Tariffs on List 4 of China Imports Likely Not the Last, Experts Say

President Donald Trump, angry that China neither stopped the flow of fentanyl nor returned to buying U.S. soybeans, announced on Twitter Aug. 1 that tariffs on nearly 3,800 8-digit tariff lines will begin Sept. 1. Just like with List 3, the tariffs will start at 10 percent.

But while six months ago, China watchers predicted Trump wouldn't risk recession by going to 25 percent on such a large group of imports, they now believe the tariffs on List 4 will ratchet up to 25 percent at some point before November 2020.

Unless the Office of the U.S. Trade Representative removes categories before any exclusion process, 96 percent of the tariff code's eight-digit subheadings would be covered by Section 301 tariffs (see 1905150051). A spokeswoman said, "USTR will publish a finalized tariff list in the Federal Register in the coming days. The finalized list will reflect revisions to the proposed list based on comments and testimony during the public comment period and hearings held in June."

Business voices reacted with alarm. The U.S. Chamber of Commerce said the tariffs would undermine the economy, adding: "We are deeply disappointed that the two sides missed the opportunity in May to address the substantive disagreements between them and have not yet reached a comprehensive, enforceable agreement. We urge the two sides to recommit to achieving progress in the very near term before these new tariffs come into effect, and to remove all remaining tariffs as swiftly as possible."

"The President’s decision to proceed with adding these additional costs for hard-working American families is truly shocking,” the American Apparel and Footwear Association said.

Derek Scissors, an expert on the Chinese economy at the American Enterprise Institute, said he expects the tariffs on List 4 to hold steady at 10 percent at least through 2019. "I believe the President wants an increase to 25 percent in his pocket as the campaign picks up," he told International Trade Today.

Phil Levy, chief economist at Flexport, said he's not sure how much ability companies have to rush extra shipments into the U.S. in the next month. "This may mean that August gets particularly crazy" for shippers like Flexport -- and August was already part of the busy season for stocking for Christmas, he said. "We will see August front-running as people try to get goods in ahead of this as best they can."

But Levy, who once was chief trade economist during the George W. Bush administration, said that at the beginning of the China trade war, there were a lot of business executives who thought, "Well this is a pain and this stuff isn't going to last very long." He added: "If you're looking at this now, that's probably not what most businesses are thinking."

"Is it plausible that sometime between now and next November that the president goes from 10 to 25 percent," Levy asked, and then answered his question: "Yes, or even probable. But when?"

But even if businesses expect things are going to continue to get worse, it's hard to know how to minimize the impact on their costs. For instance, should a business ask its vendors to continue to produce at peak volumes after the Christmas 2019 order is fulfilled, so that it could stock up for Christmas 2020 with February shipments, so that it brings goods in before the tariff goes up to 25 percent?

"That's not a terrible plan as long as those tariffs hit in March," he said, but if they hit in October, you've put yourself at a cost disadvantage to competitors who imported in August and September. And if they hit in January, you've paid for rush orders for nothing.

"There are serious reasons why it's hard to do that," Levy said, even if you got the timing right. "You've got to tie up capital. It's one thing if I get paid in two or three months, it's another if I get paid in 14 months. We've introduced a new Flexport capital product exactly for this."

Another problem is in apparel, where there are trends, and how would you know what customers will want by the end of 2020?

Levy and Scissors both said six months ago that the trade war would not get this bad. Scissors said now that "the Chinese have been much more narrow-minded than I thought they would be. I thought they would make legal changes for the sake of IP enforcement, which would be meaningless since the [Communist] Party is above the law. Then buy U.S. goods as the only true concession.

"They blew up the talks in May for the sake of what was really a formality and have held to that position since. This leaves the president with no possibility of a 'great' deal to step forward and support. So he either accepts the status quo or raises the heat."

Levy said, "I think the president is still working on the assumption if he gradually turns up the heat on the Chinese, that they will some day say, enough is enough, and give in to him. We haven't seen any evidence of that whatsoever. If anything that makes it harder for the Chinese to provide concessions."

Levy said Chinese officials think: "There's no appeasing President Trump, so why even try?"

Levy had thought Trump would not go to 25 percent on List 3 because he'd be too fearful of damaging the economy. Although the economy is still strong, Levy said these kinds of actions take time to have macroeconomic effects, and the reaction of the bond market on Aug. 1 shows that traders think the economy next year will be worse than today. "The bond market, they're sounding the klaxons," he said.

He thinks Trump has boxed himself in, because if China doesn't bend, his only tactic is raising tariffs. "I don't think there's an easy way to see any grand remedy that doesn't look like a retreat from his point of view," he said.

Trump told reporters at the White House Aug. 1 after his tweet: "Until such time as there is a deal, we'll be taxing them," referring to China.

Sen. Ron Wyden of Oregon, the top Democrat on the Senate Finance Committee, issued a statement that said: "I am always first in line for getting tough on China. But Trump doesn’t have any strategy to get China to stop cheating on trade -- the only thing he knows how to do is raise tariffs.... Trump said he’d bring back Americans’ jobs, instead he’s picking their pockets.”

Pro-trade Democrat Rep. Ron Kind of Wisconsin reacted to the announcement with a press release that said, "China is already refusing buy our agriculture products, unilateral tariffs are not going to make China more willing to come to the table."

Business groups echoed that argument. Tariffs Hurt the Heartland responded to the news saying: "The administration is doubling down on a failing strategy. Nobody wins in a trade war, and raising tariffs further on American businesses and consumers will only result in slower economic growth, more farm bankruptcies, fewer jobs and higher prices."

The National Retail Federation said: "The tariffs imposed over the past year haven’t worked, and there’s no evidence another tax increase on American businesses and consumers will yield new results."

But the National Council of Textile Organizations welcomed the inclusion of apparel on the tariff list -- while still asking for rayon, threads and dyes to be removed. “We believe this move will lead to more re-shoring of production to the United States and the Western Hemisphere production platform -- and will also address and mitigate China’s rampant trade distortions," the NCTO said.

Even before the action was announced, several Republican senators asked that 96 tariff lines -- which were removed from earlier lists -- also be spared on List 4. Sens. Rob Portman of Ohio, Johnny Isakson of Georgia and Tim Scott of South Carolina, all Finance Committee members, sent the letter on July 31. They said they welcomed the delay in imposing tariffs on List 4, and said that would help "ensure negotiations stay on track."

"Last year during the deliberations over whether to impose $200 billion in addition tariffs on China (List 3), you removed from the list certain tariffs on 96 products because of those tariff’s harmful economic impact on these importers and our economy," they wrote -- so they said it would make sense to spare them again. "At 96 Harmonized Tariff Schedule (HTS) codes out of a total of 3,805 codes, the amount of the trade in goods removed from the supplemental trade action and added to the proposed supplemental trade action is small. And yet the impact that it has on our constituents is large," they said.

These kinds of complaints from both parties are a challenge for Trump, Levy believes. "I think there's going to be increasing pressure on the president to deliver results from his trade policy. The question is, how does he get there?"