The China/Section 301 diversion is real. So far in 2021, GSP imports are up 12% for products where Chinese imports face Section 301 tariffs but down 7% for products where Chinese imports don’t face any new Section 301 tariffs. It is impossible to know how much more GSP imports might be up (or Chinese imports down) if GSP expiration hadn’t forced American companies to pay tariffs for those products too. We wrote about how GSP renewal must be a part of any “China trade” conversation here.

Imports into 38 states (plus Puerto Rico) paid at least $1 million in tariffs due to GSP expiration. The map below shows estimated tariffs paid for products claiming GSP by state.

It is critical that Congress renew GSP – with refunds for tariffs paid – as soon as possible. We strongly encourage GSP importers hurt by expiration to answer our new survey here. As always, no company-specific details will be published without permission.

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.

GSP benefits have become even more important in recent years since Altus Brands completely stopped buying this product from China due to 25% Section 301 tariffs. In 2020, GSP saved Altus Brands over $25,000 in eliminated tariffs. The company’s imports also further GSP’s development goals: it purchases from a factory that offers benefits and higher pay than other local factories. It’s good for workers in the Philippines and the United States, since the high-quality products command a higher price and help support other Made in the USA product lines.

But GSP expiration threatens all of this. Altus raised prices to cover the $14,000 (and growing) in extra tariffs paid. It has lost sales at home and in export markets (e.g., Canada, Germany, and Russia), which in turn led to reduced purchases from the Philippines.

According to company president Gerand Lemanski, it could get worse yet: “Without renewal of GSP my product is not competitive in the US market and I will have to cease selling this product within a year. That will result in letting one production person go.”

Unfortunately, Congress recently recessed until mid-September. Altus Brands’ experience shows why it must make GSP renewal an immediate priority when it returns.

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.

As recently as 2015, GSP savings averaged just $56 million per month. But they have grown steadily following a 2.5-year renewal in 2015. The Trump administration’s extension of GSP to travel goods from all countries in mid-2017 and Congress’ 3-year renewal legislation earlier this year led imports to really take off, as shown below.

The steady savings growth starting in 2015 – and then accelerating in 2017/2018 – shows the importance of long-terms renewals and minimizing program lapses. GSP savings trended downward from 2012-2015, due largely to its expiration from August 2013 to July 2015. (Savings figures in those months reflect tariffs paid – and later refunded – once GSP was renewed.)

Did China tariffs impact growing GSP savings? Uncertainty about tariffs on imports from China may have as much to do with the October savings jump as the certainty provided by GSP renewal. Three rounds of “Section 301” tariffs have been added to Chinese imports in recent months: a 25% tariff on some products in July (List 1); another 25% tariff on other products in August (List 2), and a 10% tariff on even more products in September (List 3).

GSP countries compete directly with China on many of the covered products. In fact, nearly 70% of GSP imports in 2018 are products included on one of those lists. October was a banner month for GSP imports of products now subject to additional 10-25% tariffs on imports from China:

• GSP imports of “List 1” products grew by 10% compared to 2017
• GSP imports of “List 2” products grew by 27% compared to 2017
• GSP imports of “List 3” products grew by 29% compared to 2017

Each of those year-over-year GSP growth rates was the highest of any month yet in 2018. Conversely, GSP imports of products not on any China tariff list grew by 8% in October. That is not bad, but it is a middle-of-the-pack result (4th of 10 months) and stands out given compared to the other three product groupings.

It this a short-term bump or the start of a long-term trend (at China’s expense)? It is hard to draw too many conclusions from one month of data. GSP increases of Section 301 products could be an anomaly, part of a several-month bump, or the start of a long-term sourcing shift from suppliers in China to competitors in GSP countries.

The Administration’s own policies may be the biggest impediment to a long-term shift out of China and into GSP countries such as India, Indonesia, Thailand, and Turkey. Each of those countries is under Administrative review that could result in lost GSP benefits, in whole or in part, with just 60 days notice. Any such decision would make imports from China more competitive (again).

The uncertainty about future GSP benefits may discourage companies from identifying and qualifying new suppliers in GSP countries. After all, who wants to spend the time and money to find suppliers that also may see tariff hikes in the near future? For American companies that have increased sourcing under GSP, any decision to revoke GSP duty-free treatment could push them right back to Chinese suppliers.

In conclusion, October was a record-breaking month for GSP, but future growth is at risk due to the country reviews. To the extent the Administration wants to encourage US companies to import less from China, it should consider the important role GSP benefits for countries such as India, Indonesia, Thailand, and Turkey may play in long-term sourcing decisions.