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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

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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,

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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

1

U.S. Trade and Investment Relationship with Sub-Saharan Africa: The African Growth and Opportunity Act and Beyond Danielle Langton

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

Trade Capacity Building: Foreign Assistance for Trade and Development Danielle Langton

121

Chapter 5

Chapter 6

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vii

Chapter 7

Chapter 8

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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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

ix

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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Preface

xi

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

xiii

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.

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

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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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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William H. Cooper

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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William H. Cooper

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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U.S. Trade with Developing Countries

9

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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