Tariffs Take Effect on Third Set of Chinese Imports; China Retaliates

On the first day of tariff collection for the third phase of the U.S.-China trade war, another 5,745 products became subject to 10 percent higher levies, with the threat of an additional 15 percent levy on those products following in a little more than three months.

This list has been described as the value of $200 billion in imports last year (see 1809170051), but according to a Peterson Institute of Economics estimate, it's really $176 billion after smartwatches, wireless headphones, plastic gloves and child safety seats, among other goods, were spared.

The Tax Foundation, which opposes higher taxes, has modeled that the tariffs enacted so far under Sections 201 and 301 and 232 will cost 94,303 full-time equivalent jobs. Fitch Ratings says U.S. protectionism is materially affecting the global economic outlook. "The trade war is now a reality," Fitch chief economist Brian Coulton said.

At the same time the third round of U.S. tariffs took effect, China imposed additional 10 percent tariffs on 3,571 U.S. items, with oak wood veneer, non-electrical machines, makeup, copper and natural gas among the top-volume items -- as well as 1,636 tariff lines with an additional 5 percent tariff. Together, the two lists accounted for about $60 billion in imports last year.

Alibaba Founder Jack Ma said the trade war will last 20 years. Tony Fratto, who served in the George W. Bush White House and who now advises companies on international affairs as a partner at Hamilton Place Strategies, isn't sure it will last that long, but thinks it will not be over until Trump leaves office. "I think it’s going to go on for a very long time," he said in an interview with International Trade Today. "I don’t know about 20 years. Some of the kinds of things that are being cited as concerns are not things you can address overnight."

He said Chinese policies on forced tech transfer through joint ventures are really hard to resolve, especially since China claims it's not a policy at all. Ending intellectual property theft is also something that's really hard to prove, he said. "If we were just having a tariff fight, you lower your tariffs and I lower my tariffs, you can both see it," he said. "The other kinds of stuff you need evidence over time, and where do you draw the line on things" to know the problem has improved enough to drop tariffs?

Moreover, he said, most of the items China would like in exchange for making reforms are in the arena of direct foreign investment in the U.S. and technology products subject to export controls. "We just passed a bill all but explicitly designed to limit Chinese investment in the United States," he said (see 1806270053). He said he's not saying that tighter export controls or investment controls are the wrong thing to do, but the fact that we're going in the opposite direction makes it harder for China to agree to a deal.

As recent earnings calls from Micron Technology and Voxx attested (see 1807110058 and 1809210021), companies that now accept tariffs as a fact of life are increasingly turning their sights toward mitigation strategies that lower their exposure. Sourcing from countries of origin other than China remains an option for some, but many tech companies testified at last month’s Section 301 hearings they have no practical alternative to importing Chinese components.

Product-specific exclusion requests are another mitigation option, emailed David Cohen, a customs lawyer with Sandler, Travis & Rosenberg. The Office of the U.S. Trade Representative put procedures in place for seeking exclusions on the first two rounds of tariffs that took effect July 6 and Aug. 23. If granted, the exemptions would be in force for one year, retroactive to the dates the tariffs became effective, Cohen said: “No decisions have been made on the thousands of requests that have been filed so far.”

Other mitigation strategies, according to Cohen: (1) “reclassification” of goods “if there is a more appropriate classification applicable” that’s not subject to tariffs; (2) “tariff/origin engineering,” or “tinkering with the production process to result in a country of origin other than China”; (3) first sale valuation, which lessens the tariffs' impact by legally structuring transactions to take advantage of an earlier sale for customs appraisement; (4) using a foreign-trade zone or bonded warehouse as “a deferral mechanism”; (5) duty drawback; and (6) using a “de minimis” provision in the customs laws.

Cohen cautions that in “pursuing these options companies should engage recognized Customs experts to make certain these options are viable and compliant,” he told us. “We are counseling clients daily on all of these options in order to try and mitigate the impact of the Section 301 duties and encourage importers to reach out to explore which may be applicable to their circumstances.”