The Trump administration’s new round of trade tariffs, announced on April 2, shocked the rest of the world and caused fears that global trade would be upended. President Donald Trump announced a sweeping 10 percent tariff on all countries exporting goods to the United States, and “reciprocal” tariffs on dozens of countries accused of applying unfair tariffs on U.S. exports. One of the main targets was clearly China, which got slapped with a 34 percent tariff across the board.
To date, the reciprocal tariffs have been placed on hold – except for the penalties on China, which have been hiked to 145 percent after several rounds of retaliation and escalation.
The America First Memorandum
The April 2 announcement had been in the making for several months. On January 20, Trump issued the “America First Trade Policy” presidential memorandum, mandating a comprehensive review of U.S. trade and economic policies. The memorandum required various government departments to make recommendations concerning trade deficits, unfair trade practices, and creating an External Revenue Service, and called for reviews of existing U.S. trade agreements, the de minimis exemption, and export controls.
A significant part of the memorandum dealt with the issue of trade with China. It instructed the Office of the United States Trade Representative (USTR) to review the “Phase One” trade deal signed by the United States and China in 2020, during Trump’s first term, to determine whether China is acting in accordance with the agreement. The USTR was also ordered to reassess a report from last year on China’s technology transfers and IP protection, and then consider potential additional tariffs as needed, especially with respect to “industrial supply chains and circumvention through third countries.”
In addition, the USTR was requested to investigate any other actions, policies, or practices by China that are “unreasonable or discriminatory” and may “burden or restrict” U.S. trade, as well as recommend appropriate responses. The memorandum further required the USTR and the secretary of commerce to jointly assess legislative proposals on revoking China’s Permanent Normal Trade Relations (PNTR) status, while the secretary of commerce was requested to assess the status of intellectual property, for instance patents, copyrights, and trademarks, conferred upon Chinese nationals.
Finally, the secretary of commerce and the secretary of homeland security were asked to assess unlawful migration and fentanyl flows from China, as well as from Canada and Mexico, and recommend appropriate measures to resolve this “emergency.” The deadline for all these agencies to report back to the president was set on April 1. On April 3, the White House announced it had received a unified report covering the topics mentioned by the “America First Trade Policy” memorandum. The report is non-public, but a summary of the findings was published on the White House’s website.
The report had a heavy focus on China. It contains an entire section on economic and trade relations with China alone. Unsurprisingly, its findings are very negative, at least according to the summary released by the White House. The report noted that China, in common with many other countries, has much higher tariffs on U.S. exports than the U.S. does on its imports. It claimed that China pursues “intentional policies of consumption reduction” to gain an “unfair trade advantage over the United States.”
The report found China failed to respect its commitments under the 2020 “Phase One” agreement with the U.S., particularly on agriculture, financial services, and IP protection. China was accused of exploiting the PNTR status that the United States granted it in 2000 (in common with most of the world’s countries), by taking advantage of the openness of the U.S. economy while maintaining all sorts of protectionist and non-market measures of its own.
When it comes to IP protection, the White House’s summary simply noted that “the full extent of China’s abusive tactics and practices with respect to U.S. intellectual property is staggering,” and that the report recommended appropriate responses. On the topic of fentanyl flows and migration, the report praised the strong action Trump already took in invoking the International Emergency Economic Powers Act (IEEPA) to impose tariffs on Canada, Mexico, and China, and identified “further measures,” which were not specified in the public summary.
Supply Chain Concerns
The interesting thing to note is that, as part of its work to comply with the “America First Trade Policy” memorandum, the USTR officially invited the public to submit comments regarding “unfair and non-reciprocal foreign trade practices” on February 20. The deadline for the submission of comments was March 11. In total, the USTR received around 750 comments from the American public, many of them from the owners of small and medium-sized businesses. All the comments are visible online.
Most of the comments received by the USTR denounced unfair trade practices by other countries, most frequently China. Some of them, however, took a very different tone, expressing concern about the disruption to supply chains that depend on China. For example, the CEO of a Mississippi-based company that makes children’s educational products stated the following:
…a significant portion of our raw materials still originates from China. Although we aspire to increase domestic production, the necessary infrastructure and industry are not present in the United States.
Imposing tariffs will not revive this industry domestically; instead, larger manufacturers will simply relocate to countries like Cambodia and Vietnam, continuing to source raw materials from China and labeling products as ‘made in X country.’ This circumvention will disadvantage smaller businesses, like ours, genuinely striving to create American jobs, and ultimately force us out of the market.
The founder of a toy company expressed similar concerns in a comment:
Small businesses often rely on cost-effective sourcing from China to offer competitive pricing. The additional 10 percent tariff increases import costs, compelling these businesses to either absorb the expense – thereby reducing already thin profit margins – or pass it on to consumers, leading to higher retail prices.
The USTR, a body that belongs to the Executive Office of the President but is still generally seen as non-partisan, does not appear to have taken any of these concerns into account in its America First Trade Policy report. Instead, the report, at least in broad terms, seems to reflect the Trump administration’s general attitude toward China.
China is presented as a country that is enacting a mercantilist plan to export as much as it can to the United States while minimizing its imports, takes unfair advantage of the PNTR status that the U.S. granted it in 2000, has not fulfilled its commitments under its earlier trade deal with the U.S., and does not respect U.S. intellectual property.
Telling the President What He Wants to Hear
While it is hard to argue, from a U.S. perspective, that there is no truth to the report’s conclusions, it seems clear that the USTR and the secretary of commerce did not make use of this opportunity to present Trump with some of the arguments against the imposition of higher tariffs on China. Instead, their report appears to have told the president exactly what he wanted to hear, just on the day before his “reciprocal tariffs” were announced to the world.
This is in spite of the fact that the United States’ most prestigious economic thinkers are unanimous in claiming that the imposition of drastically higher tariffs on China is a misplaced strategy, which could turn out to be far more damaging to the US than to China. As Nobel prize-winning economist Paul Krugman stated recently, “while we have real grievances against China, Trump’s tariffs are a very bad way to address those grievances, not least because he’s alienating everyone who should be on our side.”
Fellow Nobel prize-winner and former chief economist of the World Bank Joseph Stiglitz also has an entirely negative assessment of Trump’s strategy: “We are very interdependent on China – right through our whole supply chain… Doubling the cost of every input is going to mean the cost of our goods are going to go up.” Former Treasury Secretary Janet Yellen didn’t mince her words, either: days ago, she called Trump’s tariffs “the worst self-inflicted wound that I’ve ever seen,” adding that “President Trump has taken a wrecking ball” to the economy.
It is too early to say whether Trump’s tariffs on China will stick. Exemptions have already been granted for smartphones, computers, and certain other electronic products, perhaps due to a growing awareness within the Trump administration of the effect these tariffs could have on ordinary U.S. consumers. It is certainly possible to imagine that some kind of grand bargain with China will be reached, or more likely that the administration will simply back down and reduce the tariffs or suspend them indefinitely.
What is clear, however, is that the tariffs are already doing severe damage to the United States’ credibility and long-term interests. At a time like this, it is important that government agencies take the initiative to present the president with a truthful and complete picture of the situation.