The State of Trade: Revisiting 301 Tariffs - What’s In Store for U.S.-China Trade Relations? (July 2022)

Phil Levy: Hello everyone, and thank you for attending today's webinar, The State of Trade. Hello, everyone. Thank you for attending today's webinar, The State of Trade, Revisiting 301 Tariffs: What's In Store For U.S.-China Trade Relations.

We'll drop a link in the chat and you can ask your questions there.

None of us are lawyers and we always recommend reaching out to a Flexport expert to discuss your particular situation.

All right. Now, let's get down to it. I am Phil Levy. I am Chief Economist at Flexport. I am joined by Chris Rogers in London, our Principal Supply Chain Economist. Good morning or good afternoon, Chris.

And I am thrilled to welcome Chad Bown, the Reginald Jones Senior Fellow at the Peterson Institute for International Economics. Chad and I go way back, he has an extraordinary list of accomplishments. He was senior economist for trade at the Council of Economic Advisers. He has worked at the World Bank, he has taught at Brandeis, he has been at the heart of efforts to gather critical trade policy data on topics such as anti dumping, and he has led efforts to analyze the functioning of the WTO dispute settlement system to name just a couple of his important areas of work. He's also been a clear and prolific commentator on trade policy developments serving as the host of the excellent podcast trade talks. How many underscores does that have chat? Two he says. Okay, new to me.

All right. I listen all the time.So trade talks, and you ought to as well, but we're delighted to have him here with us. Chad, welcome, it's great to have you.

Chad Bown: Thanks, Phil.

Phil Levy: All right. So today, we're going to discuss the section 301 Tariffs the US imposed on China, they've been in place for four years, so we are statutorily required to review them a nah, I'm just kidding. We're not statutorily required to do anything. The Biden Administration is statutorily required to do this, which we thought would make a very nice news peg to see what will they do? What should they do? And what will come next after that. So that's why we're turning to this.

Now, what we're going to do is we're going to start with a recap of how we ended up with tariffs on hundreds of billions of dollars of imports from China to the US. We're going to ask what effect those tariffs have had and look at that from a number of different angles. We're going to talk about what the Biden Administration is likely to do in the near term, both with the review and potentially with negotiations that follow. And then we'll turn to what we see happening economically in the US China relations trade relationship, in the longer run.

As is our want, however, we will start by seeing what you all are thinking on the topic. So we're gonna do a poll. And here is our first poll question. You can see the poll on the tab over the right. So the question to you all, has the Biden Administration stance toward China, and we're talking about trade matters here, been tougher than you expected? Just what you expected, less tough than you expected, or I don't know, I haven't really paid attention so far.

Actually, some of you have actually confessed to that. Okay. So let's see what you all say. What this is really sort of setting the stage and the expectation that we're going to go and see where we're coming from.

It looks like we're oh, it's sort of neck and neck. Thank you, for those are answering this. It's kind of exciting to watch in real time as these things bounce around. But it looks like you all weren't terribly surprised by the Biden Administration did, but those who were it came off a little less tough. So, but actually an interesting spread here for this, so well, cool. We'll see. We'll talk it through and see what has happened and where they seem to be going. But I think so far the winner looks to be that it's been pretty much what you expected. Alright, let's jump right in and let's talk about, you know, what led up to the Biden administration, where do we come from and what was going on with all of this, and thank you again everyone for voting on that.

Alright, let's jump into our slides. How did we get here?

A Sign of Equity in Relations, or Just Balancing Equation?

Let me say right up front. This slide pains me a little bit. I find it difficult. Because it's showing a trade deficit, merchandise trade deficit. And in fact, it's showing bilateral trade deficits. And I've spent years and I'm hardly alone and this is sort of standard boilerplate for economists preaching that economically, this is not what matters.

