The second edition of the U.S.-Sino trade war kicked off shortly after President Donald Trump returned to the Oval Office.
Effective February 4, the United States imposed an additional 10% tariff on imports from China. China responded by levying tariffs of 10-15% on specific American products. This escalating conflict is not limited to just China; the U.S. is drawing battle lines with other trading partners, notably Canada and Mexico.
This new trade war will impact US$440 billion worth of goods imported from Mainland China, alongside US$6 billion from Hong Kong. Approximately US$14 billion worth of American products imported into the Mainland face additional tariffs. This landscape illustrates the far-reaching economic implications that these tariffs could have on global trade.
Lessons from the Past
Tariffs have become a pivotal tool in Trump's negotiation strategies, aimed at securing economic advantages for the country. However, with the president’s characteristic impulsiveness and unpredictability, the upcoming trade war may veer off the path established in the previous conflict. The lessons learned from the 2018-2019 trade war highlight the significant influence of tariffs on the merchandise trade sector.
During the first trade war, the U.S. imposed tariffs on roughly US$550 billion of Chinese goods, with tax rates ranging from 10% to 25%. China retaliated with tariffs on US$185 billion of U.S. goods. The consequences were evident: in 2019, U.S. imports from China plummeted 16.6% year-on-year, while U.S. exports to China also fell 11.5%.
The two countries eventually signed a Phase One trade deal in January 2020, committing China to increase purchases of U.S. exports by US$200 billion over two years. Subsequently, the US goods trade deficit with China narrowed from US$418 billion in 2018 to US$295 billion in 2024.
Reshaping Global Supply Chains
The U.S.-Sino trade war is leading companies to adopt the “China Plus One” strategy, resulting in a more diversified regional supply chain. Between 2018 and 2024, while the share of China's exports to North America declined, there was a marked increase in exports to other regions such as Latin America and Europe.
Hong Kong, too, is adapting. The city has expanded its exports to emerging markets like ASEAN and the Middle East, shifting towards a growing share of raw materials and semi-manufactured goods. In contrast, the share of consumer goods has decreased.
Amid these trade conflicts, the re-export of Mainland-origin goods from Hong Kong to the U.S. has dropped nearly 50% since the onset of the first trade war, while re-exports of ASEAN-origin goods to the Mainland have surged by over a third.
New Tariffs: A Closer Look
For the first time, Trump’s tariffs have been applied to goods from Hong Kong, reflecting the U.S. administration's increasing scrutiny of the city. In 2020, a presidential executive order removed Hong Kong’s special privileges despite its special status under the World Trade Organization.
Hong Kong experienced a 4.1% drop in total exports in 2019, with an 8.2% decline in re-exports of Mainland-origin goods. Today, approximately HK$157 billion (3.4%) of total exports are under U.S. tariffs, a notable decrease from HK$292 billion (7%) in 2018. Consequently, the impact of the new tariffs on Hong Kong’s export sector may be less severe than in the past.
With a 10% tariff, many businesses can absorb the added costs by increasing order sizes or focusing on higher-value products. However, tariffs escalated to 25% during the first trade war, and Trump repeatedly hinted at imposing new 60% duties on China during his presidential campaign last year. Such increases could significantly alter the economic landscape unless trade agreements are reached.
De Minimis Exemption, E-Commerce Challenges
Another looming challenge is the potential removal of the de minimis exemption, which currently allows packages valued under US$800 from the Mainland and Hong Kong to enter the U.S. duty-free. While the U.S. temporarily reversed its decision to block this exemption, there is a possibility that thresholds could be raised alongside more stringent reporting requirements. Notably, the threshold was only US$200 per shipment before 2016.
The significance of this change is underscored by a Congressional Research Service report indicating that China's exports of low-value packages surged from US$5.3 billion in 2018 to US$66 billion in 2023, with the U.S. remaining a major market. U.S. Customs and Border Protection estimates that de minimis imports reached 1 billion parcels worth about US$54.5 billion in 2023, with China accounting for roughly one-third of this total.
Changes to the U.S. de minimis policy will undoubtedly influence China’s cross-border e-commerce expansion, pushing Chinese e-commerce giants to prepare for challenges by relocating their production bases to Southeast Asia and other regions. For Hong Kong, this shift is expected to decrease demand for air cargo, putting additional strain on one of the world's busiest air cargo hubs.
As the trade war unfolds, its implications extend far beyond the immediate tariffs imposed. The lessons learned from previous conflicts will be crucial in navigating this new era. The stakes are high, and the global economy is watching closely.
Doris Fung, dfung@chamber.org.hk