China calculates impact of losing most favored nation status
Pundits say US tariff hikes will hurt manufacturers seriously – and it may be time to upgrade their businesses
China is expected to suffer from a 3.4% deflationary pressure if the United States revokes permanent normal trade relations (PNTR), previously known as most favored nation (MFN) status.
Beijing’s concerns about losing its MFN status have increased since the November 5 presidential election victory of Republican candidate Donald Trump, who has vowed to raise tariffs for all imported Chinese goods to 60%.
John Moolenaar, chairman of the House Select Committee on the Chinese Communist Party (CCP), heated up the issue further on November 14 by introducing the Restoring Trade Fairness Act, which calls for ending China’s PNTR.
Moolenaar said that when China prepared to enter the World Trade Organization (WTO) in 2000, the US Congress voted to extend PNTR status to China, hoping that the Chinese would liberalize and adopt fair trading practices, but “this gamble failed.”
“Having PNTR with China has failed our country, eroded our manufacturing base and sent jobs to our foremost adversary. At the same time, the CCP has taken advantage of our markets and betrayed the hopes of freedom and fair competition that were expected when its authoritarian regime was granted PNTR more than 20 years ago,” he said.
Republican Senators Marco Rubio, Tom Cotton and Josh Hawley on September 26 introduced The Neither Permanent Nor Normal Trade Relations Act to end PNTR with China. On November 13, Rubio was nominated by Trump to be the next US secretary of state. Rubio is likely to gain Senate confirmation and begin his term after Trump’s January 20, 2025, inauguration.
“Giving Communist China the same trade benefits that we give to our greatest allies was one of the most catastrophic decisions that our country has ever made,” Rubio said in a press release in September. “Our country’s trade deficit with China more than quadrupled, and we exported millions of American jobs. Ending normal trade relations with China is a no-brainer.”
Three scenarios
In October, Shenwan Hongyuan Securities, a state-owned brokerage firm, commissioned Infinite-Sum Modeling, a Shenzhen-based consulting firm, to conduct research on possible US tariff hikes against Chinese goods.
“If the US revokes China’s MFN status, it will impose an average of more than 60% tariffs on Chinese goods,” calculating from the facts that the US imposes “an average 42% tariff for non MFNs, and there is an additional 20% Section 301 tariff against Chinese products,” Zhao Wei, chief economist of Shenwan Hongyaun, writes in a research report.
After a trade war broke out in 2018, he says, 48% of Chinese goods imported by the US have ceased to enjoy the low MFN tariff. Citing a report published by the Peterson Institute for International Economics, he says the average tariff imposed on Chinese goods was 19.3% in June 2023, compared with about 2.3% in 2018.
Shenwan Hongyuan made economic forecasts for three scenarios if a new trade war breaks out between China and the US:
- 1. The US imposes a 60% tariff on Chinese goods;
- 2. The US imposes a 60% tariff on Chinese goods, and a 10% tariff on all other imported goods;
- 3. The US imposes a 60% tariff on Chinese goods, and a 10% tariff on all other imported goods, while China retaliates with a 60% tariff against American goods.
In all three scenarios, the US would be able to cut its trade deficit but it would also suffer from slower domestic consumption and economic growth.
Zhao points out that the US not want to have scenario 2 or 3 as its GDP would drop more than China’s.
A Jiangsu-based commentator using a pseudonym “Beibei” says in an articlepublished on November 15 that if China’s MFN status is revoked by the US, Sino-US trade relations and the global supply chains will face a huge negative impact.
“If this really happens, tariff barriers will significantly increase, resulting in a plummeting of the trade between China and the US, Beibei says. ”Many Chinese exporters will suffer from shrinking orders and rising costs. Some small-and-medium-sized enterprises may even face risks of bankruptcy.”
However, the columnist says China will be able to overcome these challenges by focusing more on domestic markets and some Belt and Road countries. She says Chinese manufacturers may also use this chance to increase the added value of their products and shift from labor-intensive industries to knowledge-based ones.
She adds that US companies will be harmed by potential supply chain disruptions and rising costs. She says US retailers and consumers who rely on high-quality and low-priced Chinese goods will face rising prices.
Since Trump won the election, the Chinese foreign ministry has so far refused to comment on potential US tariff hikes and called the matter “hypothetical.”
Xie Feng, Chinese ambassador to the US, said on November 15 in a Hong Kong forum that cooperation between China and the US never has been a zero-sum game.
He said the US-China bilateral trade of more than US$660 billion per year allows 70,000 US companies to make profits totaling US$50 billion in China. He also said Chinese goods can help American consumers cut living costs.
Yong Jian is a contributor to the Asia Times. He is a Chinese journalist who specializes in Chinese technology, economy and politics.