Chelsea_SunChelsea_Sun ・ May. 21, 2024
What to Watch for After U.S. Tariff Hikes?
The European Union has also been increasingly stringent in its restrictions on China's new energy imports.

AsianFin – Hefty tariff hikes on a range of Chinese products, including on electric vehicles, semiconductors, batteries and steel, is part of incumbent U.S. President Joe Biden’s election-year effort to win more votes by allegedly protecting the U.S. domestic industry. What repercussions are Chinese firms bracing for? How would they react to the fresh levies?  An analysis of the event would offer some clues.

Last Tuesday, the Biden administration released the results of the four-year review of the tariffs imposed on China under Section 301, stating that fresh tariffs will be imposed on a range of China-made products. Among them, electric vehicles, lithium batteries, and photovoltaic products are known in China  as "new three major exports."

Two days later, the White House issued another statement, announcing further restrictions on imported solar cells. The statement said it would cancel the previous tariff exemption for solar panels and reinstate tariffs on photovoltaic products imported from four Southeast Asian countries  -- Cambodia, Malaysia, Thailand, and Vietnam -- after June 6 this year. It also requires that the relevant imported products be installed within six months to avoid stockpiling.

Politically-motivated Tariff Hikes

The Office of the United States Trade Representative (USTR) detailed the background and consequences of the "Section 301 Investigation" in its Four-Year Review Report. In simple terms, the so-called "Section 301 Investigation" is an investigation conducted under Section 301 of the U.S. Trade Act of 1974, which pertains to unfair trade practices. On August 18, 2017, during the Trump administration, the U.S. Trade Representative initiated the "Section 301 Investigation" on the grounds of "determining whether China's government policies and measures related to technology transfer, intellectual property, and innovation are unreasonable or discriminatory and whether they burden or harm U.S. commerce." On March 22, 2018, the Trade Representative concluded that China had adopted "a series of unreasonable or discriminatory practices, policies, or actions related to technology transfer, which burden or restrict U.S. commerce," and indicated that legal action could be taken accordingly. Between April and June of 2018, the U.S. issued tariff imposition lists, most of which took effect on July 6, 2018. The content of these lists continued to expand, although some products were exempted.  For example, certain healthcare products related to the U.S. response to COVID-19 were excluded from the 301 tariffs in 2020. However, such investigations and tariff measures require continuous supervision, feedback, and review after implementation. On May 5, 2022, the U.S. Trade Representative began a statutory review of the previously imposed tariff lists, stating that the revised measures might terminate upon their four-year expiration. In early 2023 and 2024, the Office of the U.S. Trade Representative, the Section 301 Committee, and relevant experts held multiple meetings to discuss China's government policies and the impact of the "301 Tariffs" on the U.S. economy. They focused on exploring the possibilities and directions of modifying the measures, such as further increasing tariffs, and how these plans would affect the U.S. economy.

Last Tuesday, the USTR released the aforementioned review report, stating that "additional tariffs should be imposed on products listed in the 301 tariff directory." Specifically, the main products subject to this round of additional tariffs include steel and aluminum, critical minerals, semiconductors, port cranes, medical and personal protective equipment, and the highly concerned "new three" new energy products, with a total value of approximately $18 billion. In terms of the "new three," electric vehicles have the highest tariff increase, with their tariffs directly rising from 25% to 100%; tariffs on various lithium batteries have been raised from 7.5% to 25%, but tariffs on lithium-ion electric vehicle batteries will be implemented in 2024, while tariffs on lithium-ion non-electric vehicle batteries will not be implemented until 2026; tariffs on photovoltaic cells and components have been further increased from the previous 25% to 50%.

After the announcement of the additional tariff measures, the intentions and purposes of the United States became the focus of attention. A statement released by the White House claimed that this move was to "protect American workers and businesses." The Ministry of Commerce of China issued a statement on its official website, expressing firm opposition, pointing out that the United States is "motivated by domestic political considerations," abusing the 301 tariff review process, which is a practice of politicizing economic and trade issues, and is "a typical political manipulation."

