By Jamie Adams
Back in 2018, when then-president Donald Trump imposed a 25% tariff on the vast majority of imports from China, he did so with two goals in mind. The first, was to discourage U.S. companies from sourcing primary, intermediate and finished goods from China and produce them in the U.S. instead. This was based on the fact that China was America’s largest trading partner and also enjoyed a massive surplus in its trade with the U.S. The second goal was to diminish China’s role in the global economy and its growing economic hegemony in Asia-Pacific. This was in response to China’s long track record of engaging in unfair practices, including subsidies, intellectual property theft, corporate espionage, forced labor and more.
Fast-forward to 2024 and it’s clear that neither of these objectives has been accomplished. The tariffs – often unfairly characterized as the Trump tariffs despite the fact that they were kept in place and even expanded by the Biden administration – have really only served to increase costs for U.S. businesses. How much cost? Since 2018, U.S. businesses have doled out $257 billion in customs duties associated with the tariffs against China. That amount is about to grow immensely. With a universal tariff of between 10-20% on the way and a 60% tariff against all goods coming in from China, things are about to get very expensive for U.S. importers, and very competitive for U.S. exporters – to the tune of more than $2 trillion.
China’s trade status
Despite the best efforts of two consecutive administrations, American businesses continue to import goods from China, albeit at lower volumes than they had in the past. Imports from China have declined from $538 billion in 2018 (when the tariffs were first implemented) to $426 billion in 2023, a 20% fall. That’s substantial and would be seen as a win by proponents of the tariffs. Yet, China remains America’s third-largest trade partner (after Mexico and Canada) and U.S. businesses – particularly those with interest in selling products within China or the Asia-Pacific region continue to invest in operations in China.
Many of those businesses continue to report challenges that are inconsistent with free-market economies, such as higher levels of scrutiny by the Chinese government and a concerted effort by the government to promote state-owned enterprises (SOEs) over foreign-owned companies. Those who use China as a base for production of good destined for western markets continue to face the cost pressure associated with the tariffs, which is about to get much worse.
One might presume that a fall in Chinese imports into the U.S. has hurt China’s export potential and prompted it to consider a move away from the non-market policies that prompted Washington to impose the tariffs in the first place. Not so much.
Export boom
While its exports to the U.S. have fallen, China’s overall exports to the world have gone up decidedly since the tariffs were imposed. In fact, at the start of 2018, China’s balance of trade stood at a surplus of only $18 billion dollars. By February of 2024, the surplus had peaked at $125 billion (compared with the U.S.’s trade deficit of more than $1 trillion. October 2024 marked the fastest pace of growth for Chinese exports since July 2022. And that’s about to accelerate at lightning pace.
U.S. importers faced with the possibility of a 60% tariff on all imports from China (as proposed by the Trump campaign during the election) are likely to stockpile inventory stateside in the coming months to pre-empt the tariffs coming into force. European importers may take a similar approach as the EU could very well follow suit with tariffs of its own to prevent China dumping goods in the European market.
Impact of tariffs on U.S. businesses
While there’s been much discussion of the tariff threat to imports from China, the threat is actually far greater than that. In recent years, there’s been a fairly predictable chess board of global trade activity. Importers have found clever ways to circumvent the tariffs. Some chose a “China + 1” strategy where they kept the bulk of their production in China but made arrangements with suppliers in neighboring countries, such as Vietnam, Thailand, the Philippines, Taiwan, South Korea, India and Indonesia for additional production. This way imports came in as Vietnamese or Thai products, rather than Chinese. Others moved some or all of their production closer to home in Mexico or Canada, allowing them to not only avoid the tariffs but take advantage of duty exemption through the United States-Mexico-Canada Agreement (USMCA).
But the chess board is about to get far more complex. The 25% tariff imposed by the first Trump administration was absorbable for many importers who either took the hit to the margins (albeit with adverse impact to wages, overall employment and investment in R&D) or downloaded part or all of the additional cost to the consumer. But the proposed 60% tariff and accompanying 10-20% universal tariff being proposed changes the stakes significantly. Few businesses will be able to absorb that degree of additional cost. The vast majority will pass down the cost to consumers, which means consumers overall spending power will decline by about $2,600 per year. The news isn’t all bad. Consumer spending power will also be pulled up by proposed income tax breaks on consumers and the expected spike in the value of the greenback, but not enough to offset the impact from the tariffs.
