The letter was led by House Ways and Means Committee Members Suzan DelBene (D-WA) and Brad Wenstrup (R-OH) and letter signers include:

• 43 Democrats and 32 Republicans in 34 different states
• 19 Ways and Means Members (10 Democrats and 9 Republicans)
• 7 of 11 Democrats and 5 of 8 Republicans on the Ways and Means Trade Subcommittee

“The letter shows that strong, bipartisan support remains for win-win outcomes on trade, such as restored GSP for India” said Dan Anthony, Executive Director of the Coalition for GSP. “Program users are hopeful the letter will help advance U.S.-India discussions as well as refocus attention on the need for Congress to renew GSP.”

The letter supports a framework to restore GSP soon after Congress renews the program if there can be tangible progress on resolving market access issues that led India to lose its GSP back in 2019.

But the facts show that restored GSP for India would help American workers, manufacturers, farmers, etc. in its own right:

• Americans have paid up to $800 million in extra tariffs due to lost GSP for India. For example, one of the categories facing the most tariffs are agricultural chemicals, hurting both the manufacturers that turn bulk products into retail forms and the farmers that must pay more for the end product. One repeated refrain from companies: tariffs didn’t move sourcing out of India, but higher costs led importers to scale back expansions or other domestic manufacturing plans. In part because…
  
• Tariffs from lost GSP for India disproportionately harms American manufacturers. Over 75% of (previously) GSP-eligible imports from India are raw materials, components, and parts used to produce other things in the United States. For the current GSP countries, the figure is closer to 50%. The imports-as-inputs shares are even higher in big manufacturing states such as Texas (83%), Ohio (84%), Pennsylvania (89%), and Michigan (95%). Lost GSP for India make American manufacturers less competitive in the US and export markets.
  
• The pain appears very one-sided – on the wrong side – as imports from India are rising (likely due to China tariffs). Americans are paying more and scaling back investments, but imports of (previously) GSP-eligible imports from India are up 20%+ compared to before GSP was terminated. Why? Probably because 92% of those imports would face Section 301 if imported from China. New 4% tariffs on India don’t seem so bad compared to 25% tariffs on China for similar products. Imports from India of products facing 25% when imported from China have driven recent import growth.
  
• India is still very much a developing country, and Covid has made the situation worse. According to the World Bank, in 2019 India’s per capita income was just $2,120 – about the same as Ghana, Nigeria, and East-Timor. According to Pew Research, the number of people in India with incomes of $2 or less a day increased by 75 million, with a total of 134 million now living on less than $2 a day. Another 1.162 billion people in India – 3.5 times the entire US population – live on between $2-10 per day.

Some facts on GSP expiration:

• American companies paid at least $760 million in extra taxes from January to September 2021 due to GSP expiration. The breakdown of tariffs paid by state is available here.
  
• Tariffs due to GSP expiration primarily affect small businesses. Past research has shown the typical GSP importer has 10-15 employees and saves $100,000-$200,000 annually as a result of the GSP program. Small businesses – often supplying niche products – dominate the over 300 American organizations that sent a letter to Congressional trade leaders urging retroactive GSP renewal in late September.
  
• Retroactive GSP renewal would provide meaning relief to companies dealing with supply chain disruptions, higher freight costs, and other inflationary pressures. While tariffs are not the driver of these issues, refunding tariffs paid would help small businesses in particular that do not have the resources to pay tariffs without passing the costs along in the form of higher prices.

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.

American businesses: “By lowering tariffs for American companies that import under GSP, it supports jobs and investments in the United States.”

(WASHINGTON) – Over 430 American businesses and associations from across the country that currently use the Generalized Systems of Preferences (GSP) program to help sustain and grow their businesses today wrote to Congressional leaders asking their help in delaying a recent decision to terminate the program for India and Turkey. In their letter, the American businesses pointed out that just last year, Congress voted nearly unanimously to renew the GSP program for all eligible countries and that their help is needed in ensuring that the recent termination decisions reflect Congressional intent in overwhelmingly agreeing to continue the program.

“As representatives of American companies that would pay higher tariffs as a result of these decisions – and similar ones that could come in the future – we urge you to request a delay beyond May. This would provide Congress time to work with the Administration and ensure the decisions match both the letter and the spirit of the GSP law.” the letter states. By lowering tariffs for American companies that import under GSP, it supports jobs and investments in the United States, particularly at U.S. small businesses. Congress showed the strong bipartisan support for GSP when it reauthorized the program for three years in 2018.”

The GSP programs was established in 1974 to both promote economic development and provide duty-free imports to help American small businesses compete. As the U.S Trade Representative’s office website states, GSP: “Supports tens of thousands of jobs in the United States.  GSP also boosts American competitiveness by reducing costs of imported inputs used by U.S. companies to manufacture goods in the United States.  GSP is especially important to U.S. small businesses, many of which rely on the programs’ duty savings to stay competitive.” India and Turkey currently provide roughly a third of total GSP imports.

