On March 3, Adams Lee and I participated in a webinar titled The Biden Administration on International Trade, together with Lynn Jenkins and Todd Bertoson of the Capitol Hill Policy Group.
Since we got tons of questions from the audience that we were not able to get to, we decided to pull some of those questions and offer our comments:
1. Trump Tariffs & Exclusions
Will Trump’s tariffs be lifted? If so, when? What is likely to happen with the product-specific China Section 301 exclusions that expired on 12/31? Will they reopen the process to seek exemptions from the tariffs?
Adams: If you look at the Trump tariffs from a business or purely economic standpoint, there’s no question the Biden administration should lift the tariffs and/or grant exclusions for certain products, such as those that can’t be supplied by American sources. Tariffs are taxes, the costs of which have largely been shouldered by American importers, distributors, manufacturers and consumers and act as a drag on the U.S. economy. With all the other pandemic related problems weighing on the U.S. economy, lifting the tariffs or providing more tariff exemptions would provide much needed help to many U.S. companies directly and immediately.
But political considerations will far outweigh any business and economic considerations for the Biden administration in deciding if and when Trump’s tariffs get lifted. The Trump tariffs obviously are supported by Trump Republicans. But many Democrats (e.g., Sanders, Warren) also believe the push for globalization should be reined in and any trade deals should not just be for free trade, but also fair trade. The Biden administration is certainly sensitive to this view that trade should not just benefit the multinational conglomerates, but also smaller American companies and the workers displaced by trade. Notably, one of President Biden’s first actions was to issue an executive order to strengthen “Buy American” provisions to promote federal procurement of American made products. Biden likely will move cautiously on trade issues to try to balance multiple competing free v. fair trade interests coming at him from all sides.
Internationally, all countries recognize they would be better off if everybody just lifted their respective tariffs and retaliatory tariffs. But many countries, like the United States, have to deal with protectionist sentiment in their own countries and will be cautious and wait to see how the U.S. handles these tariffs before withdrawing them. Also, the U.S. has all sorts of long standing trade issues with so many countries. The Biden administration may be using the lifting of the tariffs or granting tariff exclusions as a bargaining chip to offer to some countries in exchange for some concessions from those countries on trade or other issues.
I think Biden will eventually unwind and lift most if not all of Trump’s tariffs, but not until after he takes some action to show he is not soft on trade or on China. He may re-open the tariff exemption process as that may be a way to keep the tariffs in place but still give a path for more American companies to justify why certain imports should not be tariffed.
Fred: Both businesses that depend on China supply chains and advocates of engagement would welcome a rollback of tariffs. At the same time, there are constituencies that would react negatively to their elimination or reduction because of what they represent in terms of the bilateral relationship with China and/or their broader implications for trade and labor policies. Due to this, the Biden administration will face a tough balancing act, and the factors that influence it will not be static. For instance, if China is perceived to be purposely hindering efforts to determine the origins of the COVID-19 pandemic, or if there is a worsening of the human rights situation in China, this could strengthen public support for a tough approach on China trade.
The Biden administration’s initial steps on China policy suggest a certain sense of resignation when it comes to China. Ultimately, there is little China can realistically offer to warrant relaxing the Trump tariffs. Any tariff relief would likely be viewed by China as an admission by Team Biden that there is little to be done about the China challenge in terms of trade – a message one doubts the administration will want to send.
Most likely, the Biden administration will look to bring tariff relief in ways that can be spun to make it look as though broader policy objectives are being advanced by doing so. For instance, tariffs on components for products made in the United States may be eliminated, as well as products made by the China operations of US companies. There may also be a revamped exclusion process that allows the optics of tariffs to remain, while providing for loopholes in practice.
2. Supply Chain Changes
We avoided China for production of our initial product launch and chose Thailand (or Vietnam, Malaysia, Mexico, etc.). Considering the potential policy changes, should we reconsider China for our current or new product lines? We own a China factory and we’re getting badly hurt by the tariffs. Moving production elsewhere hurts our investment in our company there. We are also finding that supply chains elsewhere are less reliable and more expensive. Should we stay in China?
Fred: There are good reasons to stay or even double down on China – but the expectation of more favorable policies toward Chinese imports should not be one of them. For a start, it is not clear there will be any tariff relief; and if there is, it will likely be limited in scope. In addition, though it is hard to see how the overall US-China relationship will improve over the short- or medium-term, it is not hard to see how it could worsen. China’s human rights issues and/or its aggressiveness toward its neighbors could lead to further souring of the US-China relationship, with possible consequences not just on imports, but on the operations of US companies in China more broadly.
