U.S. Threatens Further Tariffs on Chinese Imports:
An Analysis of Sectors Potentially Impacted

U.S. Threatens Further Tariffs on Chinese Imports:
An Analysis of Sectors Potentially Impacted

Executive Summary

  • On May 10, the Office of the U.S. Trade Representative (USTR) issued a notice proposing additional ad valorem tariffs of up to 25 percent on USD 300 billion (EUR 266.6 billion) worth of goods imported from China, commonly referred to as “List 4” in relation to Section 301 of the Trade Act of 1974. Although the effective date has yet to be announced, this new list of tariffs is set to affect almost all Chinese-made goods currently not impacted.
  • The List 4 tariffs target over 3,800 subheadings of the Harmonized Tariff Schedule of the U.S. (HTSUS) that cover all remaining products not already subject to Section 301 tariffs. Items subject to the new proposed tariffs include iron and steel (218), machinery (152), electrical machinery (151), organic chemicals (96), aluminum (42), base metals (41), and plastics (35) products. As with previous lists, List 4 notably leaves out rare earth minerals and Chinese-made pharmaceutical components. 
  • While China’s reliance on American higher-end technology has been well publicized, less attention has been paid to the United States’ dependence on Chinese imports across a variety of sectors such as chemicals, metals, and machinery. In some cases, many products targeted by List 4 – particularly metals and intermediate goods (parts and components) – are either completely or almost exclusively imported from China, leaving U.S. importers with major challenges in identifying alternative sourcing.
  • On June 29, the U.S. and China confirmed that both countries have agreed to restart trade negotiations following an official announcement made at a meeting between U.S. President Donald Trump and Chinese President Xi Jinping at the G20 Summit. The U.S. agreed to delay issuing tariffs on USD 300 billion (EUR 264 billion) worth of Chinese imports in exchange for China making unspecified new purchases of U.S. agricultural products. List 4 tariffs are currently under a formal USTR review process and can be implemented any time after July 2.
  • To combat the volatility and restrictions posed by these tariffs, supply chain professionals in the U.S. must be nimble in identifying risks and develop plans to mitigate them. Sourcing teams must focus their efforts on identifying alternative suppliers of products and ingredients. In the short-term, this process involves knowing the risk profile of suppliers in China through identifying, rating, and prioritizing alternative suppliers; and undertaking scenario planning exercises. In the medium-term, it is important for companies to develop regional supply chains expertise to find and manage quality component suppliers. 

Background

The List 4 tariffs consist of 3,805 full and partial HTSUS subheadings that cover all remaining products not already subject to additional Section 301 tariffs. The latest proposed list continues to include raw materials, intermediate goods, and finished products for the iron and steel, machinery, electrical machinery, chemicals, aluminum, and plastics sector, as well as higher-end consumer electronics such as cellphones and laptop computers. Products previously omitted from List 2 consist of containers, alginic acid, splitting, slicing and paring machines, floating docks and microtomes, while transporter cranes that were previously left off List 3 are now included on the latest List 4 tariffs. 

The tariff proposal followed a breakdown in U.S.-China trade negotiations and U.S. President Donald Trump’s decision to raise existing tariffs from 10 to 25 percent on USD 200 billion (EUR 178.6 billion) worth of Chinese goods that came into effect on May 10. On May 13, China responded that it would be imposing its own retaliatory tariffs at 5, 10, 20, and 25 percent rates on a revised list of USD 60 billion (EUR 53.3 billion) worth of products from the U.S. effective from June 1 (see Figure 1). 

Figure 1: U.S.-China trade war timeline (2018-Present). Source: Everstream Analytics

During that collapse of the trade negotiations, Beijing issued its three demands which include the removal of tariffs imposed in the trade war, the scale of goods purchased from the U.S. that China will make to reduce the trade imbalance between the two, and the need for a “balanced” text for any trade deal. Washington countered that it was looking for an enforceable trade deal whereby it can improve intellectual property protection, address forced technology transfers and industrial subsidies, and remove other non-tariff barriers that are ailing U.S. businesses in China.

In the U.S., List 4 tariffs have been subject to lengthy public hearing testimonies held by the USTR from June 17-25, whereby written submissions were considered. Final comments are due seven days after the end of the hearing on June 25, which marks a notably shorter public comment period than previous rounds. The latest round of tariffs on List 4 products have received as little as 40 days of public scrutiny as opposed to 71 days that were provided for the List 3 tariffs on USD 200 billion (EUR 177 billion) worth of Chinese imports. The current timeline means that President Trump will not be able to trigger a new wave of tariffs until after July 2 when a seven-day final rebuttal comment period ends. 

After weeks of speculation, Washington and Beijing confirmed that both countries have agreed to restart trade negotiations following an official announcement made at a meeting between U.S. President Donald Trump and Chinese President Xi Jinping at the G20 Summit on June 28. The U.S. has agreed to delay issuing tariffs on the proposed List 4 for Chinese imports in exchange for China making unspecified new purchases of U.S. agricultural products.

