The “temporary” GSP lapse could lead to permanent closure for Bueno of California, which already has paid over $800,000 in extra tariffs due to GSP expiration. That is a massive amount for the 20-person company in Fullerton, California, which sells handbags, wallets, and soft carry-all luggage both online and through major retailers in the United States and Canada. For Bueno, new costs have meant declining orders, layoffs, and canceled investments – and possibly worse in the near future.

I might close the company once our lease expires. The US government is not friendly to small business owners.

Bueno of California President Joseph Pagliaro

The feeling that tariffs are unavoidable is particularly strong in (though not limited to) the travel goods industry. Section 301 remedies imposed on China starting in 2018 now raise tariffs on travel goods by up to 45%. Like many others, Bueno found new suppliers in India and Cambodia to avoid these “outrageous” tariffs. Then India’s GSP was terminated in 2019, raising tariffs on those products. Then Congress allowed the entire GSP program to lapse at the end of 2020, raising tariffs on Cambodian too. Not to mention a global pandemic that has reduced demand for travel-related products such as luggage. There are no good options, and Bueno is now buying more from China despite the 45% tariffs.

Reduced orders hurt GSP’s development goals in Cambodia, whose GDP per capita of $1,513 in 2020 was about 42 times smaller than the United States. After years of growth, Cambodia’s GDP per capita declined 8% in 2020, more than three times the 2.6% decline in the United States. Bueno’s contract factories, which employ mostly women, must pass U.S. safety and social compliance audits done by independent audit company. These are “good jobs” at risk for vulnerable populations that desperately need them.

While Congress can renew GSP “retroactively,” decisions such as “close the business instead of renew the lease” are not so easy to undo. Congress must renew GSP before it is too late for all the companies in Bueno of California’s situation.

Note: this example came from a new Coalition survey on expiration impacts. It was published with permission. GSP importers are encouraged to take the survey here – no company-specific details will be published without such permission.

Triad Magnetics manufactures transformers and inductors for American producers of medical equipment, the power grid, renewable energy and transportation systems. It employs 30 workers in California doing design, manufacturing, and distribution. In 2010, Triad Magnetics moved manufacturing of its main product line – about $7 million/year – from China to the Philippines due to GSP benefits. Without GSP, the Philippines is not as competitive.

Triad Magnetics’ history of creating jobs, raising environmental standards, and creating economic opportunities for women is a textbook example of what GSP benefits are meant to promote. As shared by company president Bill Dull:

“When we opened our Philippine factory in 2010 there was a line around the block with applicants. Many Filipinos are forced to work overseas as they can’t find work at home, so moving 1,500 jobs out of China to the Philippines was a very welcome move.

Furthermore, we treat our employees well. We offer transportation, health care, PTO and recreational benefits. The majority of our workers as well as line-leaders, supervisors and management team are women. They are paid equally to men doing the same jobs and are afforded equal advancement opportunities.

Our Philippine factory is ISO14000 which is a family of standards related to environmental management that exists to help organizations (a) minimize how their operations (processes, etc.) negatively affect the environment (i.e. cause adverse changes to air, water, or land); (b) comply with applicable laws, regulations, and other environmentally oriented requirements; and (c) continually improve in the above.“

Perhaps ironically, it is discussions about how to add new provisions on these topics (e.g., environment) that are holding up renewal and undermining this GSP success story.

And expiration impacts are not limited to the Philippines. Triad Magnetics has been forced to delay new hires and investments in California. Its president expressed the feelings of many:

“Working through COVID in a “critical Infrastructure” market has been challenging. The continued delays reinstating GSP simply add to the challenges, stress and frustration that we are already dealing with. Frankly as an ordinary citizen trying to run a business, it’s very hard to understand why it’s taking so long to reinstate GSP knowing that it has bi-partisan support and the last time it was reinstated Congress passed the legislation something like 98% yes to 2% no.” (emphasis added)

GSP expiration is a clear lose-lose outcome (except for some producers in China). Congress must pass a GSP renewal bill ensures companies like Triad Magnetics can create jobs and opportunity in Philippines and the United States. And it must do so as soon as possible to limit the (already significant) damage.

Note: this example came from a new Coalition survey on expiration impacts. It was published with permission. GSP importers are encouraged to take the survey here – no company-specific details will be published without such permission.

Tai: I hear you. But I think that is the way the global economy needs to evolve. We need to build in incentives. And when we talk about incentives, we’re talking about carrots and sticks. So in some ways, what we need to do is figure out how we need to re-devise those carrots, maybe the shape of the carrots, when they’re applied. We need to look at the sticks in terms of how to enforce. We also want to be taking a look at rules that were devised when our world, frankly, looked and operated differently, and maybe think about where those rules need to be tightened or loosened.

