Chinas’S Retaliatory Tariffs on U.S. Goods: A Sectoral Analysis

Chinas’S Retaliatory Tariffs on U.S. Goods: A Sectoral Analysis

Executive Summary

  • In response to the U.S. decision to raise tariffs to 25 percent for USD 200 billion (EUR 178.6 billion) of Chinese imports on May 10, China imposed retaliatory tariffs of 5 to 25 percent on 5,140 products imported from the U.S. worth USD 60 billion (EUR 53.3 billion) on May 13. The tariffs will come into effect from June 1. 
  • China’s retaliatory tariffs target product categories such as machinery and electrical equipment, semiconductor parts, chemicals, medical devices, and pharmaceutical products, as well as energy and liquefied natural gas (LNG) imports. Besides agricultural produce and food products, the majority of the tariffs which are relevant for manufacturing companies apply to machinery products (734), chemicals (564), electrical machinery (459) as well as iron and steel items (295), and products in the life sciences and healthcare sector (220).
  • Customers affected by the latest retaliatory tariffs are able to apply for a tariff exemption on China’s Ministry of Finance (MOF) website (http://gszx.mof.gov.cn). The MOF has established a process for applying for tariff exemptions on USD 60 billion (EUR 53.3 billion) worth of U.S. imported goods. The application period is set for September 2 to October 8. 
  • Companies are encouraged to conduct proper due diligence on their exposure to the China and U.S. markets, identify alternative suppliers if necessary, and develop contingency plans to mitigate the impact of the ongoing trade dispute. Organizations that are seriously contemplating reducing production or relocating their supply chains out of China to avoid the tariffs should take into consideration whether doing so would be more cost-intensive than absorbing the tariffs themselves. 

Background

On May 13, China announced that it would be imposing retaliatory tariffs on a revised list of USD 60 billion (EUR 53.3 billion) worth of 5,140 imported goods from the U.S effective from June 1. The move comes in direct response to the U.S. government’s decision to levy tariffs on USD 200 billion (EUR 178.6 billion) worth of Chinese goods on May 10 amid breakdowns in trade negotiations between Beijing and Washington. It also comes after an announcement on May 8 from the Ministry of Commerce (MOFCOM) after Beijing declared that it would take retaliatory measures against the U.S. if President Donald Trump raised tariffs from 10 to 25 percent. 

The latest retaliatory tariffs are mostly in line with the 25, 20, 10, and 5 percent tariff rates on the USD 60 billion (EUR 53.3 billion) of U.S. imports originally proposed by MOFCOM on August 3, 2018 barring minor revisions. The list consists of 25 percent tariffs on 2,493 items, 20 percent tariffs on 1,078 items, 10 percent tariffs on 974 items, and 5 percent tariffs on 595 items that focus on machinery and electrical equipment, semiconductor parts, chemicals, medical devices, and pharmaceutical products as well as energy and liquefied natural gas (LNG) imports. China’s revised list has not targeted products such as crude oil and large aircraft, which make up a significant amount of U.S. imports to China. 
In September 2018, the tariffs were, in practice, only levied at the 5-10 percent tariff rates after the U.S. agreed to place tariffs at a 10 percent rate on USD 200 billion worth (EUR 178.6 billion) of Chinese goods – with plans to eventually raise the rates to 25 percent from January 1, 2019. The U.S. tariff hike was delayed following a 90-day tariff ceasefire before Washington abruptly announced on May 10 that it would be raising tariffs to 25 percent after the latest breakdown in trade negotiations. 

Figure 01: Global Trade War Timeline 2018-2019

Sectoral Analysis

From June 1, China will raise tariffs of between 5-25 percent on a total of 5,140 products imported from the U.S. In September 2018, it had already imposed duties of 5-10 percent on 5,207 U.S. products worth USD 60 billion. The difference between the initial list of 5,207 and the  current list of 5,140 products essentially comes from the removal of 67 products targeting vehicles and auto parts previously listed at the 5 percent tariff rate.

Besides agricultural produce and food products, the majority of the tariffs which are relevant for manufacturing companies apply to machinery products (734), chemicals (564), electrical machinery (459) as well as iron and steel items (295), and products in the life sciences and healthcare sector (220). Other notable items include plastic (132), rubber (102), copper (71), and aluminum (51) products. The sectoral analysis focuses primarily on the product categories with the largest number of affected items namely machinery and electrical equipment, semiconductors, chemicals and items belonging to the life sciences and healthcare sector.

