect of trade preferences on beneficiary countries’ economic development is not assessed in a cross-programmatic manner that would examine progress made under preference programs. U.S. agencies do prepare reports that attempt to measure the effects on economic development of certain trade preference programs, but not all. The law requires only one program to directly report on impact on the beneficiaries. In addition, even when agencies report on the economic effect of some of these programs, different approaches are used, resulting in disparate analyses that are not readily comparable. As noted earlier in this report, trade preferences are fundamentally intended to promote development in beneficiary countries by providing enhanced opportunities for their products to access the U.S. market. In its 2006 to 2011 strategic plan, USTR notes that one of its objectives is to apply “U.S. trade preference programs in a manner that contributes to economic development in beneficiary countries.” However, there is no formal crossprogrammatic examination of the preference programs collectively. As shown in table 4, USTR pursues different approaches to administering these programs, and does not consider the preference programs jointly, with respect to their performance. Moreover, there is no evaluation of how trade preferences, as a whole, affect economic development in beneficiary countries. In response to statutory requirements, several government agencies report on certain economic aspects of the regional trade preference programs and their effects on specific countries or groups of countries, but these agencies do not report on the economic development impact of GSP. Agency officials noted that they strive to comply with statutory reporting requirements and, through the TPSC, they coordinate with each other on various aspects of administering these programs, including reporting. This reporting, nevertheless, is done on a program-by-program basis. For example, USTR has produced three reports to Congress on the operation of ATPA. The ITC also issues biennial reports on ATPA’s impact on U.S. industries and consumers and on drug crop eradication and crop substitution. Additionally, USTR prepares a biennial report for Congress on CBI that highlights increases in overall U.S. imports from the countries in the program. Similarly, ITC reports on the CBI program’s impact on beneficiaries on a biennial basis, the only report required by statute to address the impact on the beneficiaries. Finally, USTR produces an annual report on the implementation of AGOA that highlights trade and investment trends in Sub-Saharan Africa. However, there is no comparable periodic reporting on the effect of GSP on the economic development of countries covered by that program. USTR officials told us that the vehicles they use for reporting on the GSP program are the annual Report of the President of the United States on the Trade Agreements Program and the annual Trade Policy Agenda. Discussion of the GSP program in these documents focuses on product coverage and country conformity with eligibility criteria, not on the impact of benefits to beneficiary developing countries in terms of trade growth or economic development. Different approaches used to measure the effects of trade preference programs on beneficiary countries, while consistent with statutory reporting requirements, produce

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disparate data and analysis that are not readily comparable to evaluate how these programs advance economic development—their fundamental goal. For instance, USTR’s report on the ATPA provides some examples that illustrate the role of the program in promoting exports and development in each of the four beneficiary countries and refers to analyses by the ITC and Labor on some aspects of the economic impact of ATPA. On the other hand, ITC reporting on the ATPA provides some material on exports and economic diversification for countries under the program. USTR’s reporting on CBI highlights overall and country-specific increases in U.S. imports from countries in the CBI program. The report includes discussions on individual countries, which generally do not evaluate the impact of CBI on the exports or development of the beneficiaries. The ITC reports on the impact of CBI examine how that program affects those countries that have relatively large trade flows with the United States. The trade profile for the region presented in this report has shifted over time, with certain countries receiving more emphasis in earlier reports while later iterations focus on others. USTR’s comprehensive report on trade and investment in Sub-Saharan Africa and the implementation of AGOA provides an overview of trade and investment trends in participating Sub-Saharan countries, reviews economic integration efforts at the regional and subregional level, and discusses participation by AGOA countries in the WTO. Finally, while there is no regular reporting on the economic impact of GSP on beneficiary countries, in 1980, the administration prepared a statutorily required report to Congress on the first 5 years of operation of the GSP program. That report included an analysis of the impact of the GSP on developing country economies. This appears to have been a one-time report, and USTR officials confirmed that no further such reports were prepared.

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Thus, while there is an abundance of reporting on various aspects of the economic effects of trade preference programs on beneficiary countries, the analyses and data presented in these reports is typically quite dissimilar and does not lend itself for use in evaluating the overall effects of trade preferences.

CONCLUSIONS Congress created these programs over the years to address compelling trade and foreign policy objectives. The programs are important to individual businesses and industries, both domestically and internationally. Additionally, the criteria for participation associated with the programs have served as an important tool to advance U.S. foreign and trade policy objectives. The preference programs have evolved over time to accommodate not only the general goal of trade-led development, but regional interests, such as counternarcotics efforts in ATPA. Changes to the preferences programs in the past have had an impact on beneficiaries’ trade profiles with the United States, by stimulating export growth to this

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country. Much of the increased exports coincided with congressional expansions of the programs in 2000 and 2002 to cover key products. However, U.S. trade preferences are neither administered nor evaluated on a crossprogrammatic basis. A lack of systematic evaluation limits any judgment about the extent to which the collection of U.S. trade preference programs has increased trade and fostered development in beneficiary countries. While evaluations may occur to determine whether countries should retain eligibility for preferences, such inquiries have not been made regularly or in a consistent manner across the programs or beneficiary countries. Two different approaches have evolved to monitor compliance with criteria set for various trade preference programs, and we observed advantages associated with each approach, but individual program reviews result in gaps and appear disconnected from other on-going U.S. government efforts, such as the Special 301 process. Further, the petition-driven process can result in a long time passing between reviews of country compliance with the criteria for participation. There are also certain practices, such as stronger links between preference benefits and trade capacity building efforts in the AGOA program, that may be advantageous to some of the other programs. A distinct reporting approach for each program limits the United States’ ability to determine the extent to which U.S. trade preference programs as a whole foster development in beneficiary countries. However, the programs’ positive impact on developing economies may be attenuated because the United States does not extend preferential access to products that are important exports of beneficiary countries and because the United States imposes complex entry requirements for some products.

MATTERS FOR CONGRESSIONAL CONSIDERATION

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As Congress deliberates on whether to renew the ATPA, CBTPA, and GSP programs this calendar year, it should consider whether a more integrated approach would better ensure programs meet shared goals. Specifically, Congress should consider which elements of the approaches used by agencies to administer these programs, such as petition-initiated compliance reviews or periodic assessment of all countries under certain programs, have benefits that may be applied more broadly to trade preference programs in general. Congress should also consider streamlining various program reporting requirements to facilitate evaluating the programs’ progress in meeting their shared economic development goal.

RECOMMENDATIONS FOR EXECUTIVE ACTION To ensure that these programs, as a whole, meet their shared goals, we recommend USTR undertake the following two actions: work through the TPSC and its associated agencies to consider ways to administer, evaluate, and report on preference programs in a more integrated manner, and periodically convene the TPSC to discuss the programs jointly to determine what lessons can be learned from the various provisions concerning matters such as linkages to trade capacity building.

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Additionally, to ensure that beneficiary countries are in compliance with program criteria, we recommend that USTR should also periodically review preference beneficiaries that have not otherwise been reviewed by virtue of their membership in the regional programs.

AGENCY COMMENTS AND OUR EVALUATION We provided a draft of this report to USTR; the Departments of Agriculture, Commerce, Homeland Security, Labor, State, and Treasury; USAID and ITC. USTR, and the Departments of Agriculture, Labor, Commerce, Treasury, and State provided extensive technical comments on an interagency basis. The Departments of Homeland Security, Labor, and State, and ITC also provided separate technical comments. We have incorporated these comments where appropriate. USTR indicated that it would report on the actions taken in response to the recommendations in a letter, within 60 days of public issuance of this report, as required under U.S. law. As agreed with your offices, unless you publicly announce the contents of this report earlier, we plan no further distribution until 30 days from the report date. At that time, we will send copies of this report to interested congressional committees; the U.S. Trade Representative; the Secretaries of Agriculture, Commerce, Homeland Security, Labor, State, and the Treasury; the Administrator of USAID; and the Chairman of ITC. We also will make copies available to others upon request. In addition, this report will be available at no charge on the GAO Web site at http://www.gao.gov. If you or your staff have any questions about this report, please contact me at (202) 5124347 or [email protected]. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this report. GAO staff who made major contributions to this report are listed in appendix VI.

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Loren Yager Director, International Affairs and Trade

APPENDIX I. SCOPE AND METHODOLOGY In this report, we (1) describe how U.S. preference programs affect the United States, (2) review the effects of the programs on exports and development of foreign beneficiaries, (3) identify trade-offs facing the programs, and (4) evaluate the overall approach to preference programs. We followed the same overall methodology to complete objectives 1, 3, and 4. We reviewed and analyzed U.S. laws and regulations, authoritative international trade reports/documents describing the impact of trade preference programs on the United States,

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such as the biennial impact studies from the U.S. International Trade Commission (ITC) on the Caribbean Basin Initiative (CBI) and the Andean Trade Preference Act (ATPA), and periodicals. We interviewed officials from agencies participating in the Trade Policy Staff Committee—including the Office of the U.S. Trade Representative (USTR); the Departments of Agriculture, Commerce, Labor, State, and the Treasury; U.S. Customs and Border Protection; and ITC— regarding the impact of preferences on the U.S. economy. We also interviewed representatives of businesses that used the preference programs and nongovernmental organizations (NGOs) that have filed petitions under the programs. We reviewed academic, World Trade Organization, and other research studies, on the effects of preference erosion on developing countries. In addition, we analyzed the 2006 U.S. government reports on the Special 301 process, the August 2007 report on the Worst Forms of Child Labor, and finally, the 2007 State Department report on Trafficking in Persons. For information on key features and use of U.S. preference programs, we drew from findings from a previous GAO report on U.S. preference programs, International Trade: An Overview of Use of U.S. Trade Preference Programs by Beneficiaries and U.S. Administrative Reviews (GAO-07-1209). To review the effects of U.S. preference programs on exports and development of foreign beneficiaries, we reviewed relevant academic, government and other literature. Particularly useful were recent broad reviews of the trade preferences literature found in (1) Bernard Hoekman and Caglar Ozden, Trade Preferences and Differential Treatment of Developing Countries (Cheltenham, UK, and Northampton, MA: Edward Elgar Publishing, 2006) and (2) Caglar Ozden and Eric Reinhardt, “Unilateral Preference Programs: The Evidence,” chapter 6, in Simon J. Everett and Bernard Hoekman, eds., Economic Development and Multilateral Trade Cooperation (Washington, D.C.: The World Bank and Palgrave Macmillan, 2006). We also conducted extensive analysis of the U.S. tariff schedule and U.S. trade data published by the ITC. Our analysis focuses on 2006 data except where we engaged in analysis of historical trends. We relied on the 2006 edition of the official U.S. tariff schedule from the ITC to identify products (tariff lines) eligible for duty-free treatment under one or more U.S. trade preference programs, as well as the countries designated as eligible for each program. We also used ITC data to analyze Census data trends in overall U.S. imports, imports from preference beneficiaries, and imports actually entered under U.S. trade preference programs and to compute measures such as program coverage and utilization and the diversification of U.S. preference imports. More detailed information about our data analysis is contained in appendix II. Furthermore, we interviewed officials from the Office of the U.S. Trade Representative; the Departments of Agriculture, Commerce, Labor, State, and the Treasury; U.S. Customs and Border Protection; and ITC regarding the effects of preferences on foreign beneficiaries. In addition, we attended the sixth AGOA Forum in Accra, Ghana, in July 2007. We also traveled to Brazil, Colombia, Haiti, Kazakhstan, and Turkey to meet with U.S. embassy officials, foreign officials, and industry groups using U.S. preference programs to discuss the issues mentioned above. We selected these countries based on representation on preference program eligibility and income levels according to the World Bank and United Nations (see table 5). Additionally, we chose to visit Haiti and Ghana because they are among the poorest beneficiaries and ones where mechanisms to take advantage of recently expanded benefits under newer preference programs—Haitian Hemispheric Opportunity through Partnership Encouragement (HOPE) and African Growth and Opportunity Act (AGOA)—are being put in

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place. Also, Ghana was the site of the annual AGOA Forum. We selected Brazil and Turkey to visit because these countries have successfully used U.S. trade preferences to export a diverse range of relatively sophisticated manufactured goods. We chose Colombia and Kazakhstan because they are large users of preference programs and are both undertaking broader liberalization efforts. Colombia has completed a free trade agreement with the United States, and Kazakhstan is trying to join the WTO. Table 5. Countries Selected for GAO Field Research Beneficiary country Brazil Colombia Ghana Haiti Kazakhstan Turkey

Program

Income levels

GSP ATPA AGOA CBI/ HOPE GSP GSP

Upper-middle Lower-middle Low Low Upper-middle Upper-middle

Source: GAO.

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In addition, we selected these countries to gain perspective on the spectrum of issues related to usage and capacity of each of the programs in country. Brazil is a top user of the Generalized System of Preferences (GSP) program since the 1970s; Colombia is an extensive user of ATPA; Ghana represents the African countries under AGOA that are dealing with internal infrastructure issues that can limit their use of the preference programs; Haiti is an historic user of CBI and is in the beginning stages of implementing HOPE; Kazakhstan is an extensive user of GSP and is undergoing high liberalization; and Turkey is also another high user of GSP and exports sophisticated manufactured goods to the United States. We conducted this performance audit from March 2007 to February 2008 in accordance with generally accepted government auditing standards. Those standards require that we plan and perform the audit to obtain sufficient, appropriate evidence to provide a reasonable basis for our findings and conclusions based on our audit objectives. We believe that the evidence obtained provides a reasonable basis for our findings and conclusions based on our audit objectives.

APPENDIX II. ADDITIONAL INFORMATION ON GAO DATA ANALYSIS This appendix provides additional information relevant to the data analysis contained in this report. It includes information about the data used, definitions of program, product and country groupings, and definitions relevant to various program measures used.

Data We relied on the 2006 edition of the official U.S. tariff schedule (Harmonized Tariff Schedule [HTS]) from the ITC to identify products (tariff lines) eligible for duty-free

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treatment under one or more U.S. trade preference programs, as well as the countries designated as eligible for each program (beneficiaries or beneficiary countries). We considered any country designated for benefits for all or part of 2006 to be beneficiaries. We relied on official U.S. trade statistics for imports to analyze trends in overall U.S. imports, imports from preference beneficiaries, and imports actually entered under U.S. trade preference programs. Data for time series are in constant 2006 U.S. dollars. We made an adjustment for program and product groupings primarily pertaining to apparel such that those apparel items normally classified under HTS Chapters 61-63 eligible to enter duty-free under regional preference programs if they meet specified rules of origin, as specified in HTS Chapter 98, were identified and marked with a # sign. This accounts for the R#, J#, and D# in the program groupings below.

Program Groupings GSP: In terms of products, we defined products covered by GSP as the sum of all tariff lines designated as A or A* in the 2006 U.S. tariff schedule. In terms of countries, all countries that were designated as eligible for GSP at any point in 2006 were considered beneficiaries.

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GSP-least developed countries (LDC): In terms of products, we defined products covered by GSP-LDC as all tariff lines designated as A+. In terms of countries, all countries that were designated as eligible for GSP-LDC at any point in 2006 were considered beneficiaries. CBI: We defined this category to include products covered by CBI as E or E*, and products covered by CBTPA as R or R#. In terms of countries, all countries that were designated as eligible at any point in 2006 were considered beneficiaries. It should be noted that some of the countries in the 2006 sample have now lost eligibility for benefits under CBI due to the entry into force of the Dominican Republic-Central America-United States Free Trade Agreement (CAFTA-DR) as follows: Dominican Republic (March 2007), El Salvador (March 2006), Guatemala (July 2006), Honduras (April 2006), and Nicaragua (April 2006). ATPA: We defined products covered by ATPA as J, J*, and products covered by Andean Trade Promotion and Drug Eradication Act (ATPDEA) as J#, J+. We defined countries as Bolivia, Colombia, Ecuador, and Peru. AGOA: We defined products covered by AGOA as D, D#. We defined countries covered by AGOA as all countries eligible for the program at any point in 2006.

Product Groupings In order to examine broad groups of products, we organized the HTS product chapters into 12 sectors as follows: Animal and plant products (HTS, chapters 1-15) Prepared food, beverages, spirits, and tobacco (HTS, chapters 16-24) Chemicals and plastics (HTS, chapters 25, 26, 28-40)

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With the exception of textiles and apparel, for figure 5, we use the more aggregated groupings presented in our last report.60

Country Groupings We used the same sample of countries for analysis of import trends over time. Specifically, we assigned each country to a country group based on their eligibility and country income category in 2006. When time series analysis was done, it is thus for “2006 program beneficiaries” and “2006 country income group” rather than the actual program beneficiaries or actual income groups at earlier points in time. Numerous countries have been removed from programs over the 1992-2006 period, mostly due to attaining high-income status (e.g., Cyprus and Aruba), attaining overall competitiveness (Malaysia), joining the European Union (e.g., Hungary and Poland), or entering into a free trade agreement with the United States (e.g., Mexico and Morocco). For additional information on eligibility for programs by country, see appendix III of GAO-07-1209.

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AGOA countries: Those countries designated as eligible for the AGOA program at any point in 2006. All of these countries are eligible for GSP, and some of these countries are eligible for GSP-LDC. ATPA countries: Those countries eligible for ATPA at any point in 2006. All of these countries are also eligible for ATPDEA and GSP. CBI: Those countries designated as eligible for the Caribbean Basin Economic Recovery Act (CBERA) at any point in 2006. Some of these countries are also eligible for the Caribbean Basin Trade Partnership Act (CBTPA) and GSP. GSP-only countries: Those countries only designated as eligible for the GSP program. Country income groupings: We relied on World Bank data on country income levels. We relied on United Nations designations of least-developed countries and for data on country income when World Bank data was unavailable.

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Definitions Covered products: We defined covered products as all items identified in the 2006 U.S. tariff schedule as eligible for a preference program. We defined products covered by GSP as the sum of all tariff lines designated as A or A* in the U.S. tariff schedule. We defined products covered by GSP-LDC as all tariff lines designated as A+. We defined products covered by CBI as E, E* and products covered by CBTPA as R, R#. We defined products covered by ATPA as J, J*, and products covered by ATPDEA as J#, J+. We defined products covered by AGOA as D, D#. Eligible beneficiary(ies): We used the term eligible beneficiary for any countries designated as eligible for a particular preference program. The term eligible beneficiaries is used for all countries designated as eligible for a particular program. Country income category: We relied on World Bank data on country income levels. We relied on UN designations of least-developed countries. Dutiable products/imports: We defined dutiable products as all products that were subject to most favored nation (MFN) tariffs that are greater than zero in 2006. We defined the value of dutiable imports as total U.S. imports minus total imports of MFN duty-free products. Preference eligible imports: We defined preference eligible imports as the value of imports of covered products from eligible beneficiaries. Preference imports: We defined preference imports as the value of imports actually entered under a given preference program or programs.

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Preference margins: The difference between the otherwise applicable or MFN tariff rate and the rate at which the product is eligible to enter under U.S. preference programs. Most products covered by preferences enter duty-free, but some products enter at reduced (nonzero) duties. We relied on others’ estimates of U.S. preference margins, specifically those by a team of ITC and World Bank economists given responsibility for preparing estimates for U.S. programs as part of a multicountry study organized by the World Bank.

PROGRAM MEASURES Coverage: We considered coverage relative to two metrics: (1) the number of lines in the U.S. tariff schedule and (2) the total value of imports of covered products divided by the total value of imports of dutiable products (i.e., dutiable imports) from each preference partner. (See above for definitions of “covered products” and dutiable products.) Utilization: We calculated this as a ratio of the value of preference imports (imports actually entering under U.S. preferences) relative to (divided by) the value of imports of covered products.

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For coverage, summing the value of preference-eligible imports from all partners and then dividing it by the sum of the value of dutiable imports from all partners. For utilization, summing the total value of preference imports from all partners, and then dividing it by the total value of imports of covered products from all partners, that is, the sum of each partner’s covered products. Country averages related to total preference program coverage and utilization measures were calculated by: For coverage, summing the value of preference-eligible imports under all programs for each partner, including adjusting to avoid double counting where a product is covered by more than one program, and then dividing by the value of dutiable imports from that partner. For utilization, summing the value of preference imports from that country actually entering under preferences, adjusting to avoid double counting, and then dividing by the value of imports of covered products from that country.

Diversification

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Our analysis of diversification examines the distribution of total U.S. imports from preference-eligible countries at the two-digit level of product classification (i.e., at the “chapter level” or broad product grouping level of the HTS of the United States, the U.S. tariff schedule). We grouped preference-eligible countries according to the program(s) for which they were eligible in 2006. We then calculated a measure of diversification based on a normalization of a commonly used indicator of industry concentration known as the Herfindahl-Hirschman Index.61 For purposes of exposition and intuitive appeal, we re-based the index by subtracting it from one to show lower values as indicating lower diversification (more concentration) and values closer to one as indicating higher diversification (less concentrated). Specifically, the formula used to calculate the index is:

where xi represents the import/export value of the ith commodity, X is the country’s total imports/exports to the United States in 2006, where N is the number of products. The index value (H*) ranges from 0 to 1. For example, if the products are evenly distributed the value of the index would be 1, and the more concentrated the product distribution, the closer the value

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is to 0. It is observed that the index is a function of the mean and variance of the value of imports/exports share in different commodity groups.