This report takes a look at the potential impact that the List 4 tariffs pose to major manufacturing industries – such as machinery, metals, chemicals, and transport – if it were to be enacted. The analysis focuses particularly on major raw materials, intermediate parts, and consumer goods with U.S. import value of over USD 20 million (EUR 17.7 million) and for which China is a major exporter. In this report, a number of industries (such as pharmaceuticals and rare earth minerals) that have been left out the List 4 tariffs have been identified, and a set of recommendations for supply chain professionals to navigate through the trade uncertainty has been outlined.

Industry Impact

List 4 covers nearly every consumer product category left untouched by the previous round of tariffs on USD 200 billion (EUR 178.6 billion) worth of Chinese imports. With the exception of retail products (including apparel, clothing, and footwear), the majority of the tariffs that are relevant to manufacturing companies apply to metals (437 products items), machinery (303 products items), chemicals (133 products items), opt., labora., medical (53 products items), transports (16 products items), rubber (12 products items), and minerals fuels (11 products items). As with the previous rounds of tariffs, List 4 notably excludes tariffs on rare earth minerals and Chinese-made pharmaceuticals that are largely considered integral for the production of higher-end consumer products in the technology, drug, and life sciences sectors. 

Figure 2: Chinese imports subject to U.S. tariffs under List 4 by sector.  Source: ITC Trade Map, U.S. Trade Representative

Metals

Metals are a major targeted industry in List 3 with 437 metal products that are used in the automotive, manufacturing, and electronics sectors, with Sections 72 (iron and steel) and 76 (aluminum and articles thereof) being the most heavily impacted. Overall, List 4 features a list of metal products with a total import value of USD 1,894 million (EUR 1,675 million) in 2018 distributed as follows: USD 204 million (EUR 179 million) in iron and steel; USD 500 million (EUR 439 million) in articles of iron or steel; USD 425 million (EUR 373 million) in aluminum and articles of aluminum; USD 700 million (EUR 614 million) in tools of base materials; and USD 66 million (EUR 58 million) in zinc (see Figure 3).

Figure 3: Chinese metals imports subject to U.S. tariffs under List 4 by category. Source: ITC Trade Map, U.S. Trade Representative

The proposed tariffs on metals come a little over a year after President Trump’s first round of tariffs on steel and aluminum imports from China went into effect. These tariffs, just like the ones enacted over a year ago, are aimed at revitalizing American producers and handicapping Chinese competitors. Metal products included in List 4 include a wide range of end-user products such as metal scissors (USD 109.5 million; EUR 96.1 million), kitchen and butcher knives (USD 84.3 million; EUR 74 million), and metal razors (USD 39.5 million; EUR 34.7 million). Most importantly, however, List 4 includes a large number of intermediate metal products from China that are used in different manufacturing processes in the automotive, aerospace, computer and electronics, and food manufacturing industries, among others. 

The following table presents the top ten intermediate metal products (by total value) imported from China in 2018, which are potentially subject to U.S. tariffs under List 4. Intermediate metal items on List 4 include coated iron/steel, aluminum foil, and aluminum machinery products used in the production of industrial products and systems such as semiconductors, auto parts, building materials, storage containers, packaging products, insulation, corrugated iron, barrels, buckets, coal scuttles, wash boilers and sheet metal piping for heating and air conditioning ducts, food and beverage cans, and other machinery parts.

HTSUSDescriptionU.S. imports from China in 2018 (in USD millions)Total U.S. imports in 2018 (in USD millions)Percentage of imports from ChinaProduct Uses
7321815000Iron or steel, non-portable non-electric domestic grates & warming appl, for gas/fuel127.25194.1365.5%Gas/fuel domestic appliances not for cooking
7607113000Aluminum, foil, w/thickness n/o 0.01 mm, rolled but not further worked, not backed82.76368.3022.5%Packaging products, insulation, cooking products, arts and decoration, microphones
7615109100Aluminum, table, kitchen or other household articles and parts thereof70.45113.5562.0%Parts of aluminumhousehold articles
7321811000Iron or steel, portable non-electric domestic grates & warming appl for gas/fuel62.3765.8494.7%Gas/fuel domestic appliances not for cooking
7607205000Aluminum, foil, w/thickness n/o 0.2 mm, backed, nesoi60.60244.1124.8%Packaging products, insulation, cooking products, arts and decoration, microphones
7607116000Aluminum, foil, w/thickness over 0.01 mm but n/o 0.15 mm, rolled but not further worked, not backed55.76408.0513.7%Packaging products, insulation, cooking products, arts and decoration, microphones
7210120000Iron/non alloy steel, width 600mm+, flat-rolled products, plated or coated with tin, less than 0.5 mm thick43.34740.835.8%Corrugated iron, coal scuttles, wash boilers and sheet metal piping for HVAC ducts, food and beverage cans and other machinery parts
7210500000Iron/non alloy steel, width 600mm+, flat-rolled products, plated or coated with chromium oxides41.88219.3319.1%Packaging products, auto parts, building materials, storage containers, mailboxes, and other machinery parts
7606126000Aluminum alloy, plates/sheets/strip, w/thick. o/0.2mm, rectangular, clad37.32128.1629.1%Semiconductor/LCD, medical devices, energy, building fabrication equipment and other machinery parts
7609000000Aluminum, fittings for tubes and pipes31.15103.3530.1%Piping or tubing systems in many different settings
Table 1: Top 10 intermediate metal products imported from China potentially subject to U.S. tariffs. Sources: United States Trade Representative, ITC Trade Map

