China's Retaliatory Tariffs, Section 301 Authorities, and Tariff Refund Litigation

A new study from North Dakota State University found that China's retaliatory tariffs on US ag goods wiped out an estimated fourteen point nine billion in export sales over twelve months. So Scott, let's look under the hood here. What stands out to you as you look through these numbers?

And soybeans is primarily a very efficient food for pigs. So that was an agriculture match made in heaven, at least for the moment at the time. And so the US found a great source of sales, net sales additional for their soybeans and other products, and uh Chinese consumers improved their diet as it became more and more important element

of trade between the two countries. And as trade tensions rose, it became one of the obvious places for trade pressure and retaliation. And that's indeed what happened with soybeans. China, basically, you look at it broadly, they changed sources. They switched their purchases from the United States to Brazil and Argentina principally. This had an immediate effect in slowing down sales.

and therefore exports from US over the course of crop cycle, most of the consumption of soybeans was the same worldwide. But what happened is your sourcing changed. So the China sourced Brazil and Argentina principally, instead of the United States, US soybeans went to Europe instead of China. Europe previously had gotten soybeans from Argentina and Brazil. So there was a change in the shipment patterns.

But it showed up in uh net losses, as the uh North Dakota State University survey showed, net losses for US farmers. And it was sort of broadly across agriculture

Now there's a big drop in total ag sales to China. From twenty twenty four to twenty twenty five. Sales dropped from twenty four billion to eight billion. So its steepest one year decline It certainly got the message through and it's one of those things when you accelerate pressure on a rival's economy.

They have techniques they can use back. So this happens pretty frequently. It was not unexpected. And all I can say is that the agriculture groups in the United States tend to be strong supporters of the president, and they tend to be very well represented in the U.S. Congress. And so over time this'll work itself out. Certainly there were there were a lot of state by state issues that these losses materialized. And it's coming now at a time when farm incomes

are under a lot of pressure. If you happen to drive by a a gas station that sells diesel fuel, look at the difference between diesel and gasoline. Diesel's what does work in the country. Gasoline's what gets you to work, but diesel's over five dollars a gallon in most parts of the country. Big separation from regular gas. That's a just indication of the pressures on the energy supply system. Those will have translated to farm country higher costs.

Uh because they use diesel for basically everything, from uh powering the tractors to wetting their dryers and all sorts of equipment.

And I'll come back to that. This is really the first fairly comprehensive study we've seen of retaliation. And in fairness, I think a lot of us, including me, expected more retaliation in the beginning. We thought that everybody would retaliate, or at least I did. And it turned out almost nobody did. The Chinese did, and the Canadians did to a lesser extent. And that was it. Of course, the reality of the global economy these days is if the Chinese retaliate, that's a law.

And in this case it's fourteen point nine billion in lost ag sales. And I think the salient thing about that is this is not, I don't think, a short term phenomenon. These markets are gone. You know, the Chinese have shifted to Brazil and Argentina. And I don't think they're necessarily gonna shift back. I mean, they'll probably make some token shifts back. They made a commitment last October to restart some purchases because last year they purchased zero.

And the Trump administration has indicated that they committed to I think seventeen billion in ag imports for them, not just soybeans but all agriculture. I don't think the Chinese have confirmed that number, but You know, if you take it as a number, that's significant. It doesn't get us out of the overall Act deficit. And we've discussed that on past episodes. We are now in our fifth year, I believe, of uh agriculture deficits after more than seventy years of surplus.

So we've kind of turned a corner here that's disquieting for the farmers. And, you know, this if the Chinese actually follow through on a seventeen billion commitment, that'll help. But it's not going to erase the projected deficit uh for this year. And then Sc Scott made the other important point, which is on top of that, the farmers are facing a boatload of increased cost.

Fuel costs, diesel costs. And as mentioned, I think in the last episode when we were talking to Nassim Fasel from BRT, cost of fertilizer is going up. The cost of fertilizer ingredients is going up, in part because of the closing of the strait of hormones.

And the cost of equipment is going up because most farm equipment, no surprise, is made out of steel. And we now have, depending on what country you're coming from, fifty or twenty five percent or maybe fifteen percent tariffs on steel and aluminum. So if you're buying a new tractor, a new combine, a new uh the harvester, First of all, it's expensive anyway. And what you're now having to do is pay something that's substantially more expensive because of the increased price of raw materials.