APPENDIX III. COVERAGE, UTILIZATION, AND LIMITATIONS OF PREFERENCE PROGRAMS To assess the opportunities extended to developing countries under U.S. preference programs, we examined the scope of programs’ coverage by beneficiary and product, the size of tariff cuts (or margins of preference), and some eligibility conditions that can affect the ability of beneficiaries to access program opportunities. We also examined the extent to which countries are using the available opportunities.

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Coverage of U.S. Preference Programs Our analysis of U.S. tariff and trade data shows that duty-free coverage under U.S. trade preference programs has increased over time. Considered in combination, U.S. preference programs now extend duty-free status to most of the product lines in the U.S. tariff schedule. However, coverage varies notably by program, beneficiary, and product. Because eligibility for duty-free status is cumulative in that countries eligible for one preference program may also be granted additional preferences depending on their income and regional memberships, the potential duty-free access for particular countries can vary substantially. Figure 9 shows that, as of 2006, the countries eligible for GSP only were accorded duty-free access to 69 percent of the total number of tariff lines in the U.S. tariff schedule or 7,285 lines, composed of 3,879 MFN duty-free lines, and 3,406 additional lines that are duty-free under GSP. All three of the subsequently enacted regional programs, and their enhancements, improve upon GSP to varying degrees. The expansion of GSP for LDCs in 1996 also increased the number of duty-free lines for LDC partners. The proportion of tariff lines accorded duty-free status also varies by product. Figure 10 shows the distribution of dutiable and duty-free lines by product group. GSP alone offers relatively extensive duty-free coverage to certain manufactured goods, such as chemicals and plastics; glassware, precious metals, and jewelry; and machinery and electronics; where coverage exceeds 40 percent of tariff lines. However, duty-free coverage is much more limited for other product groups. Textiles, footwear, leather, and apparel are product groups where duties still apply to the most and highest percentage of lines, but where regional programs offer notable improvements in coverage over GSP. For example, with AGOA’s enactment and the enhancements of CBI and ATPA offered since 2002, 33 percent of apparel lines are eligible to enter duty-free under regional programs, and 43 percent of apparel lines altogether (including MFN and GSP) have duty-free access. Coverage can also be examined relative to imports from beneficiary countries using the ratio of preference eligible imports to total dutiable imports from beneficiaries eligible for particular programs.

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Our analysis (see table 6) shows that: (1) countries eligible for only GSP have the least coverage of partners’ dutiable imports—approximately 25 percent, (2) regional programs and GSP for LDC’s have much higher coverage of partners’ dutiable imports, and (3) country variations in coverage are wide.

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Figure 9. Cumulative Duty-free Tariff Lines in the U.S. Tariff Schedule, by Preference Program Source: GAO analysis of the Harmonized Tariff Schedule of the United States, 2006.

For example, 35 GSP beneficiaries including Lebanon, Paraguay, Somalia, and Zimbabwe have high coverage rates, exceeding 75 percent of the value of their dutiable imports. Yet, 48 GSP beneficiaries such as Bangladesh, Egypt, Pakistan, and Uzbekistan have low coverage rates (less than 25 percent of dutiable imports).

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Figure 10. Dutiable and Duty-free Lines in U.S. Tariff Schedule by Product Group Source: GAO analysis of the Harmonized Tariff Schedule of the United States, 2006. a Dutiable products face MFN duties and are ineligible for U.S. preference programs. b Duty-free products are eligible to enter duty-free due to MFN or U.S. trade programs. c Although some of these HTS lines are not listed as generally qualifying for these preference programs, items are eligible for duty free import under the regional programs if they meet the rules of origin.

PREFERENCE MARGINS The value and effectiveness of tariff preferences depends on the magnitude of the tariff that would otherwise be imposed on imported products, often referred to as the preference margin. Preferences can have an impact only if there is a nonzero tariff that otherwise would apply in the U.S. market. Moreover, if the MFN (normally applicable) tariff on a product is negligible, the advantage provided by preferences can be so small as to become an insignificant factor in trade decisions. A recent effort to quantify margins of preferences across all U.S. preference programs by staff economists at the ITC and the World Bank shows that preference margins are relatively high for apparel products, as well as certain agricultural

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goods (melons, cut flowers, frozen orange juice, raw cane sugar, and asparagus);62 they tend to be relatively low for other products and fairly uniform among programs.63 Specifically, the authors found the following: Across member countries and all eligible U.S. nonagricultural imports, AGOA preference margins were the highest on average (14 percent) in 2003. CBTPA preference margins ranked second with an average of 9 percent, and ATPA preference margins third with an average of 8 percent. Nonapparel preference margins average 3 percent to 5 percent for ATPA, CBTPA, and CBERA countries and show little variation across countries within each program. AGOA nonapparel preference margins are much higher—5 percent to 10 percent for more than half the countries, and 10 percent to 20 percent for a few. Average apparel margins under AGOA, CBTPA, and ATPA are two or three times as high as those for nonapparel for nearly all preference beneficiary countries. Despite its importance in AGOA trade, average petroleum preference margins by country did not exceed 2 percent, and most were well below 1 percent. All in all, the authors conclude, while “the potential duty savings from all U.S. preference programs represent a very small share of beneficiaries’ dutiable exports to the United States, countries in the CBTPA and those in the AGOA-LDC program show duty savings exceeding 10 percent of their dutiable exports to the United States.”64 In fact, the potential duty savings for 35 countries---all but 3 of whom qualify for regional programs—exceed 5 percent of the value of their dutiable exports to the United States. As a result, they find that preferences are sufficiently important to 29 countries’ exports to warrant concern over the impact of preference erosion due to multilateral and bilateral liberalization. At the same time, they note that some of this liberalization has since occurred, with the phase-out of global textile quotas in 2005.65

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Product Caps and Rules of Origin May Limit Use and Benefits Conditions on product entry are also a significant factor affecting opportunities and trade under U.S. preference programs. Two specific conditions, “competitive need limits” and “rules of origin,” illustrate how administration of program provisions, although addressing important policy considerations, may affect the ability of beneficiary countries to fully access the opportunities otherwise offered by U.S. preference programs.66 GSP places export ceilings or “competitive need limits” (CNL) on eligible products for certain beneficiaries that exceed specified value and import market share thresholds. (LDCs and AGOA beneficiaries are exempt.) Our analysis of 2006 data shows that some 37 percent of the value of imports of GSP products from non-LDC, non-AGOA GSP beneficiaries—or $13 billion of the $35 billion—were excluded from entering duty-free under GSP largely due to CNLs. Researchers also warn that rules of origin and related paperwork are often complex and can raise costs. As a result, it may not be worth incurring the expense of compliance to use preferences. Rules of origin for U.S. trade preference programs typically specify a minimum percentage value-added to the entering product that must come from the beneficiary country in order to qualify for duty-free treatment. However, some programs allow countries to “cumulate” inputs from other countries or regions. More complex rules apply to some

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products, notably apparel. The fact that U.S. Customs and Border Protection—the U.S. agency charged with enforcing such rules when goods enter the United States—used a 70page PowerPoint presentation to train its officers on the conditions associated with apparel access under U.S. preference programs is illustrative of the complexity of such rules. For example, our meetings with CBP and statements by Haitian textile industry groups indicate that some of the rules of origin for HOPE are highly complex to administer and use. Indeed, as recently as late November, 2007 industry sources had indicated to us that HOPE has yet to become fully operational for Haiti to benefit because of delays in issuing export visas, and the complicated nature of HOPE rules of origin. Another possible indication of the impact of rules of origin are the “fill rates” for each region’s quotas (known as “tariff preference levels”). Within Africa, the LDCs that qualify for liberalized rules of origin allowing “third country” (non.-U.S., non-AGOA) fabric and yarn to be used in apparel and still qualify for duty-free entry under AGOA had achieved a relatively high 43.3 percent “fill rate” for their quotas in 2006, versus other African suppliers, which must use domestic African or U.S. inputs, whose fill rate stood at 1.8 percent. Recent economic literature also suggests that AGOA had some success in increasing export activity for some countries, but the increased exports are mainly associated with the liberalized apparel provisions.”67 Yet others are concerned that without requiring more Sub-Saharan African value-added (e.g., through local sourcing and production), the trade, investment, and supply linkages to the local economy that foster development and diversification may not accrue to AGOA beneficiaries. As a result, the recent long-term extension of the third country fabric provision was accompanied by a new requirement to use fabrics deemed widely available for commercial use (i.e., in “abundant supply”) in Africa. However, at a recent ITC hearing, a major U.S. jeans manufacturer expressed concern that the limitations the law places on their flexibility to source fabric is making them reluctant to continue purchasing from African producers. Our fieldwork revealed examples where complex rules-of-origin requirements appear to be complicating preference trade. In Ghana, for example, we met with a firm that decorates Tshirts with original designs, using traditional African decorative techniques. This firm had been importing plain white T-shirts from Honduras to decorate in Ghana and then exporting them to the United States. We were surprised to learn that the firm had to pay duty on the finished product exported to the United States, since the inputs were exempt from tariffs under U.S. preferences programs. For example, the plain white T-shirts manufactured in Honduras would have entered the United States duty-free under CBI. The value-added through the decorative process in Ghana would also be exempt from duties under AGOA. However, because the T-shirt manufactured in Honduras did not meet the rules of origin requirements for the AGOA program this company was obliged to pay duty on the finished decorated shirts. The company is now seeking to shift its T-shirt purchases to South Africa, or another AGOA beneficiary, since this sourcing would enable them to qualify for duty-free treatment under AGOA. On the other hand, liberalizing quotas and rules of origin have been a principal means by which the regional programs have been improved in recent years. For example, CBTPA was enacted in 2000 to enhance the CBI program, and temporarily eliminates tariffs and most quantitative restrictions on certain products. The CBTPA liberalized rules of origin for certain textiles and apparel in an effort to mitigate adverse effects on CBI suppliers caused by diversion of production and U.S. trade to Mexico when the North American Free Trade Agreement (NAFTA) entered into force. The change in rules appears to have benefited CBI

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suppliers somewhat. Notably, items entering under the CBTPA, such as cotton T-shirts and trousers had become leading imports from Central America and the Dominican Republic at the time the ITC assessed the impact of CAFTA-DR in 2005. Yet, apparel and footwear were also the Central American sectors expected to benefit most from further liberalization of U.S. access under CAFTA-DR. Notably, CAFTA-DR attempted to sustain and encourage subregional integration within the Americas by further loosening rules of origin to allow “cumulation” (adding together the value) of inputs from United States, CAFTA-DR, NAFTA, and CBI suppliers to meet its rules of origin. Bringing such attempted improvements in opportunities to fruition remains complex. In our visit to Haiti, for example, there was uncertainty as to how CAFTA-DR will interact with Haiti’s new HOPE program. In particular, concern was expressed over whether existing production-sharing operations between the Dominican Republic and Haiti would be eligible for duty-free entry.

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Utilization of Regional Programs Is Fairly High Compared with GSP but Varies by Partner Our analysis of the share of preference eligible imports actually entering under each preference program shows that the benefit of U.S. preference programs may vary considerably by program and partner. Figure 11 shows the 2006 utilization of U.S. preference programs where the “utilization rate” is defined as the ratio of actual preference imports under each program to eligible imports. As Figure 11 indicates, the utilization rate for the regional preference programs offered by the United States is high, particularly relative to the utilization of GSP. To some extent, low utilization of GSP may reflect the fact that coverage across programs is relatively uniform for many products, whereas program conditions and rules of origin vary. As a result, countries that have access to both GSP and regional programs may opt to use the regional programs. The utilization rate for GSP or GSPLDC imports from all eligible partners was 61 percent. The utilization rate for imports from countries eligible for only GSP or GSPLDC was slightly higher, at about 75 percent. Countries eligible for GSPLDC, with enhanced duty-free access, had a utilization rate of 58 percent. Countries that were eligible for AGOA and CBI/CBTPA had utilization rates of 77 percent and 47 percent, respectively. The four Andean countries eligible for ATPA/ATPDEA had the highest utilization rate of 90 percent. Our analysis of data for each program (see table 6) shows variation in utilization of the programs across eligible countries in 2006. In brief, our analysis finds the following: GSP or GSPLDC—Analysis of GSP shows that low-income countries are well represented among the top countries in terms of utilization rates, as 9 of the 35 countries with high utilization rates are designated low income. The utilization rates of the leading GSP exporters to the United States in terms of value vary widely, ranging from 99 percent (Zimbabwe) to 9 percent (Chad).

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Figure 11. Utilization Rates of U.S. Preference Program Partners, 2006 Source: GAO analysis of official U.S. trade statistics and tariff schedule. Note: The four CBI/CBTPA countries that lost preference eligibility in 2006 are included in the CBI and regional averages.

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United States Government Accountability Office AGOA—Nigeria uses AGOA for 96 percent of its exports to the United States and dominates the share of U.S. imports under the program. Other major suppliers are Angola, Chad, and Gabon. The program appears to be highly utilized for exports of others with lesser-valued imports, including Botswana, Cameroon, Cape Verde, Ethiopia, Kenya, Lesotho, Madagascar, Mauritius, Mozambique, South Africa, Senegal, Swaziland, Tanzania, and Uganda. Perhaps, as a reflection of weaknesses in the trade capacities of some AGOA eligible countries, 12 of the 38 AGOA eligible countries (Benin, Burundi, Djibouti, Gambia, Guinea-Bissau, Guinea, Liberia, Rwanda, Sao Tome and Principe, Seychelles, Sierra Leone, and Democratic Republic of the Congo (formerly Zaire) did not export under the program, though several did export under GSP. ATPA/ATPDEA—Most of the approximately $13.5 billion in U.S. preference imports under ATPA/ATPDEA came from three beneficiaries. However, utilization of the program by all beneficiary countries, including Bolivia, is relatively high. CBI/CBTPA—The CBI/CBTPA preference program is the most varied regional program in terms of the development status of eligible countries as seven of the countries eligible for CBI are high income, one (Haiti) is low income, and the rest are middleincome countries. However, Trinidad and Tobago—a high-income country—is the leading supplier and has the highest utilization rate under this preference program.

APPENDIX IV. U.S. IMPORTS AND GLOBAL EXPORTS FROM LEAST-DEVELOPED COUNTRIES Dollars in millions

Product group Animal and plant products Prepared food, beverages, spirits, and tobacco Chemicals, plastics, and minerals except fuel

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Fuel Wood and paper products Textiles, leather, and footwear

Preference Imports Imports imports

Ratio of U.S. Preference preference to total imports U.S. imports

2005 LDC exports to the world

$408

2%

$29

0%

7

62%

90

0

56

0

62

6 2

370

2

92

1

25

15,129

66

14,513

92

96

3

12

0

2

0

17

5

178

1

5

0

3

1

6,214

27

1,008

6

16

16

Glassware, precious metals and stones, jewelry

179

1

9

0

5

5

Base metals and articles of base metals

38

0

5

0

12

0

Machinery, electronics, and hightechnology apparatus

16

0

1

0

7

0

0

0

0

0

30

0

Apparel

Aircraft, autos, and other transportation Miscellaneous manufacturing Total

160

1

7

0

5

0

$22,796

100%

$15,728

100%

69

100%

Source: GAO analysis of official U.S. trade statistics and U.N. trade statistics.

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APPENDIX V. PREFERENCE IMPORTS BY PROGRAM AND PRODUCT GROUP, 2006 Dollars in billions Preference imports in 2006

Share in each preference program

Percentage of Percentage of total U.S. preference imports imports Value

Product group Animal and plant products

GSP

AGOA

ATPA/ ATPDEA

CBI/ CBTPA

2%

0%

7%

9%

$2.4

3%

6%

Prepared food, beverages, spirits, and tobacco

2.9

3

8

4

0

3

9

Chemicals and plastics

5.6

6

3

12

0

1

14

Wood and paper products

1.0

1

2

3

0

0

0

Textiles, leather, and footwear

0.9

1

2

2

0

0

1

Glassware, precious metals and stones, jewelry

6.0

7

10

17

0

2

3

Base metals and articles of base metals

5.1

6

5

12

0

8

0

Machinery, electronics, and hightechnology apparatus

4.9

5

1

14

0

0

4

Aircraft, autos, and other transportation

1.9

2

1

5

1

0

0

Miscellaneous manufacturing

0.7

1

0

2

0

0

0

54.8

59

17

27

94

68

27

5.9

6

7

0

3

10

32

$92.1

100%

5%

100%

100%

100%

100%

Fuels Apparel Total

Source: GAO analysis of official U.S. trade statistics and tariff schedule.

APPENDIX VI. GAO CONTACT AND STAFF ACKNOWLEDGMENTSAPPENDIX GAO Contact Loren Yager, (202) 512-4347, or [email protected]

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Staff Acknowledgments In addition to the individual named above, the following persons made major contributions to this report: Kim Frankena, Assistant Director; Juan Gobel, Assistant Director; Ann Baker; Gezahegne Bekele; Ken Bombara; Karen Deans; Etana Finkler; Richard Gifford Howland; Ernie Jackson; Marisela Perez; and Celia Thomas. The team also benefited from the expert advice and assistance of Martin de Alteriis, Susan Offutt, and Mark Speight.(320480)

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CONGRESSIONAL RELATIONS Ralph Dawn, Managing Director, [email protected], (202) 512-4400 U.S. Government Accountability Office, 441 G Street NW, Room 7125 Washington, DC 20548

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Table 6. Coverage and Utilization Rates by Beneficiary Country and Preference Dollars in millions All preference programs Beneficiary

Total imports

Preference imports

Coverage rate

Utilization rate

Afghanistan

$45.2

$0.2

74%

28% 62

Albania

12.5

0.2

5

Algeria

14,752.7

0.3

0

55

Angola

11,513.8

11,307.2

100

100

Anguilla

4.2

0.0

0

N.A.

Antigua and Barbuda

5.8

0.0

49

4

3,924.7

666.4

33

78

46.5

28.1

85

97

2,605.7

0.2

100

0

Bahamas

435.7

125.1

99

59

Bahrain

632.3

0.7

37

1

3,267.8

20.5

1

72

33.0

4.7

85

87

146.4

78.2

98

70

Argentina Armenia Aruba

Bangladesh Barbados Belize Benin

0.6

0.0

89

90

Bhutan

1.1

0.0

47

9

Bolivia

362.4

187.9

99

85

25.6

3.5

22

89

252.1

28.3

96

97 58

Bosnia and Herzegovina Botswana Brazil

26,169.0

3,737.7

48

British Indian Ocean Territory

0.8

0.0

39

0

British Virgin Islands

26.3

0.2

54

11

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Bulgaria

457.4

61.1

39

83

Burkina Faso

1.0

0.1

94

10

Burundi

1.9

0.0

25

0

Cambodia

2,188.2

5.0

0

54

Cameroon

223.5

153.2

100

92

Cape Verde

1.0

0.1

100

37

Central African Republic

4.3

0.0

41

0

1,904.7

1,698.0

100

91

Chad Christmas Island

0.4

0.0

54

0

Cocos (Keeling) Islands

1.5

0.0

52

0

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United States Government Accountability Office Table 6. (Continued)

GSP

Regional programs

Preference Eligible for Regional imports Coverage rate Utilization rate GSPLDC program

Preference imports

Coverage rate

Utilization rate

4,532.9

100

40



$0.2

74%

28%

0.2

5

62

0.3

0

55

6,774.3

100

60

 AGOA

0.0

49

0

CBI

0.0

65

3

666.4

33

78

28.1

85

97 CBI

0.2

100

0

CBI

125.1

99

59

CBI/ CBTPA

4.7

85

87

CBI/ CBTPA

72.2

98

65

0.0

0

0

166.2

99

76

28.2

94

99

CBI

0.2

54

11

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0.0

0.7

37

1

20.5

1

72

0.0

79

0

6.0

27

19

0.0

89

90

0.0

47

9

21.7

60

16

3.5

22

89



 AGOA  ATPA/ ATPDEA

0.0

2

4

3,737.7

48

58

AGOA

0.0

39

0

0.0

47

0

61.1

39

83

0.1

92

9

 AGOA

0.0

83

1

0.0

25

0

 AGOA

0.0

0

0

5.0

0

54

0.8

2

24

AGOA

152.4

98

94

0.0

100

7

 AGOA

0.1

30

100

0.0

41

0



166.6

100

9

 AGOA

1,531.4

100

82

0.0

54

0

0.0

52

0



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Table 6. (Continued) Dollars in millions All preference programs Beneficiary Colombia Comoros Congo Cook Islands Costa Rica Croatia Democratic Republic of the Congo (formerly Zaire) Djibouti Dominica

Preference imports

Coverage rate

Utilization rate

9,239.8

4,972.8

92

91

1.5

0.0

0

N.A

3,045.5

774.6

100

26

2.1

0.0

53

5

3,813.5

1,495.3

94

92

352.6

145.6

76

90

85.1

2.6

98

94

3.3

0.0

2

0 29

3.1

0.1

23

Dominican Republic

4,540.0

2,613.8

99

86

Ecuador

7,011.4

5,396.4

98

94

Egypt

2,404.2

69.9

8

90

El Salvador

1,842.7

164.0

97

10

Equatorial Guinea

1,718.1

1,558.9

100

95

0.9

0.0

69

0

Eritrea Ethiopia

81.1

7.2

86

98

Falkland Islands

12.2

0.0

41

0

Fiji Gabon Gambia Gaza Strip

145.8

52.8

41

98

1,331.0

1,290.0

100

100

0.3

0.0

58

60

0.8

0.3

44

92

Georgia

115.6

34.5

54

96

Ghana

192.2

45.3

99

65

0.8

0.1

86

37

Gibraltar Grenada Guatemala Copyright © 2010. Nova Science Publishers, Incorporated. All rights reserved.

