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US tariffs target Chinese industrial goods; consumer products largely spared

The United States Trade Representative outlined the first tranche of Chinese products that will be subject to import tariffs starting in July as part of a broader 25% levy on $50 billion worth of goods such as cars, computer hard drives and heavy machinery.

The initial wave of tariffs on goods identified by the Trump administration as benefiting from Chinese industrial policies will affect 818 types of products worth a total $33.8 billion. Customs and Border Protection officers will begin collecting the additional duties July 6, 2018.

The USTR focused on goods produced as part of the "Made in China 2025" program, which includes the aerospace, automotive and robotics sectors, among others.

A senior administration official told reporters in a briefing June 15 that if the U.S. did not act now, it would be "extraordinarily difficult to compete" with China in these areas.

Of the affected products, the automotive category was among the most valuable, representing imports worth a total $1.53 billion in 2017, according to the U.S. Census Bureau. Other major products subject to tariffs include hard drives, parts of pumps, printers, pipes, heavy machinery, global positioning systems and LEDs.

Research by Panjiva — a data company owned by S&P Global Market Intelligence — found that the largest categories are construction equipment parts, totaling $1.89 billion; power switching equipment at $1.79 billion; pump systems, at $1.78 billion; and PC components, at $1.4 billion. The figures cover the 12 months ending April 30.

Supply chain headaches

The broad-brush approach to tariffs may not have the desired effect, trade experts said, especially given the interwoven supply chains that make up most of global manufacturing.

About 50% to 60% of U.S. imports for manufacturing are products that are used to assemble finished products, said Rod Hunter, a partner in Baker McKenzie's Washington office. Hunter formerly was a senior director of the National Security Council under President George W. Bush.

"Part of the goal of some in the Trump administration may be to get industry to rethink their supply chains," Hunter said in an interview.

However, if tariffs push international companies to restructure their supply chains, it does not mean they will source components from the U.S. They may look elsewhere for their products, he pointed out.

The U.S. has also underscored China's historic disregard for intellectual property, or IP, protections. Beijing has been accused of stealing IP, as well as requiring joint ventures with domestic companies for foreign companies seeking to do business in China — effectively forcing technology transfers.

"They’ve been attacking us — they’ve been stealing our technology ... they’ve been forcing our companies to do what they don’t want to do," the senior administration official said in the press briefing.

But it is not clear whether the new tariffs hit the right spots. "You're not targeting the companies or industries in China that are stealing technology, necessarily," said Mauro Guillen, a professor of international management at The Wharton School.

China, which announced that it would retaliate with 25% tariffs on about $50 billion in U.S. products, has been "more targeted, more surgical" in their list, Guillen said.

Chinese tariffs are particularly aimed at agricultural and energy products and some manufactured goods that are produced in areas where "President Trump and the Republicans have a lot of support," Guillen added.

Products removed

Of the initial 1,333 product lines subjected to U.S. scrutiny April 6, televisions were the most significant in value at almost $4 billion, according to Panjiva. But following a review, common consumer products including televisions and cellphones were among 515 product lines removed from the list. Panjiva's analysis reveals that, in all, those products were valued at $14.4 billion.

A number of steel products were also removed from the final list, although they remain subject to 25% tariffs under a separate order, as well as numerous anti-dumping duties already in place.

A second tranche of 284 proposed products amounting to $16 billion will undergo further review in a public notice and comment process, including a public hearing scheduled for July 24.

Market effect

While the U.S. tariffs may not be precisely targeted, they should have some effect on China's economy. Capital Economics estimates that $50 billion equates to around 10% of total U.S. imports of Chinese goods and will hit China to the tune of 0.1% of its GDP.

But trade experts are also concerned about the effect on the world economy in general, especially at a time when the U.S. is sharpening its trade rhetoric even with traditional allies. After a contentious G-7 meeting, Trump refused to sign a communique that included support for multilateral trade pacts. North American Free Trade Agreement renegotiation is also on hold because the U.S., Canada and Mexico still disagree on critical issues.

The U.S. tariffs, and China's response, "pose a broader challenge to the global trade regime, particularly in the context of growing U.S. trade tensions with other trading partners," Moody's Investors Service said in a note following the tariff announcement.

"In addition to their direct impact on trade, continued tit for tat tariffs will likely generate more volatility in financial markets," Moody's said, adding: "If they also weaken consumer sentiment and moderate corporate investment in the U.S. and elsewhere, the second order impact of tariff increases would be to dampen currently robust global growth momentum."

U.S. equities markets, which had been rising throughout the week, closed slightly down June 15. The S&P 500 Index fell 0.11% to 2,279.42 and the Nasdaq Composite Index closed down 0.19% at 7,746.38. Investors moved into bonds, with the yield on the 10-year U.S. Treasury dipping to 2.922%.

China's attempts to dominate technology and certain kinds of manufacturing should be of concern to the global economy, Baker McKenzie's Hunter said. "But you have to choose your fights and build alliances," he said.

"If we we pick fights with our NAFTA trading partners, Europe, and China all at the same time, it makes it hard to do," he said.