US launches third round in China tariff war but blunts initial impact

18 September 2018 23:37 Source:ICIS News

NEW YORK (ICIS)--With the third round of US tariffs on $200bn in Chinese imports, the US is launching another phase in the US-China trade war. However, it is mitigating some of the impact by excluding a number of chemicals in the final list and setting a lower initial tariff rate.

The revised final list will initially have a tariff rate of 10% versus the 25%, which had been considered. In it,  142 chemicals and finished plastics products (just two finished plastics) were removed compared with the preliminary list, according to an analysis by the American Chemistry Council (ACC).

The two finished plastics categories removed are all plastic gloves – seamless and otherwise.

This third round of US tariffs will be implemented on 24 September, and the duties are set to rise to 25% by 1 January 2019 if there is no agreement on trade with China.

The final US round three list includes a total of 1,363 chemicals and plastics products, of which the US imported $12.9bn worth from China in 2017, noted the ACC in its analysis of US International Trade Commission (ITC) data.

At a tariff rate of 10%, this equates to $1.3bn in tariffs that would be collected by the US government, based on 2017 levels of imports. At 25%, this rises to $3.2bn. However, future imports of these products could fall significantly, reducing the actual amounts collected.

The ACC analysis includes HTS (Harmonized Tariff Schedule) code chapters 27 (only select chemicals from this list), 28 (inorganic chemicals), 29 (organic chemicals) and 31-39 (fertilizers, dyes, extracts, surfactants, finished plastics, etc). It excludes chapters 30 (pharmaceuticals) and 40 (rubber products).

As the original list included 1,505 chemicals and plastics products valued at $16.4bn, the value of the imports from China of the removed products in 2017 was $3.5bn.

For the most part, the chemicals removed from the final list do not include bulk chemicals and plastics resins covered by ICIS, with the exceptions of vinyl chloride monomer (VCM) and paraffin wax.

The US imported just 829 tonnes of VCM from China in 2017 (all US VCM imports were from China), while it imported 98,876 tonnes of paraffin wax from China, or 59% of total paraffin wax imports of 168,781 tonnes from all countries, according to ITC data.

In dollar amounts, the US imported $126.5m in paraffin wax from China in 2017, or 55% of total imports of $231.3m. The dollar amount for imported Chinese VCM came to just $0.96m.

Also removed are five groups of rare earth elements used in fluid catalytic cracking (FCC) units, which produce gasoline and refinery-grade propylene as a byproduct.

In terms of bulk chemicals and polymers, US exports to China are far more impacted than China in both the second and third rounds.

The first round of US tariffs on $34bn Chinese imports implemented on 6 July were at 25% but included no chemicals or finished plastics. The second round of 25% tariffs on $16bn of Chinese imports set on 23 August included $2.2bn of chemicals and finished plastics.

Across all three rounds, the US tariffs cover 1,516 chemicals and finished plastics, representing $15.1bn in imports from China in 2017.

China’s final list of third round retaliatory tariffs on $60bn of US imports did not change from the original, but the rates were significantly reduced to 5-10% versus 5-25%.

NUCLEAR OPTION

But that is not likely to be the end of it. US President Trump reiterated his threat to impose additional tariffs on $267bn of Chinese imports. This would encompass almost all US imports from China.

This fourth round, what we dub the “nuclear option”, could exclude the products already removed in the third round as those were deemed too important for US commerce. Yet anything is possible in this unprecedented trade war between the world’s number one and two economies.

MTB IMPLICATIONS FOR ROUNDS 1-3

Importantly, the US Miscellaneous Tariff Bill Act of 2018 (MTB) does not void any of the 25% tariffs on a combined $50bn of Chinese imports in rounds 1 and 2, or the 10% tariffs on $200bn of Chinese imports in round 3.

Rather it simply reduces existing “normal” tariff rates on certain imports to zero or reduces them significantly for a period of three years.

The MTB has been in the works since 2016, before the US-China trade war kicked off.

Of the over 1,600 products listed in the MTB - which became law on 13 September - chemicals comprise over 50% of the list, and this amount is around 60% including finished plastics products, according to the ACC.

However, these include imports from all countries – not just China. And the MTB only reduces or eliminates the base or “normal” duties on all these imports, noted the ACC.

The special or “additional” tariffs in the US-China trade war still apply.

The MTB also does not prevent the additional US tariffs on Chinese imports from taking effect.

However, the MTB could reduce the impact of US tariffs on Chinese chemical imports appearing on that MTB list on a net basis.

For example, a chemical with a 5% “normal” import duty that is on the MTB list and on the US list of 10% tariffs on Chinese imports in the third round would be exempt from the 5% duty but would still come under 10% tariff if it came from China.

Another chemical with a 5% “normal” duty that is not on the MTB list, would still retain that 5% duty, plus another 10% tariff (if on the list for round 3) if that product was imported from China.

Click here to view related stories and content on the US-China trade war topic page.

By Joseph Chang and Al Greenwood
Additional contribution by Will Beacham

Pictured: Nantong Port, north of Shanghai
Source: Imaginechina/REX/Shutterstock

By Joseph Chang