US-China relations are evolving through a new round of summit and ministerial meetings. While US exports under the Phase 1 trade deal are behind schedule, that’s a red herring. What really matters is the future for existing Section 301 tariffs and a potential new review of China’s industrial support policies.

This report provides a primer for some of the history, the current position and potential future developments in US-China trade relations. Further information and commentary is also available from our November 2021 State of Trade Webinar. Future reports will dig into the details of the impact of tariffs and corporate supply chain reactions.

Trade War 1.0

China’s share of global trade activity has grown steadily since the late 1990s and was likely helped by its entry into the World Trade Organization in 2001. China overtook the US in its share of global exports in 2007 while the United States’ has steadily shrunk, setting the stage for economic rivalry.

As of 2020, China accounted for 15.4% of global trade, as shown in Figure 1 above from UN Comtrade data, compared to just 8.5% for the United States. It accounts for a smaller share in imports.

China’s rise has been addressed by successive US administrations via a series of dialogues. That initially continued under the Trump administration with the 100 day, “Comprehensive Economic Dialog.”

A new phase of relations started after the US Trade Representative launched the Section 301 review of China’s treatment of intellectual property rights in August 2017. Tariffs linked to that review were applied in a series of four waves from July 2018 onwards. As shown in Figure 2 above, as of September 2021 those have reached $4.4B per month excluding the impact of exemptions granted to certain products.

A subsequent round of negotiations in late 2019 and early 2020 yielded the US-China Trade & Economic Agreement (TEA, aka the “Phase 1” trade deal) that put a halt to tariff increases, drew commitments to address policy from China as well as a series of commitments covering purchases of US agricultural, energy and manufactured goods in February 2020.

The inclusion of firm dollar-value commitments may indicate an attempt by the Trump administration to increase the accountability of the deal.

Old Deal, New Approach

The Biden administration initially left most of the Trump administration’s measures in place. The terms of the Phase 1 trade deal require a six-monthly review, which so far has not occurred under the Biden administration. The Section 301 tariffs are unchanged.

In October 2021 US Trade Representative Katherine Tai set out a series of four measures that have set the tone for relations in the coming months including: a review of the Phase 1 deal; review exclusions from Section 301 tariffs; work with allies to “share the rules of fair trade”; and address concerns regarding China’s support for state-owned enterprises.

US exports of products covered by the Phase 1 trade deal are well behind schedule, as shown in Figure 3 above. As of Sept. 30, the gap has reached $110.6B on the basis of US Census Bureau data for the three main goods categories covered by the deal.

The shortfall has been exacerbated in recent months by a few developments: a collapse in exports of aerospace products linked to the pandemic; a shift in manufacturing of electric vehicles to China from the US; and challenges for delivery of agricultural products including soybeans due to a reduced US harvest as well as a shortage of containers for shipping.

Critics argued that such market turbulence is to be expected and represents a fundamental shortcoming of an approach featuring numerical targets.

The tariff exclusions review has gotten underway with an initial decision on medical products extending to four-fifths of products reviewed. A further 549 products are still under review through December 2021.

Evidence of coalition-building with allies can already be seen in three US deals signed with the European Union, including: solving a long-running aerospace subsidy dispute; restructuring steel and aluminum duties, as outlined in recent Flexport Research; and the start of the Trade and Technology Council.

The fourth measure, regarding China’s industrial policies, will likely be at the heart of future discussions.

The Way Ahead - Talks, Tariffs and X-Shoring

The way ahead for relations, and resulting supply chain decision-making for corporations, will depend critically on whether trade and other issues can be divorced from each other.

One encouraging sign comes from the US-China Glasgow climate deal signed in November 2021 after negotiations that effectively remained secret. Another comes from Biden administration comments that trade matters are being handled in a separate “bucket” of issues to those covering climate, pandemic and security measures.

The bilateral meeting between President Biden and President Xi was wide-ranging but did not appear to cover the specifics of the Phase 1 deal or tariffs. From the US side the main trade reference was to “the need to protect American workers and industries”.

There were more explicit references from China that trade policy “should not be politicized” and complaints regarding “overstretching the concept of national security”.

The Section 301 duties have been effective at deterring imports from China, despite the recent surge in consumer goods spending.

Flexport’s analysis in Figure 4 above shows US imports covered by the four categories of tariffs, excluding products which received exclusions, fell by a combined 39.4% in the 12 months to Sept. 30, 2021 versus the 12 months to July 31, 2018. Imports not covered by tariffs increased by 29.3% over the same period.

Arguably the tariffs have worked in changing how companies see their supply chain positioning vis-a-vis China, even if they haven’t changed the economic policies of the Chinese government.

Corporate "x-shoring" actions—to either onshore production to the US or reshore to other countries rather than China—have been underway for many products already with varying degrees of success.

In the case of US imports of disc drives (HS 8471.70.40, shown in Figure 5) the share of imports from China fell to 1.5% in the 12 months to Sept. 30 compared to 16.8% in calendar 2017, as shown in Figure 6. Imports from Thailand and the Philippines meanwhile rose to compensate, allowing total imports of disc drives to rise by 14.7%.

By contrast, US imports of memory chips (HS 8542.32) have fallen by 27.4% with Chinese suppliers’ share dropping to 4.7% from 30.5%. That may indicate a paucity of alternatives rather than the impact of the global shortage of semiconductors given the decline occurred in 2019.

In conclusion, the future for both existing and potentially new US tariff actions against imports from China and resulting supply chain decision-making remains tied up with wider geopolitical relations that may take more than a few months to resolve.

Disclaimer: The contents of this report are made available for informational purposes only and should not be relied upon for any legal, business, or financial decisions. Flexport does not guarantee, represent, or warrant any of the contents of this report because they are based on our current beliefs, expectations, and assumptions, about which there can be no assurance due to various anticipated and unanticipated events that may occur. This report has been prepared to the best of our knowledge and research; however, the information presented herein may not reflect the most current regulatory or industry developments. Neither Flexport nor its advisors or affiliates shall be liable for any losses that arise in any way due to the reliance on the contents contained in this report.