As demonstrated by Table 1, iron or steel parts for gas/fuel domestic appliances are an important sector targeted by List 4 tariffs. These products, identified under HTSUS codes 7321815000 and 7321811000, accounted for USD 189.6 million (EUR 166.3 million) of imports from China to the U.S. in 2018. Even more relevant, perhaps, is the fact that China is the source of over 75% of U.S. imports under these two product categories, which means that they are highly susceptible to tariff increases and that major U.S. importers, such as Samsung America Inc., Rinnai America Corporation, Lg Sourcing Inc. or Tractor Supply Company, may have a hard time finding alternative suppliers outside of China, at least in the short-term.

Iron/non-alloy steel products coated with tin (with an import value of USD 43.34 million; EUR 38 million), and aluminum fittings for tubes and pipes (with an import value of USD 31.15 million; EUR 27.3 million) are also among the products most heavily targeted by List 4. These products are commonly used in the manufacturing of piping and tubing products and systems for heating and cooling (HVAC), waste removal, and portable water delivery industries, among others. While China is the top exporter of aluminum fittings for tubes and pipes into the U.S., representing approximately 30% of total exports in 2018, other important producers include Mexico, Canada, Taiwan, and South Korea. In the case of tin coated iron/non-alloy steel products, U.S. importers may be able to find alternative suppliers in countries like Germany, Netherlands, Canada, South Korea, and Brazil.

Another important metal item included in List 4 is chromium and chromium oxides coated iron/non-alloy steel products (with an import value of USD 41.88 million; EUR 36.7 million). Major U.S. importers (such as Cbc America Corp., Dongbu Usa Inc., Landsberg Orora, and Island Can Caribbean Inc.) use chromium coatings on metal alloys as decorative finishes, and to prevent corrosion and metal ion release. Chromium coatings are important elements in the production of packaging products, auto parts, building materials, storage containers, mailboxes, and other machinery parts.

In addition, tariffs on aluminum foil have been a point of contention between the U.S. and China. In February 2018, U.S. Department of Commerce upheld tariffs on imports of Chinese aluminum foil valued at nearly USD 400 million a year saying the product receives unfair subsidies from Beijing. List 4 also includes new tariff increases to aluminum foil products of different thickness and properties. This can be a major point of concern for U.S. packing companies (such as Durable Packaging International, Behr Dayton Thermal Products Llc., Amcor Flexibles Shelbyville, Gsk Co, Vaassen Inc, and Rivercap Usa Inc.) because China is the world’s top exporter of aluminum foil and accounts for approximately 25% of U.S. imports in 2018, followed by Germany, Japan, Italy and South Korea. Aluminum foil is extensively used in the food, pharmaceutical and healthcare, cosmetics and personal care, tobacco, and pet food industries as it provides a complete barrier to light, oxygen, moisture, and bacteria. 

Aluminum is also used in many aspects of the semiconductor manufacturing process. Consequently, higher tariffs on aluminum imports from China are likely to impact the U.S. semiconductor industry, as aluminum metal lines are commonly used as the main conductor between components. In addition, they are also the metal used for the bonding and probing pads on the die as well as for wire bonding integrated circuits in ceramic packages. While China is the top exporter of aluminum alloy and plates/sheets/strips to the U.S., representing 29% of total exports in 2018, alternative sources include Brazil, Germany, Austria, and Thailand.

Machinery and mechanical appliances

Machinery (HS Codes Chapter 84 – 85) is another sector heavily targeted by the proposed tariffs with a total of 303 products included in List 4, covering a wide range of sectors and applications which includes a mix of industrial and consumer machinery products. U.S. machinery imports amounted to USD 72.3 billion (EUR 64 billion) in 2018. This figure is divided as follows: 64% machinery and mechanical appliances (152 product items) and 36% electrical machinery and equipment (151 product items), with laptops (included in the machinery and mechanical appliances chapter) representing over 52.4% of the total value (see figure 4).

Figure 4: Chinese machinery imports subject to U.S. tariffs under List 4. Sources: United States Trade Representative, ITC Trade Map

Notable machinery and mechanical appliances include computer devices such as personal computers, laptops, scanners, and keyboards, as well as parts for heating, ventilation, air conditioning, and other industrial systems. The total value of U.S. imports from China in 2018 included in List 4 amounts to USD 46 billion (EUR 40.5 billion), with 82% corresponding to laptops.

