By Charles Benoit, CPA Trade Counsel
In December, the U.S.-China Commission, a group created by Congress to advise on managing the bilateral relationship, formally recommended that China lose its Most-Favored Nation (MFN) tariff status. Referencing the decision to grant China permanent MFN status in 2001, Speaker McCarthy said in remarks on the House floor yesterday that “We spent decades passing policies that welcomed China into the global system. In return, China has exported oppression, aggression, and anti-Americanism.”
With the repeal of China’s MFN status a priority for the 118th Congress, we’ll walk through below what exactly that means and entails below.
What does “Most Favored Nation” status mean?
In the United States, “Most Favored Nation” (MFN) is synonymous with “Normal Trade Relations” (NTR). NTR was a term coined by Congress in 1998 (Pub. L. 105–206) to replace use of the term MFN in domestic law, as ‘MFN’ generates considerable confusion.
The HTSUS Column 1 tariff rates correlate with the U.S. MFN commitment to the 163 other nations in the World Trade Organization (WTO). Every WTO Member has made a “Schedule of Concessions” to every other WTO Member. The tariff rates in Column 1 match the tariff rates in the U.S. Schedule of Concessions to the WTO.
The reason they match is because Schedules of Concessions promise maximum tariff rates to every other WTO Member, with individual maximum rates fixed to a list of around 6,000 product categories, covering every thing imaginable. So what we promise to every WTO country, we implement in Column 1 of the HTSUS.
Most U.S. MFN tariffs are set at 0%, and if you average the tariffs we do have, they come out at 3.4%, the lowest of any WTO Member
. To learn more about how we can fix our WTO MFN tariffs in pursuit of something resembling reciprocity, see the CPA Guide (PDF) here
What does the legal process of denying MFN status to a country look like?
In short, the legal process of denying MFN status to a country means moving the country from Column 1 to Column 2 of the HTSUS, and is done by statute.
The HTSUS lists tariff rates for every conceivable physical product that can show up in a port. These tariff rates are typically expressed as a percentage (a.k.a., “ad valorem”), but sometimes expressed as a “specific tariff”, e.g. $0.10 per 1 kilogram.
But instead of listing just one tariff rate for a product, you’ll see 3 columns with (typically) different rates in the HTSUS, adjacent to the listing of every conceivable product.
Confusingly, the 3 columns are called ‘Column 1‘; ‘Column 1*‘; and ‘Column 2′:
- Col. 1 lists our negligible ‘MFN/NTR’ tariff rates, which is available to merchandise from every country except Belarus, Cuba, North Korea, and Russia.
- Col. 1* is for our preferential (i.e., lower than MFN/NTR/Col. 1) tariff rates, which are available to merchandise if it qualifies under a U.S. free trade agreement, or other preferential tariff program (like the Generalized System of Preferences, “GSP”). Most rates in Col. 1* are zeroed-out, i.e. 0%.
- Col. 2 is our non-MFN/NTR tariff rates, currently only applicable to Belarus, Cuba, North Korea, and Russia, and which averages 32.5%. (Source: pg. 5 of this PDF from PIIE).
China is still in our MFN (Col. 1) schedule, and thus receives the same base tariff treatment as Europe, Norway, Taiwan, the United Kingdom, and many others.
Note the Section 301 tariffs on China are a ‘trade remedy’, like an anti-dumping or countervailing duty (AD/CVD) tariff, and as such apply in addition to the base rate in the HTSUS, whichever column is being used. The additional Section 301 tariffs, however, only apply to a fraction of products, covering approximately one-third of what China exports to the U.S. in any given month. Section 301 tariffs are also time limited by statute.
Finally, note that in U.S. history, a tariff schedule with an average rate of 32.5% was considered quite low. In 1844, free trade Democrats took control of Congress, and passed the The Walker Tariff of 1846. Even here, the lowest tariff rate among the three commodity schedules was Schedule C, at 30%.
Congress’ repeal of MFN status for Russia and Belarus
SEC. 3. SUSPENSION OF NORMAL TRADE RELATIONS WITH THE RUSSIAN FEDERATION AND THE REPUBLIC OF BELARUS.
(a) Nondiscriminatory Tariff Treatment. — Notwithstanding any other provision of law, beginning on the day after the date of the enactment of this Act, the rates of duty set forth in column 2 of the Harmonized Tariff Schedule of the United States shall apply to all products of the Russian Federation and of the Republic of Belarus.
Repealing MFN status for a country is that straightforward.
Is denying MFN status to China the same thing as repealing ‘PNTR’?
Not quite. The U.S. has a history of granting MFN status on a term-limited basis, subject to renewal. Countries have been upgraded from this term-limited MFN status when Congress decides to pass ‘Permanent Normal Trade Relations’ (PNTR). From 1979 to 2001, China enjoyed term-limited MFN status, but that status was subject to periodic Congressional review, and Congressional expectations about advances in market liberalization and human rights.
In 2001, Congress passed PNTR for China, thus making China’s status as a Column 1 MFN country indefinite, giving global business substantial confidence to offshore production to China. Following PNTR, China’s MFN, Col. 1 status was no longer subject to Congressional reauthorization or Presidential proclamation.
Several legislative efforts have been introduced over the years to repeal China’s PNTR status, although they have been fiercely opposed by lobbyists for multinational enterprise.
In 2005, a bi-partisan bill with 61 co-sponsors (45 Democrats and 16 Republicans) was introduced in the House of Representatives that would have repealed permanent PNTR status for China.
In 2021, Senators Tom Cotton (R-Arkansas), Jim Inhofe (R-Oklahoma), and Rick Scott (R-Florida) introduced the China Trade Relations Act
to strip China of its PNTR status and return China to the pre-2001 system of MFN status, subject to Congressional reauthorization. Since then, as the situation with China has further deteriorated, the U.S.-China Commission and others
have argued for denying MFN status to China entirely, moving them to Column 2, as happened with Russia and Belarus last year.
Will there be adverse WTO legal implications for denying MFN status for China?
No. When the Trump Administration imposed the Section 301 tariffs on top of China’s MFN rate, China retaliated with their own additional tariffs. Given China’s prolific use of non-tariff barriers to trade, the actual tariff rates resulting from China’s retaliation are beside the point. China only buys from us what the CCP authorizes.
China did sue the U.S. at the WTO in April, 2018, for violation of GATT Article I:1, which is the textual MFN commitment all WTO Members make to each other. The U.S. in turn sued China for the same Article I:1 breach, given their retaliatory tariffs. Both Nations won their respective suits they brought and lost the ones they were respondent to. The WTO rulings were meaningless, as neither side followed the WTO ruling.
China’s WTO win, in September 2020
, was expected. The WTO ruled that the additional Section 301 tariffs did not fall into one of the narrow allowances for additional tariffs (like AD/CVDs), nor was there a justifiable exemption, like National Security. This is because the Section 301 tariffs were premised by the U.S. on China’s intellectual property theft from U.S. businesses, which is not an actionable WTO item (at least neatly).
All of this means that the U.S.-China trade relationship is already totally outside of the WTO legal framework, and the new norm. Moving China from Column 1 to Column 2 is essentially a mild expansion of what we did in 2018, we can’t “lose more” at the WTO. Another WTO lawsuit victory for either nation would mean less than a small-claims court judgment against a Nigerian prince (which is at least in theory enforceable).
Several other G7 nations joined the United States in 2022 in repealing their respective MFN tariff rates for Russia, a fellow WTO Member, and nothing happened. The WTO should be understood merely as a forum to hear disputes, it is not a governing body.
What are the likely economic effects of denying MFN status to China?
Denying MFN status for China is not some drastic decoupling move. It should be viewed more as a revenue measure, which nonetheless sends an important message to the global business community that sourcing from China for the United States is not favored. Corporate America always says “Congress needs to decide if we should be trading with China or not.” By “trading” they mean sourcing. Repealing MFN is the signal that Congress does indeed recommend they source elsewhere. It will thus have positive effects at strengthening U.S. supply chain resiliency.
MFN repeal also need not be viewed as a punitive measure, like sanctions. Putting a country into Column 2 of the HTSUS merely conveys: ‘we see trouble ahead for that region, do not believe our own business have been treated fairly, and thus we are slightly increasing the revenue measures for sourcing from that market.’
The reason moving China to column 2 should be understood as a modest revenue measure is because thanks to our Section 301 tariffs, we already tariff roughly one third of what China sends us at an additional 25% over the Column 1 rate, for the most part (some items are tariffed at an additional 7.5%). While Column 2 rates average 32.5%, this is an incremental step above the Column 1 rates + 25%.
In 2018, prior to imposition of the Section 301 tariffs on China, multinationals and their allies in the press warned of impending catastrophe and price shocks, but none of these materialized. Overwhelmingly, producers in China absorbed the increased tariff, with no price increase for the U.S. consumer. For example, the Buick Envision, made in China and imported into the U.S. since 2015, actually saw a price decrease
for its 2019 model year despite being subject to a 27.5% tariff (2.5% Column 1 tariff + 25% Sec. 301 tariff). This happened despite media alarm
it would cost $8,000 more.
Moving China to Column 2, which has a 10% tariff on passenger cars instead of a 2.5%, would mean the Buick Envision would be subject to an additional 7.5%, for a new total tariff of 35%. Considering that China’s currency depreciated more than eleven percent in 2022, we can expect no price increase again for the U.S. consumer.
When we fail to tariff a good from China, it remains the favored sourcing destination. Our top 3 imports from China all face no tariff whatsoever (Col. 1 tariff at 0%, and no Sec. 301 tariff):
- Portable computers and tablets. HTS Code: 8471.30; Col. 1 tariff: free; Col. 2 tariff: 35%. (No Sec. 301 tariff applies).
- Cellphones. HTS Code 8517.12; Col. 1 tariff: free; Col. 2 tariff: 35%. (No Sec. 301 tariff applies).
- Children’s toys. HTS Code: 9503.00; Col. 1 tariff: free; Col. 2 tariff: 70%. (No Sec. 301 tariff applies).
First, consider whether it is in America’s interest to have imports for those products overwhelmingly come from China. Is relying on China for laptops and cell phones a good idea? Have Americans ever been happy with children’s toys from China?
Second, know that the tariffs are far less heavy than they sound. Consider:
- China’s yuan continues to depreciate, down 11% in 2022, essentially taking that ~35% down to ~24%. This puts it perfectly in line with the imports from China that were hit by the 301s, and from which we never saw inflation.
- All these tariff rates apply to the import invoice, which aside from commodities is typically far, far less than a retail price. So for those big top 3 categories of laptops, cell phones, and toys, the tariff is far more muted than it appears. Apple is not reporting the retail price of an iPhone on its customs invoice when it imports them in bulk.
- In addition to the above reasons, importer law firms actively market ‘tariff mitigation’ strategies to help Chinese producers minimize to negligible levels the tariff they pay. These strategies include “tariff engineering” (minor tweaks to a product to help it jump to a lower tariff level) and “the first sale rule“.
Also, many Col. 2 tariffs are negligible to begin with. For example, Mott’s children’s apple juice boxes source apple concentrate from China for American children. The MFN tariff is 0%, the Col. 2 tariff is a mere 1.3¢/liter.
Indeed, when Congress moved Russia to Column 2 last year, they gave the President authority to increase Column 2 rates further for Russia, as so many rates were quite low.
Other Options for Congress in Repealing MFN status for China
Congress is likely to pass China MFN repeal alongside other trade legislation, including the Miscellaneous Tariff Bill (MTB). The MTB is a system designed to allow American manufacturers to obtain tariff waivers on items not made domestically. This is precisely the kind of program that further limits the effect of moving China from Column 1 to Column 2.
Congress could also ‘phase-in’ China’s move from Column 1 to Column 2. While Russia’s MFN suspension was immediate upon the law becoming effective, there is no reason Congress couldn’t pass an MFN repeal with the effective date set one or two years into the future, giving even more time to global business to shift sourcing before the tariffs went into effect.
Failure to repeal China MFN status would undermine all rhetoric on confronting the Chinese Communist Party
In a December, then Rep. Kevin McCarthy and Rep. Mike Gallagher, now each Speaker and Chairman of the new Select Committee on Strategic Competition Between the United States and the Chinese Communist Party respectively, published a joint op-ed titled “China and the US are locked in a cold war. We must win it. Here’s how we will.”
In the op-ed, the two wrote that “The first step [to winning the cold war] is to restore our supply chains and end critical economic dependencies on China.”
This is entirely correct, of course. However if Congress does not move promptly to repeal China’s MFN status, a modest first step towards ending our economic dependence, then these words will sound entirely hollow going forward.