As a business owner, you’ve likely been following the potential trade war between the US and China, and hopefully, are aware that this has already caused increased tariffs on Chinese products. China has responded in kind by increasing tariffs on American products entering the Chinese market.
Understanding what these terms means, and how they might affect your business, can be overwhelming. The economic and international trade jargon used to describe the tariff increases might have you feeling like you’re on the outside of the conversation. This can be incredibly frustrating as a business owner. After all, these decisions can greatly affect your business, either directly or indirectly.
This guide to the tariff increases put in place by China will help you gain a better understanding of the trade situation. It examines why the tariffs were increased as well as other ways China may punish American businesses for trade disputes.
Ultimately, this guide will show ways in which the tariff increases will affect American businesses and what you can do to help your business continue running successfully.
How Do Tariffs on Foreign Goods Work?
Before going into the specifics of the tariffs from China, it’s important to understand what a tariff is and how it works in general. Simply put, a tariff is a tax that one country places on goods or services imported from another country. These taxes are used to restrict the number of imports from a particular country by making the price less appealing to domestic consumers.
Most of the time the tariffs lead to increased prices for foreign goods. For example, if you are looking to buy a car and a domestic vehicle costs $10,000 while foreign cars of similar quality cost $15,000, you are more likely to purchase the domestic car.
Tariffs are used by governments for a variety of reasons, including protecting domestic industries from foreign competition. They are also commonly used to exert political pressure on foreign countries by discouraging domestic consumers from buying foreign goods. The unwanted result of tariffs is commonly increased prices for consumers.
Who Actually Pays the Tariff?
In theory, the country on which the tariff is imposed will pay the tax to the US Customs and Border Protection agency. However, this isn’t usually the case. They are usually paid by the importing company or a third-party importing service used by domestic businesses. That new car in the example above will have its tariff paid by the domestic company that sells it to local consumers. The company may then raise its prices to consumers to recoup some of the tariff cost.
Companies can also absorb tariff costs by lowering employee wages or cutting shareholder profits. Although tariffs are supposed to tax the country on which they’ve been imposed, costs almost always end up being covered by domestic consumers, at least partially.
What are the New Chinese Tariffs?
China announced in May of 2019 that it would be increasing tariffs on a large number of products from the United States. According to China’s Ministry of Finance, the new tariffs will affect nearly $60 billion in US imports to China. Some of the newly imposed tariffs would tax goods from the United States at 25%. This increase is more than double what was being paid prior to the moves made by China. The American industries that are affected most by this increase include agriculture and liquid natural gas.
Why are These New Tariffs Being Imposed?
The new Chinese tariffs on American goods are being imposed as retaliation for increased tariffs on Chinese goods coming into America.
When first entering trade negotiations, the US accused China of stealing American trade secrets and forced technology transfers. US President Donald Trump then announced a 25% tariff for certain Chinese products coming into the US. This initial increase affected about $250 billion worth of Chinese imports. The US has said it has plans to increase taxes on the remaining $300 billion of Chinese products imported to the States.
Additionally, the US put a Chinese telecom corporation, Huawei, on a blacklist. American companies are now barred from supplying the technology giant with computer chips, software and other components unless given approval by the US government.
These restrictions and taxes on Chinese goods led China to impose its new tariffs on American goods. The country also recently released a statement blaming the US for trade disputes and increased tariffs. China has also reacted to the blacklisting of Huawei by creating its own list of “unreliable entities.”
When Will the New Tariffs Go into Effect?
The new Chinese tariffs went into effect on June 1, 2019. The US tariffs on Chinese imports have been in effect since the middle of May. Representatives from both China and the US are working to set up more trade talks in the coming weeks or months.
Both President Donald Trump and his Chinese counterpart, Xi Jinping, are expected to attend the G20 Summit in Osaka, Japan later in June. The Summit is a meeting of 20 of the world’s largest economies to discuss trade and other factors. The US and China may resume negotiations at this summit. If a trade deal is reached, the tariffs for both Chinese imports into America and US imports into China would hopefully be reduced back to normal rates.
What Do the New China Tariffs Cover?
