The U.S. and China have each taken additional trade measures against each other in recent days, further dimming prospects for the conclusion of a bilateral trade agreement. There is also increasing concern that, due to these and other factors, the tariffs each has imposed on imports from the other could remain in effect for the foreseeable future. In this environment companies engaged in U.S.-China trade should consider ways to minimize their costs and maximize certainty regarding their operations.
On Aug. 5 the Treasury Department announced that it has designated China as a currency manipulator. China recently allowed the exchange rate of the yuan to fall to its lowest level in more than a decade and Treasury argued that doing so was intended to “gain an unfair competitive advantage in international trade.” A weaker yuan would in fact lower the cost of Chinese goods to foreign buyers and make U.S. goods less price competitive as a result. However, many observers criticized Treasury’s reasoning and conclusion, asserting that China has actually been intervening in the markets for some time to prevent its currency from getting weaker. Treasury itself made a similar determination just two months ago when it concluded that China was not a currency manipulator because it met only one of three criteria.
The practical effect of this designation is fairly limited. Treasury said it will now engage with the International Monetary Fund to “eliminate the unfair competitive advantage created by China’s latest actions,” but press reports noted that the IMF recently gave a favorable review of China’s exchange rate policy. If the U.S. is unable to achieve satisfactory results at the IMF or through bilateral talks within a year it may take specified measures against China (e.g., limiting its access to Overseas Private Investment Corporation financing and U.S. government procurement markets), but none of those measures would likely have much of an effect. A Politico article notes that designating China as a currency manipulator “could help open the floodgates to a number of trade remedies cases seeking countervailing duties on Chinese goods,” but likely only if the Department of Commerce finalizes a proposed rule under which currency manipulation could be deemed an export subsidy and subject to CV duties.
The more important aspect of Treasury’s announcement may be that it signals a further deterioration in bilateral trade relations and thus even dimmer prospects for concluding an agreement that many have been hoping would lead to the reduction or withdrawal of the additional tariffs the U.S. and China are imposing on trade with each other. The currency manipulator designation followed China’s devaluation of the yuan and a formal order to halt purchases of U.S. agricultural products, which in turn came after President Trump’s surprise decision to break a month-old truce and levy 10 percent tariffs on almost everything the U.S. imports from China that has not already been hit with tariff hikes.
Additional trade restrictions could be in the offing as well. For example, a Reuters article notes that China could limit exports to the U.S. of rare earth elements, which are used in the manufacture of high-tech goods; make it harder for U.S. companies to export to or operate within China, a tactic some say is already being employed; or tax U.S. farm goods purchased after Aug. 3.
There is also increasing concern that those trade measures already in place, and those that may be taken in the future, will remain in effect for an extended period. Some say neither the U.S. nor China is likely to seriously pursue a bilateral trade agreement before the November 2020 presidential election – the U.S. because President Trump will not want to be seen as giving in to China during the campaign, and China in hopes that either Trump will be forced to the table by the damage his tariffs do to the U.S. economy or he will be voted out of office and replaced by someone easier to work with. However, with both Republicans and Democrats having adopted a tougher tone on China over the past two years, even with a change in U.S. administrations tariffs might remain in place until the U.S. can secure an agreement that sufficiently addresses its concerns.
Source: Sandler, Travis & Rosenberg Trade Report