Stockpiling rush | China commission report | China and Brazil ink trade deals

With tariffs on the horizon, companies are stocking up

President-elect Donald Trump has proposed raising tariffs on imports from China by between 60% and 100% - on top of existing duties. In anticipation of these tariffs, companies are scrambling to import as much as they can before Inauguration Day. Year over year exports from China surged 13% in October, as companies globally attempted to hedge against potential supply chain disruptions.

Our analysis: Inventory front-loading will create frothiness in economic and trade data. Increased tariffs are expected early in Trump's second term. In 2017, many companies incorrectly judged tariff threats to be bluster until it was too late. Fewer companies will make that mistake this time, but there will still be skeptics and companies that have not previously exited China who will pay the new tariffs. Between a potential second dockworker strike in January and threats of tariffs, congestion at U.S. ports will ramp up as January 20 approaches. Companies that hesitate may find their orders clearing Customs after new tariffs take effect.

Additional reading: Bloomberg Law, Wall Street Journal, Axios

China Commission recommends revoking China's PNTR status

The U.S.-China Economic and Security Review Commission (USCC) released its annual report to Congress. Among other things, it recommended ending Permanent Normal Trade Relations (PNTR) with China. Several bills are currently circulating that would accomplish this, including a bill by Rep. John Moolenaar (R-MI) that would revoke China's PNTR status, set a minimum tariff rate of 35% for all PRC goods, and a 100% tariff rate for certain specified goods.

Other recommendations by the USCC include:

• To launch a "Manhattan Project" to expedite development of artificial general intelligence (AGI);
• Eliminating the "de minimis" exemption for imports valued under $800;
• Directing U.S. Customs and Border Protection to develop or obtain new tools to identify the origin of parts and materials contained in finished goods entering the United States;
• Strengthening U.S. export control enforcement, including allocating resources for hiring experts at Commerce's Bureau of Industry and Security
• Instituting new controls on Chinese involvement in U.S. biotechnology companies;
• Banning importation of humanoid robots and energy infrastructure products from China;
• Extending U.S. rulemaking on connected EVs to also cover connected Internet of Things devices and appliances;
• Prohibiting Chinese investors from sitting on corporate boards in strategic sectors;
• Creating new rules isolating U.S. quantum computer supply chains from China;
• Prohibiting outbound investment from the U.S. into China in certain key sectors; and
• Removing the ability of companies in Foreign Trade Zones to avoid tariffs on goods from China that are subsequently re-exported.

Our analysis: The USCC report is representative of the current hawkish sentiment towards China in D.C. Many of its recommendations have bipartisan support and will find little resistance in a second Trump term. Revocation of China's PNTR status would have dramatic near-term effects in the form of even higher tariffs on Chinese imports. Elimination of the de minimis exemption would be a boon for U.S. retailers like WalMart, Target and Best Buy. It would require Temu, AliExpress and China-based Amazon sellers to pay duties on every direct-to-consumer order, dramatically reducing their ability to compete in the U.S. market. Both the revocation of China's PNTR status and the elimination of the de minimis exemption are more likely than not over the next four years. Elimination or reduction of the de minimis exemption in particular has been under discussion for almost a decade. Similar to tariffs, China's PNTR status may be used as a bargaining chip to extract concessions.

Additional reading: U.S. China Commission Report, Summary of Recommendations

China's Xi and Brazil's Lula sign deals

On Wednesday, Chinese President Xi and Brazilian President Lula met in Brasilia and agreed to seek "synergies" between Brazil and China. Signed agreements include deals to open the Chinese market to Brazilian sorghum, sesame, fishmeal and grapes, the last of which was an economic priority for Brazil. Brazil expects the new deals to generate an additional $450 million in export revenue. Other agreements covered data management, renewables, and research cooperation. While Brazil does not participate in China's Belt and Road program due to concerns about its effect on its ties with the U.S., it regardless maintains close ties with China as the largest market for Brazilian exports.

Our analysis: China expects the U.S. to continue on its trajectory of taking a less active role in global leadership and hopes to fill the vacuum left behind. It is attempting to re-brand itself in multilateral fora from a global rule-breaker to being a stable, reliable partner. Countries such as Brazil will increasingly need to weigh between engaging with China's overtures and maintaining U.S. ties and market access. With respect to trade, the United States controls most of the world's sorghum market; with renewed U.S. / China tensions on the horizon, China is seeking replacements for U.S. sorghum, which has been the target of Chinese dumping tariffs in the past and is a likely target for future retaliatory tariffs.

Additional reading: Reuters, AP, SCMP, State Council Press Release