Trade War Truce Rolls Back Tariffs on Coffee and Tea

by

By Dan Bolton

The January truce in the trade war between the US and China rolled back US import duties from 15% to 7.5% on $112 billion in Chinese goods, including coffee and tea, easing tensions that have disrupted the global supply chain.

In response, China lowered tariffs on 859 categories of US imports.

Turmoil in beverage commodities was heightened last spring amid threats of duties of 25-30% on imported Chinese tea and coffee. The putative, unprecedented tax drew universal opposition from tea importers, blenders, wholesalers, and retailers.

In testimony before the US Trade Representative (USTR) industry representatives made clear that tea tariffs pose no threat to the $17.9 billion Chinese tea industry.

“Due to the disproportionate economic harm these tariffs would have on the US tea industry and US consumers, our recommendation is to remove black and green teas [from the list of goods],” reads the formal rebuttal: “Ultimately the US consumer will pay the price. It’s the consumer that gets hurt.”

The impact was less dire in coffee since the US imports very little green coffee from China. According to US Customs and Border Protection (CBP) rules, coffee originating in China, when roasted in Canada for example, avoids country-of-origin duties while Chinese tea blended in Canada must pay the tariff. Arabica and organic arabica imports through November were down 26% and 98% respectively, compared to the previous year. Decaf, which has a long shelf life, spiked to $10 million to beat tariff deadlines but the declared value of all Chinese green coffee imports through November was only $26 million, down from a recent high of $36 million in 2017.

A 25% tariff on $250 billion of Chinese goods remains as leverage prior to resumption of talks, with no further tariffs anticipated until after the November US presidential election. Tea and coffee were fortunate. Under terms of the phase one agreement, rates were reduced on very few of the thousands of agricultural goods, machinery, and industrial goods listed in four tranches by USTR. The US instead insisted on forcing China to purchase $200 billion in US goods and services. Lower duties for goods on Section 301 List4a Annex A (Aug. 20, 2019) became effective February 14.

Global threats to trade

The fabled geniality of the tea trade is fading. As the cost of labor and production increased, excessive supply depressed prices in 2019; while extreme weather events worldwide substantially increased financial risks that investors studiously avoid; and economic uncertainty curtailed orders from the top tea markets including Russia (CIS), Iran, and Pakistan.

“International trade is becoming much more of a challenge to the entire supply chain,” writes Peter Goggi, president of the Tea Association of the USA. “While the “good news” is that the tariffs have been reduced from 15% to 7.5%, our position has not changed since the imposition of these “taxes” by the [current US administration],” writes Goggi, adding, “Economic growth and stability cannot be achieved long term without free trade.”

In the US the damage is done:

• Blenders seeking alternative sources of commodity-grade green tea have by now switched suppliers. The Foreign Agricultural Services (FAS) GATS database shows tea imports from China were valued at $67.8 million through November, down 17% compared to the same period in 2018. This despite a rush to import as much green tea as practical during the first six months of the year. Volume declined 4% during this period suggesting China’s more valuable teas were shipped elsewhere. In contrast, tea imports from Sri Lanka spiked 15% with year-over-year green tea exports to the US increasing by 87% through November. Japan, Taiwan, India, and even Argentina (a predominately black tea producing country) saw gains.

• Specialty tea retailers that feature unique and expensive varieties of Chinese tea such as pu’er, white tea, and roasted oolongs have priced tariffs into their 2020 sales catalogs. These teas sell at a premium that makes tariffs less onerous (i.e. 500 grams of Wuyi oolong is currently priced at $311 online and a half kilo of yellow organic Mo Gan Huang Ya sells for $370). But loose leaf in total represents less than 1% of the US tea market. Of the 1,607 US special tea retailers identified by Sinensis Research, only 7.3% predominately offer Chinese tea. It remains unclear but likely that higher prices will reduce sales volume in 2020 which peaked around $100 million in 2016. China has no incentive to lower prices given global demand and scarcity of its best teas.

• In the US tea accounts for 15% of restaurant beverage menu items, according to Mintel market research. About 40% of restaurant-goers drink iced tea, twice the number of hot tea drinkers. Green tea currently accounts for 15% of total US volume across all segments, reflecting strong growth in the past decade, much of it in the ready-to-drink segment. Health benefits continue to drive sales, but green tea growth has slowed. The surge from 5% to 15% market share was due in part to availability at foodservice chains like 6,711-store Wendy’s, the No. 3 burger chain in the US, which began serving organic green tea in 2015. McDonald’s offers green tea lemonade. Restaurants, including fast casual chains, are experimenting with fresh brewed tea including iced green tea blends. In 2020, when confronting an additional 7.5% increase, price-sensitive chains are more likely to promote black tea.

Green tea setback

There were no green tea imports to the US from China during the 1950s through the 1970s. Japan supplied small quantities of green tea, but sales amounted to only $3 million in 2000. Green tea imports remained flat through the 1990s, averaging about $25 million per year until 2004-05 when values quickly increased to more than $135 million per year, according to OECD (Organization for Economic Co-operation and Development) statistics. Imports of all types of green tea from all US trading partners were $151 million in 2018 with Japan accounting for $60 million of sales on 1,828 metric tons of green tea imports. China, which markets less expensive teas for blending, imported much larger quantities in 2018 recording 8,290 metric tons valued at $48 million.

