As you have likely heard by now, President Trump announced this past Sunday that “substantial progress” has being made in the on-going trade talks with China; as a result, he will be delaying the scheduled increase in tariffs applicable to Chinese-origin goods included on List 3; and that both sides are planning “a Summit” at Mar-a-Lago (reportedly in late March) to “conclude an agreement.” While additional details have yet to emerge, we wanted to share some initial thoughts with you on what to look for when they do.
First, the duty rate applicable to articles included on List 3 is scheduled to increase from 10% to 25% on March 2, 2019 (i.e., this coming Saturday). We believe that a Federal Register notice, presidential proclamation, or some other official statement will be issued this week confirming the delay (i.e., we do not believe that the scheduled tariff increase can be delayed by tweet).
Second, in any deal, it will be important to pay particular attention to the enforcement mechanisms that are included. If the Trump Administration’s goals include reducing the United States’ trade deficit with China, then including a unilaterally-imposable ‘snapback’ type of enforcement mechanism would help achieve that. For example, if the United States reserves the right to re-impose duties if China fails to live up to its commitments in one or more areas (e.g., failing to stop engaging in cyber theft – something China has not admitted to doing in the first place), then that will create significant uncertainty for U.S. businesses, which should impact sourcing/investment decisions. If duties of 25% could be imposed on the articles you purchase from a given country with little-to-no advance notice, would you continue sourcing from there, or would you look to eliminate that risk by sourcing from elsewhere? Thus, even if a deal resolving the dispute is ultimately reached, it will be important to understand how the agreement will be enforced. It is likely (in our view) that, even if a deal is reached, that trade with China will not return to what it was before.
Finally, it seems strange that President Xi would be willing to come to the United States to conclude such a deal given the appearance it creates. Where a “summit” like this is held matters, in terms of public/political perception. This is why such summits are usually held in a third country, so as not to give the appearance that one side has ‘won,’ or is more powerful than the other (compare the Trump-Kim summits held in Singapore and in Vietnam; the Reagan-Gorbachev summit held in Iceland; etc., to Holy Roman Emperor Henry IV kneeling in the snow in front of Pope Gregory II’s castle in Canossa). It is not clear why President Xi would be willing to come to the United States (and to one of President Trump’s golf resorts, in particular) to conclude such a deal. The optics on that within China cannot be good (of course, if China thinks it is getting a very good deal . . . ).
Time (and the terms of the deal) will tell.
We hope that this helps. If you have questions, please let us know.