Trump Has Gotten China to Lower Its Tariffs. Just Toward Everyone Else.

Chad P. Bown (PIIE), Euijin Jung (PIIE) and Eva (Yiwen) Zhang (PIIE)

June 12, 2019 6:30 AM
Photo Credit: 
REUTERS/Stringer

China increased its retaliatory tariffs hitting US exports on June 1 in response to President Donald Trump’s latest escalation of his trade war. Yet, this action is only half of the bad news for US exporters. The other half is that China has begun rolling out the red carpet for the rest of the world. Everyone else is enjoying much improved access to China’s 1.4 billion consumers, a fact that has been little noticed or reported in accounts of the US-China economic confrontation.[1]

While Trump shows other countries nothing but his tariff stick, China has been offering carrots.  Beijing has repeatedly cut its duties on imports from America’s commercial rivals, including Canada, Japan, and Germany.

Trump’s provocations and China’s two-pronged response mean American companies and workers now are at a considerable cost disadvantage relative to both Chinese firms and firms in third countries. The result is one more eerie parallel to the conditions US exporters faced in the 1930s.

Another important implication of China’s action is that Americans are likely suffering more than President Trump thinks due to his trade war. Inflicting such punishment on Americans may be one factor motivating China. A separate motivation may be that it is trying to minimize the harm to its own economy by importing vital goods at better prices from other parts of the world.

Chinese Tariffs Throughout the Trade War

China has increased tariffs on US exports to an average 20.7 percent.[2] But also striking for American farmers, companies, and workers is that China has reduced tariffs on competing products imported from everyone else to an average of only 6.7 percent (figure 1).[3]

As recently as early 2018, firms in both the United States and the rest of the world competed in China with each other on a level playing field, facing an average Chinese tariff of 8.0 percent. Figure 1 summarizes how the Chinese tariff differential has arisen over the course of Trump’s trade war.

Figure 1: China’s average tariff rate is climbing on US goods and falling for the rest of the world

On April 2, 2018, China retaliated against US exports in response to Trump imposing tariffs on steel and aluminum imports under Section 232 of the Trade Expansion Act of 1962. Without waiting for authorization from the World Trade Organization (WTO), China imposed new duties on $3.0 billion of US exports.[4] Like all of the retaliatory duties to date, the April tariffs were imposed in addition to the normally applied most favored nation (MFN) tariffs. As a result, China’s average tariff on US exports increased to 8.4 percent.

Later in 2018, China’s retaliation against $110 billion of US exports increased the average Chinese tariff on US-based production ultimately to 18.3 percent. This hike came in three waves, and each was an immediate response to Trump imposing a round of tariffs on China under Section 301 of the Trade Act of 1974. China’s retaliatory tariffs hit $34 billion and $16 billion of US exports on July 6 and August 23, respectively. More duties covered an additional $60 billion of US exports on September 24.

Yet, throughout 2018, China also lowered its tariffs on imports from all other WTO members.[5] The headline involved China reducing its tariff on auto imports on July 1. But on the same day, China also cut tariffs on 1,449 other consumer goods like farm and fish products, cosmetics, clothing, and home appliances. On November 1 it reduced duties on 1,585 industrial products, including chemicals and machines.

By then, China had lowered its tariffs on imports from the rest of the world from 8.0 to 6.7 percent. Consumers in China now had another reason to switch away from American suppliers.

While painful to US exporters, China’s tariff reduction is not a violation of any WTO rules. So long as it keeps a tariff below the “binding” rate it has submitted to the WTO, China is well within its legal rights to reduce its applied MFN tariffs to whatever level it chooses.

As a sign that trade tensions with the United States were thawing, China did extend its auto tariff reduction to US exporters on January 1, 2019.[6] The decision and its later continuation were seen as part of the trade truce that Presidents Trump and Xi negotiated at a meeting in Buenos Aires on December 1. The result was a decline in China’s average tariff on US exports from 18.2 to 16.5 percent.