There's a huge temptation to look at trade deficits, and take them as a scorecard for how well or how poorly a country is doing. We could spend an entire session talking about why that's not a good thing to do. Min Chen, do you have your favorite answer as to why we're choosing costs and later, I would, the answer I like to give is, that if you look at the things we care about, what do we really think of his economic well being? What is the economy booming? What is unemployment low, we usually see high trade deficits in those times. And when we go into a real slump, you often see the trade deficit moderate. And that's talking about the overall trade deficit not even bilateral.

But Chad, first, maybe you have an even better explanation or a better explanation as to that. But I also wanted to get you to say something that it hopefully justify us putting this up in terms of what role did they were showing the longer view of trade deficits going back to the George W. Bush Administration. What role does this play in the sort of politics of China trade policy in terms of driving some of the actions that we saw in the Trump Administration?

Chad Bown: Yeah, I mean, I think this is probably, so thank you for the opportunity to join you. I think you've nailed it. This probably, if you had to put up one chart that would summarize, certainly candidate Trump and President Trump's view of the problematic trade relationship with the United States has with anybody, it would be the bilateral trade deficit.

And so you know, the story was in their administration, they had basically lined up the countries with which the United States had bilateral trade deficits, meaning we exported less to them than we imported from them every year, and then identified them as the problem countries and went after them in one way or the other. So that included, you know, Mexico, with renegotiating NAFTA, the USMCA. But then certainly also was China, and President or candidate Trump ran on that. And then when he, you know, was elected, this was, this was his beacon and, you know, key motivator and fodder for Twitter, you know, through the entire administration. So I think this is exactly politically the perfect chart to show.

Phil Levy: Thank you for that. And, should we that we get your stance, you know economically, does this work as a metric? And I've talked a little bit over that says, you can take that or you can take the bilateral ones that we're showing here?

Chad Bown: No, I mean, I agree with you. It's the bilateral trade deficit is essentially a useless metric. You know, for a number of different reasons. One of which is, with so much trade now not being in final goods that, you know, we need to we would need to adjust this, if we even really wanted to understand from the US perspective, how much of what we're trading with China, on the import and export side is really American or Chinese value added, as opposed to say, you know, Japanese content or Korean content embedded in final goods that we're buying from China or American content even. You would need to adjust for those kinds of things as well.

And then, you know, the bilateral imbalances frequently reflect underlying, really solid economic reasons, you know, that are just based on things like comparative advantage, there's no good economic theory, why trade should necessarily be balanced between any two countries out there in the world. And so while it's a it's, it's nice for politics, economically, it's very much a meaningless statistic.

Phil Levy: Yeah, and that's a good point about the supply chain. And I think even feel, well depends how hard you squint, you may see a little of that in this graph, as we get to around the 2020 era where you can we can reroute trade. That one of the problems with this, and we're not going to go too far down this particular rabbit hole.

But one of the problems with us is we tend to count goods as coming from wherever the final thing was shipped. It's not done on the basis of value added. So we saw this very much when China was emerging as a power on the global trading scene where they might finish a good that was 90% produced in Malaysia or Indonesia. But it would count as a 100% Chinese export if it came from China. I think you see here that in that era, the early part of well actually, in the 2020 election, kind a time before President Biden, you saw the the bilateral deficit going down with China, but up with with rest of world. And that is whether this is why but that is the kind of effect you would have if you decide to say finish a good in Vietnam, as opposed to finishing it in China.

All right. We could talk a lot about this, we could talk about whether or not President Trump succeeded by his own standards. But I want to go on to the sort of what were the actions, what happened? And the couple takeaways.

Three Lists at 25%, One at 7.5%

So first, I look at this graph and it reminds me of that, you know, Hemingway quote, on bankruptcy is you know, how it's gonna go bankrupt, you know, first gradually, and then suddenly. We ended up with a lot of tariffs on things, as we do tranches. Before we even get to this though, we've sort of, it's in the title here we talk about the Section 301 Tariffs list. What is section 301? Where did this come from? Before we get to tranches, what motivated all this Chad?

