US-China: House tariff bill a helpful blueprint, but not final vector of Trump’s upcoming actions

• Members of the US House of Representatives are pushing China tariff legislation that would:
  • Hike general China tariffs to a minimum 35%.
  • Hike national security-related sector-specific China tariffs to 100%+ over 5 years – “10% in the first year, 25% in the second year, 50% in year four and 100% by year five” (Source).

• The bill’s two-pronged approach – separating out an ‘early general increase’ from a ‘phased-in, critical sector-specific increase’ – is exactly in line with our longstandig basecase for the Trump administration’s China tariff action, which we laid out as early as last July:
  • On general tariffs: “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”.
  • On critical sector tariffs: “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’” (Source).
    • In fact, we specifically pointed to the bill introduced today as a likely template for the second Trump administration’s actions on China in our pre-inauguration tariff expectations recap on January 14, here.

• The key difference between this draft legislation’s blueprint and our own expectations is that – despite persistent chatter on the matter – we remain unconvinced that tariffs will be successfully merged with President Donald Trump’s 1H tax-related reconciliation bill ambitions, for the following reasons:
  • First, while the prospect of using tariffs as a ‘pay-for’ for the extension of the 2017 so-called ‘Trump tax cuts’ may sound appealing, it is not per se necessary according to the reconciliation process’s rules.
    • To the extent that President Trump might want to claim that his policies will be offset by tariff revenue, he would likely feel plenty comfortable making this argument in the abstract – without relying on strict budget scoring.
      • In fact, this might be more appealing than risking drawing attention to a lackluster number (should tariff-related revenue fall short of his aspirations or tax cut-related ‘needs’).
  • Second, attempting to attach tariff measures to the tax-related reconciliation package would likely be too-great a headache to be successful, given:
    • 1) The already-high level of complexity of said-bill’s upcoming negotiation dynamics; and
    • 2) Very likely pushback from House representatives and Senators alike.
  • Third, while President Trump may be tempted by the prospect of enshrining his tariff legacy into law and reaping revenue benefits from the move, doing so would come at the cost of tying his hands, which we continue to believe a highly transactional president will in fine prefer to avoid.
    • For instance, pushing forward a bill such as the one advocated by House China hawks above while simultaneously (reportedly) attempting to pursue grand bargain negotiations with Chinese President Xi Jinping would not appear to be the most coherent course of action (no matter our expectations that such a grand bargain is unlikely to succeed anyway).