Timing, Scope of China Tariffs Discussed at Think Tank

Trump transition team members may have already drafted an executive order hiking tariffs on Chinese imports, said Peterson Institute for International Economics fellow Mary Lovely, during a webinar moderated by former European commissioner and now PIIE fellow Cecilia Malmstrom.

However, Lovely said, given the dependence on China for electronics, pharmaceuticals and other items, she thinks the tariffs -- maybe 60%, maybe 100% on some products -- will be hiked on only some products at first, with tranches of later hikes.

"Where it actually settles, we don’t know, but we are bracing for higher tariffs on goods from China," Lovely said. "We’re going to see this forced decoupling on a number of different stages."

In addition to tariffs, sanctions on Chinese firms and outbound investment restrictions, Lovely said she expects the U.S. to pressure other countries to reduce their manufacturers' use of Chinese inputs. "We’ll certainly see this in the review of USMCA next year," she said. She noted that 95% of electronics include Chinese components. She also noted that President Joe Biden tried to lessen U.S. reliance on critical minerals, but didn't "make a whole lot of progress," showing how difficult it is to develop new sites to process minerals used in batteries, wind turbines and semiconductors.

Malmstrom asked Tao Wang, head of Asia economic research at UBS Investment Bank, how China might retaliate in a second round of a trade war with the U.S.

Wang said she isn't sure the Chinese government has a set of plans for retaliation yet, but, she said, "My own view is, I don’t think China will retaliate as aggressively as the first time. Because I think China understands [the] U.S. wants to decouple from China, but China’s interest is to stay integrated in the world."

Wang said UBS is forecasting that the higher tariffs will only affect 75% of Chinese exports, because "certain products are very hard to substitute away from."

Lovely said the effect on China's economy from these hikes will depend on how China reacts.

"China has greatly diversified both its import sources and its export destinations" since 2018, she said. "Exporting to the U.S. is no longer the focus of the economy."

Lovely, who said a repeal of the permanent normal trade relations for China is a real possibility, reminded viewers that when PNTR was granted, it didn't lower tariffs, as the U.S. had already been granting Chinese exports most favored nation status for years, but Congress voted annually to continue doing so. Ending that uncertainty "did greatly accelerate investment into China," she said.

She said policymakers who want to end PNTR think investment will flow into the U.S. to restore manufacturing. "I think this is incredibly short-sighted," she said.

"What I fear is we’ll end up with isolated supply chains for the U.S. You’ll have much higher [cost] inputs for U.S. manufacturers. And costs for consumers. And a very healthy black market and circumvention."

Malmstrom asked the panelists to think of a bright spot, and Lovely said Trump has expressed openness to Chinese firms opening electric vehicle factories in the U.S.

Wang said, "Indeed, China would be happy to invest in the U.S.," but she noted other politicians "would say we can’t trust Chinese investments."

She said Chinese officials hope that Trump the businessman will want to negotiate again, as he did in the first term for an agreement to buy more American exports. No tariffs were ended as part of that deal, but planned increases were indefinitely delayed, and $120 billion worth of Chinese exports had the Section 301 tariff halved from 15% to 7.5%.

"I think [the] Chinese government would be very open to have a deal," Wang said. "But it’s just not clear to me what Trump would want." She said that earlier, he seemed to want to sell more exports to China. "Right now he seems to want something different. He wants to bring manufacturing back to the U.S."