Donald Trump's plan to impose 10% tariff on China has $64 bn import hole

It might be difficult to achieve it fully because tens of billions of dollars worth of goods will probably escape those import taxes due to loopholes and undercounting

By Bloomberg News 

President-elect Donald Trump has promised to impose 10 per cent tariffs on all imports from China as soon as he takes office next month. 

But that might be difficult to achieve fully because tens of billions of dollars worth of goods will probably escape those import taxes due to loopholes and undercounting of how much is actually arriving from China.

 

In recent years, some experts have pointed out a widening gap between US and Chinese trade data that they believe is driven by three factors: the “de minimis” tariff loophole, an underreporting of the value of imports by US importers eager to reduce the cost of tariffs and over-reporting by Chinese exporters eager to maximise tax rebates.

 

The anomaly has appeared in global trade data from early 2020, when China started to say it was selling more goods to the US than America reported buying from the Asian manufacturing behemoth. The gap has grown steadily since and at $64 billion in the first 10 months of this year it’s on track to exceed the record set last year. 

  The upshot: Not only will tens of billions of dollars worth of shipments likely avoid Trump’s tariffs, but the US data also downplays just how dependent US businesses and consumers remain on trade with China.

 

“Distorted trade data may prevent US policymakers from designing effective trade and supply chain policies,” according to the most recent report to Congress from the US-China Economic and Security Review Commission. 

 

The US under-reported imports from China by about 20 per cent-25 per cent last year, according to Adam Wolfe of Absolute Strategy Research, who gave testimony to the Commission. He estimates that up to $160 billion of imports from China didn’t get counted last year, mostly due to US importers avoiding tariffs by under-reporting or misreporting their purchases.

 

De-minimis loophole 

Another factor causing the data gap is the “de minimis” rule, which means that small packages valued at less than $800 don’t get counted or tariffed by the US. American shoppers and companies imported about $48 billion worth of shipments from the world under that loophole in the first nine months of this year, according to US Customs and Border Patrol estimates.

 

Much of that is likely from China, with low-cost shopping apps like Shein and Temu seeing strong growth in the US in the past two years. 

Chinese data shows more than $17 billion worth of shipments to the US of ‘articles of low value in simplified customs procedures’ in the first 10 months of this year, above the total for the whole of 2023. That’s set to rise, with both Shein and Temu seeing US sales and customers reaching record highs in November, a month powered by the Black Friday shopping spree.

 

Sales on the Temu platform in the US in November jumped 31 per cent from a year ago, while Shein had a 20 per cent year-on-year expansion in US sales, according to data from Bloomberg Second Measure, which analyses consumers’ card transactions. 

 

The administration of President Joe Biden said in September that it would narrow that loophole, but hasn’t released any det  ails as to how or when, and it is unclear if that will continue under Trump. 

 

De minimis shipments account for 11 per cent of China’s exports to the US, according to research from economists at Nomura Holdings Inc., who this week estimated a 1.3 percentage point hit to export growth and a small reduction in China’s gross domestic product expansion if these were totally banned.

 

Another explanation of part of the trade data gap comes from the other side of the Pacific. Federal Reserve economists noted in a 2021 report that Chinese companies have over-reported exports to get larger tax rebates.

 

Between March 2020 and the end of 2021, more than 90,000 companies in the nation enjoyed almost 38 billion yuan ($5.2 billion) in export tax rebates, according to state media. Beijing moved to limit that last month, canceling rebates for copper and aluminum and lowering them for some refined oil, solar, battery and non-metallic mineral products. 

It’s difficult to pin down the precise contribution of each of these factors, but “the growing, sizable gap between US and China trade data has important implications for our understanding of what Trump’s first trade war accomplished when it comes to reducing US dependence on China,” said Nicole Gorton-Caratelli of Bloomberg Economics.

 

Trade diversion 

The Trump administration will also have to deal with the increase in Chinese goods making their way indirectly to the US via other manufacturing hubs such as Vietnam or Mexico.

 

New research from Bloomberg Economics shows that while both the US and China report having diversified their trade from each other, the US continues to be the largest single destination for Chinese manufacturing value-added. 

“Chinese value-added is still entering the US — it’s just entering via other countries,” Gorton-Caratelli and Gerard DiPippo of Bloomberg Economics write.

 

Taken together, the data show that claims the US has lowered its trade dependence on China are premature at best.

 

“The US has not de-coupled from China in any significant way,” according to Absolute Strategy Research’s Wolfe. “Higher tariffs are likely to lead to more tariff avoidance, not de-coupling.”