Tag: 301

Yes, Tariffs on Imports from China Are Taxes (Even When Absorbed by Business!)

Instead of entering what many anticipated would be the home stretch of negotiations to end the nearly yearlong trade war, U.S. tariffs on about $200 billion of imports from China are set to increase from 10 percent to 25 percent tomorrow morning. There is plenty of speculation as to what happened, who’s to blame, whether President Trump is engaging in negotiating tactics described in “The Art of the Deal,” and which economy is better situated to withstand a wider, longer trade war (as if a 10 percent economic contraction means victory if the other economy shrinks by 15 percent).

The most prominent explanation for the abrupt reversal is that U.S. negotiators learned that their Chinese interlocutors were backing away from previous commitments to resolve the forced technology transfer problem, which is one of the most important U.S. objectives in these talks. After mulling that development last weekend, Trump opted for escalation. He also promised that the balance of Chinese goods (another $250 billion of imports not yet tariffed) soon will be hit with rates of 25 percent, as well. In response, Beijing announced it will impose yet-to-be-specified countermeasures.

Interestingly, this week’s developments haven’t completely torpedoed the negotiations. A somewhat smaller (than originally planned) delegation of Chinese officials is in Washington for negotiations slated to begin at 5pm, which gives them exactly 7 hours to sort everything out before Trump’s higher tariffs take effect at the stroke of midnight. Don’t expect a comprehensive deal or even the contours of one to materialize, but with Chinese Vice Premier Liu He making the trip to Washington despite this latest upheaval, there is at least some hope that the actual tariff escalation will be deferred.

It turns out that the fine print in the Federal Register notice announcing the new rates states that products leaving China after 12:01, Friday, May 10, will be subject to the higher tariffs. It takes about two weeks for a cargo ship departing Shanghai to arrive in Long Beach, so negotiators really have seven hours, plus about two weeks, to reach a deal before Customs has to tax U.S. importers at the new, higher tariff rate. Of course, time is much shorter (seven hours plus about twelve hours!) for importers of high-value, fragile, and perishable products, which are typically transported by air.

As of this moment, the United States has punitive tariffs in place on approximately $250 billion of imports from China. Since last July, tariffs of 25 percent have been levied on imports that were valued collectively at about $50 billion in 2017. Nearly all of those goods are intermediate inputs or capital equipment—the purchases of U.S. producers. Trump advisor Peter Navarro was pleased to note at the time that, in selecting the products to target, he and colleagues used a special economic model to help them avoid burdening consumers by focusing on business purchases, as if businesses don’t pass their higher costs onto consumers in the form of higher prices or onto to their shareholders and workers in the form of lower profits. Thanks, Pete!

After Beijing retaliated, the Trump administration imposed 10 percent tariffs on an additional $200 billion of Chinese goods. This time, the majority of targeted products were consumer goods. It is this tranche of products for which tariffs are slated to increase to 25 percent at midnight. Makes one pine for the days when Navarro worried about consumers.

If matters aren’t resolved quickly, the likelihood is very high that all U.S. goods imports from China will be hit with tariffs of 25 percent.  Let me try to put that in some perspective.

In 2017 (before the punitive tariffs were in place), U.S. imports from China totaled $504 billion and duties paid to U.S. Customs amounted to $13.5 billion, which is an average applied tariff rate of 2.68 percent. Last year, when tariffs of 25 percent on $50 billion of Chinese goods were imposed in June and July, and additional tariffs of 10 percent on $200 billion of Chinese goods were imposed in late September, the value of imports from China totaled $543 billion and the duties collected came to $23 billion—an average applied tariff rate of 4.23 percent.  Nearly $10 billion of costs associated with the higher tariffs were imposed on consumers, businesses, shareholders, and employees.

It turns out that for many products Americans purchase from China, demand is fairly price inelastic. In other words, a one percent increase in price generates less than a one percent decline in quantity demanded. Total revenue rises. At least that is the case for broad swaths of products within the range of price increases attributable to the tariffs. Afterall, despite that tariffs, import value rose from $504 to $543 billion in 2018. Maybe there aren’t many substitute sources or the costs of finding substitutes and switching is too high relative to the tariffs.

