No longer in favor

Brian Straight, Supply Chain Management Review 12/24/24

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There is a lot that can and will be written about the supply chain impact of President-Elect Donald Trump’s policies, but the perceived threat China poses to the U.S. supply chain received a bipartisan boost this past week when the U.S.-China Economic and Security Review Commission released its annual report. The 12-person commission (6 members each appointed by each party) provides recommendations to Congress on China policy. This year’s report includes 32 policy recommendations, including a “Manhattan Project-like program dedicated to racing to and acquiring Artificial General Intelligence capability.” It includes initiatives such as investment in biotechnology, the banning of certain technologies from China (such as humanoid robots), and bolstering import controls to deny China access to certain goods and technologies, but I want to focus on two of the recommendations, which given the posture of the incoming administration, could come to pass. (The full nearly 800-page report is available here)

Elimination of PNTR

The first significant impact is the commission’s call to eliminate China’s Permanent Normal Trade Relations status. House Republicans started to push the idea of killing China’s PNTR status, which was first granted in 2004, shortly after the election. “For too long, the Chinese Communist Party has taken advantage of America’s open hand with predatory economic practices that target the American economy, our workers, businesses, and our national security. We believe in free trade with free nations, but as the Committee recommended on a bipartisan basis, it is now time to reset our relationship with China by moving past PNTR to a trade relationship that reflects the threat we face from the CCP,” a spokesperson for the House China Committee told Fox News Digital.PNTR status, when granted to a country from another, offers the receiving country trade advantages, such as low or no tariffs, and ensures it is treated with the same trade respect as other PNTR countries. China first received special trade consideration in 1980, but it required an annual waiver until 2000 when China was granted permanent status. It allowed China to accelerate imports to U.S. consumers. China imported some $500 billion worth of goods in 2021.But, PNTR also made it easier—and cheaper—for U.S. companies to outsource manufacturing to China.Now, with a new administration set to take over and a desire to boost American manufacturing, PNTR for China is a hot-button issue. Those in favor of keeping PNTR intact argue that removing the status would cause higher prices and inflation as it would make it easier for Trump to enact tariffs on Chinese goods. Trump has promised general tariffs of 10% to 20% on all imports and up to 60% on Chinese imports.Opponents argue that PNTR has allowed China to take advantage of the U.S., steal IP, and ultimately undercut U.S. businesses and workers. “The PNTR status allows China to benefit from the same trade terms as U.S. allies… repealing PNTR could reintroduce annual reviews of China's trade practices, giving the U.S. more leverage to address unfair trade behaviors,” the commission said in the report.A new trade war was already a possibility, but removing PNTR will undoubtedly trigger some form of economic retaliation by China. It will be a waiting game, but one for which businesses must start building contingency plans.

Elimination of de minimis

The other recommendation that will have a significant impact on supply chains is the suggestion that the U.S. eliminate the “de minimis” exemption (Section 321 of the Tariff Act of 1930) in tariff law. De minimis allows items valued at less than $800, particularly e-commerce-related shipments, to avoid strict U.S. Customs and Border Patrol scrutiny and enter the U.S. duty free. According to Fox News, the U.S. imported approximately 4 million shipments of Chinese origin per day under de minimis last year.Fox reported that the commission concluded shipments entering the U.S. under de minimis “are often used to sneak fentanyl into the U.S.” The commission recommended Congress allocate additional resources to beef up enforcement and inspections if de minimis is removed.From a supply chain impact, increased enforcement would slow down the process of bringing goods into the country, and potentially increase costs. One alternative to avoid delays may be building larger shipments and bringing more goods into the U.S. at once, potentially eating up valuable warehouse space as items are stored domestically until they are sold.Following through on either suggestion may create some short-term pain for businesses and consumers. Will they lead to increased domestic manufacturing and jobs? Leading economists are mixed on this conclusion. I don’t study these impacts enough to know the true answer, but for businesses that import goods or materials from China (and other countries for that matter), it just adds another layer of potential disruption to consider.