U.S. Boosts Targeted Tariffs, But How Will China Respond?

The United States has moved to boost tariffs on a narrow range of Chinese goods on Tuesday, with electric vehicles, solar panels and semiconductors top of the list. The move seeks to punish what the U.S. calls “China’s unfair trade practices” regarding technology transfer and intellectual-property protections.

The White House has instructed U.S. Trade Representative Katherine Tai to impose an added tariff burden on US$18 billion worth of Chinese imports.

The move comes on the occasion of a four-year review of what are technically called Section 301 tariffs. The Biden administration has been mulling what to do with Trump-era tariffs on China, which have remained in place. It now makes the distinction that, unlike blanket tariffs on all goods put in place under Trump, these expanded tariffs target certain sectors where China has an “unfair” advantage.

Tai says she’s tackling “harmful” technology transfer policies and practices “that continue to burden U.S. commerce and harm American workers and businesses.” In an expansion of the normal criticisms of forced partnership deals inside China, she specifies that “cyber intrusions and cyber theft” are new concerns, hinting at the way hacker cells backed by the Chinese military, and part of the military-industrial complex, have expanded their role.

It’s a threat the U.S. government had not publically identified as a problem until the last couple of years. In increasing these tariffs, Tai called for greater collaboration between private companies and government authorities to combat state-sponsored theft.

As had been hinted via leaked reports, the import duty on a Chinese electric vehicle will rise from 25% to 100% in 2024. The tariff on solar cells will rise from 25% to 50% this year, with the same increase in effect for semiconductor chips in 2025.

The import-duty freight on some Chinese steel and aluminum products will increase from an upper limit of 7.5% to 25% in 2024. Tariffs on lithium-ion EV batteries will increase from 7.5% to 25% this year, as will tariffs on battery parts, while the same increase on lithium-ion non-EV batteries will become effective in 2026.

The tariff duty on natural graphite as well as magnets rises from 0% to 25% in 2026. There’s the same tariff increase on ship-to-shore cranes but effective this year.

Tariffs on certain medical products will also rise, from 0% to 50% for syringes and needles, and from up to 7.5% to 25% for respirators and face masks. Surgical gloves see the duty rise from 7.5% to 25% in 2026.

There’s a handy chart from the U.S. Trade Rep showing the upper limits of the tariffs here.

The full White House statement is here.

The question is now, “How will China respond?”

The first salvo has been bluster. The Global Times, the state-run English-language newspaper that’s often used to communicate China’s position to an overseas audience, features a vlog from its former editor-in-chief Hu Xijin that’s full of sound and fury.

His “Hu Says” short calls tariffs imposed on Chinese electric-vehicle imports a “sign of panic and incompetence” on behalf of the United States. “It is not a sharp sword at all but more like a white flag raised by the US in the field of new energy competition,” he explains, since China exports essentially no EVs to the United States at the moment anyway.

But Hu does raise an interesting point. He concedes that China’s capacity for “original innovation from 0 to 1 still lags behind the U.S.,” but goes on to say that “our ability to catch up from 1 to 100 and the ability to re-innovate and build supply chains and industrial chains are the best in the world.”

This gets to the crux of the matter. China has built itself into the “factory to the world,” but now finds companies keen to diversify with “China+1” or “China+many” production strategies. An overdependence on any one part of the world is a mistake, as was laid bare by the pandemic-induced chaos of distribution over the course of the last few years.

It is also a natural progression that China would like to move up the value chain, with employees demanding higher wages, and companies keen to manufacture higher-end goods. When I first moved to Hong Kong in 2001, the industrial town of Dongguan just across the border was making cheap shoes and plastic trinkets. Then it progressed to electronic toys and cordless phones.

Now Dongguan and neighboring Shenzhen have built themselves into China’s equivalent of Silicon Valley. It’s all startups and technological innovation. But as Hu at the Global Times referenced, the spark of originality may be lacking along a production chain that was originally designed to copy and mass produce.

It’s true that Chinese intellectual-property theft is rife. One Chinese venture capitalist told me that she was in a group hearing pitches from startups seeking funding. If they liked a pitch, they didn’t fund the company, but instead asked among the v.c. group, “So who wants to set up their own startup to do this?”

Multinationals have also often been forced to transfer their technology to local partners, who may seek to then go it alone. An American executive working for a Dutch company recounted being in a meeting in China where the main question from the local partners was, “How do you make this?” He assumed that, if the Dutch company spilled its production secrets, the overseas partner would be cut out of the loop as quickly as possible.

I believe China’s response will be measured. These tariffs actually apply to relatively few Chinese goods. For instance, it’s true there are essentially no Chinese EVs being imported into the United States at the moment, because the existing tariffs already made it unattractive. So the extra trade duties are pre-emptive. Europe, on the other hand, is witnessing a rapid expansion of Chinese EV shipments.

Will China retaliate against overseas producers such as Tesla TSLA and Apple AAPL, with a large manufacturing presence in China? I would doubt it. It’s far more likely that China will respond with tariffs against the import of a symbolic range of U.S.-made goods. Farmers, beware. Crops and something flashy and headline-grabbing like California wines may be top of the list.

China is desperate to catch up in sectors such as semiconductors. While Chinese President Xi Jinping has directed heavy investment into the sector, analysts say it will take years for the country to catch up. And given the leaps and bounds seen in memory and data processing speeds, catching up can still leave you behind.

So while some Chinese government agencies are reportedly telling technology companies to cut back on their purchases of foreign-made chips, particularly in the field of Artificial Intelligence, China does still depend on Western tech. U.S. companies such as Nvidia NVDA, in particular, have a solid jump on any competition.

On the other hand, tariffs on Chinese solar panels are not going to reignite the U.S. solar-panel industry. That bird has flown. China can produce these low-cost cells at a far cheaper price than will ever be competitive in the United States.

And indeed Tai’s proposal does include a carve out where there would be 19 exclusions for solar manufacturing equipment that’s used in U.S. domestic manufacturing already. Where Chinese goods are essential for U.S. production, there’ll be a way to import successfully and cost-efficiently into the United States.

China will no doubt reposition exports, with Southeast Asia recently seeing a rapid increase in Chinese shipments into the region. China now accounts for 21.3% of imports into other Asian countries, up from 15% a decade ago. India and the ASEAN bloc have been prime destinations.

On the EV front, it means U.S. consumers will not be able to get their hands on vehicles that can cost as little as US$10,000 in China. The Chinese manufacturers now have models at all price points, from entry-level cars to supercars. Costs will stay higher in the United States, with less choice.

China’s first response to these tariffs will no doubt be bluster, and repeated demands for tariffs to be rolled back. Beyond that, expect a measured practical response, targeting specific U.S. goods for a penalty on shipment into China.

Tariffs make sense when they’re targeted. Blanket increases in trade duties inevitably lead to higher domestic prices, with U.S. consumers paying the ultimate price of increased duties.