GSP renewal must be a part of any Congressional focus on China trade issues

Multiple congressional committees are moving ahead with hearings and legislation to address competitive issues with China. Two weeks ago, the Senate Foreign Relations Committee Chairman and Ranking Member introduced the Strategic Competition Act of 2021, which aims to use trade negotiations and encourage supply chain diversification out of China (among other things). Similarly, the Senate Commerce Committee last week held a hearing on the Endless Frontier Act, which is expected to be the centerpiece of any China-related legislation. Finally, the Senate Finance Committee will hold on April 22 on U.S.-China Relations: Improving U.S. Competitiveness Through Trade.

Any discussion of improving competitiveness through trade – especially as it relates to diversifying supply chains away from China – must include GSP renewal. In many cases, GSP countries are natural alternative suppliers to China. By eliminating tariffs on China’s competitors, GSP makes those other countries a more viable alternative to low-cost Chinese producers. The imposition of Section 301 tariffs of up to 25% on China has made the tariff differences more stark.

The chart below shows that American companies have turned to GSP countries for products that face new face when imported from China. Since 2017, imports from China of products subject to Section 301 tariffs fell by 21%, while GSP imports of those same products increased by 30%. GSP increases appear special and different – and not a case of buying from “anyone but China” – as non-GSP, non-China imports (including products from GSP countries that don’t get GSP benefits) grew by just 4%.

Trends are very different for products NOT subject to Section 301 tariffs when imported from China. GSP imports actually declined by 9% from 2017 to 2020, compared to just a 1% decrease for China. GSP benefits may be helpful, but not always sufficient, to grow trade. Yet the combination of GSP benefits + Section 301 tariffs on products from China was rocket fuel for GSP growth from 2017 to 2020. (This isn’t really new, we wrote about it in 2019).

The current GSP expiration jeopardizes the trends of shifting sourcing from China to GSP countries. Backpacks (HTS 4202.92.3120) help show why. Duty-free treatment under GSP was extended to imports from least-developed countries in July 2016 and to all GSP countries in July 2017. Before this, imports from both GSP and China faced the normal 17.6% tariff.

As the graph below shows, China traditionally accounted for about 65% of these U.S. backpack imports. Then backpacks were included on China Section 301 List 3, meaning imports from China started facing an extra 10% tariff in September 2018. The extra tariff rate increased to 25% in May 2019. With Chinese products facing tariffs of up to 42.6% and GSP imports face 0% tariffs, trade shifted quickly starting in late 2018. (The non-GSP, non-China share didn’t grow much, similar to the overall trends reported above). GSP’s share of these backpack imports eclipsed China in May 2020. By early 2021, China’s share of U.S. imports (33%) was about half of its share in 2016. In theory, this is exactly the type of result policymakers hope to see from new proposals under discussion.

But the trends hide something that many may not expect: despite regular + punitive tariffs up to 43%, China was still the low-cost supplier in 2020. The average cost of a duty-free backpack was $7.86 from Cambodia, $10.64 from Indonesia, and $12.54 from the Philippines. By comparison, the cost of an average backpack from China (including tariffs) was just $4.78. GSP benefits didn’t make those countries a cheaper alternative than China, but they closed the price gap by shaving a couple dollars off the price of each backpack. With GSP expired, backpack importers must now pay the extra 17.6% tariff on previously duty-free imports. Suddenly, imports from Cambodia cost nearly twice as much as those from China, while imports from Philippines cost more than three times as much.

It’s counterproductive to raise the cost of buying from China’s competitors while asking U.S. companies to buy less from China. Something has to give. In a worrying sign for policymakers that hope to see companies shift sourcing away from China: GSP’s share of backpack imports decreased in February 2021 for the first time since benefits were extended in 2016. It’s too early to tell whether this is a bump-in-the-road or a turning point for imports of these backpacks, but the GSP Coalition has heard from importers of other products about sourcing shifting back to China in recent months. Without GSP in effect, other countries aren’t competitive against China (despite 301 tariffs remaining in place).

The data clearly show that American companies have used GSP to shift sourcing away from China in recent years. The longer GSP remains expired, the more likely it is that trade shifts back to China. If Congress is serious about using trade policies to help the United States and its allies compete with China, renewing GSP should be at the top of the legislative priority list.