Tariff Hikes: Escalation of the U.S.-China Trade War

Tariff Hikes: Escalation of the U.S.-China Trade War

Executive Summary

  • China’s State Council Tariff Commission (SCTC) announced on August 23 that it will be imposing 5 or 10 percent tariff rates on USD 75 billion (EUR 67.6 billion) of U.S. imports covering 5,078 tariff lines which will come into effect on September 1 and December 15 respectively. The latest tariff list contains a significant portion of items that overlap with previous tariff lists and will be subject to an additional 5 or 10 percent tariff on top of any original tariffs and existing Chinese tariffs imposed on USD 3 billion (EUR 2.71 billion), 50 billion (EUR 45.2 billion), and 60 billion (EUR 54.3 billion) of U.S. imports. 
  • Beijing will also reinstate tariffs of 25 percent on automobiles and 5 percent on auto parts and components covering 211 tariff lines effective from December 15. The auto tariffs are divided into three tranches covering 211 tariff lines: (1) 28 automotive products subject to 25 percent tariffs; (2) 115 automotive products subject to 25 percent tariffs; and (3) 67 auto parts and components subject to a tariff of 5 percent. The tariffs were previously suspended on December 14, 2018 following the Buenos Aires G20 Summit and again on April 1, 2019 in an effort to facilitate bilateral negotiations. 
  • Analysis from Everstream Analytics found that the first tranche of U.S. imports subject to Chinese tariffs that are relevant to manufacturing sectors include chemicals, plastics, machinery, and fertilizers. The second tranche focuses on vehicles, machinery, electrical machinery, iron and steel, chemicals and pharmaceutical and medical device products. Notable raw materials and intermediary parts subject to additional tariffs include rare earth materials (lithium, cobalt, lanthanum, and yttrium), crude oil, turbines, aluminum and copper scrap, vehicle engines, and auto parts for hybrid and electric vehicles. Semiconductors are largely untouched and no additional tariffs have been placed on liquefied natural gas (LNG). 
  • In retaliation, U.S. President Donald Trump announced later the same day on August 23 that Washington would be increasing tariffs from 25 to 30 percent on USD 250 billion (EUR 224.8 billion) of List 1-3 Chinese imports effective from October 1. The U.S. will also raise tariffs from 10 to 15 percent on USD 300 billion (EUR 267 billion) worth of Chinese imports under List 4A (USD 112 billion; EUR 101.1 billion) from September 1 and under 4B (USD 160 billion; EUR 144.5 billion)  from December 15, 2019.
  • The unpredictable nature of the U.S.-China trade negotiations suggests that supply chain professionals will need to develop contingency plans, identify alternative suppliers if necessary, and assess regulatory risks or financial stress facing suppliers exposed to the trade dispute. In addition, companies should anticipate heavy port congestion leading up to the tariff deadlines, as well as greater non-tariff and regulatory scrutiny for foreign firms operating in China. 

Background

On August 23, China’s State Council Tariff Commission (SCTC) announced that it would be imposing 5 or 10 percent tariff rates on USD 75 billion (EUR 67.6 billion) of U.S. imports, covering 5,078 tariff lines. In a similar fashion to the U.S. List 4 tariffs, Beijing’s latest tariffs are covered under two tranches: the first tranche of 1,717 items comes into effect on September 1, 2019, while the second tranche of 3,367 items will take effect from December 15, 2019. The first tranche of tariffs that are relevant to manufacturing industries includes certain chemicals, plastics, machinery, and fertilizers whereas the second tranche focuses on vehicles, machinery, iron and steel, chemicals, and pharmaceutical and medical device products. 

In addition, China will reinstate 25 percent tariffs on U.S. automobiles and 5 percent tariffs on auto parts and components effective from December 15, 2019. The auto tariffs are divided into three tranches covering 211 tariff lines: (1) 28 automotive products subject to 25 percent tariffs; (2) 115 automotive products subject to 25 percent tariffs; and (3) 67 auto parts and components subject to a tariff of 5 percent. The tariffs were previously suspended on December 14, 2018 following the Buenos Aires G20 Summit and again on April 1, 2019 in an effort to facilitate bilateral negotiations. 

In retaliation, President Donald Trump announced via Twitter later on the same day that the U.S. will increase tariffs from 25 to 30 percent on USD 250 billion (EUR 224.8 billion) of List 1-3 Chinese imports effective from October 1, 2019. The U.S. will also increase tariffs from 10 to 15 percent on USD 300 billion (EUR 267 billion) worth of Chinese imports under List 4A (USD 112 billion; EUR 101.1 billion) and 4B (USD 160 billion; EUR 144.5 billion) that will come into effect from September 1 and December 15 respectively. President Trump also called on U.S. companies to close their China operations and move production back to the U.S. after threatening that he had the “absolute right” to use his broad executive authority under the International Emergency Economic Powers Act of 1977 to declare trade with China a national emergency.

