Original Post in World Trade Online

September 20, 2018

U.S. business groups are calling for an exclusions process for the latest round of U.S. tariffs on $200 billion in Chinese goods, but sources say exclusions are not expected at least for the initial 10 percent duties that go into effect next week.

In announcing a previous tranche of tariffs on $50 billion worth of goods earlier this year, the Office of the U.S. Trade Representative offered a product-exclusion process that some industry sources said was an improvement over the Commerce Department’s process for the Section 232 tariffs on steel and aluminum. On Monday, however, the administration announced tariffs on another $200 billion worth of goods but made no mention of an exclusions process.

Multiple private-sector sources told Inside U.S. Trade that USTR was not expected to set up an exclusions process for the initial tariffs of 10 percent, which will kick in on Sept. 24.

USTR, one source said, believes the lower 10 percent rate, in addition to a slew of products already removed from the original list, make an exclusion process unnecessary. USTR informed Capitol Hill that there would not be a process for excluding products from the 10 percent duties, the source said.

“The business community is concerned about the rumor that the administration won’t provide an exclusion process for the 10% round of tariffs,” another business group source said. “We hope the administration re-considers its approach and provides an exclusion both for tariffs at 10% and again when they escalate to 25% on January 1.”

The tariff rate will increase to 25 percent at the beginning of next year. Whether an exclusion process will be instituted for the higher tariffs remains unclear. Asked for comment, a USTR spokeswoman said only that there were “no announcements on this at this time.”

Industry groups are pushing for an exclusions process.

“We will certainly be advocating for one to be in place,” Erin Ennis, senior vice president of the U.S.-China Business Council, told Inside U.S. Trade in an email Wednesday. “There are a significant number of products covered in the list and there is a high likelihood of products getting caught in the process that have no alternative suppliers, or that have important reasons to be excluded from the tariffs. There should be a process in place for those companies to seek relief.”

Ryan Baldwin, a spokesman for the American Chemistry Council, told Inside U.S. Trade the group “would value the opportunity as it’s an important tool for our members given the breadth of chemicals tariff lines still on the list.”

In a statement on the tariff announcement on Monday, House Ways & Means Chairman Kevin Brady (R-TX) said the U.S. should set up a process to exclude key products.

“Until China comes to the table, one way to relieve pressure on Americans is establish an effective and timely process to allow products to be excluded from these additional tariffs if tariffs would make it harder for us to sell more ‘Made in America’ products globally,” Brady said.

Business groups have vehemently opposed the tariffs, warning they will hurt American consumers, and instead have called for negotiations and a coordinated response with U.S. allies like the European Union and Japan.

William Zarit, the chairman of the American Chamber of Commerce in China, told Inside U.S. Trade on Wednesday that some companies would be forced to raise prices because of the tariffs, which will put them at a disadvantage.

“You can transfer the burden to the consumer if the consumer doesn’t have a lot of choices,” he said. “I think the retail and consumer sector is going to be affected quite a bit here.”

Pointing to a survey his group released last week, Zarit said it would not be as easy for companies to shift production as “certain folks in the administration” have contended. The survey shows the number of companies considering moving production out of the United States is roughly equal to the number considering leaving China. “I don’t think that was necessarily an expected result of this,” Zarit said.

China has announced plans to retaliate for the $200 billion tariffs with duties of its own on $60 billion worth of U.S. goods, but at lower rates than previously announced. In August, Beijing released four lists of goods to be hit with 25, 20, 10 and 5 percent tariffs, respectively. China’s Ministry of Finance this week said the first two lists will face 10 percent duties and the latter two 5 percent tariffs, beginning Sept. 24. China has also challenged the U.S. tariffs at the World Trade Organization.

Zarit said Beijing was running out of options to retaliate against the U.S. Chinese leaders, including influential former finance minister Lou Jiwei, have been talking about potentially restricting exports of key components and spare parts to U.S. companies, he said. Beijing would be “very tactical” in its approach because it has a good sense of which parts would be crippling to stop shipping, he said.

Craig Allen, the president of the U.S.-China Business Council, on Tuesday told reporters that Beijing should be careful about imposing export controls that violate WTO rules, pointing to a rare earth minerals WTO case that China lost.

