On May 5, 2019, President Trump announced that he intends to increase the Section 301 tariff rate on approximately US$200 billion worth of "List 3" Chinese imports to 25 percent (from the current rate of 10 percent) beginning on Friday, May 10, 2019. He further threatened to impose an additional tariff of 25 percent on approximately US$325 billion worth of annual Chinese imports that are not currently subject to Section 301 tariffs.

President Trump's announcement came as a Chinese delegation led by Vice Premier Liu He was preparing to travel to the United States on Wednesday, May 8 for bilateral trade negotiations with the United States. According to US officials, the announcement was prompted by recent difficulties in the bilateral negotiations, which are in an advanced stage but continue to encounter obstacles related to technology transfers and other issues. US officials also confirmed late on Monday, May 6, that the Federal Register notice announcing the tariff increase, effective Friday morning, would be issued the following day (Tuesday, May 7).

We discuss these developments and their implications below.

Potential Section 301 tariff increase and new Section 301 tariffs

As of May 6, the Office of the US Trade Representative (USTR) had not issued a formal Federal Register notice implementing the threatened tariff increase on the List 3 Chinese imports. However, USTR Robert Lighthizer stated late in the day on Monday that the notice will be published on May 7, and that the tariff increase will be scheduled to take effect at 12:01am EDT on Friday, May 10. The threatened tariff increase on List 3 goods was previously scheduled to occur on March 1, 2019, but USTR issued a Federal Register notice postponing the increase "until further notice" at the direction of President Trump, who cited "substantial progress" in the bilateral negotiations.

USTR Lighthizer did not explain whether the forthcoming Federal Register notice (or a separate notice) will address President Trump's separate threat of an additional 25 percent tariff on US$325 billion in imports from China that are not currently subject to Section 301 tariffs. Such an action would represent a major escalation of the US-China trade dispute.

Ongoing US-China negotiations

President Trump's announcement was prompted by recent challenges that have emerged in the ongoing bilateral negotiations between the United States and China, and appears to be aimed at maximizing US leverage over China in those negotiations. The negotiations, which have been ongoing for six months, are considered by some US officials and business groups to be in the "endgame" stage, and administration officials previously said that they hoped to reach an agreement with China during the negotiating round scheduled for this week. However, during a negotiating round held last week in Beijing, China allegedly backtracked on commitments the United States believed China previously had made in the negotiations, according to US officials. USTR Lighthizer stated on May 6 that "[w]e felt we were on track to get somewhere. Over the course of the last week, we have seen an erosion of commitments by China." He did not elaborate.

According to published reports, however, several major sticking points have emerged in recent days:

  • First, China previously committed to enact domestic legal changes to address US concerns regarding forced technology transfers – one of the key "structural issues" the United States has emphasized in the Section 301 investigation – but last week stated that it would not accept any agreement language requiring changes to Chinese law. US officials previously considered that the negotiations regarding technology transfers were resolved, and viewed the move as an attempt by China to renegotiate settled language (indeed, President Trump's May 5 statement references China's alleged "attempt to renegotiate," and USTR Lighthizer accused China of "reneging" on its previous commitments.)
  • In addition, multiple sources have reported that the United States has made significant concessions in the talks in recent weeks in an attempt to conclude a deal – including by dropping demands with respect to industrial subsidies and cyber-theft of trade secrets, which also were emphasized in the Section 301 investigation – but that China reportedly continues to resist concessions on many US priorities (e.g., data localization, cloud computing, pharmaceutical and intellectual property issues, and biotechnology).
  • Finally, China has sought the full and immediate elimination of the Section 301 tariffs, whereas the United States is seeking to keep at least some of the tariffs in place until China has implemented its commitments under the agreement. USTR Lighthizer stated on May 6 that this issue remains unresolved.

In this context, President Trump's threat appears to be aimed at extracting last-minute concessions from China on technology transfer and other issues during this week's negotiations. However, the move also heightens the risk that the talks collapse altogether. China's Foreign Ministry stated on May 6 that China still intends to send a delegation to the United States this week to continue the bilateral negotiations, despite President Trump's announcement. This could change, however, particularly given that USTR Lighthizer has confirmed that USTR will publish a formal Federal Register notice to implement the threatened tariff increase – something that cannot be easily reversed at the last minute. Moreover, China might refuse to engage in further negotiations if the tariff increase ultimately is imposed, and would likely respond to such action by retaliating further against US exports and companies.

Outlook

A collapse in the US-China talks would have significant ramifications beyond the direct impact of the associated tariff increases on importers, exporters, and consumers. Indeed, the US financial markets have appeared sensitive to developments in the US-China negotiations, but still appear to expect that a final deal will emerge in the coming days or weeks. Thus, a collapse in the talks would likely cause a significant negative market reaction. The Trump administration's desire to avoid this outcome (and, conversely, to prompt a positive market reaction should the talks succeed) ahead of the 2020 presidential election has been one of its principal motivations for seeking an agreement with China. The Chinese government also has appeared motivated to reach an agreement, given the magnitude of Chinese exports to the United States and its desire to avoid further economic turmoil. Moreover, the threatened US tariff increase on "List 3" goods, as well as new tariffs on China-origin goods not yet covered by the Section 301 measures, could prompt domestic legal challenges from US business groups, who have warned that they consider such actions to be inconsistent with US law. For these reasons, and given the overall status of the negotiations, it remains possible that the two sides will reach an agreement that averts the threatened tariff increase on "List 3" goods and other Chinese imports. Nevertheless, President Trump's threat has injected significant new uncertainty into the negotiations, and has provided only a very brief window for the two sides to resolve the complex and sensitive issues that remain.