Total imports

Guinea-Bissau

4.5

0.1

28

62

3,102.7

699.3

97

30

0.5

0.0

76

0

Guinea

91.7

0.1

44

58

Guyana

125.0

19.7

95

95

496.1

380.7

99

82

data not significant

0.0

data not available

data not available

Haiti Heard Island and McDonald Islands

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United States Government Accountability Office Table 6. (Continued)

GSP Preference imports

Coverage rate

Regional programs Utilization Eligible for Regional rate GSPLDC  =



 =

   =  



ƈ¬

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 Ɛ¬ =

0.0

0

37

0.0

53

5

113.3

37

18

145.6

76

90

2.6

98

94

0.0

2

AGOA

774.5

100

26

1,382.0

94

85

 AGOA

0.0

1

0

0

 AGOA

0.0

CBI

CBI/ CBTPA

0.0

18

0

0.1

23

29

132.7

42

10

CBI/ CBTPA

2,481.0

99

82

71.2

4

27

ATPA/ ATPDEA

5,325.2

98

92

69.9

8

90

9.9

4

15

154.1

97

10

1,558.9

100

95

0.0

69

0

2.2

28

92

 AGOA

5.0

61

97

0.0

41

0

52.8

41

98

0.0

0

0

AGOA

1,290.0

100

100

0.0

56

62

 AGOA

0.0

2

0

92 AGOA

34.9

84

59

CBI/CBTPA 

0.3

44

34.5

54

96

10.5

16

96

0.1

86

37

0.0

24

33

CBI

46.4

16

12

CBI/CBTPA

0.0

76

0

0.1

43

59

14.6

73

91

1.4

4

8

0.0

data not available

data not available

0.1

28

33

652.8

97

28

 AGOA

0.0

0

0

 AGOA

0.0

2

0

CBI/ CBTPA

5.1

95

25

 CBI/ CBTPA

379.3

99

82

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Table 6. (Continued) Dollars in millions All preference programs Total imports

Preference imports

Coverage rate

Utilization rate

3,734.7

568.6

99

19

21,673.6

5,678.0

53

84

Indonesia

13,267.8

1,945.7

33

76

Iraq

11,326.3

0.2

0

68

722.7

20.0

14

76

Beneficiary Honduras India

Ivory Coast Jamaica

470.9

257.8

98

98

1,421.3

15.3

9

12

Kazakhstan

988.9

483.1

61

97

Kenya

352.8

272.9

99

96

Kiribati

1.3

0.0

25

0

Kyrgyzstan

4.2

0.0

33

2

Lebanon

87.8

34.2

80

96

Lesotho

408.4

384.6

100

99

Liberia

139.8

0.0

98

0

Macedonia

42.2

7.5

34

99

Madagascar

281.1

231.6

100

96

79.0

60.9

100

80

7.9

0.5

48

56

Jordan

Malawi Mali Mauritania

51.2

28.3

100

56

Mauritius

218.6

157.5

99

92

Moldova

37.1

2.4

12

78

Mongolia

113.9

0.5

1

58

0.8

0.0

75

0

15.6

11.8

100

100

Montserrat Mozambique

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Namibia

115.6

33.2

96

70

Nepal

99.4

4.0

8

78

Niger

123.7

0.0

95

0

Netherlands Antilles

1,100.6

2.2

100

0

Nicaragua

1,526.1

111.0

96

9

27,863.4

25,824.3

100

96

0.1

0.1

99

100

0.1

0.0

97

44

782.0

64.7

12

98

Nigeria Niue Norfolk Island Oman

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United States Government Accountability Office Table 6. (Continued)

GSP

Regional programs

Preference Eligible for Regional imports Coverage rate Utilization rate GSPLDC program 12.7

20

2

5,678.0

53

84

1,945.7

33

76

0.2

0

68

20.0

14

76

12.1

17

27 12

Preference imports

Coverage rate

Utilization rate

CBI/CBTPA

555.8

99

18

CBI/ CBTPA

245.8

98

93

AGOA

265.1

95

97

15.3

9

483.1

61

97

7.9

4

61

0.0

25

0

0.0

33

2

34.2

80

96

0.1

0

30

 AGOA

384.5

100

99

0.0

98

0

 AGOA

0.0

98

0

7.5

34

99

2.1

2

57

 AGOA

229.5

98

96

31.0

76

54

 AGOA

29.9

94

42

0.5

47

56

 AGOA

0.0

8

2

28.3

100

56

 145.8

90

93

0.0

75

0



11.7

8

80

2.4

12

78

AGOA

0.5

1

58

0.0

59

0

CBI

10.9

94

97

 AGOA

0.9

9

90

0.2

0

87

AGOA

33.0

96

70

4.0

8

78

0.0

95

0

0

  AGOA

0.0

94

CBI

2.2

100

0

111.0

96

9

25,823.1

100

96

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CBI/CBTPA 1.2

0

66

0.1

99

100

0.0

97

44

64.7

12

98

AGOA

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Table 6. (Continued) Dollars in millions All preference programs Total imports

Preference imports

Coverage rate

Utilization rate

Pakistan

3,666.6

130.3

4

90

Panama

337.6

58.0

93

87

Beneficiary

Papua New Guinea

83.6

2.9

10

99

Paraguay

51.4

24.8

82

98

Peru

5,896.9

3,381.2

99

98

Philippines

9,696.7

1,141.5

38

72

0.1

0.0

47

0

Pitcairn Island Romania Russia Rwanda Sao Tome and Principe

283.5

52

77

512.1

15

34

8.9

0.9

97

100

0.2

0.0

95

0

Senegal

21.4

14.4

87

94

Serbia/Montenegro

68.6

29.8

85

80

Seychelles

10.1

0.1

33

26

Sierra Leone

35.9

0.1

62

16

2.2

0.0

44

3

Solomon Islands Somalia

0.4

0.0

79

0

South Africa

7,497.3

1,783.3

97

92

Sri Lanka

2,141.0

143.6

9

88

St. Helena

1.7

0.0

99

0

St. Kitts and Nevis

50.0

25.8

96

91

St. Lucia

37.3

7.6

94

24

2.0

0.2

98

19

St. Vincent and the Grenadines

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1,151.6 19,641.6

Suriname

164.2

0.2

83

14

Swaziland

155.8

149.8

100

98

Tanzania

34.6

3.7

72

93

Thailand

22,344.7

4,252.3

53

83

Togo

3.6

2.3

99

99

Tokelau Islands

5.1

1.0

33

91

Tonga Trinidad and Tobago Tunisia

7.3

0.2

9

54

8,398.5

3,685.1

99

95

427.8

113.9

40

89

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United States Government Accountability Office Table 6. (Continued) GSP Preference imports

Coverage rate

Regional programs Utilization rate

130.3

4

90

24.2

76

45

2.9

10

99

24.8

82

98

179.4

42

12

1,141.5

38

72

Eligible for Regional GSPLDC program CBI/CBTPA

ATPA/ ATPDEA

Preference imports

Coverage rate

Utilization rate

33.8

93

51

3,201.9

99

93

0.0

47

0

283.5

52

77

512 .1

15

34

0.9

97

100



AGOA

0.0

95

0



AGOA

0.0

27

0

0.1

2

44

AGOA

14.2

85

95

29.8

85

80

0.1

32

26

0.1

62

16

0.0

44

3

0.0

79

0

1,065.9

59

91

143.6

9

88



0.0

AGOA

0.0

0

0

AGOA

0.0

2

0

AGOA

717.4

38

96



0.0

99

0

1.0

85

4

CBI

24.7

96

87

0.5

19

7

CBI/ CBTPA

7.1

94

22

0.0

97

2

CBI

0.2

98

17

14 AGOA

135.4

89

99

AGOA

3.0

57

96

3,677.7

99

95

0.2

83

14.4

10

95

0.7

17

71

4,252.3

53

83

2.3

99

99

1.0

33

91

0.2

9

54

7.4

27

1

113.9

40

89

 

CBI/ CBTPA

Dollars in millions All preference programs Beneficiary Turkey Copyright © 2010. Nova Science Publishers, Incorporated. All rights reserved.

Turks and Caicos Islands Tuvalu

Total imports

Preference imports

Coverage rate

Utilization rate

5,387.0

1,125.7

48

70

12.1

0.0

17

16

0.0

0.0

0

N.A

Uganda

21.8

2.5

97

95

Ukraine

1,637.9

23.8

26

34

Uruguay

512.1

50.3

14

86

Uzbekistan

151.5

2.8

16

99

2.3

0.1

80

100

36,283.4

685.2

3

96

data not significant

0.0

data not available

data not available

3.1

0.8

46

60

Yemen

447.4

390.2

100

89

Zambia

29.0

0.4

94

74

$103.2

$67.7

95%

99%

Vanuatu Venezuela Wallis and Futuna West Bank

Zimbabwe

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Table 6. (Continued)

GSP Preference imports

Coverage rate

Regional programs Utilization Eligible for Regional rate GSPLDC program

1,125.7

48

70

0.0

17

16

1.0

41

89

23.8

26

34

50.3

14

86

2.8

16

99

Preference imports

Coverage rate

Utilization rate

1.5

56

100

$0.0

8%

19%



0.0

0.1

80

100

685.2

3

96

0.0

data not available

data not available 60

 AGOA



0.8

46

390.2

100

89



0.4

86

79

 AGOA

$67.7

95%

99%

Source: GAO analysis of official U.S. trade statistics and tariff schedule.Note: Program eligibility information is for 2006. For detailed information about changes in country eligibility during 2006, see GAO-07-1209, appendix III, table 1, pages 51- 55.

END NOTES

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1

GAO, International Trade: An Overview of Use of U.S. Trade Preference Programs by Beneficiaries and U.S. Administrative Reviews, GAO-07-1209 (Washington, D.C.: Sept. 27, 2007). 2 MFN trade is a concept promulgated in Article I of the General Agreement on Tariffs and Trade (GATT). The article provides that contracting parties to GATT must grant each other treatment as favorable as they give to any country in the application and administration of import duties. 3 See the Decision on Differential and More Favourable Treatment Reciprocity and Fuller Participation of Developing Countries, Nov. 28, 1979, GATT Doc. L/4903, known as the Enabling Clause, paras. 3(a) and (b). 4 ATPA expires Dec. 31, 2008. 5 Certain CBI countries receive enhanced benefits under CBTPA on previously excluded products, such as apparel, footwear, handbags, etc. These enhanced benefits expire on Sept. 30, 2008. Other CBI benefits are permanent. 6 GSP expires Dec. 31, 2008. 7 Section 206 of ATPA requires ITC to prepare a biennial report assessing the actual and the probable future effects of ATPA on U.S. industries and U.S. consumers. The most recent is: ITC, The Impact of the Andean Trade Preference Act, 12th Report 2005, Investigation No. 332-352 (Washington, D.C., ITC Publication 3888, September 2006). 8 Section 215 of CBI requires ITC to report biennially to Congress with an assessment of the actual and probable future effects of CBI on U.S. consumers and U.S. industries. The most recent is: ITC, The Impact of the Caribbean Basin Economic Recovery Act, 18th Report 2005-2006, Investigation No. 332-227 (Washington, D.C.: ITC Publication 3954, September 2007). 9 Congressional Research Service, Generalized System of Preferences: Background and Renewal Debate (Washington, D.C., January 2008). 10 GAO-07-1209. 11 For more information on the overall review, see p. 41. 12 See ITC, CBI 18th Report (Investigation No. 332-227) and ATPA 12th Report (Investigation No. 332-352), analytical approach section. 13 ITC defines consumer surplus as a dollar measure of gains (or losses) to consumers resulting from lower (higher) prices. 14 Title V of Pub. L. No. 109-432, Dec. 20, 2006.

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GAO-07-1209. In the annual GSP review process, petitions may be filed by interested parties to request actions allowed by the statute and regulations governing the GSP program, including adding or removing a product from overall GSP eligibility and waiving the CNL for a product from a specific beneficiary. In addition, any person may file a petition requesting that the status of any eligible beneficiary be reviewed with respect to any of the designation criteria listed in the statute governing the GSP program. 17 In principle, a country granted duty-free access under U.S. trade preference programs would see demand for its exports grow, relative to exporting countries still facing MFN (normal) tariffs. If the exporter is a “price taker” on world markets for its goods—i.e., if its share of world supply is so small that it does not change world prices—it may also be able to keep the difference between the prevailing world market price and what it is able to charge as a result of duty savings, thereby transferring the foregone duties to the exporting country. The increase in exports and the duty transfer both would benefit the exporting country. Quantifying these effects and isolating them from other forces influencing countries’ growth and development has proven difficult. As a result, economists tend to look at descriptive data on program coverage, use, and trade to analyze the likely effect of preferences on countries’ development. 18 See appendix II for a discussion of our definition of eligible and dutiable, and our methodology for calculating country trade coverage. 19 Judith Dean and John Wainio, “Quantifying the Value of U.S. Tariff Preferences for Developing Countries,” World Bank Policy Research Working Paper 3977 (2006), forthcoming in C. Braga, B. Hoekman, and W. Martin, eds., Trade Preference Erosion: The Terms of the Debate (New York: The World Bank and Palgrave Macmillan). The authors develop and use detailed tariff rate data for all U.S. imports, and estimate ad valorem (by value) tariff rates for goods such as agriculture and apparel that face complex tariffs and tariff-rate quotas, as well as the overall tariff savings from preferences by country. Such analysis is beyond the scope of GAO’s present study. 20 Despite relatively low MFN tariffs, petroleum-related products, chemicals, jewelry, and electrical machinery were also significant products in the duty savings of countries. Regarding cut flowers, ITC staff note that with duty rates of some 6.8 percent and high shipping costs, the effective duty rate (margin of preference) is somewhat lower. 21 Caglar Ozden and Eric Reinhardt, “Unilateral Preference Programs: The Evidence”; chapter 6 in Simon J. Everett and Bernard Hoekman, eds., Economic Development and Multilateral Trade Cooperation (Washington, D.C.: The World Bank and Palgrave Macmillan, 2006), 197-199. For another review of the research on trade preferences, see chapter 1, Bernard Hoekman and Caglar Ozden, eds., Trade Preferences and Differential Treatment of Developing Countries (Cheltenham, U.K., and Northampton, MA: Edward Elgar, 2006), xi-xlii. 22 The ratio of the actual imports entering the United States that claim a preference, to the total imports that are eligible to do so, is termed the “utilization rate.” See appendix III for data and further discussion. 23 Some of the 12 did export under GSP. 24 The United Nations currently designates 50 countries as “Least Developed Countries.” Least Developed Countries (LDC) are countries which according to the United Nations meet certain specific criteria, including a low-income criterion, a human resource weakness criterion, and an economic vulnerability criterion. To be added to the list, a country must satisfy all three criteria. To qualify for graduation, a country must meet the thresholds for two of the three in two consecutive reviews. Also, the list does not include countries whose population exceeds 75 million. There is thus not a one-to-one correspondence between the level of income of countries and their LDC designation. 25 With the entry into force of the Dominican Republic-Central America-United States Free Trade Agreement (CAFTA-DR), the Dominican Republic was no longer a U.S. preference program beneficiary as of Feb. 28, 2007. 26 For further information comparing the distribution of total U.S. preference imports in 2006 to the distribution of total LDC exports to the world, see appendix IV. Forty-six of the 50 countries identified by the United Nations as LDCs are U.S. preference program beneficiaries. 27 See appendix II for further information on methodology. We conducted the analysis at a fairly high level of product aggregation—that is, at the two-digit level of product classification in the Harmonized Tariff System. 28 It should be noted that the data are for total U.S. imports for the relevant countries (present U.S. beneficiaries) over the period. Our more detailed analysis showed that products such as fuel, which have come to dominate U.S. preference imports in the AGOA program, were imported by the United States prior to the advent of the AGOA program in 2000 and their designation as preference imports. Therefore, fuels could be considered as a “traditional” import product by the United States and would not generally change the diversification profile of U.S. imports from AGOA countries. 29 For additional background, see GAO, Foreign Assistance: U.S. Trade Capacity Building Extensive, but Its Effectiveness Has Yet to be Evaluated, GAO-05-150 (Washington, D.C.: Feb. 11, 2005).

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217

USTR has provided training and outreach to producers in the government and business associations in Turkey to promote GSP awareness and continues to assist U.S.-based Turkish-American business associations. Other than that, Brazil and Turkey receive little or no assistance from U.S. agencies, such as USAID. 31 An analysis provided GAO by the Federation of Industry of Sao Paolo, for example, shows that inter-company trade accounted for (depending on the sector) roughly 25 percent to 50 percent of Brazil’s GSP exports to the United States and is particularly prevalent in the machinery, auto part, agrichemical, and glass industries. 32 Brazil Ministry of Commerce, GSP presentation to GAO, shows that nearly 95 percent of the value of Brazil’s exports to the United States were manufactured goods and that 33 percent of the value of Brazil exports to the United States under GSP would otherwise face tariffs ranging up to 2.5 percent, whereas an additional 51 percent would otherwise face tariffs of greater than 2.5 percent but equal or less than 5 percent, meaning that 84 percent of Brazil’s preference exports would otherwise face tariffs of 5 percent or less. 33 The legal exclusion applies to all textile and apparel articles that were not eligible articles on Jan. 1, 1994; all watches, except those entered after June 30, 1989, that the President specifically determines will not cause material injury to watch or watch band, strap, or bracelet manufacturing and assembly operations in the United States or its insular possessions; and all footwear, handbags, luggage, flat goods, work gloves, and leather wearing apparel that were not eligible articles on Jan. 1, 1995. Electronic articles, steel articles, and semimanufactured and manufactured glass products that are considered import-sensitive are also excluded. USTR indicated that these categories of articles could be considered for GSP eligibility based on a petition by an interested party and an ITC study of the impact of such a designation on the relevant domestic producers and on consumers. 34 Under this multilateral agreement, which was in effect from 1974 to 1994, countries whose markets were disrupted by increased imports of textiles and apparel from another country were able to negotiate quota restrictions. 35 Paul Brenton and Takako Ikezuki, “The Initial and Potential Impact of Preferential Access to the U.S. Market under the African Growth and Opportunity Act,” World Bank Policy Research Working Paper No. 3262, April 2004. 36 Of the 46 LDC preference beneficiaries, 18 enjoy some form of duty-free access for apparel in the U.S. market under AGOA or CBI/CBTPA. 37 In addition, Aruba, Bahamas, Cayman Islands, Cyprus, French Polynesia, Greenland, Israel, Macau, Malta, Netherlands Antilles, New Caledonia, and Slovenia were graduated between 1995 and 2002, based on high income. Some of these countries remain eligible for CBI and CBTPA. 38 The GSP statute states that European Union members are ineligible for GSP. The Czech Republic, Estonia, Hungary, Latvia, Lithuania, Poland, and the Slovak Republic were also removed from GSP in 2004. 39 The Dominican Republic, El Salvador, Guatemala, and Honduras were removed from eligibility for all these programs, and Nicaragua only from CBI/CBTPA, as it was not eligible for GSP. Upon entering a free trade arrangement with the United States, a country gains phased duty-free access for virtually all its exports while providing duty-free treatment for U.S. imports. Thus, trade preferences are no longer necessary. 40 The CNL caps—$135 million in GSP imports of one product from a single country in 2008, or 50 percent of all U.S. imports of the product—are set by legislation. When GSP imports of a product reach one of these limits, the country is denied GSP benefits for that product unless imports fall below the CNL level in a subsequent year and it seeks renewed designation for GSP eligibility. However, an interested party could petition for a waiver of the CNL before imports reach the CNL cap. 41 A significant portion of GSP-eligible trade is not subject to the CNL ceiling because LDCs and AGOA beneficiaries are exempt from the CNL review. 42 The purpose of the review was to determine whether the program should be modified to expand participation by GSP-eligible countries that were not major users of the program. 43 A large developing country, such as India, may have more competitive export industries than smaller leastdeveloped countries, but it also may have many more people living in poverty, who may benefit from the economic opportunities provided under trade preferences. 44 Officially called the “Decision on Differential and More Favorable Treatment, Reciprocity, and Fuller Participation of Developing Countries,” the Enabling Clause applies as part of GATT under the WTO. 45 A CNL waiver can be revoked, after it has been in effect for 5 years or more, when imports of the product from that country reach a ceiling equal to 1.5 times the CNL ($202.5 million in 2008), or 75 percent of all U.S. imports of the product. 46 H.R. 3890, 110th Cong., 1st Sess. The related Senate bill (S. 2257, 110th Cong., 1st Sess.), which is currently pending before the Senate Foreign Relations Committee, does not include the GSP provision. 47 Members of the Southern African Customs Union are Botswana, Lesotho, Namibia, South Africa, and Swaziland. 48 See GAO-05-150, appendix IV, and GAO, World Trade Organization: Congress Faces Key Decisions as Efforts to Reach Doha Agreement Intensity, GAO-07-379 (Washington, D.C.: Mar. 5, 2007). 49 Selected studies include: Mary Amiti and John Romalis, “Will the Doha Round Lead to Preference Erosion?” National Bureau of Economic Research Working Paper, No. 12971, March 2007; Yongzheng Yang, “Africa

