US-China: Trump 2.0 tariffs would be both above and below 60%

• Much has been written about a potential Trump 2.0 trade policy vis-à-vis China. The below is our interpretation of what is likely to transpire:

• 1) We expect a Trump 2.0 presidency would likely use China’s failure to fulfill the so-called ‘Phase 1’ trade deal as an initial rationale to increase tariffs on Chinese goods by approximately 10 percentage points…
  • Thereby roughly mirroring its initial August 2019 plans (to increase List 1, 2, and 3 tariffs from 25 to 30% and List 4A tariffs from 7.5% to 15%, as well as impose 15% tariffs on List 4B goods – possibly excluding toys, sports equipment, and footwear).
  • Indeed, this would have the advantage of:
    • Signaling early resolve.
    • Being ‘justified’-enough to avoid major Chinese retaliation.
    • Being ‘small’-enough to limit damage to the US economy.
  • A reelected President Donald Trump would be unlikely to be deterred by warnings of inflation and recession, considering that: “tariffs were raised in the Trump years and inflation stayed below 2% […] [and] even an ardently anti-tariff think-tank, the Peterson Institute for International Economics, found that the direct effect on inflation of Section 301 tariffs was an increase of just 0.26 percentage points” (Source)

• 2) We do not expect a Trump 2.0 administration would follow through on its threat to impose 60% overall tariffs on Chinese goods.
  • Our understanding is that there are two different potential origins for the often-hyped 60% figure:
    • 1) “Privately, Trump has discussed with advisers the possibility of imposing a flat 60 percent tariff on all Chinese imports, according to three people familiar with the matter” (Source)
    • 2) Separately, “Moving Chinese exports to Column 2 tariff rates [as a result of potentially abrogating China’s so-called ‘permanent normalized trade relations’ (PNTR) status] would raise the overall average tariff on Chinese products to 61% [though with differentials across types of goods]” (Source)
  • On interpretation #1:
    • We believe a blanket 60% tariff rate is unlikely, as it would be both:
      • Too disruptive, and
      • Relatively non-sensical, by treating sensitive and non-sensitive imports alike.
  • On interpretation #2:
    • Although often threatened by the Trump camp, the abrogation of China’s PNTR could be difficult, given it would likely require…
      • Not only a ‘red sweep’ by Republicans of both chambers of Congress,
      • But also a 60-vote Senate majority approval.
    • Perhaps more important, however, is that even if China’s PNTR status were terminated, we would expect this to serve as the basis for:
      • Either: bargaining around “annual presidential approval of the conditions of the U.S.-China trade relationship using [various] metrics” (Source) [as was the case in the 1990s]…
      • Or: the creation of “a new column of tariffs specific to China” (Source)…
      • Rather than to impose ‘60%’ / Column 2 tariff levels per se.

• 3) Lastly and relatedly, we expect a Trump 2.0 administration would impose tariffs greater than 60% “to completely eliminate dependence on China in [select] critical areas” including “semiconductor devices and other electronics, steel and pharmaceuticals -- products for which Trump aims to gradually reduce imports from China to zero over four years”:
  • We believe this is what Trump was hinting at when he said that ““Maybe it’s going to be more than [60%]” (Source)
  • As one of his leading advisors, Robert O’Brien, recently said: “They [the Chinese]’re trying to make Beijing the chief supplier of the entire world.” “We may have to decouple.”  (Source)
  • However, we expect a Trump 2.0 administration to be fully aware that “Before American firms could produce anything, they would have to buy capital goods […] Our capital stock of manufacturing equipment hasn’t grown since 2001, according to Federal Reserve estimates. We’re about $1 trillion short in capital equipment investment at current prices compared with the long-term trend. That’s five years’ worth of total investment in capital equipment at current rates” (Source)
    • Hence… “they [the 60%+ tariffs] would obviously be phased in" and selective (Source)

Appendix: ‘Bucket list’ for potential additional Trump 2.0 restrictions on China

• Trade (beyond tariffs):
  • De minimis: closing the import loophole – for Section 301 tariff-related goods, or entirely.
  • Chinese connected vehicles ban.
• Semiconductors:
  • End all remaining licenses to Huawei
  • Close loopholes regarding South Korean, Japanese, and Dutch companies
  • Target advanced packaging
  • Undertake technical steps described here
  • Target open-source solutions
• Capital flows:
  • ‘Outbound CFIUS’ expansion to biotechnology, electric vehicles, battery technology.
  • ‘Inbound CFIUS’ expansion: “prohibit Chinese companies from owning U.S. infrastructure in the energy and tech sectors” (Source, Source)
  • IPO limitations: “not allow Chinese companies to [IPO] in the United States [at all or] unless they [follow certain conditions]” (Source)
  • Portfolio investment limitations:
    • On funds benefiting from tax advantages (e.g. 401Ks, universities).
    • Into Chinese companies already identified as malevolent.
    • Into entire sectors of the Chinese economy (‘outbound CFIUS’ inclusion).