Graduation from U.S. GSP: The case of Singapore

Abstract

Gn January 2, 1989, the United States graduated the four East Asian newly industruthzing economies {NIEs)-Hong Kong, Singapore, South Korea, and Taiwanfrom its generalized system of preferences (GSP). Instituted in 1976, the U.S. GSP has indisputably benefited the four East Asian NIEs. While it was by no means the overriding factor behind their remarkable economic growth in the past quarter century, it was a major contributing factor. The easing of entry into the U.S. market enabled them to develop a combined trade surplus with the United States that in I987 exceeded that of Western Europe with the United States-U%323 billion (S$61.7 billion) as against US$30 billion (S$56.6) for Western Europe. The graduation from U.S. GSP no doubt hurt the four East Asian NIEs. The degree of hurt, the ability to take it, and the wider implications of the graduation (e.g., pressure to graduate from developing to developed country status under GATT) differ between the NIEs. This article focuses on Singapore. In a subsequent article we take up the cases of each of the other three East Asian NIEs-Hong Kong, South Korea, and Taiwan-and compare them with that of Singapore. The objective of this article is twofold: (1) to estimate the loss to Singapore of U.S. GSP trade benefits that would result from graduation; and (2) to draw attention to the other economic implications of the graduation. For the first objective, we use the model in Baldwin and Murray (1977) to compute the trade-creation and tradediversion effects of the U.S. GSP. These two effects represent the trade benefits Singapore (the beneficiary country) derived from the U.S. GSP and hence her loss resulting from graduation from the scheme. For the second objective, we consider the wider implications of the graduation, specifically (a) the pressure to graduate to developed-country status under GATT, and (b) the American multinational corporations (MNCs) relocating to neighboring countries still enjoying U.S. GSP. In section II we provide the background to the study with a discussion of the