But the truce was short-lived, and China increased its tariffs on US exports again, this time to an average of nearly 21 percent, on June 1, 2019. This increase was in response to two areas of escalation on the US side. First, on May 10, the United States raised tariffs from 10 to 25 percent on $200 billion of Chinese exports.[7] Second, on May 17, the Trump administration stated it would soon impose a 25 percent tariff on roughly $300 billion of additional Chinese exports to the United States.[8]

The US-China talks that had been progressing since December 2018 also ground to a halt on May 10, 2019. The signs from April and early May of an imminent deal turned out premature.

China’s June 1 Retaliation Did Not Change the Affected Us Export Products and Increased Only Some Tariffs

At least three important pieces of evidence indicate that China’s June 1 tariffs on US exports were a carefully calibrated response.

First and most importantly, China did not retaliate against more US products beyond those already hit. It could but hasn’t. It turns out that $67.7 billion of US exports—out of a total of $154.8 billion of US exports to China in 2017—are not under any retaliation. Put differently, only 56.3 percent of US exports to China are currently under Chinese retaliation.

Second, the June 1 retaliatory tariffs increased on only $35.5 billion of US exports.[9] Since China’s $60 billion list from September 2018 technically covered only $53.4 billion of US exports in 2017, only about two-thirds of that list faced a tariff increase at all.

Put differently, tariffs did not change on the other third of US exports on the $60 billion list. The 5 percent retaliatory tariffs on $17.4 billion of trade imposed on September 24 stayed at that level. And the June 1 tariff increase did not hit autos and parts covering $0.5 billion that had been suspended from retaliation on January 1, 2019.[10] Those products continued to face no retaliatory tariffs even with the June 1 change.

Third, of the products whose tariffs went up, nearly half—$15.7 billion—had retaliatory duties increase only to 10 percent. China increased its tariffs to 20 percent on only $10.2 billion of US exports, and it elevated duties to the full 25 percent on only $9.7 billion of US exports.[11]

By limiting the product coverage and levels of its tariff retaliation, China is likely minimizing the economic harm to itself. China’s retaliatory tariffs currently do not target aircraft, oil products, autos, and parts.

The downside is that China’s June 1 tariff increase on $35.5 billion of US exports did end up affecting a variety of US products, including agriculture, wood, paper and metal, machinery, and chemicals. Figure 2 summarizes key American sectors hit to date by China’s retaliation.

Figure 2: Amount of US exports to China covered by Chinese retaliatory tariffs by sector, billions of dollars

Significant Differentials Are Emerging Despite China Limiting Its Retaliatory Tariffs

A substantial gap has emerged between Chinese duties facing US exporters and those facing exporters in the rest of the world (figure 3). The difference has arisen even though China has not simply followed Trump’s lead and imposed a 25 percent tariffs on US exports.

Take farm and fish products. China has increased the duties facing US exporters from an average of 21 percent to 42 percent. But it has lowered the average tariff on everyone else to 19 percent. With the exception of autos, aircraft, and pharmaceuticals, there is now a sizeable difference between the tariffs facing US exporters and those facing exporters elsewhere.

Figure 3: China’s tariff rates on US goods vs. the rest of the world’s goods by sector as of June 1, 2019

China Is Shifting Some of Its Imports Away from the United States and Toward the Rest of the World

As China’s economic growth has slowed during the trade war, its imports from both the United States and the rest of the world have also fallen (figure 4). China’s tariff reductions toward the rest of the world are likely to have helped stem the decline in imports from those countries. Nevertheless, the drop in US exports to China—due to slowing domestic demand, the retaliatory tariffs, as well as the incentive to switch to other foreign sources—is much more severe.

Figure 4: China’s imports from the United States have declined much more rapidly than imports from elsewhere during the trade war

Two fishery products provide examples. The American lobster industry saw its exports fall by 70 percent after China imposed its retaliatory tariff of 25 percent on July 6, 2018. Things are so bad that the industry has sought federal assistance, though it has not been eligible for the subsidy programs the Trump administration’s US Department of Agriculture (USDA) has provided to date.[12] On the other hand, Canada’s lobster exports to China nearly doubled as it benefited from a 3 percentage point tariff cut in 2018.

Similarly, American exporters of Pacific salmon saw their sales to China decline after the retaliatory tariff, only to be replaced by Chinese imports from Japan. China had reduced the duty facing Japan by 3 percentage points.