Being in China for China and/or for non-U.S. markets might be a different story, though concern over China’s trade practices, human rights, and aggressiveness are by no means present only in the United States.
As companies deal with the growing pains of relocating supply chains, it is worth remembering that China’s establishment as an export manufacturing powerhouse did not happen overnight. Over time, conditions are bound to improve in most of the alternative destinations and my law firm’s international manufacturing lawyers have definitely been seeing an uptick of manufacturing moving out of China, mostly to other countries in Asia, but we are also seeing near-shoring to Mexico and to Poland.
Adams: Many in the U.S. supply chain that have been hurt by the tariffs are hoping President Biden will lift the tariffs and the supply chain will return back to the way it used to be. But I just do not see this happening. Beyond the early indications from the Biden administration that it is in no hurry to ease the China tariffs, it is also interesting to see a good number of Chinese companies setting up new factories throughout Southeast Asia and many are doing so in Mexico as well — it is no accident that our lead Mexico attorney is fluent in Chinese! Chinese manufacturers have been complaining about the increasing labor costs in China. So taking advantage of the crisis created by the Trump tariffs, these companies saw an opportunity to move some of their manufacturing to countries (like Laos, Vietnam, Malaysia, and Indonesia) that offer lower cost labor. It will be interesting to see how successful these new factories set up by the Chinese will be in dealing with the tradeoff between lower labor costs and lower productivity efficiencies. But at a minimum, these relocations demonstrate that even a good number of Chinese companies do not think the supply chain will return to how it was.We have even seen Chinese companies set up factories in Taiwan as well, choosing to pay more for labor but to avoid the tariffs.
3. Forced Labor
I have read that Xinjiang is the largest producer of cotton in China, which in turn is the largest cotton producer worldwide. Can America restore a clean cotton supply chain, if Xinjiang is “blocked” for trade?
Fred: Closing the door to all Xinjiang cotton, as U.S. Customs and Border Protection (CBP) has done, is a necessary to ensure a clean cotton supply chain. However, it will be hard if not impossible for CBP to actually identify all Xinjiang cotton. Moreover, forced labor has infected China supply chains generally: Cotton from other parts of China could be produced using forced labor as well. Ultimately, dealing with the forced labor issue honestly would require a reassessment of the entire China trade relationship.
Given the current trade tension between the U.S. and China, will U.S. companies exporting U.S. made commercial products into China face brand discrimination versus competitive products made in China?
Fred: Many U.S. companies are doing very well in China. However, the situation varies depending on several factors, not least of which is the existence and type of Chinese rivals. In addition, conditions could change on a dime if the Chinese authorities feel the need to scapegoat foreign companies, as it has a history of doing (see Australia recently, and Canada, Norway, Japan, and France before that). Of course, companies should be careful not to shoot themselves in the foot and bring on unwanted attention.
Adams: No U.S. company doing business in China should think it immune from being targeted by the Chinese government. In 2019, China cut off the NBA from broadcasting in China after the Houston Rockets’ GM tweeted support for Hong Kong. This action was taken even though basketball has become China’s most popular sport with NBA players like Stephon Marbury and Jeremy Lin gaining insane levels of popularity in China. If the NBA can be blacklisted by the Chinese government, any organization can.
How does Hong Kong fit into the new administration’s plans for trade? Will Hong Kong now be considered as “China” insofar as country of origin is concerned for US trade? And when speaking of Hong Kong and China, one must not forget Taiwan. . . . Thoughts?
Fred: The clear and inexorable trend is for distinctions between Hong Kong and the Mainland to blur, due mainly to China’s own policies. For the U.S. government to insist on separate treatment would be to ignore reality and endorse China’s cynical “two systems” kabuki. It is clear that the United States’ Hong Kong policy has now largely shifted to a concern for Hongkongers themselves (by, for example, providing immigration alternatives), rather than gauging the degree of autonomy that persists.
We can expect U.S.-Taiwan relations to continue to strengthen under the Biden Administration. CPTPP membership for Taiwan might be on the U.S. wish-list as it negotiates a possible entry with this trade bloc. There will be calls for an Fair Trade Agreement with Taiwan, but considering the economic lifeline a deal might provide to Taiwan, concerns over China’s reaction will be an unavoidable and possibly a fatal obstacle to a deal—even if U.S. domestic support could be obtained.
If you have any more questions, please feel free to reach out!