That gets me to the other issue because what's becoming obvious is that there are real costs here for Americans and that what Trump said from the beginning is well, well, the foreigner's gonna pay. He didn't say anything about retaliation. And what we're discovering is that there wasn't as much retaliation as expected, but what there was has made a difference.

particularly to the farmers. And we are seeing increased costs on the import side that where the biggest cost or the most important one has been on intermediate goods. And Scott has pointed out previously that intermediate goods now are like half of our imports, I think, something like that. Intermediate goods are the parts and components, the stuff that US manufacturers use to make end products.

And so what we've succeeded in doing is making US manufactured products more expensive because now their inputs are more expensive. It makes it inflationary for them to sell here. It makes them harder for them to compete in the global market.

When President Trump took office in January twenty twenty five, both the Customs Service and the Yale Budget Lab reported two percent was our typical tariff rate. So two percent of all imports It was the tariff rate. So today, the actual if you do the math, which is total imports and then tariffs as a percent. It's seven point three percent. The EO budget labs has it at eleven point eight. But both those numbers are lower than a year ago in June of twenty twenty five.

The AL budget lab had a total tariffs fourteen percent of all imports. If you did the tariff math, it was closer to ten percent. But both those numbers are now down from fourteen to eleven point eight or from ten. To 7.3. So year on year, it's definitely higher than it was when the president took office by quite a bit, but it's moderated versus a year ago.

We'll have to see how this works. Bill's absolutely right. In some of the specific areas where tariffs are the highest, like steel and aluminum, there'll be big differences and noticeable increases. But overall, the tariffs are moderating slightly.

metals, and that's not just steel aluminum, but all metals, two hundred ninety nine billion. Timber seventeen point seven billion, which is making our housing costs go up. Trucks, I mean heavy trucks here. 27.7 billion, and essentially everything else that wasn't exempted, 1.1 trillion. So that's quite a bit.

They also have, just odd fact to it, I've never seen this before, an interesting little chart about the status of Trump's threats. And so they counted up every terror threat he's made and they decided there were fifty nine of them. since November 2024. And the disposition is interesting, although it doesn't reflect the magnitude of the various ones, but the number that have imposed in full is only eight.

I imposed partially two, under investigation eleven. That's probably smaller now because it was before the announcement about the forced labor investigations, which we'll get to in a minute. Threats that have not yet been imposed is the biggest number, twenty three.

And then threats or actions that were repealed three and threats that were withdrawn twelve. So it's a mixed picture. It's a much more of a mixed picture than one would think, although some of them are a lot bigger than others. Let's put it that way.

elsewhere. Like how beneficial is that to them if China's moving their soybean purchased to Brazil and elsewhere?

cultivating customers in China, they now have to go out and cultivate new customers. Yeah. And that's real work. That's important work. Reliable suppliers are hard to find. Reliable customers are treated like gold by most companies who are customer facing. So there is work to be done in that area, and when you're dealing with China's retaliation, first of all, as Bill pointed out, it's large in scale. And second, it's often driven by other factors than individual enterprises making decisions.

it tends to be a very sort of top-down operation. So there's recovery that will have to happen and there's real work involved in satisfying a whole new set of customers.

And it sounds like, you know, the farmers are unhappy, but most of them are saying we're sticking with Trump and this is one of their problems. Trump knows this. They don't have a lot of leverage because they voted for him three times and he's pretty confident they're gonna do what he tells'em the next time. I mean there'll be some erosion. It'll probably be show up in people staying home in the midterms rather than voting the other way.

And there's been some work done on that by people like Charlie Cook and then Zogbeet, the professional polsters, who've pointed out that the easiest thing to do if you're unhappy is just you don't vote. And getting farmers that have voted Republican for the last, you know, twelve elections to suddenly switch and vote for a Democrat.

So Bill, give us a lay of the land here, what's going on, and explain how the administration is doing this under three hours.

And there's all these hoops and hurdles you have to go to. And to Ambassador's credit, unlike what Trump often does, he's not ignoring the hoops and hurdles. He's following the procedures which will allow them to avoid a court loss over process. So the proposed remedy is out for comment. They're put it out in draft. So it'll show up in the Federal Register in the next day or so. Request for public comment and there's going to be public hearings later this month.