Figure 02: Number of U.S. imports subject to Chinese tariffs (by sector) 

Machinery and electrical equipment

Machinery and electrical machinery imports are among the sectors most heavily targeted by China with a combined total of 1,193 products subject to tariffs of 25 percent (562 items), 20 percent (306 items), 10 percent (181 items), and 5 percent (149 items). Notable products include commercial and industrial machinery (oil and gas, casting metal, packing and wrapping machinery), machinery and equipment (boilers and turbines, engines and generators, lifts and cranes), electric batteries (lithium ion, zinc, and nickel), and computers and telecommunications equipment (such as routers and wireless accessories).   

According to the U.S. Trade Representative (USTR), the top 2-digit HS code categories for U.S. exports to China in 2018 were machinery (USD 14 billion; EUR 12.5 billion) and electrical equipment (USD 13 billion; EUR 11.6 billion). At the state level, the retaliatory tariffs on industrial machinery may most heavily impact California (USD 1.6 billion; EUR 1.4 billion), Texas (USD 1.1 billion; EUR 982.7 billion), Oregon (USD 591 million; EUR 528 million), and Massachusetts (USD 397 million; EUR 354.6 million) based on data compiled by the U.S.-China Business Council (USCBC). It will also likely impact U.S. electrical equipment and components exports from Massachusetts (USD 218 million; EUR 194.8 million), Connecticut (USD 40 million; EUR 35.7 million), as well as agricultural and construction machinery exports from Iowa (USD 112 million; EUR 100 million).

The latest round of Chinese tariffs target higher-value U.S. machinery imports such as machines and mechanical appliances (USD 690.8 million; EUR 617.7), optical media (USD 645 million; EUR 576.7 million), and engines (USD 376.3 million; EUR 336.4 million).[iv] While much of the attention has been placed on high-tech goods, the tariffs will likely accelerate China’s foothold as a dominant producer rather than an importer of medium-level technology such as heavy equipment, electrical machinery, and construction machinery. The shift by Chinese heavy manufacturing companies – most notably Sany Group – into more sophisticated capital goods has seen China increase its global market share for medium hi-tech exports over recent years, with a stronger emphasis on emerging markets across Asia and Latin America amid the ongoing trade war. Among the main U.S. market players in the machinery sector that could be adversely affected is Caterpillar, which receives around 10 to 15 percent of its construction industry sales in China. 

Semiconductors

Some semiconductor products are also subject to tariffs at the 20 percent rate which include semiconductor devices, semiconductor parts (such as copper, particle accelerators, insulated parts, and cables), and electrical conductors. 

The new retaliatory tariffs on U.S. products will likely impact the Chinese semiconductor devices and integrated circuits industry in several ways. The tariffs are in line with Beijing’s strategic efforts to reduce reliance on U.S. technology and accelerate ‘self-sufficiency’ within its semiconductor sector as it looks to build up globally competitive domestic firms as part of its Made in China 2025 plan. Although China has pledged over USD 118 billion (EUR 106 billion) over five years to shore up its homegrown semiconductor industry, Chinese companies are still largely manufacturing low-and-mid range integrated circuits (ICs) and remain well behind higher-end ICs produced by leading global technology firms.

Nevertheless, U.S.-based semiconductor suppliers will likely see higher costs as a large number of consumer products are sent for manufacturing to China where ICs are assembled, tested, and packaged before being imported back into the U.S. Given that a many U.S. semiconductor suppliers have a relatively high ‘ship-to’ revenue exposure to China, the Chinese tariffs will add additional pressure on U.S. companies to pay duties on their own products – including some of which that are initially built in the U.S. 

Chemicals

China will target USD 8.8 billion (EUR 7.88 billion) worth of US chemical imports from June 1, with most of these chemicals being subject to 25 percent tariffs, up from 10 percent currently. This will likely impact U.S. chemical companies for two reasons: first, China represented the 3rd largest export market for U.S.-based chemical makers in 2018; and second, chemical exports targeted by Chinese tariffs of 25 percent in September 2018, such as high density and low density polyethylene, have fallen by around 60 percent. 

