US-China Trade Relations; Trump and a new age of Sanctions?

• The increased use of tariffs by the Trump II administration on Chinese products seems inevitable, building on existing tariffs imposed by Biden and feeding on bipartisan pressures for a more robust policy towards China in both houses of Congress. The solar industry will continue to be targeted.
• Chinese companies will continue to seek loopholes in response, including investing production facilities in third countries and the US itself.
• Tariffs will pose a challenge for the Chinese government which lacks clear means to respond.

President-Elect Trump announced on 25 November that he will impose 10% additional tariffs on Chinese goods from the first day of his Presidency, alongside 25% tariffs on Mexican and Canadian goods. The newly announced measures are ostensibly to punish the three countries for their failure to control the flow of synthetic opioids and illegal migrants into the United States.

This announcement came as a surprise, and there are already questions about whether and how they could be implemented in practice. However, they reinforce the widespread expectation that the second Trump administration will be unabashed at using aggressive trade policies to pursue political objectives, above all to usher in a new wave of US measures on Chinese goods and ramp up the simmering trade war between the two economic superpowers.

There is understandable unease about what a Trump II presidency will mean for trade, especially in relation to the PRC, so it is worth considering what the current situation is in the dying days of the Biden administration, what we know about the future direction of tariffs and why rhetoric and reality may diverge.

The Tariff Inheritance – It’s not all about Trump

The re-election of Donald J. Trump will not in itself initiate a new direction in policy towards China; the threatened imposition of tariffs on Chinese goods has wide bipartisan support in Congress. Moreover, a suite of existing tariffs is already in place, announced in May 2024 by the Biden administration and in effect from 27 September 2024. Among these are tariffs on solar cells of up to 50%, on L-Ion EV batteries and battery parts of 25% and 100% tariffs on Chinese EVs. The Biden administration had plans in the pipeline to abolish the de minimis exceptions on these products, whereby individual items valued at less than $800 are exempt from the tariffs.

Meanwhile there has been pressure in Congress to go further in imposing trade sanctions on Chinese goods generally. A bill introduced to Congress on 14 November by Congressman John Moolenaar (Rep – Michigan) chair of the bipartisan House Select Committee on the Chinese Communist Party calls for the repeal of China’s Permanent Normal Trade Relations (PNTR) status and abolishing the de minimis exemptions on all Chinese goods. It mirrors a bill introduced to the Senate earlier this year by three Republican senators, including Marco Rubio, Trump’s nominee for Secretary of State. If passed these measures would lead to tariffs on all Chinese goods of 35%, with 100% tariffs on certain specified categories of goods, including solar cells. The tariffs would be brought in on a staggered basis over 5 years. One week later, the bipartisan US-China Economic and Security Review Commission 2024 Annual Report to Congress, published on 19 November, also recommended inter alia repealing China’s PNTR status.

Enter Trump

During the US presidential election, the Trump campaign repeatedly stressed the need for tougher tariffs on Chinese-imported goods, particularly regarding industries related to electricity and solar power. The figure of 60% tariffs across the board on Chinese imports has been repeatedly mentioned. The campaign strongly criticised Biden’s tariff policies, with a statement on Trump’s official website declaring “On Day One, President Trump will rescind every one of Joe Biden’s industry-killing, jobs-killing, pro-China and anti-American electricity regulations.” Biden announced a partial exemption for solar cells in his tariff package which allowed their importation tariff-free up to a quota level of 5 GW, raised in August 2024 to 12.5 GW. This carve-out was driven by competing imperatives to protect the US solar industry from Chinese imports on the one hand while still meeting renewable energy goals. A Trump administration, with its clear scepticism about the net-zero agenda, will be hostage to no such contradictions.

The first Trump administration’s tariffs largely failed to curb imports of solar energy products of Chinese suppliers. A 2023 US Department of Commerce report declared that Chinese solar companies had been re-routing and expanding their supply chains overseas (most notably in south-east Asia) to bypass the tariffs. To plug this loophole, the incoming administration is likely to introduce tariffs specifically targeted at solar imports from south-east Asia, though whether this will have a significant impact on imports of photovoltaic materials produced by China-based companies is uncertain. China’s effective monopoly over the global production of polysilicon makes it near impossible for the US solar industry to completely disassociate itself from Chinese companies.

