November 11, 2020
By: Alexandra Kleinschmidt (VP Customs Brokerage & Trade Advisory Services)
One of the most heavily disputed subjects in the last two years has been the Section 301 tariffs (aka Trump tariffs) on products imported from China. Over the previous eight months, with the emergence of COVID-19, the tariffs became even more contentious amongst the trade community, especially with the rising prices in shipping and the lack of space available with ocean and air freight.
As the media projected Joe Biden as President-elect this past weekend, the topic on tariffs resurfaced like a pestering cold sore, leaving several U.S. importers anxious and with the same question in mind.
A question that most desperately needs to be answered as several small and mid-sized businesses went belly up due to the exorbitant increase in duties paid for their imported products. There are high hopes that Biden's election will quickly eliminate or "relax" tariffs on China if sworn into office, alleviating the negative effect on our small business community. However, if we look at the political and business relationship between China and the U.S. during the last two years, everything points at a "re-evaluation" of the tariffs, not an elimination.
Joe Biden cannot come out looking like a bull in a China shop (no pun intended) with the international community as there has been no significant change in the trade relations between China and the United States. Even after the signing of the famed, yet failed, Economic and Trade Agreement Between the United States of America and the People’s Republic Of China: Phase One or "Phase One" deal. Biden needs to come out looking like the man with the plan. The whole point of the Section 301 investigation and levying of tariffs against China was because of the vast violations on Intellectual Property, specifically regarding "forced technology transfers" and subsidies, both of which have left U.S. companies and investors in disarray. Suppose a "forced technology transfer" requirement on a U.S. company wants to engage in business in China. In that case, the Chinese government can force that company to share their technology in exchange for market access. The result is that the U.S. company cannot compete because their Chinese competitors will also have that same access, technology, along with a potential subsidy, in a mostly protectionist market where foreign investors are eager for the U.S. company's success. A successful investment in a U.S. company in China is based on that company's endeavors. If the U.S. company cannot compete, it will not succeed; therefore, the investment wanes.
If we look at Phase One's current success rate to date, changes for the better have been minimal. One of the agreements between China and the U.S. was for China to commit to purchasing $200 million of U.S. manufacturing, agriculture, and energy products. According to the Peterson Institute for Internal Economics, China's imports of U.S. products from January through September 2020 were $65.9 billion, compared with a prorated year-to-date target of $124.9 billion agreed upon in Phase One.
With Intellectual Property issues, the discriminatory practices that the U.S. still faces in China (with the fact that Phase One does not contain measures to enforce such rules), and China's failure to meet U.S. purchase commitments, Section 301 tariffs will remain in place as a negotiation point for Biden. If he can achieve a substantial bilateral trade agreement, much like President Obama tried to close during his second term, we will see a change in Section 301 tariffs. He will most likely use these as a negotiating point for greater market access in China for U.S. companies while also explicitly prohibiting the use of "forced technology transfers" with directly related penalties associated with this trade practice. Phase One did not address the specific consequences of discriminatory trade practices. Instead, they were loosely mentioned in Phase One as everything reverted to asking China to put together some form of due process to address such "cases" and repeatedly says both the U.S. and China are coming together in "cooperation."
Biden's attitude towards Section 301 and China will have to be tactical as the tariffs will most likely be used as a tool, hopefully with a free-market approach that addresses what Phase One did not. We will not see an immediate lift on the tariffs- if Biden achieves what Obama could not with a bilateral trade deal (instead of the mercantilist Phase One) between both countries. We talk about an ever-expanding trade deficit but purchasing more goods could mean economic strength. An expanding trade deficit is not necessarily a wrong signal to an economy, but it could signify that the country is prosperous and doing well. How can we ultimately make America's trade great if we do not address the real problem source, which brings to the table what is lacking, a trade deal with substance?
Crane Trade Services can assist you with understanding if these exclusions apply to your products and determine any duty mitigation possibilities- for assistance please reach out.
ABOUT THE AUTHOR:
Vice President Customs Brokerage & Trade Advisory
Alexandra Kleinschmidt is a licensed customs broker, certified customs specialist and has an experienced background in leadership roles covering customs brokerage, compliance, ocean product, and sales. She has lived on multiple continents throughout her career and speaks four languages fluently, bringing a global experience to this leadership role. She is a graduate of Loyola and Tulane University.