Figure 01: U.S. – China Trade War Timeline

China’s Retaliatory Tariffs

China’s latest tariff escalations were largely in response to President Donald Trump’s decision on August 1 to then-raise 10 percent tariffs on USD 300 billion (EUR 267 billion) worth of Chinese imports under List 4. Beijing reiterated in a statement that the U.S. decision violated the mutual consensus reached by leaders of both countries at the 2018 G20 Argentina and 2019 Osaka meetings. 

The latest tariffs are structured in a manner that mirrors the U.S. List 4 tariffs with deadlines set for September 1 and December 15, although the two lists are both divided into four sections: two sections that are subject to 10 percent tariffs and the other two sections subject to 5 percent tariffs. This falls in line with a similar strategy that was adopted in China’s previous round of tariffs on USD 60 billion (EUR 39.2 billion) at 25, 20, 10 and 5 percent rates that allowed Beijing to adjust after the U.S. raised tariffs on USD 200 billion in goods from 10 to 25 percent. 

Both lists contain a significant portion of items that overlap with previous tariff lists and will be subject to an additional 5 or 10 percent tariff on top of any original tariffs and existing Chinese tariffs imposed on USD 3 billion (EUR 2.71 billion), 50 billion (EUR 45.2 billion) and 60 billion (EUR 54.3 billion) worth of U.S. imports. 

However, it should be kept in perspective that China’s latest round of additional tariffs of 5 or 10 percent on USD 75 billion of U.S. imports remains considerably smaller in scale compared to the U.S. tariffs at 10 percent on USD 300 billion of Chinese imports (List 4) or 30 percent tariffs on USD 250 billion of Chinese imports (List 1-3). 

Sectors impacted

Data collected by Everstream Analytics indicates that the tariffs relevant for manufacturing companies under the first tranche subject to 10 percent tariffs (see Appendix A) apply to electrical machinery (28), machinery (21), and iron and steel (18) products. Items under the first tranche subject to 5 percent tariffs (see Appendix B) include inorganic chemicals (225), plastics (124), tanning and dyeing extracts (54), and fertilizers (24). 

The second tranche of tariffs subject to 10 percent tariffs includes vehicles (158), machinery (108), electrical machinery (79), and iron and steel (34) products. The second tranche subject to 5 percent tariffs consists of machinery (422), electrical machinery (237), optical, laboratory and medical (126), iron and steel (119), vehicles (112), and inorganic chemicals (70) products.

Notable raw materials and intermediary parts subject to additional tariffs include rare earth materials (lithium, cobalt, lanthanum, yttrium), crude oil, turbines, aluminum and copper scrap, vehicle engines, batteries as well as auto parts and components for hybrid and electric vehicles. Semiconductors are largely untouched and no additional tariffs have been placed on liquefied natural gas (LNG). According to industry sources, products that appeared on previous tariff lists will be subject to additional duties of 5 or 10 percent which include certain chemicals, automobiles, airplanes, and coal. 

Tariffs on automotive & mobility

China will also be reinstating tariffs on automobile products at 25 percent and auto parts and components at 5 percent that come into effect on December 15. 

Analysis conducted by Everstream Analytics found that the 144 automotive products subject to 25 percent tariffs were mostly comprised of motor cars and other motor vehicles (117); vehicles, public transport passenger type (16); and vehicles for the transport of goods (10) (see Appendix C). The most affected sub-categories (up to 6-digit HS Codes) were vehicles with both spark-ignition internal combustion reciprocating piston engine and electric motor for propulsion (29); both compression-ignition internal combustion piston engine (diesel or semi-diesel) (27); and with only spark-ignition internal combustion reciprocating piston engine (12). The 67 auto parts and components items subject to 5 percent tariffs are largely comprised of motor vehicles, parts, and accessories (60) (see Appendix D). The most-affected sub-categories include parts and accessories other than safety seat belts (12); vehicle parts and accessories (12); and vehicle parts with drive-axels and non-driving axels (11). 

U.S. Raction

The latest decision to raise tariffs by 5 percent on USD 250 billion (List 1-3) and 300 billion (List 4) of Chinese imports could be a sign that the U.S. is becoming more cautious about substantially levying more tariffs or adding additional items after it was reported that President Trump’s decision on August 1 to levy 10 percent tariffs on List 4 products was largely opposed by his inner circle of advisors. 

On August 13, the U.S. Trade Representative (USTR) released guidelines indicating that it would be dividing the List 4 tariff list into two tranches. Tariffs on List 4A goods – which cover almost all remaining electronics, industrial, and agricultural products – will be applicable to products entered or withdrawn from warehouse for consumption on or after 00:01 Eastern Standard Time (EST) on September 1 and entered under HTSUS 9903.88.15. List 4B items – which cover mostly retail and consumer products such as cellphones, laptops, certain clothing and footwear items – will be applicable to products entered or withdrawn from warehouse for consumption on or after 00:01 EST on December 15 and must be entered under HTSUS 9903.88.16. 

