When it comes to the lower house of Congress, House Ways & Means Committee Chairman Jason Smith (R-MO-8) has taken the lead in making sure that any trade policy coming from his Committee benefits U.S. producers and workers, rather than being a rubber stamp for a status quo that the International Trade Commission says benefits multinational corporations.
Speaking in a trade subcommittee hearing on Sept. 20 about renewing the Generalized System of Preferences (GSP), Smith said “Our trade policy should support American jobs at any opportunity. Should we change the rule so that GSP countries increase their rule of origin threshold, which is now only 35%?”
That 35% number means that a country selling a product benefiting from GSP can qualify even if 65% of the product comes from a non-GSP country. The ultimate goal would be to make sure that some of that 65% is Made in the U.S.A. Right now, the U.S. is not included in the mix.
“If we raise the rule of origin standard, we’re asking our trading partners to do a little bit more for their producers, and at the same time American producers could benefit as well,” said Roy Houseman, the Legislative Director for United Steel Workers and one of four witnesses in the hearing. [Witness Statement] “A GSP country can assemble a product with 65 percent of that good coming from China or Russia and then send it tariff-free. U.S. content does not even get a preference in this program. Personally, I would rather see an American rancher from my home state of Montana benefit from selling leather to a GSP country handbag manufacturer than Xinjiang forced labor leather going into that handbag. That’s a key element that really I think is a value to add to the GSP program.”
At the heart of Wednesday’s debate was jump-starting the GSP program, which has not been authorized since 2020.
It seems the majority in the House Ways & Means Subcommittee on Trade was in favor of renewing the program, but everyone agreed that it needed reform and could not pass muster as is.
“The global economic landscape has fundamentally changed since the 1970s (when GSP launched). China was not the second largest economy then, nor were the supply chains nearly as globalized,” said Rep. Earl Blumenauer (D-OR-3), who sits on the trade committee. “GSP has supported economic opportunities abroad, and it has been leveraged to improve standards in developing countries, including worker rights in its current form, but it does not reflect the current evolution of trade policy.”
GSP operates by waiving tariffs on about 3,600 tariff lines for goods viewed as non-import sensitive from 119 low and middle-income beneficiary countries. In exchange for this, it asks the beneficiaries to comply with 15 eligibility criteria on issues ranging from market access to labor standards, ending resource cartels, and aligning intellectual property rights with U.S. law.
In 2020, the year before it lapsed, GSP covered $17 billion worth of imports. This was about 11 percent of imports from the beneficiary countries, and about 0.7 percent of imports of our total $2.35 trillion in imports in 2020, according to data presented by witness Ed Gresser, Director for Trade and Global Markets at the Progressive Policy Institute. [Witness Statement]
“I share the view implicit in various reauthorization proposals that GSP should be updated and improved,” he said. “Any changes to GSP should be designed to serve Congress’ top economic policy goals. But if a core aim is to encourage sourcing diversification and alternatives to China, the U.S. buyers should see GSP countries as an option,” Gresser said, touting the main argument for GSP renewal – near duty-free access to the U.S. and a way out of China.
But businesses have repeatedly told Congress that even with lower tariffs in other countries, it is not easy to pack up and leave China. Some countries don’t have the expertise or the logistics. Those that have left, have done so because of GSP, said witness Fabian Garza, Vice President of Operations, Black Diamond Equipment, makers of outdoor clothing and equipment. [Witness Statement]
“GSP is a tool for us,” he told Jason Smith. “It’s one of the main tools for us to actually drive down our product costs. It’s one of the main tools for us to do that.”
Fabian Garza’s company makes outdoor equipment and gear for hikers and skiers. He said GSP is the only way he can compete with global competitors on price.
Blumenauer hinted that GSP could pass with USMCA-style labor and environmental standards already approved by Congress. He is in favor of GSP, but not status quo GSP. “We have a viable GSP proposal that is consistent with what everybody on this committee already approved,” he said towards the end of the hearing. “If GSP is important, it seems to me we should move forward with what we have approved before in the USMCA,” he said.
Rep. Dan Kildee (D-MI-8) reminded Committee members and the witnesses that “the goal of trade is to support US workers and increase American economic competitiveness.” He said he was working on a bill that would seek to address reducing or suspending tariffs on specific imports on products the U.S. does not make, adding that one of the bigger problems on trade policy reform is enforcing those changes.
Witnesses gave Committee members examples of how GSP helped the labor market in Cambodia for textile exporters, as well as concerns about gross labor violations in countries like Indonesia, another likely GSP beneficiary. The takeaway from the hearing was that Committee members and the four witnesses believed GSP needed fixing before reauthorization, with some GSP country importers like Black Diamond slightly more reluctant to say so.
The U.S. has the lowest tariff rates in the world, averaging well under 4%. Most developing countries have tariffs at double to triple those rates.
In 2021, CPA senior economist Andrew Heritage wrote a report about the GSP, concluding that the GSP program did not lift countries out of poverty as many have assumed.
Only around 10% of imports from developing countries to the U.S. fall under GSP rules.
On Sept. 15, CPA Trade Counsel Charles Benoit wrote that as Congress considers renewal of GSP, the marketing has switched to “facilitating supply chain shifts out of China”.
In 2023, America became a net food-importer, likely for the first time in our history, and much of it from GSP countries. Fruit and vegetable producers, ranchers who bring us meat, dairies that give us milk, fishermen who bring us seafood, they’re all being wiped out, Benoit said. America as an agricultural power is largely based on the monoculture centers in the breadbasket states exporting soy and corn.
Meanwhile, despite GSP expiring, U.S. Customs and Border Protection has enabled importers here to flag their imports as “GSP eligible”. “This was done under the expectation that if GSP is renewed, tariff refunds will be awarded retroactively,” Benoit said. “This will result in a transfer of billions of dollars from the U.S. Treasury to U.S.-based importing entities (the importers of record). If the goal is to help developing countries, why not use those billions of American taxpayer dollars to forgive debt instead? Why give it to the importers?”
Trade Subcommittee Chairman Adrian Smith (R-NE-3), who supports GSP as a “China supply chain alternative” says it needs a makeover before they can reauthorize it. “There’s no question the GSP program has a proven track record,” he said. “However, I do not believe we should forego the opportunity to examine ways to improve it.”
Generalized System of Preferences Renewal Would Delight China
