U.S. Threatens to Raise Tariffs to 25 Percent on Chinese Goods

U.S. Threatens to Raise Tariffs to 25 Percent on Chinese Goods

Executive Summary

  • U.S. President Donald Trump has threatened to raise existing tariffs from 10 to 25 percent on USD 200 billion (EUR 178.6 billion) worth of Chinese goods by May 10. President Trump added that he would “shortly” impose 25 percent tariffs on the rest of U.S. imports from China not yet targeted in the trade dispute. Recent reports confirmed that China reneged on pledged commitments made during the ongoing trade negotiations such as intellectual property protections and forced tech transfers. 
  • The proposed tariff hike would impact Chinese products such as consumer electronics (including internet modems and routers), chemicals, building materials, and furniture. Trump’s threat to impose additional 25 percent tariffs on remaining U.S. imports from China not covered in the trade dispute would include cell phones, computers, clothing, footwear, and other consumer products. 
  • The latest tariff threat comes at the heart of a heated dispute between Washington and Beijing over unfair trade practices for technology and intellectual property rights protection, following an U.S. Trade Representative (USTR) Section 301 investigation released in March 2018. Despite recent overtures aimed at improving the foreign investment environment and intellectual property protections, China could potentially retaliate with additional tariffs of their own or introduce new regulatory restrictions that would directly impact foreign companies and global supply chains. 
  • Given the unpredictability of the situation, supply chain professionals with interests in the U.S. and China should reassess their company’s exposure to these risks and contingency plans to mitigate the impact of the U.S.-China trade war. In addition, multinational companies will need to increase efforts to enhance visibility throughout their supply chain by mapping their supplier and shipping locations. Companies with key suppliers in both countries should also identify alternative suppliers and assess their viability ahead of time utilizing up-to-date intelligence. 

Background

On May 5, U.S. President Donald Trump threatened to raise existing tariffs on USD 200 billion (EUR 178.6 billion) worth of Chinese imports from 10 to 25 percent by May 10 as part of the ongoing U.S.-China trade negotiations. President Trump also vowed to “soon” target remaining Chinese imported goods with tariffs not currently covered in the trade dispute. The announcement comes on the heels of reports that China reneged on commitments to change laws to resolve core complaints identified by the U.S., which include intellectual property theft and forced technology transfers, during the trade negotiations. The tariff increase was originally set for March 1 but had been delayed on February 24, following trade talks that took place on February 21-24. 

Although U.S. Trade Representative Robert Lighthizer has clarified that the negotiation talks between the two nations will continue, the tariff hike is expected to come into effect on May 10, 12:01 a.m. Eastern Standard Time (EST). China’s Ministry of Foreign Affairs has announced that a delegation led by lead negotiator Liu He is still planning to attend the 11th round of the trade talks in Washington, D.C. on May 9 and 10 to try to salvage the negotiations.

If U.S. tariffs on Chinese goods are enacted, the risk of a breakdown in the ongoing trade negotiations between the two nations will heighten significantly. As a result, the prospect of prolonging a no-deal situation in the coming months is likely. Any further escalation in retaliatory tariffs from China on imported U.S. goods or additional regulatory hurdles could have a considerable impact on global supply chains as companies and suppliers scramble to prepare for the fallout from the trade tensions.

Tariff Wars

The latest threat centers around raising the 10 percent tariffs to 25 percent on USD 200 billion worth of Chinese goods that include chemicals, building materials, furniture, and some consumer electronics (e.g., computer modems and routers) that were imposed on September 24, 2018 in response to China’s retaliatory tariffs. President Trump previously made similar threats in September 2018, but later decided against it in February 2019 after citing “substantial progress” made in the trade negotiations. 

In addition to the tariff threats, the U.S. had also imposed 25 percent tariffs on around USD 50 billion (EUR 44.6 billion) worth of Chinese technology goods on July 6 and August 23, 2018, which included machinery, semiconductors, auto, aircraft parts, and intermediate electronics components as part of the Section 301 investigation into China’s intellectual property practices. Should matters escalate further, any additional tariffs on remaining Chinese imported goods would likely cover all 2019 imports such as mobile phones, computers, clothing, footwear, and other consumer products. 

