China Policy Commission Examines How to Go Further in Tariff Policy to Spur Decoupling

The U.S.-China Economic and Security Review Commission, shortly after the administration chose to keep and expand the Section 301 tariffs (see 2405220072), grappled with what it should recommend to Congress on how to use trade policy to counteract trade distortions from China's communist-run economy.

Commissioner Robin Cleveland told witnesses that the commission recommended two years ago that Congress should revoke permanent normal trade relations with China. "I’m curious what you see as the viabilty and necessary steps to unwind it in a way that doesn’t have a negative effect on our economy," she said.

Jamieson Greer, former chief of staff to the U.S. trade representative during the Trump administration, and an attorney at King & Spalding, noted that the House Select Committee on China also recommended that (see 2312120004).

He said it could be phased in, and there could be an exclusion process.

Peterson Institute for International Economics Senior Fellow Mary Lovely said, "We have essentially moved away from MFN tariffs on China." Currently, Section 301 tariffs cover about 75% of Chinese imports, and those are on top of most favored nation tariffs. Imports from China have fallen about a third as a result. Before Section 301, Chinese exports to the U.S. made up 21.6% of the total import value; in 2023, they were 14%.

Lovely said she was disappointed that the commission made that recommendation, and warned that allies wouldn't follow suit. She said exceeding U.S. bound tariff rates for China "would be deeply disruptive to the global economy, I believe it would be counterproductive to U.S. goals."

Cleveland argued that China made 35 commitments when it joined the World Trade Organization, and failed to live up to almost all of them. Lovely agreed, and said that litigation in the WTO -- and a reform of the WTO -- is the solution, not blowing up the rules-based trading system.

Co-chair Michael Wessel told Lovely he appreciated that she is concerned about the cost to consumers of the Section 301 tariffs, but questioned whether that should be the primary concern.

"I would challenge the past narrative that China is responsible for all of our ills," she said, and noted that she grew up in Pawtucket, Rhode Island, and spent most of her adult life in Syracuse, New York. "I don’t think anyone needs to tell me about deindustrialization. I have witnessed it since I was a little kid," she said. But, she said, the decline of manufacturing in the Rust Belt cannot be laid at China's feet. "I think a lot of that would have gone anyway."

Commissioner Aaron Friedberg asked the witnesses about transshipment, given that they testified that exports from China to Vietnam and Mexico have risen as those two countries have replaced Chinese goods facing 25% Section 301 tariffs in the U.S. market. "Do we know how much value is actually being added in country of origin," he asked, and also asked if the U.S. should design a tariff on the value inside a good from another country that comes from China, to encourage diversification.

Lovely said that the best way to discourage too much Chinese content in goods headed to the U.S. is to negotiate a trade agreement with Vietnam or other countries that have taken market share from China, and negotiate rules of origin. "They’re very anxious to access the American market," she said of Southeast Asian developing countries. "But we need to help them."

Dartmouth Business School's Davin Chor, an associate professor of business administration and globalization chair, agreed with Lovely. He said putting tariffs on Chinese value in goods from Vietnam or Mexico "would send exactly the wrong message."

Hearing Co-Chair Leland Miller asked, given the elevated inflation rate, should there be fewer products facing tariffs? Or should the administration seek to devalue the dollar to help exports?

Greer replied that it's healthcare, food, housing and education that have fueled recent inflation, and that when the tariffs were first applied in 2018 and 2019, inflation went down.

Lovely disagreed, saying economists estimate the Trump administration tariff actions added about 1 percentage point to the U.S. inflation rate. She said she thinks some Section 301 tariffs, when linked to intellectual property theft, should be higher, but tariffs on garments aren't strategic and shouldn't exist. She said during the hearing that Congress should change the law that authorized the investigation, and should put guardrails on both the length of the tariff action and how large it can be.

"I do think there is a longer-term danger of tariff creep, and that will erode competition in the US economy," she said.

In Chor's opening remarks, he noted that goods from Vietnam and Mexico that replaced goods from China on the 25% target lists have higher unit prices than the same goods in China.

He said policymakers need to recognize there are "significant trade-offs" to their actions to reshape supply chains.

Commissioner Reva Price asked Lovely how she would change the Section 301 lists. She said lists 1 and 2 did apply to knowledge-intensive sectors. But she noted that list 4b, which includes laptops, cell phones and other advanced goods, was never hit with the Section 301 tariffs.

She asked: "Why do we have a tariff on a tablecloth, but you don’t have a tariff on a Fitbit or an Apple Watch?

Chor agreed that the Section 301 duties should be limited to technology- and knowledge-intensive products, in areas that pay high wages.

Greer disagreed, saying that any good that faces tariffs creates an incentive for businesses to rethink supply chains. He said when China's MFN treatment had to be renewed each year, that discouraged offshoring.

"I would say there’s a value in uncertainty," he said. In his opening remarks, Greer said: "We clearly need to continue on this trajectory. Increased tariff usage should be on the table."