The American and Chinese flags are photographed on the negotiating table during a bilateral meeting in Geneva. U.S. trade deals with Vietnam and Britain make clear China remains in the U.S. President's crosshairs.KEYSTONE/EDA/Martial Trezzini/Reuters
After a bruising tariff fight with China earlier this year, Washington has opened up a new front in its trade war with Beijing – this time using third countries as proxies.
In the pair of trade deals Donald Trump has signed to date, and the flurry of threats he’s made against other countries, the U.S. President has been manoeuvring to cut China out of global supply chains.
The deal he signed last week with Vietnam imposes a two-tier tariff system, with higher U.S. levies for goods that originate in China and are routed – or transshipped – through Vietnam. The deal with Britain imposes security requirements aimed at limiting Chinese investment in the British steel industry.
The strategy became more explicit in recent days. In nearly two dozen tariff letters Mr. Trump sent to trading partners this week, he warned that transshipped goods would be hit with higher levies, a threat widely seen as being aimed at Chinese products.
Having gone toe-to-toe with China earlier this year – with both countries increasing tariffs to mutually destructive triple-digit levels, before backing down – the U.S. appears to be outsourcing its belligerence.
This could be a hard pill for many trading partners to swallow, especially Asian countries that trade extensively with China. And attempts to track and limit the transshipment of goods could be fiercely difficult, experts say.
Still, the message from the Trump administration seems clear: If you want a deal with the White House, and access to the world’s largest consumer market, you have to trim your ties with China.
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“This is all built on U.S. anxiety about the consequences of the way in which China has come to dominate global manufacturing,” said David Lubin, senior research fellow in the global economy and finance program at Chatham House in London. “That’s an essentially geopolitical argument.”
U.S. complaints about the transshipment of Chinese goods are rooted in the trade war Mr. Trump started with China in 2018.
As the U.S. increased tariffs on Chinese goods, direct trade between the two countries contracted. At the same time Chinese exports to other countries, such as Vietnam, Cambodia and Mexico, rose sharply while exports from those countries to the U.S. increased “as a kind of photographic negative image of the decline of Chinese exports to the United States,” Mr. Lubin said.
“The consequence of Trump’s tariffs on China in 2018 was to create what you might describe as tariff arbitrage,” he said, adding that this took two forms: the rerouting of trade flows and the relocation of Chinese manufacturing capacity out of China and into other emerging market economies.
That trend continued through the Biden administration, as China doubled down on its export-led growth strategy in the face of a property market crash and weak demand from domestic consumers.
And it appears to have accelerated in the opening months of the second Trump presidency, with another big spike in Chinese exports to third countries ahead of new U.S. tariffs.
“That’s part of the reason why these tariffs have not had a huge impact on global trade, on inflation, because in many cases importers are not actually paying that full higher tariff rate on Chinese goods, because they’re still able to get their hands on Chinese goods at a lower tariff rate through other countries,” Julian Evans-Pritchard, head of China economics at Capital Economics, said in a webinar this week.
“Now, this is obviously something that the U.S. would like to crack down on because it undermines the tariffs on China.”
Shipping containers are stacked at a port in Shanghai. As the U.S. increased tariffs on China in 2018, direct trade between the countries contracted, but more Chinese goods flowed through other countries.-/AFP/Getty Images
The U.S. trade deal with Vietnam takes aim at the issue by imposing a 20-per-cent tariff on Vietnamese goods – which is roughly half what Mr. Trump threatened in April – and a 40-per-cent tariff on Chinese goods that are transshipped through the country.
It’s unclear, however, how this will work in practice. A lot depends on how the U.S. defines transshipment.
If the U.S. is simply looking to crack down on countries importing finished goods from China, relabelling them, and exporting them to the U.S. to avoid tariffs, the economic impact would be relatively small. That practice, after all, is already illegal.
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By contrast, the economic impact would be much larger if the U.S. used an expansive definition of transshipment to limit the amount of Chinese inputs used in products manufactured in third countries. That would look more like how “rules of origin” work in the United States-Mexico-Canada agreement (USMCA), the continental free trade agreement, and would be difficult to enforce at a global level.
“I think it borders on the impossible if your definition of transshipment for goods includes any goods or parts that are used as inputs in production in those countries,” said Jesse Goldman, a partner at the law firm Osler, Hoskin & Harcourt LLP who focuses on international trade.
“What they’re probably hoping to achieve is to change global supply chains by raising the threat of enforcement with those types of tariff levels, with the hope, and maybe even expectation, that people won’t want to take the risk and they’ll just turn away from China as a source,” Mr. Goldman said.
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Another crucial question: Who will actually get on board with the latest U.S. push to isolate China?
For some countries, like Canada, the calculus will be obvious, said Jeff Nankivell, chief executive of the Asia Pacific Foundation of Canada. Even as Ottawa looks to diversify Canadian export markets, maintaining access to the U.S. market is an overwhelming priority.
“If concessions related to China are able to head off concessions in other directly bilateral areas, then that may be the lesser of two evils from a Canadian point of view, in a situation where there are no good choices,” Mr. Nankivell said.
Indeed, Canada already gave up its ability to cut a separate trade deal with China when it renegotiated NAFTA during the first Trump administration. The USMCA contains a clause that none of the countries will negotiate a trade deal with a non-market economy – a code word for China – without informing the other partners.
And Ottawa mirrored U.S. tariffs on Chinese steel and electric vehicles, even before Mr. Trump returned to office.
The situation is far more complicated for many Asian countries, such as Indonesia, Thailand and the Philippines, which have deep trade and investment ties with China and may be less likely than Vietnam to sing from Mr. Trump’s songbook.
“If they do have to make a hard choice, the China trade relationship is worth more to them economically than the U.S. trade relationship,” Mr. Nankivell said.
The test case for Mr. Trump’s new China strategy will be in how major trading partners like the European Union, Japan and South Korea deal with U.S. demands.
All have significant relationships with Beijing but share many of America’s concerns about China’s emphasis on export-led growth coupled with its push to replace imports with domestically made goods – a model Mr. Lubin calls “asymmetric decoupling.”
“Hostility toward China’s emphasis on asymmetric decoupling is not just the U.S. obsession,” he said. “It’s a European obsession, and it’s also growing increasingly into an obsession in the developing world.”