The US-China Trade War Is and Will be the New Normal
I hate to say we told you so, but for nearly a year, WE TOLD YOU SO. Since October, 2018 we have been all but screaming at anyone and everyone who has product made in China and sold into the United States to get out of China fast, if at all possible. We say this and we set out the below timeline to prove this not so much to show that we have been right all along, but to try to convince you that we are right when we now say there will be no resolution to the US-China trade war for a very long time and you need to act accordingly.
The below is our timeline/proof of our having predicted a straight-line decline in US-China trade relations:
- Way back in October, 6, 2018, In China, the United States and the New Normal we called the US-China trade war the “New Normal” and we predicted a “diminished future for foreign companies” manufacturing in China. We went on to say that “since pretty much the inception of the US-China trade war we have been saying that we do not see its end because we have always seen it as more than a trade war.”
- Also in October, 2018, in Would the Last Company Manufacturing in China Please Turn Off the Lights, we started advocating for companies to do whatever they could to end their China manufacturing, and we have done so relentlessly ever since, while recognizing that for some companies this simply is not possible.
- Then in January, 2019, in The Huawei Indictments are the New Normal, we wrote how what was happening between the US and Huawei would negatively impact US-China relations even further.
- In April, 2019, the Wall Street Journal quoted me in a cover story, Trade Deal Alone Won’t Fix Strained U.S.-China Business Relations, on how “There is no way any deal between China and the U.S. will cause everyone on both sides to say, ‘We were just kidding,’ and on how the tariffs, the arrests, the threats, and the heightened risk have impacted companies and that reality will not go away.”
- On May 1, in Yet Another International Trade (AD/CVD) Petition Against China, we wrote of how the United States was upping the duties (retroactively and sometimes by more than 200%) against Chinese products as a way of conducting an anti-China foreign policy on the sly.
- On May 4 — the day before President Trump’s by now infamous tariff tweet — in The US-China Trade War: Winter is Coming we wrote how neither the United States nor China wanted relations to improve and we should therefore expect relations between those two countries to only worsen. We wrote how “the United States is aggressively and unabashedly doing what it can to isolate China and to remove it from the world of international trade” and of how shutting out China will become a regular thing in all new U.S. trade agreements.
- On May 8, in The US-China Cold War Starts Now: What You Must do to Prepare, we proclaimed the start of the US-China cold war and we have been pushing this position ever since.
- On June 20, in Has Sourcing Product From China Become TOO Risky? we laid out the many and growing and unpredictable risks inherent in having your products made in China and posited that China was indeed becoming too risky for many who make their products there.
China Increases Its Tariffs on US Products
Yesterday marked yet another round in a long line of tariff escalations between the United States and China, with China starting the day by announcing new tariffs on $75 billion in U.S. goods. China announced it would place additional tariffs of 5% or 10% on US imports starting on September 1st and that it would place 25% tariffs on US automobiles and 5% on automobile parts, commencing on December 15th. The new tariffs will target 5,078 products, including soybeans, coffee, whiskey, seafood and crude oil. The below is a graphic listing the general categories of US products, by value, that will be subject to these new tariffs:
CNN did a nice job of breaking down the list of US products that will be hit by China’s new tariffs:
Tariff List 1 — effective September 1 :
- Part 1: 270 items will be imposed with a 10% tariff, including seafood, fish, crab, shrimp, fruit, and nuts
- Part 2: 646 items will be imposed with a 10% tariff, including: beef, chicken, potatoes, wheat, soybeans, TCM, and steel
- Part 3: 64 items will be imposed with a 5% tariff, including: cream
- Part 4: 737 items will be imposed with a 5% tariff, including: turkeys and chemicals
Tariff List 2 — effective December 15:
- Part 1: 749 items will be imposed with a 10% tariff, including: coffee, corn, caviar, chemicals, cars, buses, scooters, and bikes
- Part 2: 163 items will be imposed with a 10% tariff, including: cars and motorcycles
- Part 3: 634 items will be imposed with a 5% tariff, including: whiskey and cigars
- Part 4: 1815 items will be imposed with a 5% tariff, including: wood, floors, doors, clothing, CDs, TVs, lights, automobile parts, and pens
We contemplated translating the full list of products to show the breakdown as between those products that will be hit by a 5% versus a 10% tariff increase, but we decided that would take too much time and is not really necessary because the Chinese language lists set out the tariff numbers. See China Tariff List 1 and China Tariff List 2.
China Tariff Exclusion Requests Have an October 18 Deadline
With its previous round of tariff announcements back in May, China announced it would initiate an exclusion request process for companies that import, manufacture, or use the U.S. products subject to China’s retaliatory tariffs. U.S. companies that do not have their own Chinese entities (such as a WFOE/WOFE) should ask their Chinese customers to see if they would be willing to submit an exclusion request for their products. Some of our American clients that sell their products into China via Chinese importers and/or Chinese distributors did that, and their Chinese importers/distributors have mostly responded by saying they would do so, so long as the American company pays some or all of their attorneys’ fees and costs. Applicants for these exclusions are to submit their exclusion requests through the China Tariff Policy Research Center of the Ministry of Finance website. Each request must be limited to a single product and must identify the eight-digit tariff heading. Exclusion requests will be considered based on the difficulty to obtain the imported U.S. product from other sources (domestic, third-country) and also based on any structural impact on the relevant Chinese industries.