_Chad Bown: So Section 301 is part of a trade law dating back to 1974. And in broad terms, you can think about this is where, you know, if you're an American exporting industry, and you think that trading partners are doing something unfair, that is preventing you from being able to access their market, they're not following some sort of rules out there that they've agreed to, you're going to ask the United States government to pursue one of these investigations on their behalf. And we used to see a lot of these things back in the 1970s and 1980s, early 1990s. Before the WTO came along, and then when the WTO came along, the United States really stopped doing using this law to do these kinds of investigations, and instead sort of brought cases to the WTO, formal trade disputes to the WTO on behalf of American exporters when a trading partner, you know, was doing something that we didn't like.

The Trump Administration, not a big fan of the WTO and so it's sort of reactivated use of this particular law, which had not gone away, it was just not really being used in the US anymore, did an investigation that a seven or eight month investigation of all the things that China was doing that it disliked. And then at the end of that said, China's guilty, and we're going to impose tariffs and just as you said, Phil, beginning in March of 2018, initially, they were going to impose $50 billion worth of tariffs or tariffs covering $50 billion worth of imports from China at a rate of 25%. But then, over the course of the next 18 months or so, we had this tit for tat action. So we impose some tariffs, and China retaliated. The Trump administration wasn't happy with that retaliated, ended up imposing tariffs on an additional list of goods coming in from China. Until finally, you know, we had four different lists of products that were ultimately hit with with tariffs.

Phil Levy: Was there a method? Chris feel free to jump in here too? I've always, both you guys are kind of guys that get along with me in the trenches when it came to it. The, sorry for that one. Was there a method to this in terms of what was this one list, two list, three list, four? Can we characterize this? Or was this? Just you know, what were their numbers on the Harmonized Tariff Schedule?

Chad Bown: Go ahead, Chris. You give it a shot explaining it, and then I'll.

Chris Rogers: Oh, lordy. Okay. Yeah. So, the original idea, as I understood it, behind the case was to look at where China had used its intellectual property practices to inveigle itself into global supply chains. So the first two lists, so Chad refers to the $50 billion initial amount. They split out these two lists, list one, list two. And, those are mostly what you call kind of deep supply chain products. So it's semiconductors, and it's machine components, and really the areas where, you know, trying to limit China's development in those areas might limit their broader ability within the supply chain. So List 1 was a much focused towards high tech, list 2 more towards kind of mid tech.

During the tit for tat process, you suddenly need bigger numbers. And so naturally, you end up with a situation where list three was more in the way of completed manufactured goods. Though, you know, trying to move a little bit kind of down the supply chain to more manufactured goods. And that actually ended then started capturing more consumer goods. You think about it if you're putting a tariff on an engine of some sort, that might be an engine that goes into an on site power generator for a construction site, but it could also be the diesel engine that goes into a boat. So you end up hitting a lot of different industries and then List 4A so this championship andList 4 was basically going to be everything that, but it got split into two separate lists 4A and 4B. And 4A includes a lot of durables. So you've got like furniture in there, for example.

What got skipped was a lot of the kind of very visible electronics. So things like mobile phones, laptop computers, so those didn't get captured. So yeah, so we kind of went from a deep supply chain through manufactured products to certain areas of consumer products.

But I guess, you know, what we also saw was not, you know, there were different tariff rates supplied at different times, especially the next chart, maybe if you if you like to go on to your next chart.

Multiple Rounds of Tariff Increases and Compromises

Phil Levy:_ And then also Chad, maybe you can explain to us what this whole phase, thank you for the description, what this whole Phase 1 thing was about. So we get to all of this escalation and then what?

Chad Bown: So, I think Chris characterized it perfectly. You know, the big takeaway at the end was, toward the end of it, they were really trying to avoid consumer goods if they could. And then when they sort of ran out of stuff, they started hitting some consumer goods, that last at List 4A also included some I think, clothing and footwear and things like that as well.

