[Economy Pulse] The United States' Meticulous Strategy to Counter China

The Donald Trump administration's policy toward China is being pursued meticulously and systematically. While it may appear that separate policies are being announced sporadically, in reality, multiple policies are being implemented in a highly interconnected manner. Over the past decade, the United States has learned that only by formulating and implementing China policies in a tightly coordinated, whole-of-government approach can they be effective. This is because Chinese companies, when faced with specific measures, have repeatedly found ways to circumvent them, thereby diminishing the intended policy effects. This is known as the so-called "balloon effect."

Consider the case of solar modules: In 2018, when the United States imposed a 30% tariff on Chinese solar modules, Chinese solar companies responded by building large-scale final assembly plants in countries such as Cambodia, and then exporting locally assembled modules to the United States at lower tariffs. The United States then imposed the same measures on these rerouted exports as it did on Chinese-made products. As a result, domestic companies that entered the U.S. market achieved significant success.

The United States' economic security policy toward China is largely focused on two fronts: imposing high-intensity export controls to prevent China from catching up in advanced fields such as semiconductors, and using various tariff measures to restrict the entry of Chinese goods into the U.S. market. In addition, President Trump has repeatedly emphasized the need to close loopholes in China policy.

Tariffs on imported Chinese goods were raised as high as 145%, but after two rounds of negotiation, it was agreed to maintain a 30% tariff until November of this year. President Trump has pointed out that the "de minimis exemption" system, which allows duty-free entry for packages under $800 through e-commerce, is a loophole in the tariff regime. He has stated in the media that "the de minimis exemption is one of the most foolish things this country has ever done."

In May of this year, the United States abolished the duty-free exemption for packages under $800 imported from China and Hong Kong. Instead, a basic tariff rate of 30% or $25 per item was applied to these packages. The 30% tariff is the same as the rate agreed upon in the U.S.-China tariff truce. Essentially, this appears to be part of a policy to impose a 30% tariff on all goods imported from China, suggesting that the United States intends to maintain this 30% tariff going forward.

Although e-commerce was pioneered by U.S. companies, Chinese companies such as Alibaba, Shein, JD.com, and Temu have come to dominate the global market. In particular, the U.S. de minimis exemption for packages under $800 and subsidized postal rates have formed the foundation of the business models for Chinese e-commerce companies. Similar issues exist in Korea, but with millions of packages being delivered daily from China to the United States, problems of oversight and abuse have arisen.

Since August 29, the United States has permanently abolished the de minimis exemption for low-value packages from all countries. U.S. authorities stated that the abolition was intended to prevent China from using third countries to circumvent U.S. tariffs and to stop the misuse of the exemption for smuggling prohibited items such as drugs. From August 7, fixed tariffs have been imposed on all delivery networks, including postal services, based on reciprocal country-specific tariffs.

Now, when sending kimchi or gifts to children studying abroad or relatives, the tariff burden can exceed the value of the goods themselves. While this will cause significant consumer harm, U.S. authorities have expressed satisfaction with the effects of eliminating the exemption. They announced that the number of small packages from China and Hong Kong has dropped from an average of 4 million per day to 1 million, and that tariffs collected on these packages have reached $500 million.

Australia and New Zealand have revised their de minimis exemption policies, and the European Union and the United Kingdom are also reviewing similar changes in response to the U.S. decision. Duty-free cross-border e-commerce for low-value packages provides significant benefits to consumers. Rather than abolishing the exemption, it is necessary to discuss complementary measures within the tariff system.

Jung Ingyo, Professor of International Trade at Inha University (Former Head of Trade Negotiations)