The deadlines for submitting exclusion requests on products previously tariffed by China depended on the particular tariff line and tariff list. Exclusion requests for certain excluded products were to be submitted by July 5, 2019 (so you are too late for that), and exclusion requests for other products are to be submitted from September 2, 2019 to October 18, 2019. This second deadline refers to your products on the lists for which you are not too late to apply for an exclusion.
New US Tariffs on Chinese Products
In retaliation for China’s increasing its tariffs against U.S. goods (which were in retaliation for the U.S. imposing tariffs on Chinese goods), President Trump issued a series of tweets, setting out the following:
1. On October 1, the U.S. will increase tariffs by 5% on $250 billion in goods already subject to 25% tariffs.
2. The U.S. will increase tariffs by 5% on the remaining $300 billion in Chinese goods (mostly consumer items) that are set to be subject to a 10% effect, beginning on September 1 or December 15.
3. “Our Country has lost, stupidly, Trillions of Dollars with China over many years. They have stolen our Intellectual Property at a rate of Hundreds of Billions of Dollars a year, & they want to continue. I won’t let that happen! We don’t need China and, frankly, would be far better off without them. The vast amounts of money made and stolen by China from the United States, year after year, for decades, will and must STOP. Our great American companies are hereby ordered to immediately start looking for an alternative to China, including bringing our companies HOME and making your products in the USA. I will be responding to China’s Tariffs this afternoon. This is a GREAT opportunity for the United States. Also, I am ordering all carriers, including Fed Ex, Amazon, UPS and the Post Office, to SEARCH FOR & REFUSE all deliveries of Fentanyl from China (or anywhere else!). Fentanyl kills 100,000 Americans a year. President Xi said this would stop – it didn’t. Our Economy, because of our gains in the last 2 1/2 years, is MUCH larger than that of China. We will keep it that way!”
As of this morning, the Office of the United States Trade Representative (USTR) has this to say about yesterday’s trade war events:
Today, China announced it will impose unjustified tariffs targeting U.S. products. In response to China’s decision, and in order to achieve the objectives of the China Section 301 investigation, President Trump has instructed the United States Trade Representative (USTR) to increase by 5% the tariffs on approximately $550 billion worth of Chinese imports. For the 25% tariffs on approximately $250 billion worth of Chinese imports, USTR will begin the process of increasing the tariff rate to 30%, effective October 1 following a notice and comment period. For the 10% tariffs on approximately $300 billion worth of Chinese imports that the President announced earlier this month, the tariffs will now be 15%, effective on the already scheduled dates for tariff increases on these imports.
USTR will publish in the Federal Register as soon as possible additional details on today’s announcement.
What This Latest US-China Tit-for-Tat Means for Your Business
We assume you understand how the new tariffs on both sides will increase costs for those who manufacture product in China for sales to the United States and vice-versa. As to who will pay those costs and what you can do to try to reduce those costs, we urge you to read Who Pays the Tariffs on China Imports? President Trump vs. CNN and What YOU Can do NOW to Reduce Your China Price.
But what should you make of President Trump’s ordering US companies to immediately start looking for an alternative to China? He can’t really do that, can he? No, but in many respects this is exactly what Trump has been doing since the U.S.-China trade war began. Trump cannot literally require American companies to pull out of China, but he can and has made it so difficult that they all but have to leave China. And this is what most of the international lawyers and international trade lawyers at my firm have come to believe has been Trump’s plan all along.
Every step of the way, Trump has made it all but impossible for China to make a trade deal with the United States, which is why this blog has been consistently clear that there will be no trade deal between the United States and China. If the US-China trade war/cold war were really about trade imbalances, it would have ended long ago with China buying more soybeans and Boeing airplanes from the United States. But from the very beginning, the U.S. has demanded China stop stealing IP and open its markets for foreign companies, and there is just no way China will agree to either of these things. Lead negotiator Robert Lighthizer is without a doubt smart enough to have known this all along. All this leads us to believe that the U.S. plan has always been to force a slow decoupling of the U.S. and China and then work to convince the rest of the democratic world (the EU, Australia, Canada, Latin America, Japan, etc.) to decouple from China, as well. In June, in Does China WANT a Second Decoupling? The Chinese Texts Say That it Does we wrote of how China wants this decoupling, as well.
This latest Trump “order” does not have the force of law, so in that respect it is not an order at all. But in most other respects it is. This order indicates Trump’s passionate desire to rid the United States of what he sees as the China scourge. More importantly, it is yet another clear signal that he will continue to escalate this war with China until such time as he considers the United States to be victorious. The fact that Trump issues this “order” amidst rising recession fears only highlights how ending U.S.-China trade is at the top of his to-do list.
So in terms of what this means for your business, it means that you must stop believing there will be a solution to the trade war that will allow you to go back to doing business with China the way you used to do business with China. You need to instead recognize that this situation is the New Normal as between the United States and China and that, if anything, things are way more likely to get worse than they are to get better.
What Your Business Should do Now
In our next post on the no-deal issue, we will set out what your business should do if you manufacture your products in China for sale to the United States or even for sale anywhere else in the world. We will then follow up that post with a post setting out what you should do if you are doing business in China. Please stay tuned.