China Responds to U.S. Aluminum and Steel Tariffs

On March 23, new tariffs on steel and aluminum imports into the U.S. went into effect. While they are being applied to all exporters of steel and aluminum, with a few exceptions, the clear target is China. As we outlined in the March 5, Market Intel article, China is far and away the largest producer of steel and aluminum in the world. Even though it doesn’t export much steel to the U.S., China does export a significant volume of aluminum. On April 2, China countered with tariffs aimed at more than 120 U.S. products.

The U.S. actions were taken under Section 232 of the Trade Expansion Act of 1962, which gives the executive branch the ability to conduct investigations to “determine the effects on the national security of imports.” This is critical because under the General Agreement on Tariffs and Trade Article XXI Security Exceptions, a country can unilaterally suspend trade benefits it extends to other countries if it deems that imports are posing a national security threat.

In response to the U.S. action, China notified the World Trade Organization on March 29 that it would begin suspending concessions, i.e. increasing tariffs, for some products from the United States because it did not believe our government was acting in the name of national security. Instead, China said the United States was increasing tariffs on steel and aluminum as a "safeguard" measure. The distinction is important because the procedures for taking action against a trade partner under the Safeguards Agreement are significantly different from those that may be taken if trade actions are taken under the National Security Exemption. In its WTO notification, China charges that “the measures taken by the United States are not consistent with its obligations under the relevant provisions of the GATT 1994 and Safeguards Agreement.” China’s notification also included the list of U.S. products that, beginning April 2, would face higher tariffs when entering China to serve as partial compensation for the WTO rights upon which China believes the U.S. is infringing.

The retaliation list that China produced includes 128 HS-8 level tariff lines. Of those 128, 94 are agricultural in nature; the remainder are steel and aluminum. The agricultural lines are divided into two categories – 86 products that will be subject to an additional 15 percent tariff and eight products that will be subject to an additional 25 percent tariff. It is important to keep in mind these new tariffs are in addition to existing tariffs. For example, a Chinese importer of U.S. frozen pork (HS 02032900) had been paying a tariff of 12 percent before April 2; now she will pay a tariff of 37 percent on the same U.S. product, while competing against frozen pork products from our European Union, Canadian, Brazilian, Chilean and other international competitors subject to the regular 12 percent tariff. It doesn’t take much of a math or economic background to appreciate that the U.S. competitive position will quickly deteriorate in these conditions.

Further examination of the Chinese retaliation list is quite interesting. For some products, like pork, China is a critical market for the U.S. and the U.S., having a substantial market share, is a significant supplier of this product to China. But for many other items, China is neither a significant market for the U.S. nor does the U.S. supply a significant share of total Chinese imports. For a third subset the tariffs are indeed irrelevant. In fact, for 23 products – 42 percent of the list – the U.S. exported zero dollars in these products to China in 2017 and have never had a significant presence in the market. Further, only three of the top 10 agricultural products that the U.S. shipped to China in 2017 were on the list - pork ($663 million), tree nuts ($242 million) and fresh fruit ($225 million). Below, Figure 1 details the tariffs to be paid by Chinese importers of listed U.S. products. Figure 2 details the 2017 U.S. export value of each product on the list, as well the relative importance of the Chinese market to each U.S. product and the share of the Chinese market the U.S. captured in 2017.

Much debate can be had about why the list includes the products it does, but it is clear Chinese officials are sending a message. And there are suspicions they are paying attention not only to what the U.S. officials are saying in formal communication, but also monitoring informal communication channels like social and other media.