It's not a fast track. So they're going through all the motions to let people talk about whether this is a good idea or what they should do instead. And then I think what they're gonna do is of the sixty countries, I think there were fifty four that were found not to have

appropriate laws. And so they're getting the twelve and a half percent tariff. And then the remaining one, which includes the EU, which is important, were found to have relevant laws but not doing enough to enforce them. Their tariff is ten percent. The interesting word in the announcement

is these were referred to consistently as additional tariffs, which suggests to me that they're going to be on top of the existing tariffs. Now, what that really means, I think, is a practical matter is a section 232 tariff. because the AIPA tariffs are gone, thanks to the Supreme Court. The one twenty two tariffs are in effect, but they go away July twenty fourth.

And given even the schedule here with the comment period and the the hearings and everything, I think these new tariffs will probably replace the one twenty two tariffs. So they won't be on top of the existing ten percent. They'll just be a new ten percent. or for some people it'll do twelve and a half. But for a lot of items they'll be on top of the two thirty two numbers, I think, which means, depending on which country you are.

Your fifteen is going to go to twenty-seven and a half or twenty-five, and your twenty-five is gonna go to thirty-five or thirty-seven and a half. To be fair, there are a lot of exemptions. There's a very, very long list of exemptions that are framed around stuff we don't make.

Stuff that would cause a lot of increase cost increases here if we ran into supply shortages. Stuff that is essential for US production. And if you look through the items, there's a number of agriculture items, beginning with beef appropriately, because beef prices are way up.

So we can't accuse them of making that worse in this case. And there's a lot of metal, steel and aluminum derivative products, downstream products on the exclusion list. And you'll remember that uh this has been a bone of contention with manufacturers. the reason I said earlier that they're ho complaining the inputs that they need to make their stuff that they can't get here has gone up way up in price. I think this is an effort to solve some of those problems. So the net impact

Maybe less than it might seem at first. I saw I think one story that estimated it was not a thorough study, estimated that maybe half of the items that we import are going to be covered by this and the other half are going to be exempted. So it won't be a big deal, so they say. But it you know, obviously as Scott said earlier, if if you're in one of the affected companies, it is a big deal. Mm-hmm. Sure. Because ten percent are

Twelve and a half is not peanuts. What's gonna happen next? You know, he'll be sued. Of course he'll be sued.

I've taken a a narrower view and if you look at the federal register notice, you'll see that Ambassador Greer has too. The statute says that in order to act, you have to find that a foreign act policy or practice is an unjustifiable, unreasonable, or discriminatory burden on the United States commerce.

And that falls into like multiple parts. Is it unjustifiable, unreasonable, or discriminatory, number one? And two, is it a burden on the United States commerce? Because it can be unjustifiable and not make any difference. You know, or it can be a burden and not be unjustifiable, et cetera. So you have to prove all these things. The administration is asserting them, and they've got a lengthy study of all sixty countries, which I've not looked at yet to back it up.

My suspicion is that if you are a smart lawyer and choose your plaintiff wisely and choose your countries wisely, you may be able to get the court to decide that in the particular case you're suing, this is not An unreasonable, that's really the only word that ambassador used. This is not an unreasonable act policy or practice that burdens or restricts U.S. commerce.

For example, and this is already screams of outrage are already coming from the EU, with good reason, because they have a law on this subject. And this has been something that the EU has actually attempted to deal with through a number of measures that they've taken over the years. They would probably say that they are more aggressive on forced labor than we are. We would probably not agree with that. But to imply that they're deficient is

obviously offensive to them. The chairman of the Parliament's trade subcommittee has said this is either ridiculous or absurd. I forget which word he used for this particular thing. So they'll push back. And they'll argue this is an unconstitutional extension of the statute that goes beyond the president's authority. Somebody's gonna say to the court, you know, in a case like that, what you need to do is find that this is not an unreasonable practice.

