Tea Industry Faces Disruptive 10% Tariff

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Continued volatility poses a threat to processed coffees

By Dan Bolton

The US tea industry expressed concern at the current US administration’s August threat to levy a 10% tariff on $300 billion in Chinese goods effective Sept. 1. In late June Chinese President Xi Jinping agreed to a resumption of trade negotiations and meetings resumed in August, first in China where the communist government hesitated to commit to purchasing significant agricultural products designed to offset a trade imbalance.

Word of the import tax sharply set back stocks, lowered yields on US Treasury notes and depressed the price of oil and set in motion contingency plans hatched last spring.

Prior to the decision the US Trade Representative (USTR) heard testimony from two prominent tea industry leaders, Peter Goggi, president of the Tea Association of the USA and Jason Walker, marketing director at Firsd Tea, the New Jersey-based division of the Zhejiang Tea Group, the world’s largest exporter of Chinese green tea.

The June hearings spanned seven days with testimony from a broad range of industry leaders concerned that raising import taxes on Chinese made goods and agricultural products would harm consumers. Conducting the hearing were representatives of the state department, the commerce department, the treasury department, the labor department, as well as US department of agriculture.

Opposition was nearly unanimous. Coffee and tea had not appeared on previous lists of Chinese imports but were among the 3,805 harmonized system (HS) subheadings on “List 4”. Imposition of the tax would increase tariffs by up to 25% on coffee and tea from China.

In the meantime, USTR is currently processing an estimated 60,000 requests from importers for exemptions for 5,769 HS goods that appear on “List 3”.

Goggi formally requested that Chinese green and black teas, instant tea, and extracts be excluded should List 4 be approved. Seventy percent of the green tea consumed in the US originates in China, he said, adding “there isn’t one section of the tea market that is not touched by Chinese tea.” Imports amounted to 19.4 million kilos in 2017, about 6% of global exports. China imports only $2.6 million worth of US tea.

Taxing Chinese tea will have no appreciable impact on China because US imports amount to less than 1% of China’s total tea production, Goggi explained. “Commercial tea growers in America do not need to be protected by tariffs,” he said. “Tea has been tax-free for many, many, many years and it should remain that way,” said Goggi.

Walker said committee members listened attentively and asked follow-up questions regarding the testimony. “Questions posed by committee members indicated they had familiarized themselves with the testimonies prepared,” he said. Walker explained that individuals providing testimony were organized into panels of five. “The panel that included Firsd Tea also heard testimony from the leader of an international business council and a university-level economics instructor. All members of our panel opposed the tariffs,” said Walker.

“Speaking with others who had attended hearings from the previous days, the overwhelming majority of witnesses opposed the tariffs,” he said.

Transcripts of the hearings are posted on the USTR.gov website. Once hearings concluded the committee began reviewing written materials related to witness testimony. If the process resumes, deliberations will precede announcing their recommendations.

In July 2018 the US imposed a 25% tax on 818 Chinese goods valued at $34 billion in the first round of actions designed to halt Chinese trade practices that the US considers unfair. In August 2018 an additional 279 goods (List 2) valued at $16 billion were listed. On May 10 President Trump announced a 25% levy on 5,769 Chinese imports valued at $200 billion (List 3). In August Trump threatened to impose a 10% tax on the remaining $300 billion in Chinese goods (List 4) effective Sept. 1.

Decoupling and deleveraging

The trade impasse sparked stock market volatility but tariffs are not the only contributor to slowing trade.

“Export-led developed economies that escaped the worst effects of the 2008 global financial crisis—like Canada, Australia, and Sweden—are now also reducing their debt loads,” according to the Wall Street Journal. Trade data paints “an unflattering picture of the global economy,” according to the newspaper. Suppliers are seeking new export partners outside China. Exporters of raw products are affected by weaker Chinese demand.

“China’s slowdown has been rippling through markets since before Trump was elected and many of the factors in dispute can’t be easily resolved,” according to the newspaper. “As a centrally planned economy, China can offer no quick answers to questions of national security, intellectual property, and anti-competitive trade practices.” Decoupling the US and Chinese economies is viewed as inevitable. The immediate impact is traumatic for ventures that require assembly at scale and for products like specialty green teas where few if any suitable replacements exist.

Unwinding deeply interlocked supply chains and trading relationships may be the first skirmishes in what is becoming an economic Cold War. Instead of contributing to stability and interdependence, decoupling forces companies to decide with which bloc they will do business. China is likely to retreat from participation in free markets, convinced that integration threatens both its economic policy and sovereignty while the US withdraws into its bunker, erecting barriers to trade in the hope it can go it alone.

Volatility is the new norm

Risks to free trade extend well beyond China. Mexico has ratified the USMCA (NAFTA) but not Canada. US negotiations with Japan anticipate a reduction in its trade surplus, but at 73.5% in favor of Japan, it seems unlikely that Japan can afford to spend the billions on American imports required to bring about a balance in trade.

BREXIT remains an unknown with a hard-exit possible Oct. 31. Perhaps most troubling to European markets are renewed US threats to impose $11 billion in tariffs on 326 import categories of EU goods identified in April. This is on top of $28.8 billion in steel and aluminum tariffs levied in 2018. In July, the chaotic US administration threatened to tax an additional $4 billion in EU consumer goods, some with tariffs as high as 100%.

Coffee amounts to 4.6% of the total, estimated as high as $184 million. The exact tariff on 89 import lines of whiskey, pork, and pasta is unspecified but would apply to EU processed coffee, solubles, capsules, and ground roast.