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.

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.

Due to GSP expiration, Ciranda has paid over $209,000 in extra tariffs on imports of tapioca powders and syrups, coconut products, rice syrup and powders from Brazil, Pakistan, Philippines, and Thailand. The need to pass these costs onto customers led sales to fall. Even if tariffs paid (eventually) are refunded, those lost sales can’t be regained. As an employee-owned company, everyone at Ciranda is impacted by those lost sales and profits.

Ciranda is a great example of the kind of trade GSP is meant to promote. Its qualification process includes an in-person visit to every supplier. While on-site, it observes each ingredient’s journey from the field to the processing plant. In addition to evaluating product quality, it surveys working conditions, fair labor practices, and the overall environmental health of the project. In 2020, Ciranda published a book highlighting the farmers around the world growing their product.

By eliminating U.S. tariffs on sustainable food ingredients, GSP helps companies like Ciranda do “more good” for workers and the environment in developing countries and the United States. Their example also highlights the risk of imposing too many eligible criteria on GSP countries for which higher tariffs are the only possible punishment. No matter how well-intentioned a new GSP criterion (e.g., on environment) may be, terminating GSP often hurts those meeting or exceeding even the highest standards. That’s why the Coalition believes Congress should consider changes to mitigate any punitive actions as part of GSP renewal, such as supporting partial (instead of full) terminations and/or creating a mechanism for good actors to retain benefits.

Note: Ciranda’s story came from a new Coalition survey on expiration impacts. GSP importers can take the survey here.

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:

• make countries care more about keeping GSP benefits (this post)
• help countries make progress on the new criteria
• prevent abuse/misapplication of the new criteria
• minimize collateral damage when actions are necessary

Due to GSP country terminations of Turkey (May 2019) and India (June 2019) and partial suspensions of Thailand (April 2020, December 2020), American companies have paid about $800 million in extra tariffs. Despite costs to American companies and workers rapidly approaching $1 billion, there has been no progress on any of the issues raised in those country reviews.

With GSP expired for six months, why are we worried about old country reviews? Because the Senate-passed GSP renewal legislation, the House Republican companion bill, and a separate House Democratic bill, all add numerous criteria that could be justified to revoke a country’s GSP status but nothing providing direct help or indirect incentives for countries to comply. If history is a guide, new tariffs on Americans are much more likely than U.S. policy “wins” in GSP countries. Congress should do everything in its power to avoid setting up such lose-lose situations as part of its GSP renewal bill.

Tariff trends make the (lack of) outcomes look even worse. If exporters in India/Turkey/Thailand were suffering, you’d expect to see U.S. tariffs faced falling over time as American companies cut back orders and found alternative sources in other countries. The opposite has happened, with tariffs paid on (previously GSP-eligible) imports from all three countries hitting new highs in April and/or May 2021. While American companies pay $50+ million per month in extra tariffs, the exporters in India, Turkey, and Thailand are thriving. American companies and workers clearly have borne the brunt of GSP terminations.

It’s worth reiterating: there has been no resolution of – or even tangible improvements on – any of the issues raised during the country reviews. There have been no “victories” for American companies or interests, only losses. That includes export losses given that India stopped delaying imposition of Section 232 steel/aluminum retaliatory tariffs immediately after GSP talks collapsed.

This is not to suggest that eligibility criteria can’t or shouldn’t be added. But if policymakers want to create an environment where new 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 to:

• make countries care more about keeping GSP benefits
• help countries make progress on the new criteria
• prevent abuse/misapplication of the new criteria
• minimize collateral damage when actions are necessary

To be clear: they’re not paid by the countries and haven’t achieved any other U.S. policy goals and won’t be refunded if benefits are reinstated. They’re just $500 million in new taxes on U.S. companies at a time of unprecedented economic collapse and job losses.

Above is the breakdown of estimated tariffs paid by state. Imports into California and New Jersey have faced about $50 million in new tariffs each. Companies in traditional – or newfound – election battleground states Texas, Georgia, Florida, Pennsylvania, Michigan, and Ohio were all in the top 10 of tariffs paid, collectively paying up to $168 million in extra taxes.

And the taxes paid continue to climb.

The bulk of taxes – up to $366 million from June 2019 to August 2020 – have been paid on imports from India. The typical GSP importer from India had 14 employees and saved $100,000 per year. The burden falls overwhelmingly on small businesses struggling to make it through the pandemic, not the large multinational that can rapidly shift sourcing to suppliers in other countries. A report from April 2019 profiled many U.S. companies that would be hurt by termination for India (and others).

Up to $111 million in tariffs have been paid on imports from Turkey from May 2019 to August 2020. In similar comments submitted as part of the Turkey review, we noted the typical GSP importer from Turkey had 14 employees and saved about $150,000 annually. The Turkey review was launched over “market access” issues, but there were no known discussions about resolving issues. Instead, Turkey was “graduated” for sufficient economic development despite just entered a recession and having a GDP per capita that has now fallen in 5 consecutive years (the metric used to determine if countries should be graduated from GSP automatically).

Up to $23 million in tariffs have been paid on imports from Thailand from May 2020 to August 2020. Importers from Thailand tend to be a little bigger – but far from large! – with the typical importer having 28 employees and savings $183,000 annually under GSP. Most unhelpfully, the product facing the most tariffs appear to be face masks. Higher tariffs on face masks may not have seemed like a big deal when Thailand’s partial suspension was announced in October 2019, but we’re in a very different world with mask imports surging due Covid-19.