So, you know, the last round 4A went on in September of 2019. And that one was at 15%. There was another one scheduled to go on this was going to be List 4B in December of 2019, but right at that stage, you know, the story was that they really wanted a deal, or the Trump administration really wanted a deal. And so we had this Phase 1 agreement, that was ultimately agreed, signed, and went into effect in early 2020.

And what that did, basically, on the tariff side was put a freeze on the tariffs, they rolled back slightly. So they cut in half that last tranche on figure on our List 4A that went from 15%, to seven and a half percent. And then there was this Phase 1 agreement that, you know, there was a little bit of China agreeing to do some things on their end, the better improvements to intellectual property rights protection, opening up their financial services market to Wall Street, getting rid of some technical barriers to trade for agricultural products, things like that. And then agreeing essentially to, you know, buy an additional $200 billion worth of American exports over the next two years. So that was going to be essentially the Phase 1 agreement that you've seen represented here.

But by large, what it did, is it locked in these just much higher tariffs, that the two sides were imposing on each other. So the US average tariff on imports coming in from China before the trade war was about 3%. And that's now somewhere around 19%, right, it's almost, you know, a six fold increase.

On the Chinese side, they retaliated their tariff towards stuff coming in from the US started at about 8% in 2018, and is now, you know, over 21%. And during the same time period, China, kind of somewhat surprisingly, actually cut its tariffs toward the rest of the world. And so its tariffs, you know, through the rest of the world went from something like 8%. And now, you know, about six and a half percent or so, during that time period.

Phil Levy: Do we just, well, I'm gonna hold this question, because I'm gonna get all excited to do it and we're gonna get to this in the next round. Let me just sort of tie up one thing here, which is normally when someone calls, someone calls something a Phase 1 Agreement, it's kind of suggestive that there will be another phase to follow, what happened there?

Chad Bown: Well, and that's right, and I think even, I forget the exact language. But you know, when this was announced, President Trump even said, you know, we're gonna get started on Phase 2 right away. Whereas I think his trade negotiators really didn't want that to be the case. You know, they'd been going at it with China pretty heavily for over a year at that point with very little progress.

And then early in 2020, we're now in election season in the United States, and then you had the pandemic hit. And so ultimately, there was no Phase 2, there hasn't been a Phase 2. The Biden administration won the election in November 2020. And, you know, they essentially have not engaged who won't get in this too much, but with China on these things at all. So it was basically Phase 1, one and done.

Phil Levy: And please correct me if I'm wrong here, Phase 1 was sort of much more explicitly market access some of the traditional things, but they had said that a lot of their target was sort of more serious, deep seated reform of Chinese practices, a whole range, certainly intellectual property, but it was not just limited intellectual property. And that was supposed to really be the subject of Phase 2, when you would go to the sort of the deeper structural change. Is that fair?

Chad Bown: That's exactly right. You know, the deeper structural change has to do with things like subsidies, China's state owned enterprises, the myriad form of subsidies that, you know, take place within the Chinese economy that aren't necessarily direct payments from the government to a firm, but can, you know, de facto be subsidies through a combination of other types of policies when you when you put them all together? You know, that's the big underlying challenge.

It was not addressed really at all in Phase 1. And so there's still a lot of work to be done in trying to figure out how to get the, you know, the US economy comfortable with the nature of the Chinese economy, we're not there yet. We're not talking about it yet, either. And really, at the moment, also doesn't seem to be much progress and even heading in that direction.

Phil Levy: Yeah, if we can, one last topic, and Chris, I'm gonna ask you to guide us through this one. One last topic before we go on to our next poll, which is, not everyone necessarily had to face these tariffs, even if you were in the sector. There were exclusions, and that's what our next slide covers. What were exclusions all about? And how did that work?

Exclusions Under Trump Administration

Chris Rogers: Yeah, sure. So the exclusions were there to try and protect American business, American manufacturers. The argument is, okay, we're going to put a tariff on imports from China, but if you can't buy it from anywhere other than China, we don't want you to rest.