HTSUSDescriptionU.S. imports from China in 2018 (in USD millions)Total U.S. imports in 2018 (in USD millions)Percentage of imports from ChinaProduct Uses
8471300100Portable automatic data processing machines, not over 10 kg38,006.5440,274.7494.37%Laptops
8443310000Multifunction units (machines which perform two or more of the functions of printing, copying or facsimile transmission)2,358.364,536.1051.99%All-in-one printer, scanner, copier and fax devices
8471490000ADP machines, nesoi, entered as a system2,053.812,994.1868.59%General purpose computers
8414513000Ceiling fans with a self-contained electric motor of an output not exceeding 125 W1,031.331,098.8693.86%Ceiling fans
8471602000Keyboards for automatic data processing machines not entered with the rest of a system815.97876.5393.09%Computer keyboards
8481903000Parts of hand operated and check appliances for pipes, boiler shells, tanks, vats or the like, of iron or steel271.70467.8358.08%HVAC and other industrial systems
8481905000Parts of hand operated and check appliances for pipes, boiler shells, tanks, vats or the like, other than of copper or iron or steel270.66397.3068.13%HVAC and other industrial systems
8481901000Parts of hand operated and check appliances for pipes, boiler shells, tanks, vats or the like, of copper232.29420.0155.31%HVAC and other industrial systems
8471608000Optical scanners and magnetic ink recognition devices not entered with the rest of a ADP system203.75641.2531.77%Flatbed scanners, hand held scanner,, or fingerprint readers
8422110000Dishwashing machines of the household type149.18437.8834.07%Dishwashing machines
Table 2: Top 10 machinery and mechanical appliances imported from China potentially subject to U.S. tariffs. Sources: United States Trade Representative, ITC Trade Map

As seen in Table 2, China currently accounts for 94.37% of U.S. imports of laptops and tablets. Moreover, China’s output of laptops and tablets is 35 times greater than its closest competitor, which suggests that technology companies in the United States would have a very hard time shifting production to other countries. Major technology groups in the U.S. including Microsoft, Dell, HP, and Intel have expressed concerns over the effects of the List 4 tariffs, arguing that a 25 percent tariff would signify an average laptop price increase of USD 120 (EUR 105).  Technology companies have also pointed out that a tariff increase would create a ripple effect that would spread through the U.S. economy, as technology is now the backbone of many other U.S. industries, including agriculture, manufacturing, and transportation.

To avoid the tariffs, technology companies have already decided to move their product manufacturing to other countries. For instance, last year Asus announced the relocation of its motherboard and graphics card maker manufacturing facilities to Vietnam and Taiwan after the initial 10 percent tariff went into effect in September 2018. Similarly, Apple has reportedly asked its major suppliers to assess the cost implications of moving 15-30% of its production capacity out of China to Southeast Asia. Key suppliers for Apple include MacBook maker Quanta Computer Inc., iPhone assemblers Foxconn, Pegatron Corp, Wistron Corp, iPad maker Compal Electronics Inc, and AirPods makers Inventec Corp, Luxshare-ICT and Goertek. Reports suggest that Mexico, India, Vietnam, Indonesia, and Malaysia are among possible manufacturing relocation options, although it could take at least 2-3 years to move 15% of iPhone production from China to other regions, given the complexity and the logistics involved.

On the other hand, these tariffs on laptops are not as problematic for technology companies with a geographically diverse manufacturing base. This allows companies to ship non-Chinese made products to the U.S. and avoid the tariffs. Lenovo, for instance, has reportedly been able to ship products from Mexico, Brazil, Hungary, and India to the U.S., while limiting price increases to the minimum.

Besides laptops, other computer devices that would be impacted by List 4 include general purpose computers; optical scanners; all-in-one printer, scanner, copier and fax devices; and computer keyboards, which together accounted for USD 5,432 million (EUR 4,778) in U.S. imports in 2018. As in the case of laptops and tablets, China represents the largest source of these products with over 60% of total imports into the U.S., with the rest of the imports coming from Asian countries like Thailand, Vietnam, Japan, and the Philippines. Mexico is the only country outside of East and Southeast Asia that is considered an important exporter of computer devices into the U.S. The top U.S. importers of automatic data processing machines include Dell Products LP, HP Inc., XPO Logistics, and Promethean Inc., while the top U.S. importers of printers and optical scanners are Epson America Inc., Fx Global Inc., Ricoh Americas Corporation, and Brother International Corporation.

In terms of machinery metal products, the proposed tariffs would particularly affect the U.S. automotive and HVAC equipment manufacturing sectors, as China currently represents the source of around 60% of metal parts of pipes, boiler shells, tanks, vats, or similar products used in these industries. Exports of these products from China to the U.S. totaled USD 775 million (EUR 682 million) in 2018. Top U.S. importers of metal parts of pipes, boiler shells, tanks, and vats from China include companies like Borg Warner Automotive, SlPT Automotive Inc., Cooper Cameron Valves, and Fusion Coatings.

U.S. importers of miscellaneous machinery items such as ceiling fans, dishwashing machines, brewery machinery, and automatic roll towel dispensers are also likely to be impacted by the proposed List 4 tariffs, as China represents an important source of these products. For instance, China is the source of 93.86% of home ceiling fans, 44.18% of brewery machinery, and 34.07% of household dishwashing machines imported into the U.S. Imports of these three products alone totaled USD 1,623 million (EUR 1,428 million) in 2018, with China representing roughly 75% of that value (USD 1,218 million; EUR 1,072 million).