Potential GSP renewal legislation is highly unlikely to address country-specific issues, but the impacts from terminations are no less real for American companies than the prospects of expiration. If Congress considers changes to the GSP programs in the future, ensuring importers interests are not ignored in the country review processes should be a top priority.

GSP eliminates $25,000 to $30,000 in tariffs annually on panels designed in the United States and manufactured in Thailand. The savings help Vtronix keep costs low for its customers — SME American manufacturers — who in turn are better able to compete against large, multinational producers.

Watch founder Anil Gowda explain how “this year, especially with Covid…renewing GSP would be a great benefit for us.”

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

Cell cast acrylic is the raw material used to create the barriers in almost every public space, where one person must interact with another, throughout the entire United States. Cell cast acrylic production in the United States is limited. Imposing duties on products that do not threaten U.S. manufacturing and in fact, create thousands of fabrication and installation jobs, would have resulted in high COVID barrier costs which would have siphoned funds from the purchase of all types of PPE’s during this pandemic.

Put differently: the materials for the plastic barriers now installed everywhere aren’t available from U.S. sources, and GSP helps keep costs low so money can be better spent on other protective measures.

The acrylics example is important for two reasons: 1) everyone has seen the new plastic barriers even if they don’t know what they’re made from, and 2) they would never be classified as a “medical product” in the traditional sense of “what’s needed to battle Covid-19?” For example, they are nowhere to be found in the USITC’s recent report COVID-19 Related Goods: U.S. Imports and Tariffs.

The trade data shows demand for cell cast acrylics has surged in recent months. Compared to 2019, GSP imports were up about 80% in May 2020, 130% in June, and nearly 200% in July. Non-GSP imports were flat in May, up 50% in June and up 100% in July – still strong but clearly showing the important role of GSP benefits in meeting this new demand.

Importers of similar products, such as rubber gloves, have reported similar expectations. One importer of non-medical gloves said current demand for rubber gloves is at least twice – and perhaps as much as nine times – global manufacturing capacity. While lost GSP won’t reduce demand, it could mean up to $10 million annually in extra taxes on rubber gloves alone.

Face masks from Thailand, which lost GSP in April, are the flip side of the coin. Lost GSP won’t reduce Covid-driven demand, but it will raise costs for Americans responding to the pandemic. Congressional failure to renew GSP would add acrylic barriers, rubber gloves, and many other to the list of Covid-related products made “more expensive than necessary” due to tariffs.

Given the strong bipartisan support for GSP (here, or more recently here), hopefully Congress will act soon to avoid this and many other painful tariff hikes for American companies, workers, and consumers.

Our first video comes from Xpres LLC in Winston-Salem, North Carolina. After tripling employment from 25 to 75 workers since 2015, Xpres has been forced to downsize this year due to Covid-19. Not only did Xpres shut down for 3 weeks, many of its customers around the country did too. In the words of CEO Jan Reid, it’d be “double trouble” if GSP expires and its raw material imports from Thailand face 10% tariffs starting January 1.

Watch the full clip below. If you’re a GSP importer, submit your own video testimonial here.

In July alone, American companies paid over $275,000 on non-disposable cloth face masks from Thailand – and about $25,000 on other types of face masks – that face 7% tariffs without GSP. The next highest tariff line, certain off-road tires, faced a little over $200,000 in new tariffs due to lost GSP.

Such analysis was not possible until recent changes to how the United States reports import data for certain health-related products. Historically cloth face masks were reported in a catch-all “other made-up [textile] articles” category (HTS 6307.90.9889), but that catch-all category was subdivided into the following categories starting July 1:

• N95 Respirators Of Textiles (HTS 6307.90.9845)
• Respirators Of Textiles, Other Than N95 (HTS 6307.90.9850)
• Face Masks Of Textiles, Disposable (HTS 6307.90.9870)
• Face Masks Of Textiles, Other Than Disposable (HTS 6307.90.9875)
• Other Made Up Textile Articles (HTS 6307.90.9891)

Data show the old catch-all category of imports faced nearly $800,000 in tariffs in May/June – about 80% more than the next highest tariff line. And while we cannot know exactly how much of those tariffs were on masks, the July breakdown suggests it is a large majority.

Import trends clearly show tariffs from suspended GSP are hurting Americans, not Thais. While Americans are paying hundreds of thousands of dollars per month in extra tariffs, Thai exporters are shipping more than ever due to surging demand from Covid-19. It’s a lose-lose scenario for everyday Americans and for those that want to use punitive tariffs as leverage.

While the specific tariff costs for Thai masks couldn’t be known until recently, the potential costs were obvious before the GSP suspension took effect. In mid-April, 17 national associations asked the Trump Administration to delay implementation of the GSP suspension. The letter warned that the move “could undermine COVID-19 response directly” and “the United States should not reduce sourcing options or raise costs for potentially important products.”

Recognizing that higher tariffs for face masks would hurt Americans, the Trump administration suspended Section 301 China tariffs on these products in March. The Administration similarly could reinstate GSP benefits for Thailand, or it could continue harming Americans by imposing punitive tariffs on needed items.