From June 1, China is set to impose a higher tariff rate on a wide range of U.S. chemical imports, many of which are building blocks and can be converted into intermediates and polymers needed to produce final consumer or industrial products. US exports to China which are most exposed to the 25 percent tariffs are ethylbenzene and paraxylene (PX), both of which are widely used as precursors to manufacture other chemicals for applications in the home appliance, packaging, automotive, and construction industries. Top players in the paraxylene market which may be impacted by the trade restrictions, depending on their exposure to the Chinese market, include Chevron Phillips Chemical and Exxon Mobil, whereas LyondellBasell Industries and Chevron Phillips Chemical are key players in the ethylbenzene market. Other notable chemicals affected include acrylonitrile-butadiene-styrene (ABS), a common thermoplastic polymer typically used for injection molding applications in the automotive, home appliances, and consumer electronics products. Among major global players in this market, Minnesota-based RTP Company may be particularly at risk from the higher tariffs.  

Pharmaceutical products and medical devices

Nearly 100 medical items, including drugs and medical instruments, will face tariffs of between 5 and 25 percent as of June 1. Most of the pharmaceutical products on the list are intermediates (such as active pharmaceutical ingredients), like insulin for diabetes treatment and leukotriene for asthma treatment, rather than finished drugs, according to the Tariff Policy Committee of the State Council. The U.S. currently has a 10-15 percent market share for insulin exports to China, with major U.S. players including Merck & Co., Pfizer Inc., Bristol-Myers Squibb Company, and Eli Lilly. Depending on their own exposure to the Chinese market, these companies may be affected by the higher 25 percent tariffs as substitutes seem to be available outside of the U.S. 

Among high-end medical equipment subject to 5 percent tariff increases are gamma-ray radiation instruments for cancer treatment as well as ultrasound and Magnetic Resonance Imaging (MRI) machines and their components. Major U.S. players likely to be affected by the tariffs include Mirion Technologies, Fonar Corp, and Bruker Corp. According to an analysis by the Chinese Red Cross, some products such as those for cancer treatment have limited to no local substitutes, thus Chinese importers are likely to face higher prices for such medical instruments. 

Recommendations

The rapid deterioration in U.S.-China trade relations has meant that American and foreign companies will need to act proactively to identify potential disruptions to their supply chain operations leading up to and beyond the June 1 deadline. The recommendations below focus on how supply chain professionals can mitigate the impact of the retaliatory tariffs and other non-tariff barriers. 

Applying for tariff exemptions

China’s MOF has established a process for applying for tariff exemptions on USD 60 billion (EUR 53.3 billion) worth of U.S. imported goods. The application period is set for September 2 to October 8. Customers affected by the tariffs are able to apply for tariff exemptions on the MOF website (http://gszx.mof.gov.cn). The relevant importing companies should apply to customs according to regulations within six months of the release of an exemption list. To qualify, companies must demonstrate that:

  1. It would be difficult to find a good substitute or alternative sourcing; 
  2. The tariffs will cause serious financial damage to the applicant; and 
  3. The tariffs will have negative structural effects on China’s relevant industries (including industrial development, technological process, employment, and the environment). 

Successful applicants will be exempted from the tariffs for a year with the possibility of getting tax reductions for any tariffs already paid. Chinese customs authorities will also refund ad valorem tariffs already collected on products that have the conditions necessary for refunding tariffs. The tariff exemption system represents one of the first times that China has implemented such a scheme for providing companies with a duty refund.  

Anticipating regulatory and market restrictions


Although China has made clear that it does not want to impact its domestic business environment, Beijing would only have about USD 10 billion (EUR 8.93 billion) in U.S. imports left to place tariffs on and may instead resort to retaliating through more qualitative measures. In addition to tariffs, supply chain professionals should therefore prepare for greater regulatory scrutiny, customs and licensing delays, and other non-tariff barriers as a result of the fallout from the trade tensions. 

