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Trump's latest tariff hike takes effect on $200 billion of China imports ahead of second day of talks

Reuters, AP

U.S. President Donald Trump’s tariff increase to 25 percent on $200 billion worth of Chinese goods took effect Friday, and Beijing said it would strike back — ratcheting up tensions as the two sides pursue last-ditch talks to try to salvage a trade deal.

The Commerce Ministry in Beijing said it “deeply regrets” the U.S. decision, adding, without elaborating, that it will take necessary countermeasures.

The hike comes in the midst of two days of talks between top U.S. and Chinese negotiators aimed at rescuing a faltering deal its hoped will end a 10-month trade war between the world’s two largest economies, but the first day of talks concluded without the parties resolving their differences.

Chinese Vice Premier Liu He, U.S. Trade Representative Robert Lighthizer and U.S. Treasury Secretary Steven Mnuchin talked for 90 minutes Thursday and were expected to resume the talks on Friday. Officials did not speak to reporters as they left Thursday.

The Commerce Ministry said that negotiations were continuing, and that it “hopes the United States can meet China halfway, make joint efforts, and resolve the issue through cooperation and consultation.”

With no moves by the Trump administration to reverse the increase as negotiations moved into a second day, U.S. Customs and Border Protection imposed the new 25 percent duty on affected U.S.-bound cargoes leaving China after 12:01 a.m. EDT Friday.

Goods in the more than 5,700 affected product categories that left Chinese ports and airports before midnight will be subject to the original 10 percent duty rate, a U.S. customs spokeswoman said.

The grace period was not applied to three previous rounds of tariffs imposed last year on Chinese goods, which had much longer notice periods of at least three weeks before the duties took effect.

“This creates an unofficial window, potentially lasting a couple of weeks, in which negotiations can continue and generates a ‘soft’ deadline to reach a deal,” investment bank Goldman Sachs wrote in a note.

“Given this detail, downside to sentiment might be slightly more muted than if the tariff increase came with a ‘hard’ deadline. This also leaves an opportunity for the two sides to reach an agreement in the next couple of weeks, though challenges remain.”

Trump gave U.S. importers less than five days’ notice of his decision to increase the rate on the $200 billion category of goods to 25 percent, which now matches the rate on a prior $50 billion category of Chinese machinery and technology goods.

U.S. stock futures fell and Asian shares pared gains after the U.S. tariff hike, with investors worried that a protracted trade war could hamper global economic growth. The 225-issue Nikkei average in Tokyo erased gains after the tariffs were raised, closing down 0.3 percent.

Michael Taylor, managing director and chief credit officer for Asia-Pacific at Moody’s Investors Service, said the U.S. move exacerbated uncertainty in global trade, added to U.S.-China tensions and negatively affected global sentiment.

“The higher tariffs could also lead globally to the repricing of risk assets, tighter financing conditions and slower growth,” Taylor said.

The biggest Chinese import sector affected by the rate hike is a $20 billion-plus category of internet modems, routers and other data transmission devices, followed by about $12 billion worth of printed circuit boards used in a vast array of U.S.-made products.

Furniture, lighting products, auto parts, vacuum cleaners and building materials are also high on the list of products subject to the higher duties.

Gary Shapiro, chief executive of the Consumer Technology Association, said the tariffs would be paid by American consumers and businesses — not China, as Trump has claimed.

“Our industry supports more than 18 million U.S. jobs — but raising tariffs will be disastrous,” Shapiro said in a statement.

“The tariffs already in place have cost the American technology sector about $1 billion more a month since October. That can be life or death for small businesses and startups that can’t absorb the added costs.”

Economists and industry consultants have said it may take three or four months for American shoppers to feel the pinch from the tariff hike, but that retailers will have little choice but to raise prices on a wide range of goods to cover the rising cost of imports before too long according to economists and industry consultants.

Even without the trade war China-U.S. relations have continued to deteriorate, with an uptick in tensions between the two countries over the South China Sea, Taiwan, human rights and China’s plan to re-create the old Silk Road under its “Belt and Road” Initiative.

Tension between Washington and Beijing rose last week after a major setback in negotiations, when China revised a draft deal and weakened commitments to meet U.S. demands for trade reform. U.S. President Donald Trump responded by ordering the tariff hike.

In comments to Chinese state media upon arriving in Washington, Liu said that hiking tariffs would be “very disadvantageous to both parties.”