So you can make an application to the USTR, who will consider whether you should be granted some clemency and not have to not have to pay the tariff, just for the avoidance of doubt, it's important that pays, like cash out the door.

So there was a lot of demand for these things. This chart is for any our readers. No, I like a complicated chart. So I'll talk you through this one very quickly.

The left hand bar is basically the share of imports from each of the lists. So black is list one, dark grey List 2, and so on. The second bar is showing you of the roughly speaking 2700 or so exclusions that were granted what lists they applied to.

And so list one and two applications were a lot more readily granted, or there are a lot more list one, two applications per dollar of imports, than there were for list three and list 4A and that comes back to that whole thing earlier, about list one and two being very much down in the supply chain.

So if you're an American manufacturer, and you go look, guys, I can't buy this widget from anywhere else in the world, my profit margins only 10%, and you want me to pay an extra 25%, for my product, I'm gonna go to the wall, then you may well have got an exclusion for that, as well. So 2300 exclusions were made.

Now those were fixed time deals. So you've only got your exclusion for a certain amount of time, a whole bunch of them were renewed, but not all of them. And that's what the right hand two bars are showing. So some of them renewed, about 24% of them were renewed.

And then another charge were extended again. So that's been extended, or more recently, but only around 19%, therefore, of those exclusions actually got extended for any period of time. We're going to talk about what the Biden administration are doing later on, but there was a more recent extension of around 350 products. And then on top of that, you've got 80 products that got exemptions because of their use in the fight against COVID-19.

So the exclusion process was horribly complicated and remains horribly complicated. You know, I'm delighted to say our colleagues in our customs team at Flexport are all over this and know a lot more about it than I do. And I've got the tools to kind of deal with this as and when we see what the Biden Administration wants to do, going forward.

In terms of what made for successful exclusion as well, that was far from simple. So partly showing the government you know, I really, really depend on this product, but also the style and the way that the exclusion request went in, you know, detail, focus, and frankly that, frankly, bullets and loved helped as well. And there's plenty of press stories about companies who were successful there. So exclusions, you know, they're still out there, there are an issue that the administration still address.

Chad Bown: Okay, I just ran with one thing on the account. So I mean, just to see in none of your, nobody watching this will be surprised that this but, you know, the kind of the worst story with the exclusions came really early on with the pandemic.

So in List 4A, it turns out, there's a bunch of PPE it, though, you know, N95 respirators, I think maybe the protective garments, things like that we're sitting under these trade war tariffs, the pandemic hits, we're all seeing these stories about how hospital workers are having to wear garbage bags, and you know, can't get PPE to go into the hospital to save lives. And it took until the middle of March for the administration to grant exclusions, essentially, for some of these pieces of PPE.

And that's, you know, part of it is they were reticent, they didn't want to change this stuff. Part of it is these products are buried into, you know, tariff codes, where it's not obvious what they are, they're in, you know, other plastics or, you know, other things of textiles, things like that. But those, as Chris mentioned, have been the ones that have tended to be extended multiple times throughout the pandemic. And these are important since, you know, we didn't, we didn't have supply chains that made a lot of this stuff in the United States when the pandemic hit. And China really was the world's, you know, residual exporter, supplier of a lot of these, these particular pieces of PPE, you know, 60 to 70% of world exports of this stuff to arguably that the tariffs matter.

Phil Levy: That's a good point. And I think we can say generally, it's sometimes it's, it's forgotten, but we're importing this stuff, because somebody wanted it other than, you know, this was the best thing they could find to consume that, you know, this is the most affordable thing that you get for the kids, or if you're a business, these were, you know, the best parts that you could get. But you sort of see that very acutely when we have a health crisis. And it becomes these are the kinds of things that can sort of seriously affect the delivery of medical care. But a reminder that we sort of do these trade flows for a reason.