Though the question was not about GSP, it is hard to think of a policy for which the answer is more timely:

• Congress created the GSP program to promote development nearly 50 years ago, in a very different world, and many of its key features have not changed in decades (if ever)
• GSP expired on December 31, and Congress is considering possible changes to the program as part of any renewal legislation
• New eligibility criteria (i.e., “sticks”) that countries must meet to retain GSP have been proposed, but there have been limited discussions on how to “re-devise those carrots, maybe the shape of the carrots” to incentivize compliance with new obligations

So what are the old rules and possible new or re-devised carrots in the GSP context? We examine several decades-old rules that reduce GSP’s effectiveness as a development and policy tool, and suggest a few minor changes that could have a large, positive impact on GSP in the 2020s and beyond.

The elephant in the room: apparel and footwear

Sadly, Members of Congress believe expanding GSP product coverage to include apparel and footwear, which have been statutorily excluded since its creation, is too controversial. But facts are facts and here they are: in 2020, the United States imported $14.8 billion in apparel and footwear from GSP countries that were subject to duties and ineligible for GSP. Excluding oil, that was more than twice as much as the $7 billion in imports subject to duties/ineligible for GSP of all other products combined. Amazingly that understates the impact, as apparel and footwear accounted for $2.4 billion of the $2.8 billion (85%) in tariffs faced for products wholly excluded from the GSP eligibility list.

While the exclusion perhaps made sense in the beginning, we’ve heard domestic production accounted for about half of U.S. apparel and footwear sales in 1974, today over 98% of U.S. clothes and shoes are imported. Given they were excluded from the start, GSP of course had nothing to do with the shift, but program coverage is still hamstrung by “rules that were devised when our world, frankly, looked and operated differently.”

The not-quite-elephant in the room: competitive need limitations (or CNLs)

Most people that follow GSP know of CNLs, but few now that CNLs eliminated as much as 1/3 of all potential GSP benefits in 2020! Here are the numbers: in 2020, imports claiming GSP totaled about $16 billion. By comparison, the value of imports on the nominal GSP list but excluded for an individual country was $8 billion. (This figure does not include imports of products removed as part of a country practice review, since they are covered by separate rules.)

How did we get here? Again, it starts with “rules that were devised when our world, frankly, looked and operated differently.” CNL rules have existed from the beginning, but the last major update was in 1996, at which time:

• China wasn’t in the WTO yet and imports from China were 55% lower than imports from Japan
• Malaysia was the top GSP import source
• 13 current U.S. FTA partners were part of the GSP program
• 13 current EU members were part of the GSP
• 21 of the top 32 import sources under GSP are no longer beneficiaries

In short, the GSP program, U.S. trade policy, and global trade patterns were all very different.

How rule designs themselves were problematic: for calendar year 1996, CNLs were set at $75 million or 50% of U.S. imports from the world. The GSP statute set the de minimis level – under which the President may disregard the 50% threshold – at $13 million in imports from the world (not the GSP country). The regular CNL increases by $5 million annually and the de minimis increases by $500,000 annually.

And there’s the catch: by setting a value change instead of a rate, the real annual increase has fallen significantly over time. For example, the CNL change from $75 million in 1996 to $80 million in 1997 was a 6.7% increase, but 25 years later the increase from $195 million in 2020 to $200 million in 2021 is just a 2.6% increase. The value of CNL increases diminishes with each passing year that Congress does not update the 1996 rules.

There also were two premises that turned out to be false: 1) that once products reached CNL levels they could sustain trade without GSP benefits; and 2) if trade did shift, it would go to lesser developed GSP countries and lead therefore promote further growth in GSP countries. Empirical research in 2011 by Dr. Shushanik Hakobyan (then at the University of Virginia, now at the International Monetary Fund) found that the opposite was true:

• “By the third year of exclusion, imports from affected countries decrease by more than 70 percent relative to the pre-exclusion average…These findings imply that CNLs may not be targeting the “super competitive” exporters, rather these country-product pairs may need the preferential treatment to access the US market.”
• “By the third year of exclusion, the share of other GSP eligible countries increases by 8 percentage points, whereas that of non-GSP countries expands by 22 percentage points…CNLs seem to provide a competitive edge to non-GSP countries in capturing the US market.”

