What are the Most Recent Developments?
The United States and China have been embroiled in an ongoing trade dispute that has become increasingly tense throughout the summer months of 2018.
The dispute began in earnest when the Office of the United States Trade Representative (USTR) – after the conclusion of an extension investigation into Chinese trade practices – announced that it was considering the imposition of tariffs on list of 1,300 Chinese products, valued at $50 billion.
The announcement came months after a visit to Beijing by U.S. President Donald Trump and members of his administration at which time they had expressed their concerns around unfair trade practices being supported or not punished by Chinese authorities, including intellectual property theft. During the visit, Chinese authorities had offered reassurances that they would put stricter enforcement rules in place. However, after several months and an extensive investigation into Chinese trade practices, U.S. officials concluded little had changed and that China’s trade practices were causing undue harm to American industry.
On June 15, 2018, the Office of the United States Trade Representative (USTR) released a list of $34 billion worth of Chinese imported products with “industrially significant technology” that would be subject to a 25% import tariff under Section 301 of the Trade Act of 1974. Section 301 authorizes the President of the United States to take action against violations of international trade or treaties and/or that cause undue harm to the commerce of the United States. This first list, which took effect July 6, 2018, affected finished metal goods, machinery, electrical equipment and industrial goods. China responded immediately with tariffs in kind on U.S. exports to China, including exports critical to America’s agricultural sector, such as soybeans.
At that time, an additional list of $16 billion in Chinese imports was put forward for public consultation. Once this process was complete, the USTR released the final second list of tariffs on Chinese goods, which went into effect on August 23, 2018. The second list affected medical supplies, pharmaceuticals, agriculture and agricultural machinery and textiles, among others. Once again, China responded in kind and filed a complaint with the World Trade Organization.
The trade war further escalated on September 17, 2018 when the United States announced it would be imposing tariffs of 10% on a list of Chinese imports totaling $200 billion in value. These tariffs would take effect on September 24, 2018 and would increase to 25% in January 2019. However, in December 2018, Washington and Beijing announced a a truce in the trade dispute, prompting Washington to extend the date on which the 25% tariff would take effect to March 2, 2019. Shortly before the truce was set to expire, Washington announced it would further postpone the imposition of of the 25% tariff until an indefinite date. However, on May 5, 2019, Washington announced it would impose the 25% tariff effective May 10.
The products associated with List 3, though extensive, did exclude some products that had initially been considered as part of the trade action, including consumer products such as electronics, child car seats and bicycle helmets, as well as certain chemical products.
At the time the U.S. government announced List 3 it warned that if China further retaliated it would impose tariffs on an additional $300 billion in Chinese goods, which would effectively place tariffs on all Chinese imports into the United States. China did retaliate, imposing tariffs on an additional $60 billion in U.S. goods, including items such as consumer alcohol products and cooking oils.
The United States announced that it would be putting forward a fourth list of products, but would conduct a public consultation process in advance of imposing any tariffs. Submission for comment were due by June 17, 2019. However, on June 28, 2019, U.S. President Donald Trump announced that the U.S. and China would be resuming talks and a result he agreed to put a hold on any new tariffs. However, he did not put forward a timeline for a potential resolution with China or the potential imposition of List 4 tariffs.
On Aug. 1, 2019, President Trump announced via social media that the U.S. would be imposing a 10% tariff on items set out in List 4 effective Sept 1. The announcement came as a surprise to many, particularly since the President had only days earlier suggested additional trade action against China was unlikely before 2020.
The announcement was said to be a response to delayed action by China to fulfill promises of purchasing more U.S. agricultural goods. Industry groups quickly responded with concern, noting List 4– more than any of the previous lists – contained finished consumer goods and it would be near impossible to avoid downloading the additional cost of the tariffs onto consumers.
In the following days, China’s government allowed its currency to be devalued, prompting the U.S. Treasury to call out China as a currency manipulator and accusing it of attempting to unfairly compete in the global marketplace by devaluing its currency to allow China’s exports to be more competitive than American exports.
Why is this Happening?
The current U.S. administration has made trade policy a key tenet of its foreign policy objectives. President Trump has a strong focus on trade relations and believes strongly that the U.S. must work to create more balanced trade relationships so that bilateral trade between the U.S. and a trading partner does not result in excessive trade surpluses or deficits on either side.
The United States’ largest bilateral trade deficit, by far, is with China. In 2017, the U.S. maintained a trade deficit with China of $375 billion, which is three times larger than the deficit it held when China entered the World Trade Organization in 2002. As such, China and its trade practices have been a focal point for the USTR and Department of Commerce.
Since China’s inclusion into the WTO in 2001, U.S. firms across many industries, but particularly the technology sector, have complained that China was circumventing rules set out by the WTO and illegally misappropriating the intellectual property of U.S. firms for its own gain. These activities are often considered part of the “Made in China 2025” policy of the Chinese government, which sets out a road map to move Chinese manufacturing higher up on the value chain and to do so while being less dependent on high-value imports.
In October 2018, the Department of Commerce held a public hearing to solicit additional information from legal, industry and academic representatives. Feedback at the hearing, combined with information obtained by the Section 301 committee, resulted in a determination that practices carried out by Chinese authorities were unreasonable and/or discriminatory and causing undue harm to U.S. commerce and estimated the associated value to be $50 billion annually.
Subsequent to this determination, the USTR published a list of approximately 1,300 products codes associated with Chinese imports that would be subject to tariffs of 25% to offset the loss of economic activity suffered by the U.S. due to China’s unjust trade practices.
Response to Proposed Tariffs
Trade actions against China have been cause for concern among many industry groups – outside of the technology sector – for which China has become a critical manufacturing base and/or integral link in their international supply chains. These include apparel, consumer packaged goods, agriculture and several others. The application of the tariff would force businesses in these industries to dramatically increase the landed costs associated with their import practices, forcing them to raise their prices or become less competitive in the international market.
China’s retaliation has been equal cause for concern, particularly in the U.S. transportation and agricultural industries, which rely heavily on exports to China.
While views vary on the degree to which these trade barriers will impact the U.S. economy, many economists argue the imposition of tariffs by the U.S. and/or by China will only serve to destabilize the economy and cause speculation in financial markets.
Few believe tariffs will effect change with respect to China’s intellectual property practices and will only serve to drive up costs for businesses on both sides and disrupt the global supply chains on which American multinational businesses rely to remain competitive in international markets.
The initial list of $34 billion in tariffs will primarily affect finished metal goods, machinery, electrical equipment and industrial goods. The subsequent list – should it resemble the balance of the initial list of 1,300 products announced by the USTR – will affect medical supplies, pharmaceuticals, agriculture and agricultural machinery and textiles, among others.
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Livingston will continue to monitor the progress of discussions and will continue to provide updates. If you have any immediate questions, please contact 1-800-837-1063.