U.S. and China face last chance to avoid Jan. 1 tariff hikes, but don't get your hopes up

 ( Photo: Flickr )

(Photo: Flickr)

Upcoming summit could provide surprise deal, but acrimony and lack of consensus puts deal in doubt.

As the U.S. and China show no sign of settling differences related to trade, shippers are being warned to prepare for a longer and deeper trade war.

November will be a critical month in whether the two largest world economies can reach an agreement on trade issues. President Donald Trump and Chinese President Xi Jinping are set to meet at the G20 summit in Argentina by month’s end.

The talks will naturally focus on ways to end the U.S. tariffs on $250 billion in Chinese goods and the $110 billion in reciprocal import duties China imposed on U.S. goods.

Trump said over the weekend that “a deal will be made” at the summit to avoid escalating the tariffs on $200 billion in Chinese goods once January rolls in. If no deal is made, Trump says new import duties are “ready to go” on yet another $267 billion in Chinese goods.

This fourth tranche of import duties would likely hit a broader swathe of consumer goods such as apparel and personal electronics.

 Timeline of the U.S.-China Trade War (S ource: Census.gov )

Timeline of the U.S.-China Trade War (Source: Census.gov)

But some trade experts are less optimistic about a deal being struck, given recent U.S. views on China. In its latest report to Congress, the U.S.-China Economic and Security Review Commission says China shows no sign of ending practices including technology transfer, subsidies to local Chinese companies and restrictions on foreign ownership that provoked the tariffs in the first place.

“The Chinese government continues to resist—and in some cases reverse progress on—many promised reforms of China’s state-led economic model,” the Committee’s trade bulletin said.

National Retail Federation vice president Jonathan Gold says the new Congress does not appear ready to take on Trump’s trade strategy in time to avoid the increased tariffs. Likewise, the differing views on the trade dispute from members of the President’s Cabinet show there is little consensus on how to end the dispute.

While a surprise deal could be struck, “expect that you will see tariffs go up on January 1 and expect to see some more in the coming weeks,” Gold told attendees of an annual meeting of the Coalition of New England Companies for Trade.

The run-up to January 1 tariff deadline has seen shippers rush to bring goods into the U.S. Home Depot (NYSE: HD) Chief Executive Craig Menear said on the company’s third quarter conference call last week the home improvement retailer did pull some purchases forward in the quarter “to get ahead in terms of tariffs.”

But the pull forward from shippers means container volumes could drop at the start of 2019, Gold says. The Port of Los Angeles says the various tariff measures impact up to 1.6 million in twenty-foot equivalent (teu) containers coming through the port, about one-quarter of the total capacity.

“Consumer confidence is at an all-time high right now,” Gold said. “If (consumers) are going to a retail store and seeing prices increase, they are going to start buying less.”

 The U.S. trade deficit with China hit $375 billion last year ( Source: Census.gov )

The U.S. trade deficit with China hit $375 billion last year (Source: Census.gov)

Retailers and their suppliers are looking to mitigate the tariff impact on shoppers once 2019 starts. Daniel  Binder, vice president at Walmart (NYSE: WMT), says the nation’s largest retailer will “try and take out cost where we can” to lessen any price increases.

David Murphy, a partner at trade-focused legal firm GDLSK, says there are a variety of ways importers and shippers could offset the tariff impact.

Those include sharing the cost of tariffs between importers and shippers and removing third-party fees from the landed costs of Chinese goods.

Importers could also get waivers if Chinese-made components are assembled in and shipped from a third country to the U.S. or the third country’s components are just assembled in China.

But those waivers requires applying for a “substantial transformation test” from U.S. Customs, which is not an easy process, Murphy warned.

But NRF’s Gold says those moves could not practicably be done in time to avoid the incoming round of tariffs.

“I hope and I pray that (the U.S. and China) are successful in Argentina,” Gold said. “But considering how this administration is operating, I don’t think there will be a successful outcome.”