In fact, many media reports and public discussions have also focused on the "political intentions" of the United States. One particular viewpoint has garnered significant attention, namely the belief that the Biden administration's move is aimed at wooing voters for this year's election. Wu Xinbo, Dean of the Institute of International Studies at Fudan University, argued that Biden's tariff increase is more about showcasing his tough stance on economic issues with China to win the support of swing states, especially the "Rust Belt" areas with a high concentration of manufacturing workers. Golin, a podcast host who has long followed U.S. elections and produced related programs, expressed a similar view to TMTPost. He also mentioned that during the 2020 election, both Biden and current Treasury Secretary Yellen criticized Trump's tariff measures, claiming that such measures imposed higher costs on American consumers and promised to reduce some tariffs to alleviate public burden once in office. However, this year, Biden's campaign strategy has clearly changed. In an April campaign event in Pittsburgh, Pennsylvania, a key swing state, he stated that if unfair trade practices were found in Chinese industrial products, he would urge U.S. Trade Representative Katherine Tai to significantly increase Section 301 tariffs. Pittsburgh, once known as the "Steel Capital of the World," is also home to the United Steelworkers (UWS), North America's largest union. TMTPost also noted that when Biden announced the tariff increase decision, he was surrounded by leaders of major American unions and industrial workers. This aligns with his efforts during his term to promote "manufacturing reshoring" and the "Inflation Reduction Act" (IRA), which aims to provide "middle-income jobs" for the industrial and manufacturing sectors, as well as the recent heated debate over so-called "overcapacity." These actions and proposals reflect the current U.S. administration's series of initiatives under the guise of "for the workers." In fact, the issue of "election tariff cards" has been noted by foreign media such as Reuters, the Financial Times, and Bloomberg. A Financial Times report stated that "the move to impose tariffs on Chinese goods places trade, protectionism, and blue-collar workers at the core of this year's presidential election." Trump had long called for a 100% tariff on Chinese cars during his campaign and even suggested a 200% tariff on Chinese cars imported to the U.S. through Mexican factories, suggesting that both candidates are competing to see who can be tougher on China.

However, it is unrealistic to separate political elections from economic and trade measures. Emphasizing "election showmanship" may overlook the real issues behind the tariff increase that need to be discussed and considered. The reason why the viewpoint highlighting Biden's electoral considerations is so prevalent is not only because the election showdown is approaching but also due to the question of whether "the U.S. tariff increase this time can truly have a practical effect."

A Body Blow to Chinese Firms?

As an important export destination, measures such as tariff hikes in the past have often caused anxiety or even panic in related domestic industries. Although the discussion about this tariff increase is still heated, there is no longer a sense of "panic." Moreover, at least for the highly discussed "new three items," industry opinions generally believe that it does not constitute a so-called "body blow," and the impact on some products is even minimal.

Take electric vehicles, which seem to have the highest tax increase, for example. Barron's Weekly in the U.S. published an article stating that "Biden's tariff increase on Chinese electric vehicles is more symbolic than substantive." TMTPost also learned from the China Chamber of Commerce for Import and Export of Machinery and Electronic Products that although China's electric vehicles are an "emerging force" in exports, they rarely flow to the U.S., with last year's exports to the U.S. accounting for less than 1% of the total export value. An industry observer also stated that in terms of whole vehicle exports, Chinese companies do not operate on a large scale in the U.S. The 100% tariff on electric vehicles seems "scary," but the actual impact is minimal. Instead, the announced tariff increase on materials such as natural graphite and permanent magnets for electric vehicles will have a real impact. In the U.S. tariff increase list this time, the tariff rate on natural graphite and permanent magnets was raised from 0% to 25%, but it will not take effect until 2026. The aforementioned person commented that "tariff increases are a double-edged sword. Those that will have a significant impact have been given a certain digestion period, like a deferred execution."

Similar distinctions also exist in lithium battery products (increasing from 7.5% to 25%). The tariff on lithium batteries for electric vehicles will be implemented starting in 2024, while the tariff on lithium batteries for non-electric vehicles, primarily energy storage batteries, will be implemented in 2026. After the U.S. "official announcement," the Tiantian Securities Electric New Energy team released a brief comment, stating that "The imposition of tariffs in the new energy sector is much better than market expectations, with the most favorable being energy storage, which is directly exempted for two years." Tiantian Electric New Energy also mentioned that "All indications show that the imposition of tariffs is indeed for votes, and policies that truly choke supply (graphite) and affect downstream demand (energy storage) are particularly unexpected." The Beijing News Shell Finance also reported that insiders within lithium battery companies generally stated that the tariff increase has little impact on enterprises. Leading lithium battery company EVE Energy (300014.SZ) recently responded to investor inquiries, stating that the company currently does not directly export power battery products to the U.S., and the new tariff policy has no impact on the company. For the non-power battery segment, which will start imposing tariffs in 2026, the company has already set up a factory in Malaysia, planning for consumer and energy storage battery production capacity, which is expected to support deliveries to U.S. customers by 2026. Following the increasingly stringent trade restrictions in recent years, many Chinese new energy companies have participated in the U.S. market through overseas production capacity. However, future attention should also be paid to the long-term impact of tariff policies on the cost and competitiveness of U.S. domestic products. Renewable energy and technology research consultancy InfoLink analyzed that although short-term energy storage tariffs will not affect U.S. energy storage demand, as the exemption period approaches, if the situation does not change, U.S. energy storage demand will surge from the second half of 2025. It is expected that the cost of domestically manufactured battery cells in the U.S. will be on par with the cost of Chinese-made cells exported to the U.S. by 2027, and may further form a cost advantage thereafter.

