Repealing China’s Most Favored Nation Status: What it Means for U.S. Manufacturers and Workers

Sen. Josh Hawley (R-MO) this week introduced a critical bill to repeal China’s Most Favored Nation (MFN) status. It’s one of two bills circulating the Senate at this time.

“It is time for Congress to remedy the past mistake of granting China MFN status,” said CPA’s CEO Michael Stumo in a statement on Tuesday supporting the legislation. The repeal would mean higher tariffs on imports of Made-in-China merchandise. Currently, China’s top exports to the United States, including laptops, cell phones, and children’s toys, come in without any tariff. Stumo said the U.S. should not be giving MFN trade treatment to a non-market economy, especially one whose businesses are known for using “forced labor and (are) subsidized by the CCP.”

Currently, all countries except Belarus, Cuba, Russia, and North Korea receive Most Favored Nation trading status with the U.S., making the U.S. the largest, most open market in the world. Our MFN tariff schedule averages at just 3.4%. That has made the U.S. a dumping ground for products that local producers are hamstrung to compete against.

In short, the legal process of denying MFN status to a country means moving the country from Column 1 to Column 2 of the Harmonized Tariff Schedule of the United States (HTSUS). 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 (ad valorem), but are sometimes charged per weight or another unit of measure.

Earlier this year, Sen. Tom Cotton (R-AR) introduced his own bill that would defer to the President as to whether China should continue to receive MFN status. Cotton’s bill included Senators Rick Scott (R-FL), Ted Budd (R-NC), and J.D. Vance (R-OH) as co-sponsors.

***See CPA Trade Counsel Charles Benoit’s Guide to Repealing China’s MFN Status.***

CPA Trade Counsel, Charles Benoit, talks about what China’s losing Most Favored Nation trading status would mean.

Q: If China’s Most Favored Nation status is repealed, what is in it for companies that really don’t trade with China, but compete directly with Chinese companies for the same product lines?

A: It sends a message to transnational enterprises about sourcing from China, and repealing MFN for China means the government is saying that it sees trouble ahead for that region and does not believe you will be treated fairly there, so we are going to add tariffs to importers sourcing from that market. It will have a positive effect on strengthening U.S. supply chains and protecting U.S. consumers. It will surely speed up the diversification of supply chains out of China.

Import lobbyists claim that repealing MFN status will be catastrophic, but that’s not true at all. It’s a modest first step in reducing our import reliance on China. Right now, about two-thirds of what China sends us in a given month comes in with little-to-no tariff. For example, laptops and smartphones from China come in at zero percent tariff thanks to MFN status. Without MFN, those two products will be subject to a 35% tariff. But keep in mind, that’s not 35% on the retail price you see as a consumer, but rather 35% on the import transaction price, which is typically far lower than the retail price. So to that end, repealing China’s MFN status should be seen as a modest revenue measure, but also an important symbolic measure.

To that end, it’s certainly a net positive for domestic manufacturers. But ultimately what we need is holistic tariff reform. Congress needs to embrace tariffs not as a punitive tool, but as the preferred revenue raiser for the Treasury as well as a tool for industrial growth. This was the policy that built America.

Q: Let’s assume history is made here and China is no longer an MFN trading partner. What does that do with the existing Section 301 tariffs imposed in 2018?

A: The Section 301 tariffs, which only apply to about one-third of what China sends us, go on top of the base tariffs outlined in our tariff schedule’s Column 1 for MFN countries and Column 2 for non-MFN countries. For car imports, our Col. 1 tariff is 2.5% and we have a Section 301 tariff on Chinese cars of 25%, so currently they pay a combined 27.5% tariff.

In Column 2, our car tariff is 10%, a 7.5% increase over Column 1. The 301 will remain, so the new combined is now 10% + 25% = 35%.

Q: Wouldn’t it be more likely that repeal of MFN would mean the government ends the 301s? How likely are the 301 tariffs, the steel and aluminum tariffs, and the solar tariffs likely to remain if China loses MFN?

Legally and operationally, the application of the 301s is not affected by an MFN repeal. So repealing the 301s would be an entirely political decision. I don’t see why the Administration would do that. Congress repealed Russia’s MFN status, but because our Column 2 tariffs aren’t typically that high, they still went ahead and raised tariffs on most of Russia’s exports beyond the Column 2 rates.

Q: In your view, does repealing MFN in any way help make the case for reshoring?

When we hit Made-in-China cars with tariffs, we held off the growth of imports, and Volvo even moved manufacturing from China to South Carolina. Some other countries like Mexico and Vietnam will likely be huge beneficiaries. I think a big win will be that similarly with the 301s, all the cries of inflation and damage will prove hollow. And then the other win is all the revenue paid into the Treasury out of foreign vendors’ profit margins. We’ve made $175 billion in China tariffs to date, that’s amazing. Congress is waking up to how excellent tariffs are for revenue purposes.

So hopefully Congress gets more comfortable deploying tariffs again – not just as a tool for punishment, but as a tool for revenue and growth. As that happens, we’ll have done wonders for the case for reshoring.

Q: Finally, are we prepared for the argument that – now that MFN for China is repealed, let’s run free trade deals with SE Asia up the flag pole to make up for it? This seems like the logical response to China losing MFN in Washington. Not sure American manufacturing would like that alternative. What are your thoughts on that?

I’m not too worried about that. Americans know cutting tariffs is a we-lose, they-win deal every time. This Administration to their credit has not pursued any further tariff cuts in new trade deals. Frankly, with a 3.4% average tariff, we don’t have much leverage to pursue new trade deals anyway. We are already giving away virtually-free market access to the whole world. If we can go from our current $50 billion per year in China tariff revenue to $100 billion-plus, I hope Congress will see the benefit in a broader, holistic tariff policy.

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Senator Hawley’s bill includes a two-year delay in the implementation of the MFN repeal and a generous accommodation to importers who continue to source from China.

The tariffs on Chinese imports imposed pursuant to Section 301 of the Trade Act of 1974 only cover approximately one-third of China’s imports in any given month.

Last December, the U.S.-China Commission, a group created by Congress to advise on managing the bilateral relationship, formally recommended that China lose its MFN tariff status. A poll conducted by Morning Consult last year found that 60% of voters oppose China continuing to receive MFN trade status with the U.S.