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US, China Locked in High Stakes Trade War

11.19.18

 

US, China Locked in High Stakes Trade War

 SUMMARY: The US and China are currently locked in a growing trade war with no resolution in sight.  Already the US has imposed steep tariffs on $250 Billion of Chinese goods, with China authorizing tariffs on $110 Billion of US goods in retaliation. While the industrial and consumer goods sectors have been the primary focus, a wider range of industries are feeling the effects, and many US and Chinese companies are looking to new approaches to avoid disruption in their global supply chains.

 CURRENT SITUATION:

In addition to the Section 232 Tariffs on Steel and Aluminum imposed earlier this year, as well as the prolonged renegotiation of NAFTA, culminating in the announcement of a new agreement entitled USMCA at the end of September, President Trump has slowly—but far from quietly— been escalating political and economic tensions with China.  This escalation has primarily taken the form of a series of broad tariffs on Chinese goods accompanied by public condemnation as the President seeks to correct the lopsided trade deficit and pressure China to change unfair trade practices and protect US businesses against intellectual property theft.  Since Trump initiated his trade war at the beginning of 2018, the US has levied tariffs on $250B of Chinese goods, while China has responded with $110B of retaliatory measures.

PLAY-BY-PLAY & TARIFF SPECIFICS:

Trump’s tariffs began with an initial tariff authorization in Q1 of this year comprising a 20% duty on washing machines and a 30% duty on solar panels. This initial authorization was followed by three much larger waves of tariffs, which came into effect in Q3 of this year:

  • The first and second of these major waves placed a 25% duty on a collective $50B worth of goods and centered on “industrially significant technology.”  The two waves covered 1,102 separate items largely comprised of machinery and components spanning the manufacturing, robotics, transportation, construction, communications, energy, agriculture, food processing and medical device industries.

  • The third major wave of tariffs placed a 10% duty on an additional $200B worth of goods (with the rate set to increase to 25% by the end of the year).  This most recent wave included additional industrial goods such as chemicals, ores and precious stones, finished metal parts and vehicle parts, but further broadened the scope of duties to also include many consumer goods, such as foods and beverages, other plant and animal products, boats, textiles, and household as well as luxury goods, totaling an additional 5,745 items.  The three complete item lists can be found here, here and here, respectively.

  • Retaliatory duties from China went into effect on $50B of American goods in response to Trump’s first two waves of tariffs, and an additional $60B of goods in response to his third wave.  US imports covered under Chinese duties include a range of items at different rates: 25% duties on aluminum, airplanes, cars, pork and soybeans; 15% duties on fruit, nuts and steel pipe; 10% duties on meat, wheat, wine and chemicals; and 5% duties on smaller aircraft, textiles and computers.

CURRENT EFFECTS AND RELIEF STRATEGIES:

Though it is unclear how much further Trump will push the standoff, already the economies of both countries appear to be feeling the crunch.  Experts predict that the trade war may hit China harder than the US as China’s official manufacturing PMI fell in September as a result of its weakening exports while manufacturing sector unemployment appeared to be on the rise.  Already, the Chinese government has promised stimulus measures in response to slowing growth with both fiscal and monetary levers likely to play a role in attempts to offset the impact of the trade war. 

In the US, some of the greatest effects will be felt by automakers who are feeling pressure on their global supply chains from tariffs on both sides.  Many automakers are responding in the short run by pulling the Chinese-made models from the US market and seeking to source components from other countries outside the US and China.  Longer term solutions include relocating manufacturing to Southeast Asia or other low-cost regions to escape Trump’s duties.  But automakers are not alone.  A host of US industries are being impacted by these new trade barriers and many companies that rely on Chinese goods are finding different ways to work around the new obstacles in place. 

In addition to pursuing the obvious solutions such as relocating manufacturing footprints and shutting down unprofitable products, a growing number of American buyers and Chinese suppliers have turned to questionable tariff evasion methods in the face of ever-growing barriers.  Transshipment of goods through other countries such as Vietnam, Singapore, and Malaysia has become a common strategy used by the Chinese steel industry in recent years to avoid tariffs, and other industries have adopted a similar approach.  In addition, misclassification of goods under the Harmonized Tariff Schedule used by US Customs to assign tariff rates has grown more popular in recent months. Companies that wish to avoid duties can simply have suppliers reclassify goods under duty-free HTS codes in the hopes of avoiding inspection and taxation. The incidence of HTS misclassification lawsuits brought by US Customs has been steadily rising as new tariffs have come into effect, which speaks to the desperation of US companies as they pursue new strategies in the face of global supply chain disruption.

The effects of these tariff policies are also starting to be felt beyond the US and China.  Unsurprisingly, the ongoing trade war between the world’s first and second largest economies has also resulted in widespread effects on global confidence and economic growth.  Both the IMF and OECD have raised the alarm, cutting global growth forecasts for 2018 and predicting that the world economy could lose out on “close to one percent of GDP by 2019.”

 OUTLOOK FOR THE FUTURE:

Despite Trump’s announcement that Chinese leaders are willing to come to the negotiating table, a quick resolution does not appear close at hand. The President has said that China is “not ready yet” for a trade deal and has continued to threaten an additional tariff package on $276 B worth of goods. To justify his tariffs, Trump has relied on Section 301 of the Trade Act of 1974, which authorizes the President to unilaterally impose sanctions on trading partners pursuing unfair practices that are deemed to endanger US business interests.  On this basis, an acceptable resolution appears to be highly subjective and as long as Trump remains unsatisfied with Chinese moves to level the playing field and correct what he deems harmful and unfair policies, current tariffs will remain in place and additional tariffs and/or rate increases will remain a strong possibility for the foreseeable future. Thus, experts are anticipating the new norms will hold — large-scale supply chain disruptions and attendant higher prices for consumers in the US and China, alongside falling investor confidence and slower growth across the globe. In this new economic climate, flexibility is key and shrewd business leaders in the US and abroad must take notice.