Tariffs – The Next Chapter: U.S.-China Trade War Reaches a Crossroads at G-20 Summit

All eyes will be on President Donald Trump and Chinese President Xi Jinping this week when the two leaders meet on the sidelines of the G-20 summit in Osaka, Japan. Both sides have indicated a willingness to re-engage on stalled negotiations to end the current trade war. The U.S. is considering delaying or reducing proposed new tariffs – covering $300 billion worth of Chinese goods – pending the outcome of the discussions.

Domestic Support Wavers

The potential imposition of new tariffs on Chinese imports has prompted resistance from some U.S. importers. On June 19, U.S. Trade Representative Robert Lighthizer received pointed questioning from some members of the Senate Finance Committee during a hearing on the administration’s trade policies. Lighthizer indicated the administration is playing the long game to correct trade imbalances that have persisted for decades, with short-term impacts being worth the sacrifice. The Office of the U.S. Trade Representative (USTR) has stated that if new tariffs are imposed on Chinese imports, an exclusion process would be put in place – similar to the first three lists of tariffs on Chinese imports

That may not be enough for some industries which rely heavily on imports from China. More than 660 U.S. companies signed an open letter to President Trump on June 14, requesting a resolution to the trade war and demanding that the administration drop the threat of additional tariffs. The letter warned that the new tariffs would amount to a tax on U.S. businesses and consumers. The USTR in public hearings last week heard dozens of public witnesses opposing the new tariffs, although there were also some speakers supporting them.

How Did We Get Here?

Since the earliest days of his 2016 campaign, President Trump expressed a desire to recalibrate the U.S.-China trading relationship to eliminate perceived imbalances. The administration has shown a preference for using tariffs as a tool to compel change with nearly all U.S. trading partners. That strategy has evolved over the past year to include tariffs under several different authorizing statutes:

• In January 2018, the U.S. imposed 30% import duties under Section 201 of the Trade Act of 1974 on imports of solar cells into the U.S., which applied equally to all countries but disproportionally affected China as a world leader in the manufacture of solar cells.
• In March 2018, the U.S. imposed tariffs of 10% and 25% under Section 232 of the Trade Expansion Act of 1962 on aluminum and steel, respectively, which applied equally to China and the rest of the world.
• China retaliated against the aluminum and steel tariffs by imposing tariffs on U.S. goods roughly equivalent to the value of Chinese goods affected ($2.4 billion).
• In July 2018, the U.S. imposed 25% tariffs on Chinese goods under Section 301 of the Trade Act in response to China’s alleged discriminatory trade practices, including misappropriation of U.S. intellectual property and alleged market distortion, with those tariffs applying to approximately $34 billion in Chinese goods.
• China responded in July 2018 by imposing 25% tariffs on 128 types of U.S.-made goods, with a dollar-for-dollar impact ($34 billion).
• In August 2018, both sides imposed a second round of 25% duties on each other’s goods, impacting approximately $16 billion of one another’s imports.
• In September 2018, the U.S. imposed duties of 10% on approximately $200 billion worth of Chinese goods, with the threat of the duty rate increasing to 25% in January 2019.
• China responded in September 2018 with tariffs on approximately $60 billion worth of U.S. goods.
• In May 2019, U.S. duties of 10% on Chinese goods increased to 25% after negotiations between both sides broke down, impacting nearly $200 billion of Chinese goods.
• In May, President Trump threatened 25% duties on a further $300 billion of Chinese imports, which would effectively levy a tariff of 25% on all imports into the U.S. from China.

Where Do We Go From Here?

The discussions between President Trump and President Xi this week are unlikely to be conclusive but could slow the new tariffs and commit both sides to further serious discussions. Even if a deal is struck, President Trump has indicated that some U.S. tariffs on Chinese goods may remain.

Notwithstanding a potential breakthrough this week, U.S. importers should recognize that a return to pre-tariff days is unlikely. U.S. companies should clearly evaluate their business models, take stock of the current financial impact of the tariffs on their bottom lines and determine how to adapt. Some U.S. businesses have already begun evaluating alternate supply chains outside of China. For others with less flexibility in the short- or long-term, the question becomes how to allocate the increase in costs among the manufacturer, importer and customer. For more on that, please stay tuned for the second part in this series.