US tariff wall on Chinese imports looks more and more like Swiss cheese
“AN EASY WAY avoid tariffs? Craft or manufacture your goods and products in the good old days United States. It’s very simple!” Back when Twitter was the main medium for presidential proclamations, it was what Donald Trump recommended for companies using China as a manufacturing base. He was half right: avoid tariffs turned out to be pretty straightforward.What he didn’t see, however, is that avoidance is an eminently viable strategy for companies that stay in China.
The scale of avoidance is, to use a non-technical term, enormous. A giant gap that has opened up between Chinese and American trade data opens a window into the tariff evasion that has occurred in the past three years since America imposed tariffs on Chinese goods. Much of this involves importers taking advantage of loopholes; some of it appears to be outright evasion, with companies lying to customs inspectors.
The numbers quickly add up: The total value of Chinese-made products entering America and avoiding tariffs may have exceeded $100 billion by 2021, according to calculations by The Economist. Taken alone, these goods would equate to the United States’ fourth-largest source of imports, even surpassing its purchases from Japan and Germany. Moreover, if all of these goods were correctly counted, America’s two-way goods trade deficit with China would have shattered its annual record in 2021 – a damning condemnation of the use of tariffs as a means of closing the trade gap. with China.
To understand the gap, start with official US trade data. According to figures released on February 8, the United States bought $506 billion worth of goods from China last year. That was up 16% from 2020 (a reflection of booming US consumption), but still below its import peak reached in 2018. Chinese trade data is starkly different. They show America bought $576 billion worth of goods from China last year, up nearly 30% from 2020, by far the highest on record.
This discrepancy is particularly striking because the historical trend is for China to systematically underestimate its exports to America by around 18%. (One reason for the historical understatement is that China classifies many products shipped via Hong Kong as exports to Hong Kong, while America classifies them as imports from China.) If the rule Empirical 18% understatement still applies, China’s exports to America may have reached as much as $680 billion last year, or $174 billion more than reported by the America.
The obvious question to ask is why anyone should favor data from China, with its reputation for manipulation, over US data. In other words, maybe America counted its purchases from China correctly, while China overstated its sales to America. Last year, two Federal Reserve economists, Hunter Clark and Anna Wong, explored this possibility, trying to account for the divergent data.
Part of the problem, they found, was indeed on the Chinese side. To mitigate the impact of the trade war with America, China has dramatically increased tax rebates for its exports, which has encouraged exporters to report more overseas shipments. But looking at trade data for 2020, their conclusion was that tax changes explained just 14% of the gap, while tariff avoidance explained 62% (it was hard to pinpoint a specific reason for the rest). If the same proportions applied to trade data for 2021, tariff avoidance would have reached $108 billion, nearly double the amount in 2020. And there’s reason to think it could be even higher: in 2021, China has actually cut some of its tax refunds for exporters, while those trying to circumvent US tariffs will only be the more adept.
What are the tricks of the trade? One approach is to exploit what is known as the “de minimis” rule. According to this principle, countries do not levy duties on imports and do not collect complete data on imports below a certain value. Most developed countries set the threshold at around $200. In 2016, keen to focus limited customs resources on high-value shipments, America raised its bar to $800, giving importers plenty of leeway to avoid tariffs. In the 12 months to September 2021, US customs officials counted 771.5 million de minimis parcels entered the country — a fifth more than in the previous period — without an estimate of their real value. Some logistics companies are now offering services to US importers, allowing them to make bulk shipments to Mexico or Canada and then split them into smaller packages for duty-free entry into America.
Some companies may also evade tariffs by presenting false information to customs inspectors. In their article, Mr. Clark and Ms. Wong noted that US importers could use “low-priced invoices provided by their Chinese suppliers.” There also appears to have been an increase in goods produced in China but falsely labeled as coming from other countries. Since 2016, Customs and Border Protection, a federal agency, has published an account of its investigations into potential anti-dumping duty evasions. In the past two years, it has launched 37 such investigations, compared to 24 in the previous three years. Virtually all of them targeted products from China. In January, for example, customs investigators determined that Simpli Home, a furniture company, had imported quartz products from China, but incorrectly claimed they were from Vietnam. In December, they discovered that A&A Pharmachem, a supplier of medicinal ingredients, had transhipped xanthan gum produced in China through India to avoid customs duties.
With tougher rules and tighter border controls, America could stop some of that tariff avoidance. Earl Blumenauer, a Democratic congressman from Oregon, introduced a bill aimed directly at China last month that would block companies in non-market economies from using the de minimis loophole. If customs officers opened more shipping containers and examined them carefully, they could identify more understated invoices and more mislabeled countries of origin. But this would require expertise and time, which is all the more difficult when ports suffer from backlogs. Officials want to speed up shipments, not slow them down with even more inspections.
Indeed, America can be at least somewhat grateful for all the tariff avoidance. Border duties ultimately act as a tax on American consumers, driving up the prices of imported goods. At a time of high inflation, fare evasion helps reduce costs. ■
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This article appeared in the Finance and Economics section of the print edition under the title “Artful dodge”