Chinese solar companies, for their part, have been preparing for a tightening of the US tariff regime by investing in manufacturing facilities in SE Asia and other regions such as the Middle East, with Chinese companies already looking to manufacture in Saudi Arabia, UAE and Oman. Chinese companies are also increasing production of solar panels in the US to mitigate the effect of US tariff barriers. For example, in 2023 JinkoSolar won government approval for a USD 52 million expansion of its Florida facility and Trina Solar announced a USD 200 million facility in Texas.

Future Directions?

If Trump’s new tariffs are primarily about protecting US jobs rather than excluding Chinese companies from the solar supply chain, then direct investment in the US seems a sensible policy. However, there are reasons for doubt:

• Congressional motivations over China tariffs may be less transactional than Trump’s and more national security focused. Senator Cleveland, Chairman of the US-China Economic and Security Review Commission, has criticised the failure of decades of US “whack-a-mole policy… to address the increasing and ambitious efforts by China to skirt laws or take advantage of trade loopholes”. Many legislators are looking to implement measures which will put an end to this game of “whack-a-mole” once and for all.
• Tariffs seem to be viewed by the incoming administration as a coercive tool to support foreign and security policy objectives, in practice a form of sanctions, rather than a purely trade targeted measure. This week’s announcement of tariffs as a tool to counter opioids and illegal immigrants rather than to address any perceived trade imbalances is an example.
• Arguably the biggest threat to Chinese solar from the incoming administration has nothing to do with tariffs. Trump’s stated ambition to double down on hydrocarbons and pivot away from renewables will present a serious challenge to the Chinese solar industry already suffering from over-capacity issues.

Uncertainties Remain

Despite various policy pronouncements and electoral grandstanding, the exact nature, level and effect of new US tariffs on Chinese products remains unclear. Reasons for uncertainty include:

• The extent to which Trump’s tariff announcements are transactional or driven by firm underlying policy objectives – whether they are setting out a negotiating position or are a goal in themselves. This ambiguity extends down from Trump himself to his cabinet nominees. Senator Rubio (Secretary of State designate), for instance, has consistently adopted a hard national security line on China. Robert Lutnick, the CEO of Cantor Fitzgerald and nominee as Commerce Secretary with direct oversight of tariffs, seems to support a more transactional approach. Speaking on CNBC he said, “I think we’ll make a bunch of money on the tariffs, but mostly, everybody else is going to negotiate with us, and we will be more fair.”
• Irrespective of the Trump administration’s stance, bipartisan hostility to China remains strong in Congress. Both the bills currently before the house are sponsored purely by Republican backers and, as currently drafted, are very broad in effect. However, given the current control of both Houses by the Republicans, and the presence of China hawks among the Democrats in both chambers, it is likely that the legislation, albeit amended and toned down, will progress. Additional to Congressional tariff pressures are other measures to restrict Chinese imports directed towards specific security or foreign policy concerns, such as the Uighur Forced Labor Prevention Act, signed into law in 2021, and the Biosecure Act currently under discussion. Congress will remain no friend to Chinese companies.
• Despite the desire of US legislators to close all loopholes that enable Chinese companies to circumvent US tariffs, for instance by establishing production facilities outside China, it may be impossible in practice to design and legislate a watertight regime.

What will China do?

Above all, there is uncertainty surrounding the Chinese response. China exports far more to the US than the US exports to China, both in volume and diversity of goods, with $427 billion of goods exported in 2023, according to the National Institute of Economic and Social Research. It remains China’s largest export market representing around 13% of China’s total exports and 3% of its GDP. China is highly exposed at a time when its economic position is faltering, youth unemployment is hitting record levels and social pressures are building.

China’s ability to retaliate in a trade war over tariffs is limited, given the relatively narrow range of goods it imports from the US and because of its large trade surplus. China has already been cutting prices to increase its exports of surplus production. Further price cuts in response to US tariffs would damage the profitability of Chinese companies. A possible response would be a devaluation of the renminbi, but this risks higher inflation and further domestic pressures. It would also damage Xi’s ambition to promote the renminbi as an alternative global reserve currency to the US dollar.

The rational Chinese response would be to seek to defuse the tensions underlying tariff pressures, rather than enter into a trade war it is ill-placed to win. A negotiating process leading to a face-saving deal between Xi and Trump might appeal to both main protagonists. However, US hostility to China extends well beyond Trump and the increasing contradictions underlying the Chinese economic model will likely make any such deal difficult to achieve.

Charles Hollis, Head of Strategic Intelligence

charles.hollis@aperio-intelligence.com