Senate China Bill’s “Division G” Was a Gift to the CCP; House Dems Provide Hope

By Charles Benoit, CPA Trade Counsel

There is high drama in Congress this summer as the U.S. House and Senate offer differing takes on the direction of U.S. trade policy. The Senate’s bill would disarm America’s trade defenses and ensure a relentless flood of imports from China if passed. Fortunately, the House Ways and Means Committee responded with a healthy dose of skepticism and disbelief in their own bill, which actually moves things in the right direction.

Trade was always going to be on the agenda, as two tariff cut programs for importers – the Miscellaneous Tariff Bill (MTB) and the Generalized System of Preferences (GSP) – were both up for renewal by Congress.

But while MTB and GSP debate were expected, the Senate’s tactical nuclear strike against our China 301 tariffs as part of a “countering China” bill was not.

MTB, GSP and 301: What are they?

The MTB is a biennial tariff cut free-for-all for importers, although it’s marketed as a way to help manufacturers source needed intermediate goods not made here. (Truth be told though: more finished goods than inputs come through, and we can make them here).

GSP, launched in 1974, is ostensibly designed to favor developing countries who are “on the right track” developmentally (read: not on the road to communism). 119 countries are included, including powerhouses like Brazil and Thailand. U.S. businesses who offshore production to those countries are rewarded with tariff waivers.

Both programs are bad for America. But with the average U.S. applied tariff at a measly 2.4%, GSP & MTB don’t get much attention from Congress or the media. Most of the cutting has been done now. Still, the current MTB will cost the Treasury about $1.2 billion per year, and GSP was estimated to cost the Treasury $492 million in 2020.

They’re tax cuts for importers. Simple as.

The needle finally moved in favor of American producers with our China tariffs, however. They were imposed by President Trump under Section 301 of the Trade Act of 1974. (Hence, ‘301 tariffs’).

The China 301 tariffs applied to thousands of goods, mostly at 25%. Before they went into effect, Customs & Border Protection (CBP) in their FY 2017 collected just $34.6 billion on $2.39 trillion in imports. But two years later, even despite all the 301 exclusions obtained by Chinese importers, tariff collection more than doubled to $74.4 billion on $2.42 trillion in imports by FY 2019. Nice!

President Xi and his allies who run global multinationals are angry though. They want “their” money back. Unfortunately, they convinced the U.S. Senate to oblige.

‘Division G’: The Senate Bill’s Disarming of America

Senators Wyden (D-OR) and Crapo (R-ID), the top men from each party on the Senate Finance Committee, attached to the Senate bill a ‘President Xi wish-list’, titled “Division G –Trade Act of 2021.”

Senator Schumer accepted it into his Innovation and Competition Act (known as the “China bill”) to get bipartisan support for it in the Senate. How much of this dog’s breakfast will make it through the House and into law is still a very open question.

Sec. 73011 of Division G was an all-out assault against the ability of any President to use Section 301 tariffs against China. Specifically, it:

• Reinstates exclusions that ended last year, and refunds 301 tariffs for those Chinese exports paid this year
• Allows tariff exclusions for made-in-China goods if the producer merely claims “lost profitability”
• Directs USTR to prioritize cheap imports in its decision making, and creates an onerous and difficult process for USTR to deny any importer exclusion request (unless USTR waits for a WTO panel to authorize the action first, and even then, the WTO panel gets to decide the damage amount!). Importers can and will sue in court to overturn every adverse decision.

Even the obvious damage is catastrophic enough, but woven throughout Division G are subtle litigation-landmines to empower importers and DC lawyers to overturn anything USTR might do to defend America. Foreign companies will be able to sue USTR in court if USTR tries to limit their access to the U.S. market.

Division G opens the door to forced-labor goods, invites foreign countries to sue President

This same landmine tactic is even used against CBP to undermine the law enforcement agency’s ability to fight imports made with forced labor. Just one of the new processes CBP will have to check off going forward: a consultation with the State Department, to ensure no hurt feelings with the CCP.

Likewise with GSP, Division G strips the President’s responsibility for foreign relations, giving final say on questions on foreign country’s development over to the courts. These countries will be able to hire DC lawyers and sue to keep their tariff-free access to American market. DC lawyers win, America loses.

Too many bad things for one article

Beyond making GSP much worse, the Senate Bill also failed to improve MTB in any manner. Another big kick in the face to the American recovery: it eliminates the China 301 tariffs across 114 tariff lines theoretically tied to Covid-19 preparedness (including booze!), and envisions a national stockpile of Made-in-China PPE. Disgraceful work championed by Senator Toomey (R-PA). Oh and one more: in addition to telling USTR to prioritize cheap goods over American producers, the bill invites Big Tech into the room; they get their own point-man as USTR decides how to deploy its precious few resources.

Ways & Means Democrats offer Hope

U.S House Ways & Means Committee (W&M) Trade Subcommittee Chairman Earl Blumenauer (D-OR) was clearly not impressed, referring to the Senate bill’s “significant shortcomings.”

They responded with a clean bill that sticks to GSP & MTB, and actually makes those programs better (less harmful). It leaves all our trade defenses alone. On GSP, American producers will be able to more easily petition USTR and on new grounds, including foreign countries tolerating environmental abuses. And CPA was thrilled that a long-standing abuse of MTB – waiving tariffs on finished goods – will be eliminated. CPA stood alone among Washington and its web of special interests in asking for MTB to be limited, and we applaud Ways & Means Democrats for their commonsense reforms to these programs. We hope many House Republicans will join them—and stand up for American industry and workers in the process.