A few hours after the US government announced on July 6 that it will impose a tariff on $34 billion Chinese products, the office of the U.S. Trade Representative(USTR) immediately released the information regarding the process for applying for product exclusion. Under this process, U.S. stakeholders may request that particular products classified within a covered classification be excluded from the additional duties. All exclusion requests must be received by October 9, 2018 and the granted exclusion will last one year only. Three conditions must be proved before issuing the product exclusion: first of all, whether the particular product is available only from China; secondly, whether the imposition of additional duties on the particular product would cause severe economic harm to the requestor or other U.S. interests; and lastly, whether the particular product is strategically important or related to “Made in China 2025” or other Chinese industrial programs.
The reason behind the announcement of the product exclusion is that the US government does not want to hurt the US stakeholders. On the first list of the products that subject to the addition tariffs, 59% of the products are produced by multinational companies in China, more than 70% of them are processed by US companies in China and more importantly, these products are indispensable in the global industrial chain.
Can the product exclusion save American companies? Some of the products subject to the additional tariff are tourism products including suitcases, wallets, backpacks and sport shoes, which is a $31 billion market in the US and 87% of the products are imported from China. This is why the vice president of the US National Retail Federation, Jonathan Gold made it clear that he is against the trade war for the simple reason that he could not find enough alternatives from other countries. The American Chamber of Commerce in Shanghai has urgently released the results of a survey, indicating that 69% of the US companies in China do not want the US government use additional tariffs as a leverage, and they do not want their companies to become an inspection object when applying for the product exclusion annually.
Undoubtedly, many US high-tech companies have maintained close strategic partnerships with China’s industrial programs because they are optimistic about China’s huge production potential and would like to form a longer-term cooperation with their Chinese counterparts. Even if they can apply for the product exclusion, the exclusion will only last for one year. The US government has pushed these elite companies into a dilemma and thus, they might follow Tesla to establish headquarters and production bases in China.
If the Trump administration expands the addition tariffs to $200 billion Chinese products, the losses brought to American companies will only grow bigger regardless of the subsidies they will get from the government. When that happens, the US companies will impose a stronger objection to the Trump administration. On the one hand, the American companies do not want to lose the huge consumption market of China. On the other hand, the business operation of the American companies in China is generally smooth despite some bumps and they cannot withstand the severe consequence of the China-US trade war.
We have also noticed that the US government and public opinion blame the so-called unfair treatment of the US companies in China for their declining return on investment. However, the declining return on investment of the US companies does not just happen in China, but also in Japan, Australia and Europe. Most of the American companies in China are optimistic about the long-term stability and sustainability of China’s policies. They hope that China can maintain its pace of reform and opening up, pay more attention to the protection of intellectual property rights and ease market access.
According to the latest data from the Ministry of Commerce, the newly established foreign-invested enterprises in the first half of this year increased by 96.6% year-on-year. In the next five years, the number of foreign-invested enterprises is expected to maintain a double-digit growth. Correspondingly, China should build the world’s best business environment sooner rather than later. The trade protectionism of the Trump administration goes against the will of the people. On the contrary, China will adhere to its opening up policy and defend the multilateral trade system.