Trade War

Last week, the U.S. Trade Representative announced that they had established a process to request an extension to exclusion requests that had been granted late last year from the China 301 tariffs imposed on their first list.

List 1 consists of $34 billion in Chinese imports subject to a 25 percent tariff that have been in place since July 6, 2018. The first exclusions from this tariff were issued in a December 2018 notice, and are set to expire on December 28, 2019. Those exclusions from the tariff were only provided for a year. This new extension of the exclusions is again only for up to 12 months, and again with be evaluated again on a case-by-case basis.

This seems pretty straight-forward and was hoped for (nothing is expected these days in this current trade war). USTR will evaluate the possible extension of each exclusion on a case-by-case basis.

But what was not highlighted in the coverage of the new extension was that the focus of the evaluation will be whether, despite the first imposition of these additional duties in July 2018, the particular product remains available only from China. While one of the important questions asked in the exclusion request was whether the product was made in America or could be found anywhere else but China, it appears the USTR is looking more closely at after a year, those folks who were granted exclusions were making efforts to move out of China.. That seems a big signal, regardless of the current signs in Washington that a limited phase-one deal between China and America is coming in the near future, that the U.S. wants American companies to locate their supply chain outside of China if possible.

And what about that deal? Last week when everyone said the deal is in the bag, just trying to find a place to ink it, there was blowback from the White House. The President said he hasn’t agreed to lift or reduce any tariffs on Chinese goods, one day after a Chinese government spokesperson said the two sides were in agreement on that. “Well, they would like to have a rollback. I haven’t agreed to anything,” Trump told reporters on the White House lawn. “China would like to get somewhat of a rollback. Not a complete rollback because they know I won’t do it. “Trump also reiterated that discussions were continuing. “They want to make a deal. Frankly, they want to make a deal a lot more than I do,” he said. “I’m very happy right now. We’re taking in billions of dollars” in tariff payments.

China has made removing existing US tariffs a key point for reaching a phase one deal, so this is kind of a stumbling block. They want the tariffs called Section 301 list 4 A which went into effect on September 1, 2019 rolled back and the proposed tariffs on list 4B scheduled for December 15, 2019 eliminated.

This week on Tuesday, the President made a speech at the Economic Club of New York on trade, which many were hoping might bring news of the agreement and tariff reductions. Instead he threatened substantially more tariffs on China in case the first step of a broader agreement isn’t reached. “If we don’t make a deal, we’re going to substantially raise those tariffs,” he said. “They’re going to be raised very substantially. And that’s going to be true for other countries that mistreat us too.”

And on Wednesday, it was reported that China was now balking at committing to specific purchase amounts, resisting U.S. requests for tech-transfer curbs, and for enforcement mechanisms to what is being agreed to by the parties. To break this down, President Trump has said China has agreed to buy up to $50 billion in U.S. soybeans, pork and other agricultural products annually. But China has not yet agreed to put a numerical commitment in the text of a potential agreement, because they want to be able to stop the purchases if things go south again.

What is really likely to happen if they really do get a “phase-one” agreement with China? It is clear from the new emphasis on what your company has done during your exclusion to find product outside of China, that the President likes what his tariffs are doing to redirect supply chains away from China. And his statements make clear he also likes the revenue boost that import taxes are giving to a Treasury Department that’s facing a trillion dollar budget deficit. U.S. consumers and businesses paid a record $38 billion since the trade war began in February 2018 through September 2019, according to an analysis of federal data. While he may remove the threat of more levies on Dec. 15, he’s unlikely to roll back the existing ones without something big in return.

The bottom line is China and the United States are joined at the hip economically, each being the other’s biggest trading partner. But if the effort by the President is to not just achieve a new more balanced trade agreement between these countries, but to decouple the two economies, that will bring huge economic consequences for both economies. We are already seeing such disruption as the top issue for C-suites today, with a U.S. Chamber study analyzing earnings calls in the second quarter 2019 of 400 Fortune 500 company executives, finding manufacturing and industrial firms mentioning tariffs most frequently, with 64% of calls mentioning tariffs, followed by retailers (58%) and technology firms (43%). The calls focus on how to mitigate the harm to their company.  The problem is there is no end to these global trade wars in sight, so companies doing business need to consider such disruption as the new norm in global trade.

One final note, if you are thinking that you might be better off under the Democrats running for President, think again. All of them have said they too would take on China, they just don’t like the way he is conducting the trade war with them. And, notably, not one of them have committed to removing tariffs.

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