In other instances, the new tariff on the United States was the only thing needed for China’s consumers to make the switch. China shifted much of its imports of US soybeans in 2018 to imports from Brazil and Argentina without further reducing its existing 3 percent tariff on soybean imports from those countries.

Costly Tariffs, Historical Parallels

Tariffs are costly to the country imposing them, and China is no exception. Concern over such costs likely explain both China’s restrained retaliation against the United States and its decision to reduce tariffs toward the rest of the world.

China’s choice of products and tariff levels are also likely the result of a complex calculation. Like Trump, Beijing may be acting strategically in an attempt to inflict political-economic pain on the other side.[13] But the nuance of its choices may also signal that it is wary of self-harm. And one potential way to offset the cost of its higher tariffs on US exporters is to lower its tariffs on everyone else.

This is not good news for US exporters. China’s retaliatory tariffs put them at a disadvantage relative to local firms, which obviously don’t have to pay any border taxes. But reducing tariffs on imports from other countries means US exporters also face an increasing disadvantage relative to competitors in Canada, Japan, Europe, and elsewhere.

China’s actions have two parallels of note. The first is the contemporary counterpart of American beef being shut out of Japan—not because of retaliation, but because of President Trump’s decision to pull the United States out of the Trans-Pacific Partnership agreement in January 2017. Americans are at a disadvantage as Australia, Canada, New Zealand, and other agricultural exporters enjoy lower tariffs in Japan because those countries agreed to implement the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP).

The second and more ominous parallel is the shadow of the 1930s. Like China’s response today, there was a two-pronged international reaction to the United States’ imposition of its infamous Smoot-Hawley Tariff Act. Yes, US exporters consequently face higher tariffs due to retaliation. But they were also squeezed out of foreign markets when countries like Canada and the United Kingdom lowered tariffs only on each other by forming the system of Imperial Preferences.

This is just one more good reason why trade wars are not easy to win.

Appendix A Putting China’s 2018 MFN tariff cuts in context

China considerably lowered its MFN tariff in 2018. Some of this reduction involved implementation of an earlier agreement, and some of it repeated earlier actions. This appendix briefly explains which of the 2018 tariff reductions are different and thus likely influenced by conditions changing during the trade war.

Appendix table A.1 lists China’s changes to its MFN tariffs implemented between 2015 and June 1, 2019.

Temporary MFN rates

In recent years, China has amended tariffs on some products that it designates as interim or temporary rates. These tariffs typically apply for one year or until they are revoked. The WTO has typically taken the interim rate into consideration when calculating China’s average MFN tariff in its Trade Policy Review (e.g., see table 3.2 for 2018).[14]

Information Technology Agreement

On September 3, 2016, China ratified the Information Technology Agreement (ITA). All members agreed to cut tariffs on a set of products to zero on an MFN basis in stages. China’s first round of tariff cuts on 484 products (8-digit Harmonized System level) was implemented on September 15, 2016. In subsequent years, China has implemented additional cuts to tariffs on these products on July 1. The ITA has a seven-year phase-in period.

Tariffs on some consumer goods

Since 2015, China has periodically implemented mid-year tariff cuts on consumer goods. The coverage of the 2018 tariff cut was much larger at 1,449 products, whereas cuts in earlier years covered only 14 products (2015) and 187 products (2017).

Tariff cuts associated with the trade war

In 2018, the Chinese government made three major changes to its tariffs that were quite different from earlier actions. As noted, the first was the substantial increase in the number of consumer products covered relative to earlier years. The other two were the July 1 and November 1 reductions in tariffs on auto products and industrial goods, respectively. Combined, these three actions made permanent cuts to MFN tariffs on 3,252 products, or 38 percent of the 8,549 products on China’s tariff schedule in 2018.

