Retooling U.S. Trade to Meet the China Challenge: GSP Matters

Commentary by Daniel F. Runde, Thomas Bryja, and Meredith Broadbent

Published November 4, 2024

Introduction

The General System of Preferences (GSP) is the oldest and largest U.S. trade preference program, authorized in 1974 and subsequently renewed 14 times. Once an anchor of U.S. international economic relations with developing countries, GSP promoted economic development through the duty-free entry to the United States of over 3,500 non-import sensitive products from 120 beneficiary developing countries around the world). However, the program lapsed in December 2020 and has yet to be renewed.

The cessation of GSP came at a time when China assumed a prominent position as the leading trading partner to over 120 developing countries (see Figure 1). As the United States works to retool its trade regime to respond to China's aggressive posture, it must offer developing countries other options. The renewal of GSP is a necessary step in this direction, holding the potential to rebuild strong relations with emerging economies. While there is increasing momentum in Congress toward reinstating GSP, the process has been lumbered by debates over various amendments. Reauthorizing GSP by 2025 is a prerequisite for the United States to push back against China's development offensive financed through its Belt and Road Initiative (BRI).

The lapse of GSP is part of a broader collapse in U.S. trade policy over the past 15 years. Free trade agreements, once a cornerstone of U.S. economic policy, have become politically contentious. Trade mechanisms like the Trade Promotion Authority and Trade Adjustment Assistance (TAA) have also fallen by the wayside. While the GSP program has received bipartisan support in Congress for decades, the current delay in reauthorization is now years long. This is partly due to a political contest over several proposed amendments to GSP. Despite options with bipartisan support, disagreements have risen over changes to the eligibility criteria, the value limit placed on eligible products, and whether GSP should be packaged with other trade bills or reauthorized in standalone legislation. Some of these amendments create complexities that risk diminishing participation rates of beneficiary countries and curtailing gains for small enterprises.

One Belt, One Road, One Strategy: Displacing Trade with United States

As Washington delays renewing GSP, China is steadily building its economic and political sway over developing countries. Since 2013, BRI has reinforced Chinese strategy by facilitating the investment of over $1 trillion in infrastructure projects in more than 140 countries. Since GSP's expiration, nine additional countries have signed onto BRI, of which three are former GSP beneficiary countries. This is part of a larger trend of China promoting bilateral trade expansion through infrastructure investments in developing countries where U.S. presence has declined. For example, Argentina became the second largest recipient of energy investments from China and signed an $8 billion contract to build a nuclear plant just two years after GSP lapsed. Likewise, the countries that saw the largest growth in BRI engagement in 2023 included former GSP beneficiaries Bolivia and Uzbekistan. If the United States fails to counter the BRI with a compelling offer of growing bilateral trade relations, the dependence of developing countries on China will continue to rise. The renewal of GSP would provide tariff benefits that promise to strengthen commercial relations with developing countries-an effective strategy to counteract China's trade expansionism.

Figure 1: Countries for Which China and the United States are the Largest Trading Partner, 2019

Source: The Future is Asian

GSP Supports Mutually Beneficial Trade with the Global South:

For the past four decades, GSP has played a vital role in increasing the competitiveness and attractiveness of exports from countries across the developing world that compete with low-cost manufactured products from China. The subsequent lack of an American option in recent years has allowed China to pressure longstanding U.S. trade partners into accepting more Chinese imports and onerous financing terms for infrastructure projects under BRI. Therefore, renewing GSP is a crucial tool of a larger strategy to be a counterweight to Chinese influence throughout the Global South.

• GSP Promotes Economic Growth: GSP has been an important driver of market-based economic growth in developing countries, benefiting a wide range of industries. The lapse of GSP will continue to impact emerging markets worldwide, particularly small- and medium-sized enterprises that rely on reduced tariff rates to stay competitive with China. During a previous GSP lapse in 2011, small exporters were hurt the most, with a nearly 90 percent drop in their exports.
  