China has responded with its own share of retaliatory tariffs. In response to an initial round of U.S. tariffs, China imposed 25 percent tariffs on USD 50 billion (EUR 44.7 billion) worth of U.S. imports primarily focusing on consumer goods such as soybeans, beef, pork seafood, vegetables, and ethanol between July and August 2018. An additional 5 to 10 percent tariffs on USD 60 billion (EUR 53.7 billion) worth of U.S. goods including chemicals and liquefied natural gas were imposed on September 24, 2018. A full timeline of the global trade war between 2018 and 2019 is shown in Figure 1. It remains unclear as to whether China will continue to suspend additional 25 percent tariffs on U.S. vehicle and auto part imports that have been delayed during the trade negotiations if the proposed U.S. tariff hikes take effect. 

Figure 1: Global Trade War Timeline 2018 – 2019, Source: Everstream Analytics 

U.S.-China Trade Tensions

The escalating tariff wars strike at the heart of broader trade tensions between Washington and Beijing on intellectual property rights and forced technology transfers as both countries compete to ramp up their respective high-tech capabilities in key strategic sectors, such as semiconductors, 5G telecommunications, auto, and artificial intelligence. 

Washington has expressed serious concerns regarding forced technology transfers on the basis that U.S. companies have been forced to hand over intellectual property and technical expertise in exchange for Chinese market access. The U.S. alleges that Beijing’s Made in China 2025 initiative – a strategic program aimed at fostering indigenous innovation – has created unfair advantages for Chinese companies in both domestic and global markets due to heavy government subsidies, as well as sourcing, administrative, and licensing restrictions for foreign companies. 

Some experts believe that the most recent escalation in the trade war is a sign that Beijing is willing to draw out the negotiations with the U.S. in a tit-for-tat approach, while President Trump wants trade negotiations to conclude as quickly as possible as he attempts to shore up working-class votes in the Rust Belt states ahead of the 2020 U.S. presidential election. 

Recommendations

Should the trade talks scheduled for later this week proceed as planned and provide some pathway for a compromise, the tariffs may not go into effect on May 10 after all. As uncertainty and risks intensify, supply chain professionals with interests in the U.S. and China should reassess their company’s exposure to these risks, revisit their contingency plans, and boost efforts to ease the pain of a U.S.-China trade war. One of the main lessons of the ongoing trade war is that President Trump’s threats to impose tariffs should be taken seriously, which means that shippers in China and their U.S. counterparts must create operational plans that respond to a variety of potential tariffs and regulatory scenarios. Supply chain professionals in industries such as automotive, aerospace, technology, and machinery should monitor the specifics of U.S. tariffs and potential retaliatory actions from China.

Additionally, in the face of increased trade tensions between Washington and Beijing, multinational companies must increase efforts to enhance visibility throughout their supply chain by mapping their supplier and shipping locations. Clear visualization of critical supplier and shipping locations would enable more accurate assessments of risks at sub-tier supplier levels. Moreover, it is important for companies to know exactly which of their suppliers could be potentially affected by tariffs or the corresponding retaliatory measures, both from a geographical and product flow perspective. Similarly, companies should monitor the financial health of key suppliers affected by the tariffs to detect any early indicators of potential insolvency issues.

Finally, companies with key suppliers in the U.S. and China should identify alternative suppliers and assess their viability ahead of time, utilizing up-to-date intelligence. Knowing where alternative suppliers are geographically located, and their possible exposure to similar trade war risks, enables companies to improve contingency measures in case of supply shortages. Some domestic U.S. suppliers may, for instance, consider relocating or shutting down their operations due to higher costs of importing raw materials or components from China, forcing large manufacturers to look for alternatives or shift production elsewhere and producing longer-term impacts resulting in manufacturing network restructuring. Companies with an interest in how these tariffs may impact global supply chains in the long-run are advised to monitor developments on Everstream Analytics. 

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