The tariffs won’t hurt only importers. U.S. exporters will also be impacted. The transactional nature of the first Trump administration would indicate that in addition to the 10-20% universal tariff, the administration will also target countries with which the U.S. has substantial trade deficits with additional tariffs. Those countries are the one being used as alternatives to China for production (including Mexico for which a flat 25% tariff is being considered). These countries will almost certainly reciprocate with tariffs of their own. That means higher cost of entry into those markets, combined with a higher valued U.S. currency, putting significant strain on the competitiveness of U.S. goods in those markets. Those targeting the Chinese market with exports will face the same tariff and exchange-rate barriers, along with declining overall demand for imports. The loss of export potential is particularly damaging as U.S. businesses exported $147 billion in goods alone to China, up 22% since 2018 when the trade war began.
The competitive disadvantage in Asia is going to be exacerbated by the fact that Chinese goods will be mostly shut out of the U.S. and European markets, meaning China-based companies will be turning their attention to Asia-Pacific where they will not only be dumping their oversupply at below-market rates, but they will be able to do so duty-free with the Regional Economic Partnership or RCEP, a trade deal spearheaded by China involving 15 countries. In short, U.S. commercial competitiveness in Asia is going to decline drastically in the event the tariffs being floated by the Trump campaign are implemented as described.
Where opportunities may remain
Watch the negotiations: As noted above, the Trump administration is very transactional. Commercial enterprises with global interest will need to watch the details of what the incoming administration negotiates. While the absence of tariffs is highly unlikely, there may be opportunities where tariffs are significantly reduced in certain areas, or where export opportunities that were previously limited suddenly become more accessible. A recent example is the EU floating the idea that it could buy more U.S. light natural gas (LNG) as a pre-emptive negotiating tactic. There are countries in Asia that may employ similar tactics. Those with good memories will recall the so-called Phase 1 deal negotiated by Beijing in 2019 to buy $200 billion in U.S. goods in exchange for maintaining the tariff rate at 25%. China ultimately reneged on its commitment and is unlikely to get that kind of deal again, but other countries might be given the benefit of the doubt.
Diversity is key: The Trump administration’s trade policy will not remain static. That means countries with which the U.S. currently has a trade imbalance will be the first to be targeted, but those countries may see reduced tariff rates down the line while others see rates go up. It will ultimately depend on how the U.S. Trade Representative and Department of Commerce see the favourability of the bilateral trade relationship. Keeping supply chains fluid by injecting redundancies and having good balance in geographic breadth means businesses can pivot to meet the changing nature of trade policy. Keeping all suppliers in one part of the world leaves supply chains vulnerable to disruptive shifts in policy while anchoring to one export market could expose businesses to higher levels of revenue risk.
Nearshoring vs. reshoring? The purpose of the tariffs is twofold. The first is to shore up revenue to subsidize income tax and corporate tax relief. The second is to encourage businesses to bring production back to the U.S. The administration learned from its past mistakes that placing tariffs on one country simply compels businesses to go to another. Placing tariffs on all countries doesn’t give them an out. But reshoring isn’t necessarily the solution, either. Many businesses have found that sourcing domestically can be challenging, particularly for products that require high-skilled labor and/or products that require low-skilled labor. Hi-tech producers have often found it challenging to find a sufficient pool of the skills required to do the work involved in manufacturing their products. Those that are available command far higher wages than their counterparts in China, putting the cost of production into uncompetitive territory. While the pool of low-skilled laborers continues to grow each year, the number of low-skilled jobs outpaces that growth while wages for those jobs remain relatively low and make the jobs undesirable to many. Even with the proposed tariffs, overseas production may still be more cost effective and labor may be more accessible.
It’s not just about tariffs and duties: Yes, tariff rates raise the cost of production, but importers and exporters have to tread carefully before shifting production to new locales. Factors such as wages, transportation and port infrastructure, corporate taxes, labor skill and availability, labor unrest, geopolitical stability, vulnerability to natural disasters or climatic change and transportation routes should all be considered before making any decision about supply chain shifts.
Planning for disruption
There’s little question that 2025 will be a year of trade disruption and there’s very little opportunity for U.S. businesses engaged with trade across the Pacific to avoid being impacted. But when it comes to trade, keeping an eye on the fundamentals, including risk analysis, regulatory and customs compliance, proper goods classification, correct valuation, country-of-origin certification, secure transport and solid document and/or data management will go a long way in helping businesses reduce supply disruption and unexpected expense. At a broader level, only time will tell what the future holds in store for trans-Pacific trade.
Jamie Adams has extensive and diverse experience in compliance with relevant domestic and foreign import and export laws, as well as in creating and executing plans to improve global trade and international supply chain programs and systems.