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Report Assesses Impact of U.S. and Mainland Chinese Tariff Actions

The non-partisan Congressional Research Service issued on 9 October a new analysis of tariff actions implemented by the United States and mainland China. The report summarises numerous other reports, including one by the non-partisan Congressional Budget Office that estimates that the tariff increases already in effect as of the end of July 2019 will reduce real U.S. gross domestic product by 0.3 percent by 2020. Uncertainty stemming from the frequently changed tariff rates may also be dampening U.S. business activity, including new investments. An analysis of earnings calls made by large U.S. firms to their biggest investors shows that tariffs are a significant concern for many U.S. executives. What’s more, preliminary research suggests that uncertainty from the tariffs may have reduced aggregate U.S. investment by one percent or more in 2018.

CRS noted that Federal Reserve Chairman Jerome Powell has cited concerns over weakening investment and U.S. exports, which he has tied to trade policy uncertainty. CRS also mentioned an earlier report from the International Monetary Fund that estimated that global trade conflicts would lead to a US$700 billion loss in global GDP by 2020. The IMF has since further revised its world economic outlook, lowering its global growth forecast to 3.0 percent for this year (the lowest growth level since 2008–09 and a 0.3 percentage point downgrade from the April 2019 forecast). The IMF noted a projected slowdown in mainland China and the United States and argued that “policies should decisively aim at defusing trade tensions, reinvigorating multilateral cooperation, and providing timely support to economic activity where needed.”

CRS observed that while the United States has implemented or proposed tariff increases on all major product categories, mainland China has “repeatedly targeted some product groups, particularly agriculture, while entirely excluding others.” For example, mainland China has largely excluded turbojets and parts, semiconductors and related devices, certain plastics and other aircraft from its retaliatory tariffs. The only new category announced by Beijing involved a potential 30 percent retaliatory tariff on motor vehicles and their parts, which represented US$15 billion worth of imports from the United States in 2017.

U.S. tariffs on imports from mainland China now encompass most trade in major import categories, with the exception of toys, cell phones and computers. An examination of average U.S. tariff increases by product category shows that intermediate goods (including motor vehicle parts) have faced the largest tariff increases (to nearly 30 percent if all current and proposed tariffs take effect), while consumer goods sectors (including apparel and footwear, toys, cell phones and televisions) face the lowest tariff increases (roughly 15 percent if all proposed tariffs take effect on 15 December).

Both the United States and mainland China have excluded a limited number of products from the implemented tariff increases, but the CRS report noted the difficulty of analysing any mitigation effects derived from the current tariff exclusion processes. On 11 September, mainland China’s Ministry of Finance announced that 15 tariff lines would be excluded from the retaliatory tariff actions (of more than 5,500 tariff lines currently affected by such tariffs). The Office of the U.S. Trade Representative has issued tariff exclusions on a rolling basis, covering roughly 350 tariff lines at the time of the report’s issuance (of more than 8,000 U.S. tariff lines affected by the additional tariffs). The scale of exclusions is relatively small for both economies and the exclusions only apply to specific products within each tariff line-- making it difficult to determine the precise amount of trade covered by the exclusions.

CRS also noted that as the tariffs increased during 2019 total bi-lateral trade flows decreased significantly, even as U.S. exports to mainland China have fallen at a higher percentage than U.S. imports (though from a much lower base level). Preliminary official U.S. data for 2019 indicate that, compared to the first eight months of 2018, U.S. merchandise exports to mainland China dropped by 16 percent (down US$13.4 billion) while U.S. imports from the mainland fell by 13 percent (down US$43.2 billion).

With Beijing’s retaliatory tariffs focused on agricultural items, those products have generally been available from other sources, including Canada, Brazil and Argentina. With U.S. tariffs focused on intermediate goods, U.S. manufacturers have often faced the problem of not having any other immediate source for needed inputs. Therefore, in many instances U.S. manufacturers have been forced to continue to import from the mainland in order to maintain their production, harming their overall competitiveness in global markets. The CRS report showcases how Beijing’s tariffs have been targeted in a way that limits harm to the mainland Chinese economy, while U.S. tariffs have often amplified such harm.

In highlighting Congress’ constitutional authority over U.S. tariff policy, CRS concluded that Congress “may wish to evaluate the Administration’s ultimate objectives from the tariff increases, whether potential benefits justify potential costs, and whether the President’s tariff actions align with Congress’ intended use of its delegated authority.”

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