New year hike in tariffs to 25 percent may be inevitable

   Businesses should prepare for the “seeming inevitability” that the 10 percent tariffs on imports of $200 billion of Chinese goods into the U.S. that went into effect on Sept. 24 will be raised to 25 percent on Jan. 1, says Erin Ennis, senior vice president of the U.S.-China Business Council.
   Speaking last week to the Pacific Coast Council of Customs Brokers and Freight Forwarders Association at its annual Western Cargo Conference (WESCCON), she said, “There is no clear pathway of what China can do to reduce the concerns that the United States has, and there is no agreement within the administration on what they should be asking the Chinese for.”
   While there is an opportunity on Nov. 29 — when President Donald Trump and Chinese President Xi Jinping are scheduled to attend the G20 meeting in Buenos Aires, Argentina — for an agreement to be reached, Ennis said, “It is not clear that will happen.”
   (Earlier this month a meeting of G20 finance ministers and central bank governors was held in Indonesia in the lead-up to next month’s meeting of heads of states. Nicolás Dujovne, Argentina’s minister of the treasury, said while global growth projections remain steady, downside risks “are starting to materialize.” With respect to trade tensions, he said, “We agreed that international trade is an important engine of growth, and we need to resolve tensions which can negatively affect market sentiment and increase financial volatility.”)
    Ennis said, “The president’s view of the unfairness of how American companies are treated in China really is at the core of everything that the administration is doing.
   “With all of the uncertainty and with the very unusual approach that this administration has taken on these issues, the Chinese are actually willing to talk now,” she said. “They do seem to recognize that this administration is serious, that they will have to do things that are different from what they have done in the past.”
   The U.S.-China Business Council represents more than 200 American companies that do business with China. Ennis said there is a “litany” of things that China could do to improve property rights and technology transfer policies — the issues that prompted the Trump administration to impose the initial two rounds of tariffs against a total of $50 billion of U.S. imports of Chinese goods.
   She noted that some of those steps the Chinese could take “are easier than others, but they need to be done and they are in China’s own interest.”
   “China has been talking about reforming its economy for at least five to 10 years,” she said. “They recognize that the model they had of making a lot of stuff and shipping it around the world isn’t very sustainable. So they’ve been focusing on creating domestic demand and try to give themselves a little more flexibility in terms of how global changes in trade affect them.
    “That movement away from manufacturing more into services creates different kinds of jobs and allows you to have different skills sets. They also recognize that protecting intellectual property rights is probably good for their own companies,” she said. “They don’t want to be the assembler of the world. They would like to be a leader in technology. That requires very robust IP protections.”
   She referenced the Made in China 2025 initiative that targets 10 industries in which China “wants to become a global leader.”
    The consulting firm McKinsey says these are: information technology; numerical control tools and robotics; aerospace equipment; ocean engineering equipment and high-tech ships; railway equipment; energy-saving and new-energy vehicles; power equipment; new materials; medicine and medical devices; and agricultural machinery.
    “There will be subsidies and incentives to make it in China,” said Ennis. “It’s potentially a souped-up version of all the ‘buy American,’ ‘made in America’ things here because the Chinese are willing to put a lot more money into subsidies to make these kinds of things happen.”
    She said Made in China 2025 “has been very controversial because while the policy itself does not include it, accompanying documents from some of the think tanks that the Chinese government has set those domestic market share and global market share targets.
    “China is saying that it will determine if it has met its goals if they have both increasing shares of products in those 10 categories sold within China and products in those 10 categories sold everywhere else in the world,” said Ennis. “To me, that is a recipe for overcapacity in 10 of those areas. 
    “You’ve seen this before. This is what happened with solar panels. You put in a lot of money … and then suddenly you’ve got a glut of product. That is not a good economic policy.”
    However, Ennis also said that just because China has announced a policy does not mean they will be totally successful. “They will probably reach that goal in maybe 50 percent,” she said.
   The U.S. “could demand that China do what they were planning to do anyway,” she said. “The Chinese could say, We are not doing this because the U.S. forces us to do it. You can go back and look at our policies for five, 10 years we have been talking about doing it. We are simply now ready to act and don’t worry about the U.S.
   “The risk for China right now is that they have no guarantee that even if they were to do these things the U.S. still wouldn’t back away.”
   However, she said for China and the United States to come to some sort of agreement in Argentina, a list of U.S. demands would need to be put forth, “China would need to go through it; we need to set timetables of what it looks like. You want to have something that is measurable with it so that they can guarantee that you were getting something before you back off from the tariff. It is not clear that that will happen.
    “The pathway on this should be leading us to something where a resolution is possible.” Ennis said, but added, “There is a division within this administration over what is appropriate.