Appendix table A.1 Changes to China’s most favored nation (MFN) tariffs, 2015–June 1, 2019

Effective date

Announcement date

Description of MFN tariff reduction

Type

Products affected (HS-08 lines)[1]

January 1, 2015

December 12, 2014

Interim MFN rates for 2015

temporary

749

June 1, 2015

May 21, 2015

Tariff cut on consumer goods

temporary

14

January 1, 2016

December 4, 2015

Interim MFN rates for 2016

temporary

787

September 15, 2016

September 9, 2016

Information Technology Agreement  tariff cut

permanent

484

January 1, 2017

December 19, 2016

Interim MFN rates for 2017

temporary

822

July 1, 2017

December 19, 2016

Information Technology Agreement tariff cut

permanent

484

December 1, 2017

November 22, 2017

Tariff cut on consumer goods

temporary

187

January 1, 2018

December 12, 2017

Interim MFN rates for 2018

temporary

975

July 1, 2018

December 12, 2017

Broken Rice

permanent

2

July 1, 2018

December 12, 2017

Information Technology Agreement tariff cut[2]

permanent

484

May 1, 2018

April 23, 2018

Pharmaceuticals[3]

temporary

28

July 1, 2018

May 22, 2018

Autos and auto parts

permanent

218

July 1, 2018

May 31, 2018

Tariff cut on consumer goods

permanent

1,449

November 1, 2018

September 30, 2018

Industrial goods (e.g., chemicals, wood, paper, textiles, metals, and machines)

permanent

1,585

January 1, 2019

December 22, 2018

Interim MFN rates for 2019

temporary

706

1. HS-08 = 8-digit Harmonized System product code. In 2018, there were 8,549 HS-08 product codes on the Chinese tariff schedule.

2. The average MFN tariff was cut by 0.03 percent due to the Information Technology Agreement (ITA)-scheduled tariff cut that went into effect on July 1, 2018. Omitted from this table (and the calculations in the text) are the ITA tariff cuts scheduled to go into effect on July 1, 2019.
3. For pharmaceuticals, 27 of the 28 products with temporary tariff cuts on May 1, 2018 were made permanent by the tariff cuts on consumer products implemented on July 1, 2018.

Notes

1. Bown (2019) provides a more complete characterization of the US and Chinese tariffs through 2018 and the policy issues underlying the trade war.

2. Note that construction of the average tariffs in figure 1 and figure 3 trade-weights by relying on product-level US exports to the world.

3. The exception is a handful of exporting countries that receive lower than MFN tariffs in the Chinese market due to its 14 free trade agreements and its unilateral preference programs offered to poor countries.

4. Canada, Mexico, the European Union, Russia, and Turkey also retaliated.

5. To put China’s 2018 actions in context, appendix A describes in more detail these and other changes China made to its applied MFN tariffs between 2015 and June 1, 2019.

6. This affected $14.3 billion of US exports to China. Of this, $12.9 billion of exports had been on China’s $34 billion list, $0.8 billion had been on China’s $16 billion list, and $0.5 billion had been on China’s $60 billion list.

7. The US announcement was made in a Federal Register notice published on May 9. Technically, “on the water” exports departing China prior to May 10 would not face the additional 15 percentage points of the US tariff provided they arrived in the United States prior to June 1, 2019, as clarified in a subsequent Federal Register notice published on May 15. The arrival date was then extended to June 15, 2019 in a subsequent announcement on May 31.

8. President Trump had indicated this tariff was forthcoming in his tweet of May 5. On May 17, the US Trade Representative published a Federal Register notice formally initiating the process that could lead to the new tariffs sometime after public hearings scheduled for June 17, 2019.

9 Here and throughout, all references to dollar amounts of trade are with respect to 2017 levels.

10. These were part of the list of products whose tariffs were suspended on January 1, 2019.

11. Of these 4,545 products, 974 had retaliatory tariffs increase from 5 to 10 percent, 1,078 had retaliatory tariffs increase from 10 to 20 percent, and 2,493 had retaliatory tariffs elevated to 25 percent.

12. The USDA announcement of May 23, 2019, did not reference making seafood products eligible for the Trump administration’s program providing “Support for Farmers Impacted by Unjustified Retaliation and Trade Disruption.” See “Maine lawmakers ask Trump for trade aid for lobster industry,” Inside US Trade, June 7, 2019.

13. See also Fetzer and Schwarz (2019) and Fajgelbaum et al. (2019).

14. Following the WTO approach, our calculation of average tariff rates will not include tariff changes that are applied to only a subset of products within an 8-digit Harmonized System code.

Data Disclosure: 

The data underlying this analysis are available here.