Last week, we wrote about how American companies have paid about $800 million in extra tariffs due to recent GSP country terminations but there has been no progress on any of the issues raised in country reviews. There are lots of new proposed eligibility criteria, and policymakers want to create an environment where those criteria are more likely to raise standards – and avoid lose-lose outcomes like these recent cases – Congress should incorporate other changes into GSP renewal legislation. What do we mean when we say countries do not care enough about GSP benefits?
Some basic facts
- GSP covers a very small share of beneficiary countries exports. GSP covered just 11% of U.S. goods imports from GSP countries in 2020. Factoring in services exports to the United States and exports to other countries, and GSP covers only about 1% of total exports from GSP countries in any given year.
- Even compared to other U.S. preferences, GSP benefits are very limited. A common refrain is “updating” GSP criteria to match programs like AGOA. But AGOA covers an extra 1,400 products eligible only for least-developed countries (LDCs) in GSP, plus apparel and footwear and agricultural products wholly excluded from GSP, and has no import caps (e.g., GSP’s “competitive need limitations”, or CNLs). The result: excluding Section 232 tariffs, average tariffs on imports from GSP countries were more than 20x higher than tariffs on AGOA countries in 2020.
It is one thing to say “GSP should be more like AGOA,” but it’s something very different to say “GSP should adopt AGOA criteria – and then some – but not receive any of the AGOA benefits.” Because the lack of benefits has severely limited GSP’s effectiveness as a “stick” on multiple occasions in recent years.
Real-world example #1
Bangladesh is the textbook example of how GSP coverage limitations eliminate any leverage that U.S. policymakers may wish to exert through GSP reviews. Bangladesh lost GSP in 2013 for failure to address freedom of association violations and ongoing safety issues in the garment sector. Yet impacts were more symbolic than economic. Despite being an LDC, GSP covered just 0.7% of U.S. imports from Bangladesh in 2012. Put differently, GSP termination was wholly irrelevant to 99.3% of Bangladeshi exports to the United States, including for the sectors (e.g., apparel) of greatest concern.
The prospect of restored GSP for improved labor conditions remains economically irrelevant today. Excluding face masks, not a single one of Bangladesh’s top 100 exports to the United States in 2020 would benefit from restored GSP benefits.
Real-world examples #2-4
Perceived lack of impact is not limited to Bangladesh, but don’t take our word for it: nearly all press reports within GSP countries cite the lack of product coverage and/or import caps such as CNLs as reasons why. Here are some examples:
- An October 2019 Bangkok Post article cited a Thai government report showing expected exports would drop by about $30 million, or 0.01% of exports to the world, due to suspending GSP for 1/3 of covered products from Thailand. A private analyst said GSP suspensions would not impact publicly listed companies “because major Thai agro-industrial food and seafood conglomerates, such as Thai Union Group Plc (TU) and Charoen Pokphand Foods Plc (CPF), do not receive any GSP privileges for exporting shrimps, tuna and animal feed.” Seafood and agricultural industries were the major areas of concern, so like in Bangladesh the impacts of expiration don’t fall on the sectors where the United States is most keen to see change.
- A June 2019 article in the India’s The Diplomat noted that excluding apparel and footwear “has often limited the expansion and diversification of exports from developing countries,” while CNLs “created a lot of uncertainty and confusion related to the re-designation of the GSP status of a particular product after the export volumes have gone below the threshold.” Also in June 2019, CRISIL (a subsidiary of S&P Global) wrote that GSP suspension “will have limited impact on India’s overall export trade” and noted “pharmaceuticals and textiles & apparel would be relatively unscathed.”
- A March 2019 article in Turkey’s Daily Sabah stated “Another important point is that the Turkish textile and apparel sector will not be exposed to any additional tax increases since it is not already covered by the GSP system, just like the processed agricultural products sector.“
Two recommendations to make countries care more about keeping GSP benefits
Update “competitive need limitation” rules, particularly related to product restoration, to bring more products non-sensitive back under the program. CNL rules have eliminated as much as 1/3 of GSP benefits over the past 25 years due to ever-smaller threshold increases and the practice of not restoring GSP benefits even when products fall below the thresholds in future years. Over 90% of excluded products would not be at risk of losing GSP today because imports since GSP loss. As discussed in more detail here, some simple CNL changes that could have a big impact include:
- Reset the benchmarks to match original growth rates;
- Make reinstated GSP for products below CNLs the norm;
- Make reinstated GSP for products above CNLs an option, and
- base CNL calculations only on products claiming GSP.
An underappreciated point: if moving from “bad” actors that lose GSP based on new criteria to “good” GSP actors causes imports from good actors to exceed CNLs, the current rules incentivize companies to continue sourcing from bad actors. Effective leverage requires viable sourcing alternatives, but CNL rules limit those options.
Create a process for identifying/adding non-sensitive apparel and footwear products to GSP. In 2020, the United States imported $15 billion in apparel and footwear from GSP countries that were subject to duties and ineligible for GSP. Excluding oil, that was more than 2x as much as imports subject to duties/ineligible for GSP of all other products combined – and would be much higher if counting imports from countries like Bangladesh and India that may really strive for GSP restored with potential benefits for apparel and footwear. Apparel and footwear are politically sensitive – for producers in FTA partners, other preference program beneficiaries, and the United States – but finding a subset of products to add to GSP should not be impossible.
A two-part check could eliminate concerns of current FTA/preference country and U.S. producers alike:
- Check #1 (for foreign producers): limit new GSP apparel/footwear petition to products where less than 10% of imports claimed any sort of duty-free treatment;
- Check #2 (for domestic producers): create an MTB-like process to further limit benefits to products without sufficient domestic production.
Those criteria could protect sensitive supply chains/domestic production while (likely) opening up billions of dollars in apparel/footwear trade to GSP benefits. They also could encourage new sourcing of products currently not made in the US/FTA/preference countries from GSP countries instead of non-beneficiaries like China. All while increasing GSP countries’ incentives to comply with new and existing GSP eligibility criteria significantly.
Read more on how Congress should: