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.
- 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).
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.
- 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).
- 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“.
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.