Wednesday’s ruling by the U.S. Court of International Trade limiting Trump’s tariff authority under the International Economic Emergency Powers Act (IEEPA) throws a new variable into the US-China trade outlook. If the ruling overcomes challenges by the Trump administration, it would be a net positive for China’s economy in the near term but leave major uncertainty over other tariff authorities that Trump may use. Meanwhile, investors should be aware of escalating non-tariff tensions that are hard to quantify but pose risks for China’s tech sector and US supply chains.
SUMMARY:
- If it stays in place, the ruling by the Court of International Trade (CIT) invalidating Trump’s IEEPA tariffs will be a qualified positive for China’s near-term growth and markets outlook; Trump will use other trade authorities to target trade with China, but these will be slower moving and somewhat more predictable.
- However, US-China “supply chain wars” are also heating up, with reports yesterday of tightened US export controls on aircraft parts and chip design software in retaliation for Beijing’s failure to rescind its own restrictions on critical mineral exports; there is a risk of further escalation, with spillovers to supply chains and to US-China trade talks.
- Secretary of State Marco Rubio’s announcement that the US will “aggressively rescind” visas of Chinese students in the US underscores the hawkish drift of US policies towards China, regardless of the status of tariffs; lack of internal coordination between Trump’s trade and non-trade policies will increase uncertainty in the US-China relationship.
WHAT THE RULING IMPLIES FOR TRUMP’S CHINA TARIFFS
On Thursday afternoon, a federal appeals court granted the Trump Administration’s request for a pause on the ruling by the Court of International Trade (CIT), with a deadline of June 9 for arguments.
If the CIT ruling overcomes challenges and stays in place, it would remove most of the tariffs that Trump has imposed on China’s imports since January. The ruling invalidates the 20% tariffs related to fentanyl concerns, and the 10% reciprocal tax imposed on April 2. The US weighted tariff rate on imports from China would thus go down from around 40% to around 12%, leaving in place the tariffs imposed under Section 301 (initially in Trump’s first term, and later added to by Biden). The Washington Post reports that the CIT order appears to also reinstate the de minimis exemption on parcels under $800, but we have not confirmed this.
Trump will have other tools to impose tariffs on Chinese imports, in rough order of ease of use and flexibility:
- Existing Section 301 authority. Trump likely has considerable latitude to use the prior investigation into China’s unfair trade practices under Section 301 – the legal basis for tariffs on Chinese imports imposed in his first term, which remain in place – to impose additional tariffs on Chinese imports across a broad range of sectors. This could happen fairly quickly (i.e., this summer), though there are procedural requirements, including (at least in theory) a public comment period (usually 30 days) and a formal exclusions process. Also in theory, Trump would need to frame the use of tariffs as related to the subject matter of the original investigation (tech transfer and related intellectual property policies) or run the risk of challenges in courts.
- Pending Section 232 sectoral tariffs (semiconductors and pharmaceuticals), which have been underway and could potentially come out any day. At a presumed rate of 25%, the semiconductor tariffs could increase the weighted average US tariff rate on China by several percentage points, and possibly more if USTR expands the coverage of these tariffs to include not only semiconductors but also finished goods containing semiconductors made in China. The impact of pharma tariffs on China’s exports is small.
- Potential new actions under Section 301, Section 232, and other trade authorities. These generally require investigations, which would push tariffs under new authorities into late summer for Section 232 (sectoral tariffs) and later for Section 301 (country-based tariffs). For a cheat sheet on Trump trade authorities, see HERE (Atlantic Council) and HERE (Council on Foreign Relations).
- Stripping China of Permanent Normal Trading Relations (PNTR) status. This extreme move would require approval by both the House and Senate, which seems quite unlikely. The Peterson Institute estimated last year that revoking China’s PNTR status would increase the weighted-average tariff rate on imports of manufactured goods made in China by around 40 percentage points.
IMPLICATIONS FOR US-CHINA TRADE TENSIONS
China’s economy would benefit from the near-term suspension of IEEPA tariffs. If courts revoke Trump’s broad IEEPA tariff authority, he may focus his attention on China – long his top target – instead of other trading partners. Still, the net outcome for China would be positive in the near term if the ruling stays in effect. The US tariff rate on Chinese imports would drop dramatically, and it would take some time before Trump could recreate the IEEPA tariff regime with other tariff authorities (if he so chooses). China would also benefit from a better outlook for global trade without Trump’s broader IEEPA regime in place, and from a tougher time that the US would have pressuring other countries to crack down on imports from China (some of which are transshipped to the US as the final destination). The factors mitigating some of the upside for China’s growth and markets would be: (1) Beijing would be less likely to implement aggressive stimulus, although this was already our expectation; and (2) uncertainty about the longer-term US-China trade outlook would remain high.