Now let's look at another major category in the "new three items": photovoltaic products. As the earliest "target" of the U.S. "double anti" investigation and trade restrictions in the new energy field, before the 301 tariff on Chinese photovoltaic products was increased from 25% to 50%, they were already generally facing many restrictions such as the 201 tariff, WRO detention order, and UFLPA Xinjiang-related bill. In recent years, few companies have directly exported battery and module products from China to the United States. From this perspective, this tariff increase measure has no direct impact. Leading module companies like LONGi Green Energy (601012.SH) and Jinko Solar (688223.SH) have also publicly expressed this view. An insider from a top 10 photovoltaic module shipping company told TMTPost that the company has not been very concerned about the so-called tariff increase, but photovoltaic companies have already formed a complete industrial chain in Southeast Asia. Instead, the expiration of the U.S. tariff exemption for photovoltaic products from four Southeast Asian countries will have a greater impact and is the real focus of the industry. As mentioned above, on May 16, the White House announced the cancellation of the import tariff exemption for photovoltaic modules from four Southeast Asian countries. In addition, on April 24 this year, the American Solar Manufacturing Trade Committee submitted an application for a "double anti" investigation on photovoltaic cells and modules imported from four Southeast Asian countries. The U.S. Department of Commerce also announced on May 15 that it would formally launch an investigation, and a ruling is expected in the fourth quarter of this year. TMTPost App mentioned in the report "Evolution of Photovoltaic Going Overseas" that Chinese companies have a battery and module production capacity of more than 50GW in Southeast Asia (most of the battery production lines in the region are built by Chinese companies, and nearly 60% of the modules are built by Chinese companies). Leading material companies like LONGi Green Energy, Trina Solar (688599.SH), Jinko Solar, and JA Solar (002459.SZ) all have more than one production base in Southeast Asia. Their module products are mainly sold to the more profitable U.S. market, and many companies have also warned about the risk of the expiration of the Southeast Asian tariff exemption in their 2023 annual reports.

In fact, the impact of relevant policies can also be seen from the performance of listed companies' stock prices. From the news of tax increases in early May to the official announcement by the White House, the stock prices of new energy vehicles, photovoltaics, and energy storage sectors in the A-shares, Hong Kong stocks, and U.S. stocks were mostly unaffected. Instead, after the news of the end of the Southeast Asia photovoltaic exemption and the initiation of "anti-dumping and countervailing" investigations, the A-share photovoltaic sector saw a decline, with leading companies like JinkoSolar and Trina Solar dropping by more than 2%. In terms of response strategies, although the Southeast Asian production capacity of Chinese photovoltaic companies is inevitably affected, most leading component companies have offset the impact by setting up production capacities in the U.S. and continue to participate in the U.S. market. In 2023, China's five major photovoltaic component companies (JinkoSolar, LONGi, Trina Solar, JA Solar, and Canadian Solar) all established factories in the U.S. (JinkoSolar expanded its capacity). Among them, LONGi's 5GW photovoltaic component production line in Ohio and JinkoSolar's 1GW expanded N-type component capacity in Florida have officially started production in the first quarter of this year. These companies have also expressed a relatively optimistic attitude towards their U.S. business in recent annual reports and performance briefings.

Additionally, just as mentioned earlier, Biden criticized Trump during the 2020 election campaign for imposing tariffs that harmed American citizens' interests. The ongoing trade disputes and their impact on the U.S. have become a hot topic recently. Currently, there are still many views that imposing tariffs will make ordinary consumers bear more living costs. For example, Colorado Governor Jared Polis publicly expressed his dissatisfaction on social media platform X, stating that this measure "will hit every family." Furthermore, some downstream companies and industry organizations (such as photovoltaic power station operators and the Solar Energy Industries Association) are concerned that the ongoing trade disputes will force them to purchase domestically manufactured products at higher prices, which is not conducive to investment returns. Another type of criticism worries that these trade barriers will negatively impact international cooperation in addressing the climate crisis and promoting clean energy development. Domestic media such as Xinhua News Agency and People's Daily stated that U.S. tariffs "will harm the global economic green transition and undermine efforts to combat climate change." At the same time, there are concerns that related trade restrictions may further escalate, with countries like the EU possibly following suit, potentially leading to increased friction that could affect the global economic and trade recovery.