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in the Doha Round: Dealing with Preference Erosion and Beyond,” IMF Policy Discussion Paper, PDP/05/8, November 2005; Caglar Ozden and Eric Reinhardt, “The Perversity of Preferences: GSP and Developing Country Trade Policies, 1976-2000,” Journal of Development Economics, vol. 78 (2005), 1-21; R.E. Baldwin and T. Murray, “MFN Tariff Reductions and Developing Country Trade Benefits Under the GSP,” The Economic Journal, vol. 87, no. 345, March 1977, 30-46. 50 Amiti and Romalis (2007). See also: Dean and Wainio (2006); Patrick Low, Roberta Piermartini, and Jurgen Richtering, “Multilateral Solutions to the Erosion of Non-Reciprocal Preferences in NAMA,” WTO Economic Research and Statistics Division Working Paper, ERSD-2005-05, October 2005; Low, Piermartini, and Richtering, “Non-Reciprocal Preference Erosion Arising from MFN Liberalization in Agriculture: What Are the Risks?” WTO Economic Research and Statistics Division Working Paper, ERSD-2006-02, March 2006. 51 Judith Dean, “Is Trade Preference Erosion Bad for Development?” ITC Office of Economics Working Paper, No. 2006-11-A, November 2006. 52 Products coming from CBI or ATPA countries are eligible to enter under either the GSP program or the regional program. In contrast, AGOA simply made all AGOA countries eligible for GSP (with certain enhancements) but did not duplicate the product coverage of the GSP program. 53 On May 16, 2007, the Senate Committee on Finance held a hearing to assess U.S. trade preference programs. U.S. Preference Programs: How Well Do They Work? Hearing before the Senate Committee on Finance, 110th Congress (2007). 54 “Special 301” refers to certain provisions of the Trade Act of 1974, as amended, that require USTR to annually identify foreign countries that deny adequate and effective IPR protection or deny fair and equitable market access for U.S. entities or individuals who rely on IPR protection. 55 The requirement for the Labor report is in the GSP statute. 56 Countries placed on the Tier 2 Watch List are those countries whose governments do not fully comply with the minimum standards but are making significant efforts to do so; and have a very significant or increasing number of victims; fail to show increasing efforts to combat trafficking from previous year or have been assessed as making significant efforts to comply based on commitments to take steps over the next year. Countries placed in Tier 3 are those whose governments do not comply with minimum standards and are not making significant efforts to do so. 57 CBI benefits were withdrawn for a limited number of products from Honduras in 1997 and restored in 1998. 58 AGOA requires the President to convene annual high-level meetings between appropriate officials of the U.S. government and officials of the governments of Sub-Saharan African countries to foster close economic ties between the United States and Sub-Saharan Africa. 59 The U.S. Census Bureau lists imports that qualify for regional preference programs under chapter HTS98 (certain textiles and apparel) under the original tariff line. Importers must provide the original tariff line between HTS1 and HTS97 plus the HTS98 code that shows they are eligible for trade preferences. The ITC tariff schedule only lists the HTS98 tariff lines as eligible for preferences. Therefore, trade data show imports under tariff lines that don’t appear eligible for trade preferences. We confirmed that this is the case with ITC. We marked the original tariff lines as being eligible for trade preferences under the relevant regional program with a # sign and excluded HTS98 to avoid double counting. 60 It should be noted that these classifications are slightly more disaggregated than those presented in our September 2007 report. Notably, in that report: Agriculture includes what we present in this report under animal and plant products and prepared food, beverages, spirits, and tobacco; Chemicals, plastics, paper includes both chemicals and plastics and wood and wood products; Textiles and apparel includes both what we report under textiles, leather, and footwear and what we report under apparel; and Machinery and electronics includes what we report under the three categories of machinery, electronics, and high-tech apparatus; aircraft, autos, and other transportation; and miscellaneous manufacturing. 61 According to Hirschman (1964), the index is designed as a measure when concentration is a function of both unequal distribution and fewness. Albert O. Hirschman, “The Paternity of an Index,” The American Economic Review, vol. 54, no. 5, Sept. 1964, 761. 62 Despite relatively low MFN tariffs, petroleum-related products, chemicals, jewelry, and electrical machinery were also significant products in the duty-savings of countries. 63 Judith Dean and John Wainio, “Quantifying the Value of U.S. Tariff Preferences for Developing Countries,” World Bank Policy Research Working Paper 3977 (2006), forthcoming in C. Braga, B. Hoekman, and W. Martin, eds., Trade Preference Erosion: The Terms of the Debate (New York: The World Bank and Palgrave Macmillan). The authors develop and use detailed tariff rate data for all U.S. imports, and estimate ad valorem (by value) tariff rates for goods such as agriculture and apparel that face complex tariffs and tariff-rate quotas, as well as the overall tariff savings from preferences (including GSP) by country. Such analysis is beyond the scope of GAO’s present study. 64 Dean and Wainio (2006), 18.

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The data used in the Dean and Wainio analysis was for 2003. While the data on coverage and margins of preference suggest a degree of success in improving the benefits of U.S. preference programs, in general, recent assessments of the literature express some skepticism as to whether trade preferences, and GSP in particular, have had more than a very modest impact on the export performance, and hence the development, of eligible countries. (See Hoekman and Ozden (2006) and Caglar Ozden and Eric Reinhardt, “Unilateral Preference Programs: The Evidence,” chapter 6, in Simon J. Evenett and Bernard M. Hoekman, eds., Economic Development and Multilateral Trade Cooperation (Washington, D.C.: The World Bank and Palgrave Macmillan, 2006). For example, Ozden and Reinhardt (Ozden and Reinhardt (2006) 197-199) not only indicate that GSP often fails to cover products in which beneficiary countries have the greatest comparative advantage, such as agricultural products, but cite administrative features of the programs—notably export ceilings and rules of origin—as key constraints on benefits. 67 Early assessments of the AGOA program, based on simulation work, suggested that the program would benefit many African countries. One study that focused on the possible gains from apparel exports and the relaxation of the rules of origin estimated that AGOA could raise nonoil exports by 8-11 percent (Mattoo, Aaditya, Devesh Roy and Arvind Subramanian, “The Africa Growth and Opportunity Act and its Rules of Origin: Generosity Undermined?” World Economy, 26 (6), 829-51). This study further asserted that the estimated benefits of AGOA would be much greater, up to fivefold, after 2005, if more liberal rules of origin were to continue to be applied to apparel and the program had wider coverage. Another study reiterated these points that apparel preferences and liberal rules of origin were key to AGOA’s impact but also noted that “with the exception of clothing most of the products liberalized under AGOA had been liberalized under GSP for LDCs.” The study indicated that AGOA is mainly about LDCs and clothing, and that for nonoil exporters and LDCs not eligible for the clothing provisions, the benefits of AGOA would be small (Paul Brenton and Takako Ikezuki, “The Initial and Potential Impact of Preferential Access to the U.S. Market under the African Growth and Opportunity Act,” World Bank Policy Research Working Paper 3262 (April 2004). More recent studies allow an assessment of AGOA based on historical data and subsequent to the extension of the special rules of origin for apparel to 2012. One study uses updated empirical techniques and finds that the apparel provisions of AGOA are associated with a 53 percent increase in imports to the United States, and for GSP products, AGOA accounts for a 14 percent increase. The positive effect of AGOA grew over time and despite the dismantling of the Multi-fiber Agreement in 2005. This study also finds that AGOA also had a positive impact on the growth of U.S. imports of GSP agricultural and manufacturing products (Garth Frazer and Johannes Van Biesebroeck, “Trade Growth Under the African Growth and Opportunity Act,” National Bureau of Economic Research Working Paper 13222 (July 2007). Another recent study estimates an even larger effect from the liberalized apparel provisions of AGOA (Paul Collier and Anthony J. Venables, “Rethinking Trade Preferences: How Africa Can Diversify its Exports,” World Economy, August 2007, 1,3261,345).

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Chapter 8*

INTERNATIONAL TRADE: THE UNITED STATES NEEDS AN INTEGRATED APPROACH TO TRADE PREFERENCE PROGRAMS United States Government Accountability Office WHY GAO DID THIS STUDY

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U.S. trade preference programs promote economic development in poorer nations by providing duty-free export opportunities in the United States. The Generalized System of Preferences, Caribbean Basin Initiative, Andean Trade Preference Act, and African Growth and Opportunity Act unilaterally reduce U.S. tariffs for many products from over 130 countries. However, two of these programs expire partially or in full this year, and Congress is exploring options as it considers renewal. This testimony describes the growth in preference program imports since 1992, identifies policy trade-offs concerning these programs, and evaluates the overall U.S. approach to preference programs. The testimony is based on two recent studies on trade preference programs, issued in September 2007 and March 2008. For those studies, GAO analyzed trade data, reviewed trade literature and program documents, interviewed U.S. officials, and did fieldwork in six trade preference beneficiary countries.

WHAT GAO RECOMMENDS In the March 2008 report, GAO made a number of recommendations to the U.S. Trade Representative, including to review beneficiary countries that have not been considered under the regional programs, and periodically consider preference programs jointly. In response, *

This is an edited, reformatted and augmented version of Testimony Before the Committee on Finance, United States Senate Statement of Loren Yager, GAO-08-907 Dated June 12, 2008.

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USTR indicated that it would undertake an interagency review of the programs and consolidate discussion of them in its annual report. To view the full product, including the scope and methodology, click on GAO-08-907T. For more information, contact Loren Yager at (202) 512-4347 or yagerl@gao. gov.

WHAT GAO FOUND Total U.S. preference imports grew from $20 billion in 1992 to $92 billion in 2006, with most of this growth taking place since 2000. The increases from preference program countries reflect legislation passed by Congress in 1996 and 2000 that enhanced preference programs and added new eligible products. Preference programs give rise to three critical policy trade-offs. First, preferences entail a trade-off to the extent opportunities for beneficiary countries to export products duty free must be balanced against U.S. industry interests. Some products of importance to developing countries, notably agriculture and apparel, are ineligible by statute as a result. Secondly, certain developing countries have been given additional preferential benefits for such importsensitive products under regional programs. But some of the poorest countries, outside targeted regions, do not qualify. Third, Congress faces a trade-off between longer program renewals, which may encourage investment and undermine support for the likely greater economic benefits of broader trade liberalization, a key U.S. goal, and shorter renewals, which may provide opportunities to leverage the programs to meet evolving priorities. Trade preference programs have proliferated over time, becoming more complex (as shown below), but neither Congress nor the administration formally considers them as a whole. Responsive to their legal mandates, the Office of the U.S. Trade Representative (USTR) and other agencies use different approaches to monitor compliance with program criteria, resulting in disconnected review processes and gaps in addressing some countries and issues. Disparate reporting makes it difficult to determine progress on programs’ contribution to economic development in beneficiary countries.

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Mr. Chairman and Members of the Committee: I am pleased to be here today to discuss our work on U.S. trade preference programs. Since the committee’s hearing last year on this subject, GAO has completed two in-depth studies of U.S. preference programs for the Finance Committee and the Committee on Ways and Means.1 Our findings suggest that these programs do provide benefits to recipient nations, but it is more challenging to determine programs’ contribution to economic development in those nations. Our findings in those studies also support the need to consider whether a more integrated approach would better ensure programs meet shared goals. This hearing is particularly timely, as a number of the preference programs were or are still scheduled for expiration during the current calendar year. We believe that this provides an opportunity for Congress and the administration to review the progress and performance of these programs as a group and begin to address some of the difficult questions that you posed in the last hearing. In order to contribute to that discussion, I will address three topics today. First, I will describe preference import trends. Second, I will outline key policy trade-offs

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between various domestic and foreign interests that are inevitable in the design of preference programs. Finally, I will summarize our recent findings and recommendations regarding the importance of considering the preference programs as a group.

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Growth of Trade Programs over Time

My remarks are based on the two studies of the preference programs that we have published in the last year. In conducting the work for Congress, we consulted with the Office of the U.S. Trade Representative (USTR) and other executive agencies involved in implementing the programs, as well as representatives from trade and development organizations who have expertise and interest in the programs. In addition, we met with government representatives from a number of the beneficiary nations, including some of the larger beneficiaries such as Brazil, as well as poorer nations such as Haiti and Ghana. We conducted this performance audit from March 2007 to February 2008 in accordance with generally accepted government auditing standards. Those standards require that we plan and perform the audit to obtain sufficient, appropriate evidence to provide a reasonable basis for our findings and conclusions based on our audit objectives. We believe that the evidence obtained provides a reasonable basis for our findings and conclusions based on our audit objectives.

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BACKGROUND In an effort to promote and achieve various U.S. foreign policy objectives, trade preference programs have expanded in number and scope over the past 3 decades. The purpose of these programs is to foster economic development through increased trade with qualified beneficiary countries while not harming U.S. domestic producers. Trade preference programs extend unilateral tariff reductions to over 130 developing countries. Currently, the United States offers the Generalized System of Preferences (GSP)2 and three regional programs, the Caribbean Basin Initiative (CBI),3 the Andean Trade Preference Act (ATPA),4 and the African Growth and Opportunity Act (AGOA). Special preferences for Haiti became part of CBI with enactment of the Haitian Hemispheric Opportunity through Partnership Encouragement (HOPE) Act in December 2006. The regional programs cover additional products but have more extensive criteria for participation than the GSP program. Eight agencies have key roles in administering U.S. trade preference programs. Led by USTR, they include the Departments of Agriculture, Commerce, Homeland Security, Labor, State, and Treasury, as well as the U.S. International Trade Commission (ITC). GSP—the longest standing U.S. preference program—expires December 31, 2008, as do ATPA benefits. At the same time, legislative proposals to provide additional, targeted benefits for the poorest countries are pending. U.S. trade preference programs are widely used, but some economists and others have raised questions about them. Their concerns include the potential for diversion of trade from other countries that these programs can cause; the complexity, scope of coverage, duration, and conditionality of these programs; and the potential opposition to multilateral and bilateral import liberalization preferences can create.

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U.S. PREFERENCE IMPORTS HAVE INCREASED SHARPLY U.S. imports from countries benefiting from U.S. preference programs have increased significantly over the past decade. Total U.S. preference imports grew from $20 billion in 1992 to $92 billion in 2006. Most of this growth in U.S. imports from preference countries has taken place since 2000. Whereas total U.S. preference imports grew at an annual rate of 0.5 percent from 1992 to 1996, the growth quickened to an annual rate of 8 percent from 1996 to 2000, and 19 percent since 2000. This accelerated growth suggests an expansionary effect of increased product coverage and liberalized rules of origin for LDCs under GSP in 1996 and for African countries under AGOA in 2000. There is also some evidence that leading suppliers under U.S. preference programs have “arrived” as global exporters. For example, the 3 leading non-fuel suppliers of U.S. preference imports—India, Thailand, and Brazil—were among the top 20 world exporters and U.S. import suppliers in 2007, and their exports in 2007 grew faster than world exports, according to the World Trade Organization (WTO).5

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Figure 1. Trends in U.S Preference Import Levels (1992-2006) Note: Values of imports are expressed in nominal dollars, not adjusted for inflation.

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CRITICAL POLICY TRADE-OFFS AMONG U.S. CONSUMERS, PRODUCERS, AND FOREIGN BENEFICIARIES ARE INHERENT IN PREFERENCE PROGRAMS Preference programs entail three critical policy trade-offs. First, the programs are designed to offer duty-free access to the U.S. market to increase beneficiary trade, but only to the extent it does not harm U.S. industries. U.S. preference programs provide duty-free treatment for over half of the 10,500 U.S. tariff lines, in addition to those that are already duty-free on a most favored nation basis. But, they also exclude many other products from duty-free status, including some that developing countries are capable of producing and exporting. GAO’s analysis showed that notable gaps remain, particularly in agricultural and apparel products. For 48 GSP-eligible countries, more than three-fourths of the value of U.S. imports that are subject to duties (i.e., are dutiable) are left out of the programs. For example, just 1 percent of Bangladesh’s dutiable exports to the United States and 4 percent of Pakistan’s are eligible for GSP. Although regional preference programs tend to have more generous coverage, they sometimes feature “caps” on the amount of imports that can enter duty-free, which may significantly limit market access. Imports subject to caps under AGOA include certain meat products, a large number of dairy products, many sugar products, chocolate, a range of prepared food products, certain tobacco products, and groundnuts (peanuts), the latter being of particular importance to some African countries. The second trade-off is related and involves deciding which developing countries can enjoy particular preferential benefits. A few LDCs in Asia are not included in the U.S. regional preference programs, although they are eligible for GSP-LDC benefits. Two of these countries—Bangladesh and Cambodia—have become major exporters of apparel to the

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United States and have complained about the lack of duty-free access for their goods. African private-sector spokesmen have raised concerns that giving preferential access to Bangladesh and Cambodia for apparel might endanger the nascent African apparel export industry that has grown up under AGOA. Certain U.S. industries have joined African nations in opposing the idea of extending duty-free access for apparel from these countries, arguing these nations are already so competitive in exporting to the United States that in combination they surpass U.S. FTA partners Mexico and CAFTA, as well as the Andean/AGOA regions, which are the major export market for U.S. producers of textiles. This same trade-off involves decisions regarding the graduation of countries or products from the programs. It relates to the original intention that preference programs would confer temporary trade advantages on particular developing countries, which would eventually become unnecessary as countries became more competitive. Specifically, the GSP program has mechanisms to limit duty-free benefits by “graduating” countries that are no longer considered to need preferential treatment, based on income and competitiveness criteria. Since 1989, 28 countries have been graduated from GSP, mainly as a result of “mandatory” graduation criteria such as high income status or joining the European Union. Five countries in the Central American and Caribbean region were recently removed from GSP and CBI/CBTPA when they entered free trade agreements with the United States. In the GSP program, the United States also pursues an approach of ending duty-free access for individual products from a given country by means of import ceilings— Competitive Needs Limitations (CNL). Over one-third of the trade from GSP beneficiaries— $13 billion in imports in 2006—is no longer eligible for preferences because countries have exceeded CNL ceilings for those products. Although the intent of country and product graduation is to focus benefits on those countries most in need of the competitive margin preferences provide, some U.S. and beneficiary country officials observe that remaining GSP beneficiaries will not necessarily profit from another country’s loss of preference benefits. We repeatedly heard concerns that China would be most likely to gain U.S. imports as a result of a beneficiary’s loss of preferences. In 2007, the President revoked eight CNL waivers as a result of legislation passed in December 2006. Consequently, over $3.7 billion of trade in 2006 from six GSP beneficiaries—notably Brazil, India, and Thailand—lost duty-free treatment. Members of the business community raised concerns that revocation of these waivers would harm U.S. business interests while failing to provide more opportunities for poorer beneficiaries. GAO’s analysis showed that China and Hong Kong were the largest suppliers of the precious metal jewelry formerly eligible under GSP for duty-free import by India and Thailand; Canada, Mexico, Japan, and China were the leading competitors to Brazil’s motor parts.6 Policymakers face a third trade-off in setting the duration of preferential benefits in authorizing legislation. Preference beneficiaries and U.S. businesses that import from them agree that longer and more predictable renewal periods for program benefits are desirable. Private-sector and foreign government representatives have complained that short program renewal periods discourage longer-term productive investments that might be made to take advantage of preferences, such as factories or agribusiness ventures. Members of Congress have recognized this argument with respect to Africa and, in December 2006, Congress renewed AGOA’s third-country fabric provisions until 2012 and AGOA’s general provisions until 2015. However, some U.S. officials believe that periodic program expirations can be useful as leverage to encourage countries to act in accordance with U.S. interests such as

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global and bilateral trade liberalization. Furthermore, making preferences permanent may deepen resistance to U.S. calls for developing country recipients to lower barriers to trade in their own markets. Global and bilateral trade liberalization is a primary U.S. trade policy objective, based on the premise that increased trade flows will support economic growth for the United States and other countries. Spokesmen for countries that benefit from trade preferences have told us that any agreement reached under Doha round of global trade talks at the WTO must, at a minimum, provide a significant transition period to allow beneficiary countries to adjust to the loss of preferences.7

PROLIFERATION OF PREFERENCE PROGRAMS HAS LED TO A NEED FOR A MORE INTEGRATED APPROACH Preference programs have proliferated over time. In response to differing statutory requirements, agencies pursue different approaches to monitoring the various criteria set for programs. The result is a lack of systematic review and little to no reporting on impact.

Trade Preferences Have Proliferated, Creating a Complex Array of Programs, but Congress Still Considers Each Program Separately U.S. trade preferences have evolved into an increasingly complex array of programs. Congress generally considers these programs separately, partly because they have disparate termination dates.8 Table 1. Growth of Trade Preference Programs

Program

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GSP CBI • Caribbean Basin Economic Recovery Act • Caribbean Basin Economic Recovery Expansion Act • CBTPA • HOPE ATPA • ATPDEA AGOA

Enactment date

Number of eligible countries, 2007

January 1975 Several amendments

131

• August 1983

19

• Amended August 1990 • May 2000 • December 2006 December 1991 • Amended August 2002 May 2000 Several amendments

9 1 4 4 39

Source: GAO.