Though the AmCham survey shows that companies are an experiencing an uptick in non-tariff retaliation from Beijing, including increased inspections and customs delays, Zarit said that China was still showing restraint in its use of “qualitative” trade measures because they it did not want to scare off foreign investors. The increase reported by companies could be due to overzealous provincial leaders wanting to demonstrate patriotism or to saber-rattling by China to illustrate the potential for escalation, he said.

“They don’t really seem to have a lot of very good options,” he said. “I think it’s unfortunate that it’s so difficult for them to compromise because of the way that they’ve been kind of painted into a corner by the U.S. administration. I think it’s too bad, because I think we could start addressing the issues now and we wouldn’t have to go through all these histrionics and all the pain to the companies.”

CEO Larry George

Some industries are looking for silver linings. Larry George, an Oregon hazelnut grower and CEO of George Packing Company, told Inside U.S. Trade his industry viewed the trade dispute as an opportunity to address a longstanding gripe with China’s tariffs on U.S. hazelnuts.

Growers in Oregon have ramped up production to serve a niche market in the Northeastern region of China but have historically faced a 25 percent tariff (now 65 percent due to retaliation against U.S. tariffs) plus a 10 percent value-added tax. This year, he said, “may be a very painful year, but it’s like taking medicine: At some point you’ve got take your medicine and you’ve got to have these discussions because long-term it’s going to be much worse.

If our industry triples in size, the discussion is much tougher later on,” he said in an interview, adding that growers were also facing stiff competition from Turkey given the depreciation of the country’s currency. George said hazelnut growers “don’t mean to be the Pollyannas of the trade discussion,” but had previously lacked a forum to address the issue.

Now, however, it feels that “both on the Chinese side and the U.S. side we have been getting very favorable reactions and nobody would talk to us before.” “People are looking at their immediate hit and not realizing some of us were in a pretty tough situation before all of this blew up,” he said.

Zarit said he didn’t foresee a near-term resolution to the trade dispute because it would be difficult for China to make concessions without appearing to capitulate to the U.S.

“Since they don’t seem to have been given options, it’s ‘surrender or die’ tactics that seem to be used. I don’t see any face-saving compromises that can be made at this time,” he said. “And I think it’s unfortunate — either it’s because folks that are designing these tactics don’t understand Chinese culture or Chinese society or Chinese politics or even China’s economy.”

“If there were a better understanding and if there were better relationships at the decision-making level then probably we would have an off-ramp,” he added, “but we don’t seem to have an off-ramp and it’s a slash-and-burn type of thing, [an] all-or-nothing approach, and I think it’s going to be difficult to come up with a resolution here without a lot more pain.”

He also laid some blame on China for not coming to the table with substantive proposals to address U.S. concerns, which he said would ultimately be in China’s interest. Opening up the “Made in China 2025” initiative to foreign investment, for example, would result in better innovations, he said.

The tariffs are pursuant to a Section 301 investigation into Beijing’s intellectual property and tech transfer policies.

Made in China 2025, a plan to achieve Chinese dominance in certain industrial sectors, is identified in USTR’s Section 301 report and the first round of U.S. tariffs targeted goods that fall under that plan.

Asked if the U.S. was negotiating in good faith given comments made by President Trump and White House trade adviser Peter Navarro about the benefits of tariffs, Zarit said, “I certainly have to hope that they’re not trying to decouple. I have to hope that, because if they are I don’t think they’re looking at the benefits to the United States of staying engaged with China. And the very, very negative aspects of not staying engaged in China.”

He also urged the U.S. not to agree to a “quick and dirty agreement,” such as a purchase deal to reduce the bilateral trade deficit.

“We’ve gone this far, we finally have China’s attention — I don’t like the way it’s being done, but OK, it’s being done and we’re in the middle of this so I hope that at least we can get something substantive and longer-lasting out of this,” he said. “Which again, open the markets; it’s in China’s interest anyway.” — Anshu Siripurapu (anshus@iwpnews.com) and Isabelle Hoagland (ihoagland@iwpnews.com)