The Changing Reality of Trade with China

Monday, July 11, 2022

the changing reality of trade with China

By Ann Wilson, Senior Vice President of Government Affairs, Motor & Equipment Manufacturers Association (MEMA)

Ann Wilson

This year marks the 50th anniversary of President Nixon’s historic visit to China. That visit was followed by significant changes in the economic relationship between the United States and China with the granting of permanent normal trade relations in 2000. Fifty years on from Nixon’s famous visit, the United States is altering its stance on our economic and security relationship with China. This will have a significant impact on the automotive aftermarket industry.

Recently this change of relationship was marked by a speech by U.S. Secretary of State designed to rally the international community to deter and counter China, which the United States sees as “the most serious long-term challenge to the international order.” A Chinese Foreign Ministry spokesperson then countered that the address was U.S. “disinformation” and an attempt to “smear China’s domestic and foreign policy.”  And just today, the United States is accusing Chinese companies of assisting Russia in the war in Ukraine.

What does all this really mean for the aftermarket?

First, Washington is willing to invest to compete against the Chinese economy. As this piece is being written, Congress is considering legislation to invest $52 billion for the manufacture and research and development of semiconductor chips in the United States. This is in large part in response to the chips shortage that has plagued the American industrial base for more than 18 months. But it is also in reaction to the continued large investment being made by China in the market.  

This willingness does have its limits. There are concerns of “corporate welfare” and deficit spending that have marked a very public debate on chips funding. And this willingness to invest does not signify that the United States will open its collective pocketbook to go head -to- head against China in other critical spending.

Second, your supply chain is changing. During COVID and the slowdown at U.S. ports, we have seen a growing movement toward nearshoring the supply base. This movement has only been heightened when China shut down much of the country this spring to stymy the spread of COVID.

Looking forward, the Uyghur Forced Labor Prevention Act (UFLPA) was passed by Congress in 2021. Effective, June 21, 2022, the Act creates a reputable presumption that any goods mined, produced, or manufactured wholly or in part in the Xinjiang Uyghur Autonomous Region of China used forced labor and is prohibited from entry into the United States.

While the Department of Homeland Security (DHS) has indicated that special attention will be paid to cotton, polysilicon and tomatoes, there are no exceptions for small quantities of content.

DHS and Customs and Border Protection (CBP) have both issued guidance on what is necessary to demonstrate the product was not manufactured with forced labor. This includes a detailed description of the supply chain, a list of suppliers associated with each step of the production process, affidavits from each company or entity in the production process, purchase orders, invoices, bills of materials, invoices, inventory records, certificates or origin, and payment records. All importers will also need to demonstrate that any records are part of an operating system or an accounting system that includes audited financial statements.  For more information, CBP has released importer guidance and DHS has released UFLPA Operational Guidance for Importers.

Third, tariffs will remain an issue. Four years ago, President Trump imposed a wide range of tariffs on goods entering the United States from China. Over time, tariffs were imposed on virtually all goods coming from China except for some consumer products. While some in the aftermarket applauded the imposition of tariffs, many other manufacturers struggled to find alternatives for inputs and other components.

Over time, the Trump administration granted individual exclusions from Section 301 tariffs on some products. Yet, now these exclusions have expired and there are very few opportunities to seek new ones.

So, what is the status of these tariffs?

The Biden administration is currently considering requests to continue the tariffs. Later this summer, industry will have an opportunity to oppose the continuation of the tariffs. It is unlikely that the Biden administration will remove tariffs from a large number of goods this year. The Motor & Equipment Manufacturers Association (MEMA) has focused a significant portion of our efforts on reinstating the exclusion process allowing manufacturers to demonstrate that certain components or materials are not available outside of China. Watch for this pressure to continue throughout 2022. 

Finally, both Republicans and Democrats agree about the need to be “tough” on China. Legislation and pressure to continue the tariffs comes from both political parties. For that reason, we do not believe an election will change the trajectory of these decisions. But manufacturers will continue to be pressured to “re-shore” into the United States. 

The landscape is changing and the expectations from our nation’s leaders are changing too. We may see even greater export restrictions on goods imported into China. U.S. domestic investment will be a key element in this new environment as our government tries to match Chinese investment for new technologies. And the current and future administrations will keep the pressure on manufacturers to move manufacturing back to the United States. 

Stay vigilant and stay current. New requirements and new policies will impact your business today and into the future. One way to stay informed is by attending AAPEX 2022 where industry leaders will provide updates and information on many of these issues. 

July 11, 2022