21 July 2017
U.S. Provides Duty-Free Treatment to Travel Goods from All GSP Beneficiaries
U.S. President Donald Trump issued a proclamation on 29 June adding a range of travel goods (including luggage, backpacks, handbags and pocket goods such as wallets) from all Generalised System of Preferences beneficiary countries to the list of GSP-eligible products. As a result of this action, originating travel goods from large U.S. suppliers like the Philippines, India, Indonesia and Thailand have benefited from duty-free treatment under GSP since 1 July. By contrast, travel goods from the two largest U.S. suppliers – mainland China and Vietnam – will continue to face regular MFN duties.
As we have extensively reported, the previous administration granted duty-free treatment to these goods on 30 June 2016 but only for least-developed beneficiary developing countries (of which there are currently 43) and African Growth and Opportunity Act beneficiary countries (of which there are currently 38). That decision was met with disbelief by U.S. travel goods importers and retailers, trade associations and lawmakers, which subsequently urged the Office of the U.S. Trade Representative – both under the Obama and Trump administrations – to change its position and expand the designation to cover travel goods from all GSP beneficiary countries.
The addition of travel goods to GSP does not automatically confer duty-free treatment to all imports of these products from beneficiary developing countries. To qualify for such treatment, a product must be the growth, product or manufacture of a designated beneficiary developing country and be imported into the customs territory of the United States directly from such country or territory, provided that the sum of (i) the cost or value of the materials produced in the beneficiary developing country or any two or more countries which are members of the same association of countries which is treated as one country, plus (ii) the direct costs of processing operations performed in such beneficiary developing country or such member countries is not less than 35 percent of the appraised value of such product at the time of its entry into the customs territory of the United States.
In the case of beneficiary ASEAN countries, the 35 percent minimum value content can be cumulated between Burma, Cambodia, Indonesia, Philippines and Thailand. In the case of beneficiary countries in the South Asian region, meanwhile, cumulation towards the minimum 35 percent value threshold is allowed between Afghanistan, Bangladesh, Bhutan, India, Maldives, Nepal, Pakistan and Sri Lanka.
It is also important to take the double transformation principle into consideration when looking at the GSP origin rules. This principle applies in instances where the final product is made from inputs or materials imported from a non-cumulation partner (for example, mainland Chinese inputs imported into India or Thailand for further production). For any materials imported from a non-cumulation partner to be counted toward the 35 percent requirement, they must be “substantially transformed” in the GSP beneficiary country into new and different materials, which are then used to produce or manufacture the article to be exported to the United States. Thus, a double substantial transformation must occur for those foreign inputs or materials to be counted towards the 35 percent threshold.
The addition to GSP of handbags, luggage and other travel goods from all eligible beneficiary countries is expected to undermine the competitive position of mainland Chinese and Hong Kong exporters in the U.S. market for these products, as importers and manufacturers may decide to shift some or all of their production to other Asian suppliers in an effort to cut costs. Mainland China is by far the largest U.S. supplier of travel goods of heading 4202 with a 59.5 percent share or US$2,489.1 million of total U.S. imports during January-May 2017, while Hong Kong ranks fourteenth with a 0.6 percent share or US$27.1 million. Vietnam ranks second with a 10.5 percent share or US$440.1 million, followed by Italy with a 7.9 percent share or US$332.1 million and France with a 5.8 percent share or US$244.8 million.
While none of the aforementioned suppliers benefit from duty-free treatment under GSP, fifth-ranked the Philippines, sixth-ranked India, seventh-ranked Indonesia and tenth-ranked Thailand now qualify for such treatment. The Philippines accounted for 3.0 percent or US$124.1 million of total U.S. imports of travel goods of heading 4202 during January-May 2017, India held a 2.4 percent share or US$99.2 million, Indonesia held a 1.6 percent share or US$67.3 million, and Thailand accounted for 0.9 percent of all imports or US$36.8 million.
U.S. imports of travel goods of heading 4202 from mainland China have been sluggish in recent times, falling by 4.2 percent during January-May 2017 after dropping by 11.7 percent to US$6,476.9 million in 2016. By comparison, imports from Vietnam went up by 5.2 percent to US$1,059.3 million in 2016 and 4.5 percent during January-May 2017, imports from the Philippines increased by 16.3 percent to US$295.1 million in 2016 and 27.9 percent during January-May 2017, imports from India fell by 2.6 percent to US$232.1 million in 2016 but grew by 13.0 percent during January-May 2017, shipments from Indonesia advanced 1.1 percent to US$117.8 million in 2016 and 37.7 percent during January-May 2017, and imports from Thailand declined by 15.7 percent to US$88.8 million in 2016 only to grow by 6.4 percent during January-May 2017.
Previously, Cambodia was the only large U.S. supplier of travel goods that benefited from duty-free treatment under GSP. U.S. imports from that country rose 19.9 percent to US$59.9 million in 2016 and have soared after becoming duty free last year, with shipments up by 137.4 percent to US$48.8 million during January-May 2017. As a result, Cambodia is currently the eighth largest U.S. supplier of travel goods, up from 15th position during calendar year 2016. Fifteenth-ranked Burma (Myanmar) is also an up-and-coming least-developed country supplier of travel goods that is making strides in the U.S. market. U.S. imports of travel goods of heading 4202 from that country surged 146.9 percent to US$66.6 million in 2016 but were 1.9 percent lower at US$25.6 million during January-May 2017. Imports from sixteenth-ranked Bangladesh, meanwhile, are not currently eligible for duty-free treatment under GSP because that country was suspended from the programme in June 2013 due to its failure to meet statutory eligibility requirements related to worker rights (a worker rights review of Bangladesh is on-going).
U.S. import duties on travel goods of heading 4202 are substantial, averaging 12.2 percent during January-May 2017. Duties have been high or fairly high for most major and up-and-coming suppliers, including mainland China (13.7 percent average during January-May 2017), the Philippines (12.3 percent), India (7.7 percent), Indonesia (10.8 percent) and Thailand (10.6 percent). This means that the U.S. decision to provide duty-free treatment to travel goods from all GSP beneficiaries has given these and other eligible suppliers a considerable edge over mainland China.
It is worth noting that the GSP programme is currently slated to expire at the end of the year. While the U.S. Congress could renew the programme prior to its scheduled expiration, a lapse in benefits come 1 January 2018, cannot be discounted. Should the programme not be renewed this year, it would likely be renewed at some point thereafter and duty-free treatment would most likely be provided retroactively to eligible goods entered during the period in which the programme had lapsed. Retroactive benefits have normally been provided in past instances where GSP has lapsed.