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Senseless GSP Sanctions against Russia Hurt US Importers

by and Tyler Moran | July 16th, 2014 | 10:03 am
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Because economic exchange benefits both parties, sanctions usually harm the sender country as well as the target. Nevertheless sanctions are a handy tool in the conduct of foreign policy, especially when the impact on the target greatly exceeds the impact on the sender. What can’t be justified is imposing a “sanction” that hurts only the sender, while having no impact on the target.

Yet, according to reports,1 members of Congress have talked about excluding Russian products imported months before the Ukrainian crisis from a refund of duties already paid by US importers under the Generalized System of Preferences (GSP). If hallway conversation finds its way into law, that would be a curious case of punishing US importers with no impact on Russian exporters. On May 7, 2014,the administration “graduated” Russia from the GSP program, reflecting its economic status as well above the level of other developing countries. Hence, starting in June 2014, Russian exports to the United States were no longer eligible for GSP tariff relief. What’s at stake in the current debate is duties paid on US imports from Russia prior to “graduation.”

GSP allows certain goods from designated developing countries to enter the United States free of tariffs. First enacted in 1974, the original program expired in 1997. Since then it has been repeatedly extended, generally between two and four years. But Congress often fails to reauthorize continuing programs before they expire, and this has been the fate of GSP. Following its most recent reauthorization (in 2011), duty-free treatment lapsed for all GSP imports, including those from Russia, on August 1, 2013. When GSP lapses, US importers must pay the standard duties. However, Congress has always retroactively refunded these payments when GSP was reauthorized.

On March 18, 2014,Russia annexed Crimea, and within days the United States and the European Union imposed an array of sanctions against Russia.2 Denial of GSP refunds would not add to this array—it would only hurt US importers who contracted for the imports before the current crisis started. Duties are paid at the point of entry into the US market, generally by the US firm that imported the product. Our calculations suggest that, if Russian products are denied retroactive relief, collectively these US importers would lose tariff relief on some $430 million worth of imports. The imports in question are a medley of industrial goods, such as ferrosilicon, aluminum, miscellaneous metals and chemicals, and some consumer goods such as tires, shotguns, motorcycles, and glassware. The tariffs in question add up to about $15 million, a small sum in the grand scheme of the US economy, but more than chump change to the US importers that would be stuck with the extra payments. The unhappy precedent would not be forgotten the next time GSP lapses, possibly two years from now. If congressional talk ripens into statutory text, the old saying about “cutting off your nose to spite your face” would be appropriate.

Notes

1. Inside U.S. Trade, “Congress Working On Advancing GSP Renewal; Senate Pushing GSP-Only”, June 20, 2014.

2. Hufbauer, Cimino, and Moran, “Ukraine-Related Sanctions: Facts and Assessment”, May 12 2014, PIIE.