The United States’ one of the oldest and largest trade agreements, the Generalized System of Preferences (GSP), which expired in December 2020, has not been renewed, leading to manufacturing orders flowing towards China. In order to deter this trend, the U.S. Congress is seeking to reinstate this trade preference for developing countries.
The GSP aims to promote trade and economic development by eliminating tariffs on goods manufactured in developing countries. It applies to approximately 119 countries or regions, providing cheaper goods for American businesses and consumers.
According to the Congressional newspaper, Senate Finance Committee Chairman Ron Wyden stated during a hearing on Wednesday, June 5, that “if the United States truly wants to move away from Chinese-made products and create high-paying jobs in the red-collar (public officials), white-collar (knowledge workers), and blue-collar (manual laborers) fields, extending the GSP would be a good start.”
Wyden and the top-ranking Republican on the Finance Committee, Senator Mike Crapo, both argued that the GSP would provide an “alternative option” for the supply chains established between China and African countries. “We’re losing in the competition with China in Africa,” said Crapo.
The purpose of this hearing was to evaluate the reinstatement of the GSP and the extension of other preferential programs, including the African Growth and Opportunity Act (AGOA), which is set to expire in September 2025.
Scott Lincicome, Vice President of Economic Studies and the Stevenson Center on Trade Policy at the Cato Institute, criticized the current state of the 2024 trade policy during the hearing. Lincicome pointed out that it is regrettable to be discussing the expiration of AGOA while the GSP has been expired for over three years without renewal.
The GSP was established by the United Nations Conference on Trade and Development in 1968 and implemented by the U.S. in 1974. It has historically enjoyed bipartisan support and swift renewals. However, this time, disagreements over the eligibility criteria for potential beneficiaries have led to a stalemate in Congress discussions.
In 2021, the U.S. Senate voted 91 to 4 in favor of renewing the GSP. However, the amendment faced obstacles in the House of Representatives as Democrats sought to add clauses and qualification requirements related to human rights, gender protection, and environmental issues. Republicans opposed these additions, arguing that imposing more conditions might harm trade with developing countries. Despite a compromise between the two parties, the proposal ultimately stalled.
This year, Democrats are pushing to include Trade Adjustment Assistance (TAA), which could once again hinder the implementation of the GSP due to partisan conflicts. TAA is a legal framework that requires welfare and support for workers harmed by international trade disruptions.
Senator Elizabeth Warren (Democrat-Massachusetts) stated during the hearing that, “if extensions are to be made for programs like the GSP, TAA should also be extended.”
Democratic lawmakers Sherrod Brown and Sheldon Whitehouse also expressed that they would not agree to extend the GSP without TAA. However, Republican Senator Crapo advised against this approach, urging that if people support the GSP, these programs should move forward expeditiously without attaching unnecessary conditions. Crapo also noted that the House is prepared to reinstate the GSP, contingent on it not being merged with other programs.
The expiration of the GSP will not have a significant impact on the overall U.S. economy as GSP imports account for less than 1% of total U.S. imports. In 2023, the total U.S. foreign trade amounted to $6.88 trillion. However, not extending the GSP could result in increased costs for some businesses that may have to consider relocating their production facilities.
To avoid U.S. tariffs on Chinese imports, some companies had shifted production from China to Southeast Asia. Now, with the GSP expiration, these companies are reverting orders back to China for manufacturing due to its low costs and strong production capabilities, compelling firms to relocate production to China.
Experts supporting the GSP claim that U.S. companies have lost $3.36 billion in tariffs since the GSP expired – costs that are being passed on to American consumers.
On April 17, the House Ways and Means Committee passed the GSP Reform Act by a vote of 25 to 17. The bill includes provisions for holding China accountable and permanently revokes China’s GSP membership.