The increased tariffs on American goods imported to China will cover over 5,000 American products. Goods are separated into four lists, although only the top three highest tariff lists are being raised. The 595 products on List Four include goods like tires, light bulbs and some paper products. These products will not see an increase from the existing 5% tariff currently in place, although continued trade tensions may bring more tariff increases in the future. Auto parts have been exempted from tariffs since December and remain excluded from the increases.
The remaining lists of products will see increased tariffs from their existing percentages.
List One: 25% Tariff
List One consists of over 2,000 products imported to China from the US. Products in List One include major exports to China such as animal products like beef, agricultural products like vegetables or frozen fruit, technology such as microwaves and liquified natural gas products. Alcoholic drinks and chemical products are also included in this list. The existing tariff on these products was only 10%. The newly imposed tariff raises the tax to 25%, greatly increasing the cost to import these products from the US into China.
List Two: 20% Tariff
The second list, List Two, has approximately 1,000 goods that are regularly imported from the US to China. This list includes food items not found in List One, certain construction equipment and books. List Two also features a tariff increase on many consumer goods such as golf clubs and bowling balls. The existing tariffs for List Two items were the same as the previous amount for List One, 10%. The new tariff increase taxes these products at 20%, doubling the cost of tariffs.
List Three: 10% Tariff
There are 974 items currently on List Three which are subject to a new tariff percentage. These products used to be taxed at 5%. The new tariff increases raise the percentage to 10%, again doubling the cost of tariffs for these products. Products on this list include baby diapers, sunglasses and knives such as kitchen knives or hunting knives.
Which Products are Included in the New China Tariffs?
With over 5,000 products included in the new tariffs, almost every US industry is affected by the increases. The biggest cost to American businesses will likely come from the products on List One, which will see a new 25% tariff. Below are some of the categories of those goods in List One and what types of American businesses and industries may see negative financial outcomes due to the tariffs.
Food products are one of the largest American exports to China. Much of the food products included in List One are related directly to the agriculture industry. Products include frozen beef, honey, corn and wheat flour, spirits like gin or vodka, soda and plant oils such as soybean oil or olive oil. The effect of tariffs to the agriculture industry is already being felt, as new contracts for Chinese companies to purchase soybeans from American farmers are being stalled.
China is the largest buyer of soybeans in the world. The stalled contracts for American soybeans have been a large factor in the decline of soybean commodity prices. With the rising tensions in US and China trade relations, China has begun to seek soybeans from Brazil, another large supplier of soy products.
The list of products subject to 25% tariffs also includes a variety of building materials. This includes large materials such as bricks, stone and floor tiles. It also includes small construction items like handsaws, scissors and other types of blades. Wall and ceiling coverings, as well as carpet and wood flooring, also make the list for increased tariffs. Companies that manufacture these products may face a larger barrier of entry into the Chinese market as they look to expand. Additionally, the domestic construction industry may see an increase in competition as companies pull their products from China to avoid tariffs and instead focus efforts on securing American business.
The list of consumer goods included in the Chinese tariffs increase covers thousands of everyday consumer tools and products. From large furniture items such as wooden frames for upholstered furniture to footwear and shoe accessories, these consumer good tariffs may cause direct effects to US businesses. Other products included in the 25% consumer good tariff are watches and clocks, musical instruments, lighting fixtures, hats, walking sticks and bedding or sleeping bags.
Taxes to these commonly-purchased consumer goods may have Chinese customers looking for less expensive alternatives from domestic Chinese companies. If consumers in China stop purchasing consumer goods from the US, American retailers operating in China will likely see a decline in sales. Likewise, American manufacturers of these products and their parts will lose business as the demand for their raw materials decreases.
Transportation materials and equipment included in the 25% tariff list is a combination of both consumer products and commercial products for the Chinese transportation industry. Consumer products include luxury items like sailboats or yachts, as well as other recreational vehicles such as canoes and motorboats. Commercial products for transportation needs include track signal equipment for railways and parts for locomotives and trams that are used for both passenger travel and rail transportation of products.
Some of the transportation goods and materials included are already sold at a high cost, such as a yacht or expensive railway maintenance equipment. With initial costs high, many Chinese companies and consumers will be unlikely to pay an added premium for these products from the US. It’s most likely that they will instead look for other manufacturers, whether domestic firms or from a foreign, non-tariffed country.