Will EU Follow Suit?

Just like the immediate cancellation of Southeast Asia exemptions and the initiation of "double anti" investigations following the imposition of tariffs, U.S. trade restrictions are unlikely to stop here. At a press conference on May 14, Katherine Tai stated that they are studying whether to impose tariffs on products imported from Mexican factories by Chinese companies (such as electric vehicles). The prevailing view is that if Trump wins the election, trade restrictions on China are likely to be further intensified.

Additionally, China's countermeasures are also drawing significant attention. A spokesperson for China's Ministry of Commerce stated that "the U.S. should immediately correct its erroneous actions and cancel the tariff measures imposed on China. China will take resolute measures to defend its own rights." In an interview with the media, Wu Xinbo analyzed that China might retaliate by imposing tariffs on certain U.S. goods. However, considering that the White House's tariff increases are more for election posturing and have limited actual impact, China's tariff increases might also be relatively limited to avoid escalating the situation unnecessarily.

Besides the United States, the European Union has also been increasingly stringent in its restrictions on China's new energy industry recently. The most typical example is the intervention in the bidding and operations of Chinese new energy companies in EU countries through the Foreign Subsidies Regulation (FSR). The TMTPost App has previously published several articles on this topic. To date, all four investigations initiated under this new regulation have targeted Chinese new energy companies, involving electric trains, photovoltaic products, and wind power products. The rationale is that these companies have gained an "unfair advantage" through "subsidies from the Chinese government." In April, the EU also updated its so-called "Report on State-Induced Distortions in China’s Economy," claiming that China's new energy industries, such as photovoltaic cells, wind power components, and electric vehicles, have high state-owned enterprise ratios and significant government intervention, leading to "market distortions." As of mid-May, the Chinese companies involved in these investigations, including CRRC Corporation Limited (601766.SH), LONGi Green Energy, and Shanghai Electric (601727.SH), are reportedly withdrawing from the bidding process.

In this broader context, discussions naturally arise about whether the EU will follow the US in imposing additional tariffs. However, at least for now, there are no signs that the EU is directly pushing for sweeping tariff increases. In its official response on May 14, the European Commission only noted the situation and stated that it would assess its impact on the EU. Josep Borrell, the EU's High Representative for Foreign Affairs and Security Policy, mentioned in an interview with an American diplomatic magazine that the EU and the US have differing views on some China-related issues, and the US did not coordinate with the EU before raising tariffs. German Chancellor Olaf Scholz explicitly stated that the EU should not follow the US in raising tariffs, and Swedish Prime Minister Ulf Kristersson also publicly opposed the tariff increase. From an economic and trade perspective, Europe's dependence on Chinese products in the new energy sector is much higher than that of the US. Many believe that under the premise of still needing photovoltaic and lithium batteries to drive net-zero goals, most European countries cannot afford the risk of "decoupling" from Chinese products. However, it is still impossible to predict the overall situation of the EU, or rather, there are various competing views within the EU itself. For instance, regarding electric vehicles, the South China Morning Post recently reported that the EU is likely to decide in early June whether to impose temporary tariffs on Chinese imported electric vehicles, with many supporting the tariffs. According to a Reuters report, the G7 meeting held in Italy in late May will focus on discussing the "risks of global trade fragmentation" triggered by the "US tariff increases on China".

Actually, compared to the "simple and crude" tariff increases, it is the new restrictive measures or trade barriers such as anti-circumvention investigations, FSR regulations, carbon tariffs, and carbon footprint investigations that are more worrying. Lin Xueping, a visiting researcher at the China Institute for Quality Development at Shanghai Jiao Tong University and author of the book "Supply Chain Warfare," once stated that a country's design capabilities in the supply chain are crucial. The strategic planning of Europe and the United States in the new energy supply chain game is becoming increasingly sophisticated, with many professional institutions, think tanks, and industry-academia-research collaborations assisting in decision-making. In contrast, Chinese enterprises often lack effective means to directly respond to these new restrictive measures. When the main importing countries pull out not ordinary "stones" but a series of "precision strike weapons" from their toolbox, it may be the time to be more vigilant. (This article was first published on the TMTPost App, Author | Hu Jiameng, Editor | Liu Yangxue)

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