The bilateral trade relationship between the US and China has become increasingly fraught recently, as the two sides continue negotiating an agreement to address their considerable differences. What began as a skirmish between the two largest global economies has now evolved into a broader campaign by the US to hold China to account for its alleged transgressions, including, for example, by limiting Chinese foreign direct investment in the US and restricting the export of certain emerging and foundational technologies from the US to China. But by far the most prominent and controversial tool used by the US to leverage Chinese behaviour has been the imposition of tariffs on imports into the US of Chinese-origin goods, which has caused some degree of pain to Chinese manufacturers and exporters, but considerably greater pain to US importers and consumers, and certain US export industries, such as agriculture, and has dramatically distorted global trade and investment flows. That pain will be exacerbated exponentially should the Trump administration follow through with its recent proposal to impose tariffs on a much wider swathe of Chinese-origin imports. As these issues come to a head, the time is right to look back at how the US and China have arrived at this point and to look forward at where the ongoing confrontation may end up.

What are tariffs and how are they applied

As a threshold matter, it should be noted that tariffs are a blunt instrument that most often are applied on an ad valorem basis, meaning that the tariff rate, which is expressed as a percentage, is multiplied against the value of imported merchandise as declared to US Customs and Border Protection (CBP) at the time of entry. The customs duties are paid by the importer of record, which could be the non-US manufacturer and exporter, but more typically is the US purchaser. While it may be possible for the US purchaser to negotiate more favourable arrangements with its non-US suppliers that would have the effect of limiting the duty liability, as a practical matter US purchasers either bear the brunt of the additional duty liability, pass the additional costs on to their consumers, or some combination of the two.

Jul-Sep 2019 Issue

Skadden, Arps, Slate, Meagher & Flom LLP