25 HTSUS tariff codes proposed for inclusion in List 4 have also been removed due to “health, safety, national security and other factors.” No grace period for Chinese imports will be granted and no flexibility will be given for goods that are already in transit to the U.S. 

An official notice from the U.S. Federal Register is set to be released on August 30 confirming the 15 percent tariffs on USD 300 billion worth of Chinese imports (List 4), which will come into effect on September 1 and December 15. However, no details have been released on when requests will be accepted to exclude specific products from List 4 tariffs. 

A separate Federal Register notice with details of the U.S. government’s planned increase to 30 percent tariffs on USD 250 billion worth of Chinese imports (List 1-3) will be published at a later date. The USTR has also announced that it would be holding a public comment period until September 20 before raising tariffs on List 1-3 products on October 1. 

Recommendations

Everstream Analytics outlines a series of recommendations on how your organization can better protect global supply chain networks and mitigate risks at a moment of unpredictability in the U.S.-China trade conflict:

  • Make contingency plans: Customers are advised to conduct proper diligence on exposure to both countries, identify alternative suppliers if necessary, and develop contingency plans to mitigate the impact of the U.S.-China trade dispute. Companies that are seriously considering moving production out of China or relocating to another market will need to evaluate whether the cost would be greater than assuming the tariffs themselves, logistics bottlenecks resulting from weak public infrastructure and shipping delays in other countries, and identifying and establishing relationships with new suppliers while maintaining supplier quality and production capacity. 
  • Evaluate supplier stress across the supply chain: Procurement teams should assess the extent to which a supplier is under regulatory or financial stress, and evaluate if this could undermine product quality, response times, and delivery reliability. Manufacturers should be on the lookout for currency risk as the recent weakening of the Chinese Renminbi (CNY) to below CNY 7 per 1 U.S. dollar (USD) suggests that Beijing may be allowing its currency to fall further to cushion the blow of U.S. tariffs and boost Chinese exports. This could mean that, in addition to the tariffs, companies operating in China that are buying U.S. imports could be subject to higher costs. 
  • Anticipate heavy port congestion: A major factor to take into consideration will be the extent to which U.S. and Chinese ports will be inundated with heavy congestion as companies scramble to stockpile shipments and load up on inventory in a bid to avoid the latest round of tariff increases from both sides. Major U.S. ports that are most likely to be impacted by the tariffs include the Port of Los Angeles, Long Beach, and Newark while Chinese ports that are most likely to be impacted include the Port of Shanghai, Ningbo-Zhoushan, and Shenzhen. 
  • Continue applying for tariff exemptions: Supply chain professionals should continue to apply for tariff exemptions from the U.S. and China. China will continue its tariff exclusion process and products that were not available for exclusion in the previous two batches will be included in the upcoming batch along with tariff exemptions for automobiles and auto parts. The USTR has also confirmed that it will be holding a public comment period until September 20 on USD 250 billion of Chinese imports before raising tariffs to 30 percent.  

Outlook

The unpredictable nature of the U.S.-China trade negotiations suggests that the prospects for a trade deal are becoming increasingly more difficult to predict under the Trump administration. Senior Chinese trade officials have publicly called for dialogue but may be hedging their bets heading into the 2020 U.S. Presidential Election with the hopes of negotiating a new deal under a Democratic President. 

Beijing is likely to resort to more qualitative retaliatory measures such as non-tariff and regulatory barriers against U.S. and foreign businesses operating in China. Concrete examples include greater regulatory scrutiny (such as licensing restrictions and environmental inspections), delayed or restricted customs clearances, and additional export restrictions on rare earth materials that are critical for U.S. and foreign technology and pharmaceutical companies. For instance, Beijing has already vowed to retaliate through a variety of export control measures including its proposed Unreliable Entities List (UEL) targeting foreign companies in China is set to be imminently released according to Chinese-state media sources.   

Customers are advised to closely monitor the latest developments on the U.S.-China trade war and its impact on global supply chain networks. 

Appendix

10% Tariff Most Affected Products

Appendix A: Number of U.S. Imports Subject to 10 Percent Chinese Tariffs (by Sector)

5% Tariff Most Affected Products

Appendix B: Number of U.S. Imports Subject to 5 Percent Chinese Tariffs (by Sector)

Automotive 25% Tariff

Appendix C: Number of U.S. Auto Product Imports to 25 Percent Chinese Tariffs (Effective from December 15)

Automotive 5% Tariff

Appendix D: Number of U.S. Auto Parts and Components Imports Subject to 5 Percent Chinese Tariffs (Effective from December 15)

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