   “It has been widely reported — and we see evidence of it every day — that within the administration there are those who feel very strongly that it is time to back away from the tariffs, that we just need to just get a deal and move forward and recognize that damage has begun to the U.S. economy and it will only get worse as things go on.
   “There is another camp in the administration that feels very strongly that now is not the time to back away from what we have done, that maybe we have focused China’s attention but that they still are not doing sufficient things to address what our concerns are and that what we are dealing with is short-term pain that is going to lead to a much stronger U.S. economy, a much more competitive playing environment,” she said.
    “This does not bode well for what you are going to do between now and November 29 to come up with a path forward,” she said. “There is no one agency that is fully in charge of these things. There is jockeying that goes on and this is among the challenges.”
   Ennis believes President Trump’s “personal inclination is to keep the pressure on because there probably are few things that China could do that would genuinely address those concerns.”
   She urged her audience to “tell your own stories” about how tariffs are affecting their businesses.
   “It is the only thing we know of that the administration pays attention to. They could care less about the data. They are not concerned about inflation. There are some economic reasons for that, but the bottom line is they think that this pain is worth it.”
   Ennis believes there are some officials in the Trump administration who say “largely in private, although every now and then Peter Navarro will say it publicly, that part of the goal of the tariffs is to bring manufacturing back to the U.S. And the goal to get the manufacturing back to the U.S. is a secondary goal, but at least get your manufacturing out of China.
   “Frankly that’s a state-led economy when you start dealing with things like that. Actually it looks a lot more like how we have been criticizing China in terms of things that it’s been doing, but that may be part of it, she said.
   “I do think the administration is having an internal debate about whether tariffs are the right way to go, which tariffs are the right ones to do. … Among the reasons why I think that new tariffs on auto parts have not come about is because they both recognize that they are having an effect.”
   In response to a comment from the audience that the $800 de minimis duty exemption on the 301 duties has created “a loophole as wide as the state of Montana” Ennis said. “The reality of e-commerce is that it’s changed the dynamic for a variety of aspects of trade with China. I have a friend who works in the bicycle components industry and he’s talked about how the shipments now that are coming in. Rather than doing it all in one big box, you just divide it up into 10 boxes and suddenly you have met the criteria.”
    But she added that “the vast majority of trade that we have probably is not getting around those tariffs. The evidence that companies have right now that they are talking about in terms of the damage they are now seeing, most companies are not finding this work-around, even though there is a significant loophole. Will they address it going forward? It’s hard to say.
   “Right now, between the steel and aluminum tariffs and the 301 tariffs, the Commerce Department and the Office of the U.S. Trade Representative are dealing with the initial problem of all of the companies that want to get themselves excluded from this list. And then how people are circumventing those things are probably secondary to it.”
   To an audience member who was concerned about requests for exclusions from the 301 tariffs being denied, Ennis said she thinks part of the problem is the large number of tariffs that have been imposed, that the tariff process is still in the early stages (The period for requesting exclusion from the initial round of tariffs on $34 billion of Chinese imports only ended on Oct, 9.) and that the office of the U.S. Trade Representative is a small government agency staffed with employees “who are not trained to look at HTS codes. They may have no idea of why one widget is different from another widget and whether it should get a tariff exclusion or not.
    “This is not what their expertise is and they are being asked to make determinations about things and where the goal is probably to exclude as little as possible but you don’t want to cause undue damage to companies. So I think they are probably still trying to figure out what they are doing,” Ennis said.
   Based on the exclusions that have been granted imports of steel and aluminum, “one of the criteria in the steel and aluminum tariffs is that if no one objects to your exclusion request then it might be granted, but if anyone objects it will not be granted.”
   As to whether there will be an exclusion process for the tariffs on the latest round of tariffs on $200 billion worth of imports from China, “I think right now what we are hearing from the administration seems to be that they feel the 10 percent tariff is not so much of a burden that anyone should feel they need to get an exclusion from it, but perhaps if those tariffs go up to 25 percent they might consider it. 
    “If you feel there needs to be an exclusion process, get your voice in there, get your members of Congress in there, get your trade associations in there,” Ennis urged, noting there is no requirement that an exclusion process be set up.
   Bloomberg reported on Monday that “companies and business groups including the U.S. Chamber of Commerce ramped up their spending on lobbying during the third quarter as they sought to contain the damage from President Donald Trump’s trade war.” It said the chamber “spent $17.6 million on lobbying during the third quarter, a 34 percent increase from the same quarter last year.”
   Ennis also cautioned that by taking unilateral action, the United States runs the risk of making U.S. companies look less attractive to Chinese buyers because of the uncertainty created by tariffs when contrasted with suppliers in Japan or Europe.
   “When you do this alone, you essentially are putting a target on American companies,” she said. “It’s harder to retaliate on all of your trading partners.”