Electronics included in List One of the Chinese tariff increases are mostly consumer products that everyday Chinese consumers might purchase. The list includes coffee makers, hair dryers, space heaters and appliances such as electric ovens. It also includes telecommunications equipment and audio/visual equipment such as headphones, speakers, recorders and broadcast cameras.
As China has a large electronics manufacturing industry, it is likely that Chinese consumers will move away from American goods as prices go up with the tariff increase. It’s possible many Chinese companies, including the telecom electronics giant Huawei, will see increased domestic sales within China.
Natural Resources and Chemicals
In addition to agriculture products, many of the products exported to China from the US are part of the natural resources and chemical industry. These products include natural resources such as rocks like marble and granite, precious stones like diamonds, and metal ores such as iron or zinc. Liquified natural gas is another major natural resource commonly exported to China. Chemicals included in the tariff list feature products such as fertilizers, iodine, chlorine and dyes or pigment.
Certain natural resources are only available in certain parts of the world, but many of the American exports can be found from other sources at lower prices. Tariffs on natural resource and chemical products may have Chinese companies looking towards the resources from sources that do not have taxes imposed on their products.
What Other Ways Could China Retaliate Besides Tariffs?
One of the advantages that the US has over China is that we import many more Chinese goods than we export to China. This means that the number of products China can tax using tariffs is limited compared to the number of Chinese imports the US could tax. However, there are other ways that China may choose to retaliate to continued trade standoffs.
Boycotting American Products
The biggest fear of retaliation from China is the boycott of American products. Although some products have trade agreements in place, such as US soybeans, China could pull out of these agreements and simply not make the purchase. Additionally, China may encourage consumers to not purchase American products which could hurt sales and force companies to leave the Chinese market.
Increase Customs Regulations
As trade tensions continue to grow, China is making it more difficult for American businesses to enter the Chinese market. They’ve done this by introducing more stringent customs checks and regulations for American products. According to a survey by the American Chamber of Commerce in China, nearly 20% of American businesses have experienced slower customs checks.
Stalling Licensing for US Businesses
In addition to slowing the customs process, China may stall the licensing and approval of US companies to operate in China. By slowing the process of entering the Chinese market, China forces American companies to lose money while waiting for approval.
What Does This Mean for American Business Owners?
The most important aspect of the new Chinese tariffs on American imports is the rising cost of goods from America. As American products become more expensive to sell in China, American businesses must either absorb the cost of the new tariffs or pass these costs on to their consumers.
The problem with absorbing the cost is that your business may not see high enough profits from the Chinese market to make it worthwhile to absorb those costs. On the other hand, the price increase on certain products to counteract the cost of the tariffs may make products too expensive for the average Chinese consumer.
In both of these scenarios, the tariffs may cause American businesses to remove Chinese operations and instead look at other markets. If your business operates in China, you will have to face these issues directly, deciding between absorbing costs somewhere in your company or raising prices for Chinese consumers.
Some American business owners may choose to leave the Chinese market and try to replace their sales in a new international market. However, moving international operations is a huge undertaking and there’s no guarantee that your new market will be as profitable as the Chinese market. You may also leave the Chinese market and bring all operations back to the US, focusing instead on growing your domestic sales.
Do the Tariffs Still Affect my Business if I Don’t Operate in China?
Many American business owners operate on a smaller, regional or national scale and are not involved in the international market. If your business operates solely in a local or domestic market, you may believe that your business is not affected by the increased tariffs in China. Unfortunately, even local businesses may face negative economic impacts from the Chinese tariffs.
Although your business may not be directly affected, as larger companies or companies that focused on Chinese sales leave China to avoid the tariffs, many will enter as larger players in the domestic market. For example, if you have an electronics manufacturing operation in the US and serve a regional market, you may find that larger companies are now entering your market after scaling back their Chinese operations. You may soon see your sales lowering as you face more competitors.
No matter what industry you serve or the size of your business, the new Chinese tariffs on American goods can have both a direct and indirect impact on your business. Understanding how the tariffs work and why they have been imposed is important to help you make sound financial decisions for your business while weathering the current trade tensions between the US and China.