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American ShipperNewsTrade

Latest US-China tariff deal does not address ‘structural issues’

U.S.-China Business Council executive says the relationship between the two countries has deteriorated and a course correction seems unlikely.

The announcement by President Donald Trump of a postponement in further tariff increases on imports from China as well as a deal to sell $40 billion to $50 billion of U.S. agriculture products to China was described by Matthew Margulies, vice president of China operations for the U.S.-China Business Council, as a “skinny-mini” deal, but one that could “arrest some of the frictions in the U.S.-China relationship hopefully by mid-November.”

“If the question is ‘deal or no deal,’ I think the answer to both is yes,” said Margulies, speaking at the Western Cargo Conference (WESCCON) of the Pacific Coast Council (PCC) in Rancho Mirage, California, on Oct. 12. The council is made up of five organizations that represent freight forwarders and customs house brokers on the West Coast.

“Yes, we have a partial deal that is going to delay or remove a tariff rate increase for some imports. But yes, there is also no deal, because essentially the key elements that sparked the trade war amd the structural issues in China’s economy really have not been addressed at all,” he said. “Long term, the tensions still persist, the tariffs are still in place.” These include tariffs on a new group of products that are scheduled to go into effect on Dec. 15.

Trump announced Oct. 11 the U.S. will keep the 25% tariff on Chinese products imported into the U.S. on lists 1, 2, and 3 instead of raising the rate to 30% on Oct. 15. The value of those products is estimated to be about $250 million.

The U.S. is also keeping in place a 15% tariff that went into effect on Sept. 1 on the Chinese imports on list 4A. Margulies estimated those imports had a value of about $120 billion.

Trump also said China would purchase $40 billion to $50 billion in U.S. agricultural products.

As to the proposed 15% tariff on the items on list 4B due to go into effect on Dec. 15 (like those on list 4A, these include many consumer goods), the Trump administration held out the possibility that they might not go into effect if a trade deal with the Chinese is reached. Margulies estimates they amount to about $160 billion (Reuters gives similar, though slightly different estimates) and are unlikely to change unless a dramatic change in negotiations occurs before then.

China has imposed tariffs on about $110 billion of U.S. exports to China, said Margulies, whose organization represents the interest of U.S. businesses in both China and Washington, D.C.

Tariffs as well as “political winds and political decisions coming from Washington” have resulted in U.S. firms being seen by Chinese companies as less reliable suppliers, he said, particularly in high-tech industries.

Instead, Chinese businesses are looking to companies in Europe, Japan, South Korea and other locations, taking away market share from U.S. companies.

“Once you lose that market share, it is really difficult to regain it,” he said. He cited an unnamed Midwest agricultural company, saying it took 10 years for it to develop a long-term relationship with a Chinese buyer, which was then lost in two years. Some companies, he said, would rather remain in China and absorb the costs of tariffs than give up the hard-won business they have in China.

The U.S.-China Business Council has about 220 members, all of which are U.S. companies and view China as a “priority market;” 80% say U.S.-China tensions are having a tangible impact on their operations, but few plan to leave China.

Margulies said a survey of its members found 90% plan to remain in China, but added some businesses may delay expansion or new investment. He said most of the council’s members are in China to sell in China, not to use the country as an export base to sell back into the U.S.

China is no longer the low-cost market for manufacturers, he said, and the trade war between the U.S. and China has, if anything, just accelerated decisions by some companies to shift manufacturing to other countries. He said Dell and other manufacturers of consumer electronics are among companies that have announced plans to move some manufacturing out of China to other countries.

A July article in Nikkei Asian Review said “more than 50 global companies, including Apple and Nintendo, have announced or are considering plans to move production out of China.”

Still, if a company is going to leave China, Margulies says they “need quite a few stars to align” in order to have adequate manufacturing capacity, access to raw materials, infrastructure to move components and finished goods around and skilled labor. As a result, relocating manufacturing is usually not something that happens overnight, but is a long-term, expensive operation that takes a number of years.

While tariffs may result in a shift in some manufacturing to Mexico, Vietnam, Bangladesh or other Asian countries, he said they have not resulted in jobs moving back to the United States.

“We are probably going to continue to live in a world where we have to expect some degree of tariffs on imports from China for the foreseeable future,” he said. Regardless of who wins the election next November, “the U.S.-China relationship has really deteriorated from its high three to five years ago and I don’t really see a course correction even if we were to achieve some semblance of a strong trade deal.”

He said there is a lack of trust by both countries and that many Chinese believe the U.S. is trying to contain it politically and militarily.

Margulies said the Trump administration’s attitude toward China may also be affected by the president’s reelection campaign. He said a campaign adviser told him that “being tough on China polls six times higher than the president’s border agenda and immigration policy agenda.”

“If there is one issue that unifies Democrats and Republicans, it’s taking a strong stance on China,” he said, and any deal that U.S. enters will be scrutinized by both parties.

Margulies, who previously worked for the U.S. Chamber of Commerce, is scheduled to relocate from Washington to Beijing in December.

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Chris Dupin

Chris Dupin has written about trade and transportation and other business subjects for a variety of publications before joining American Shipper and Freightwaves.

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