We’re unaware of any more recent academic research on CNL impacts, but the fact that approximately 95% of products excluded in the past were below the CNL (or de minimis) thresholds in 2020 strongly suggests that post-GSP loss import declines continue – and exports rarely recover.

Congress’ self-correction mechanism also has failed: the GSP statute explicitly allows products that fall below CNL thresholds after losing GSP to be reinstated. The statute does not even appear to require a formal review! Yet in practice, it almost never happens, even when stakeholders attempt to navigate the GSP Annual Review process.

Case in point: wind turbine parts from Brazil

This seems like a good example, since the preceding question to Ambassador Tai’s response asked how to align trade and environmental policy “in a global trade environment where all the incentives are cheaper, faster and not necessarily environmentally friendly.” The wind turbine parts lost GSP on July 1, 2006 based on 2005 imports of $143 million (CNL threshold: $120 million). Imports from Brazil continued to grow in 2006 and 2007, then collapsed just as Dr. Hakobyan’s research showed was the norm:

• From 2007 to 2008, U.S. imports from Brazil fell from $305 million to $65 million (-79%) and the share of U.S. imports from Brazil fell to 4.8%
• From 2008 to 2009, U.S. imports from Brazil fell from $64 million to $27 million (-58% more) and the share of U.S. imports from Brazil fell to 2.8%
• In 2008, China became the top supplier, nearly tripling its import value (from $80 million to $230 million) and more than doubling its import share (from 8% to 17%) since the last full year of GSP benefits for Brazil in 2005
• China remained the #1 supplier for wind turbine parts every year except one between 2008 and 2019, accounting for 35% of U.S. imports in 2017 before Section 301 tariffs were imposed it 2018

Shouldn’t someone have petitioned for restored GSP based on the clear statutory authority to restore GSP for products that fall below the CNL threshold? GE Energy did. Twice. As part of both the 2009 and 2010 GSP Annual Reviews.

Shouldn’t they have noted the import collapse and how non-GSP countries were benefiting? Of course, and they did in their 2009 petition: “In 2008, Brazil’s exports of HTS 8503.00.95 declined by 78.7% by value while at the same time, the developed nations of China, Japan, the United Kingdom and France increased exports by 49%, 24%, 25% and 37% respectively, by value.” And again in their 2010 petition: “Of the eight other countries supplying more product to the U.S. market none are BDC’s.“

Shouldn’t they have argued that restored GSP would promote President Obama’s goal to increase U.S. wind energy production? Yup, and the did that too!

But both petitions were denied. And no one has petitioned since despite the fact the GSP imports from Brazil have never gotten close to CNL thresholds in subsequent years. Fool me once and what not. On several levels, GE Energy is far from alone:

• It appears that fewer than 10 product redesignations were granted between 2007 and 2020, of which 4 were never formally requested (e.g., 3 products for Ukraine were restored after Russia invaded Crimea)
• Stakeholders petitioned to restore GSP for 22 products as part of the 2020 GSP Annual Review, and USTR denied all of them without review (i.e., requests were denied on the front end as opposed to on the merits following hearings, testimony, etc.)
• We know multiple companies in multiple sectors importing from multiple countries that filed multiple petitions, all rejected, and eventually just gave up.

In summary, 25-year old rules based on flawed premises and longstanding norms not to use the authority granted by statute now eliminate 1/3 of GSP benefits annually.

GSP priorities for the 2020s and beyond

It seems clear that anyone creating the GSP program from scratch in 2021 would design a very different program than the one that exists today, which represents a mix of primarily 1970s and 1990s trade priorities. GSP has eligibility criteria that prohibit countries “dominated or controlled by international communism” or that participate in cartels blocking exports to the United States (e.g., OPEC), but no criteria related the environment.

The key question: beyond “development” in a broad sense, what goals do U.S. policymakers hope to achieve through the GSP program today? Three broad themes that were/are priorities for Congress and both the Trump and Biden administrations:

1. Using the eligibility criteria as leverage in negotiations with GSP countries (though priority areas differ depending on the policymaker)
2. Encouraging U.S. companies to source less from China
3. Providing tariff relief and promoting job growth for constituents and other U.S. companies

Ignoring that elephant (wearing imported clothes and shoes), the current GSP rules regarding CNLs and norms regarding redesignation undermine all of these priorities.

As it relates to leverage in bilateral talks, it doesn’t matter if the goal is better market access or improved labor laws or stricter enforcement of environmental treaties – each and every stakeholder in beneficiary countries that cares about retaining GSP benefits strengthens the the United States’ negotiating hand. By eliminating GSP for both a large share of stakeholders, and in many case the biggest and most successful stakeholders in a country, CNLs weaken the United States’ hand in bilateral negotiations significantly. That makes it considerably less likely that GSP countries will undertake major reforms to maintain GSP, no matter how much policymakers think they should.

