Tariffs are key again and an issue in the economic relationship between the world’s two largest economic powers.
Elections and Tariffs:
It is probably an understatement to say that the relations between the US and China are strained. And with the US election cycle underway, hyperbole is the currency de jour for exchanges between the world’s two largest economic powers.
From the global publics’ perspective, there seems to be very few things that Washington and Beijing see eye-to-eye on, whether it concerns the Russia-Ukraine War, the South China Sea, Taiwan, or Trade.
It’s a difficult choice as both candidates and indeed both parties have adopted a stance that advocates a decoupling of trade between the US and China.
Given the current state of affairs between the US and China, it isn’t surprising tariffs once again have become a key topic on the 2024 presidential campaign trail.
Former President Trump, who once called himself the “Tariff Man”, is credited with starting the current trade war with China, when in January of 2018 he began setting tariffs and other trade barriers on China to address unfair trade practices.
President Trump’s principal complaint was the disparity in Chinese imports to US exports and the resulting mammoth trade deficit. For example, in 2018 China exports to the US were over $538 billion compared to China’s imports of US goods of just over $120 billion. In his first term Trump as president imposed $250 billion in tariffs on China. And back in February, candidate Trump reiterated the same views and stated he would impose tariffs of 60% or higher on Chinese imports.
To a large degree, the Democrats agree with Trump’s overall assessment of China’s exports to the US, although they have been a little more select in their targeting. The CHIPs and Science Act was aimed in both curbing US exports of strategic goods (i.e. blocking the sale of advanced chips and chip making machines to China, Russia and other adversaries) while encouraging more semiconductor plants to be built in the US. It is a narrative that fits well with the nearshoring, friend-shoring or China plus 1, 2 or 3 trend in sourcing.
In May, the then candidate President Biden said, “I’m announcing today: 25% tariff on Chinese steel and aluminum products. And we’ll counter China’s overcapacity in these industries. And we’re making major investments in clean American steel and aluminum — clean American steel and aluminum. It’s a big deal.”
While it is clear that China’s manufacturing surplus (a surplus in part because of a decline in Chinese consumer spending) is again turning into exports to help lift the economy, it is debatable how effective tariffs are as a trade tool.
Back in 2018 economists from the Federal Reserve Bank of New York took issue with Trump’s assertation that tariffs would narrow the trade deficit and said it would reduce both US imports and exports with little change in the deficit.
Another study in 2019 by the National Bureau of Economic Research found that the tariffs had little impact on the Chinese exporters and the US importers absorbed and, in most cases, passed on, the higher import costs to the US consumer.
The National Retail Federation (NRF), in their position statement, summarized the problem with weaponizing tariffs as tariffs are “punishing U.S. consumers, workers and businesses more than they are punishing China while doing little or nothing to create U.S jobs.”
Still, it is highly unlikely that whether Trump or Harris gets elected the tariff war with China will abate — as the song goes, it is really just a case of you say tomayto and I say tamahto between the two parties. Perhaps the difference might be Kamala Harris’ vice presidential pick Minnesota Governor Tim Walz. Walz has a long standing relationship with China, but whether this is a step towards better terms, worse or more of the same, it is a great unknown.
And while the tariffs themselves have thus far produced only a selective but marginal impact on US-China trade in terms of figures, the heightened tension between the US and China heightens the business risk for all.
Risky Business
There is an old African proverb, that says, ‘when elephants fight, the grass gets trampled’ and there are no bigger elephants in international trade than the US and China.
In July Steve Vickers, lead consultant for the Hong Kong-based firm Steve Vickers Associates and a veteran observer of the China Trade, wrote a blog entitled, “Escalating Risks in Asia – US Elections and Government Intervention” assessing the potential risk to not only US but global business in the context of the upcoming US elections. In the piece Vickers wrote, “The upshot is that the political risks for any foreign company dealing with China or Chinese counterparties are rising. Perhaps the most overt threat is serious disruption to supply chains, thanks to tariffs or conflict (Editor’s Italics). A large number of companies are at risk, ranging from simple plastic toy producers to complex high-end electronics and electric vehicle manufacturers.”
And international trade disputes, like real conflicts, spread quickly. In July the European Union (EU) in July announced it was imposing tariffs of up to 37.6% on vehicles made in China. The EU decided to levy the tariff based on its findings that Chinese automakers had received substantial government subsidies which gave the automakers an unfair competitive advantage over the EU’s own auto manufacturing companies.
In August, China brought the dispute to the WTO (World Trade Organization) arguing in a statement by the Commerce Ministry, that any subsidies were within the WTO rules and instituted, “to safeguard the development rights and interests of the electrical vehicle industry…”
Quite aside from the WTO complaint, China has also launched investigations into EU exports such as French cognac and EU pork.
The EU wasn’t alone in its assessment of China’s EV strategy. In May the Biden Administration announced the US also hiked tariffs on China EVs to 100% from 25% and raised tariffs on batteries from 7.5% to 25%.
But as Vickers points out, as the tariff war heats up, so does the business risk,
“A related concern must be payment risk. The imposition of heavy tariffs by the US would probably result in many companies simply failing to meet their debt obligations, or to pay for goods; and efforts to secure restitution in mainland China would certainly prove tough. In an extreme scenario, the imposition of sanctions by the US treasury on a major Chinese bank could provoke a financial crisis.”
The Box Business
While China has slipped to the number three position as a trading partner to the US (USMCA partners Mexico and Canada rank one and two respectively), when it goes to containerized freight, China is by far the number one trading partner.
And despite the uncertainty or perhaps because of it, business with China is booming.
On August 7th Descartes Datamyne released its “August Global Shipping Report” which noted “July 2024 US container imports hit a 26-month high, growing 11.2% to 2,556,180 twenty-foot equivalent units (TEUs). This also marks the first time in 22 months that volumes have been above the 2.4 million TEU level…” Among the key findings was “U.S. imports from China set records: Imports reached 1,022,913 TEUs; this is a 14.7% increase over June totals and a 19.9% increase over July 2023.” [See Descartes Datamyne charts for more details]
Undoubtedly, some of this surge is related to US importers trying to build inventories in advance of tariffs and a potential strike by the International Longshoremen’s Association (ILA) on the East Coast. As Freightos noted in their August analysis, “Some importers pulled forward shipments of goods from China facing tariff increases meant for August 1st. Just last week, though, the US Trade Representative announced it needed more time to review public comments on the tariffs. A final determination is expected sometime in August and the tariffs will only go into effect two weeks after that announcement.”
With the low water problems of the Panama Canal and the Houthis attacks in the Red Sea forcing long diversions and the threat of an East Coast dockworkers strike, it isn’t surprising that the West Coast has benefited from the surge in box business from China. However, with the low water crisis in the Panama Canal slowly abating, more traffic could be heading back to the East Coast… should a longshoremen’s strike be averted.
Although imports from China are strong, the same cannot be said for exports.
In 2023 US exports to China through January-June were around $72.655 billion and in 2024 the figure is running at $70.757 billion. Descartes Datamyne reports that in the first half of 2024 US exports to China were 753,106 TEUs while the box count for the first half of 2023 was 762,494 TEUs. However, it is important to point out that most of the agricultural exports to China from the US move in bulk or breakbulk ship as opposed to containerships and thus not reflected in TEUs. Nonetheless, exports to China are. through the first half of 2024, down.
Still, there is the possibility that while the fundamental differences will remain that the tensions between the US and China will lessen. At this writing, a group of senior Biden administration officials are heading to Shanghai this week for a high-level round of meetings under the auspices of the US-China Financial Group centered around finding some common ground in regard to the economic relationship of the two superpowers.
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