Although not included in the top 10 machinery products imported from China, U.S. politicians and industry experts have called the USTR to remove ship-to-shore transporter cranes classified under HTSUS code 84261900, from the proposed List 4 tariffs. U.S. imports of transporter cranes, gantry cranes and bridge cranes from China totaled USD 111.4 million (EUR 98 million) in 2018, which represents roughly 20% of the total value of imports under this HTSUS code. Transporter cranes, gantry cranes and bridge cranes goods that are handled at many U.S. ports, including the Port of Savannah in Georgia and the Port of Charleston in South Carolina, are loaded and offloaded by transporter cranes from China and could potentially lead to major disruptions to trading in the U.S

Electrical Machinery and Equipment

Electrical machinery and equipment is another sector heavily targeted by the proposed List 4 with a total of 151 products. List 4 includes a large number of electrical products for consumer use. Notable products include computer monitors, solid-state drives (SSD), parts for telephone sets, electronic cameras, and TV set-top boxes. The total annual value of Chinese electrical machinery products included in List 4 amounts to USD 26.12 billion (EUR 23 billion), out of which USD 4.76 billion (EUR 4.19 billion) corresponds to computer monitors and USD 4.01 billion (EUR 3.53 billion) to solid-state drives (SSD). 

HTSUSDescriptionU.S. imports from China in 2018 (in USD millions)Total U.S. imports in 2018 (in USD millions)Percentage of imports from ChinaProduct Uses
8528520000Other monitors capable of directly connecting to and designed for use with an automatic data processing machine4,760.925,661.8384.1%Computer monitors
8523510000Semiconductor media, solid state non-volatile storage devices4,010.1310,030.2640.0%Solid-state drives (SSD)
8517700000Parts of telephone sets; parts of other apparatus for the transmission or reception of voice, images or other data2,648.425,820.2445.5%Connector seals, battery door seals, and other parts for telephone sets
8525804000Digital still image video cameras1,759.043,451.7251.0%Electronic cameras
8528712000TV reception set top boxes with a communication function, nesoi1,588.552,178.9172.9%TV set-top boxes
8525501000Television transmission set top boxes which have a communication function1,552.321,703.9191.1%TV set-top boxes
8516790000Electrothermic appliances nesoi, of a kind used for domestic purposes1,401.881,624.1386.3%Glue gun,  electric kettle
8518302000Headphones, earphones and combined microphone/speaker sets, other than telephone handsets1,138.051,501.7975.8%Headphones, earphones
8518220000Multiple loudspeakers mounted in the same enclosure875.271,187.5073.7%Loudspeakers
8528694500Color video projectors w/flat panel screen, video display diagonal not over 34.29cm584.981,026.9857.0%Video Projectors
Table 3: Top 10 electrical machinery and equipment imported from China potentially subject to U.S. tariffs. Sources: United States Trade Representative, ITC Trade Map

Table 3 shows that the two most important electrical machinery products included in List 4 are computer-related devices, namely computer monitors and solid-state drives. In the case of computer monitors, China is the source of around 84.1% of U.S. imports, followed by Japan (6.1%), South Korea (4.4%), Taiwan (3.1%), and Mexico (2.3%); for solid-state drives (SSD), China represents 40% of U.S. imports, followed by Taiwan (22.9%), South Korea (14.8%), Malaysia (12.8%), and Japan (9.5%).

The decision to place tariffs on SSDs is in line with Washington’s broader aim of restricting Chinese access to higher-end technologies. Much of this is grounded in U.S. concerns over forced technology transfers and intellectual property theft in the face of growing Chinese competition and efforts through Beijing’s ‘Made in China 2025’ initiative to establish self-sufficiency in the key industry. This has been consistently reflected in Washington’s repeated efforts to cut off access for Chinese companies to U.S. semiconductor suppliers by blocking acquisitions including a U.S. court ruling that barred Micron Technology and its Chinese subsidiaries from selling SSDs in China.

Increased tariffs on SSD imports are also an important point of concern for technology manufacturers in the U.S. as the demand for these intermediate products is expected to surge in the next five years. The explosion in big data brought about by IoT devices and business applications has caused an increasing demand for mega-sized SSDs at a lower cost. The SSD market was valued at USD 30.33 billion in 2018, and is expected to reach USD 69.91 billion by 2024. A potential increase in tariffs on Chinese SSD imports from 10 percent to 25 percent would be particularly tough on smaller U.S. vendors, who are more reliant on Chinese suppliers for their components.

Another intermediate electrical machinery product that is being targeted by the List 4 tariffs are telephone set parts, which includes products such as connector seals, battery door seals, and main gaskets. U.S. imports of these products totaled USD 5.8 billion (EUR 5.11 billion) in 2018, with China representing approximately 45.5% (USD 2.6 billion; EUR 2.29 billion) of them. Other countries with large exports include Mexico, Thailand, Malaysia, and Taiwan. Top U.S. importers of cellphone parts from China include Radio Frequency Systems, Flextronics, and Foxconn Assembly Llc.

