When It Comes to Tariffs, Many U.S. Companies Are on China’s Side

Date: Friday, June 28, 2019
Source: The Wall Street Journal

As Trump and Xi prepare for G-20 summit, U.S. businesses warn of expected damage from proposed levies

WASHINGTON—Chinese President Xi Jinping isn’t the only one pushing President Trump to lay off on tariffs.

As the two leaders gear up for their trade meeting in Osaka, Japan, on Saturday—where tariffs will be a central point of discussion—U. S. businesses are warning that new 25% duties on $300 billion a year of Chinese goods will wreak widespread direct and collateral damage.

A company that assembles TV sets in South Carolina says it might have to move operations to Mexico if the tariffs extend to the LCD screens and circuit boards it imports from China. Retailers say Chinese rivals could undercut them by shipping goods directly to U.S. consumers by mail, evading tariffs.

Port operators say cranes and other equipment to load cargo largely come from China, raising their operational costs.

“All we’re doing is making it more competitive for the freight to find its way to Canada or to Mexico, because they won’t have to pay the tariffs on their equipment and they’ll be able to put forward a product at a lower price,” said John Reinhart, the chief executive of the Virginia Port Authority.

Mr. Reinhart was among hundreds of executives arguing against the tariffs during public hearings that ended this week on 25% tariffs on $300 billion in Chinese goods Mr. Trump has proposed, on top of existing tariffs on $200 billion in Chinese imports.

Mr. Trump contends the tariffs are intended to coerce China into making changes he says are needed to create level competition for U.S. businesses. Beijing says it is willing to make changes, but that the U.S. is unfairly seeking to thwart its economic advance.

Negotiations to resolve the dispute broke down in early May, with China saying the U.S. was making unreasonable demands and the U.S. saying Beijing reneged on commitments it had made earlier.

With both sides at an impasse, Mr. Trump and Mr. Xi are scheduled to meet on the sidelines of the Group of 20 leading economies summit in Osaka on Saturday for what many see as a make-or-break moment in trade talks.

Mr. Xi plans to present Mr. Trump with a set of terms the U.S. should meet before Beijing is ready to settle the confrontation. Among these, Beijing is insisting that Washington remove its ban on the sale of U.S. technology to Chinese telecommunications giant Huawei Technologies Co., according to Chinese officials with knowledge of the plan.

Beijing also wants the U.S. to lift all punitive tariffs and drop efforts to get China to buy more American exports than Beijing agreed to when the two leaders met in December.

On Wednesday, before flying to Asia, Mr. Trump said it was “absolutely possible” he would agree to hold off on the proposed new tariffs after his meeting with Mr. Xi.

“If we don’t make a deal, I will tariff—and maybe not at 25% but maybe at 10%,” the president said in an interview on Fox Business.

Mr. Trump also repeated his point that tariffs are putting more pressure on China, where economic growth is slowing.

“Now, we’ve had conversations over the last few days,” Mr. Trump said, referring to a resumption of informal talks with the Chinese. “They are negotiating, but, you know, my attitude is I’m very happy either way. The tariffs are—there’s no way you’re going to beat the tariffs.”

Although many companies have applauded the president’s stance, business groups have generally opposed the escalation of tariffs and are urging the president to show restraint.

“The profound impact can’t be just defined by the tariffs—it’s the unintended consequences we’re also watching,” said Myron Brilliant, the head of international affairs at the U.S. Chamber of Commerce. “The fallout is just beginning to be felt. Over time it will be felt in even more profound ways.”

Element Electronics, for example, imports LCD panels and circuit boards from China for assembly at its factory in Winnsboro, S.C. The tariffs would raise costs significantly, the company said, which could force it to close the factory in South Carolina and move production to Mexico.

“Element faces a classic tariff inversion that creates an incentive to import TVs rather than produce them here in America,” David Baer, the company’s general counsel, said in testimony to the U.S. Trade Representative’s office.

Some U.S. apparel manufacturers are also opposing tariffs. The machinery that powers American clothing and shoe factories, such as circular knitting machines for hosiery, looming machines, and embroidery machines, comes almost entirely from China. The tariffs would thus make U.S. factories more expensive, rather than more competitive, some groups warned.

“We use imported components from China to sustain the scale of our U.S. footwear manufacturing that keeps 1,600 people fully employed,” Monica Gorman of New Balance Athletics told the government panel. “The U.S. supply chain is simply too small and too limited in scale to support the current depth and breadth of our U.S. manufacturing.”

Few “Made in U.S.A.” apparel manufacturers could avoid the impacts, said Rick Helfenbein, the president of the American Apparel and Footwear Association.

“We are dumbfounded that the new tariff list includes several categories of imported textile, shoe materials, equipment and machinery that our members need to make product in the U.S.A.,” he said.

Even a handful of companies that said they support tariffs in their industry warned the USTR that it risked creating a loophole that would create a large competitive edge for their Chinese competitors: Under current trade rules, shipments valued at less than $800 are exempt from duties, a move designed to facilitate easier postal shipping. But that means a U.S. retailer selling Chinese goods faces the 25% tariff, while a Chinese company that ships the exact same item directly to consumers through the mail could avoid the tariff.

This is a “substantial and growing loophole that gives China backdoor duty-free access to the U.S. market at a time when the administration is spearheading efforts to address China’s unfair trade practices,” said Kimberly Glas, the president of the National Council of Textile Organizations, one of the few groups that testified or wrote letters to USTR in favor of the tariffs.

If the loophole isn’t plugged, some companies said they could move operations outside the U.S. and ship from China or elsewhere.

“I could actually put a warehouse in Hong Kong and ship to my customers, and not pay duties at all,” said Steve Lang, the chief executive of Mon Cheri Bridals in Trenton, N.J., which sells prom dresses, bridesmaid dresses, tuxedos and other formalwear. “Why haven’t I done it? That wouldn’t be very American, but that’s what this tariff is telling all manufacturers to do.”

Mr. Lang said his firm is looking to diversify its sources of production, but such a move will take time. Financing to make the change may not be forthcoming, he said.

“My bank has already told me they will not lend me an additional $5 million just to pay duties,” said Mr. Lang. “They’ll pull my credit lines, and I’ll be done.”

The USTR has said it would carefully consider comments received at the hearing before proceeding. Items can still be removed from tariff lists, and a process will eventually be put in place for companies to seek exemptions for specific items.

 

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