As it relates to encouraging U.S. companies to source less from China, the CNLs affect appears self-evident: companies will not shift sourcing from China to GSP countries if rising imports trigger CNLs and lead to higher tariffs. This is not a new argument against CNLs, only the most timely. Back in the mid-2000s, a joint submission from Carnegie Endowment for International Peace, German Marshall Fund, Oxfam America, and the Women’s Edge Coalition recommended eliminating CNLs that create “a glass ceiling.” From a purely development perspective, they argued CNLs have the unintended effect of chilling investment because “Investors appear reluctant to invest in certain sectors in marginal countries because they believe that as soon as their investment succeeds, they will no longer receive the preference.” That China is the country that companies are moving from – as opposed to flocking to – makes the argument no less relevant than when raised 15 years ago.

As it relates to tariff relief for constituents, the affect once again are clear: U.S. companies paid as much as $340 million in tariffs in 2020 for individually excluded products. Cumulatively over the years, it is billions of dollars in tariffs paid – after the sharp declines in imports that typically accompany GSP loss – and generally for products that do not even meet the current statutory definition of “competitive.”

Taking it back to the beginning, it’s hard to see how any of these outcomes – fewer incentives to meet eligibility criteria, extra incentives to go to/stay in China, or higher U.S. tariffs/lower U.S. imports – help workers in developing countries or further GSP’s original development goal.

Re-devising those carrots (or at least the shape of the carrots)

Development NGOs argued for eliminating CNLs altogether, and it would be the cleanest mechanism to eliminate issues that have arisen over the years due to them. But a few minor changes could make a big difference.

Reset the benchmarks: if the regular CNL threshold grew at the same annual rate as it in the beginning, the limit would have been a little more than $350 million in 2020. Maintaining the original CNL-to-de minimis ratio would put that in the $50-$60 million range. Those seems like good ballpark figures, then CNLs should be set to increase by a growth rate as opposed to set value Congress doesn’t have to worry about diminished benefits again. Increasing that threshold also provides a lot more room to run for companies and sectors seeking alternatives to China.

Make reinstated GSP for products below CNLs the norm: what does keeping non-competitive products out of GSP forever achieve? It hurts development, hurts the U.S. companies that import the product, and reduces the Administration’s leverage in bilateral negotiations. Importantly, CNLs do not protect domestic producers. Any U.S. company or industry that feels it is being harmed can request GSP removal of a given product regardless of import levels. Simply changing the GSP statute to say the President “should” restore GSP, instead of “may,” would provide clear congressional intent while retaining Administrations’ discretion in potentially sensitive reviews.

Make reinstated GSP for products above CNLs an option: the current statute prohibits reinstated GSP if imports from a country exceeded the CNLs in the prior year. There is an exemption to the 50% rule for products not made in the United States, but no possible exemption to the value threshold even for products that aren’t made domestically. Changing the GSP statute to say the President “may” restore GSP would give the Administration new tools to promote development and increase negotiating leverage for truly non-sensitive but high value products. If past history is any indication, statutory authority saying products “may” be redesignated is likely to be used sparingly.

Base CNL calculations only on products claiming GSP: products have lost GSP even though the value of imports claiming GSP was well below CNL thresholds. This generally happens when imports that can’t meet the rule of origin increase, but the result is punishing companies with significant local content (as intended) while having no impact on the companies only doing final assembly (that rules of origin are meant to discourage). It may be more likely to happen if companies shift production from China but need imported parts for several years as operations get up and running. The GSP statute’s “super-CNL” bases its calculations on GSP-claiming imports, and Congress could adopt that language for all CNLs.

Such changes are far from radical. All sticks and no carrots, as Congress appears to discussing, likely will continue to whittle away at the benefits provided by GSP product by product, country by country. But there’s a better way and a few small tweaks would greatly improve GSP’s effectiveness as a development tool, a leverage point, and an alternative to China in the years and decades to come.

No similar linear diaphragm pumps are manufactured in the United States, though competitors in China often try to copy Hiblows design and sell for lower prices. Hiblow’s operations also exemplify GSP’s original development goals: workers at the Philippines factory receive competitive wages, bonuses and family outings throughout the year, and private health insurance benefits. GSP is one tool that helps Hiblow workers in the United States and the Philippines stay competitive in the global market.