Other electrical machinery items, where China is the predominant supplier, include electronic cameras (USD 1.76 billion; EUR 1.55 billion), TV reception set top boxes (USD 1.59 billion; EUR 1.40 billion), TV transmission set-top boxes (USD 1.55 billion; EUR 1.36 billion), headphones (USD 1.14 billion; EUR 1 billion), loudspeakers (USD 875 million; EUR 770 million), and video projectors (USD 585 million; EUR 515 billion). Increased tariffs on these items could adversely impact end-consumers and subsequently, lower demand for these products in the U.S. Top U.S. importers of these items include Samsung America Inc., Sony Electronics Inc., Logitech Inc., Arris Group Inc., Humax Usa Inc., Holland Electronics Llc., and Voxx International Corp.

Chemicals

As was the case with the List 3 tariffs, List 4 targets 133 more products used in the chemicals sector, particularly with Sections 28 (Organic Chemicals) and 29 (Inorganic Chemicals) being the most heavily impacted. U.S. chemical imports from China amounted to USD 808 millions (EUR 715 million) in 2018. The distribution of the total value of imports among the different chemicals sub-sections can be seen in Figure 5.

Figure 5: Chinese chemical imports subject to U.S. tariffs under List 4 by category. Sources: United States Trade Representative, ITC Trade Map

List 4 features major products with an annual import value in 2018 greater than USD 20 million (EUR 17.6 million) that are almost exclusively imported from China. These items include 3,5-Dinitro-o-toluamide (100% of which comes from China), p-Chlorobenzotrifluoride and 3,4-Dichlorobenzotrifluoride (99%), sucralose (98%), aromatic fungicides (96%), quinones (93%), N-tert-Butyl-2-benzothiazolesulfenamide (93%), chloride oxides (90%), non-aromatic carboxylic acids (81%) and pesticides (77%) which are predominantly for agricultural use.

HTSUSDescriptionU.S. imports from China in 2018 (in USD millions)Total U.S. imports in 2018 (in USD millions)Percentage of imports from ChinaProduct Uses
2918995000Nonaromatic carboxylic acids with additional oxygen function, and their derivatives,nesoi128.96159.3881%Pharmaceuticals (Vitamin-C based medicines), soft drinks, and food additives
2914699000Quinones, nesoi72.3778.0193%Tanning hides, animal fibres, gelatin insol, and food additives
2926902100Aromatic fungicides of nitrile-function compounds60.2262.6396%Fungicides
2903990800p-Chlorobenzotrifluoride; and 3,4-Dichlorobenzotrifluoride59.7060.0899%Dye intermediate, chemical intermediate, solvent and dielectric fluid / Intermediate for insecticides and herbicides
2932140000Sucralose56.6857.6698%Foot additives, toothpaste, flavour enhancer, non-nutritive sweetner
2827495000Chloride oxides and chloride hydroxides other than of copper or of vanadium46.2951.1590%Industrial organic chemicals, nonferrous metals
2912410000Vanillin (4-Hydroxy-3-methoxybenzaldehyde)41.3764.1764%Food additives/ flavouring agents for confectionaries, beverages, foods;
29242903003,5-Dinitro-o-toluamide21.3621.36100%Food additives, animal drug products, pesticides
2909303000Pesticides, of aromatic ethers and their halogenated, sulfonated, nitrated ornitrosated derivatives21.0027.1477%Pesticides
2934200500N-tert-Butyl-2-benzothiazolesulfenamide20.5422.0393%Food additives, plastics and rubber manufacturing, fillers for textiles and paints
Table 4:  Top 10 chemical products imported from China potentially subject to U.S. tariffs. Sources: United States Trade Representative, ITC Trade Map

A number of major chemical compounds on List 4 are widely used in various consumer products including non-aromatic carboxylic acids (USD 128.9 million; EUR 113.2 million), quinones (USD 72.3 million; EUR 64.5 million), sucralose (USD 56.6 million; EUR 49.7 million), and vanillin (USD 41.3 million; EUR 36.3 million). Non-aromatic carboxylic acids have been used for the production of food additives for soft drinks and preservatives, as well as in the manufacturing processes of soaps, detergents, cosmetics, and other personal care products. N-(Cyclohexylthio) phthalimide, with 99% of all imports to the U.S. coming from China, similarly has a wide range of commercial uses including plastics manufacturing, rubber products, adhesives, and automobile repair products. Companies that could be impacted by the List 4 tariffs are BASF SE, Dow Chemical Company, Celanese Corporation, and Eastman Chemical Company, all of whom are major market vendors for carboxylic acids. 

For the dyes and ink industry, P-Chlorobenzotrifluoride is widely used in the printing ink industry for its ability to dissolve high volumes of ink and as a replacement for xylene in cleaning, degreasing and in paint thinning products. Benzoxazol – with 98% of total U.S. imports coming from China – is a major ingredient that can be found in optical brighteners for laundry detergents. U.S.-based firms that would likely be impacted by tariffs on these chemicals include Sherwin-Williams, Miniwax Company, and Zinsser & Company. 

In the case of chemicals used for pharmaceutical products, non-aromatic carboxylic acids have been used for the manufacturing of medicines based on Vitamin-C (ascorbic acid), fungicides (caprylic acid), and antipyretic and analgesic (acetylsalicylic acid). Sucralose is used for food additives and as a flavor enhancer for toothpaste and other household life sciences products for brands such as Colgate and Crest of Colgate-Palmolive, and Procter & Gamble, respectively. 

