U.S. China Trade War Escalates Rapidly

Trump Administration to Add 10% Tariffs on $300B of Chinese Goods and Labels China a "Currency Manipulator"; China Halts U.S. Farm Purchases and Devalues Chinese Yuan

5 min

President Trump announced on August 1, 2019 that the United States will impose new tariffs on $300 billion worth of Chinese imports consisting of nearly all goods not currently subject to Section 301 tariffs effective September 1, 2019, following the most recent round of trade negotiations between China and the United States last week. In the announcement, President Trump cited China's failure to buy U.S. agricultural goods and curb the flow of fentanyl to the U.S. as justification for the new tariffs. According to the White House, the final list of goods subject to the new tariffs will be released "in days." President Trump also suggested that the tariff rate could rise in stages and "go well beyond 25%," but also noted that the administration is not necessarily looking to do that.

The list of goods subject to the tariffs is expected to be largely the same as those on the May 13, 2019 U.S. Trade Representative (USTR) Federal Register notice proposing a fourth round of Section 301 tariffs ("List 4" products). List 4 products include essentially all products from China not currently subject to tariffs—including consumer goods—with the exclusion of pharmaceuticals, certain pharmaceutical inputs, select medical goods, rare earth materials, and critical minerals. In the initial notice, USTR proposed imposing tariffs of up to 25% on more than 3,800 products imported from China worth about $300 billion. Many products originally excluded from previous rounds of tariffs were nevertheless included on List 4. Both consumers and U.S. retail business are likely to feel the effects of these tariffs more directly, given that List 4 products include items like toys and consumer electronics.

Once the final list of goods subject to tariffs is announced, USTR is expected to create an exclusion process resembling that utilized for previous rounds of tariffs. In a May 17, 2019 Federal Register notice, USTR requested public comments regarding the fourth round of tariffs and accepted them until June 17, 2019, the same week it held a hearing on the matter. Given the short time frame before this round of tariffs goes into effect, USTR is unlikely to review all of the comments submitted or exclude products from the final list.

The tariffs on the proposed List 4 were "indefinitely suspended" following a meeting between President Trump and President Xi Jinping at the G-20 summit on June 28-29, 2019 in Osaka, Japan, which restarted the previously stalled trade talks. President Trump's decision to impose tariffs came after Treasury Secretary Mnuchin and Trade Representative Robert Lighthizer, returning from trade talks in Shanghai last week, presented a report to President Trump on what were widely understood to be tense negotiations, but were nonetheless characterized as "constructive."

On August 4, 2019, shortly after President Trump announced the new tariffs, the Chinese Ministry of Commerce announced that China was halting all purchases of U.S. farm goods effective immediately. It further indicated that it would not rule out imposing import tariffs on U.S. farm products purchased after August 3, 2019. China previously released its own list of products to be tariffed in retaliation for the proposed List 4 tariffs—the complete list (in Chinese), including HTS codes subject to the tariffs, is available for download here. This decision to halt the purchase of U.S. agricultural products followed the People's Bank of China's decision to allow the RMB to weaken past 7 RMB per USD over weekend, which has the effect of making Chinese exports to the U.S. cheaper.

In response, the U.S. Department of Treasury announced on August 5, 2019 that it was labeling China a "currency manipulator." This label was applied under the Omnibus Foreign Trade and Competitiveness Act of 1988 rather than the Trade Facilitation and Trade Enforcement Act of 2015, which has both stricter criteria requirements for applying the label and more concrete consequences. Under the 1988 Act, the U.S. will have to negotiate with China directly or bring a case to the International Monetary Fund to eliminate any unfair competitive advantage created by China's latest actions. While the decision to apply the label is largely symbolic, if the Commerce Department finalizes its proposed new currency manipulation methodology for countervailing duty investigations, Treasury's designation of China as a currency manipulator will allow the Commerce Department to impose much higher anti-subsidy duties on Chinese imports in countervailing duty cases.

Other countermeasures that China could potentially pursue include restricting the export of rare earth minerals used in most electronic devices and upon which the U.S. is highly dependent, and creating more regulatory hurdles for and restrictions on U.S. businesses operating in China.

These recent actions by both the U.S. and China appear to signal a halt in any meaningful progress on bilateral trade negotiations.

Citing the uncertainty that tariffs have created for businesses, Senator Sheldon Whitehouse (D-RI) introduced a bill, the American Business Tariff Relief Act, on August 1st that would require the U.S. Department of Commerce and USTR to set up a product-exclusion process prior to the imposition of any new tariffs under Section 232 or Section 301. Per the text of the legislation, the Act would require Commerce and USTR to consider whether any article subject to tariffs is "not available from any source other than a source that is subject to the duties" or whether "the imposition of such duties on the article would cause economic harm to a United States interest," and require Commerce and USTR to render a decision within 30 days and provide a rationale for any denial. The agencies would also have to submit quarterly reports to the Senate Finance and House Ways & Means committees detailing the exclusion requests they received and their determinations.

We will continue to monitor any developments and provide regular updates. In the interim, please feel free to speak to Venable's International Trade Group attorneys if you have any questions as to how these recent developments may impact your business.