Beijing has sworn to institute countermeasures to combat a huge increase in tariffs, from 15 percent to 25 percent, that have been imposed by Washington on $200 billion worth of a wide range of Chinese goods. A set of high-level, last-minute, talks yesterday to postpone or prevent the tariffs failed.
“The US has raised the tariff on the US$200 billion to China’s exports to the United States from 10% to 25%. China deeply regrets that it will have to take necessary countermeasures. The eleventh round of China-US high-level economic and trade consultations is underway. It is hoped that the US and the Chinese side will work together and work together to resolve existing problems through cooperation and consultation,” reads a statement that was issued today (Friday, May 10) by the Chinese Ministry of Commerce.
A Ministry of Commerce spokesman had earlier stated, on May 9, that: “the position and attitude of the Chinese side are consistent and clear. We oppose the unilateral increase of tariffs, and there is no winner in the trade war. This is not in line with the interests of the Chinese side, does not conform to the interests of the US, and is not in line with global interests. It is hoped that the US side will go hand in hand with China, solve problems through dialogue rather than unilateral measures, and reach a mutually beneficial and win-win agreement on the basis of mutual respect and equal treatment.”
The spokesman also stated that China is “well-prepared, determined and capable of safeguarding its legitimate rights and interests”. However, although specifically asked by reporters, the spokesman did not state what counter-measures it could, or would, take.
Trade and the scale of the tariffs
Imposition of a 25 percent set of tariffs on U.S. trade with China would be significant. According to the Office of the U.S. Trade Representative, China is the largest goods trading partner of the U.S. The value of two-way goods trade between the two countries in 2018 stood at US$649.8 billion. Goods exports to China stood at US$120.3 billion and the value of goods imports from China stood at US$539.5 billion. The U.S. goods trade deficit with China was US$419.2 billion last year.
So a 25 percent tariffs on $200 billion worth of imports means that about goods accounting for about 37 percent of China’s goods exports to the U.S. are affected.
And a wide range of goods are affected. This includes, but is not limited to, freshwater and saltwater fish (edible and ornamental); seafood (frozen, processed, chilled, containerized); meat and offal (fresh, chilled, frozen, dried, salted or smoked); animal, vegetable and agricultural products of a wide range of types for use in farming, by industry, for processing or consumption; minerals such as chalk, granite, iron ores, sandstone and many others; oils, petrols, fuels, kerosenes and others; chemicals and gases of numerous types; metals; consumer and industrial products; and a generally wide range of goods.
Back in September last year, U.S. President Donald Trump directed the U.S. Trade Representative to impose duties of ten percent on Chinese products that had a total trade value of US$200 billion. Those duties came into effect a few days later. That same notice also set a further rate of increase to 25 percent, effective January 1, 2019. However, there were a series of postponements to that further increase. Jump forward in time to early March this year and President Trump directed that the increase to 25 percent would be suspended “until further notice”.
That notice was given about five days ago. Upon the direction of President Trump, the U.S. Trade Representative ordered that the increase to 25 percent, would take place with respect to goods either entered for consumption, or withdrawn from warehouse for consumption, on or after 12:01 a.m. eastern daylight time on May 10, 2019, and exported to the United States on or after May 10, 2019.
Allegations of forced technology transfer
The apparent root cause of the hike in tariffs is an attempt by Washington to pressure Beijing to stop engaging in alleged activities that may adversely affect U.S. economic interests.
President Trump issued a memorandum to the Trade Representative back in August 2017 alleging that China had “implemented laws, policies, and practices and has taken actions related to intellectual property, innovation, and technology that may encourage or require the transfer of American technology and intellectual property to enterprises in China or that may otherwise negatively affect American economic interests.”
This includes, but is not limited to, allegations of “opaque and discretionary administrative approval processes, joint venture requirements, foreign equity limitations procurements, and other mechanisms to regulate or intervene in U.S. companies’ operations in China, in order to require or pressure the transfer of technologies and intellectual property to Chinese companies.”
It is also alleged by Washington that U.S. companies face vague and unwritten rules, and local rules that differ from national rules that are applied in a selective manner “to pressure technology transfer”.
The memorandum instructed the Trade Representative to carry out an investigation under the Trade Act of 1974 to determine whether China’s actions were unreasonable or discriminatory burden on U.S. Commerce. Section 301(b) of the Trade Act of 1974 directs and empowers the Trade Representative to take all appropriate and feasible action to obtain the elimination of the act, policy or practice under investigation.
“Unreasonable accusations,” Beijing decries
Beijing denies that China engages in any practices that would pressure foreign companies to transfer technology. A spokesman for China’s Ministry of Commerce stated on May 9 that China has “repeatedly refuted these unreasonable accusations that lack factual basis”.
The spokesman added that China’s government encourages technical exchanges and cooperation in line with market principles and “has never forced technology transfer”. He further said that there are no legal requirement for foreign companies to transfer technology to Chinese partners and that a newly passed “Foreign Investment Law” prohibits bureaucratic bodies from using administrative means to force technology transfer.
Expert insight: is it all just a negotiating tactic
FreightWaves sought insight from customs expert Russell Wilkinson, the founder and CEO of World Customs Portal, which specializes in customs matters related to Chinese trade.
“It’s all a bit hard to tell what’s going on. Is it just posturing to eke out a better trade deal? I always suspected that it’s just a negotiating strategy… it’s a classic negotiating maneuver to secure a better long-term deal,” Wilkinson says to FreightWaves, pointing out that it is as easy to remove tariffs as it is to impose tariffs.
He also points out that the fact that tariffs have been increased might be a signal that negotiations are not going too well for the U.S. “You wouldn’t do something like this otherwise,” he says.
“But the key question is this: how much patience do the Chinese have? They could just walk away and retaliate. I suspect the economic outcome to the U.S. wouldn’t be too good. And not for the rest of the world either,” he says.
Next move: China
A key issue is what the Chinese can and will do. So far, they’re not saying. China could attempt to impose similar value tariffs on Chinese exports to the U.S. But the U.S. has a big trade deficit with China. That would tend to give the upper hand to Washington as Beijing has more to lose.
“When you have that massive trade imbalance, I’m not sure what can be done,” Wilkinson says.
And, he points out, there are many factors that complicate any analysis. Are the affected products in the U.S. generally available or not? Are there any exemptions for a given product?
One possible strategy that China could opt for is to impose tariffs of a much higher value on a much smaller range of products. “Especially in the areas of textiles, clothing and footwear – that’s massive,” Wilkinson says.
“No-one knows where it will all finish. It’s no good for anyone this tit-for-tat,” he concludes.