The heavy dependence on Chinese imports for many chemical products suggests that U.S.-based companies will likely be hard-pressed to find sourcing alternatives beyond China under such a short timeframe. However, U.S. companies can consider sourcing different raw materials and intermediate parts in order to make similar products or finished goods. In contrast, several major products on List 4 which appear to be minimally affected by the tariffs, with Chinese imports making up less than 5 percent of total U.S. imports in 2018, include aluminum oxide (3%), glycerol (0.3%), industrial fatty alcohols (0.2%).

Transportation

List 4 includes only 16 items from the transportation sector under HTSUS Codes Sections 86 (railway and parts), 87 (vehicles), and 89 (ships, boats and floating). 

Figure 6: Chinese transport imports subject to U.S. tariffs under List 4 by category. Sources: United States Trade Representative, ITC Trade Map

While the impact is relatively minor compared to the abovementioned sectors, List 4 notably includes tariffs on shipping and transport containers despite China supplying 76% of the U.S. total annual imports in 2018 (see Table 5). 

HTSUSDescriptionU.S. imports from China in 2018 (in USD millions)Total U.S. imports in 2018 (in USD millions)Percentage of imports from ChinaProduct Uses
8609000000Containers (including containers for transport of fluids) specially designed and equipped for carriage by one or more modes of transport532.20703.6676%Goods shipments, transport of liquids
8905901000Floating docks12.9113.91293%Floating docuks
8714998000Pts. & access. nesoi, for bicycles and other cycles of heading 871239.30157.2225%Bicycles
8714996000Pts. & accs. for bicycles & o/cycl., trigger & twist grip cntrls for 3-spd hubs, alum. handlebar stems >$2.15 ea, & stem rotor assys. & pts1.949.1921%Bicycles
8703101000Motor vehicles specially designed for traveling on snow0.68213.130.3%Motor vehicles
Table 5: Transportation products imported from Chinese potentially subject to U.S. tariffs. Sources: United States Trade Representative, ITC Trade Map

The latest proposed tariffs are likely to pose further challenges to container and shipping operators that have already seen purchases of ultra-large boxships curtailed due to reduced container activity as a result of previous rounds of tariffs in the trade war. The new proposed tariffs on container imports are likely to do little to help the U.S. reduce its trade balance for U.S. containers as demand has largely remained stagnant.

Tariffs on floating structures (such as rafts), warships, motorcycle parts, and waste mineral fuels appear to have little to no impact as Chinese imports to the U.S. for these products are largely minimal.

Notable exclusions

The proposed List 4 includes notable exceptions such as rare earth minerals as well as Chinese-made pharmaceutical inputs. Rare earth minerals consist of 17 major chemical elements (such as gadolinium, lanthanum, cerium, and promethium) that are inputs in the manufacturing of mobile phones, laptops, electric vehicles, and consumer products, and that are largely viewed as critical to the U.S. technology, drug, and defense industry. On the other hand, Chinese-made pharmaceutical inputs are widely used in the production of cancer treatment drugs, surgical supplies, and pacemakers.

The U.S. decision to leave Chinese rare earth mineral imports off its Section 301 tariffs (including List 4) comes amid heavy speculation on whether China will act upon its repeated threats to put curbs on exports to the U.S., which accounted for around 80% of U.S. rare earth imports. Few alternative suppliers have been able to compete with China as it is home to 37% of global rare earth reserves. U.S. Treasury Secretary Steven Mnuchin has also repeated on a number of occasions that Washington would be very careful with its exclusions from tariffs on Chinese goods to protect U.S. consumers and companies. 

On June 4, China’s National Development and Reform Commission (NDRC) announced that it would establish a mechanism for reviewing the entire process of rare earth exports by auditing export shipments and tracing their shipment routes. Chinese media reports have repeatedly pointed to the need to “utilize and protect” its strategic resources ever since President Xi Jinping visited a rare earth mining and processing facility operated by JL MAG Rare-Earth Company in Ganzhou, Jiangxi on May 20. 

Against this backdrop, the U.S. Department of Commerce published a report on June 5 outlining 61 recommendations and urgent steps needed to boost domestic production of rare earth and other critical minerals, warning that a halt in Chinese or Russian exports could lead to significant shocks in global supply chains. The report was followed by another U.S. initiative to work closely with Western allies to help countries develop reserves for minerals such as lithium, cobalt, and copper to reduce reliance on China for materials crucial for high-tech industries. In May 2019, Chinese exports of rare earth magnets to the U.S. reportedly rose more than 20 percent from the previous month to their highest since at least 2016, according to data from China’s General Administration of Customs. 

Major non-China based rare earth suppliers include Lynas Corporation (Australia), Avalon Rare Metals and Rare Element Resources (Canada), and Rare Elements Resources and Molycorp (U.S.). 

