US-China Business Council Says to Assume List 3 Tariffs Will Continue Indefinitely

Six weeks ago, the senior vice president of the U.S.-China Business Council believed the Trump administration's pressure was successfully empowering Chinese officials who believe in reforming China's capitalist/state-controlled hybrid economy. "I was pretty optimistic that we were, as a consequence, going to be able to say that the administration had achieved things that probably no previous administration had genuinely been able to achieve," Erin Ennis told an audience member at the Washington International Trade Association China trade panel May 29.

But since the collapse of talks between Chinese and U.S. negotiators, hardliners in China have been strengthened, she said. "How long that lasts, I don't know."

She said the administration's decision to hike the tariff on List 3 goods from 10 percent to 25 percent, the announcement of a new List 4 of additional goods, the executive order on Chinese technology, and the addition of Huawei to the entities list for sanctions in rapid succession undermined the momentum on trade negotiations. "Adding more tariffs undermines those like-minded officials," she said. "I think we are facing diminishing returns at this point."

Ennis said it's not clear exactly why negotiations broke down, but that disagreement in China's government over concessions that had been made, and the fact that the U.S. was not willing to lift all Section 301 tariffs at signing probably both contributed.

While the U.S.-China Business Council is advising companies that 25 percent tariffs are going to be in place on Chinese imports "as far as we can see," Ennis did not rule out the possibility of a resolution.

She said that even though no negotiations are happening, and there's no indication of when they might begin again, there have been other times when there was no groundwork for an agreement, but President Donald Trump and another country's leader agreed on something when they met in person.

"I continue to believe that if the two sides are genuinely interested in negotiating a deal, then a deal is to be had," she said.

While importers are waiting for a deal to be struck, Hun Quach, vice president for international trade at the Retail Industry Leaders Association, recommended telling their stories both at the hearing on List 4 and in written comments to the Office of the U.S. Trade Representative.

Quach noted that television sets had been on List 1, but were removed after RILA explained that Mexican televisions are not substitutable for Chinese sets, because the Mexican TVs are bigger and more expensive.

"For the large part the administration heard us -- consumer electronics, toys, apparel, shoes have been spared so far," she said, with USTR delivering on its promise to inflict maximum pain on China while causing minimum pain to U.S. consumers. She said there's a very big difference between 10 percent and 25 percent as far as the cost on the shelf goes, so as the tariff rate on List 3 ratchets up in June, she predicts sellers will downsize the packages or cut corners on quality to try to mitigate the price hike.

For List 4, Quach said, "I would suspect that there is a possibility that these tariffs are not put in place." She said that if they are, RILA will argue that the rate should be 10 percent, rather than 20 or 25 percent. "You can take the pain at 10 percent," she said.

Alliance for American Manufacturing President Scott Paul said that so far the effect of tariffs on consumer goods has been muted. "Clearly the tariffs are disruptive. They’re designed to be," he said. "They’re designed to produce changes in behavior for both consumers and producers."

Steve Lamar, executive vice president for the American Apparel and Footwear Association, moderated the panel, but broke in to say that AAFA members have been diversifying out of China for years, and that that's accelerating. He said AAFA looks at Trump's tweets recommending manufacturing move to Vietnam and Mexico "as sort of instructions from the administration."

Quach said 98 percent of apparel and shoes are imported, and 40 percent of those goods come from China.

Both Quach and Semiconductor Industry Association CEO John Neuffer noted that if U.S. firms turn away from Chinese factories under pressure from the administration, that decision is not easily reversed. Neuffer said he was just in China last week, and said it was very clear to him that Japanese and European business people are there arguing that they are reliable trading partners, contrasting themselves with American businesses.

"I don’t think we in our generation can ever reverse that," Neuffer said. "We’ll never get back to normal trading relations with the Chinese."