Trade Cases

Leibowitz: Rare Bipartisan Agreement on Section 301 Tariffs on China

Written by Lewis Leibowitz

This past week the Biden administration released a list of questions for the public on the four-year review of the Section 301 tariffs on China. The questions and the procedures in the review reveal quite a bit about where this investigation is going, and what policy choices will be coming out after the 2022 midterm elections.

First, a bit of background.

balanceThe China Section 301 tariffs (25% on most goods coming from China, and 7.5% on items in List 4A, implemented in 2019) were first imposed by the US Trade Representative (USTR) in July 2018. The first list (List 1) covered imports with a 2017 trade value of about $34 billion. List 2, imposed in August 2018, covered a trade value of $16 billion. The USTR doubled down and then some when these tariffs had no real impact on China’s behavior regarding patent infringements, theft of trade secrets, and other alleged transgressions (and the Chinese imposed retaliatory tariffs on US exports to China). It imposed 25% tariffs on more imports with $200 billion of trade value.

The final list, List 4 ($300 billion trade value), was deferred until 2019. When the list was finally released, it had been pared down to $120 billion in trade value. At the end of 2019, the tariff rate was cut in half from 15% to 7.5%, thanks to a commitment by China to purchase billions of dollars of goods from the US. China fell woefully short of the commitment, but US exports to China did increase in both 2020 and 2021.

Tariffs on China cover about $370 billion in trade value, or about three-fourths of trade between the two countries.

Under the Section 301 statute, the Office of the US Trade Representative must review the effectiveness of Section 301 remedies every four years. The questions just released are the beginning of that process.

USTR requested public comments on the aggregate impact of the Section 301 tariffs on the nation as a whole, as well as on individual sectors/industries. The impact has been mixed, but there has been a reduction in the percentage of total imports accounted for by Chinese goods.

In 2017, the last full year before the Section 301 tariffs were imposed, imports from China were about $503 billion, which accounted for nearly 22% of total US imports. In 2018, imports from China increased to $543 billion, even though tariffs on $50 billion of imports were imposed about halfway through the year. The increase, in large part, seems to be due to the anticipation of the tariffs becoming effective, so consumers bought more. But in 2018, the percentage of total imports coming from China declined slightly, because total imports from the world increased a bit more than imports from China.

By 2019, the rise in imports from China due to anticipation of tariffs had ended. US imports from China declined significantly, from $543 billion to $453 billion. The 2019 share of total US imports from China shrank from 21% to 18%.

So far in 2022 (figures are available through August), imports from China were $361 billion, up considerably from the same period in 2021 ($307 billion). But the percentage of total imports taken by China continued to decline. This year only 16.7% of total imports because total imports grew slightly more than imports from China.

It surprises me that the decline in imports was so slight. There are many reasons for the meager results of such enormous tariffs, but perhaps most important is the fact that China has succeeded in becoming the “workshop of the world.”

Many products, from furniture to rare earth metals, are made in China and not so much anywhere else. Customers in the US simply have no real alternative to sourcing from China for thousands of products. The selling power of China is one reason that virtually all economists insist that the burden of the tariffs falls primarily on Americans, not on Chinese exporters.

Another big reason for the relatively modest decline in imports from China is the exclusion process. Companies that rely on China filed thousands of requests for exclusion from the tariffs. USTR approved a small percentage of those requests, but they added up.

We don’t know what the Customs value of excluded products is, because that data is not released. But we do know that most exclusion requests were denied. Most that were granted were either capital goods (such as machinery or “intermediate goods”) used in manufacturing. The exclusion process has helped some companies, but others complain that the process is opaque and seems largely arbitrary.

We also know, just by reading the newspaper, that the tariffs, which have raised many billions of dollars in government tax revenue, have not changed China’s behavior regarding technology transfer, trade secrets, and intellectual property infringement.

USTR is opening the comment window on Nov. 15 and closing it on Jan. 17. I can’t wait to read them all.

The larger question is what the future should be of these tariffs. Are they necessary to accomplish larger goals?

First, as noted above, it is hard to make a case that the tariffs have remedied or even addressed the alleged Chinese practices that the USTR identified as “burdening” US commerce, as defined in Section 301. I say “alleged” because no unbiased tribunal has considered actual evidence. The US Trade Representative’s Office under former USTR Robert Lighthizer can hardly be considered unbiased.

Second, I expect that many of the comments will argue that things will get worse if the tariffs are ended. Others will argue that the tariffs have failed and should be ended immediately.

The pressure to keep them in place will come from US businesses and labor wanting continued protection. As many of you will have noticed, Democrats and Republicans are wooing manufacturing workers for their votes. Neither party is anxious to cede those votes to the other.

Probably the best we can hope for is a “stay the course” decision, with reform of the exclusion process, a step that is sorely needed. It is crucially important that the process be more objective and transparent.

And, of course, reforming the tariffs also depends on the geopolitical situation. The recent confirmation of Xi Jinping as the leader of China for a long time to come, and the increased belligerence of China in rhetoric about Taiwan as well as Ukraine could lead to more “decoupling.” But as we have already seen, you can only decouple from China if you have viable options—right now, those options are few.

Lewis Leibowitz

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Lewis Leibowitz, SMU Contributor

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