  In contrast, similar programs like the European Union's GSP+, which gives countries special incentives to implement sustainable development and good governance international standards, have led to explosive expansions in trade. Within just four years, the value of goods imported from Uzbekistan to the European Union under GSP+ increased fourfold, and Uzbek exporters saved over $30 million in one year alone. Countries rich in critical minerals, like Uzbekistan, might be eager to expand trade with the United States, but efforts are far more laborious without a scheme similar to GSP (see Box 1).
• GSP Can Help Make U.S. Supply Chains More Resilient: On a bipartisan basis, members of Congress have urged U.S. companies to diversify their dependence on China by moving supply chains to other allies and trading partners. Raising GSP tariffs on developing countries goes in exactly the wrong direction. China is the world's largest manufacturing power due in part to its low cost of production, which accounts for a large percentage of China's price advantage over foreign competitors. Many of the industry-focused, vertically integrated supply chains in China exist nowhere else in the world. Given a tariff advantage over China, GSP beneficiary countries, like Indonesia and the Philippines, stand ready to increase production for the U.S. market while lowering the costs of products for U.S. consumers. Yet U.S. onshoring, nearshoring, and friendshoring efforts are hampered by inefficiencies that add cost in developing countries; GSP would help equalize the burden of these inefficiencies and enable companies to pivot from a cost-driven to a development-driven approach.
  
  Moreover, GSP allows U.S. businesses to bring their corporate ethos to beneficiary countries, including responsible sourcing, sustainability, and partnerships with NGOs and local governments. Business in China is easy, predictable, and inexpensive, whereas the lapse of GSP has made doing business with the United States difficult, continually unpredictable, and more expensive than the Chinese alternative.
• GSP Can Counter China's Periphery Diplomacy: The vacuum created by the expiration of GSP allows China to powerfully assert itself in the Global South, particularly with economies looking for alternative trade partners as the United States recedes. Ambassador Cristian Espinosa, Ecuadorian ambassador to the United States, posed it during a private CSIS roundtable discussion this way: "What are we supposed to do? Wait for the U.S. to partner with us, or reach out to other countries that are willing to partner with us? . . . Ecuador still requires trade preferences and if we cannot make use of GSP, we will find other ways to trade and expand, and we will do so with other countries..."
  
  China has benefitted greatly from this trade need across the Global South. Consequently, China's global trade surplus has more than doubled since 2018 to over $893 billion in 2023. The BRI has accelerated China's trade expansion, allowing the country to aggressively move into emerging markets through infrastructure development, while the United States has offered little in response. The United States cannot fight something with nothing.
  
  Moreover, China engages in economic enticement through the strategic offer and withdrawal of trade and investment in U.S. partner countries. By engaging in aggressive economic brinkmanship, China puts pressure on recipient countries to respond to its demands, orchestrating key changes in the world order. If the United States fails to provide a counteroffer, then it must prepare for a China-dominated future.

Advantages of GSP to the Global South: Country Case Studies

Why Is GSP Important to the United States?

GSP is also an important tool of U.S. economic influence. While active, GSP helped advance U.S. economic and strategic interests, as well as democratic values. Under GSP, beneficiary countries were required to meet 15 policy-based eligibility criteria, which included the provision of adequate market access to the United States and protected intellectual property rights. An additional component of its eligibility criteria was maintaining internationally recognized labor rights. Failure to meet any of these criteria could result in the loss of tariff benefits following a review from the United States Trade Representative (USTR). This tactic saw successful policy compliance in Bolivia, where child labor laws were reformed in 2019. Additionally, copyright laws were revised in Ukraine in 2019, forced labor was abolished in Uzbekistan's cotton industry, and workplace health and safety law was amended in Georgia in 2019 and 2020. GSP has served as a key negotiating tool for advancing the adoption of these eligibility standards globally, which also benefited U.S. companies like Crayola, which have higher standards for their partners.

One of the key tools for the United States to strengthen foreign relations and foster global stability will be its economic openness and engagement with developing countries. Trade preference programs such as GSP are an important avenue to boost relations with developing countries, particularly those that are being pulled into China's political orbit. Continuing to allow GSP to languish at a juncture when developing nations enjoyed a steady increase in bilateral trade and increased competitiveness of their goods threatens trade with beneficiary countries and damages relations with the United States.

