December 3, 2018

U.S. And Chinese Presidents Agree: No New Tariffs

While a Federal Reserve report last week argued rising trade tensions between the United States and its trading partners are a major near-term risk to the U.S. financial system, in a meeting and dinner held on the sidelines of the G-20 summit in Argentina U.S. President Trump and Chinese President Xi Jinping agreed their respective countries would not impose any new tariffs on each other’s products after Jan. 1, 2019.

Specifically, that means President Trump will leave the tariffs on $200 billion worth of Chinese products at the current 10 percent rate, instead of raising the rates to 25 percent as had been proposed previously. The two countries will immediately engage in a 90-day period of negotiations outstanding issues including technology transfer, intellectual property protection, and non-tariff barriers. U.S. Trade Representative Robert Lighthizer will lead those discussions.

According to the White House, if the two sides are unable to reach an agreement during that window, the Office of the U.S. Trade Representative (USTR) would then proceed with previous plans to elevate tariffs to 25 percent on that additional $200 billion worth of Chinese products.

Prior to the meeting, The Wall Street Journal (subscription required) reported this type of deal had been under discussion for a few weeks.The Journal said the agreement was broad, but that China would be expected to make significant changes to its economic policy.

After his meeting with his Chinese counterpart, President Trump said, “It’s an incredible deal … What I’ll be doing is holding back on tariffs. China will be opening up. China will be getting rid of tariffs. China will be buying massive amounts of products from us.”

Chinese companies, meanwhile, are exploring ways to evade the recent U.S. tariffs. According to Politico, “[C]ompanies with factories and workers in mainland China are racing to relocate outside the country — but they’re not moving those jobs to the United States. Instead, multinational companies selling into the U.S. are beginning to move supply chains to countries like Vietnam where labor costs remain low but Trump’s tariffs don’t apply.” Click here to read the full story.

Last week’s breakthrough with China came after the Office of the USTR issued a formal update of its March 2018 Section 301 report on Nov. 20. That report said China has not taken steps to address or engage meaningfully on U.S. concerns about trade. Instead, the report said, Chinese officials “denied there were problems” and sought to “cause further harm to the U.S. economy, by increasing duties on certain U.S. exports to China.” In a press release, Trade Representative Lighthizer said the report showed “China has not fundamentally altered its unfair, unreasonable, and market-distorting practices that were the subject of the March 2018 report on our Section 301 investigation.”