3 Things to Know When Navigating Shifting US Trade Policies on China

In today’s climate, trade with China is often influenced by shifting geopolitics, rather than solely the ebb and flow of supply and demand. As a US company that relies on importing from or exporting to China, navigating these shifting policies and new regulations can be challenging at best. Here are the top three policy trends that will affect your business with Chinese companies: trade in technology, tariffs and duties, and de-risking.

#1. Trade in Technology

In 2021, China was in the top three countries for both imports and exports of US semiconductors. From late 2022 onwards, the US has restricted trade with China, imposing export controls and export bans on the semiconductor industry. Semiconductors are a critical input to many products; they appear not just in your cellphone, but also in your smart kitchen appliances and new car.

There has been a longstanding (and increasing) trade deficit in US semiconductors, which the US is now attempting to off-set. Going forward, the Creating Helpful Incentives to Produce Semiconductors Act 2020, or the “CHIPS Act” for short, was signed into law on August 9, 2022. The Chips Act offers $280 billion in funding and support over the next decade to US companies to research, develop and commercialize technologies that require semiconductors. The goal is to bolster US domestic product capacities and scientific know-how in this industry, ultimately moving towards greater self-sufficiency in this field.

What does this mean for trade in technology with China? The trend of decreasing trade in technology with China will continue with help from the CHIPS Act and ongoing export controls. Moreover, this stance is reaffirmed by the US Department of Commerce’s March 2023 reclassification of some semiconductors as being “critical to national security”. Thus, this shift away from trading technology with Chinese companies is likely to persist.

#2. Tariffs and Duties

In May 2022, the US Trade Representative (USTR) initiated the statutory four-year review of the initial tariff actions and subsequent modifications from the Trump administration against China. After consultations with domestic industry, the USTR decided to continue the tariffs until August 2023. Over 5,000 products imported from China to the US have tariffs as high as 25%. Meanwhile, Beijing has maintained its own tariffs against US products since 2019. Overall, tariffs have been proven to help domestic industry but harm the economy as a whole. Moreover, the initial tariffs were estimated to have contributed between 0.3-1.3 per cent to the inflation spike in 2022.

US companies that want to import products from China need to be especially careful because the US maintains a highly complex retrospective duty assessment system for products that are subject to anti-dumping and countervailing duties. Duties assessed on a retrospective basis means that the importer does not know for certain how much duties they will need to pay until the product is already imported. For example, Company X might import a product at what they believe would be a 2% duty rate, but one year later it may be determined that the accurate duty rate was actually 20% for that shipment, resulting in an (occasionally surprising) additional cost (and risk) for the importer. The US is presently the only WTO Member which maintains this type of retrospective trade remedies system for assessing anti-dumping and countervailing duties.

There are two main takeaways here: First, the initial tariffs will continue until at least August; second, given the heightened scrutiny facing Chinese imports into the US, importers should be aware of the risks of unforeseen costs that may result from the retrospective duty assessment system.

#3. De-Risking

Lastly, in 2023 the US economic policy under the Biden Administration towards China has been described by US Treasury Secretary Yellen as “de-risking”. “De-risking” is distinct from the more severe EU approach of “de-coupling” which necessitates severing economic ties to a certain extent. US Trade Representative Tai has also commented that the US has no “intention to decouple” with China’s economy. In her speech today, Yellen stated that the US and China “can and need to find a way to live together” while maintaining her support for US economic restrictions on China for national security reasons. This is especially salient after the discovery in February of Chinese surveillance balloons in US airspaces, and joint naval drills between China, Russia and Iran occurring in March.

What “de-risking” means for future relations is that despite the disagreements between the US and China, there is no intention to sever economic ties. Meanwhile, given the US national security concerns, there is also no reason to expect bilateral relations to become any less restricted in the near future.

Sources:

Justin Badlam, Stephen Clark, Suhrid Gajendragadkar, Adi Kumar, Sara O’Rourke, and Dale Swartz “The CHIPS and Science Act: Here’s What’s in it” October 4, 2022 (Mckinsey) https://www.mckinsey.com/industries/public-and-social-sector/our-insights/the-chips-and-science-act-heres-whats-in-it

“Navigating the Semiconductor Downturn” (Deloitte) https://www2.deloitte.com/us/en/pages/technology-media-and-telecommunications/articles/navigating-semiconductor-downturn.html?id=us:2ps:3gl:semidt23:awa:tmt:032923:semiconductor%20industry:p:c:kwd-100737596&gclid=EAIaIQobChMIztXK0dm4_gIVSB6zAB3WOATWEAAYASAAEgIFFvD_BwE

Fernando Leibovici and Jason Dunn, “U.S. Trade of Semiconductors: Cross-Country Patterns and Historical Dynamics) 2022-12-07 https://research.stlouisfed.org/publications/economic-synopses/2022/12/07/u-s-trade-of-semiconductors-cross-country-patterns-and-historical-dynamics

David Shepardson, “U.S. seeks to prevent China from Benefiting from $52 billion chips funding” March 21, 2023 (Reuters) https://www.reuters.com/technology/us-seeks-prevent-china-benefiting-52-billion-chips-funding-2023-03-21/#:~:text=U.S.%20seeks%20to%20prevent%20China%20from%20benefiting%20from%20%2452%20billion%20chips%20funding,-By%20David%20Shepardson&text=WASHINGTON%2C%20March%2021%20(Reuters),other%20countries%20deemed%20of%20concern.

Inu Manak, Natalia Feinberg and Gabriel Cabanas, “AMID Trade War with China, Few Industries Support the Tariffs” April 11, 2023 (Council on Foreign Relations) https://www.cfr.org/blog/amid-trade-war-china-few-industries-support-tariffs

“Yellen to lay out U.S. economic priorities on China in Thursday speech” April 18, 2023 (Reuters) https://www.reuters.com/world/us/yellen-lay-out-us-economic-priorities-china-thursday-speech-2023-04-18/

“EU must seek to de-risk rather than decouple from China, von der Leyen says” January 17, 2023 (Reuters) https://www.reuters.com/world/eu-must-seek-de-risk-rather-than-decouple-china-von-der-leyen-2023-01-17/

Fatima Hussein, “Janet Yellen says the US AND China ‘need to find a way to live together,’ but she’s kind of suggesting they’re not” April 20, 2023 (The Associated Press) https://fortune.com/2023/04/20/janet-yellen-us-china-need-find-way-live-together-tensions/

Darlene Superville, “China, Russia, Iran hold joint naval drills in Gulf od Oman” March 15 2023 (The Associated Press) https://apnews.com/article/china-russia-iran-naval-drills-oman-gulf-9f515b3246e4cbe0d98a35e8399dc177

Ana Swanson, “Yellen Calls for ‘Constructive’ China Relationship” April 20, 2023 (The New York Times) https://www.nytimes.com/2023/04/20/business/economy/yellen-us-china-relationship.html

“USTR Extends Exclusions from China Section 301 Tariffs” December 16, 2022 (Office of the United States Trade Representative) https://ustr.gov/about-us/policy-offices/press-office/press-releases/2022/december/ustr-extends-exclusions-china-section-301-tariffs#:~:text=WASHINGTON%20%E2%80%93%20The%20Office%20of%20the,at%20the%20end%20of%202022.