China remains the most important supplier of green tea, exporting 7,142 metric tons through November (down 6% from 7,588 metric tons during the same period in 2018) but the US’s apparent consumption of Chinese tea amounts to only 5.9% of China’s exports and only 0.825% of their production. This quantity is not a meaningful considering China’s huge production and may be a reason for China to largely ignore the US in favor of more competitive buyers.

Black tea imports from China were flat in 2019 but substantial. China now ranks third in US black tea imports at 7,200 metric tons. This is well behind the 40,400 metric tons imported from Argentina but closing in on India which imported less than 9,800 metric tons through October.

Economic impact

Tea is affordable, consumption is increasing, and the trend is toward better quality. China has invested enormous sums in cleaning up its tea for export. Chinese exports conform to USDA, Japanese, and EU organic standards. In-country testing for food safety and pesticide residue and more recently sustainability and environmental certifications make Chinese tea very competitive. Scale is enormous at 5.2 billion kilos.

The US is the world’s third-largest tea market but as the US erects barriers to trade, affluent countries along the Belt and Road benefit. The Belt and Road initiative now connects 63% of the world’s population.

The global economy slowed during the 18 months since the US imposed tariffs not only on China but Canada and member countries of the European Union. The US also imposed stiff sanctions on numerous countries during this period including Russia, Venezuela, Cuba, Iran, Myanmar, Syria, Democratic Republic of Congo, North Korea, and Zimbabwe. The US GDP  is estimated at 2.2% in 2020 after falling to 1.9% in 2019. It will be lower still in 2021 (1.9%) and 1.8% in 2022, according to the most recent forecast of the Federal Open Market Committee.

Ultimately tariffs shifted $43.2 billion in Chinese goods destined for the US to other markets. Due to tariffs imposed in retaliation, US exports to China are down $13.4 billion. Reducing the goods and services deficit, cited to justify tariffs, instead increased $28.3 billion due to US trade diverted to Mexico, the EU, Switzerland, and Taiwan. Meanwhile, American businesses paid $66.4 billion in import duties in the 12 months ending in August, double what the government collected in 2017.

Since first imposed, retailers have demonstrated little interest in raising prices or forfeiting margins to help stressed tea suppliers. No one wants to accept price increases from those below them in the supply chain but tariffs of even 7.5% are real and they are paid by US importers with few options to source tea unique to China.

Tariffs now cover almost two-thirds of US imports from China, with an average tax of almost 20%, compared with 3% before. China’s retaliatory tariffs hit almost 60% of US exports, with an average rate of 20.5%, up from 8% before the current administration, according to the Wall Street Journal. The additional costs from first-round tariffs were largely absorbed by companies but JP Morgan estimates the typical American household will face up to $1,000 in additional costs per year due to tariffs averaging 10%.

Tariff Timeline

Everyone, including representatives of the US Customs and Border Control, finds the rapid-fire changes in tariffs confusing. One way to keep track rates and exemptions is to first identify one of five Section 301 lists on which tariffed goods appear. Coffee and tea are listed in Annex A of Section 301 (known as List4a).

In August 2017 the US Trade Representative determined that Chinese trade practices were unreasonable or discriminatory and a burden restricting US commerce. In retaliation, beginning in 2018, the US imposed ad valorem taxes (tariff) of up to 25% on thousands of Chinese goods in four tranches. The goods are currently valued at $370 billion.

July 2018 – Section 301 List1

First tranche: A 25% tariff on 1,819 categories of imported products from China. Estimated value: $34 billion. An increase to 30% effective Oct. 15, 2019, was later canceled. Approximately 600 category exclusions were granted, about 34% of total requests.

August 2018 - Section 301 List2

Second tranche: A 25% tariff on 280 product categories. Estimated value: $16 billion. An increase to 30% effective Oct. 15, was canceled. Approximately 269 category exclusions were granted, about 37% of total requests.

June 2019 - Section 301 List3

Third tranche: A 25% tariff on 4,746 product categories. Estimated value: $200 billion. An increase to 30% effective Oct. 15, 2019, was canceled. Approximately 243 category exclusions were granted on 30,302 requests, a 96% denial rate.

September 2019 - Section 301 List4a

Fourth tranche: Goods valued at $300 billion initially faced duties of 10% on 3,805 product categories (including coffee and tea). Duties were later increased to 15% and the list was split. The US also canceled a grace period for products in transit making the effective date for paying duties arrival in the US and not the date of export.

December 2019 - Section 301 List4b

Fifth tranche: A 15% tax on $160 billion of laptops, computers, toys, cell phones (worth $72 billion), and $4.7 billion in clothing was suspended.

January 2019 - Section 301 List4b

In January duties on $112 billion in goods on List4a were rolled back to a rate of 7.5% effective February 14, 2020. Rollbacks include tariffs on $31 billion worth of textile goods.

February 2019 - Section 301 List4a

US importers pay 7.5% duties on coffee and tea from China.

Product categories on the lists above may still qualify for one-year exceptions. Rates are open to negotiation during phase two talks.