(End of) the Era of US Tariff Privileges

The Generalized System of Preferences, or GSP, has shaped global trade since 1971. For 54 years, or more than half a century, this tariff reduction scheme for import duties has been enjoyed by developing countries. Will Donald Trump's "Liberation Day" mark the end of this era of tariff privileges?

The United Nations Conference on Trade and Development (UNCTAD) initiated the Generalized System of Preferences (GSP) in 1971. Its purpose is to provide duty-free and quota-free market access to developing and least-developed countries. Conversely, countries granting GSP benefits will enjoy various imported commodities at relatively affordable prices.

To date, there are 15 countries that provide such tariff privileges. These countries are the United States, Armenia, Australia, Belarus, Canada, the European Union (EU), Iceland, Japan, Kazakhstan, New Zealand, Norway, Russia, Switzerland, Turkey, and the United Kingdom.

The United States, for instance, began adopting the GSP after enacting the U.S. Trade Act in 1974. There are 3,572 products from 119 beneficiary countries, including Indonesia, that are allowed to enter the U.S. market duty-free.

With the GSP, the US can maintain the competitiveness of companies in terms of the affordability of imported raw materials, reducing production costs, and preserving jobs.

The condition is that beneficiary countries must comply with 15 criteria. Some of these include legal eligibility, granting workers' rights in accordance with international regulations, protecting intellectual property rights, and ensuring fair and reasonable access to their markets.

Through the GSP, the United States is committed to supporting the growth of sustainable development for developing and underdeveloped countries. The GSP also enables the United States to maintain the competitiveness of companies, whether in terms of affordability of imported raw material prices, reducing production costs, or preserving employment opportunities.

“GSP is critical for U.S. small businesses, many of which rely on the program’s import duty savings to remain competitive,” the Office of the U.S. Trade Representative (USTR) said.

However, in 2018, during Trump's first term, the USTR reviewed the implementation of GSP for a number of countries that would end on December 31, 2020. Some of these countries include Indonesia, Thailand, Uzbekistan, Georgia, Laos, Eritrea, and Zimbabwe.

The reasons for the GSP review are varied. Thailand is considered to have not implemented fair and reasonable trade in pork products in the US market. Uzbekistan, Georgia, Laos, Eritrea, and Zimbabwe are considered to have not protected workers' rights. Indonesia is considered to have not implemented fair and reasonable trade in agricultural products in the US market.

On October 30, 2020, Trump asked the USTR to stop reviewing the GSP of those countries. In an official statement, the USTR stated that the implementation of the GSP program was effective in improving labor standards and helping the growth of US businesses and workers.

"The decision also demonstrates Trump's commitment to rigorous monitoring and enforcement of the U.S. GSP program. However, when GSP beneficiary countries do not meet the mandated eligibility criteria, we will take action to limit their preferential duty-free access to the U.S. market," U.S. Trade Representative Robert E. Lighthizer said.

When GSP beneficiary countries do not meet the mandated eligibility criteria, we will take action to limit their preferential duty-free access to the U.S. market.

Of course, the announcement was a relief for Indonesia. This is because Indonesia enjoys around 12 percent of the 3,572 tariff lines in the US GSP. Indonesian export products that receive the tariff privileges include textiles, garments, manufacturing, mattresses, furniture, rubber, bags, chemicals, and jewelry.

The US International Trade Commission (USITC) noted that in 2023, Indonesia became the largest US GSP beneficiary country with an export value of US$3.56 billion. Then followed by Thailand worth US$3.1 billion, Cambodia US$2.9 billion, Brazil US$2.5 billion, and the Philippines US$1.8 billion.

In Trump's second term, the US has not mentioned much about GSP. This time, Trump focuses on imposing reciprocal or retaliatory tariffs on countries that cause large trade deficits.

China, the EU, Canada, and Mexico have been the targets of Trump's tariff hikes. Then on Wednesday (2/4/2025) local time or Thursday Indonesian time, United States President Donald Trump is preparing to launch "Liberation Day" for the United States. "Liberation Day" for Trump is the implementation of retaliatory tariffs on 15 countries that enjoy a trade surplus with the US (Dirty 15).

USTR said the 15 countries will be selected from 21 countries that control 88 percent of total trade with the US. The countries in question are Argentina, Australia, Brazil, Canada, China, the EU, Indonesia, India, Japan, South Korea, Malaysia, Mexico, Russia, Saudi Arabia, South Africa, Switzerland, Taiwan, Thailand, Turkey, the UK, and Vietnam.

The US Bureau of Statistics shows that Indonesia is ranked 15th on the Dirty 15 list. In 2024, Indonesia enjoyed a trade surplus of 19.3 billion US dollars with the US. Indonesian commodities contributing to the surplus include mineral fuels, vegetable fats and oils, apparel, footwear, cocoa, and furniture and crafts.

It is worth noting that, despite no longer mentioning GSP, the US has never mentioned the validity period of GSP after the 2018-2020 review. Unlike the EU which has extended the validity period of GSP from December 31, 2023 to December 31, 2027.

This means that there is a potential for Trump to ignore GSP and prioritize the application of reciprocal tariffs on countries that generate trade surpluses from the US. However, there is still a possibility that the US will comb through or review products on the GSP list that still need to be maintained.

This is because many products on the GSP list are needed by US small businesses or industries. It is also possible that Trump will target certain products, both on and off the GSP list, from countries that will be on the Dirty 15 list.

Indeed, the US Department of Commerce's Bureau of Economic Analysis said that US corporate profits in the fourth quarter of 2024 rose by US$204.7 billion. However, the recovery in the financial condition of these companies does not necessarily indicate sustainable growth. Moreover, Trump has shaken global trade through his tariff policies.

The tariff hike policy will harm US trading partner countries, including Indonesia. The policy will also backfire on the economy, businesses, and even consumers in the US.