  • Delays for customs clearance and required licenses: Companies should be prepared for potential delays for customs clearance of U.S. products which could come in the form of administrative or paperwork issues, longer inspection periods, or product quality and safety assessments. Local authorities also retain the right to grant, renew, or withhold licenses, which can directly impact general business operations and the import and exporting of goods. Over recent years, China has often resorted to customs delays or clearance restrictions in retaliation against political or economic disputes with foreign countries such as bans on rare earth exports to Japan, Philippine banana importsKorean cosmetics importsNorwegian salmon importsAustralian coal imports, and Canadian canola and porkimports. To mitigate these threats, customers are encouraged to enhance their supply chain visibility by mapping critical suppliers and their shipping locations in the event that customs delays or licensing barriers arise. 
  • Increased regulatory scrutiny: Companies will have to contend with greater regulatory scrutiny, which can range from more frequent environmental and industrial safety inspections to security audit reviews and product quality assessments. For chemical and energy companies, more frequent (and at times impromptu) environmental and industrial safety inspections could lead to temporary production halts, raw material shortages, or even forced relocation of suppliers. For technology firms, companies are likely to face increased pressure to adopt ‘secure and controllable’ technology – a term used to refer to substituting foreign information technology with domestic alternatives – as part of China’s Cybersecurity Law. This comes as part of Beijing’s broader push to bolster indigenous innovation policies and reduce reliance on U.S. technology in Chinese supply chains over the long term for products such as routers, servers, switches, and logic controllers. Article 14 of the Foreign Investment Law also stipulates that China can reciprocate against “discrimination” facing Chinese investment in overseas markets, making U.S companies susceptible given ongoing developments.
  • Consumer boycotts: Over recent years, political tensions have often been reflected in Chinese consumer sentiments and have led to unrest impacting foreign companies operating in China. This includes protests against Japanese businesses during the Senkaku Islands-Diaoyu Islands dispute in 2012 that impacted sales of Nissan and Toyota vehicles in China. Another highly-publicized dispute in 2017 with South Korea over its decision to deploy the Terminal High Altitude Area Defence (THAAD) led to a Chinese boycott of Korean consumer goods in electronics (Samsung), auto (Hyundai and Kia), and cosmetics (AmorePacific). Supply chain professionals will need to prepare for similar manoeuvers that can be deployed against U.S. companies and products with English and Chinese media sources already reporting on restrictions facing U.S. agricultural and energy products and reducing Boeing orders. For instance, China’s decision to cancel an order of 3,247 metric tonnes of U.S. pork – the largest cancellation in more than a year – came only one week after the U.S. decision to raise tariffs. 

Conducting due diligence and reducing exposure

Companies are strongly advised to conduct proper due diligence on exposure to the China and U.S. markets, identify alternative suppliers if necessary, and develop contingency plans to mitigate the impact of the ongoing trade dispute. For companies affected by the tariffs, it is imperative to understand how exactly their suppliers may be impacted from a geographical, product flow, and financial status standpoint. If companies need to identify alternative suppliers, supply chain professionals should be aware of where these suppliers are located and make the contingency measures necessary to avoid taking on higher production costs brought on by the tariffs. 

Companies seriously contemplating reducing production or relocating their supply chain networks outside of China to avoid the tariffs should be mindful that the logistics infrastructure in alternative markets such as Southeast Asia may not necessarily be more developed than China when it comes to roads, rail lines, and port congestions. Other companies have cited significant logistical costs and lack of manufacturing networks as reasons for not shifting production out of China. For example, Taiwan-based Quanta Computer, the largest laptop maker in the world, stated that it would not be moving production or relocating out of China as it could prove just as expensive as absorbing the costs of the tariffs themselves.

Outlook

The contentious nature of the ongoing U.S.-China trade negotiations suggests that companies and supply chain professionals should be making contingency plans to prepare for the long-term effects of the trade war as it appears to have escalated even further. Media reports suggest that the latest negotiations broke down after an original 150-page document was reduced to 105 pages, after Beijing failed agree on the draft text which reportedly covers intellectual property, forced technology transfers, non-tariff barriers, agriculture, services, purchases, and enforcement. 

The outcome of an upcoming hearing on June 17 from the Office of the U.S. Trade Representative (USTR) on its plans to impose a 25 percent tariff on the remaining USD 300 billion (EUR 267.7 billion) of Chinese imports not subject to tariffs will have a major effect on whether Beijing will take further retaliatory measures against U.S. and foreign firms operating in China. Chinese media reports as of May 29 have heavily implied that Beijing will likely take retaliatory measures by restricting exports of rare earth minerals to the U.S., which consist of 17 chemical elements that are considered crucial to the U.S. technology industry and used in high-tech consumer products and electric car motors, following a highly-publicized visit by President Xi Jinping on May 20 to a rare earth producer in Ganzhou, Jiangxi.

Customers with an interest in how China’s retaliatory tariffs will impact global supply chains are advised to continue monitoring developments on Everstream Analytics.  

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