People may wonder why the US government started the product exclusion process for Chinese products subject to Section 301 tariffs through the office of the US Trade Representative (USTR) only a few hours after announcing tariffs on $34 billion worth of Chinese products. The public can file exclusion requests until October 9 this year. Any exclusions granted have to meet three requirements and will be effective for one year.
The intention of the US can easily be seen. The US is desperate to rescue its domestic companies while trying to hurt China. In the $34 billion list, roughly 59 percent of the goods are made in China by multinational companies, 70 percent of which are US firms. And the products manufactured by China are irreplaceable in the global production chain. So the US has to come up with a way to avoid damage to its companies.
Can product exclusions save US companies? On the long list of items subject to the US tariffs, a large portion is travel products including luggage, wallets and backpacks. The market for travel products is worth $31 billion, and 87 percent of the products are made in China. Matthew Shay, CEO of the National Retail Federation (NRF), recently said the tariffs are hurting American consumers instead of resolving trade issues with China.
“Retailers cannot easily or quickly change their global supply chains,” said Jonathan Gold, NRF vice president for supply chain and customs policy. Nearly 70 percent of US firms in China oppose the use by the US of tariffs as bargaining chips, according to a report by the American Chamber of Commerce in Shanghai. They probably do not want to join the line of those applying for exclusions.
Many US high-tech companies have high expectations for China’s manufacturing potential and are hoping for long-term cooperation. Even if they get product exclusions, they will only be valid for one year. The US government has pushed its elite companies into a hard position, and many may eventually move their production facilities to China or even build their headquarters here, like Tesla.
If US President Donald Trump escalates the trade friction by extending the tariffs to $200 billion worth of Chinese products, the damage to US firms will increase. And the opposition to his policies will also become stronger. The companies do not want to lose the Chinese market, which has enormous consumption potential. And despite some ups and down, US firms in China have mostly had a smooth path. But they could not withstand the collapse of Sino-US trade relations.
It is worth noting that US firms have seen relatively low investment return rates in China, and this has been distorted into an example of unfair treatment by China. But this situation is common and has been seen by foreign firms operating in many markets, including Japan, Australia and European countries. Most US firms in China are optimistic about China’s stability and the sustainability of its market. They hope China can keep up the pace of its opening-up, better protect intellectual property rights, and lower the bar for entering the market. Therefore, few US companies have left China. Data released by China’s Ministry of Commerce shows that in the first half of this year, there was an increase of 96.6 percent year-on-year in the new companies registered by foreign investors in China.
And the number of foreign investors is expected to keep growing in the next five years. China aims to create the best environment for businesses around the world. The product exclusion process announced by the US shows that the Trump administration needs to clean up its own mess as the tariffs have so many drawbacks and are only drawing opposition. China will keep to its opening-up promises and will be a firm defender of free trade and multilateralism.
The author is executive deputy director of the China Center for International Economic Exchanges.