Following the previous escalation in U.S.-China trade relations, American and Chinese trade officials have agreed to hold initial trade talks in Switzerland from May 9-12. The talks are likely a first step in negotiations that could last over several months while a trade agreement is ironed out. However, U.S. President Donald Trump has indicated he would not be willing to agree to an initial tariff drop to jumpstart negotiations, which could stall future talks. Meanwhile, despite publicly maintaining a hard line on the tariff debate, the Chinese government quietly began a process to allow Chinese companies to apply for tariff exemptions on certain U.S. imports. Exemptions have already been finalized for some semiconductors, chipmaking equipment, medical products, pharmaceuticals, industrial chemicals and aviation parts. The exempted goods likely total around 24% of China’s imports from the U.S. The government has also opened a public comment process for companies to recommend additional products for exemptions. However, the Chinese government also sent letters to several unspecified South Korean companies ordering them to restrict exports of products containing Chinese rare earth minerals to U.S. defense firms. The affected South Korean components include power transformers, batteries, displays, electric vehicles, as well as aerospace and medical equipment. It remains unclear which specific U.S. defense firms are being targeted by the request, or if the affected Korean companies plan to adhere to the orders.
Negotiations on reciprocal tariffs and exemptions for automotive tariffs make progress
In addition to recent developments in the U.S.-China tariff talks, President Trump’s administration is also moving forward with negotiations on reciprocal tariffs. A trade agreement with the United Kingdom was announced on May 8 following several weeks of bilateral talks. Tariffs on cars coming into the U.S. were cut from 25% to 10% for a maximum of 100,000 cars from the UK, but all imported cars exceeding this threshold will still face a 27.5% import tax. A 25% tariff on steel and aluminum imports into the U.S. that has been in effect since March has also been scrapped as part of the agreement, however, the U.S. government is reportedly planning to implement a quota system for steel and aluminum as well as unspecified derivate products, which could limit the amount companies in the UK will be able to export to the U.S. In the food sector, British farmers will be allowed to export up to 13,000 metric tons of beef to the U.S. without facing tariffs in exchange for the UK dropping an existing 20% tariff on U.S. beef imports and raising its own import quota from 1,000 metric tons to 13,000 metric tons. President Trump also claimed that engines and airplane components made by UK-based Rolls-Royce Holdings plc will not face tariffs at all. Despite these initial announcements, talks will reportedly continue to address trade in sectors such as pharmaceuticals. U.S. negotiators are also nearing a deal with India, which could include expanded U.S. market access for agricultural products, e-commerce goods, data storage products, and critical minerals. President Trump has indicated that Indian officials have made a significant offer to lower tariffs on U.S. goods to near zero. A trade agreement with Japan is expected by June, with negotiations scheduled to continue through mid-May, while a deal with South Korea also appears to be on the way as talks continue.
However, some countries are continuing to finalize plans in the event that U.S. tariffs ultimately move forward. On May 8, European Union officials released a proposed list of goods valued at $107 billion (€94.5 billion) that could be targeted by counter-tariffs as soon as July. The affected products include automobiles, automotive parts, chemicals, electrical equipment and machinery, and civil aircraft. The list would be enacted in addition to a previous list of threatened counter-tariffs affecting $23.8 billion (€21 billion) of U.S. goods, including soybeans, beef, motorcycles, and other products, which were postponed after President Trump delayed the enactment of U.S. reciprocal tariffs. Additionally, President Trump reaffirmed that there are no immediate plans to reduce tariffs on imports from Canada, despite a recent Canadian diplomatic visit to the U.S.
Meanwhile, President Trump’s planned 25% tariffs on automotive part imports went into effect on May 3. However, the final version of the tariffs exempted components covered by the United States-Mexico-Canada agreement, sparing the high volume of products imported from Canada and Mexico. Additionally, in a separate measure, President Trump approved new exemptions on the previously enacted 25% tariffs on finished vehicle imports. Under the policy, automakers paying these tariffs will be exempted from paying tariffs on steel and aluminum products. Additionally, tariffs on foreign auto parts used in United States-made automobiles will be reimbursed up to 3.75% of the value of the United States-made vehicle for one year. After one year, reimbursements will fall to 2.5% of the car’s value in the second year, after which all reimbursements will end.
The U.S. also imposed new tariffs on solar panels manufactured in Cambodia, Thailand, Vietnam, and Malaysia on April 22. The tariffs are intended to target Chinese companies accused of relocating production to these countries and dumping products into the U.S. market at artificially low prices. The tariffs, which will reach up to 3,521%, are steep enough that selling the affected products will be unfeasible in the U.S. market.
Trade decline slows port traffic at East Asian and United States West Coast ports
Amid ongoing uncertainty surrounding tariffs, the shipping sector has struggled. In November, U.S. importers began to front-load shipments in anticipation of tariff hikes on products from China and other trade partners. As a result, the volume of ocean imports to the U.S. increased by 12% from November to February compared to the previous year. However, minimum levies of 145% on all goods from China have since resulted in many of these importers cancelling orders and pausing shipments. Additional proposals to implement U.S. port tolls on Chinese shipping companies and Chinese-built vessels, now scheduled to come into effect on October 8, have created further tension among carriers and port operators. The Port of Los Angeles and Long Beach in California, responsible for approximately 32% of the United States’ container imports, is especially affected by recent measures due to shipments from China accounting for around 45% of its business. It is estimated that cargo volume will drop by about 35% coming into May compared to last year. Furthermore, a quarter of the ships scheduled at the port for May have been cancelled due to light volume. Similarly, shipping company Hapag-Lloyd AG reported that 30% of its shipments from China to the United States have been cancelled, forcing a pivot to smaller ships to avoid blank sailings on Trans-Pacific routes.
As importers look to avoid the high tariffs on Chinese goods, businesses have begun to look elsewhere for alternative suppliers. While imports from China have plummeted, shipments from countries in Southeast Asia, such as Taiwan, Vietnam and Thailand, have been on the rise. For some forwarders, bookings out of Southeast Asia have reportedly increased by 20% in recent weeks. These countries may be able to help mitigate the problem, but they are unlikely to completely replace China’s capacity. A significant volume increase on these lanes could also lead to congestion at ports, delays and potential equipment shortages.
Commercial truck sector to face new tariff investigation
In recent weeks, the United States Department of Commerce (DOC) has initiated several Section 232 investigations into the import of copper, critical minerals, pharmaceuticals, and semiconductors, among other products. Additionally, on April 23, authorities announced the launch of a new probe into imports of medium-duty and heavy-duty trucks and related parts with public hearings scheduled for mid-May. The investigation will concern trucks with a gross vehicle weight of more than 10,000 pounds along with engines, engine parts, transmission and powertrain parts, and electrical components used in such vehicles. While public hearings over the issue are scheduled for mid-May, it is unclear if or when duties will be implemented on the vehicles and parts under review. These measures could affect numerous countries such as Mexico, Canada and Japan, the top exporters of commercial trucks to the United States. New duties could also put additional pressure on automotive companies already facing increased costs due to the 25% tariff on light vehicles.
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