By Chuin-Wei Yap
Forget Apple Inc.'s smartwatch. When it comes to goods the Trump
administration exempted from its latest blitz of tariffs on Chinese
imports, the cases of fluorine salts and carbonate esters say more
about where the U.S. is vulnerable in its reliance on Chinese
supply.
The chemicals, used to make electrolytes for electric-car
batteries, are among 297 dispensations sparing importers the new
10% levy. The mineral barite, which helps energy companies drill
for oil and gas, and the painkiller ibuprofen -- 90% of which comes
from China -- were also beneficiaries, along with Apple's
far-better-known products, including its smartwatches and
AirPods.
While the latest broadside from the U.S. in its tariff feud with
China, covering 5,745 items worth some $200 billion, is a
demonstration of America's buying power, items cut from the initial
tariff hit-list point to weaknesses across a range of businesses,
from energy giants like Halliburton Co. to smaller suppliers of
specialty parts, all of which sought waivers for raw materials and
parts by arguing that China had become an indispensable
supplier.
These businesses gained exemptions after intense lobbying by
corporate chieftains during six days of public hearings in August
and in a flurry of letters to the U.S. trade representative. Nearly
400 top executives showed up for the hearings, and thousands more
wrote in; most failed to get exemptions, including giants Walmart
Inc. and GE Appliances.
The letters and hearing transcripts show where the Chinese have
become outsize global producers of relatively obscure industrial
commodities -- on which American industry has become reliant. In
some cases, the U.S. companies say, substitute makers in other
countries could be found -- but were likely to raise price tags on
American buyers as these rivals sought advantage in the escalating
bilateral standoff.
In the case of ibuprofen, chemical giant BASF SE in June halted
production at a Texas plant, which analysts say accounted for a
sixth of the world's ibuprofen, citing technical problems. The
shutdown sent American pharmacy suppliers rushing for new sources
of ibuprofen. Pharmacy suppliers faced looming tariffs on
Chinese-made ibuprofen, which would have been substitutes for the
BASF-made ibuprofen.
If enacted, "this tariff can cause a shortage of dosage
ibuprofen in the domestic market," said Joseph Mollica, chief
executive officer of LNK International Inc., a Hauppauge, N.Y.,
drug manufacturer that supplies Walmart and Target stores, among
others, in a letter to the USTR. "This will not punish China, but
will benefit India's continuing foray into the U.S. market at the
expense of U.S. manufacturing jobs."
BASF said it doesn't yet have a clear timeline on reopening its
plant.
President Trump is girding to broaden the standoff with Beijing,
saying his policy curbs Chinese tech theft and underscores how much
less China imports from America -- a roughly four-to-one imbalance
-- than the other way around.
Mr. Trump's tariffs now affect some $250 billion worth of
Chinese imports, and another $267 billion is on standby, covering
the value of nearly all Chinese imports. Beijing has retaliated on
$110 billion, but it has left out items China relies upon, such as
semiconductors and crude oil.
A USTR official said it takes into account the likely impact on
U.S. consumers and the economy when evaluating exemptions. Commerce
Department data show the U.S. is heavily dependent on China also
for consumer imports such as luggage, refrigerators and vacuum
cleaners. Despite China's accounting for about 80% of such imports,
Washington has gone ahead to tax these products; sellers say it is
likely consumers would ultimately bear most of the cost.
China has in the past been swift to sense American reliance on
its exports. In 2010, Beijing drastically slashed an export quota
on rare earths, a group of minerals essential for making high-tech
gadgets like iPhones -- a play at using China's control of 97% of
global output to raise prices. The U.S. took China to the World
Trade Organization and won. In a signal that such dependence
remains high, Washington last week quietly exempted rare-earth
minerals from their original inclusion in the tariffs.
"There are no viable suppliers available in the U.S. currently
to replace that of our Chinese manufacturers," said Curtis Glover,
president of operations at Lighting Technologies International
Inc., a California-based producer of cinematic lamps that relies on
Chinese rare earth for its xenon lights.
Rare-earth elements are also crucial in a range of military
applications, as raw material for missile-guidance systems,
satellites and aircraft electronics.
Mitsubishi Chemical America Inc. got an exemption for an obscure
class of complex fluorine salts and carbonate esters, which go into
the electrolyte for lithium-ion batteries used in electric vehicles
including Tesla Inc.'s Model 3 and Chevrolet's Bolt.
"There simply is no other viable source of these key inputs
outside China in the volumes and the quality levels that we
require," Dennis Trice, the company's president, told a USTR
hearing. "Developing new sources outside of China to replace
existing production would take massive long-term investments and
many years."
Mr. Trice said his company would have had to reconsider its
investments in the U.S., which include a $38 million plant in
Tennessee employing 2,600 workers, had it not received the
exemptions. Official data show China accounted for 46% of such U.S.
imports in the January-July period. Thailand provided 25%, trailed
by Mexico, Japan and Germany. Tesla didn't respond to a request for
comment.
A similar vulnerability won Halliburton a reprieve for barite, a
mineral used to weight drilling fluids, which aids oil-and-gas
exploration. China provided 54% of U.S. imports from January-July.
Data show India and Mexico are minor suppliers, with 18% and 17% of
the market, respectively.
"China will not suffer consequences as a result of the proposed
duties on barite, because China has the largest amount of barite
reserves in the world, the majority of which is exported," said
Ryan Ezell, Halliburton's global-operations manager.
For now, there is no sign that China plans to choke such
supplies, but the exemptions add to a menu of last resorts.
Analysts say Beijing could first unleash nontariff reprisals, such
as squeezing the amount of services it purchases from the U.S.
The fear is whether constricting supply crosses the line into a
"hot" war, said Terry Chan, an S&P Global Ratings analyst. But,
"together with dumping U.S. Treasurys, it's a so-called nuclear
option."
Write to Chuin-Wei Yap at chuin-wei.yap@wsj.com
(END) Dow Jones Newswires
September 24, 2018 05:44 ET (09:44 GMT)
Copyright (c) 2018 Dow Jones & Company, Inc.
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