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Many countries participate in more than one of these programs. Of the 137 countries and territories eligible for preference programs, as of January 1, 2007, 78 benefit from more than one program, and 34 were eligible for more than two programs.9 While there is overlap in various aspects of trade preference programs, each program is currently considered separately by Congress based on its distinct timetable and expiration date. Typically the focus has been on issues relevant to specific programs, such as counternarcotics cooperation efforts in the case of ATPA, or phasing out benefits for advanced developing countries in the case of GSP. As a result, until last year’s hearing before this committee, congressional deliberations have not provided for cross-programmatic consideration or oversight. The oversight difficulties associated with this array of preference programs and distinct timetables is compounded by different statutory review and reporting requirements for agencies. Reflecting the relevant statutory requirements, two different approaches—a petition process and periodic reviews—have evolved to monitor compliance with criteria set for various programs. We observed advantages to each approach, but individual program reviews appear disconnected and result in gaps. The petition-driven GSP reviews of country practices and product coverage have the advantage of adapting the programs to changing market conditions and the concerns of businesses, foreign governments, and others.10 However, the petition process can result in gaps in reviews of country compliance with the criteria for participation: From 2001 to 2006, three-quarters of the countries eligible only for GSP did not get examined at all for their conformity with eligibility criteria. Long periods passed between overall reviews of GSP. USTR completed an overall review of the GSP program in fall 2006. USTR completed the last general review of the program approximately 20 years earlier, in January 1987. The petition-driven review process also fails to systematically incorporate other ongoing monitoring efforts. For example, the lack of review under GSP provisions of any of the 26 preference beneficiary countries cited by USTR in 2006 for having problems related to the adequate and effective protection of U.S. intellectual property rights (IPR) makes it appear no linkage exists between GSP and ongoing monitoring of IPR protection abroad. The periodic reviews under the regional programs offer more timely and consistent evaluations of country performance against the criteria for participation, but may still miss important concerns. For example, 11 countries that are in regional programs were later subject of GSP complaints in the 2001 to 2006 period: Although AGOA has the most intensive evaluation of country performance against the criteria for participation, the GSP process later validated and resulted in further progress in resolving concerns with AGOA beneficiaries Swaziland and Uganda on labor issues. The African country of Equatorial Guinea has been reviewed for AGOA eligibility and found to be ineligible. Yet, Equatorial Guinea has not been subject to a GSP country practice petition or reviewed under GSP. As a result, Equatorial Guinea remains eligible for GSP and exported more than 90 percent of its $1.7 billion in exports duty free to the United States under that program in 2006.11

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Only One Preference Program Directly Links to Capacity Building Efforts Many developing countries have expressed concern about their inability to take advantage of trade preferences because they lack the capacity to participate in international trade. Sub-Saharan Africa has been the primary focus of U.S. trade capacity-building efforts linked to the preference programs, with the United States allocating $394 million in fiscal year 2006 to that continent. Although AGOA authorizing legislation refers to trade capacity assistance, USTR officials noted that Congress has not appropriated funds specifically for that purpose. However, USTR has used the legislative language as leverage with U.S. agencies that have development assistance funding to target greater resources to trade capacity building. In other regions of the world, U.S. trade capacity building assistance has less linkage to preference programs.

Separate Reporting and Examination Hinder Measuring Progress on Programs’ Contribution to Economic Development Separate reporting for the various preference programs makes it difficult to measure progress toward achieving the fundamental and shared goal of promoting economic development. Only one program (CBI) requires agencies to directly report on impact on the beneficiaries. Nevertheless, in response to statutory requirements, several government agencies report on certain economic aspects of the regional trade preference programs. However, different approaches are used, resulting in disparate analyses that are not readily comparable. Agencies do not regularly report on the economic development impact of GSP. Moreover, there is no evaluation of how trade preferences, as a whole, affect economic development in beneficiary countries.

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GAO RECOMMENDATIONS AND AGENCY RESPONSE To address the concerns I have summarized today, in our March 2008 report, GAO recommended that USTR periodically review beneficiary countries that have not been considered under the GSP or regional programs. Additionally, we recommended that USTR should periodically convene relevant agencies to discuss the programs jointly. In response, USTR is undertaking two actions. First, USTR will conduct a review of the operation and administration of U.S. preference programs to explore practical steps that might improve existing communication and coordination across programs. Second, beginning with the Annual Report of the President of the United States on the Trade Agreements Program to be issued on March 1, 2009, the discussion of the operation of all U.S. trade preference programs will be consolidated into its own section. We also suggested that Congress should consider whether trade preference programs’ review and reporting requirements may be better integrated to facilitate evaluating progress in meeting shared economic development goals. We believe that the hearings held by the committee last year and again today are responsive to the need to consider these programs in an integrated fashion and are pleased to be able to contribute to this discussion.

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Mr. Chairman, this concludes my prepared statement. I would be happy to answer any questions that you or other members of the committee may have.

GAO CONTACT AND STAFF ACKNOWLEDGMENTS For further information on this testimony, please contact Loren Yager at (202) 512-4347, or by e-mail at [email protected]. Juan Gobel, Assistant Director; Kim Frankena, Assistant Director; R. Gifford Howland; Karen Deans; Ernie Jackson; and Ken Bombara made key contributions to this statement. This is a work of the U.S. government and is not subject to copyright protection in the United States. The published product may be reproduced and distributed in its entirety without further permission from GAO. However, because this work may contain copyrighted images or other material, permission from the copyright holder may be necessary if you wish to reproduce this material separately.

GAO’S MISSION The Government Accountability Office, the audit, evaluation, and investigative arm of Congress, exists to support Congress in meeting its constitutional responsibilities and to help improve the performance and accountability of the federal government for the American people. GAO examines the use of public funds; evaluates federal programs and policies; and provides analyses, recommendations, and other assistance to help Congress make informed oversight, policy, and funding decisions. GAO’s commitment to good government is reflected in its core values of accountability, integrity, and reliability.

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END NOTES

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1

GAO, International Trade: U.S. Trade Preference Programs Provide Important Benefits, but a More Integrated Approach Would Better Ensure Programs Meet Shared Goals, GAO-08-443 (Washington, D.C.: Mar. 7, 2008), and GAO, International Trade: An Overview of Use of U.S. Trade Preference Programs by Beneficiaries and U.S. Administrative Reviews, GAO-07-1209 (Washington, D.C.: Sept. 27, 2007). 2 In 1996, the number of duty-free tariff lines offered under GSP was expanded to provide additional benefits to beneficiary least-developed countries (LDC). 3 In 2000, CBI was expanded by the Caribbean Basin Trade Partnership Act (CBTPA). 4 In 2002, ATPA was expanded by the Andean Trade Promotion and Drug Eradication Act (ATPDEA). 5 For additional information, see WTO, World Trade 2007, Prospects for 2008: Developing, Transition Economies Cushion Trade Slowdown, Press Release No. 520, Apr. 17, 2008, p. 19. 6 For GAO’s analysis of the scope and impact of the CNL waiver terminations, see pp. 38-41 of GAO-07-1209. 7 For additional information on these issues see GAO-08-443 and GAO-07-1209. 8 For example, the Caribbean Basin Trade Partnership Act was to expire on September 30, 2008, while GSP and ATPA expire December 31, 2008. 9 For a listing of beneficiary countries and the programs for which they are eligible, see p. 48 of GAO-08-443. 10 In the annual GSP review process, petitions may be filed by interested parties (for example, governments, businesses, or nongovernmental organizations) to request actions allowed under the statutes and regulations governing the GSP program, including adding or removing a product from overall GSP eligibility, waiving the

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competitive-need-limit for a product from a specific beneficiary. Any person may file a petition requesting that the status of any eligible beneficiary be reviewed with respect to any of the designation criteria listed in the statute governing the GSP program, including worker rights and intellectual property rights. For a summary of GAO’s analysis of the product and country petitions filed in recent years, see pp. 42-44 and p. 72 of GAO-071209. 11 AGOA requires countries to be eligible for GSP, but the reverse is not true; AGOA's criteria are more extensive than GSP. For example, AGOA requires countries to have or be making progress toward political pluralism and the rule of law and prohibits participation of countries that undermine U.S. national security and foreign policy, commit gross violations of human rights, or support international terrorism. GAO’s analysis showed that all (100 percent of the value) of Equatorial Guinea’s exports to the United States were eligible for GSP in 2006. Equatorial Guinea exported approximately $1.6 billion in fuel products to the United States under GSP in 2006.

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INDEX

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A accountability, 39, 58, 65, 67, 91, 205, 230 accounting, 4, 32, 38 accreditation, 102 ADC, 38, 42 adjustment, vii, xi, 1, 7, 13, 16, 30, 97, 111, 112, 113, 123, 126, 127, 141, 193 administration, xiii, 62, 121, 137, 138, 142, 145, 174, 178, 179, 181, 184, 185, 186, 188, 200, 215, 222, 229 administrative, 58, 62, 69, 91, 107, 119, 124, 128, 146, 162, 175, 181, 219 ADS, 148 adult, 71 adult literacy, 71 Afghanistan, 72, 130, 137 Africa, v, viii, ix, 2, 3, 4, 6, 16, 17, 19, 20, 21, 22, 23, 24, 25, 26, 27, 28, 30, 31, 32, 33, 34, 35, 36, 37, 38, 39, 41, 42, 43, 44, 67, 72, 74, 104, 129, 136, 141, 147, 178, 183, 185, 186, 187, 188, 201, 204, 217, 218, 219, 226, 229 African Growth and Opportunity Act, v, ix, xiii, xiv, 9, 19, 20, 28, 44, 122, 123, 126, 147, 149, 151, 180, 185, 191, 217, 219, 221, 224 African Union, 39, 45 African Union (AU), 39 afternoon, 206, 230 agents, 36, 57 aggregation, 169, 172, 216 AGOA, ix, xiii, 9, 19, 20, 21, 28, 29, 30, 31, 32, 33, 34, 35, 36, 37, 38, 40, 41, 44, 122, 123, 126, 147, 151, 152, 153, 154, 156, 157, 158, 159, 162, 163, 166, 167, 169, 171, 175, 176, 179, 180, 181, 182, 183, 185, 186, 187, 188, 189, 191, 192, 193, 194, 195, 200, 201, 202, 204, 216, 217, 218, 219, 224, 225, 226, 227, 228, 229, 232

agricultural, viii, xiii, 2, 5, 7, 14, 31, 33, 34, 38, 39, 58, 59, 60, 61, 78, 79, 80, 81, 82, 83, 84, 87, 93, 106, 121, 128, 132, 138, 144, 145, 161, 162, 170, 171, 174, 175, 199, 219, 225 agricultural commodities, 83, 144 agricultural exports, 5, 39 agricultural market, 78, 138 agricultural sector, 60 agriculture, x, xi, 31, 40, 58, 59, 60, 63, 65, 75, 76, 77, 78, 79, 80, 81, 82, 83, 84, 85, 87, 104, 105, 106, 125, 132, 133, 135, 138, 144, 150, 152, 168, 175, 216, 218, 222 aid, ix, x, xiii, 20, 23, 39, 47, 48, 49, 50, 55, 57, 60, 64, 65, 66, 69, 73, 79, 81, 121, 124, 140, 141, 142, 143, 144, 146, 147, 148, 154, 178 AIDS, 24, 41, 44 air, 105 Aircraft, 194 Airlines, 137 airports, 59, 125 Albania, 64, 72 Algeria, 72, 184 alternatives, 111, 113, 156 aluminum, 39, 158 ambiguity, 8 amendments, 101, 102, 109, 117, 118, 155, 227 analysts, 37, 55, 64, 171 Angola, 4, 5, 25, 26, 27, 32, 40, 42, 72, 163, 164, 166, 204 Animal and Plant Health Inspection Service, 132 annual rate, 163, 224 annual review, 160, 185 antidumping, 15, 17, 91, 92, 101, 102, 114 antitrust, 125 antitrust laws, 125 apartheid, ix, 19, 20, 38, 42 APHIS, 132

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apparel, 5, 9, 10, 11, 14, 15, 21, 26, 27, 28, 29, 30, 31, 35, 38, 40, 87, 90, 126, 150, 152, 156, 157, 161, 162, 166, 167, 169, 170, 171, 174, 175, 193, 194, 197, 199, 200, 201, 215, 216, 217, 218, 219, 222, 225, 226 apparel industries, 126 apparel products, 9, 29, 31, 161, 162, 163, 169, 199, 225 Appellate Body, 92 appendix, 161, 163, 174, 190, 191, 192, 194, 215, 216, 217 application, xi, xii, 3, 53, 84, 98, 103, 215 appropriations, vii, xiii, 36, 48, 63, 68, 69, 121, 122, 142 appropriations bills, 69 Appropriations Committee, 48, 65, 69 arbitration, 39 Argentina, 17, 25, 181, 184 argument, 104, 145, 154, 178, 226 Armenia, x, 48, 56, 57, 60, 66, 70, 72, 74, 130, 135, 184 ASEAN, 3, 4, 5, 6, 17 Asia, viii, 2, 3, 4, 5, 7, 16, 23, 24, 72, 74, 136, 175, 225 Asian, 4, 6, 7, 17 Asian countries, 4, 6, 7 assessment, 57, 86, 140, 153, 181, 189, 215, 219 assessment procedures, 86 assets, 35, 44, 171 assignment, 33 Association of Southeast Asian Nations, 17 assumptions, 95 ATC, 27, 40, 45 Atlantic, 58 Atlas, 44 auditing, 152, 192, 223 Australia, 3, 5, 10, 17, 66, 80, 104, 143 authority, vii, x, xi, xii, xiii, 1, 8, 13, 15, 16, 37, 50, 54, 62, 75, 79, 81, 92, 97, 98, 99, 100, 101, 102, 103, 104, 105, 106, 107, 108, 109, 110, 111, 112, 114, 115, 116, 119, 122 automobiles, 26, 27 availability, 36, 68, 110, 151 averaging, 40 awareness, 41, 132, 147, 171, 172, 217 Azerbaijan, 72

B back, 26, 31, 68, 79, 80, 92, 112 Bahrain, 17, 104, 176, 182 Baltic States, 142 bananas, 40

Bangladesh, 24, 72, 126, 162, 166, 175, 198, 226 banking, 14 banks, xiii, 37, 121, 139 Barbados, 176, 182 bargaining, 104 barrier, 100, 101 barriers, x, 7, 11, 14, 31, 35, 36, 42, 75, 81, 86, 88, 93, 101, 102, 105, 107, 113, 127, 146, 179, 227 Belarus, 51 Belgium, 143 benefits, ix, 8, 9, 11, 15, 20, 21, 28, 29, 30, 31, 35, 40, 41, 44, 59, 76, 77, 81, 82, 90, 105, 111, 116, 125, 140, 145, 146, 150, 152, 153, 156, 157, 158, 160, 161, 162, 171, 172, 174, 175, 176, 177, 178, 179, 181, 184, 187, 189, 191, 193, 215, 217, 218, 219, 222, 224, 225, 226, 228, 231 beverages, 193, 218 Bhagwati, 17 Bhutan, 54, 72 bias, 52 bilateral development aid, 64, 66 bilateral trade, viii, xii, 2, 16, 43, 81, 98, 179, 227 binding, 89, 110, 112, 117 biofuel, 93 biofuels, 93 biotechnology, 138 bipartisan, xi, xii, 15, 93, 97, 98, 109, 110, 112, 114 Bipartisan Trade Promotion Authority Act, 104, 113 birth, 71 blame, 126 Bolivia, 9, 17, 24, 53, 54, 56, 72, 178, 193, 204 border security, 139 Bosnia, 51, 72 Botswana, 21, 22, 24, 30, 32, 34, 38, 42, 204, 217 Brazil, 12, 17, 25, 55, 80, 81, 84, 87, 91, 93, 95, 152, 158, 171, 172, 173, 183, 191, 192, 217, 223, 224, 226 Brazilian, 81, 172, 183 breakdown, 131 broad spectrum, 8 budget deficit, 53 Bulgaria, 55, 176 Bureau of Economic Analysis, 17, 44 Burkina Faso, x, 32, 43, 48, 54, 56, 57, 62, 64, 65, 70, 72, 138 Burma, 17, 73 Burundi, 32, 42, 43, 72, 204 Bush Administration, xii, 7, 10, 15, 98, 109, 113, 114, 116 business environment, 36, 64, 126, 186 buyer, 114 bypass, 55

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C CAFTA, 10, 17, 25, 106, 109, 119, 129, 136, 142, 143, 146, 148, 167, 186, 193, 202, 216, 226 Cambodia, 17, 24, 72, 166, 175, 226 Cambodian, 176 Cameroon, 32, 39, 72, 204 Canada, 3, 5, 10, 14, 87, 94, 102, 122, 143, 226 candidates, 41, 51 cane sugar, 162, 200 CAP, 82 capacity building, vii, ix, xiii, 7, 17, 20, 33, 37, 40, 91, 121, 122, 124, 125, 128, 142, 144, 145, 153, 154, 180, 183, 186, 189, 229 capital goods, 145, 172 capital markets, 125 capital outflow, 27 caps, 217, 225 Caribbean, xiv, 10, 39, 130, 136, 149, 151, 153, 155, 156, 176, 180, 181, 183, 191, 194, 215, 221, 224, 226, 227, 231 Caribbean Basin Initiative, xiv, 10, 149, 151, 180, 191, 221, 224 Caribbean Basin Initiative (CBI), 10, 151, 191, 224 Caribbean countries, 176 carpets, 175 cash crops, 61 cast, 107 catalyst, xi, 38, 75, 79 category a, 55 Catholic, 73 Cayman Islands, 217 Census, 17, 191, 218 Census Bureau, 17, 218 Central African Republic, 32, 41 Central America, 17, 25, 104, 106, 119, 130, 136, 156, 167, 176, 193, 202, 216, 226 CEO, 50, 51, 54, 64, 66, 73, 74 cereals, 27 certification, 34 CFA, 43 Chad, 26, 32, 72, 163, 166, 202, 204 chemicals, 88, 168, 197, 216, 218 child labor, 125, 136, 160, 185 child mortality, 52 children, 63 Chile, viii, 2, 7, 10, 16, 17, 91, 104, 114, 119 China, vii, viii, 1, 2, 3, 4, 5, 7, 13, 16, 17, 24, 27, 40, 45, 54, 111, 127, 172, 177, 226 chocolate, 175, 225 citizens, 141, 170 civil liberties, 52, 54, 55 civil society, x, 33, 47, 49, 57, 147, 171

235

classification, 172, 196, 216 classrooms, 63 climate change, 93 Clinton Administration, 10, 103, 110 coconut, 61 cohesion, 77 Cold War, 16 Colombia, xi, xii, 9, 10, 17, 24, 72, 91, 98, 104, 113, 116, 118, 130, 152, 164, 172, 173, 178, 191, 192, 193 colonial power, 66 colonialism, 22 commerce, 20, 93, 99, 100, 105 Commerce Department, 17 commodities, ix, 7, 17, 20, 59, 126, 154, 170, 172 commodity, 7, 22, 23, 84, 86, 144, 147, 169, 172, 173, 196 commodity markets, 7 common external tariff, 38, 42, 43 communication, 31, 146, 229 community, viii, 2, 24, 41, 43, 123, 127, 142, 177, 226 comparative advantage, 7, 14, 15, 162, 219 compatibility, 88 compensation, 14, 127 competence, 124 competition, vii, viii, x, xiii, 1, 2, 10, 16, 58, 75, 79, 86, 90, 122, 133, 145, 172, 174 competition policy, 133 competitive advantage, 126 competitive need limitations, 162, 172 competitive process, x, 47, 49 competitiveness, 33, 126, 127, 146, 172, 176, 194, 226 complement, 65, 125 complexity, 153, 156, 201, 224 compliance, 82, 94, 107, 150, 153, 180, 183, 184, 189, 190, 200, 222, 228 complications, 172 components, 4, 31, 35, 58, 59, 61, 62, 65, 158 composition, 5, 16, 128 concentrates, 59, 60 concentration, 65, 87, 169, 196, 218 concrete, 91 confidence, 178 conflict, 22, 132, 145, 147 conflict of interest, 132 conformity, 86, 162, 178, 184, 187, 228 confusion, 146 Congressional Budget Office, 126, 147, 159 congressional hearings, 184 consensus, 11, 15, 76, 79, 90, 109, 112 consent, 100, 108, 117, 118

