Companies have forgotten how much the global trade regime matters to daily firm operations. If it did, in fact, collapse, the result would be a disaster. The global trade rules are like air. They have existed for so long that companies and consumers take them for granted. They don’t even notice them any longer. But, like air, if it suddenly went away, firms and consumers would discover to their great dismay that they actually like and need air (or the global trade system) very, very much. Why do firms need the WTO? Start with the obvious issues. Right now, 164 countries are constrained in what they can do with tariffs rates. Up until this past year, WTO members did not just randomly hike tariffs overnight. Keeping tariffs consistent has allowed firms and customers to have stability and reduce risk.
The implications, as the Singaporean trade minister noted, can be hard to calculate. For instance, American importing companies will need to increase the amount of the continuous bond they hold with US Customs. In some cases, bond levels may be 20-100 times higher than prior to Trump’s tariff wars began. Shipping volumes have fallen off dramatically. This has left firms paying more for transportation as well. So it is not just 25% tariff rate increases that affect firms. The second- and third-order implications are just starting to appear. In the short run, exporting firms have several options to limit risk and exposure to higher tariffs. They can do nothing and bear higher costs, hoping to ride out a short conflict. They can work with their importing partners to effectively “share” the costs of higher tariffs. Firms should be reexamining their options to ensure that they understand their current supply chains, tariff classifications and possible sourcing alternatives. It may be prudent to tweak existing processes to move products into new tariff classifications by, for example, adding or subtracting manufacturing steps in the supply chain from one location to another.
This is an important week for the ongoing US Section 301 case against China. The public comment period closed last week—attracting a record number of submissions--2857 and counting. This week, the US Trade Representative’s (USTR) office will be holding public hearings on the matter. By the end of next week, the United States will be in a position to impose sanctions against China at any time.
Such sanctions may be delayed, of course, as a result of discussions in Washington with China’s top negotiator, Liu He. In the meantime, it is worthwhile to examine the type of comments that arrived under the Section 301 request to see what level of support seems forthcoming for a hard reaction, represented by an opening salvo of 25% tariff increases on $50 billion in goods.
While this tariff discussion is going on inside Washington, of course, at least four additional things should also be taking place. First, the tariff list is only part of the Section 301 case. Also coming in the next 60 days is more detail on what the proposed “parallel” regime to more tightly screen Chinese investment will look like. This system is meant to run at the same time as the broader CIFUS process. So far, officials are unclear about Treasury intends to do to manage this new set of procedures. Second, the US is simultaneously moving ahead with a case against China at the World Trade Organization (WTO). Third, negotiations between the US and China should be ramping up. Since the clock is ticking on the imposition of tariffs, with only 30 days before they are meant to take effect, there is extremely limited time to get to an agreement. Given the sweeping nature of US complaints and the unclear goalposts that China needs to meet to head off sanctions, it is not obvious that 301 retaliation can be stopped. Finally, the Chinese are likely to put out their own list of counter-retaliation measures. They just published a list of 128 items subject to $3 billion in sanctions as part of their own response to US steel and aluminum tariffs. These included new barriers to US exports of wine, fruits and nuts. But these are likely to look like minor issues compared to what China has in store for the Americans in the wake of the $50 billion in tariff hikes under the Section 301 dispute. In short, the publication of the tariff list today heralds the start of a new era in US-China relations and the beginning of a totally different American trade policy. Firms should be braced for some very rough times ahead.
The trade ministers from the 11 Trans-Pacific Partnership (TPP) countries will be gathering this weekend in Hanoi to discuss bringing the agreement into force. The Asian Trade Centre and APL Logistics have created a new booklet to highlight some of the specific market access benefits for companies. To see what the TPP with 11 parties delivers in wide range of products, we highlight seafood, wine, plastics, cosmetics and soap, shampoo, wood, furniture, iron and steel and some footwear and textile categories. The product categories were chosen to illustrate the range of different market access commitments made by TPP11 members. Many of these items show tariff cuts from as high as 40% to zero. The TPP continues to offer substantial market access benefits to participating member countries. Firms that operate in and across the TPP will face fewer tariff barriers with lower rates as quickly as the first day of the agreement.