GSP benefits have helped Hiblow mitigate Covid-19 impacts, particularly a 500% increase in freight costs. Ocean shipping delays meant Hiblow had to use air freight to get its product American manufacturing customs in time.

If GSP expires, Hiblow will need to recoup $400,000 “from somewhere.” That is likely less money spent with local vendors, for conferences, for marketing and advertising materials and – most importantly for policymakers – by freezing any new hires. That is bad news at a time when there are 10 million fewer American jobs than than there were earlier this year.

Watch Hiblow President Tim Smith explain how “renewing GSP is imperative to us to grow our business and hire more people in 2021 and beyond.”

If you’re a GSP importer, submit your own video testimonial here.

GSP eliminates hundreds of thousands of dollars in tariffs annually on Cannon’s imports from Myanmar and Sri Lanka. The savings are passed along to Cannon’s customers, while helping those GSP countries “compete with giants like China.”

Watch CEO Frank Cannon explain how why its so important for Congress to renew GSP this year.

If you’re a GSP importer, submit your own video testimonial here.

“Too often GSP is seen as a benefit for foreign countries. The real beneficiaries of GSP are American businesses and workers who save hundreds of million in tariffs every year,” said Dan Anthony of the Coalition of GSP. “We surveyed the American businesses who actually use GSP and found that termination of benefits would cost American jobs, hamstring future growth, disrupt supply chains and benefit China more than American businesses.”

Today’s report is based off of recent survey responses from 124 companies that import under GSP. Key finding include that:

• GSP loss would cost American jobs. About 90% of survey respondents expect sales to fall if GSP is terminated, making it difficult to move ahead with current planned expansions. As a result, about 40% expect to lay off currents workers, and even more expect planned hires and investments to be put on hold.

• GSP termination would disrupt supply chains, with China the most likely beneficiary. About one-third of respondents expect to source more from China if GSP benefits are terminated – about the same percentage that expected to shift to any of the approximately 120 GSP countries and significantly more than “other” countries (NAFTA, EU, Japan) combined.

• GSP importers are thriving. About 70% of survey respondents have hired new workers or increased wages and benefits in the past year.

• GSP importers are poised for future growth. Most survey respondents expect further growth in the coming year, including 60%-70% of respondent that expect to hire more workers, increase pay and benefits, and make capital investments.

• Companies with increasing GSP imports create more jobs. Despite the frequent narrative that imports destroy jobs, companies with rising imports outperformed companies whose imports were flat or declined in every “desirable” category, including new hires, increasing compensation, making investment, increasing domestic production, and even growing exports.

More on the report: The report is based on survey responses from 124 companies that import under the GSP program. Companies answered a series of questions, including demographic info (locations, employees), import info (products, GSP source countries, GSP savings), recent and planned actions with GSP in place (hires, wage increases, output/export increases, capital expenditures), and expected impacts of lost GSP on sourcing and domestic operations. Aggregated data reflect all survey responses. Profiles include only those that gave explicit permission to publish company-specific info. 

For September/October, GSP imports of Christmas lights increased by $24 million compared to the previous year, while imports from China declined by $32 million. Similarly, the share of total U.S. Christmas light imports claiming GSP more than doubled to 19% in September/October 2018 from 9% during the same period in 2017.

Sourcing from GSP countries saved companies (and likely their customers) millions of dollars since they are not subject to either the 10% Section 301 tariff or the 8% MFN tariff that China already faced. Christmas lights make for a good example for a few reasons:

1. Seasonal imports are concentrated from August-October, therefore shifts will have happened already (or may not be necessary until August 2019).
2. Nearly all imports come from China (85% in 2017) or enter under GSP (12% in 2017), so there are few alternative sources to muddy trend analysis.

So what does a more detailed look at the data show? Imports under GSP jumped significantly – nearly double 2017 figures – in September and October:

And imports from China have dropped since tariffs were imposed:

Most interesting may be viewing the year-over-changes on the same graph:

Imports from China and under GSP were mostly unchanged in the first six months, and both rose in July and August as might be expected. But their paths diverged in September.

The $13 million increase in imports under GSP offset most of the $23 million decline in imports from China. In October, the $11 million increase in GSP imports more than offset the decline from China. That means for the two months combined, GSP increases offset about 75% of the decline in imports from China. (Overall tariffs on Christmas lights rose – A LOT – but GSP likely mitigated the increase by several million dollars.)

If you import from both GSP countries and China, or your GSP imports compete with those from China, please answer our new survey. We hope to collect information that could be relevant as the Administration reviews GSP-eligibility for major supplier countries such as India, Indonesia, Thailand, and Turkey.