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conservation, 62 Consolidated Appropriations Act, xiii, 48, 69, 122, 142 consolidation, 43 Constitution, xii, 98, 99, 117, 119 constraints, 59, 123, 133, 141, 162, 219 construction, 38, 59, 62, 67, 68 consulting, 106 consumer goods, 158 consumer surplus, 159, 215 consumers, vii, 1, 16, 145, 152, 156, 158, 159, 187, 215, 217 consumption, 159 contracts, 36 control, xii, 13, 56, 98, 107, 112 convergence, 43, 79, 81, 87, 95 copper, 172, 173 copyrights, 13 correlation, 13, 52 corruption, 49, 53, 54, 55, 56, 64, 65, 105 Costa Rica, 17, 25, 92 costs, vii, x, 1, 7, 14, 41, 48, 55, 57, 58, 59, 60, 68, 69, 111, 116, 123, 124, 126, 127, 141, 152, 153, 158, 200, 216 Côte d’Ivoire, 32, 36, 43 Cotonou Agreement, 39 cotton, 78, 83, 144, 159, 202 counternarcotics, 73, 156, 160, 181, 188, 228 country of origin, 29 courts, 62 covering, 8, 85 credit, 36, 58, 60, 65, 137, 146, 173 creditors, 24 creep, 65 criticism, 8, 55, 66, 78, 80, 87, 112, 116, 140, 144 crops, 58, 160 cross-program, 181, 187, 189, 228 CRS, 3, 6, 8, 9, 10, 17, 21, 43, 44, 45, 73, 94, 95, 118, 119, 129, 131, 132, 134, 136, 137, 147, 148 crude oil, 5 Cuba, 17, 100 currency, 42, 43, 172 customers, 158 Customs and Border Protection, 154, 191, 201 Customs Service, 29, 30, 44 Customs Union, ix, 10, 20, 21, 38, 44, 104, 179, 217 Cyprus, 194, 217 Czech Republic, 217

D dairy, 175, 225 dairy products, 175, 225

data analysis, 191, 192 data collection, 122 database, 17, 128, 130, 132, 135, 139, 142, 143, 148 debates, 100, 111, 117 debt, ix, 19, 23, 24, 36, 39, 73, 138 debt burden, ix, 19, 24 debt service, 24 debts, 24 decision-making process, 74 decisions, 11, 49, 52, 53, 76, 77, 81, 92, 172, 178, 179, 199, 206, 226, 230 decoupling, 82 definition, 16, 44, 123, 128, 216 delivery, 50, 65 democracy, 55 democratic elections, 51 Democratic Republic of Congo, 26, 32, 39, 42 democratization, 39 Democrats, 95, 103, 104, 119 denial, 103 Denmark, 143 Department of Agriculture, xiii, 121, 122, 131, 132, 133, 138, 186 Department of Commerce, xiii, 3, 8, 9, 10, 17, 32, 44, 113, 121, 122, 138 Department of Energy, 139 Department of Homeland Security, 139, 154 Department of Justice, 139, 184 Department of State, 133, 136, 137, 138, 173 Department of the Interior, 139 Department of Transportation, 137 depression, 100 detection, 36 deterrence, 183 developed countries, viii, 2, 7, 13, 14, 15, 22, 27, 30, 77, 78, 79, 81, 83, 84, 86, 87, 88, 90, 93, 126, 136, 154, 161, 165, 176, 193, 194, 195, 217, 231 developed nations, 91 developing countries, vii, viii, ix, x, xi, xiii, 1, 2, 3, 4, 5, 6, 7, 8, 9, 11, 12, 13, 14, 15, 16, 19, 22, 23, 28, 51, 67, 75, 76, 77, 78, 80, 81, 84, 87, 88, 89, 90, 91, 92, 93, 104, 111, 113, 114, 121, 122, 123, 124, 125, 126, 127, 128, 132, 134, 136, 137, 138, 139, 140, 144, 145, 146, 152, 153, 154, 156, 160, 163, 164, 166, 169, 170, 174, 175, 176, 177, 178, 179, 181, 186, 187, 191, 197, 222, 224, 225, 226, 228, 229 developing nations, ix, 47, 49 development assistance, xiii, 33, 121, 122, 123, 128, 141, 144, 147, 186, 229 Development Assistance, 71, 134, 142 Development Assistance (DA), 134, 142 development banks, xiii, 37, 121, 139

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Index development policy, ix, 19, 20, 128 diamonds, 26, 38 differential treatment, xi, 15, 76, 78, 86, 88, 92 direct investment, 5, 27 directives, 21, 31, 37 Director of Foreign Assistance, 50 disabilities, 52 disappointment, 80, 92 disbursement, 69 discipline, 91 discourse, 123 discretionary, 54 diseases, 14, 62, 89 dislocation, 127 dislocations, 76, 82 displacement, 111, 158 dispute settlement, 42, 81, 92, 105 Dispute Settlement Understanding, 77, 92 Dispute Settlement Understanding (DSU), 92 disputes, 12, 39, 88, 113 dissatisfaction, 92, 109, 110 distortions, 127 distribution, 59, 62, 131, 190, 196, 197, 216, 218 diversification, 40, 61, 150, 169, 173, 188, 191, 196, 201, 216 diversity, 26, 65, 170 Doha, v, vii, viii, x, xi, xii, xiii, 1, 2, 11, 12, 15, 16, 17, 75, 76, 77, 78, 80, 81, 82, 84, 85, 86, 88, 89, 90, 91, 92, 93, 94, 95, 98, 99, 104, 111, 114, 115, 116, 122, 123, 139, 140, 145, 147, 148, 179, 217, 227 domestic investment, 23, 44, 126 domestic markets, viii, 2 domestic policy, 39, 119, 124 dominance, 26, 42 Dominican Republic, 17, 25, 104, 106, 119, 136, 164, 167, 182, 193, 202, 216, 217 donor, 37, 57, 65, 66, 67, 122, 123, 139, 140, 141, 145, 146 donors, xiii, 37, 65, 67, 121, 122, 123, 125, 127, 128, 139, 141, 143, 144, 146 DOT, 137 double counting, 196, 218 draft, x, 75, 78, 80, 84, 85, 86, 87, 88, 89, 92, 95, 107, 109, 117, 154, 190 drugs, 14 dumping, 11, 15, 95 duplication, 146 duration, 174, 177, 178, 224, 226 duties, 39, 42, 84, 92, 99, 151, 195, 197, 199, 201, 215, 216, 225 duty free, 17, 31, 199, 222, 228

duty-free access, 31, 39, 150, 174, 176, 197, 202, 216, 217, 225, 226 duty-free treatment, 28, 29, 31, 158, 161, 174, 177, 191, 193, 200, 201, 217, 225, 226

E earnings, 24, 154, 160 Earth Science, 73 East Asia, 4, 5, 6, 7, 16, 72 East Timor, 56, 64, 72 Eastern Europe, 3, 142 e-commerce, 139 econometric analysis, 159 Economic and Monetary Union, 38, 43 economic assistance, 48, 50, 51, 64, 66 economic competitiveness, 42 economic cooperation, 35 economic development, xiv, 3, 7, 12, 13, 33, 39, 43, 48, 57, 128, 138, 149, 150, 151, 152, 153, 156, 160, 169, 177, 186, 187, 188, 189, 221, 222, 224, 229 economic growth, vii, ix, xiii, 1, 7, 8, 19, 22, 23, 24, 35, 39, 40, 49, 52, 57, 59, 61, 62, 67, 81, 121, 122, 125, 127, 154, 156, 179, 227 economic integration, 6, 38, 42, 130, 188 economic performance, 23, 55 economic reform, ix, 7, 20, 47, 49, 127, 134 economic reforms, ix, 7, 47, 49, 127 economic stability, 76 Economic Support Fund, 71, 134, 142 Economic Support Fund (ESF), 134, 142 economic union, 43 economic welfare, 3 economics, 136 economies of scale, 154 Ecuador, 9, 10, 17, 24, 72, 164, 178, 193 Education, 61, 70, 71, 73 Egypt, 17, 27, 42, 54, 55, 72, 129, 130, 162, 181, 198 El Salvador, x, 17, 25, 48, 55, 56, 57, 58, 59, 61, 70, 72, 130, 135, 182, 193, 217 elaboration, 123 electricity, 59, 61, 170 electromagnetic, 88 eligibility criteria, viii, 2, 153, 156, 160, 184, 185, 187, 228 eligible countries, ix, x, 8, 10, 19, 28, 29, 32, 33, 40, 41, 47, 50, 64, 134, 135, 151, 155, 162, 163, 166, 169, 176, 196, 202, 204, 217, 219, 225, 227 e-mail, 206, 230 EMP, 35 employees, 107 employment, 12, 13, 16, 40, 59, 126, 127

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empowerment, 148 encouragement, 100 energy, ix, 19, 25, 32, 34, 62, 135, 142, 143, 170, 171 energy supply, 171 engagement, 80 enrollment rates, 52 enterprise, 34, 49 entrepreneurs, 124, 170, 171, 186 entrepreneurship, 49 environment, vii, viii, xi, 2, 16, 68, 93, 97, 105, 108, 112, 113, 115, 123, 124, 133, 138, 143 environmental issues, 103 Environmental Protection Agency, 139 environmental standards, xiii, 121, 125, 138 environmental technology, 125 epidemic, 40 EPZs, 148 Equatorial Guinea, 26, 27, 166, 181, 184, 228, 232 equity, 35, 111 Eritrea, 32, 41, 42, 72 erosion, 123, 126, 153, 174, 179, 191, 200 Estonia, 217 Ethiopia, 32, 42, 72, 204 Ethiopian, 137 EU, 11, 12, 39, 78, 80, 81, 82, 83, 84, 85, 86, 87, 88, 89, 92, 93, 94, 95 Eurasia, 72 Europe, 3, 5, 72, 136 European Commission, 65, 95, 122 European Union, x, 14, 27, 39, 75, 80, 83, 90, 91, 93, 111, 123, 173, 176, 182, 194, 217, 226 Europeans, 83 evening, 86 evolution, 99, 153 exchange rate, 87 exclusion, 54, 175, 217 execution, 99 Executive Branch, xi, 97, 99, 102, 105, 108, 110, 112 exercise, xi, xii, 82, 97, 98, 109, 111, 113, 140 expanded trade, xi, 97 expansions, 189 expenditures, 37, 84 expertise, 132, 223 export competitiveness, 177 export subsidies, xi, 75, 78, 79, 82, 83, 84, 126 exporter, 176, 216 Export-Import Bank, ix, 20, 35, 44, 137, 145 export-led growth, 7 exports, vii, viii, ix, xiv, 1, 2, 3, 4, 6, 7, 16, 20, 22, 23, 24, 25, 27, 29, 33, 34, 35, 36, 38, 39, 40, 41, 42, 93, 113, 126, 144, 149, 150, 151, 152, 154,

156, 159, 160, 166, 172, 173, 188, 189, 190, 191, 192, 196, 200, 201, 204, 216, 217, 219, 224, 225, 228, 232 exposure, 35, 36

F fabric, 29, 30, 31, 35, 158, 201 facilitators, 78, 80 failure, 78, 103, 127, 145 faith, 69, 90 farmers, 58, 59, 60, 61, 82, 122, 144, 160 FAS, 138 FDI, 23 fear, x, 48 fears, xi, 97 February, x, 17, 39, 44, 48, 50, 68, 71, 74, 80, 84, 85, 87, 119, 135, 146, 148, 152, 159, 178, 192, 223 federal budget, 152, 157 federal government, 205, 230 Federal Reserve, 17 Federal Reserve Board, 17 Federal Trade Commission, 139 fees, 57, 91, 124 fiber, 219 fibers, 31 finance, 35, 59, 63, 95, 133 financial institution, 170 financial institutions, 170 financial markets, 136, 138 financial sector, xiii, 58, 121, 124, 125, 133, 135, 138 financing, 34, 35, 36, 63, 68, 137, 140, 170 Finland, 143 firms, vii, 1, 16, 33, 34, 36, 63, 113 fiscal policy, 54, 55, 125 fish, 88 fisheries, 62, 91, 92 fishing, 92, 106 flat goods, 29, 174, 175, 217 flexibility, 78, 83, 86, 87, 91, 99, 115, 134, 143, 201 flow, 162 fluctuations, 22, 147 focusing, 58, 65, 130, 160 food, 7, 17, 144, 175, 193, 218, 225 food products, 175, 225 footwear, 8, 15, 87, 88, 156, 172, 174, 175, 194, 197, 202, 215, 217, 218 foreign affairs, 99, 100 foreign aid, ix, x, xiii, 47, 48, 50, 69, 121, 142, 143, 146, 154 foreign assistance, vii, xiii, 122, 142, 144, 146, 148 foreign direct investment, 5, 23, 27

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Index foreign exchange, 154 foreign investment, 5, 11, 105 foreign nation, 99 Foreign Operations Appropriations Act, 142 foreign policy, x, 11, 28, 47, 49, 50, 128, 151, 152, 156, 157, 160, 181, 188, 224, 232 foreign producer, 150, 152, 157 Foreign Relations Committee, 217 forgiveness, 23 fragmentation, 50 France, 27, 44, 65, 66, 94, 143 fraud, 60 free trade, vii, viii, xii, xiii, 1, 2, 7, 10, 14, 15, 38, 39, 42, 81, 98, 102, 114, 118, 122, 123, 129, 130, 146, 172, 173, 176, 178, 179, 192, 194, 217, 226 free trade agreement, vii, viii, xii, xiii, 1, 2, 7, 10, 14, 15, 38, 39, 81, 98, 102, 114, 118, 122, 123, 146, 172, 173, 176, 178, 179, 192, 194, 226 free trade area, 42 Free Trade Area of the Americas, 10 freedom, ix, 47, 49, 55, 91 freedoms, 60 freight, 61 friendship, 100 front-line states, 42 FTA, xi, xii, 10, 11, 14, 15, 17, 38, 94, 98, 99, 102, 104, 107, 109, 111, 112, 113, 114, 118, 119, 123, 128, 134, 146, 226 FTAs, viii, xi, xii, xiii, 2, 10, 11, 13, 15, 16, 17, 38, 97, 98, 99, 102, 104, 106, 107, 111, 112, 113, 115, 116, 118, 119, 122, 123, 136 fuel, 93, 166, 181, 216, 224, 232 fuel cell, 93 fulfillment, 109 funding, x, xiii, 37, 47, 48, 49, 54, 55, 56, 57, 58, 63, 64, 65, 66, 68, 69, 74, 119, 121, 123, 128, 129, 130, 131, 132, 134, 135, 136, 137, 138, 141, 142, 143, 147, 186, 206, 229, 230 funds, x, xiii, 30, 34, 35, 36, 37, 39, 47, 48, 49, 60, 61, 67, 121, 122, 123, 128, 130, 133, 134, 135, 136, 138, 139, 142, 144, 145, 186, 205, 229, 230

G G-6, 80, 83 Gabon, 26, 32, 40, 163, 204 gas, 59, 60, 70, 173 GATS, 85 GATT, 11, 15, 76, 77, 100, 101, 103, 118, 215, 217 Gaza, 129, 130, 182 Gaza Strip, 182 GDP, 22, 23, 41, 42, 71, 73 GDP per capita, 71

239

gender, 52, 53 General Accounting Office, 94 General Agreement on Tariffs and Trade, 11, 76, 100, 118, 215 Generalized System of Preferences, vii, viii, xiv, 1, 2, 8, 17, 28, 29, 104, 126, 147, 149, 151, 174, 180, 192, 215, 221, 224 generators, 158, 170, 172 generic drug, xii, 14, 99 generic drugs, xii, 99 Geneva, xi, 75, 79, 80, 83, 84, 85, 87, 94, 147 Georgia, x, 48, 51, 53, 54, 56, 57, 59, 60, 66, 70, 72, 74, 130, 135 Germany, 27, 80, 87, 143 girls, 52 glass, 8, 15, 29, 174, 175, 217 global economy, 13, 105, 122, 156 global markets, 170 global trade, xiii, 121, 122, 153, 174, 179, 227 global warming, 113 globalization, 12, 111, 113 Globalization, 119 gloves, 29, 174, 175, 217 goals, xi, 39, 48, 50, 57, 75, 82, 83, 101, 105, 123, 141, 142, 145, 146, 150, 152, 153, 154, 160, 173, 174, 177, 178, 189, 222, 229 gold, 177 good faith, 90 goods and services, 36, 39, 60, 93, 137, 169 governance, 22, 23, 39, 49, 60, 62, 70, 73, 133, 134, 152, 160 government, iv, ix, 13, 19, 32, 33, 34, 37, 38, 39, 41, 42, 44, 48, 49, 50, 52, 53, 54, 57, 63, 64, 73, 77, 79, 81, 89, 90, 102, 110, 122, 124, 128, 129, 130, 132, 134, 138, 141, 143, 146, 147, 152, 153, 154, 160, 170, 171, 172, 173, 176, 178, 181, 184, 185, 186, 187, 189, 191, 192, 205, 217, 218, 223, 226, 228, 229, 230, 231 Government Accountability Office, 74, 107, 146, 148, 205, 206, 230, 231 Government Accountability Office (GAO), 107, 146 government policy, 81 government procurement, 79, 90, 102 grains, 58 grants, x, xi, xii, 48, 55, 57, 65, 66, 97, 98, 141 Great Depression, 100 Greenland, 217 gross domestic product, 38, 157 gross national product, 29 grouping, 43, 164, 196 groups, viii, x, 2, 4, 6, 7, 9, 16, 38, 41, 60, 75, 78, 80, 82, 86, 87, 90, 104, 105, 113, 129, 140, 152, 156, 160, 169, 176, 184, 187, 191, 193, 194, 197, 201

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Index

growth, vii, ix, xiii, xiv, 1, 4, 6, 7, 8, 12, 16, 19, 22, 23, 24, 26, 28, 31, 35, 39, 40, 49, 52, 57, 59, 61, 62, 67, 77, 81, 121, 122, 125, 126, 127, 133, 154, 156, 160, 163, 166, 171, 178, 179, 180, 187, 188, 216, 219, 221, 222, 224, 227 growth rate, 22, 23 GSP, viii, 2, 8, 9, 10, 15, 16, 17, 28, 29, 32, 104, 126, 151, 153, 154, 155, 156, 157, 158, 159, 160, 161, 162, 163, 165, 166, 167, 169, 171, 172, 173, 174, 175, 176, 177, 178, 181, 182, 183, 184, 185, 187, 188, 189, 192, 193, 194, 195, 197, 198, 200, 202, 204, 215, 216, 217, 218, 219, 224, 225, 226, 227, 228, 229, 231, 232 Guatemala, 17, 25, 72, 182, 185, 193, 217 guidance, 50, 57, 63, 69, 77, 100, 140, 142 guidelines, 79, 85, 91, 105 Guinea, 27, 32, 43, 72, 166, 204, 228, 232 Guyana, 54, 64, 72, 135

110, 111, 112, 113, 114, 117, 118, 119, 121, 143, 150, 158, 177, 185 House Appropriations Committee, 48, 64, 69 household, 59 household income, 59 households, 12 housing, 35, 62 HTS, 192, 193, 194, 196, 199 hub, 173 human, 20, 22, 24, 28, 41, 49, 55, 71, 122, 124, 152, 156, 160, 216, 232 human capital, 24 human development, 71 Human Development Report, 71 human rights, 28, 41, 49, 55, 152, 156, 160, 232 humanitarian, 73 Hungary, 194, 217 hybrid, xii, 30, 98 hydrogen, 93

H

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I Haiti, 72, 152, 162, 166, 170, 171, 191, 192, 201, 202, 204, 223, 224 handbags, 29, 174, 175, 215, 217 hanging, 146 harm, 150, 174, 177, 225, 226 harmonization, 43, 83, 124, 148 hazards, 113 health, 14, 49, 54, 59, 62, 65, 88, 147 Health and Human Services, 139 health care, 49, 62, 88 hearing, 66, 74, 201, 218, 222, 228 heart, 107 heat, 59 height, 100, 169 heroin, 160 heterogeneous, vii, viii, 1, 2 higher-income, 12 high-level, 79, 218 high-tech, 194, 218 hiring, 39 historical trends, 22, 191 HIV/AIDS, ix, 14, 19, 24, 33, 36, 40, 41, 71 Homeland Security, 139, 154, 156, 190, 224 Honduras, x, 17, 25, 48, 56, 57, 58, 59, 66, 70, 72, 130, 135, 145, 182, 193, 201, 217, 218 Hong Kong, 4, 17, 79, 83, 84, 85, 86, 87, 89, 90, 91, 92, 94, 95, 139, 140, 176, 226 hospital, 62 host, xii, 33, 37, 39, 98 House, xi, xii, xiii, 44, 48, 55, 64, 68, 69, 73, 74, 92, 94, 98, 99, 102, 103, 104, 106, 107, 108, 109,

ICC, 144, 148 identification, 58 ILO, xii, 99, 113, 136 images, 230 IMF, 37, 73, 141, 148, 218 immigration, 86, 119 immunization, 55, 64 implementation, x, 17, 33, 37, 48, 49, 50, 53, 57, 60, 62, 63, 66, 67, 86, 90, 102, 123, 125, 128, 131, 133, 141, 154, 162, 168, 186, 187, 188 import restrictions, 86 import sensitive, 15, 28, 83, 106 import substitution, 7, 127 importer, 172 imports, vii, viii, ix, x, xiv, 1, 2, 3, 4, 5, 6, 7, 8, 9, 10, 14, 16, 17, 19, 21, 24, 25, 26, 27, 28, 29, 30, 31, 32, 35, 38, 39, 40, 42, 75, 82, 85, 87, 88, 89, 100, 101, 118, 127, 132, 145, 150, 151, 152, 153, 154, 157, 158, 159, 161, 163, 164, 166, 167, 169, 174, 175, 176, 177, 187, 188, 191, 193, 195, 196, 197, 200, 202, 204, 216, 217, 218, 219, 221, 222, 224, 225, 226 incentive, 139, 144 incentives, 65, 148 incidence, 24, 59, 86, 92 inclusion, 90, 93, 104, 114, 136, 142 income, vii, viii, 1, 2, 8, 12, 16, 17, 22, 23, 24, 40, 41, 42, 51, 52, 53, 54, 55, 56, 58, 59, 60, 66, 67, 74, 111, 126, 138, 152, 163, 164, 165, 170, 176, 182, 191, 194, 195, 197, 202, 204, 216, 217, 226 income inequality, 13