Okay, let me recap on where we've, where we're coming from, which is, we had the Section 301 case kind of reviving a process that had been popular earlier had sort of fallen by the wayside and was picked up with the Trump Administration, you had rapidly escalating tariffs as you had sort of a tit for tat. And we and we went back and forth on this, you these were tempered, somewhat by a sort of clunky, awkward exclusion process that had some carve outs. And the whole thing kind of culminated in a Phase 1 Agreement, which, with a tiny bit of moderation, this was locked in a bunch of tariffs. That's how we got to where we are, I think, as a general thing.

We want to talk about next. What did all this mean? What were the effects of this? Before we do, we want to ask your impression of what the effects were of all of this. So pull time people, get your get your fingers ready.

What has been the principal impact of Section 301? tariffs? Was it a retooling of supply chains? Was it that it changed China's economic policy behaviors? Was it that it imposed costs on American consumers and businesses? Was it that it achieved American foreign policy goals? Or none of the above our imagination is just not rich enough?

So let's see, oh, we do have a strong leader in the pack. All right, we're this is I don't know whether I can quite say I've seen it off. But it looks like we're leaning very heavily on imposed costs on American consumers and businesses with retooling of the supply chain coming in a distant second.

So, very few thinking that a cheap foreign policy goes or that it actually had an awful lot of effect on China's economic policy behaviors.

Okay. Normally, I would say, you know, Chris, and Chad, tell me what you would have voted, but I'm gonna hold off on that for a second, because I want us to do is, we will come back, I'm gonna try to remember to make them do that. But let's move forward. And thank you for everyone who voted, very much appreciate it. Let's look and see what we thought that the tariffs did to trade. So let's get to our data.

Imports Covered by Section 30 Duties Down by One-Fifth

Chris, maybe you can talk us through this a bit. What you know, first thing is a natural thing to look at in terms of what the do's what happened to the imports that were covered?

Chris Rogers: Yeah, this charts, basically showing you the, I've bucketed these a little bit list one and two together deep supply chain, lists 3 manufactured goods, List 4 some consumer goods in there.

The 100 level is basically the average for 2017. So the pre-tariff period and we annotated when the tariffs were put in place, and basically we can see that kind of point to point. We saw an initial kind of run up just before each set of tariffs comes into a little bit of stockpiling. In the tariffs, they've got a big drop off. And then obviously, we've got this trough in early 2020, which was the pandemic which, as Chad mentioned, kind of coincided with the Phase 1 deal coming in.

Then we have a recovery, obviously, there's been strengthened demand in some of these products, particularly lisa, which is got those consumer goods in. But point to point, roughly speaking for all three of these clusters, we're now at around 80 to 90. So effectively, what that's telling us imports of these products have fallen in dollar terms by about 10% 20% from the pre tariff level. And that's kind of where we are at the moment. That's a kind of a marked drop down.

Then we have a recovery, obviously, there's been strengthened demand in some of these products, particularly list 4A, which is got those consumer goods in. But point to point, roughly speaking for all three of these clusters, we're now at around 80 to 90. So effectively, what’s telling us imports of these products have fallen in dollar terms by about 10% 20% from the pre tariff level. And that's kind of where we are at the moment. That's a kind of a marked drop down.

Phil Levy: Chad, would you have expected to see as we launched into all this.

Chad Bown: Yeah, I think I'm, and I just eyeball econometrics there, it looks like the black line, which is list 4A and that one only has right no, a 7.5% tariff on it, whereas the red line in green line have the 25% tariffs. So the fact that one is slightly above that. I think is sort of reflective of economics as well, bigger economic impact, certainly on the ones that were hit earlier and that are facing the bigger tariffs. I think that basically lines up with what I would have expected as well.

Phil Levy: But let's, I do have kind of metrics as well. The, I wonder whether I would have expected things to go down on board. This was actually the trades should be fairly robust, especially when I think one of the considerations and some of the early applications was trying to put tariffs on things where they were ready substitutes, where there was this attempt this intent to drive things away from China, this looks like that it didn't maybe do that as much. Let's go to the next slide. I want to sort of get a bunch of things in.