Everyone agrees that China is not a full-fledged market economy. It’s a Communist government; a one-party town. They do what Beijing says, for the most part. If you believe China is not a full-fledged market economy, with little state intervention in pricing, then it is not a radical step to assume China can circumvent Trump’s trade tariffs.
“In lieu of rescinding tariffs during the trade war truce, China soy importers have the government make their purchases in order to keep (them) from having to pay the tariff,” says Brent Bible, a soy and corn farmer managing around 5,000 acres of land near Lafayette, Indiana. “The government makes the purchase then turns around and sells it to the private Chinese users,” he says.
Instead of buying U.S. soybeans, now priced at 25% more than usual, China went to the No. 2 soy exporter, Brazil, and bought 10 million more tons.
Brazil and U.S. soy harvests run at different seasons. China isn’t just buying from the U.S. because Brazil is now cheaper due to tariffs. China isn’t buying from the U.S. because the heartland, the red states that sell them soybeans and animal meats, is essentially under Chinese sanction. They are being targeted in an effort to turn voters against Trump in 2020.
It worked in the mid-terms. Democrats beat Republicans easily in farm counties throughout the farm belt in November, giving the Democrats the House of Representatives.
The President reiterated his promise for more tariffs. Assuming he makes good on his threat, everything China imports will be tariffed at ports of entry. The U.S. Trade Representative’s office, led by China hawk and trade negotiator Robert Lighthizer, is doing the necessary legal work to get this done.
“The trade war has pitted candidate Trump versus president Trump,” says Sam Natapoff, president of international business consultancy Empire Global Ventures.
On Monday, China said that it was increasing tariffs on $60 billion worth of U.S. imports. Most of those new price increases target agricultural commodities not sold in deep blue zones like New York and Massachusetts.
On Tuesday, China also said it will allow for exemptions. The U.S. also allows for exemptions. Some 15,000 companies have applied for waivers, with only a handful being the lucky recipient.
Successful lobbying by some Senators and lobbying firms representing the steel and aluminum industries were able to get the Commerce Department to reduce tariffs or outright exempt some companies from paying higher port taxes for Chinese imports.
China will do the same.
See: China Inflation Goes ‘Hog Wild’ In Revenge Tariffs — Forbes
Outside of the farm belt, small and midsized business owners, the kind that tends to like fewer business regulations and lower taxes, are also a base voter for the Republican Party. Many of them, like Alex Camera, CEO of Audio Control outside of Seattle, have had relationships with Chinese manufacturers going back 30 years. Camera says his company has renegotiated lower prices with their suppliers and is looking outside of China for supply.
The other option is to hit their customers with higher prices, usually the last resort for companies.
The U.S. has less political will to bail out small and mid-sized companies. Farmers were lent financial support in the last Farm Bill. If China’s near-ban on U.S. soy and pork continues, farmers will need more help from Republicans if they are to secure a vote for Trump in November 2020. Should China cut a deal and start importing millions of tons of soybeans, now sitting in American silos, it would be considered a sizable victory for Trump in farm counties, including in some blue states like Minnesota where Trump only lost due to the urban voter.
China is a black box. It has more financial muscle to help companies hit by tariffs. But with new tariffs coming across the board, it spreads Beijing a little thin.
“You also get Chinese subsidies that help push prices lower for their manufacturers. They are still price competitive even with 25% tariffs,” says Linda Weinberg, co-chair of Barnes & Thornburg’s International Trade Practice Group in Washington, DC.
Many of her clients that made investments in China are small, family-owned companies looking for economies of scale and cost-cutting.
“Our clients who have 10% tariffs now and went to 25% this week are scrambling to figure out their options,” Weinberg says. “Some are considering a new supply chain. I think you will start to see companies say they cannot absorb these costs anymore. They will take a harder position against Trump’s tariffs,” she says, adding that could also translate into higher consumer prices.
So far, very few companies have raised pricing on account of tariffs.
Tariffs on $200 billion worth of Chinese imports were announced in September 2018.
“Things are moving in the wrong direction,” the U.S. China Business Council said in a statement on Tuesday. “More tariffs will not persuade either government to change their positions and will exacerbate the damage being done to American companies and farmers that do business with China,” the Council’s statement read.
For much of 2018, groups like the Council and the American Chamber of Commerce have argued that tariffs were not the answer. Some have requested a more activist International Trade Commission (ITC), the trade body at the Commerce Department that attaches anti-dumping charges to foreign goods, often at rates far and above current tariffs. China is practically the sole target of anti-dumping charges imposed by the ITC.
It’s complicated, this trade war.
Some businesses depend on China as part of their business strategy. Others in the same line of business see China as their death knell. Think kitchen cabinetry for instance. Some design and manufacture kitchen cabinets in the U.S. Others design and have them built in China and opt to assemble them here in the U.S. for a lower cost. Both sides are engaged in opposite sides of a trade fight at the ITC over dumping allegations.
Without progress in trade talks, Trump’s promise to “shortly” introduce 25% tariffs on $325 billion of Chinese goods, should be taken as gospel. Higher tariffs will be embedded in the U.S.-China business relationship going forward.