Analysis-Trump's China focus increases odds its special trading status could end

By Koh Gui Qing

NEW YORK (Reuters) - U.S. President Donald Trump's complaints about China's trade practices have increased the odds that a 25-year-old U.S. law that established free trade with Beijing is repealed, trade experts said, a move that could raise tariffs to 61% on average.

Buried in the barrage of first-day executive orders was an instruction from Trump to his commerce secretary and trade representative to "assess legislative proposals" regarding Permanent Normal Trade Relations (PNTR) with China. 

The designation, which generally deters the U.S. government from imposing tariffs on trade partners, was extended to China in 2000, in a major move that opened the floodgates of Chinese exports into the United States. 

Ditching the normal trade relations designation could lead to an automatic jump in levies, at rates that could far exceed what Trump has so far slapped on China.

Over the weekend, Trump imposed a tariff of 10%, calling it an "opening salvo" and sparking retaliation from Beijing. He has threatened to impose tariffs as high as 60%.

Last month, Representatives John Moolenaar and Tom Suozzi introduced a bill to repeal PNTR with China. Called the "Restoring Trade Fairness Act," the bipartisan bill proposes suspending normal trade relations with China and increasing tariffs on some of its exports to between 35% and 100% over five years.

Since Trump’s first term, as the rhetoric about fairness of trade with China has increased, multiple bills seeking repeal of the designation have been introduced in Congress but have failed to muster enough support to pass. 

But in interviews, seven trade experts said there is growing support for such a bill among U.S. Democratic and Republican lawmakers, increasing the probability that the latest efforts to repeal it might pass.

"Every year it gets closer to being repealed because it doesn't make sense," as China does not play by global trade rules, said Jim Lewis, a senior vice president at the Center for Strategic and International Studies.

"Trump will be looking to see what kind of deal he can get with the Chinese and everything will be on the table."

Representative Jason Smith, who leads the Ways and Means Committee, the main tax-writing panel in the House, has also called for a re-examination of "bad" U.S. trade policies that allowed nations such as China to "cheat" Americans.

One business consultant and two lawyers said their corporate clients are preparing for the risk that China's PNTR status is revoked. In response, they are moving supply chains out of China, repatriating foreign employees, abstaining from making new investments in China, and re-negotiating some supply chain contracts so that the cost of tariff increases could be passed on to other parties, these sources said.

The White House, the Department of Commerce, the U.S. Trade Representative, and a spokesperson for Representative Moolenaar did not respond to requests for comment.

HARD-HITTING CONSEQUENCE

The consequences of a removal of PNTR with China would be significant. All Chinese non-fuel exports to the United States, even if they were made by American companies in China, would be subject to an average 61% tariff rate, up from the current 19%, economists at Oxford Economics said in a report prepared for the U.S.-China Business Council, a trade group.

That would dent corporate profits, generate job losses, and fuel inflation pressure. 

Removal of the trade status could cut U.S. gross domestic product by up to $1.9 trillion over five years and slash 801,000 U.S. jobs, according to the report published in November 2023.

The U.S.-China Business Council (USCBC) said on Tuesday that even though China has not fulfilled all of its obligations under the World Trade Organization or the Phase One deal - an agreement struck by Beijing and Washington in 2020 requiring China to buy an additional $200 billion worth of U.S. exports over two years - "the USCBC does not support efforts to repeal PNTR."

"It is not the right tool for the job at hand," it said. "The United States has other tools to change China’s behavior.”

For proponents of repealing PNTR, doing so would be an effective way to demonstrate to China that the U.S. is serious about addressing Beijing's trade practices. But for others, the effort would be a draconian move to fix a problem that could be dealt with in other ways, with less impact on the U.S. economy.

At present, only four countries - Cuba, North Korea, Belarus and Russia - do not hold normal trade relations status with the United States.

Trump already has demonstrated he has other means to impose tariffs on China without revoking PNTR.

Moreover, how escalating Sino-U.S. trade tensions might play out is unclear. Trump has used tariffs as a tool to negotiate deals, making it difficult to assess at what rate tariffs, if any, might eventually be applied.

It is also unclear whether there is enough support within Congress to remove the PNTR, and even if there were, it is uncertain whether Congress would prioritize the issue over others, and whether Congress would repeal PNTR without Trump's final approval.

"The Republicans won't pass the bill (to repeal the PNTR) until Trump tells them to pass it," said Derek Scissors, a senior fellow at the American Enterprise Institute. "The only thing that matters is if we get the green light from Trump."

A bill to revoke PNTR needs 60 votes in the Senate to pass, and it was not brought up in September 2024 during "China week," when the House voted on 25 bills related to U.S.-China relations, suggesting that support for it might be mixed.

The status was the result of more than a decade of negotiations to bring China into the global trade fold, and which led to China joining the World Trade Organization in 2001. 

Once removed, it could take years before trade relations are normalized again, said Susan Shirk, a professor at the UC San Diego School of Global Policy and Strategy and a director emeritus at its 21st Century China Center, and who was part of the negotiations that established PNTR with China.

"Removing Permanent Normal Trade Relations with China is a very radical and extreme step that would remove any guardrails against a trade war," Shirk said. "It will be pretty chaotic."

(Reporting by Koh Gui Qing; Editing by Andrea Ricci)