It does not burden or restrict US commerce and the US char got it wrong. I don't know if that'll prevail and I think there's certainly gonna be cases where it won't prevail. The administration says everybody's guilty. Well, it's wrong to say that everybody's innocent. There's a number in there that certainly are guilty. So I think though, if you choose your victims wisely, I mean company that's actually suffered with forced labor imports from the right country or allegedly

forced labor imports from a country that probably is doing something about that. I think some of these may be winners in court. Yeah. But not all of them. Allen says they're all going to lose.

was created by the Congress. It's been statute. It's a specific delegation to the US trade representative to deal with unfair practices. But when you get down to defining how unfair is unfair, that gets very fact specific. I think claims are going to be difficult to make. Also keep in mind that while we have this proposed rule on forced labor up at the plate, over in the on deck circle,

is the three oh one on structural excess capacity. So there's another bite at this apple, all of which make me believe Secretary Besson's original forecast, which is whatever the Supreme Court decides, we're not gonna see a drop in revenue from tariffs. So I think we're on this train for a while. And once again, look, forced labor or prison labor has been prohibited in for imports to the US.

since I think the McKinley Tariff Act of eighteen ninety six. It's a common feature. Sometimes it gets expanded in its coverage. Our favorite Uffelpuff there was an expansion of a clause in the Trade Act of nineteen thirty, the Smoot Hawley that was never applied for by an individual firm about forced labor and then became this entire program. So there's a lot of ground to be plowed.

You know, one of the problems has been companies that didn't sign up for the electronic funds transfer program that C B P has. Companies the ones that haven't done that are now doing that'cause they figured out they won't get their money ever for anything.

Everybody's happy and the books are closed on that particular entry. Because it takes a long time, I mean more than three hundred days, for customs to do that, they have a schedule and it sort of rolls out Th one category of stuff is stuff that fell victim to the earliest tariffs Trump announced.

the steel aluminum ones in February of twenty five, which were under AIPA, and then the Liberation Day tariffs in April. Three hundred and twelve days takes you into sometime before the Supreme Court decision. So there was a number that got finally liquidated before the court came in. The other category which I don't know as much about seems to be those that are informally liquidated, that are which tend to be small numbers from small companies.

that are liquidated virtually when they enter. They come in, the duties paid at the same time, and that's sort of the end of it. There's it's an informal process. This is not Walmart, this is individual entities.

The judge issued a universal injunction, essentially ordering CPP to pay anyway, and the Justice Department is arguing that he doesn't have authority to do that, that the uh decision last year, which is Trump vicasa, C A S A, remove the authority issue, this kind of universal injunction that covers everybody as opposed to just the

handful of plaintiffs in the case, that'll be litigated, I think, because the court the court left the door open here, which was you can file a class action lawsuit. And so one of two things will happen. Either Court of Appeals will slap down the Justice Department's request.

and let the order stand. In the end the Supremes are gonna have to do what they should have done the first time, which is to lay out what they wanted to have happen. You know, and th all they said was the terrorists are invalid, period.

They could have gone one step further and said, and here's who gets their money back and you know, and here's the process you need to follow to do that. But they didn't do that. It's gonna come back to haunt them because it's gonna end up in their lap and they're gonna have to answer those questions.

So they could have done it the first time, but it'll probably go down that road. The alternative if justice wins, the smart lawyers are gonna rally everybody in that category, file multiple class action lawsuits. They'll win because the Supremes have already invalidated the tariffs. It's not a mystery as to how the courts are going to rule. It just forces everybody to go through an extra step, forces them to hire lawyers.

and therefore pay part of the revenue or the refunds to the lawyers. I think the Justice Department is banking on the thought that a lot of people won't bother, especially the small guys, because it's too much effort.

You know, the administration could make this easier, they could make it hard. And they've chosen to make it hard. And the losers in doing that are not going to be the large companies that have in-house lawyers and uh, you know, major compliance operations for this is just one more task.

The losers are gonna be the small importers that like Scott said have moved on, can't afford to litigate and they're just gonna say, Well, you know, I'll chalk that one up to bad experience and it's too bad because they can't afford to lose. Yes.

take the case and decide the case, to decide the case without a remedy is kind of open the door for this activity. I think there's plenty of blame to go around, but once again, every once in a while, Alex in my long life at work, I've overpaid taxes here and there.

And at some point you just you don't worry about it. You find a pile of items that you could have taken as a deduction, but it's just too much work to talk to your CPA and go back and redo it. That's the situation most importers are in who are in this situation where they have a liquidated transaction. So you move on. Life goes on.

part of this team and the economics team at CSIS. So Evan, we all want to wish you congratulations and wish you the best of luck. We're we're so proud of you and thank you for all you've done for the trade guys.