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Index incomes, vii, 1, 16, 17, 30, 40, 51, 126, 133, 134, 144, 145, 147 increased access, x, 11, 75, 90 increased competition, x, 75, 145 independence, 22 India, vii, 1, 3, 4, 5, 7, 12, 13, 16, 17, 24, 54, 72, 80, 81, 83, 84, 85, 93, 95, 114, 164, 177, 184, 217, 224, 226 indication, 201 indicators, 49, 51, 52, 53, 54, 55, 56, 60, 63, 64, 67, 147, 177 indigenous, 41, 63 Indonesia, 17, 55, 64, 72, 74 industrial, x, 27, 39, 43, 61, 75, 77, 79, 80, 84, 85, 86, 87, 88, 89, 125, 154, 170 industrial sectors, 87 industrialization, 127, 160 industrialized countries, 3, 14, 23 industry, 5, 13, 30, 31, 40, 61, 62, 89, 106, 152, 154, 156, 160, 171, 172, 176, 178, 184, 191, 196, 201, 222, 226 ineffectiveness, 112 inelastic, 17 infant industries, 154 infectious, 14 infectious disease, 14 infectious diseases, 14 inflation, 52, 225 information technology, 167 infrastructure, xiii, 7, 13, 31, 34, 35, 41, 58, 59, 60, 61, 62, 63, 65, 67, 68, 121, 122, 123, 124, 126, 128, 133, 135, 137, 138, 142, 170, 171, 186, 192 injuries, 62 innovation, 173 Inspection, 132 institutional change, 63 institutional reforms, 63 institutions, ix, 20, 35, 37, 56, 122, 127, 139, 141, 142, 169 instruments, 36, 91, 138 insurance, 13, 14, 33, 35, 36, 137, 138 integration, 6, 30, 38, 42, 43, 130, 156, 188, 202 integrity, 206, 230 intellectual property, vii, viii, xii, 2, 8, 11, 16, 38, 81, 99, 105, 113, 136, 150, 152, 153, 156, 160, 181, 184, 228, 232 intellectual property rights, vii, viii, xii, 2, 8, 11, 16, 38, 81, 99, 105, 113, 136, 150, 153, 160, 181, 228, 232 Inter-American Development Bank, 122, 139, 148 interdependence, 82 interest groups, 160 interim regulations, 30

International Criminal Court, 144, 148 International Labor Organization, xii, 99, 136 international law, 39, 118 international markets, 137 International Monetary Fund, 37, 43, 44, 141, 148 international standards, 91 international terrorism, 28, 232 international trade, viii, 2, 16, 90, 118, 124, 126, 141, 143, 151, 173, 186, 190, 229 International Trade, v, 8, 9, 10, 25, 26, 28, 29, 31, 36, 37, 44, 81, 94, 95, 106, 118, 119, 136, 141, 154, 191, 215, 221, 224, 231 International Trade Administration, 36, 44 International Trade Administration (ITA), 36 International Trade Commission, 8, 9, 10, 25, 26, 28, 29, 31, 44, 81, 94, 106, 154, 191, 224 internationally recognized worker rights, 160, 184 intervention, 79 interviews, 107 investigative, 205, 230 investment, viii, ix, 2, 5, 11, 16, 19, 20, 21, 23, 27, 31, 33, 34, 35, 38, 39, 41, 43, 44, 52, 55, 58, 59, 61, 66, 79, 90, 105, 123, 125, 126, 134, 135, 150, 153, 169, 170, 171, 173, 174, 178, 180, 185, 186, 187, 188, 201, 222 investors, 41, 178 Iran, 73 Iraq, 129, 130, 145 iron, 38 irrigation, 60, 61, 63, 70 island, 179 ISO, 34 Israel, 10, 17, 92, 94, 102, 217 ITA, 36, 44 ITC, 37, 141, 154, 156, 157, 158, 159, 162, 174, 177, 187, 188, 190, 191, 192, 195, 199, 201, 202, 215, 216, 217, 218, 224

J Jamaica, 51 Japan, 3, 4, 5, 11, 14, 80, 83, 90, 92, 111, 122, 143, 226 Japanese, 84 jewelry, 88, 158, 168, 172, 177, 194, 197, 216, 218, 226 job loss, 76 jobs, 13, 16, 82, 127, 145, 171 joining, 53, 194, 226 joint ventures, 33 Jordan, 10, 17, 55, 56, 64, 69, 72, 74, 112, 118 judgment, 189 Judiciary, 114, 119

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Judiciary Committee, 114, 119 jurisdiction, 114, 117, 118 justification, 74

K Kazakhstan, 152, 173, 191, 192 Kenya, 32, 34, 36, 42, 64, 72, 204 Kiribati, 54, 72 Korea, 17, 90, 122 Kosovo, 51, 72

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L LAB, 136 labeling, 88 labor, vii, viii, xi, xii, xiii, 1, 2, 7, 8, 12, 13, 14, 16, 17, 41, 97, 99, 103, 104, 105, 108, 109, 112, 113, 115, 121, 125, 127, 133, 136, 142, 143, 152, 158, 160, 183, 185, 228 labor productivity, 12 labor-intensive, 7, 8, 14, 158 land, 52, 58, 59, 60, 61, 62, 63, 70, 127 land tenure, 52, 61 land use, 63 language, xii, 79, 80, 82, 88, 90, 91, 92, 98, 105, 109, 113, 119, 175, 229 Laos, 17, 24, 72 Latin America, viii, 2, 3, 4, 5, 6, 16, 72, 130, 136, 176 Latin American countries, 5, 6 Latvia, 217 law, xi, 15, 20, 39, 49, 98, 101, 103, 107, 111, 115, 118, 119, 136, 138, 147, 154, 173, 175, 183, 185, 187, 190, 201, 232 law enforcement, 138 laws, viii, xi, 2, 12, 13, 15, 34, 50, 75, 92, 100, 101, 105, 106, 108, 111, 112, 113, 114, 125, 133, 151, 190 layoffs, 172 LDCs, 3, 4, 5, 6, 7, 14, 30, 31, 37, 40, 85, 88, 90, 134, 140, 141, 162, 163, 166, 175, 181, 197, 200, 201, 216, 217, 219, 224, 225 leadership, xii, 48, 69, 98, 103, 111 Least Developed Countries, 37, 141, 216 leather, 15, 29, 156, 158, 168, 172, 174, 175, 194, 197, 217, 218 leather wearing apparel, 29, 217 Lebanon, 17, 162, 198 legislation, vii, viii, ix, xi, xii, xiii, 1, 2, 16, 20, 21, 28, 30, 31, 33, 35, 36, 41, 51, 63, 68, 69, 73, 74, 81, 86, 92, 93, 98, 100, 101, 102, 103, 104, 105,

107, 109, 110, 111, 112, 113, 114, 117, 118, 121, 122, 123, 142, 144, 148, 158, 174, 175, 177, 180, 185, 186, 217, 222, 226, 229 legislative proposals, 156, 224 lending, 36 lenses, 158 liberal, 156, 181, 219 liberalization, vii, xiii, 1, 7, 10, 11, 12, 38, 40, 76, 77, 81, 85, 86, 95, 113, 115, 121, 122, 123, 126, 127, 133, 145, 150, 151, 153, 155, 156, 172, 173, 174, 179, 192, 200, 202, 222, 224, 227 Liberia, 32, 39, 72, 166, 185, 204 Libya, 42 licenses, 14, 89 licensing, xi, 76, 86, 88, 89 life expectancy, 41, 71 limitation, 28, 74 limitations, 39, 105, 126, 162, 172, 201 linear, 86 linkage, 34, 87, 124, 184, 185, 186, 228, 229 links, 31, 58, 59, 189 Lithuania, 217 livestock, 63 living standard, 41 living standards, 41 loan guarantees, 35, 36, 137 loans, 33, 35, 37, 137, 138, 141, 145 location, 27, 83 London, 43, 74 long period, 22, 153 losses, 22, 76, 82, 145, 159, 215 lower prices, vii, 1, 16, 152, 157, 158, 159 low-income, 51, 54, 74, 163, 164, 202, 216 luggage, 29, 174, 175, 217 Lula, 81

M Macau, 24, 217 Macedonia, 72 machinery, 5, 27, 88, 167, 197, 216, 217, 218 machines, 68 macroeconomic, 43 mainstream, 127 maintenance, 62, 67 malaise, 22 malaria, 14 Malaysia, 7, 10, 17, 104, 194 Malta, 217 management, 50, 52, 62, 63, 92, 138, 143 mandates, 150, 222 manufactured goods, 4, 14, 104, 158, 171, 172, 192, 197, 217

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Index manufacturer, 170, 201 manufacturing, 7, 27, 28, 35, 40, 88, 89, 100, 126, 127, 154, 172, 175, 194, 217, 218, 219 mark up, 109 market, ix, xi, 5, 11, 14, 19, 20, 21, 27, 31, 33, 36, 38, 39, 40, 43, 48, 58, 59, 75, 78, 79, 80, 82, 83, 85, 88, 90, 93, 95, 124, 125, 126, 127, 133, 134, 140, 150, 152, 156, 157, 160, 162, 163, 171, 172, 173, 174, 176, 179, 181, 184, 186, 187, 199, 200, 216, 217, 218, 225, 226, 228 market access, xi, 21, 36, 38, 39, 75, 79, 80, 82, 83, 85, 88, 90, 93, 125, 126, 140, 163, 179, 184, 186, 218, 225 market disruption, 40 market economy, 20 market share, 126, 162, 174, 200 marketing, 58 markets, vii, x, 1, 8, 11, 15, 16, 20, 36, 40, 42, 58, 59, 75, 76, 77, 82, 83, 84, 86, 89, 90, 123, 126, 127, 137, 144, 145, 169, 170, 172, 216, 217, 227 married women, 68 Marshall Islands, 72 Mauritania, 30, 32, 51, 54, 64, 73, 185 Mauritius, 20, 22, 27, 31, 32, 33, 39, 42, 204 MCA, ix, x, 47, 48, 49, 50, 51, 52, 54, 55, 56, 57, 58, 63, 64, 65, 66, 67, 68, 69, 70, 72, 73, 74 MCC, ix, x, xiii, 34, 47, 48, 49, 50, 51, 52, 53, 54, 55, 56, 57, 58, 60, 61, 63, 64, 65, 66, 67, 68, 69, 71, 73, 74, 121, 123, 128, 129, 133, 134, 135, 142, 148 meals, 63 measurement, 52, 53, 54 measures, ix, 3, 19, 20, 40, 42, 48, 51, 71, 83, 89, 90, 130, 134, 176, 191, 192, 196 meat, 175, 225 median, 49, 52, 53, 54, 55 medicine, 14 melons, 162, 200 membership, viii, 2, 11, 34, 125, 140, 153, 190 merchandise, 38 metals, 26, 27, 168, 194, 197 methanol, 158 Mexico, viii, 2, 3, 4, 6, 7, 10, 16, 17, 78, 92, 167, 194, 201, 226 microwave, 158 Middle East, 5, 129 middle income, 53, 56, 126, 138, 165, 176 military, 51, 73 Millennium, v, ix, xiii, 23, 34, 47, 49, 50, 71, 73, 74, 121, 123, 133, 134, 145, 148, 186 Millennium Challenge Corporation, ix, xiii, 34, 47, 49, 50, 71, 74, 121, 123, 133, 134, 145, 186

Millennium Challenge Corporation (MCC), ix, xiii, 34, 47, 49, 50, 121, 123, 133, 134 minerals, 26, 38, 173 mining, 27, 40 missions, 34, 37, 64, 134, 183 modalities, 78, 79, 80, 83, 84, 85, 86, 87, 92 modality, 84, 87, 88, 92, 95 models, 95 modernization, 61 Moldova, 54, 55, 56, 64, 69, 72, 135 momentum, 78 monetary policy, 42 monetary union, 38, 42 money, 141, 206, 230 Mongolia, x, 24, 48, 56, 57, 62, 71, 72, 135 Morocco, x, 17, 48, 56, 57, 62, 64, 65, 71, 72, 104, 135, 194 mortality, 52 motion, 117, 118 motivation, 144, 145 movement, 38, 86, 87, 114, 179 Mozambique, x, 32, 36, 39, 42, 48, 53, 54, 56, 57, 61, 64, 65, 71, 72, 135, 204 multilateral, viii, ix, x, xi, xii, xiii, 2, 12, 15, 16, 20, 37, 75, 76, 77, 81, 82, 93, 98, 99, 100, 101, 104, 111, 113, 114, 115, 118, 121, 122, 123, 133, 136, 139, 140, 141, 145, 156, 171, 174, 179, 200, 217, 224 multinational companies, 158 multinational corporations, 12 Myanmar, 17, 24

N NAFTA, 10, 31, 94, 103, 108, 119, 167, 201 Namibia, x, 21, 30, 32, 38, 42, 48, 55, 56, 57, 63, 65, 71, 72, 217 nation, 17, 55, 61, 76, 100, 126, 154, 195, 225 national income, 17, 176 National Institute of Standards and Technology, 139 national policy, 85, 147 national security, 28, 232 natural, 5, 7, 26, 27, 37, 52, 60, 63, 92, 147 natural disasters, 147 natural gas, 60 natural resources, 5, 7, 27, 37, 52, 92 Nebraska, 17 negotiating, x, xi, xii, 15, 75, 78, 79, 80, 81, 83, 84, 85, 87, 88, 90, 91, 93, 94, 95, 97, 98, 100, 101, 102, 104, 105, 107, 108, 112, 115, 123, 128, 139, 140, 145

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negotiation, viii, xi, 2, 39, 40, 57, 74, 78, 80, 81, 82, 83, 86, 91, 97, 102, 105, 106, 107, 111, 112, 132, 179 NEPAD, 39, 45 Nepal, 24, 54, 72, 166 Nethercutt Amendment, 144 Netherlands, 143, 217 network, 60 New York, iii, iv, 17, 43, 216, 218 New Zealand, 3 NGO, 142, 181 NGOs, 63, 122, 128, 160, 181, 184, 191 Nicaragua, x, 17, 25, 48, 56, 57, 58, 59, 71, 72, 130, 135, 145, 182, 193, 217 NIEs, 3, 4, 5, 6, 7 Niger, 32, 43, 64, 72, 166 Nigeria, 4, 9, 17, 25, 26, 27, 32, 36, 39, 40, 72, 163, 164, 204 non-binding, 89 nongovernmental, 160, 191, 231 nongovernmental organization, 160, 191, 231 nontariff barriers, x, 14, 36, 42, 75, 86, 88, 101, 102, 107 normal, 17, 100, 118, 173, 216 normalization, 196 North Africa, 27, 129 North America, 10, 31, 103, 167, 201 North American Free Trade Agreement, 10, 31, 103, 167, 201 North Korea, 73, 100 Norway, 92, 143 NTBs, 88, 101, 102, 107 nurses, 62

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O obligation, 105, 145 obligations, xi, xiii, 36, 76, 88, 91, 93, 97, 108, 110, 111, 121, 123, 130, 134, 140, 154, 177 observations, 171, 172 OECD, 17, 74, 123, 139, 142, 143, 146, 147, 148 offenders, 17 Office of the U.S. Trade Representative, 44, 150, 151, 191, 222, 223 Office of the United States Trade Representative, 13, 118, 128 Offices of Congressional Relations and Public Affairs, 190 offshore, vii, 1, 16 oil, ix, 4, 5, 20, 26, 32, 126, 166, 170, 173 Oman, 10, 104, 109 OMB, 69 omission, 93

Omnibus Trade and Competitiveness Act, 103, 112 online, 148 on-the-job training, 122 OPEC, 3, 4 open markets, 49, 174 openness, 134, 153, 180 ophthalmic, 158 opposition, 104, 111, 156, 224 orange juice, 162, 200 Organization for Economic Cooperation and Development, 74, 123, 139, 147, 148 orientation, 37, 138 Overseas Private Investment Corporation, ix, 20, 33, 35, 44, 138 oversight, vii, ix, xi, xii, 1, 16, 20, 40, 49, 57, 93, 97, 98, 123, 181, 206, 228, 230 ownership, 57, 140

P Pacific, 39, 58, 72, 74 Pakistan, 17, 24, 72, 162, 198 Panama, xi, xii, 10, 98, 104, 113, 116, 118 pandemic, 24, 41 Papua New Guinea, 72 Paraguay, 17, 25, 54, 64, 72, 162, 198 Paris, 17, 36, 140, 146, 148 Paris Club, 36 partnership, 41, 99, 110, 122, 128, 141, 148 partnerships, 40 pass/fail, 49 passenger, 61 Patent and Trademark Office, 139 patents, 13, 88 PDP, 218 Peace Corps, 66, 133, 139 peanuts, 175, 225 peer, 53 peer group, 53 peers, 53 per capita, 8, 22, 23, 24, 29, 30, 51, 60, 66, 67, 70, 71, 176, 182 per capita income, 8, 22, 30, 51, 60, 66, 67, 182 percentile, 54 perception, ix, 3 performance indicator, x, 47, 49, 52, 53, 54, 55, 57, 60, 74 periodic, viii, 2, 76, 100, 105, 153, 178, 185, 187, 189, 227, 228 permit, 154, 163 personal relations, 37 personal relationship, 37

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Index Peru, xi, xii, 9, 10, 17, 24, 64, 72, 98, 104, 113, 116, 130, 164, 178, 193 pests, 132 petitioners, 183 petroleum, 9, 26, 27, 32, 40, 200, 216, 218 Petroleum, 4 petroleum products, 9 pharmaceutical, xii, 14, 36, 88, 89, 99 pharmaceutical companies, 14, 88 pharmaceutical industry, 89 pharmaceuticals, 14 Philippines, 17, 54, 56, 64, 69, 72 philosophical, 110 piracy, 13, 183 pirated, 13 planning, 37, 67, 128, 134, 146 plants, 41 plastic, 168 plastics, 193, 197, 218 platinum, 26, 38 play, viii, ix, 2, 3, 16, 52, 53, 64, 99, 117, 123 Poland, 194, 217 police, 53 policy reform, 52, 63, 171 policymakers, 11, 146, 151, 174 political instability, 22 political parties, 110 political pluralism, 156, 232 political stability, 156 polyethylene, 158 polyethylene terephthalate, 158 Polynesia, 217 pools, 13 poor, 22, 54, 58, 59, 61, 67, 77, 85, 145, 177 population, 17, 22, 23, 38, 41, 49, 52, 54, 58, 59, 60, 61, 66, 216 population growth, 22 population size, 66 portfolio, 35 ports, 58, 59, 124, 125, 170 Portugal, 66 poverty, ix, 20, 23, 39, 49, 55, 57, 58, 59, 61, 65, 67, 122, 127, 140, 144, 147, 185, 217 poverty line, 61 poverty rate, 61 poverty reduction, ix, 20, 50, 55, 57, 58, 61, 67, 122, 127, 140, 144, 185 power, 66, 71, 83, 99, 112, 125, 158, 172 powers, 54, 99 PPP, 71 pragmatic, xi, 97, 99, 109 precedents, 105

245

preference, xiv, 7, 8, 9, 15, 106, 123, 126, 130, 149, 150, 151, 152, 153, 154, 155, 156, 157, 158, 160, 161, 162, 163, 164, 166, 167, 169, 171, 172, 173, 174, 175, 176, 177, 178, 179, 180, 181, 184, 186, 187, 188, 189, 190, 191, 192, 193, 195, 196, 197, 199, 200, 201, 202, 203, 204, 216, 217, 218, 219, 221, 222, 223, 224, 225, 226, 228, 229 preferential treatment, ix, 11, 19, 126, 127, 158, 176, 226 president, 24, 100, 106 President Bush, ix, xi, 20, 30, 33, 47, 48, 93, 95, 98, 104, 111, 119 President Clinton, ix, 19, 20, 29, 35 press, 55, 60, 93, 95 press freedom, 55, 60 pressure, xi, 75, 84, 100, 178 price taker, 216 prices, 4, 14, 22, 23, 83, 84, 145, 154, 169, 172, 173, 215, 216 primary data, 54 primary products, 86 private, 23, 33, 34, 35, 39, 50, 55, 57, 59, 62, 73, 106, 118, 128, 133, 171, 172, 176, 178, 181, 186, 226 private sector, 33, 34, 39, 50, 55, 59, 62, 73, 106, 118, 128, 133, 171, 172, 176, 178, 181, 186 private sector investment, 39, 59 private-sector, 226 privatization, 41 proactive, 79, 146 producers, viii, 2, 8, 13, 14, 40, 60, 83, 100, 124, 126, 127, 132, 138, 144, 145, 150, 151, 152, 157, 158, 171, 173, 175, 178, 201, 217, 224, 226 product coverage, 150, 156, 158, 161, 163, 181, 187, 218, 224, 228 product eligibility, 160, 175 production, vii, 1, 3, 5, 7, 8, 9, 12, 14, 16, 17, 30, 58, 59, 61, 63, 82, 93, 126, 127, 150, 152, 154, 156, 157, 158, 160, 170, 173, 201 productivity, 12, 22, 58, 59, 61, 62, 145 productivity growth, 22 profit, 59, 172, 226 profit margin, 172 program, viii, x, xiv, 2, 8, 9, 10, 13, 17, 28, 34, 36, 37, 40, 47, 48, 49, 50, 51, 53, 54, 55, 56, 57, 58, 59, 60, 61, 63, 64, 65, 66, 68, 77, 89, 113, 131, 149, 150, 151, 153, 154, 155, 156, 158, 159, 161, 162, 163, 166, 169, 171, 172, 173, 174, 175, 176, 177, 178, 181, 182, 183, 184, 185, 186, 187, 188, 189, 190, 191, 192, 193, 194, 195, 196, 197, 200, 201, 202, 204, 216, 217, 218, 219, 221, 222, 224, 226, 228, 229, 231