“We come here this time, under pressure, which shows China’s greatest sincerity, and want to sincerely, confidently and rationally resolve certain disagreements or differences facing China and the United States. I think there is hope,” he said.

Trump also took aim Thursday at the $325 billion in Chinese goods that are so far untouched by the trade war, saying he was “starting … paperwork today” to tax those with a punitive tariff of 25 percent.

The U.S. president, who has adopted protectionist policies as part of his “America First” agenda aimed at rebalancing global trade and boosting U.S. manufacturing, accused Beijing of reneging on commitments made during months of negotiations.

“We were getting very close to a deal, then they started to renegotiate the deal. We can’t have that. We can’t have that,” Trump said at an event at the White House.

The president added that if the two sides cannot make a deal, the United States would go back to manufacturing products that China now makes. “It’ll be the old-fashioned way, the way we used to do it: We made our own product.”

Data released Thursday showed the U.S. goods trade deficit with China shrank in March to its smallest level in five years, which could further embolden Trump as he escalates the trade war with Beijing.

Washington’s tariff hikes could cut China’s growth by 0.3 percentage points but the strengthening economy has become more resilient to external shocks, a Chinese central bank adviser said Friday.

Earlier Thursday China appealed to the United States to help salvage the deal. Commerce Ministry spokesman Gao Feng said the decision to send Liu to Washington despite the tariff hike threat had demonstrated China’s “utmost sincerity.”

“The U.S. side has given many labels recently, ‘backtracking,’ ‘betraying,’ etc. … China sets great store on trustworthiness and keeps its promises, and this has never changed,” he told a news briefing in Beijing.

A source familiar with the talks said China’s changes to the language of the draft trade deal were so extensive it could take a month to fix them, assuming the United States rejects them.

Reuters on Wednesday revealed the extent of the rift that has opened between the two countries, reporting that a draft trade agreement text sent by Beijing last Friday night was riddled with changes marking reversals in Chinese commitments that undermined core U.S. demands.

In seven chapters of the draft, China deleted commitments to change laws that would have addressed complaints that caused the United States to launch the trade war: Theft of U.S. intellectual property and trade secrets; forced technology transfers; competition policy; access to financial services; and currency manipulation, sources said.

The stripping of binding legal language from the draft struck directly at Lighthizer’s highest priority. The U.S. trade representative views changes to China’s laws as essential to verifying compliance after years of what U.S. officials have called empty reform promises.

Trump told supporters at a rally in Florida on Wednesday that China “broke the deal,” and vowed not to back down on imposing new tariffs on Chinese imports unless Beijing “stops cheating our workers.”

When the talks began last year, it appeared that the Chinese might have been trying to appease Trump by agreeing to buy lots of American products — especially soybeans and liquefied natural gas — and put a dent in America’s massive trade deficit with China, which reached a whopping $379 billion last year.

But as the talks dragged on, it became increasingly apparent that “a heap of soybeans isn’t going to get the job done,” said Amanda DeBusk, chair of the international trade practice at the law firm Dechert LLP and a former U.S. Commerce Department official.

Business groups, disappointed that China didn’t fully open up to foreign competition after joining the World Trade Organization in 2001, are pressuring the administration to hold out for a deal that requires China to abandon predatory trade practices, stop subsidizing homegrown companies and treat foreign firms more fairly.

“It was way past time to confront China on many of these problems,” said Michael Wessel, a member of the congressionally created U.S.-China Economic Security Review Commission and president of The Wessel Group consulting firm. “They’ve been allowed to skate for far too many years.”

Reaching a deal with China to end the tariff war would be only the first hurdle for the Trump administration. Next would come the hard part: enforcing the agreement.

“The details will matter a lot,” said Dean Pinkert, partner at the law firm Hughes Hubbard & Reed and a former member of the U.S. International Trade Commission. “In regard to the ‘structural’ issues — including intellectual property and forced technology transfers — what sort of enforcement mechanism will be established? Who gets to judge whether structural commitments are being honored?”

The Trump administration wants Beijing to accept an enforcement mechanism with penalties to make sure it carries out its commitments.

U.S. officials say they must be cautious because Beijing has made empty promises before. A 2018 report by the Office of the U.S. Trade Representative, for example, found that China has promised eight times since 2010 not to force foreign companies to transfer technology to China. Yet the coercion continued, the U.S. said.

“They didn’t comply and aren’t complying with their WTO obligations, and they aren’t following through on the commitments they’ve made repeatedly over the last decade,” said trade lawyer Stephen Orava, a partner at King & Spalding.