For pharmaceutical products, the U.S. notably leaves out select medical products and several critical raw materials imported from China for commonly used drugs and active pharmaceutical ingredients (API). These drugs include paracetamol and aspirin (painkillers); amoxicillin, ampicillin, cephalexin, cefaclor, ciprofloxacin, ofloxacin and levofloxacin (antibiotics); metformin (diabetes treatment); and ranitidine (antacid). This is largely reflective of  its heavy reliance on Chinese raw materials for its drug and pharmaceutical industries: more than 80% of APIs are imported from China and India with around 96% of U.S. antibiotics and vitamins imported from China. 

The Association for Accessible Medicines (AAM) called on the Trump administration to continue to “exempt Chinese drugs and active pharmaceutical ingredients from the tariff list,” citing that it would cause “disproportionate economic harm” if imported generics and biosimilars were to be hit with tariffs. The AAM reiterated that drug tariffs would likely hit generic drug makers harder than brand manufacturers as generic drug production would incur higher manufacturing costs relative to their price. 

Recommendations

The latest round of proposed tariffs threatens to place even more constraints on U.S. and foreign companies importing from China as they seek to mitigate disruptions to their supply chain operations from earlier tariffs. The recommendations below focus on how supply chain professionals can address these concerns and manage the cumulative impact of the U.S. Section 301 tariffs on China. 

  • Apply for tariff exemptions for List 4 products: Customers should keep an eye on applying for tariff exemptions should the List 4 tariffs come into effect. In the case of List 3, the tariff exclusion process differed slightly from the processes for List 1 and 2 in that the USTR opened a portal (http://exclusions.USTR.gov/) for applicants to file exclusion requests and to fill out an exclusion request form consisting of important data about the company. These questions included information on the company’s gross revenues, percentage of total gross sales which the requested product accounted for, and the amount of sourcing of the product from domestic or third-country suppliers.
  • Monitor tariff exclusions already granted by the USTR: Customers should be on the lookout for any tariff exclusions that have already been granted through the USTR’s Notice of Product Exclusions.  For instance, the U.S. already announced five previous batches of goods under List 3 with the latest product exclusions including one existing 10-digit HTS subheading 8537.10.8000 covering touch-sensitive data input devices without display capabilities, as well as 88 other specific product descriptions. Product exclusions for previous lists have been retroactively applied and remain in place one year after the publication of the Federal Register notice. 
  • Identify and assess alternative sourcing: Manufacturers with deep supply chains in China should identify and assess alternative suppliers to navigate the current trade war changes. U.S. importers of Chinese products should begin the process by reviewing their global import and export data and to understand the potential impact of List 4 and possible retaliatory tariffs. When looking for alternative suppliers, companies must consider the costs of inventory, logistics costs, transfer pricing ramifications, and tax implications. Moreover, supply chain, logistics, and procurements managers must assess all risks associated with switching to a new supplier or consolidating its purchases with an existing one in another country.
  • Monitor indicators of financial stress along your supply chain: Procurement teams should be careful to not only evaluate a supplier’s financial stability during the initial source selection or on a per-contract basis, but also on a continuous basis as financial stress can develop in a matter of weeks. Identifying insolvency risk is particularly important in times of high economic uncertainty, because companies with extremely weak financial positions are usually less cable of coping with the effects of a trade war. This can lead to weaker product quality, poorer delivery reliability, slower response times, and higher risk of default.
  • Stocking up on inventory: If a price increase for products or materials is anticipated, it may be necessary to stock up on inventory to receive bulk discounts before incurring tariff costs. If this is the case, it is important for procurement teams to effectively coordinate with key suppliers as well as their logistics teams to explore expedited shipping options and beat capacity constraints. 

Outlook

The unpredictable nature of U.S.-China trade relations suggests that it will be very difficult to determine whether the trade dispute will be resolved in the near future. Despite the most recent trade truce between Washington and Beijing, both countries have exchanged tense rebuttals and statements leading up to the G20 Summit meeting that all but suggest that foreign companies and supply chain professionals should be preparing contingency plans to mitigate the impact of the trade war and identifying alternative suppliers regardless of whether the List 4 tariffs are delayed. 

More than 600 companies and associations have openly opposed the tariffs in a letter addressed to the Trump administration urging for the U.S. to come to a deal with China that “addresses long-standing structural issues, improves U.S. global competitiveness and eliminates tariffs.” A wide range of U.S. firms have already cited in the USTR testimonies the potential risk of rising costs and few sourcing alternatives outside of China, while also reiterating that moving operations to other countries may not necessarily be feasible for years due to a lack of infrastructure and needed skills in those locations. 

Companies can anticipate another likely surge in Chinese imports being rushed to U.S. in a bid to avoid tariffs and stockpile inventories should List 4 be enacted. For the List 3 tariffs, the USTR granted a grace period for U.S. importers by setting a June 1 deadline for goods to arrive in the country before U.S. Customs and Border Protection began collecting 25 percent tariffs at U.S. ports. Major U.S. ports that will most likely be impacted by further tariffs on Chinese imports include the Port of Los Angeles, Port of Long Beach, Port of Newark, Chicago O’Hare International Airport, and Los Angeles International Airport. 

Customers that are affected by the ongoing trade dispute between Washington and Beijing are advised to continue monitoring developments on the Everstream Analytics platform.

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