How Will China Respond To The Section 301 Tariffs

China has announced that it will impose new tariffs on $75 billion worth of U.S. goods, in response to US section 301 tariffs. Nelson Dong discusses how that will impact industries across the board.

Section 301 Tariffs

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Nelson Dong is a a senior partner at the international law firm Dorsey & Whitney law firm and head of our national security group and co-head of our Asia group. He is a current member of the Board of Directors of the National Committee on US-China Relations (NCUSCR).    He is also a current member of the Board of Directors of the Washington State China Relations Council (WSCRC). He’s been following this issue closely and of this says:

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The U.S. Administration imposes Section 301 tariffs

"During 2018, the Administration imposed Section 301 tariffs at a 25% rate under three separate lists, which affected about $250 billion of goods made in China and imported into the U.S.  When it appeared that no progress was being made in the bilateral trade talks, the Administration then added its latest round of Section 301 10% tariffs on almost all remaining Chinese-made goods imported into the U.S., affecting another $300 billion in imports spread across thousands of additional categories.

The latest 10% round of new U.S. tariffs has been split into two phases, one becoming effective on September 1 and one deferred until December 15 to avoid harming the key end-of-year holiday consumer shopping season.  China has now responded in kind and announced today that it would place its own counter-tariffs on roughly $75 billion of U.S.-origin goods, including U.S. automobiles and auto parts.

Tarrif start dates

These new Chinese tariffs are also divided into two phases keyed to the same September 1 and December 15 dates as the new U.S. tariffs.  In the now-familiar tit-for-tat rhythm, later today there was official confirmation from the U.S. Trade Representative’s Office that, in retaliation for the Chinese move, the Administration will now increase the current 25% tariffs to 30% as of October 1 and will also increase the new tariffs due to come into effect on September 1 and December 15 from 10% to 15%, all subject to the usual notice and public comment procedures," Dong says.

"From the outside, it is difficult to see how these rapid volleys of tariffs and counter-tariffs can help the two teams of government negotiators to reach any kind of “deal” that would be acceptable to both President Trump and President Xi or can avoid the spreading collateral consequences for many thousands of suppliers and customers on both sides of the Pacific or the knock-on effects in many other national economies.

Taxes vs tariffs

Tariffs are and always have been taxes paid by an importer in order to gain customs clearance and entry into the importing country, and the cost of tariffs will thus be factored into the price of such imported goods, which are then passed down the supply chain to the ultimate user or customer at the end of that chain.  Eventually, when tariffs are imposed at this scale, consumers and end users will have to pay higher prices and thus have less effective purchasing power, and many parties along the supply chain will either experience lower profits or more lost sales (or some combination of the two).

The resulting damage to consumers, producers and intermediaries can only combine to erode investor and consumer confidence, stall many needed investments, and increase the risks of negative local, regional or even global consequences," Dong says.

"Apart from tariffs, China also has the ability through its formal system of state-owned enterprises and its informal system of influencing nominally private enterprises to decrease the imports of certain goods.  It has already used that power to sharply curtail the purchase of American-origin agricultural imports such as soybeans and other farm commodities, and there are multiple competitor countries who would eagerly replace American suppliers that have invested years or even decades in establishing their sales channels into China.

American suppliers and farmers vs China

The longer these tariff wars go on, the more China can be expected to use this “power of the purse” to regulate and influence where China buys such commodities and the greater the danger that such displacements of American suppliers will last beyond the financial endurance of individual farmers or their creditors.  In short, Beijing is likely to have far more ability to tell China’s enterprises not to buy certain things than Washington DC can tell America’s farmers to stay in business even if they suffer crippling losses of markets and income.

Moreover, given the massive demands already being made on the federal budget and the ballooning federal deficit from recent tax cuts, it is hard to imagine the U.S. Government could afford to continue to hold up and support the many thousands of adversely affected  farmers and their communities in such a multi-year struggle," Dong says.

Section 301 tariffs and Chinese response

"If these were only short-term difficulties and one could see some kind of an “off-ramp” for both sides to settle their differences, there would be more hope, but nobody in authority has thus been able to present a credible picture of what such a resolution would be that could be domestically acceptable in political terms in both countries.  If China were to respond to the list of open structural issues that led to the Administration’s imposition of Section 301 tariffs in the first place, that would implicate massive revisions to the Chinese economic and even political system that could not be acceptable to the Chinese leadership.

Conversely, if China were only to offer what the Administration views as cosmetic fixes and to renew purchasing large quantities of American goods without making those fundamental changes, it is hard to see how that result would be acceptable to the U.S. leadership, especially after so much public stress on what the Administration has been trying to achieve in terms of structural change within China.

Talks less likely to suceed

Just in terms of the tariffs and counter-tariffs that have now been erected in both countries, a great deal of time and energy of the negotiators will now have to be diverted just to timing and sequencing the withdrawal of such tariffs to avoid the domestic political cost of being seen publicly as the side that “blinked first.”   Dong says.

"Because of their mutual interdependence and the sizes of their economies, China and the U.S. undoubtedly each has the capacity to inflict considerable economic damage on the other country and, conversely, to endure a great deal of economic pain through this struggle.  The question remains whether the two countries also have the capacity and will to escape some kind of “economic death spiral” where they are each so locked into positions from which they cannot easily back away to allow a political resolution.

If the high level talks tentatively scheduled for September can still occur and could yield some progress, that will be a hopeful sign, but if today’s two sets of announcements from Beijing and Washington (and what happens in the next week or two) should derail those talks entirely, both the U.S. and international economic pictures could become quite murky and ominous,"Dong says.




About the Author

Jacob Wolinsky
Jacob Wolinsky is the founder of ValueWalk.com, a popular value investing and hedge fund focused investment website. Prior to ValueWalk, Jacob was VP of Business Development at SumZero. Prior to SumZero, Jacob worked as an equity analyst first at a micro-cap focused private equity firm, followed by a stint at a smid cap focused research shop. Jacob lives with his wife and four kids in Passaic NJ. - Email: jacob(at)valuewalk.com - Twitter username: JacobWolinsky - Full Disclosure: I do not purchase any equities anymore to avoid even the appearance of a conflict of interest and because at times I may receive grey areas of insider information. I have a few existing holdings from years ago, but I have sold off most of the equities and now only purchase mutual funds and some ETFs. I also own a few grams of Gold and Silver