A 25 percent across-the-board tariff could generate different effects. Demand may be more price elastic for more products at that price range. In other words, we will likely see a decline in import value from China if 25 percent tariffs are imposed. That means that the added costs directly attributable to the tariffs would not be 25 percent of $543 billion (the 2018 value), for example, because the value of imports will be lower. How much lower depends on these elasticities and other factors.  However, 25 percent of $543 billion is not an unreasonable, upper end estimate of the costs to U.S. consumers and businesses that would be attributable to a 25 percent across the board tariff. That’s $135 billion. That’s a cost of about $400 for every person in the United States. That’s a lot.

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Steel Yourself as Trump Cuts Off Trade to Spite His Face

Various news outlets are reporting that, at midnight tonight, special U.S. tariffs on imports of steel and aluminum from Canada, Mexico, and the European Union will go into effect. This action stems (incongruously and capriciously) from two nearly yearlong investigations conducted by the U.S. Department of Commerce under Section 232 of the Trade Expansion Act of 1962, which found that imports of steel and aluminum “threaten to impair the national security” of the United States. This seldom used statute gives the president broad discretion both to define what constitutes a national security threat and to prescribe a course to mitigate the threat. On both counts, President Trump has abused that discretion.

In March, the president announced his intention to impose duties of 25 percent on steel imports and 10 percent on aluminum imports from all countries. But temporary exemptions were granted to some countries in an effort to extort commitments from them to do their part to reduce the U.S. trade deficit (by selling us less stuff and buying from us more stuff) or to agree to U.S. demands in ongoing trade negotiations (South Korea, Canada, Mexico). The Koreans succeeded by agreeing to limits on their steel exports and by upping the percentage of US-made automobiles that can be sold in Korea without meeting all of the local environmental standards. Ah, free trade…

Apparently, the Europeans, Canadians, and Mexicans haven’t bent sufficiently to Trump’s will, therefore those countries—those steadfast allies—constitute threats to U.S. national security and will no longer be exempt from the tariffs, which means that U.S. industries that rely on steel and aluminum (imported or domestic) will be hit with substantial taxes to mitigate that threat. Got it?

This announcement comes on the heels of one made earlier this week regarding the “trade war” with China, which is back on 10 days after Treasury Secretary Steve Mnuchin declared it to be “put on hold.” (I guess it was just a rain delay.) On June 15, the administration will publish the final list of Chinese products—about 1,300 products valued at about $50 billion—that will be hit with 25 percent duties. The Chinese government has published its own list of U.S. exports that will be hit with retaliatory duties in China.

So, as has been the case every day for the past 16+ months, the U.S. and global economies (even as they’ve strengthened) remain exposed to the whims of an unorthodox president who precariously steers policy from one extreme to the other, keeping us in a perpetual state of uncertainty. With the Europeans, Canadians, Mexicans, and Chinese all preparing to retaliate in response to these precipitous U.S. actions, at the stroke of midnight we may finally get the certainty of the beginning of a deleterious trade war.

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Despite Growing Tensions, There Is Still Scope to Avert a U.S-China Trade War

If 2017 was the year of fiery trade talk, 2018 has been the year of provocative trade actions. During the first four months, President Trump imposed or announced intentions to impose tariffs on thousands of products stemming from five investigations conducted under three different, seldom-used laws. Talk of trade war is rampant and, as May begins, the troops are in formation—a circular formation, but a formation nonetheless! By Memorial Day, it should become much clearer whether their orders will be to shoot, hold fire, or demobilize.

What follows is a brief recap of the relevant trade policy actions of 2018 that have taken us to the present situation.

In January, the president imposed “safeguard” restrictions following two separate investigations of imports of large washers and solar cells, under Section 201 of the Trade Act of 1974.  Tariffs and tariff rate quotas, respectively, were imposed for a period of four years in both cases against imports from most countries. These safeguard measures are absolutely stupid as a matter of economics, but relatively trivial as far as the impact on U.S.-China relations and the prospects for trade war are concerned.

