US-China Trade War Tariffs

On Sunday, President Trump tweeted a surprising announcement that he would order tariffs be increased from 10% to %25 on $200 billion worth of Chinese goods beginning at 12:01 a.m. tomorrow (Friday). Note though that this tariff increase will not apply to exports that left Chinese ports before May 10. This unusual delay appears to have been created to give China a couple of weeks to agree to a deal.

President Trump has also threatened to impose 25% tariffs on all remaining Chinese imports (another $325 billion or so). The United States Trade Representative (“USTR”) then issued a notice confirming the increase in tariffs from 10% to 25% will take effect this Friday, May 10.  Tomorrow. This sudden increase in tariffs on goods coming into the United States from China and the threat of additional tariffs has come as a surprise to many, especially to those who were expecting a US-China trade deal to be finalized this week.

First a quick review on how we got to this point of the US-China trade war. In August 2017, President Trump initiated an investigation to determine whether certain acts, policies and practices of the Chinese government related to intellectual property and technology transfer were unreasonable and discriminatory and causing a burden on U.S. commerce. After holding a hearing and reviewing thousands of submitted comments, the office of the U.S. Trade Representative (USTR) concluded that China’s IP practices were imposing a $50 billion burden on the US economy.

President Trump then started by ordering 25% tariffs on $50 billion worth of Chinese goods in July and August 2018. After China countered by imposing 25% tariffs on $50 billion of US imports into China, the US then imposed 10% tariffs on another $200 billion of Chinese goods in September 2018.

The United States’ 10% tariffs on incoming products from China were supposed to increase to 25% effective January 1, 2019, but the USTR postponed that deadline because of the progress being made in negotiations with China. On March 5, 2019, USTR postponed the planned increase from 10% to 25% “until further notice.” Many read this latest indefinite postponement as indicating a deal would be hammered out between the U.S. and China to end the US-China tariff wars. Until Sunday, comments from USTR Robert Lighthizer and Treasury Secretary Steven Mnuchin and even President Trump himself indicated significant progress was being made and to expect a good deal soon.

But then, kablooey!

Whatever progress had been made in the US-China negotiations appears to have been completely undone. According to the Trump Administration, this sudden reversal was triggered by China back-tracking on prior commitments and trying to renegotiate previously agreed to conditions. On Friday, the Chinese negotiating team submitted comments to the 150 page draft agreement that struck out many of the United States’ core demands.

What next?

President Trump’s tweet is a bit confusing because he is still saying the “Trade Deal with China continues” even though he is imposing additional tariffs that would appear to make it more difficult to reach just such a deal. Initial reports indicated that the Chinese considered canceling the planned meetings in DC after seeing Trump’s tweets, so it is at least somewhat encouraging that the Chinese delegation is still planning to come to Washington DC later this week to continue negotiations.

But it is still unclear how China will modify its negotiation position, if at all, in reaction to President Trump’s additional tariffs tweet. Maybe the additional tariffs will cause China to concede on all key US demands. Or perhaps China will dig in and not give in on any of the key U.S. demands.  Maybe China will find other ways to retaliate against US interests, such as initiating actions under Chinese laws (e.g., antimonopoly, labor, customs, corporate, etc.) to target U.S. interests in China or — potentially even worse — by doing whatever it can to make life difficult for American companies in China. Or maybe (hopefully) both sides will concede enough for the negotiations to get back on track so as to eventually achieve resolution.

The key issues of the U.S.-China trade dispute are still pretty much the same as they have been from the very beginning. The U.S. wants China to change its intellectual property practices and policies that violate international norms. The U.S. believes its unilateral imposition of tariffs on Chinese imports is the appropriate tool to force that change in China’s IP practices. So, the US will demand that any deal to settle the US-China trade dispute have snap-back provisions that will allow the U.S. to re-impose tariffs if it determines China has not lived up to its end of the bargain. These are all very difficult asks from the U.S. that China has a long track record of resisting and rejecting.

In the meantime, the $200 billion of Chinese goods will definitely see an increase in tariffs from 10% to 25% starting this Friday May 10, though it is unclear how long these increased tariffs will stay in place. It is also unclear if and when the 25% tariffs will be imposed on the remaining $325 billion of Chinese imports, as President Trump has threatened. Presumably, the tariffs will remain in place until the US decides China has given up enough to reach a satisfactory deal, however the Trump Administration defines that. Perhaps the ultimate deadline for a deal to be reached is the timing of the next election cycle, as President Trump would like to campaign with a US-China trade deal among his list of accomplishments.

Despite President Trump’s prior claims that trade wars are “easy” to win, the US-China trade dispute is very complicated and unlikely to be easily or clearly resolved. Such a “deal” may still ultimately be reached but it seems unlikely U.S. tariffs will lead to any real changes to Chinese IP practices. In the meantime, US importers of China products will pay the China tariffs and pass some or all of that downstream US manufacturers, distributors, and consumers.