Export Competitiveness of Developing Countries and US Trade Policy

• Published date: 01 July 2017
• DOI: http://doi.org/10.1111/twec.12443
• Author: Shushanik Hakobyan
• Date: 01 July 2017

Export Competitiveness of Developing

Countries and US Trade Policy

Shushanik Hakobyan

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1

Department of Economics, Fordham University, Bronx, NY, USA

1. INTRODUCTION

EXPORT-LED growth has been perceived as one of the promising paths to promoting

economic growth in developing countries. Consequently, developed countries instituted

special programmes that grant preferential access to their markets. In the case of the United

States, the Generalized System of Preferences (GSP) offers tariff exemptions to about 130

developing countries for select products. The GSP has been credited with stimulating exports

from developing countries (see Hoekman and

€

Ozden, 2005, for a survey), but its overall effec-

tiveness has been questioned by several studies (Bureau et al., 2007; Hakobyan, 2015).

The value of imports claiming US GSP preferences was about $20 billion in 2009, benefit-

ing close to 11,200 country–product pairs.

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For the same year, the GSP programme reduced

duties charged on qualifying imports by about $0.7 billion. While these GSP imports account

for about one per cent of total US imports, they account for eight per cent of all imports from

GSP beneficiaries with considerable heterogeneity across countries. In the case of India, for

instance, imports entering the United States under the GSP programme account for 13 per

cent of the country’s total exports to the United States, whereas in the case of Armenia, they

account for 86 per cent; Indian exporters claimed GSP exemptions for 1,778 products,

whereas Armenian exporters for only 34 products.

While the GSP waives tariffs to stimulate exports from developing countries, its rules are

designed to remove such exemptions from the ‘most successful’ beneficiaries. More specifi-

cally, tariff exemptions are revoked when imports of a particular product from a given coun-

try or its share in total US imports exceed a specific threshold, known as Compe titive Needs

Limit (CNL). Exporters of such products are designated as ‘super competitive’ by the US

Trade Representative (USTR) and deemed to be no longer in need of a preferential treatment

(USTR, 2010a).

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But are the exporters subject to CNLs truly ‘super competitive?’ Are they able to continue

exporting to the United States absent the tariff exemptions under GSP? The evidence in the

existing literature on the impact of CNLs is rather scant and primarily descriptive (MacPhee

and Rosenbaum, 1989; DeVault, 1996). Import shares of affected countries seem to decline a

year or two after the CNL exclusion, with little change in average imports.

This paper has been revised and accepted for publication while the author was on leave from Fordham

University, visiting Georgetown University.

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The value of US imports of potentially GSP eligible products stood at about $50 billion (Blanchard

and Hakobyan, 2015).

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The term ‘competitive’ is introduced in the 1974 Trade Act to describe countries that exceed CNL

thresholds by exporting a significant amount of a given product to the United States. The term is used

throughout the paper within quotes to remind the reader of this meaning.

©2016 John Wiley & Sons Ltd 1405

The World Economy (2017)

doi: 10.1111/twec.12443

The World Economy

A related question of interest is the potential impact of CNLs on imports from other GSP

beneficiary countries. If CNL-affected countries are unable to continue exporting to the United

States, then who replaces them? Would the imports from (and import shares of) other GSP

beneficiaries rise and fill the void, as policymakers hope, or would those of non-GSP coun-

tries expand?

This paper addresses two questions related to the impact of CNLs. First, it revisits the

question of what happens to the imports of products from CNL-affected countries. And sec-

ond, it further explores the likely beneficiaries of CNL exclusions. More specifically, it exami-

nes 202 cases of CNL exclusions between 1997 and 2009, tracking import values and shares

of affected country–product pairs for at least one year prior to and up to three years following

the exclusion. These 202 CNL episodes accounted for $6.9 billion in imports denied the GSP

preferences, as observed in the pre-CNL year. When compared to the mean value of annual

imports over the period studied, these are equivalent to about 31 per cent of US imports

claiming GSP.

The findings suggest that imports from excluded beneficiary countries and their share in

total US imports of a given product drop abruptly in the first year of exclusion. They also

continue to decline several years after the exclusion. These findings are robust to the inclusion

of various country and product characteristics that control for the size of the country and its

stage of development, the degree of product differentiation, the importance of the product in a

country’s exports and the number of countries exporting a given product. By the third year of

exclusion, imports from affected countries decrease by about 75 per cent relative to the pre-

exclusion average. Similarly, import shares drop by 42 percentage points from an average of

63 per cent prior to the exclusion. These findings suggest that CNLs may not be targeting the

‘super competitive’ exporters (as perceived by policymakers), rather these exporters may need

the preferential treatment to continue accessing the US market.

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I further show that the share of other GSP eligible countries in total US imports increases

but less than that of non-GSP countries after the CNL is imposed. By the third year of exclu-

sion, the share of other GSP eligible countries increases by seven percentage points, whereas

that of non-GSP countries increases by 29 percentage points. This suggests that non-GSP

countries benefit from the CNLs more than other GSP beneficiaries, contrary to the policy

intent.

This paper makes three contributions to the literature on the impact of CNLs. First, it con-

trols for exporting country and product characteristics, as well as country and year fixed

effects. This complements earlier studies which rely on descriptive statistics. Second, it uses

relatively recent episodes of CNL exclusions over the years 1997–2009, whereas the existing

literature employs data through 1993. Third, this paper provides evidence of dynamic adjust-

ment to the shock of higher tariffs introduced by CNL exclusions, as imports are tracked up

to three years after the exclusion.

The remainder of this paper proceeds as follows. Section 2 provides background on the

implementation of CNLs and reviews the literature. Section 3 describes the data and discusses

the empirical strategy. Results are reported in Section 4, and concluding remarks are provided

in Section 5.

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We should not be surprised to see a decline in imports from countries that have lost tariff exemptions.

However, policymakers may not have expected such a decline to be as significant and persistent over

time as the findings suggest.

©2016 John Wiley & Sons Ltd

1406 S. HAKOBYAN