U.S.-China Trade Relations are NOT Going to Improve: What Are You Gonna Do?

Several U.S. media outlets have recently reported that the Biden administration is considering a new round of tariffs on Chinese products, even though American businesses have been pushing the administration to remove or at least reduce the tariffs imposed by the Trump administration that are still being applied on over $400 billion worth of Chinese goods.  Almost all the exemptions from those tariffs that previously were granted for a small percentage of Chinese products have expired with no plans yet to renew or resume that tariff exclusion application process.

Some U.S. businesses have shifted or begun to shift their manufacturing from China, in part to avoid the burden of tariffs.  Other companies are stuck (or feel stuck) because they are unable (or unwilling) to shift their manufacturing from China at all even with this extra tax burden.  China has the reputation as the world’s factory because over time they have developed so many factories that can seemingly produce anything and everything.  Some have concluded that it is impossible or commercially unfeasible to try to find another country that can remotely match China’s ability to produce products with high and consistent quality, in large or small volumes, at usually the lowest cost available.  Since it is too difficult or too costly to find or develop alternative suppliers outside of China, many companies have no choice but to continue sourcing from China.  Many begrudgingly pay the China import tax and pray for the day the Biden administration finally decides to roll back those Trump tariffs.

The White House is to some extent caught between a rock and a hard place. American businesses want relief from the China tariff regime, which has cost American importers more than $100 billion so far, according to U.S. Customs and Border Protection.  The cost of these tariffs are paid by American importers, who have passed on these extra costs down to their customers and ultimately to U.S. consumers.  The China tariffs have created a substantial drag on the American economy.  With the economic pressures from the on-going coronavirus pandemic and numerous supply chain disruptions (e.g., shortages in semiconductors, lumber, ocean containers, truck drivers), if/when the Biden Administration chooses to roll back the Trump tariffs, this could provide the American economy a significant boost particularly for those American companies who rely on imported inputs and other products that cannot be sourced from U.S. or other non-Chinese suppliers.

Although there are plenty of economic reasons why the China tariffs should be lifted, politically there is little to no support for such action.  China currently is the villain every politician loves to be seen hating. Although Democrats and Republicans disagree on most other issues, there is strong political consensus that the U.S. needs to continue to be tough on China trade issues. A recent Pew Research Center poll showed nearly three quarters of all Americans have an unfavorable view of China. Beyond the China tariffs that ostensibly were intended to target China’s intellectual property theft, the increasing U.S. opposition to China has arisen from a broad range of issues including China violating human rights in Xinjiang, squashing democracy in Hong Kong, threatening Taiwanese autonomy, arbitrarily arresting Canadians, and increasing military activity in the Indo-Pacific.

So where do we go from here? When asked earlier this month about the administration’s review of the tariffs, Jen Psaki, the White House press secretary, said, “I don’t have any timeline for you on when that review will be completed.”  Given the strong anti-China winds blowing, the Biden administration is likely to maintain the China tariffs, while maybe offering to re-open the exclusion process to allow a more meaningful level of exemptions for products and industries deemed either economically critical or politically sensitive.

While U.S. companies wait for the Biden Administration to make a move on Trump’s China (and other) tariffs, the status quo of Americans paying for Trump’s China tariffs also continues.  With both the U.S. and China posturing strongly towards each other, odds are that U.S.-China relations will get worse before they get better.  With such uncertainty on trade issues, many U.S. companies have delayed investments in additional manufacturing capacity, hoping that the change in administration would clarify the medium-term future of Sino-U.S. trade relations. For the time being, that clarity does not seem forthcoming.

So what are you gonna do?

In an upcoming post, we will discuss some of what companies have been doing to deal with the Trump tariffs on imported Chinese products. Some companies have tried to avoid the Trump tariffs by illegal means (e.g., making false declaration of product, country of origin, valuation). Some companies have tried to legitimately change their production processes and supply chains so that their products really are no longer “Made in China.” U.S. Customs and Border Protection is responsible for enforcing the China tariffs, so we will discuss how they distinguish between legal and illegal imports.