Any discussion of improving competitiveness through trade – especially as it relates to diversifying supply chains away from China – must include GSP renewal. China is excluded from GSP, and many GSP countries are natural alternative suppliers to China. By eliminating tariffs on China’s competitors, GSP makes them more viable alternatives to low-cost Chinese producers.

There are no two ways about it: loss of GSP makes Chinese producers more competitive. This is especially true for products where Section 301 tariffs on China may lead U.S. companies to seek alternative suppliers given the near-perfect overlap of products included on the Section 301 lists and GSP-eligible lists. And it’s not just about expiration, the dynamic applies to all types of GSP losses.

For example, while Section 301 tariffs covered just 54% of U.S. imports from China from January-September 2021, during the same time period the products on Section 301 lists accounted for:

• 96% of the estimated $763 million in extra tariffs from GSP expiration
• 97% of the estimated $318 million in extra tariffs from individual GSP product exclusions (e.g., competitive need limitations or “CNLs”)
• 90% of the estimated $312 million in extra tariffs due to lost GSP for India

Imposing an extra $150 million per month in tariffs on China’s competitors is a funny strategy for helping American companies move supply chains out of China. Backpacks are a good example of how that strategy has failed. After GSP benefits were extended to backpacks in 2016, GSP imports steadily gained market share. The Section 301 tariffs supercharged the trend – with gains now directly at the expense of China – but GSP expiration at the end of 2020 stopped both GSP imports’ rise and Chinese imports’ fall.

“GSP” and “China” issues don’t exist in a vacuum and therefore shouldn’t be treated as such. Here’s what should be done:

1. Congress should renew GSP as soon as possible. GSP expiration cost American companies at least $763 million in extra tariffs through September, and they’re likely to top $1 billion in 2021 if not renewed this year.
   
2. As part of renewal, Congress should amend GSP rules (e.g., CNLs) to keep as much trade under the program as possible. The more tariff benefits to GSP countries, the greater the incentives to leave China (and comply with eligibility criteria, as discussed here).
   
3. The Administration should make restoring GSP for countries such as India a priority. In November, 75 House Members sent a letter supporting just that, and a U.S.-India joint statement said the U.S. would consider restored GSP. Talks should move as quickly as possible.

It should go without saying: if policymakers want U.S. companies to buy less from China and more from other countries, they shouldn’t also raise tariffs on those other countries. But since imposing Section 301 tariffs on China, that’s exactly what they did by:

1. Ending GSP benefits for major countries (e.g., terminating GSP for India and Turkey in 2019, suspending half of Thailand’s benefits in 2020; result: $800+ million in extra tariffs);
   
2. Ending GSP benefits for major products (some Brazilian chemicals/countertops and Argentine essential oils in 2018, jewelry from Indonesia and plywood from Ecuador in 2020; result: about 1/3 of all “GSP eligible products” are now excluded due to similar decisions), and
   
3. Letting the entire program lapse on December 31 (result: nearly $500 million in extra tariffs in the first half of 2021).

Given those actions, it should be no surprise that companies are abandoning suppliers in GSP countries to buy more from China. It is impossible to make long-term sourcing plans based on GSP when tariff benefits for your country, or product, or the entire program, may lose benefits at any time.

It doesn’t have to be this way. Congress can help U.S. companies shift supply chains by renewing GSP (for a long time) and updating product rules so that GSP countries become more viable alternatives to China. Or it keep tariffs on China’s competitors high by letting GSP remain expired.

“I have had to switch suppliers, as I can no longer afford to do business with Thailand. Most of the new development went to China and a little to Viet Nam. I am still doing some re-orders with Thailand, but as I discontinue products there is nothing more in the pipeline for them.”

Every day that GSP remains expired is a win for producers in China. Congress should renew GSP immediately and update its rules to help American companies shift sourcing from China to GSP countries – not the other way around.

Note: the quote came from a new Coalition survey on expiration impacts. GSP importers can take the survey here.

Among the provisions, for GSP specifically the Trade Act would:

• reauthorize GSP, retroactively, through January 1, 2027
• add new criteria on environment, human rights, women’s economic empowerment, rule of law, good governance, anti-corruption, and digital trade
• require public hearings and comments before any country-specific actions can be taken
• extend notification requirements to partial suspensions and not just full terminations
• add new reporting requirements on justifications for review decisions and actions taken
• codify the Triennial Review process to review batches of GSP countries by region (launched in 2017)
• require new reports workers rights, women’s economic empowerment, and rules of origin

The long-term extension and retroactive refunds would be welcome relief for GSP importers, who have paid hundreds of millions of dollars in new tariffs since GSP expired on December 31. However, the Coalition for GSP has concerns that the bill contains many new “sticks” but no new “carrots” to incentivize GSP countries to meet proposed higher standards. The Coalition agrees with U.S. Trade Representative Katherine Tai that a race to the top requires incentives, and “when we talk about incentives, we’re talking about carrots and sticks.”

The future for the overall China package, and individual components such as GSP renewal, remain uncertain. The House must pass legislation too and may seek significant changes, including on GSP.

The Coalition will continue to work with Members of Congress on potential changes that could improve GSP for workers and companies in the United States and beneficiary countries.

