Heightened Possibility of Tea Tariff on Chinese Imports

During threeprevious rounds of tariff increases, tea was excluded from the U.S. TradeRepresentative’s list of Chinese goods that are subject to import taxes of upto 25%. That ended May 10 with a request by the Trump administration to prepareto levy import taxes on an additional $300 billion in Chinese goods, includingtea.

On that dateU.S. Trade Representative Robert Lighthizer announced a tariff increase from 10%to 25%, effective immediately, on 5,745 Chinese goods valued at $200 billion.About a quarter of these items are finished consumer goods including $11.3 billion in furniture and $6.6 billionin luggage.

“The President also ordered us to begin the process ofraising tariffs on essentially all remaining imports from China,” saidLighthizer. Coffee and tea are now listed among 3,805categories, including mate and flowering tea, and may soon be subject to a U.S.imposed tariff. There are no distinctions regarding quantities and value. Theeffective date was not specified.

Chinaresponded the following Monday by increasing taxes on U.S. goods including teaand coffee. Tariffs rose from 10% to 25% on 2,493 goods that appeared on theinitial list of goods to be taxed; an increase of 10% to 20% was applied to1,078 list2 goods; and an increase from 5% to 10% was announced on 974 goodsthat appear on list3. The Chinese kept tariffs at 5% on 595 list4 goods. China shipped $540 billion worth of goods to the U.S. lastyear but only $94.3 million of thatwas tea, up 1.2% since 2014.

It issignificant that every category on the latest U.S. list that was previouslyexempted during rounds1-3, is included in round 4. The next round places a tariff on every singleitem shipped from China. This suggests there will be no exemptions.

The tariffsannounced May 10 do not apply to goods already in transit from China, so mostaffected goods have not yet arrived on U.S. shores. Likewise, China's latestaction only takes effect on June 1, leaving a two-week negotiating window priorto enforcement.

Talkscontinue. Lighthizer is in Beijing and President Trump confirmed that heintends to meet with China’s President Xi Jinping at the G-20 summit in lateJune.

Next Steps

PresidentTrump’s May 10 order set in motion publichearings scheduled for June 17. The deadline for submitting commentsis June 10.

“Our position remains cautiously optimistic,” writes Peter Goggi, president of the Tea Association of the USA. “We have communicated to the USTR that the association is interested in preparing oral testimony in opposition to the imposition of any tariffs on tea,” writes Goggi.

He then described a consensus rationale beginning with the observation that tax and duty-free import of tea was one of the founding tenets of the American Revolution.

“The free and unencumbered import of pure tea from its origin is a centuries-old tradition,” writes Goggi. Including tea in the trade war does not advance the U.S. objective of changing China’s practices relating to technology transfers, intellectual property and innovation, he said.

“Imposing punitive tariffs on tea would not be effective inchanging these practices because tea exports are a very small part of China’soverall tea sector. Most tea that China produces is consumeddomestically.  Further, punitive tariffs would have a disproportionateeconomic impact on small and medium-sized enterprises because most of the U.S.importers (those that pay the tariffs) are small businesses,” he writes.

Austin Hodge, who founded Seven Cups Fine Chinese Tea inTucson, Ariz., imports exclusively from China and has done so the past 20years. He is not overly concerned about the immediate impact “because we buylargely spring teas of a higher quality, and we should have those in-routeprior to tariffs taking effect.”

There is room “to raise our prices and still be competitive”explains Hodge. “This is because our customers view tea as an affordableluxury. Expectations are related to quality more than price, so continuing todeliver on quality is our goal,” he said.

“There is no question that small businesses would be hurt.Chinese tea ware would take a major hit,” he said. “Most of our brokeragecustomers are outside the U.S. and won’t be affected, in fact we have loweredour prices for those customers this year because we have expanded our catalog,”writes Hodge.

Metropolitan Tea, headquartered in Montreal, Canada, onMonday notified its 4,000 customers that “we are changing many of our greenteas that had a Chinese base to a Japanese and in some cases Indian base.” Nochange will be made unless the resulting blend is “equal or better” writesMetropolitan.

“Thankfully we carry large inventories, so we areable to make changes very quickly. The result likely reduces the exposure tothis issue by about 50% or more,” according to the notice.

Metropolitanthen cautioned: “There are somespecialty teas or teas that have a unique taste profile which are onlyavailable in China. Regretfully these teas will be subjected to the 25% duty. Followingare some indications: Artisan teas, China black teas, many oolong teas and somegreen teas (such as jasmine).

MarketImpact

Goggi writes that the United States is not a tea producingnation. There is virtually no commercial tea grown that needs to be protectedby tariffs, nor are there any farm-based jobs that would be protected.

“Tea production long predates China’s rise as amanufacturing powerhouse – it is a rural-based, long-term crop that was notdesigned to capture foreign business. Its primary market is domestic, whichwill benefit from a rise in supply due to smaller exports. Further, thepercentage of tea exported from China is minimal and China would not beimpacted,” he notes.

The U.S. is the world’s third largest tea importer,but its suppliers span a broad range. China is by far the biggest supplier ofgreen tea, but Argentina, a black tea provider, ships far more tonnage annuallyto the U.S. India, Sri Lanka, and Kenya all contribute significant shares ofthe U.S. tea imports.

The World’s Top Exports website, using data compiled from the U.S. Department of Agriculture, lists China as the world’s top tea exporting nation with tea exports valued at $1.8 billion in 2018.

The U.S. earned $124 million from high-value teaexports in 2018, about 1.8% of the world total. China is one of the top dozen countriesthat buy tea from the U.S. But Canada is by far the largest trading partner,purchasing approximately $75 million annually, a number that has increased byalmost $50 million since 2005.

A lot of tea originating in China is imported fromCanada which sells more than $1 billion worth of tea annually to the US.

Buyers will certainly maintain theirrelationship with cross-border suppliers who have no say in the tariffscharged. Naming the origin is a legal requirement when shipping tea andsuppliers will provide a list of all teas that are Chinese in origin and may besubject to the expected new duty charge.

Retailers will see the additional dutyadded when receiving tea packages in the mail or on consolidated statements fromcustoms brokers.

Outlook
The tea association, in itsopposition to tariffs, will argue that “like wine, tea varies dramatically dueto local terroir (geography, climate and local manufacturing techniques). Chinahas many unique teas that are unavailable elsewhere, due to their uniquecultivars, terroirs and processing methods. In the area of specialty tea,many teas are unable to be sourced anywhere else in the world,” writes Goggi.

“The imposition of tariffs on Chinese tea will not impactthe Chinese producer, exporter or government. However, it willnegatively impact the U.S. consumer,” he concludes.

Customs experts on staff at the legal firm White & Casewrite that “negotiations are set to continue, and a breakthrough is possible —although perhaps unlikely—beforethe effects of the latest escalation are fully absorbed by either country.”

Source: Office of the U.S. Trade Representative, Metropolitan Tea, Seven Cups Fine Chinese Tea

Teas Listed for Possible Tariff