Reshma Kapadia
The Trump administration's newest tariffs on drones and a report this week outlining efforts to curb China's tariff evasion practices offer a glimpse of the next phase of President Donald Trump's trade agenda: more targeted tariffs, tougher rules governing where products are made, and greater scrutiny of efforts to evade duties.
The U.S. on Friday imposed tariffs ranging from 25% to 100% on drones, using Section 232 of the Trade Expansion Act. Countries that struck trade pacts capping sectoral tariffs -- including the European Union, Japan, South Korea and Switzerland -- face 15% levies. The duties are set to take effect Sept. 3.
Companies that commit to manufacturing in the U.S. could qualify for lower tariffs. The tariffs, aimed at addressing China's dominance in drone production, also leave room for further negotiations before they take effect. Shares of U.S. drone makers like Ondas and AeroVironment rose on the news. The details of the drone tariffs also highlight another priority for the administration: rules of origin, which determine where a product was made for tariff purposes. It is the latest push to bring back manufacturing of critical goods to the U.S. For drones from the European Union, Japan or Korea to get the preferential rate, major components have to come from the U.S. or another trade partner eligible for preferential treatment.
Trade experts expect rules of origin to remain a major focus as the administration tries to curb transshipment -- a backdoor the U.S. says China has used to evade tariffs by shipping goods through a third country, making minimal changes there, and then exporting them under that country's lower tariff rate.
In a report released this week, the administration said it would use artificial intelligence to better track where inputs are coming from and clamp down on a practice it says allowed China to evade roughly $60 billion in tariffs. It identified 40 countries as enabling the practice.
In a statement, a spokesperson for the Chinese embassy in Washington, D.C., said: "China holds that any unilateral actions or agreements concerning transshipped goods must not target or harm the interests of third parties."
"We firmly oppose any party seeking to strike a deal at China's expense or engaging in baseless economic coercion that severely infringes upon the legitimate rights and interests of relevant enterprises and gravely disrupts the stability of global industrial and supply chains."
If such a situation arises, the spokesperson said China would take measures to safeguard its interests. For now, though, analysts don't see recent tariff-related measures as upending the fragile truce between the countries.
Rules of origin are also a major issue in continuing negotiations over the U.S.-Mexico-Canada trade pact and could provide a template for other trading relationships.
The issue is likely to stay front and center, especially as the wide differences in U.S. tariff rates across countries create greater incentives for transshipment.
"Previously, the incentive to transship illegally was mostly focused on goods subject to high anti-dumping or antisubsidy duties. Now, the differential tariffs have created an incentive for more cheating," says William Reinsch, a senior adviser at the Center for Strategic and International Studies.
Another potential fallout from disparate tariff rates: Some companies may find it cheaper to source in China, especially as the U.S. and China discuss a Board of Trade that would lower duties on roughly $30 billion of less sensitive goods, writes Chad Bown, a senior fellow at the Peterson Institute for International Economics, in a blog post.
Those calculations could change quickly. More sectoral tariffs, including duties related to copper, still loom. And an even broader move may be coming: Henrietta Treyz, head of economic policy research at Veda Partners, is on "high alert" for the end of a Section 301 investigation into excess capacity that she thinks will eventually result in tariffs on China and more than a dozen countries, though potentially not until after the election.
Treyz thinks the tariffs could be announced ahead of the planned meeting between Trump and Chinese leader Xi Jinping but could be limited at first to prevent an escalation with Beijing and avoid political fallout ahead of the midterm elections.
The Trump administration also notched a legal win this week, with a federal court upholding its decision to end a tariff exemption on low-cost goods, known as the de minimis exemption and used by some retailers.
The administration's goal, Treyz says, is to get tariff rates back to what they were before the Supreme Court struck down Trump's global tariffs in February and to find ways to replenish the $100 billion in refunds Customs & Border Protection has paid back through the end of July.
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