Yesterday, the House Ways & Means Trade Subcommittee held a hearing on “Reforming the Generalized System of Preferences to Safeguard U.S. Supply Chains and Combat China.” There were a variety of witnesses and proposals made — some very helpful to GSP importers, and others not so much. At a minimum, it showed bipartisan support for GSP remains and strong desire to renew GSP this year, with Republicans and Democrats alike lamenting the extended lapse.
As expected from the hearing title — and current congressional mood — promoting GSP countries as an alternative to China was a major theme. Yet that goal is inherently contradicted by some of the other major themes, such as making rules or origin more strict, adding eligibility criteria, and increasing enforcement of both new and existing criteria in a manner that could revoke more GSP benefits in the future.
It should be crystal clear: any changes that make GSP harder to use – or benefits easier to lose – undermine efforts to reduce reliance on China. As Fabian Garza from Black Diamond Equipment responded to a question from Chairman Jason Smith, “Supply chains are not like LEGO pieces. You do not just pick them up and place them. It takes a tremendous amount of resources. It takes a tremendous amount of time.”
It’s a balance, and failure to maintain that balance risks snowballing in a bad direction. If companies can’t claim GSP because the rules of origin are too strict, or a flurry of new eligibility criteria increase the likelihood of county eligibility loss, staking major investment decisions on GSP becomes much riskier. That’s for bad development, bad for using GSP as leverage, and terrible for encouraging U.S. companies to leave China in favor of GSP countries. As Mr. Garza noted, companies don’t want to make an investment decision and second-guess it three years later. Companies must know that GSP benefits driving investments today will be in place in 5+ years.
Fortunately, changes can snowball in a positive direction too. There was lots of talk about updating GSP’s “competitive need limitation” (CNL) rules. In response to a question from Congresswoman Suzan DelBene, Ed Gresser from the Progressive Policy Institute said “if the goal is to encourage buyers to source from other than China, the CNL concept is one that should be reexamined…It is definitely a part of that program that is dated.” Companies won’t move large quantities of trade from China to GSP countries if “success” results in GSP loss and higher tariffs.
Updating or eliminating CNLs would have many positive spill-over effects, like ensuring hard-won development gains don’t evaporate as buyers are forced to find lower-priced alternatives. Imports from the GSP country generally fall — often to zero — after GSP loss. Having more trade covered by the program also improves the leverage that GSP can provide during country practice reviews. Those are the types of win-win outcomes that Congress should seek as part of GSP renewal and reform.