The United States recently announced it would impose 25% tariffs on $1.3 billion in imports from France, including handbags, effective January 6, 2021. The tariffs are in response to planned French digital services tax (DST) that largely affect American technology companies. Presumably, the U.S. announced the product list – with delayed implementation – to gain leverage in talks with France about canceling the DST. Targeting well-known French products and brands, such as Hermès and Louis Vuitton, adds symbolism on top of the direct tariff costs.
The catch? GSP could expire a few days earlier on December 31 and lead to even higher tariffs on non-French handbag suppliers than the Section 301 tariffs would cause. To date, the Trump administration has not taken a position in support of GSP renewal. The handbag case helps illustrate the complicated links between various U.S. trade policies, such as the potential GSP expiration, that can either reinforce or undermine policymakers’ plans.
The key question: why would France make DST concessions to avoid handbag tariffs if competitor countries are likely to face similar tariff hikes at the same time due to GSP expiration? GSP uncertainty, at least in part stemming from the Administration’s failure to explicitly support renewal (to date), clearly undermines the effort to use the threatened tariffs on France as leverage in the DST negotiations.* Sure, American consumers will pay more for handbags, but French producers are not singled out. Questions about GSP’s status greatly reduces the threat that buyers will ramp up purchases of non-French bags in the run-up to January 6.
Handbags were among the “travel goods” products that gained GSP eligibility in 2016/2017. Imports of handbags under GSP have grown rapidly, even exceeding traditional sources such as France. As shown in the graph below, GSP handbag imports ($783 million) were nearly twice as high as imports from France ($404 million) for the 12 months ending in May 2020.
Average handbag tariffs eliminated by GSP are high – around 13% – but not as high as the proposed 25% Section 301 tariffs. Still, the rapid growth in U.S. imports under GSP means the gap between the potential costs of a 25% tariff on imports from France and actual GSP tariff savings closed significantly, as shown below.
The Covid-19 pandemic is certainly affecting imports, but GSP countries have seen less impact to date. From January to May 2020, GSP savings on handbags were $40 million, up 13% compared to 2019. The potential tariff costs on imports from France were just $34 million, a 22% decline from 2019. If these trends continue, the handbag tariff costs from GSP expiration could be much higher than Section 301 tariffs on France.
The potential harm to importers and consumers is clear: two separate $100 million tax hikes in the span of a week. But French producers do not need to worry as much about a potential long-term shift to duty-free countries as they would if GSP benefits were locked in for another several years.
GSP countries versus France is only part of the handbag story: China would be a clear winner if GSP expires and/or Section 301 tariffs on French handbags are imposed. As recently as 2015, producers in China, France, and GSP countries faced nearly identical tariff rates (11% to 13%) on handbags. Differences were primarily due to product mix, with tariffs for specific types of handbags ranging from 5.3% to 17.6%. Today, due to GSP expansion and Section 301 tariffs on China, imports from China face tariffs that are over 37 percentage points higher than GSP countries.
The tariff rate changes offer a clear explanation for the major import changes shown below: tariffs on GSP countries fell and imports surged; tariffs on China surged and imports fell; both tariffs and imports for France remained mostly unchanged. When all the countries all faced similar tariff rates, China accounted for over half of U.S. handbag imports. It would be foolish to think that China would not benefit from much higher tariffs on GSP countries and France, which together account for about 40% of U.S. imports from the world.
While the GSP/France situation shows how one policy position inadvertently can undermine another, the China/GSP history shows how trade policies may reinforce one another. When Congress passed legislation allowing GSP eligibility for travel goods in 2015, companies started seeking new partnerships and expanding production in GSP countries of goods that previously were concentrated in China. By mid-2017, when duty-free treatment for travel goods was extended to all GSP beneficiary countries, companies were ready to increase sourcing quickly.
These investments – years in the making – further allowed companies to rapidly shift sourcing out of China once Section 301 tariffs were imposed in September 2018 and raised in May 2019. Even if Chinese Section 301 tariffs go away, GSP countries will continue to have a large tariff preference over China. Given the long-term investments made, it is unlikely that supply chains shift back to China as long as GSP is in place.
A long-term GSP reauthorization similarly could provide a (tariff) relief valve for importers should the United States move ahead with new Section 301 tariffs on handbags from France. It also could incentivize France – or at least French producers – to take the threat of handbag tariffs more seriously. GSP countries have captured a much larger share of the U.S. handbag market with a 10%-11% tariff margin preference. How much more import share could GSP countries gain – and French producers lose – if that climbs to a 35%+ tariff preference margin?
Unfortunately for GSP users broadly, there are no indications that the Administration considers the potential leverage provided by GSP in negotiations with other countries as it considers support for GSP reauthorization. Perhaps its new focus on French handbags will change that.
* Note: none of the data or analysis is meant to suggest support for either new tariffs on imports from France or the current Section 301 tariffs on China. Instead, the intent is to show the linkages between trade policies that typically are viewed as unrelated and how the Administration’s lack of a formal endorsement for GSP reauthorization may undermine other Administration goals and policies.