Implications and Recommendations from the Latest Round of US Tariffs on China
At a Glance
- On May 14, 2024, the Biden administration announced new tariffs on USD 18 billion worth of Chinese products in “strategic sectors,” including electric vehicles (EV), lithium-ion batteries, and semiconductors.
- This decision marked the culmination of the US Trade Representative’s four-year statutory review of the Section 301 tariffs imposed by the Trump administration beginning in 2018.
- New tariff rates range from 25% to 100% and will put additional strain on the already tense US-China relationship. As we head deeper into the US election season, China will become an increasingly politicized issue with serious implications for business on both sides of the Pacific.
- Businesses should consider how this tariff decision will affect them in the short term—including likely higher import prices—and in the medium to long term—where Chinese retaliation could impact US companies operating in the market.
What are the tariffs?
The US has maintained tariffs on around $550 billion of Chinese imports since 2018. The Trump administration and US Trade Representative (USTR) imposed these tariffs due to concerns that China was engaging in discriminatory practices related to technology transfer and concerns about intellectual property theft. Those tariff rates—ranging from 7.5% to 25%—have been under review by USTR since May 2022 as part of a mandatory process under Section 301 of the Tariff Act of 1974.
On Tuesday, USTR concluded that the 2018 tariffs were effective—so much so that they increased the rates to between 25% and 100%. The administration argued that the tariffs created jobs and improved supply chain resiliency, but importantly, that they did not resolve initial concerns about China’s unfair trade practices. As a result, it proposed increasing tariffs on around 5% of China’s total imports into the US.
In the announcement, the Biden administration argued that China’s unfair trade practices threaten American business and workers and flood global markets with cheap imports. It emphasized that the tariff action targeted sectors where the US is also investing via the Inflation Reduction Act (IRA), CHIPS and Science Act, and the Bipartisan Infrastructure Law—sectors such as EVs, batteries, and semiconductors that are critical to US economic and national security, competition, and job creation.
What are the implications?
For prices and supply chains: Tariffs on steel, aluminum, solar cells, syringes and needles, lithium-ion batteries, face masks, and battery parts will increase 25-100% this year. This means higher prices for US companies and consumers across supply chains, whether these targeted items are inputs—such as batteries in electric toothbrushes and pacemakers—or final goods like syringes and medical gloves. Other tariffs will increase over the next one to two years—in theory enough time for US domestic industries to accelerate production and reduce, or end, reliance on Chinese imports. In the long run, companies may be incentivized to purchase domestic alternatives which is the Biden administration’s goal. But since China controls huge portions of the US market for these products—95% of medical gloves, 70% of non-EV lithium-ion batteries—there are limited options in the immediate term other than to pay the tariff.
For US-China: The dramatic tariff increase will further agitate the already tense US-China relationship. In unusually blunt remarks, Foreign Minister Wang Yi responded that “some in the US have lost reason in a quest to ensure US unipolar supremacy.” But China likely won’t limit its response to rhetoric. Expect China to target the same sectors with its own tariffs. This includes US auto manufacturers with significant China sales, semiconductors, cranes, and medical devices. China could also target US agriculture by declining to extend certain tariff exclusions it put in place in 2020. There is also precedence for Beijing to respond with export controls. Last July, China imposed restrictions on the export of gallium and germanium in response to moves by the US, Japan, and the Netherlands to limit China’s access to advanced semiconductor manufacturing equipment. Beijing could also target specific US companies, such as those headquartered in US congressional districts with known “China hawk” representatives.
China’s response will also take into account its own economic challenges—low consumer confidence, problems in the real estate sector, and hesitant foreign investment—while considering geopolitical timing such as G7 meetings in June and upcoming elections in the EU and the US. Ultimately, neither side wants conflict and, since Presidents Biden and Xi met in San Francisco last November, both sides have made real moves to increase dialogue. But entrenched issues over Taiwan, Russia-Ukraine, and US export controls on Chinese tech exacerbated by these new tariffs could see conflict spill over into other aspects of US-China relations—not just in the industries facing higher tariffs.
For Chinese EVs: The highest tariff increase—now at 100%—will hit Chinese EV imports, effectively preventing any US imports of Chinese EVs. In practice, though, Chinese EVs already face a prohibitively high tariff rate of 25% in the US. Last year, the US imported only 12,362 Chinese EVs compared with 460,000 in the European Union (EU). The Biden administration’s dramatic increase is intended to prevent a surge of cheap Chinese EV imports due to overcapacity in China while, perhaps more salient, proving Biden is “tough on China” as the election nears.
For the EU: The EU’s anti-subsidy investigation of Chinese EVs is also nearing a conclusion. Since October 2023, the European Commission (EC) has been investigating whether Chinese EVs benefit from subsidization that cause economic injury to EU EV producers. Duties are expected by July 4, 2024, at the earliest. EU tariffs are unlikely to reach US levels but the scale of the US tariffs could pressure the EU to increase their own rates.
Next steps
The new tariff rates do not go into effect immediately. This week (May 19-25), the USTR will issue the proposed changes in the Federal Register along with a more detailed implementation schedule. The notice will also provide stakeholders with a comment period—likely around 90 days—to submit feedback to USTR on the proposed rules, as well as details on the new exclusions program. In the past, public comments from companies have resulted in clarification from USTR and even changes to Section 301 tariffs. The US-China Business Council will also begin soliciting comments from member companies next week to inform their formal response to the tariff increases.
Recommendations for companies
Asses your level of risk. Consider whether your business will be paying higher duties at the border, or if your suppliers will be—and passing the cost on to you. Evaluate your business operations in China: Are you or your partners in a sector that may be targeted for retaliation?
Establish your POV. Businesses navigating tariffs and US-China markets should be aware that your diverse stakeholders may be impacted differently by the tariffs and shifts in US-China relations. Think through approach and messaging carefully. And keep in mind that internal messaging often becomes public.
Engage with stakeholders. The USTR’s public comment period is an opportune time for businesses to provide feedback on how these increases will impact industries, supply chains, inflation, and jobs. Small- and medium-sized businesses should consider leveraging trade organizations that can elevate and amplify industry concerns.
Be prepared. Most of these tariffs allow for a runway before implementation. Take the time now to scenario plan and prepare for contingencies around supply, price, and possible retaliation from China. While the new tariffs are limited in scope, China’s response could impact companies in a wide range of industries or states, depending on China’s economic or political motivations.
Questions on China? We can help. Reach out to Matt.Chitwood@EdelmanEGA.com and Camille.Bryan@EdelmanEGA.com