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property, iv, vii, viii, xii, 2, 8, 11, 16, 38, 52, 59, 61, 62, 70, 81, 99, 105, 113, 124, 136, 150, 152, 153, 156, 160, 181, 184, 228, 232 property rights, 124 prosperity, 20 protection, vii, viii, xi, 2, 8, 11, 13, 14, 16, 17, 76, 82, 83, 88, 100, 132, 150, 154, 160, 184, 218, 228, 230 protectionism, 13, 91 public, xi, 23, 28, 29, 34, 36, 57, 88, 89, 93, 97, 112, 113, 115, 123, 133, 154, 160, 170, 183, 190, 205, 230 public funds, 205, 230 public health, xi, 88, 89, 97, 112, 113, 115 public notice, 28 public policy, 123 public sector, 36, 133 purchasing power, 71 purchasing power parity, 71

Q Qatar, x, 12, 75, 76 qualifications, 54 quotas, 14, 40, 82, 86, 114, 162, 167, 175, 200, 201, 216, 218

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R race, 12 rail, 62, 71 rainfall, 59 range, vii, 1, 4, 6, 10, 12, 16, 62, 65, 87, 95, 128, 134, 146, 152, 158, 169, 171, 172, 173, 175, 185, 192, 225 raw material, 7, 17, 35, 88, 100, 158, 172 real income, vii, 1, 16 recession, 77 reciprocity, 86 recognition, 89, 110 reconcile, 87, 109 recovery, 22 refining, 52, 68 reflection, 204 Reform Act, 118 reforms, 41, 51, 52, 63, 67, 93, 145, 152, 160, 180 regional, viii, 2, 4, 7, 9, 11, 16, 31, 33, 34, 37, 38, 39, 40, 43, 44, 57, 59, 66, 69, 77, 81, 82, 91, 122, 130, 133, 136, 141, 149, 151, 152, 153, 154, 155, 156, 161, 162, 163, 174, 175, 176, 179, 180, 181, 184, 185, 187, 188, 190, 193, 197, 198, 199, 200,

201, 202, 203, 204, 218, 221, 222, 224, 225, 226, 228, 229 regional integration, 38 regular, 63, 185, 188 regulation, 93, 183 regulations, 30, 34, 50, 101, 102, 151, 176, 186, 190, 216, 231 rehabilitate, 60, 62 rehabilitation, 59, 60, 70 rejection, 87 relationship, x, 35, 48, 56, 57, 93, 116 relationships, 31, 37, 179 relaxation, 219 reliability, 59, 206, 230 repatriation, 39 Republic of the Congo, 32, 39, 204 Republicans, 73, 103, 104 research and development, 14 reserves, 110, 173 resin, 158 resistance, 179, 227 resolution, x, xiii, 47, 48, 68, 69, 86, 99, 101, 110, 112, 115, 125, 154, 183 resources, x, 5, 7, 24, 25, 27, 37, 48, 50, 51, 52, 58, 65, 66, 77, 82, 92, 113, 123, 127, 143, 147, 153, 171, 184, 185, 186, 229 responsibilities, viii, 2, 205, 230 responsiveness, 133 restructuring, 11, 34, 36 retail, 176 returns, 51 revenue, 38, 42, 100, 106, 109, 111, 117, 118, 119, 123, 159 rewards, x, 12, 47, 49 rice, 40 risk, 33, 35, 41, 59, 60, 124, 138 risk assessment, 138 risk factors, 35 risks, 41, 65 roadblocks, 179 Roads, 70 rolling, 92 Romania, 130, 176, 182 RTA, 124, 125 rule of law, 20, 49, 185, 232 rules of origin, 28, 30, 90, 126, 162, 163, 181, 193, 199, 200, 201, 202, 219, 224 rural, 58, 60, 62, 67, 127, 135 rural areas, 58, 127 rural development, 58, 60, 135 rural population, 60 Russia, 17 Rwanda, 32, 39, 42, 43, 64, 72, 204

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Index

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S safeguard, 15, 40, 42, 80, 83, 84, 114 safeguards, 85, 90 safety, 13, 88 sales, 92, 152, 175, 176 Samoa, 55, 72 sample, 193, 194 sanctions, 113, 177 sanitation, 52, 60, 61, 65, 68 satisfaction, 107, 108 savings, 23, 152, 158, 200, 216, 218 school, 63, 71 scores, 52, 54, 55, 64 search, 151 Seattle, 11, 17, 77, 103 Secretary of Commerce, 29 Secretary of State, 50, 100 Secretary of the Treasury, 44, 50 security, 28, 58, 105, 139, 144, 171, 173, 232 selecting, 55, 74 self-report, 147, 148 senate, 95 Senate, xi, xiii, 48, 50, 68, 69, 73, 74, 86, 92, 94, 98, 100, 101, 102, 103, 104, 106, 107, 108, 109, 110, 111, 114, 117, 118, 119, 121, 144, 150, 158, 217, 218 Senate approval, 86 Senate Finance Committee, 101, 102, 109, 110, 117, 119 Senate Foreign Relations Committee, 217 Senegal, 32, 33, 34, 36, 39, 43, 56, 69, 72, 74, 204 sensitivity, 144, 175 separation, 82 September 11, 77 series, 65, 118, 156, 193, 194 service provider, 112, 114 services, iv, vii, x, 1, 11, 14, 16, 24, 34, 35, 36, 39, 59, 60, 61, 62, 70, 75, 76, 77, 79, 81, 84, 85, 86, 93, 95, 104, 105, 113, 114, 125, 133, 135, 137, 169, 186 Seychelles, 32, 42, 204 shape, 30, 44, 57, 100 shaping, viii, 2, 76 shares, viii, 2, 3, 4, 6, 7, 11, 16, 131, 163, 164 sharing, 202 shipping, 216 shocks, 141 short supply, 31 short-term, 36, 146, 171, 178 Sierra Leone, 32, 72, 204 sign, 92, 113, 135, 193, 218 signaling, 60, 85, 86

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signals, 109 signs, ix, 19 similarity, 65 simulation, 219 Singapore, 4, 10, 17, 78, 79, 90, 92, 104, 114, 176 skilled labor, 12 skills, 58, 63, 124, 170 skills training, 63 Slovenia, 217 SME, 135 social services, 24, 59 solar, 93 solar collectors, 93 solid waste, 59 Solomon Islands, 72 Solow, 43 Somalia, 32, 72, 162, 198 South Africa, ix, 10, 17, 19, 20, 21, 25, 26, 27, 30, 31, 32, 34, 35, 36, 38, 39, 42, 104, 184, 201, 204, 217 South America, 156 South Asia, viii, 2, 16, 24, 72 South Korea, viii, xi, xii, 2, 4, 10, 15, 17, 92, 98, 104, 113, 116, 118, 176 Southern African Development Community, 38, 42 Soviet Union, 139, 142 soybeans, 170 special interests, 109 specificity, 49, 91 spectrum, 8, 114, 152, 192 speech, ix, 47, 48, 74 speed, 66, 67 sports, 88 Sri Lanka, 25, 53, 56, 72 St. Petersburg, 80 stability, 76, 156, 178 stabilization, 173 staffing, 36 stages, 93, 141, 171, 192 stakeholders, 112, 147 standard of living, vii, 1, 16, 22, 71 standards, xiii, 22, 31, 39, 41, 91, 102, 104, 105, 112, 113, 121, 125, 126, 133, 134, 136, 138, 142, 144, 152, 170, 184, 192, 218, 223 Standards, 17, 34, 41, 74, 112, 119, 125, 139 State Department, 41, 50, 74, 131, 136, 139, 191 statistics, 157, 164, 165, 166, 167, 168, 170, 193, 203, 204, 205, 215 statutes, 174, 231 statutory, xi, xii, 8, 17, 74, 97, 98, 107, 108, 144, 153, 158, 162, 175, 177, 180, 181, 187, 227, 228, 229 statutory obligation, xi, 97

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statutory provisions, 158, 162, 175 steel, 15, 38, 172, 174, 217 stock, 27, 77, 79 storage, 59, 60, 123, 124 strategies, 7, 37, 133, 140, 141, 146 strength, viii, 2, 124 stress, 81 strikes, xii, 98 sub-Saharan Africa, ix, 4, 6, 9, 19, 20, 22, 23, 24, 25, 26, 27, 28, 29, 30, 31, 32, 33, 34, 35, 36, 37, 39, 44 Sub-Saharan Africa, v, 3, 4, 6, 19, 22, 23, 24, 25, 26, 27, 32, 35, 42, 43, 44, 129, 141, 147, 156, 185, 186, 187, 188, 201, 218, 229 subsidies, xi, 14, 75, 78, 79, 80, 81, 82, 83, 84, 90, 91, 92, 126, 145, 173 subsidy, 80, 84 substitution, 7, 127, 187 Sudan, 32, 42, 73 sugar, 14, 40, 109, 170, 175, 225 supplemental, 52, 53, 54, 57, 88 suppliers, 164, 166, 175, 201, 204, 224, 226 supply, 5, 31, 59, 61, 62, 85, 123, 133, 146, 201, 216 supply chain, 5 surplus, 83, 159, 215 sustainable development, 39 sustainable growth, 23 Sweden, 143 Switzerland, 87, 92, 143 sympathetic, 11 Syria, 73

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T Taiwan, 4, 92, 176 Tajikistan, 72 tangible, 69 Tanzania, x, 32, 36, 42, 48, 54, 56, 57, 62, 64, 65, 71, 72, 204 targets, 35, 37, 60, 61, 134 tariff, 9, 10, 14, 15, 17, 36, 38, 39, 40, 41, 42, 43, 78, 79, 80, 81, 83, 84, 86, 87, 88, 90, 93, 100, 101, 102, 107, 118, 123, 127, 152, 154, 157, 158, 159, 161, 162, 169, 172, 173, 174, 175, 177, 191, 192, 193, 195, 196, 197, 199, 201, 203, 205, 215, 216, 218, 224, 225, 231 Tariff Act, 100, 102 tariff rates, 17, 86, 100, 216, 218 tariffs, viii, x, xiv, 2, 7, 8, 14, 15, 16, 39, 40, 42, 53, 75, 77, 79, 80, 82, 84, 86, 93, 100, 101, 102, 106, 107, 145, 149, 151, 152, 154, 162, 167, 172, 174, 179, 195, 201, 216, 217, 218, 221 task force, 183

Tax Relief and Health Care Act, 43, 159 taxes, 99 teacher training, 33 teachers, 24 technical assistance, ix, 19, 21, 31, 33, 34, 35, 40, 59, 62, 90, 91, 124, 128, 136, 138, 140, 145 telecommunications, 125, 142, 143 tension, 146, 153 tenure, 79 terrorism, 28, 77, 232 terrorist, 73, 77 terrorists, 77 testimony, xiv, 206, 221, 230 textile, 9, 15, 21, 29, 30, 31, 35, 40, 41, 61, 106, 109, 126, 145, 161, 171, 175, 176, 200, 201, 217 textile industry, 106, 201 textiles, 5, 10, 11, 14, 27, 28, 29, 30, 31, 38, 87, 88, 90, 156, 162, 166, 167, 168, 174, 175, 194, 201, 217, 218, 226 Thailand, 7, 10, 17, 51, 55, 72, 92, 104, 158, 164, 177, 224, 226 thinking, 127 third country fabric, 201 third-country fabric, 178, 226 threatened, 66, 185 threshold, 15, 50, 51, 52, 63, 64, 68, 69, 103 thresholds, 65, 84, 158, 162, 200, 216 Tier 3, 184, 218 time frame, 178 time series, 193, 194 time-frame, 102, 146 timetable, 181, 228 timing, 106 titanium, 38 title, 61 TNC, 82 tobacco, 175, 193, 218, 225 Togo, 32, 36, 43, 72 Tokyo, 94, 101, 102, 155 tomato, 58 tourism, 60, 63, 133, 137, 139 toys, 88 TPA, v, x, xi, xii, xiii, 16, 17, 38, 44, 75, 81, 94, 97, 98, 99, 104, 105, 106, 107, 108, 109, 110, 111, 112, 113, 114, 115, 116, 117, 118, 119, 122, 156 tracking, 128 Trade Act, 9, 17, 30, 43, 93, 101, 102, 103, 104, 107, 110, 118, 119, 218 trade advantages, 176, 226 trade agreement, viii, ix, xi, xii, xiii, 2, 7, 11, 13, 16, 20, 38, 77, 81, 82, 86, 91, 93, 94, 97, 98, 99, 100, 101, 102, 103, 104, 105, 106, 107, 108, 109, 110,

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Index 111, 112, 113, 114, 115, 116, 117, 118, 119, 121, 122, 123, 126, 133, 178, 179 Trade and Development Act of 2000, 9, 28 Trade and Tariff Act, 102 trade benefits, 31, 184 trade deficit, 111 trade liberalization, vii, xiii, 1, 7, 11, 12, 38, 40, 76, 77, 81, 113, 115, 121, 122, 125, 126, 127, 133, 145, 150, 155, 174, 179, 222, 227 trade policies, 11, 16, 141, 145, 146, 179 trade policy, vii, viii, xi, xii, 1, 2, 7, 8, 11, 12, 13, 16, 34, 52, 97, 98, 99, 100, 101, 105, 107, 111, 115, 116, 118, 124, 128, 140, 141, 145, 146, 173, 179, 188, 227 Trade Policy Staff Committee, 150, 151, 191 trade preference, vii, viii, xiii, xiv, 1, 2, 7, 8, 10, 11, 15, 16, 17, 20, 28, 40, 122, 123, 126, 127, 136, 149, 150, 151, 152, 153, 154, 155, 156, 160, 162, 163, 169, 171, 173, 177, 179, 180, 181, 184, 186, 187, 188, 189, 190, 191, 192, 193, 197, 200, 216, 217, 218, 219, 221, 222, 224, 227, 228, 229 Trade Representative, ix, xii, 13, 20, 34, 35, 44, 50, 79, 98, 117, 118, 128, 150, 151, 190, 191, 221, 222, 223 trade union, 125 trademarks, 13 trade-off, xiv, 76, 77, 78, 149, 150, 151, 153, 174, 175, 177, 179, 190, 221, 222, 225, 226 Trade-Related Aspects of Intellectual Property Rights, 88 Trade-Related Aspects of Intellectual Property Rights (TRIPS), 88 trading, viii, ix, 2, 3, 4, 10, 13, 24, 27, 76, 84, 100, 101, 113, 114, 118, 138, 141, 154, 169, 173, 179, 186 trading partners, 4, 10, 13, 24, 27, 100, 101, 113, 114, 118, 179 trafficking in persons, 153, 184, 185 Trafficking in Persons, 184, 191 training, xiii, 33, 35, 37, 41, 58, 60, 62, 63, 121, 122, 124, 133, 138, 139, 140, 147, 217 training programs, 37 transactions, 35 transfer, 216 transition, 39, 58, 124, 125, 127, 129, 133, 179, 227 transition countries, 133 transition economies, 125 transition period, 39, 127, 179, 227 translation, 109 transmission, 62 transparency, 39, 58, 90, 91, 92, 105 transport, 58, 60, 62, 123, 125, 135, 142, 143 transport costs, 60

transportation, 7, 27, 31, 34, 58, 59, 61, 65, 128, 133, 135, 171, 173, 194, 218 transportation infrastructure, 65, 128, 135 transshipment, 30 travel, 30, 59, 88 travel time, 59 Treasury, xiii, 44, 50, 121, 133, 138, 152, 154, 156, 157, 159, 190, 191, 224 Treasury Department, xiii, 121, 138 treaties, 39, 99, 100 trees, 61 Trinidad and Tobago, 204 TRIPS, 14, 77, 88, 89, 94 trust, 37, 112, 122, 139, 141 trust fund, 37, 122, 139, 141 tuberculosis, 14 Tunisia, 55, 72 Turkey, 17, 43, 92, 152, 171, 172, 173, 191, 192, 217 Turkmenistan, 72 Tuvalu, 72

U U.S. Agency for International Development, ix, xiii, 19, 34, 50, 121, 122, 133, 148, 154 U.S. Department of Agriculture, xiii, 121, 122, 132, 138 U.S. Department of Agriculture (USDA), 122, 138 U.S. economy, 12, 106, 150, 152, 156, 157, 158, 191 U.S. Export-Import Bank, 145 U.S. Treasury, 138, 152, 157, 159 U.S. yarn, 29 UAE, 10 Uganda, 32, 36, 42, 55, 64, 72, 138, 185, 204, 228 Ukraine, 17, 54, 55, 56, 64, 72, 130, 135, 184 uncertainty, 77, 126, 151, 178, 181, 202 UNDP, 37, 71, 141, 148 UNESCO, 73 uniform, 42, 162, 200, 202 unions, 160, 185 United Arab Emirates, 10, 104 United Kingdom, 27, 143 United Nations, xii, 4, 27, 37, 43, 44, 99, 122, 136, 141, 152, 154, 165, 191, 194, 216 United Nations Development Program, 37, 141 unlawful transshipment, 29 unpredictability, 41 upload, 44 Uruguay, 11, 20, 25, 76, 81, 82, 85, 90, 92, 94, 95, 103, 104, 115, 118, 119 Uruguay Round, 11, 20, 76, 81, 82, 85, 90, 92, 94, 95, 103, 104, 115, 118, 119

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USAID, x, xiii, 34, 44, 48, 50, 63, 64, 66, 74, 121, 122, 123, 125, 128, 129, 130, 131, 132, 133, 134, 135, 136, 137, 138, 142, 143, 144, 146, 148, 154, 156, 171, 186, 190, 217 USDA, 122, 138 Uzbekistan, 73, 162, 184, 198

V value added tax, 53 values, 157, 196, 206, 230 Vanuatu, x, 48, 51, 56, 57, 60, 66, 67, 71, 72, 74, 130, 135 variables, xii, 98 variance, 197 variation, 65, 161, 163, 200, 202 vehicles, 8, 26, 38, 187 Venezuela, 17, 24, 158, 184 venture capital, 73 venue, 39, 81 vertical integration, 30 victims, 218 Vietnam, 17, 25, 54, 72, 138 visa, 29, 30, 114 vision, 20 vocational, 62, 63 vocational education, 62 voice, 11 volatility, 22 voting, 117 vulnerability, 147, 216

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W wages, 12, 13, 111, 145 warrants, 117 watches, 8, 15, 28, 174, 175, 217 water, 52, 59, 60, 61, 62, 63, 65, 68, 125, 170 watershed, 62 weakness, 184, 216 wealth, 173 wearing apparel, viii, 2, 16 websites, 117 welfare, 81 welfare loss, 81 well-being, 82 West Africa, 34, 38, 43, 144 West Bank, 129, 130, 182 western countries, 24

wetlands, 62 wheat, 27 White House, 108, 109 WHO, 73 wholesale, 27 wildlife, 63 wind, 93 wine, 83 withdrawal, 29, 81, 160 women, 52 wood, 168, 218 wood products, 218 wool, 30 work gloves, 29, 174, 175, 217 worker rights, 20, 52, 125, 232 workers, vii, viii, x, 1, 2, 12, 13, 16, 24, 30, 40, 41, 75, 113, 114, 127, 145 workforce, 125 working conditions, 41, 82 working groups, 82, 90, 129 World Bank, xiii, 22, 23, 24, 29, 37, 43, 44, 51, 65, 71, 73, 91, 94, 121, 122, 139, 141, 147, 148, 152, 162, 165, 176, 191, 194, 195, 199, 216, 217, 218, 219 World Development Report, 71 World Health Organization, 73 World Health Organization (WHO), 73 World Trade Organization, v, viii, x, xi, xii, 2, 11, 34, 53, 75, 76, 94, 95, 98, 99, 118, 122, 139, 147, 148, 154, 191, 217, 224 writing, 106 WTO, vii, viii, x, xi, xii, xiii, 1, 2, 11, 12, 14, 15, 16, 17, 27, 34, 35, 37, 40, 75, 76, 77, 78, 79, 80, 81, 82, 83, 84, 85, 88, 89, 90, 91, 92, 93, 94, 95, 98, 99, 103, 104, 111, 114, 118, 122, 123, 124, 125, 127, 128, 130, 133, 136, 138, 139, 140, 141, 142, 143, 145, 146, 147, 148, 154, 172, 173, 176, 177, 179, 188, 192, 217, 218, 224, 227, 231

Y yarn, 29, 30, 35, 201 Yemen, 64, 67, 72 yield, 80

Z Zimbabwe, 32, 42, 73, 162, 198, 202

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