Although the United States and China announced a 90-day trade truce following a summit from May 9-12, trade talks have continued to deteriorate amid disputes over non-tariff trade barriers. While U.S. trade officials were initially optimistic that China would rescind its export controls on the rare earth minerals samarium, gadolinium, terbium, dysprosium, lutetium, scandium and yttrium, U.S. President Donald Trump and Trade Representative Jamieson Greer have since accused China of failing to fulfill the temporary agreement by leaving these restrictions in place. China responded by saying that the U.S. has also not upheld the deal by implementing new guidelines on export controls for artificial intelligence chips and semiconductor design software and has threatened unspecified further actions. These complaints have devolved into a more hostile trade environment, bringing into question the longevity of the current tariff pause.
U.S. appeals court temporarily allows tariffs to move forward pending new ruling
On May 29, the United States Court of International Trade issued a ruling blocking President Trump from implementing several of his most severe tariff measures. The ruling determined that he overstepped his authority by invoking the 1977 International Emergency Economic Powers Act to enact tariffs without Congressional approval. Only the tariffs declared under this Act would have been blocked, which included the fentanyl-related tariffs on Canada, Mexico, and China, as well as the global reciprocal tariffs scheduled to go into effect on July 8. However, on May 30, the U.S. Court of Appeals for the Federal Circuit enacted a temporary stay of the ruling, which will block its enforcement while the appeals court decides the verdict. Other tariffs enacted through separate legal authorities are unaffected, including tariffs on steel, aluminum, and cars, as well as proposed tariffs on pharmaceuticals and semiconductors. If the ruling is upheld by U.S. courts, President Trump could seek to revise the current tariffs to fall under other legal authorities.
U.S. and China implement new trade restrictions as relationship deteriorates
On May 28, the U.S. Department of Commerce restricted sales of certain aerospace products, semiconductor technologies, and chemicals to China. Affected products include design software and chemicals for semiconductors, butane and ethane, machine tools, and products related to jet engines. The export restrictions were announced after China did not lift export controls on critical minerals. Semiconductor design software exporters Cadence Design Systems, Inc., Synopsys, Inc., and Siemens AG are likely to be affected, which sell to Chinese customers including Brite Semiconductor and Zhuhai Jieli Technology Co., Ltd. Commercial Aircraft Corporation of China, Ltd. (COMAC), which will no longer be allowed to purchase American aerospace products from suppliers including GE Aerospace, is also expected to be affected.
Additionally, U.S. government officials have proposed broadening restrictions on China’s technology sector by including subsidiaries that are majority-owned by already-sanctioned firms on the Entity List, Military End-User List, or Specially Designated Nationals List. These already-sanctioned firms include several major manufacturers of semiconductors and electronic components, including Huawei Technologies Co. and Yangtze Memory Technologies Co. Sources indicate new companies could also be added, including Changxin Memory Technologies Inc. and Semiconductor Manufacturing International Corp. The proposed regulations would prevent sanctioned Chinese companies from sidestepping the regulations by creating new unregulated subsidiaries and could come into force as soon as June.
Steel and aluminum tariffs continue to increase
Effective as of June 4, the U.S. increased tariffs on steel and aluminum imports from 25% to 50%. Imports from all countries except the United Kingdom will be affected, with the U.K. receiving an exemption following a trade deal in May. The measure has drawn criticism from many trade partners. Mexican President Claudia Sheinbaum called the tariffs unjust and has threatened potential retaliatory tariffs to come next week. Canadian Prime Minister Mark Carney has also criticized the tariffs and indicated that Canada would discuss the measure in ongoing trade talks. In response to the previous 25% tariffs imposed by the U.S., Canada promised retaliatory tariffs that have since been delayed until October while negotiations continue.
U.S. threatens additional tariffs on E.U. and rejects trade deal offers from Vietnam
On May 23, Trump threatened to impose 50% tariffs on the E.U. on June 1, over stalling trade negotiations. However, implementation was delayed until July 9 to allow time for further talks. Key sticking points include the E.U.’s value-added taxes and regulations affecting U.S. companies, which E.U. officials insist are non-negotiable. The bloc’s position on China-related issues is a focus where the E.U. has proven more willing to cooperate, particularly in strategic sectors like steel. In the meantime, a 10% baseline tariff on E.U. imports remains in effect.
Separately, German automakers Mercedes-Benz Group AG, BMW Group, and Volkswagen AG are in talks with the U.S. to secure an individual deal. These companies have either planned new investments or are increasing production at their existing U.S. facilities, including the Mercedes plant in Tuscaloosa, Alabama and the BMW plant in Spartanburg, South Carolina. A deal is expected to be finalized in June, contingent upon these investments moving forward. Under the proposed agreement, the automakers would receive credits for each vehicle exported from the U.S., which would in turn reduce their tariff bills.
Meanwhile, a deal remains elusive between the U.S. and Vietnam. American negotiators are reportedly unwilling to rescind threatened 46% reciprocal tariffs on Vietnam even if it removes all tariffs on U.S. products. The rerouting of Chinese exports through Vietnam is a priority concern for U.S. officials, as well as Vietnam’s economic reliance on materials and components manufactured in China. If enacted, a 46% tariffs could have drastic impacts on Vietnamese exports to the U.S., including consumer electronics, electronic components, clothing and footwear, and other consumer goods.
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