Without new tariff leverage, US-China trade dialogue would be very likely to muddle through without reducing trade tensions. If Trump loses IEEPA tariffs and does not quickly replace them with another tariff threat, the 90-day truce agreed in Geneva on May 12 – and the upcoming August 12 deadline to renew the truce – would carry less practical relevance. Beijing would still welcome negotiations, using them to try to understand what Trump wants from China, explore opportunities for compromise, and slow additional trade measures directed at China. But Trump himself may feel less need to articulate his demands until he regains some leverage with tariffs, and Beijing will feel less immediate pressure to put concessions on the table.
There are two risks with trade talks that muddle through:
- First, a lack of breakthroughs means dialogue would do relatively little to prevent further tariff actions by the US.
- Second, such dialogue will likely be ineffective in containing the tit-for-tat in non-tariff measures already playing out (see further below). Treasury Secretary Bessent, who leads trade talks with China, does not have the authority to compel Commerce (which oversees export controls) to come to the table. And without a deal under active discussion, Trump is unlikely to care enough about the relationship to restrain hawkish measures from the Commerce and State Departments.
If Trump seeks to maintain tariff pressure on China by quickly using Section 301 authorities to replace IEEPA, the two sides could repeat a cycle of tariff escalation. If Trump uses Section 301 to impose or threaten to impose the 30% tariffs on Chinese imports invoked under IEEPA, Beijing may initially walk away from talks, once again testing whether Trump has the appetite to follow through on his threats as market and economic pressures build. Thus, quick use of Section 301 could return the two sides to the pattern of tariff escalation seen in the 2018-2019 trade war and in March-April.
Finally, what happens if the CIT ruling and other challenges to IEEPA authorities are overturned? Our outlook for US-China tensions before the CIT ruling featured a significant risk of re-escalation of trade tensions by the August 12 deadline for the US-China trade truce (see our report from last Friday HERE). We noted that Trump will be more emboldened to re-escalate if his fiscal package passes Congress before the August recess. We also highlighted rising tensions over non-tariff measures, which continue to play out.
NON-TARIFF MEASURES ARE HEATING UP
Multiple media reports point to tightened US export controls in an intensifying supply chain standoff with China. The Trump administration has reportedly suspended the licenses for US firms to sell equipment to China’s COMAC, the fledgling rival to Boeing and Airbus, for use in its wide-body C919. The order presumably includes jet engines and other components critical for the C919’s operations. The near-term economic impact is not large, but the move would take aim at one of Beijing’s most important and most visible industrial policy projects. The US action appears motivated by frustration at Beijing’s only halting moves to loosen restrictions on exports of critical minerals since the Geneva agreement on May 12.
Separately, the FT reported yesterday that the US has ordered US and European firms to stop selling semiconductor EDA (electronic design automation) tools to China. Per the FT, the impacted companies likely include Synopsys, Cadence Design Systems and Siemens EDA, which collectively account for about 80 per cent of China’s EDA market. The scope of the order (transmitted through letters to the companies) is not yet fully clear but could have a major impact on chip design even for Chinese tech companies not on the Commerce Department entity list. This step may be as much about ongoing efforts to close loopholes in semiconductor restrictions on China as motivated by the rare earth controls.
The scope for preventing ongoing escalation is unclear. As we noted last week, Beijing has framed recent US guidance to firms discouraging use of chips made by Huawei as violating the spirit of the Geneva agreement and will view the COMAC and EDA moves as provocative. The dangers are: (1) endangering ongoing trade negotiations; and (2) further tit-for-tat, with Beijing perhaps less likely now to loosen up on critical mineral exports unless the US agrees to do the same. US firms potentially impacted by China’s restrictions on critical minerals include aerospace and defense, as well as automakers (through EV components), though Beijing will be more careful with the latter unless tensions rise further.
Several factors complicate dialogue on supply chain restrictions:
- These issues are wrapped up in national security considerations on both sides, which makes negotiation more difficult.
- Commerce, the lead agency on export controls on the US side, is not playing a major role in US-China negotiations.
- The degree of internal coordination on the US side is unclear. The latest US moves on export controls, as well as Secretary of State Marco Rubio’s announcement that the US will “aggressively revoke” the visas of Chinese students in the US, came despite the fact that the two sides are in trade negotiations. The disconnect between trade talks and other parts of the relationship may be by design but could also reflect a lack of coordination between agencies.
Indeed, the overall challenge of coordinating U.S. policy towards China is likely to increase in the wake of Trump’s decision to drastically reduce the size of the White House National Security Council staff, including positions on China and China tech policy (see more background from Politico HERE). This is an environment that will provide more leeway for individual agencies – in particular, the State Department under Rubio and the Commerce Department’s Bureau of Industry and Security – to take hawkish measures towards China. Treasury Secretary Bessent’s job of keeping trade talks on track will be challenging.