Since 2020, U.S. companies doing business with GSP countries have been hit with tariffs, leaving them with two choices: absorb increased tariff charges and ultimately lose out on long-term brand development, or find a cheaper manufacturing supplier-China. U.S. businesses have already begun moving orders back to Chinese suppliers, causing a 48 percent increase in imports of travel goods, such as bags, to the United States after GSP's expiration, disrupting efforts to strategically diversify supply chains away from China. Reauthorizing GSP presents a key avenue for nearshoring and related efforts, which will accelerate the diversification of sourcing components and inputs out of China, as well as help ameliorate the harm to the U.S. private sector, as the lapse of GSP has removed a source of low-cost inputs that U.S. businesses rely on to produce higher-value products.

Finally, the United States must seize the opportunity to establish itself as a global economic leader. Jose Manuel Romualdez, ambassador of the Republic of the Philippines to the United States, articulated the situation well:

"China is aggressively using its economic power to look to influence a lot of changes in the world order. If we do not move quickly in terms of the economic powerhouse that China is offering to the world, then we may be facing a much bigger problem later on. GSP is just one of the many tools that we need to be able to fight back."

Recommendations for Renewing GSP

Reauthorizing GSP as soon as possible is necessary to match China's competitiveness in the global market and reaffirm the trust of longstanding U.S. trade partners. The U.S. Congress should prioritize the renewal of GSP and not belabor the process with debate over nonessential amendments. Soon U.S. trade losses become irreparable. Going forward, GSP renewal must be timely, predictable, and without lengthy gaps that make it difficult for American businesses to structure sourcing.

There are five broad actions that need to be considered:

1. Adopt a Retroactive Clause: Maintaining investor confidence in GSP will require the implementation of a retroactive refund clause to reimburse the duties paid on GSP-eligible products during the expiration period. Historically, GSP has always been renewed with retroactive effect to maintain continuous coverage and investor confidence in the GSP program.
2. Consider Broadening GSP: Policymakers should consider giving authority to the President of the United States to designate additional products for duty-free treatment in targeted areas where there is an overreliance on China. Diversifying U.S. supply chains out of China to GSP beneficiaries would help grow markets in developing countries and improve the overall resilience of supply chains. Broadening eligible sectors could strengthen USTR's leverage to seek reforms since the program would be a more valuable incentive for participation. The expansion process should include guardrails to target categories where China has historically dominated and avoid politically sensitive categories with existing supply chains in the Western Hemisphere. This would involve improving the coordination between USTR and development agencies.
3. Balance the Costs and Benefits of Packaging GSP with Other Legislation: GSP could be packaged alongside other trade bills, such as the African Growth and Opportunity Act (AGOA) and Haiti HOPE/HELP programs, where there is a tangible, practical need for renewal that would force action before the lapse of this important strategic toolkit. On the other hand, previous efforts to force a tandem reauthorization of TAA have delayed the renewal of GSP, driving small and medium businesses in the United States to pay immense tariffs, institute layoffs, or face closure. Further setbacks to the reauthorization of GSP will leave more Americans without jobs.
4. Engage the Global South: Deeper engagement with the Global South would enable the United States to hear more about how programs like GSP have benefited and could benefit developing countries and the United States alike. Asian and Latin American embassies are eager for an attentive ear from the United States on how to build more strategic economic partnerships.
   

Conclusion

Over three years have passed since the expiration of GSP, which has handed China an uncontested opportunity to fortify its political and economic influence in the Global South. The consequences of the lapse in GSP are costly, both for U.S. businesses, countries that have relied on GSP, and for the United States' positioning vis-à-vis China. As the structure of the international system shifts in favor of bipolarity, the reauthorization of GSP holds geostrategic advantages for the United States and its allies. Extending GSP as a counter to China's growing influence will require Congress to overcome partisan differences. Failing to act will allow China to grow in its domination of global trade and supply chains and will result in one less policy tool to secure the United States' influence in the international economy and with developing county trading partners in strategic regions.

Daniel F. Runde is a senior vice president, director of the Project on Prosperity and Development, and holds the William A. Schreyer Chair in Global Analysis at the Center for Strategic and International Studies (CSIS) in Washington, D.C. Thomas Bryja is a program manager and research associate with the Project on Prosperity and Development at CSIS. Meredith Broadbent serves as a senior adviser (non-resident) with the Scholl Chair in International Business at CSIS.

Programs & Projects