To help the Coalition learn about who might be impacted by changes (and receive limited updates going forward), please add your organization to the free GSP supporter list.

To learn about possible benefits or risks to your company, please contact Dan Anthony about becoming a member of the Coalition for GSP.

Worker impacts from a small business that has paid $100,000 in tariffs: “GSP impact has been severe this year. Had to lay off 1 person and did not hire for a new sales position.”

Covid/worker impacts from a small business that has paid $350,000 in tariffs: “Covid19 shutdown reduced our cashflow, with GSP [expired] we don’t have the extra funds to order inventory we need. We were looking to hire at least 3 new employees. Now on hold due to GSP.”

China/worker impacts from a small business that has paid $40,000 in tariffs: “We rely heavily on Thailand produced goods in our market to compete with China imports from our competition. We are higher priced even without 10% tariffs. Now we have a real threat to our market share with cost increase on goods of 10%…Possible funds normally used for employee raised wages will be paid in new tariffs. This weakens our work force stability, thus threatening our output capacity.”

U.S. manufacturing impact from a business that has paid $15,000 in tariffs (but estimates $350,000 in tariffs if GSP remains expired all year): “We are selling our aluminum products to a leading US HVAC manufacture and those products are excluded from 232 tariff but we still have to pay the standard duty without GSP.”

In summary, GSP expiration reduces American jobs, makes pay/benefits at existing jobs worse, makes China more competitive, and raises costs for American manufacturers (even for products not available in the United States). Expiration impacts snowball over time, so Congress should renew GSP – and refund tariffs paid – as soon as possible.

If you’re a company impacted by GSP expiration, please answer our very short survey on GSP expiration impacts to date (the source for all of the above examples). To further help the Coalition for GSP educate policymakers on who is hurt by expiration (and how), companies are strongly encouraged to:

• write their lawmakers about GSP renewal with our Contact Congress tool
• join the Coalition for GSP
• add their name to the free GSP supporter list

Shifting trade from China to countries like India does not appear to be a byproduct of recent actions, but instead one of President Trump’s explicit goals:

And it’s working: GSP saved American companies $105 million in March, an increase of $28 million (36%) from March 2018 and the second highest level on record. In the first quarter of 2019, GSP saved American companies $285 million. That is $63 million more than the first quarter of 2018 – itself a record-shattering year.

Products hit by Section 301 tariffs when imported from China account for 90% of increased GSP imports in 2019. Overall, GSP imports rose by about $760 million, with $672 million coming on products on China Section 301 lists. GSP imports of products on those Section 301 lists increased 19%, while GSP imports of other products increased by just 5%.

As shown last week, imports from China subject to new tariffs are down significantly. The chart below shows countries from which GSP imports of products on China Section 301 lists have increased the most in the first quarter of 2019.

For India, 97% of increased 2019 GSP imports are on the China Section 301 lists. GSP imports on Section 301 lists increased by $193 million (18%), while imports of everything else increased by just $7 million (2%).

Similarly for Turkey, 97% of increased 2019 GSP imports are on the China Section 301 lists. GSP imports on Section 301 lists increased by $40 million (13%), while imports of everything else increased by just $1.2 million (less than 1%).

For the Philippines, GSP imports of products on China 301 lists growth helped offset declining GSP imports of all other products. South Africa, Brazil, and Egypt saw similar increases in Section 301-affected products offset losses of other products.

GSP imports from Indonesia grew *only* twice as much on affected products. Yet even here growth rates are faster for products on the Section 301 lists: GSP imports of products affected by new China tariffs grew by 22%, while imports of other products grew by 15%.

Not only would terminating GSP for India, Turkey, or others under review (Thailand, Indonesia) hurt many American companies and workers that have relied on GSP for years. It also would reduce viable sourcing options for companies looking to buy less from China in response to Section 301 tariffs – thereby undermining the President’s own objectives.

While the President tweeted yesterday about raising tariffs on China to create additional negotiating leverage, terminating GSP for India would undermine it. For some products such as luggage, simultaneously ending GSP for India and raising List 3 tariffs from 10% to 25% would make Chinese products more competitive compared to India, not less.

That’s because there is significant overlap between products imported from India under GSP and Chinese imports targeted by the Administration for Section 301 tariffs. More than 75% of India’s GSP imports are included on one of the Section 301 lists. About 65% of them are on “List 3” that could be subject to higher tariffs as soon as Friday, as shown below. (For GSP countries excluding India, only 55% of imports are included on List 3.)

Given the head-to-head competition between India and China on many of these products, ending GSP for India would have the same effect as lowering tariffs on China. And we can see that the Administration’s tariffs on China do seem to have impacted both imports from India under GSP and from China so far in 2019.

In the first two months of 2019 (most recent data available), GSP imports from India are up significantly for products on the Section 301 lists, but down slightly for products where China doesn’t face new tariffs. It is the opposite for China: imports are down significantly for products facing new tariffs, and up slightly for those that don’t.  

New tariffs on China presumably would amplify these trends – but new tariffs on India would mitigate them. That puts the Administration at a crossroads: is increased leverage on China or India a higher priority? Because the data show you can’t act raise tariffs on one without helping the other.