In March, under the guise of acting to protect national security, Trump invoked Section 232 of the Trade Expansion Act of 1962 to impose tariffs on imported steel and aluminum from all countries. Soon after the announcement and before the tariffs took effect, Trump offered temporary exemptions to several trading partners to “encourage” them to play nice: buy more U.S. stuff; sell Americans less foreign stuff; increase NATO spending (EU countries); agree to U.S. terms on various aspects of the NAFTA renegotiations (Canada, Mexico); agree to export quotas (South Korea) and the temporary exemptions will be made permanent. Well, as the temporary exemption period was about to expire on May 1, the president extended the deadline to June 1. Presumably, if the NAFTA negotiations wrap up this month (apparently, a real possibility) and Trump gets what he wants, Canada and Mexico will be permanently exempted from the steel and aluminum tariffs. Congrats!  It’s much less clear that the Europeans are willing to submit to these tactics. They’ve crafted a retaliation list and seem likely to go that route.  The Chinese, whose steel and aluminum exports have been subject to the tariff since March 23, have already retaliated against a list of 128 U.S. products (amounting to about $3 billion in U.S. exports), including ethanol, wine, nuts, fruit, and a few other commodities. 

Although the “national security” restrictions on steel and aluminum are a more significant irritant than the safeguard restrictions on washers and solar cells, they still only amount to a flea bite on an elephant’s hide relative to Trump’s most recent, most provocative, and—some would argue—most justifiable action so far. At the beginning of April, Trump announced his intention to impose tariffs on 1,300 Chinese products accounting for about $50 billion of exports to the United States, as a result of an investigation into Chinese intellectual property and forced technology transfer policies, under Section 301 of the Trade Act of 1974. The “remedy” also includes instructions for the Treasury Department to publish new investment rules that will make it harder for Chinese companies to purchase U.S. technology and U.S. tech companies.  Within a few hours of the U.S. announcement, China published a list of U.S. products, amounting to about $50 billion of exports to China (farm products, airplanes, autos, etc.), that it would subject to retaliatory duties of 25 percent should the U.S. measures take effect.

As of that point, between the 232 and the 301 cases, $106 billion of U.S.-China trade was in the crosshairs (about 15% of two-way trade). Then in reaction to China’s retaliation threat, Trump raised the stakes by instructing the USTR to identify another $100 billion of Chinese products to assess with tariffs.  That list has not yet been published, but if it is and China responds commensurately (by targeting another $100 billion of U.S. exports), its list would have to include ALL U.S. exports to China because total U.S. goods exports to China in 2017 amounted to $130 billion. (Services exports add another $50 billion, but they’re not easy to hit with tariffs). The next likely target would be U.S. companies operating in China—discriminatory taxes, regulations, restrictions, etc.  In any event, the amount of trade subject to tariffs ($306 billion) would begin to approach half the value of the two-way trade—a decidedly cataclysmic outcome.

President Trump seems to be aware of the stakes.  Last month he tweeted that trade wars can be good and are winnable. He cites the bilateral U.S. trade deficit as evidence that China needs us more than we need them.  Hopefully, he’s rational enough to realize that his avoidable actions would trigger a massive global economic contraction which, even if the United States is less hurt than others, history would not look kindly upon.

The month of May offers some opportunities to ratchet down the tensions and, even, find some solutions. The Trump administration’s trade policy team—USTR Robert Lighthizer, Commerce Secretary Wilbur Ross, Treasury Secretary Steven Mnuchin, National Economic Council Director Larry Kudlow, and National Trade Council Director Peter Navarro—is in Beijing this week, presumably to get China to commit to certain actions that would enable tensions to be dialed down.  Mid-month, the USTR is holding a hearing for the public airing of views about the Section 301 remedies, where it will be impressed upon the administration how costly a trade war would be.  And, presumably, toward the end of the month is the momentous Korean Summit.  If the president gets the results he’s looking for (whatever they may be) and Beijing is perceived as having played an important role in reaching that outcome, that could give Trump the cover he probably needs to put his pistols back in their holsters and focus on an effective, comprehensive U.S.-China free trade agreement. That should be the primary goal of U.S. trade policy during the Trump administration.

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