The businesses that sent the letter to Congress represent the profile of the average American business that benefits from the program which tend to have 20 or fewer employees and depend greatly on duty-free imports to support those employees and their overall business. The Coalition for GSP, a group of American companies, small businesses and trade associations organized to educate policy makers and others about the important benefits to American companies, workers, and consumers of the Generalized System of Preferences (GSP) program helped organize today’s letter.

The full text of the letter:

Dear Chairmen Grassley and Neal and Ranking Members Wyden and Brady:

We are writing to express our grave concerns with the Administration’s recent announcement of intent to terminate Generalized System of Preferences (GSP) program for India and Turkey. The decisions could take effect as soon as May 4, 2019. As representatives of American companies that would pay higher tariffs as a result of these decisions – and similar ones that could come in the future – we urge you to request a delay beyond May. This would provide Congress time to work with the Administration and ensure the decisions match both the letter and the spirit of the GSP law.

GSP is a 45-year old program created to promote economic development. By lowering tariffs for American companies that import under GSP, it also supports jobs and investments in the United States. Congress showed strong bipartisan support for GSP when it reauthorized the program for three years in 2018. The House of Representatives voted 400-2 in favor of GSP renewal legislation, which was then enacted into law as part of the Consolidated Appropriations Act, 2018. Congress has not just reauthorized the program in recent years but expanded it significantly in 2015 by removing the statutory prohibition on eligibility for travel goods.

Multi-year reauthorizations and expansions have had a positive impact on American companies and workers, which saved a record $1.03 billion in eliminated tariffs in 2018. Yet the Administration’s use of country practice reviews threatens to undermine Congress’ intent in reauthorizing GSP and the benefits to program users like us. About one-third of GSP savings for American importers result from the inclusion of India and Turkey in the program. Another third result from eligibility for other countries under review, such as Indonesia and Thailand.

The India decision was based on failure to resolve market access issues. The GSP statute does not require a perfect trading relationship, just assurances of reasonable and equitable treatment. There are reports that India offered significant proposals that would improve US market access for a range of products and industries. By terminating GSP, the Administration has chosen higher barriers for US imports and exports instead of more-open markets for two-way trade. This does not match the intent of the GSP program or its eligibility criteria.

The Turkey decision was based on sufficient economic development, including “rising Gross National Income (GNI) per capita.” Yet the facts do not support this decision. While Turkey has made significant strides to diversify its exports and reduce levels of poverty, according to the World Bank, Turkey’s GNI per capita declined each year from 2014 to 2017. Further declines are expected as Turkey entered recession in 2018 for the first time since the global financial crisis. This action is diametrically opposed to GSP’s original intent. Preference programs were created to promote development by giving countries a hand up, not imposing new barriers when they are down.

The decisions even are worrying to GSP program users that do not import from India or Turkey. Eight other countries are subject to pending country practice reviews, and those decisions could be announced at any time. USTR also will announce soon whether any new country practice reviews will be self-initiated for GSP beneficiaries in Europe and the Western Hemisphere soon. If the Administration chooses to terminate GSP benefits despite efforts from beneficiary countries to address U.S. concerns, and can graduate countries based on positive economic development when data suggest otherwise, what countries’ benefits are not at risk?

It is not an exaggeration to suggest that when GSP comes up for reauthorization in next year, it could be a shell of the program that so many Members of Congress supported just a year ago. The India and Turkey announcements raise serious questions about whether the Administration is enforcing congressional intent, or misusing its discretion to eliminate tariff benefits that Congress has expressly granted.

We urge you to ensure that GSP decisions follow both the letter and the spirit of the law. Jobs at our companies depend on it.

Sincerely,

VIEW ALL 438 LETTER SIGNERS HERE

1. The GSP program helps protect American workers, manufacturers, farmers, and ranchers from unfair treatment in more than 120 trading partners. The GSP program’s extensive eligibility criteria, along with the Annual Review process, ensures that interested parties have regular opportunities to address perceived short-comings in GSP beneficiary developing countries (BDCs).
2. Expanding GSP product coverage would make it a more effective “carrot and stick.” While incredibly important to current users, only 9.4 percent of U.S. imports from BDCs claimed GSP preferences in 2016. In fact, the United States collected about $6.60 in tariffs on imports from GSP countries for each $1 in tariffs waived by the program. The Administration could take a number of unilateral steps to increase product coverage without changing the GSP statute.
3. The GSP program supports American jobs, exports, investments, but lapsed authorizations undermine such American benefits. The on-again, off-again nature of the GSP program since 2010 helps show the benefits of GSP to American jobs, exports, investments – when in place. Conversely, American jobs, exports, investments, including into research and development, suffer when GSP benefits lapse.

As the Trump administration and Congress work together to develop a new trade policy, it is crucial that organizations continue to educate policymakers about the importance of GSP for American companies and workers. The Coalition strongly encourages importers that benefit from GSP to take action in support of GSP renewal before its rapidly approaching expiration on December 31.