When no one wins

Christopher Tang says four years on, the trade war is still hurting US consumers and firms

Asurvey conducted in March revealed that 71 per cent of Americans continued to support the trade war against China that began in 2018. After four years, who is winning?

Is it former president Donald Trump, who started the trade war against China by imposing an additional 25 per cent import tariff in 2018? Is it current US President Joe Biden, who has so far refused to end the trade war?

Is it the Chinese manufacturers, which have dodged the increased tariffs by changing the “country of origin”? Or is it the American firms that have labelled their Chinese imports as coming from Mexico, which attracts no import tariff under the United States-Mexico-Canada Agreement?

This trade war has certainly benefited the consulting firms, law firms and shipping companies that are helping Chinese exporters and US importers find workarounds to avoid the increased tariffs. But these workarounds are making global supply chains even more complex and vulnerable.

At the end of the day, this trade war has no winners. It’s time to call it quits.

The US trade war against China has proved to be futile at best and self-defeating at worst. The reality is that the US will continue to rely on products imported from China for now.

According to data from the US Census Bureau, the value of US imports of Chinese goods in January and February this year have returned to pre-pandemic levels – as has the trade deficit, which grew by 14.5 per cent to reach US$355.3 billion last year. US tariffs on Chinese imports are hurting American consumers directly and indirectly when US firms pass on the costs.

Most economists agree that tariffs are ineffective. But many US politicians have traditionally used tariffs as trade policy instruments to protect domestic industries and jobs, and to reduce trade deficits. Well before Trump, there was concern about Japanese firms displacing American companies through “unfair trade” in the 1980s.

The Ronald Reagan administration imposed a wide range of trade restrictions on Japan including “voluntary export restraints” on Japanese cars that were equivalent to a 60 per cent import tariff. These trade restrictions proved to be ineffective and the trade deficit with Japan continued to increase from the 1980s to the 2000s.

History repeats itself. When China surpassed Japan to become the secondlargest economy in 2010, the US shifted its target from Japan to China. As the trade war has dragged on, many US companies and Chinese manufacturers have used different strategies to reduce import tariffs on products of Chinese origin.

Some US firms have shifted just enough production away from China to countries such as Vietnam to be able to change the label from “made in China” to “made in Vietnam”.

For instance, Massachusetts-based 3D-printer manufacturer Formlabs Inc has lowered its import tariff by shifting the production of some of its circuit boards from China to Vietnam after US Customs and Border Protection officials determined that the motherboard was the part that made an unfinished product a 3D printer.

Other American firms have changed the location for their final assembly operations. Consider a Vietnamese factory that assembles solar cells and solar glass, imported from China, into solar panels. This final assembly operation may qualify as a “substantial transformation” so that the factory can declare Vietnam as the country of origin for these solar panels.

In this case, if an American firm imports these solar panels from this Vietnamese factory, it pays a tariff of 14.75 per cent, as opposed to duties of more than 200 per cent for direct Chinese imports.

US firms can reduce the import tariff further by importing products from a Mexican factory, by leveraging the United States-Mexico-Canada Agreement. Like tax avoidance, tariff avoidance is legal.

When the so-called substantial transformation step qualifies the import to change its country of origin from China, substantially reducing the tariff to be paid, that makes it a smart move for Chinese exporters and American importers to change their supply chain operations.

But this tariff avoidance and evasion also disadvantages other American firms, and some are fighting back. Californiabased solar module manufacturer Auxin Solar Inc, for example, has asked the US Commerce Department to investigate whether Chinese solar producers are circumventing import tariffs by illegally changing the country of origin to Vietnam and three other Southeast Asian countries.

Some American solar panel manufacturers are also pressuring the US government to impose tariffs on solar cells and modules from Chinese companies operating out of Cambodia, Thailand, Vietnam and Malaysia.

The tariff game has forced companies to find workarounds, making global supply chains even more complex and vulnerable. At the same time, the US Customs and Border Protection’s case-by-case determination of country of origin based on so-called substantial transformation has been criticised by some as subjective, inconsistent and opaque.

Worst of all, the trade war against China has cost as many as 245,000 American jobs and fuelled inflation in the United States. It is time for Biden to end this senseless trade war. Most economists would agree.

The tariff game has forced companies to find workarounds, making global supply chains even more complex