60% Tariffs on China? Decoding Trump's China Comments

Donald Trump recently suggested that he would raise tariffs on China to 60%. While on the surface this sounds like the sort of position Trump would take, a flat 60% tariff on all Chinese goods would be a significant departure from the policy of his first term. Not only would this figure be double the highest tariffs suggested or imposed in the round-by-round ratcheting of 2018 and 2019, such a policy would also be a departure in terms of evenness across all product categories. Remember how the Trump Administration preserved consumer-oriented goods for the very end of their brinksmanship, leaving us with the current status quo where most industrial or intermediate goods coming from China are taxed with an additional 25% tariff, but Chinese consumer goods are mostly entered with no additional Section 301 tariff. An immediate price jump which would have the largest impact on the common man and his constituents? On second thought, doesn’t actually sound like Trump. I therefore tried to read and learn more.

On Trump’s campaign website, I found the official trade position for his second term. While there are no specific mentions of 60% or any other figures with respect to Chinese tariffs, the position conspicuously calls to remove China’s Most Favored Nation (MFN) status. This would be quite a drastic step, putting China into the same group as sanctioned states such as Cuba, Iran, North Korea, and Russia.

Further research also pointed to Robert Lighthizer, the United States Trade Representative (USTR) during the Trump Administration, and his recent book No Trade is Free. I recommend a read, particularly for anyone interested in trade and trade policy. The book is a mix of history, forward looking policy prescription, and memoir of Lighthizer’s time in the Trump Administration. He specifically details his efforts launching, managing, and negotiating in the escalating Chinese trade war, and working with Mexican and Canadian delegations to replace NAFTA with the updated USMCA agreement. Lighthizer shares a convincing perspective that during his career US trade policy has shifted from a system in which the US aggressively managed each bilateral trade relationship to guarantee balance and the benefit of the United States to a new laissez-faire status quo where the US subjects itself to international institutions such as the World Trade Organization (WTO) which actively seek to oppose US interests. Regardless of politics, the book is a fascinating behind the scenes account of how government-to-government international trade policy is conducted in practice.

Ambassador Lighthizer further shares his thoughts on the rise of China. Of the critical failures in US trade policy since the end of the Cold War, Lighthizer suggests none may have been greater than granting China Permanent Normal Trade Relations (PNTR) in 2000 along with China’s admission to the WTO in 2001. While the US had already granted China Most Favored Nation status, this position required an annual renewal by Congress. Lighthizer’s view is that if the US had continued with this annual Most Favored Nation review process, it would have provided a lever by which China could have been confronted. The review process would have also signaled to US and global businesses that China was not a fully stable trading partner, perhaps encouraging investment elsewhere.

I believe Lighthizer would like to restore this Most Favored Nation review process for China. As it was in the 1990s, I believe he expects that Congress will ultimately confer MFN status for China. However, Lighthizer may believe that reinstating this process will give the US ongoing leverage over China to either address concerns or try to elevate US interests. I imagine he also hopes to discourage investment in China, rerouting capital either domestically or to closer allies. Given the current political climate, this annual review would likely extend past a second Trump Administration, projecting Lighthizer and Trump’s views on China into future administrations and generations.

However, while Lighthizer may expect Most Favored Nation status to ultimately be conferred to China, it does become possible to imagine Brexit-like scenarios where this democratic process does not go the way policymakers expect. With Most Favored Nation status removed, goods from China would face much higher base tariffs, often between 30% and 40% rather than the 0% to 5% for MFN goods. There is reason to think that these non-MFN tariffs would be applied in conjunction with the existing Section 301 tariffs, leading to total tariff bills of around 60%. This leads to another aspect of Lighthizer’s book, his respect for and deference to the former President. If the goal or result is increased tariffs on all Chinese goods, including in ways that harm consumers, I believe Lighthizer understands that it is better for this outcome to be viewed as the responsibility of Congress rather than coming from President Trump himself.

By adding the current maximum Section 301 tariffs of 25% along with an expected tariff of 35% for goods coming from a non-Most Favored Nation, we arrive at the figure that Donald Trump quoted in recent interviews, 60%. We also see evidence for his follow up qualification, “maybe it's going to be more than that”, as some non-MFN tariffs can reach as high as 60% on their own without the additional Section 301 tariffs. Therefore I believe this 60% figure is Trump’s current shorthand for removing China’s PNTR status and subjecting the relationship to annual Congressional review.

So what should US businesses do to prepare for the possibility of China losing its MFN status? The first step would be to look at the US Harmonized Tariff Schedule (HTS), to understand the exact non-MFN duty rate for certain goods. There is significant variation in these rates; looking at the codes that are relevant to our business I have seen non-MFN rates as low as 10% and as high as 60%. Knowing the exact rate non-MFN rate faced is key to forming a subsequent strategy. I believe the next step will be to follow the news, both of China potentially losing its Permanent Normal Trade Relations status and importantly the schedule by which Congress may approve or reject ongoing Most Favored Nation status for China. For companies placing periodic orders from China, it may be wise to align procurement schedules to this Congressional schedule; in the event MFN is not granted for a given year, evaluating options can begin with a full warehouse. Past this, companies continuing to source from China may want to consider more complex stockpiling and second sourcing strategies. We have been working on this for our customers, finding access to low-cost financing and storage, considering ways that increased stock volumes may be strategically placed to lower logistics costs, and identifying alternate suppliers in Vietnam and India. Please reach out if you would be interested to discuss. I can be reached at [email protected].