By: ProcurementIQ Analyst, Sean Windle
On February 11, the Senate gave final approval to a sweeping overhaul of US customs law aimed at combating unfair trade practices. The Trade Facilitation and Trade Enforcement Act, which President Obama intends to sign into law, provides enhanced protections for US companies’ intellectual property rights, closes child labor loopholes and provides new tools for the US government to respond quickly to foreign companies that circumvent tariffs and anti-dumping laws.
While the bill applies broadly to all countries that trade with the United States, its chief target is China. The country’s low wages and lax regulations have provided a steady stream of low-cost imports for American consumers; however, they have undercut US manufacturers and forced layoffs to the tune of 2.4 million manufacturing jobs lost since permanent normal trade relations were established with China in 2000, according to the Economic Policy Institute. China is also widely believed to be a currency manipulator that has been keeping the yuan artificially depressed to boost Chinese exports.
Broadly speaking, this new law will not significantly impact the price and availability of Chinese imports, but rather will result in tougher penalties for foreign businesses that violate existing trade laws. Nonetheless, presidential candidates, eager to tap into the frustrations of American workers who feel left behind by globalization and free trade, are promising tougher policies directed specifically at China if elected. Current Republican front-runner Donald Trump has even gone so far as to propose a blanket 45% tariff on all Chinese exports to the United States.
To be sure, criticism of China is nothing new. Excoriating China has been a mainstay of presidential campaigning for years, but tough campaign talk on China has typically been just that: talk. Anti-China rhetoric is hard to translate into policy, because China is our largest trading partner, accounting for about $480 billion (22%) of US imports and $116 billion (8%) of US exports, according to the US Census Bureau. Uncoupling these business ties would mean ending the largest trade relationship in the world.
But US-China relations have become increasingly sour in recent years, and not just because of unfair trade practices—cyberattacks, human rights violations and China’s encroachment into disputed territories in the South China Sea are also concerns for many Americans. According to the Pew Research Center, 54% of Americans held an unfavorable view of China in 2015, up from 29% in 2006. With the Senate’s passage of tougher trade enforcement provisions and China front and center on the presidential campaign trail, a crackdown on Chinese imports could be on the horizon.
More than half of US imports consist of low-cost raw materials that domestic manufacturers use to produce their final outputs. Were the next president and Congress to take a more protectionist approach with China, it would raise production costs for US companies, which would ultimately be passed down to buyers in the form of higher prices.
Which Chinese goods would be impacted?
Markets that would be most affected by restrictions on Chinese imports include electronic goods, such as desktop computers, laptop computers, tablet computers, computer servers and peripheral items like computer displays, keyboards and printers. Import penetration in these markets is high. For example, ProcurementIQ estimates that imports represent 89% of domestic demand for laptop computers, about 94% of which come from China. The price of heavily imported electrical equipment, such as solar panels and LEDs, would also be affected by any action against China. ProcurementIQ estimates that imports account for 90% and 50% of domestic demand for solar panels and LEDs, respectively. China is the number-one exporter of LEDs to the United States, and despite high tariffs enacted last summer, remains the number-one exporter of solar panels.
China’s slowing economy has resulted in an oversupply of steel, much of which has ended up on US shores. The glut of cheap Chinese steel has kept prices for sheet metal, steel wire, mechanical cable, industrial fasteners and other steel-based products low during the past three years. Lawsuits filed in June by top US steelmakers led to new countervailing duties as high as 236% on Chinese steel; however, further tariffs could be imposed if China continues to dump its excess steel inventory into US markets at below-market prices.
The imposition of a blanket tariff on all Chinese goods, while unlikely, would spur many US companies to source elsewhere for these and other imported goods, most likely at a higher cost to themselves and their buyers. For now, companies that rely heavily on Chinese imports can mitigate the financial fallout of a potential shift in US-China trade policy by gradually diversifying their upstream suppliers to include more US companies and competing Asia-Pacific exporters.