Time to get tough on mercantilists

With nations struggling to achieve economic growth in the wake of the Great Recession, a growing number are embracing a range of protectionist, trade-distorting practices. These “innovation mercantilist” practices include forcing local production as a criterion for market access, subsidizing exports, stealing intellectual property and favoring domestic companies over foreign ones. Unfortunately, these practices are increasing: the World Trade Organization (WTO) reported that the number of technical barriers to trade reached a high of 1,560 in 2012. Because they hurt not only the U.S. economy but also the entire global trading system, it’s time the U.S. government gets more serious about confronting this threat.

There are a variety of reasons why the U.S. government has not done more to combat these practices. Our main trade enforcement agency, the United States Trade Representative’s Office (USTR), is under-funded and lacks the resources to take more aggressive action. In addition, the WTO has become less effective at confronting mercantilism, especially now that so many mercantilist nations are in the WTO club. But there is one step that the U.S. government could take without new resources or WTO blessing: ensuring countries meet the criteria required to enjoy Generalized System of Preferences (GSP) benefits.

Instituted in 1976, GSP aims to promote economic growth in the developing world by providing preferential, duty-free treatment for up to 5,000 products when imported from one of 127 designated beneficiary countries and territories. In the 1980s the U.S. Senate made reforms to the program to specify conditions beneficiary countries must meet in order to gain and maintain their preferential trade status. In particular, one condition the President was required to consider is “the extent to which such country is providing adequate and effective protection of intellectual property rights.” At the time, the Senate Finance Committee report explained that: “In delegating this discretionary authority to the President, it is the intent of the Committee that the President will vigorously exercise the authority to withdraw, to suspend or to limit GSP eligibility for non-complying countries.”

It seems like an obvious qualification—if the United States is granting you trade preferences, then don’t bite the hand that feeds you; in other words, adhere to trade commitments and respect the interests of U.S. intellectual property (IP) rights holders. Surprisingly, it’s less obvious than one might think. In fact, the U.S. government rarely removes a country’s GSP eligibility in response to IP transgressions.

Of the 127 countries listed as GSP beneficiaries by USTR, 18 are listed on USTR’s 2013 Special 301 Report, an annual review of countries that maintain inadequate and ineffective intellectual property protection and enforcement. These include Ukraine, listed as a Priority Foreign Country, or the most egregious violator of IP. It also includes seven countries—Algeria, India, Indonesia, Pakistan, Russia, Thailand, and Venezuela—listed on the Priority Watch List, or countries in which very severe violations of IP rights occur. Finally, ten additional GSP beneficiaries—Bolivia, Brazil, Ecuador, Egypt, Jamaica, Lebanon, Paraguay, the Philippines, Turkey, and Uzbekistan—are listed on the Watch List, or countries in which slightly less severe violations of IP rights occur.

Unfortunately, the Special 301 Report serves mainly to “name and shame” and as a result, there has been no real penalty for these nations. In the last 12 years, Ukraine has been the only country to lose its GSP benefits—from 2001 to 2005—for a failure to provide adequate IP protection. But today, many of Ukraine’s exports enjoy the benefits of zero-tariff imports to America, despite the fact that since 2006 Ukraine has been on the Priority Watch List three times, the Watch List four times and a Priority Foreign Country this year.

Many will argue that removing these nations’ GSP privileges is unfair; after all, most are poor developing countries. But is it fair for these nations to steal American companies’ trade secrets, use technologies protected by U.S. patents, and rampantly pirate U.S. software, movies, and music? Moreover, the rationale for stronger enforcement does not principally rest on fairness. Rather, it’s based on the idea that countries viewing protectionism as the principal way to develop will cause the global trading system to spiral out of control. By demonstrating that there will be negative consequences for nations choosing a mercantilist path, the United States can play a key role in restoring the integrity of the global trading system.

One of the best places to start is for the Administration to follow the explicit intent of Congress: to “vigorously exercise” the right to withdraw, suspend or limit GSP eligibility for countries not complying with the criterion on IP. If nations want trade benefits from the United States, they need to play by the rules. Not doing so threatens to undermine the entire global trading system.

Wein is a research analyst with the Information Technology and Innovation Foundation.