ACA Testimony Addresses Proposed U.S. Tariffs on China
July 31, 2018
On July 24, ACA testified before an International Trade Commission (ITC) panel on the U.S. Trade Representative’s (USTR) proposed tariffs on the People’s Republic of China (PRC) under Section 301 of the Trade Act of 1974. Materials included in the first two rounds of proposed tariffs under Chapter 39 of the Harmonized Tariff Schedule (HTS) – “Plastics and Articles Thereof” – include a significant number of chemicals and were selected based on their importance within China’s “Made In 2025” plan, which aims to advance Chinese high-technology industries such as robotics, aerospace, industrial machinery and automobiles. ACA, however, believes this “high technology” characterization does not apply to the materials used in the coatings industry, which will be affected by these proposed tariffs. As such, ACA asked that USTR remove those materials of HTSUS subheadings 3901 to 3914 of the Harmonized Tariff System from the U.S. List 2.
At presstime, ACA was preparing additional rebuttal comments for the record for submission on July 31.
In its testimony, ACA noted that USTR’s proposed list of materials for tariffs (incorporated in Annex C, or List 2) includes 1,102 product lines, using “Plastics and Articles Thereof,” and that such materials are used in coatings, adhesives, inks, and other formulated specialty chemical products such as “binders”; i.e., coatings resins. While the materials that fall under this chapter are characterized as “Plastics and Articles Thereof,” ACA underscored they are neither plastics nor plastic articles in the commonly understood sense of that term as being intended for molding or casting; that they are more properly characterized as polymers and are generally shipped in a liquid medium and subsequently formulated, along with pigments, solvents, additives, etc. to produce our industry’s key coatings products. ACA also stressed that resins are, in fact, one of the most important raw material inputs in coatings formulations, comprising more than 40 percent of the raw material cost.
The list of affected chemicals within HTS Chapter 39, at least insofar as they are used by the paint and coatings industry, are largely chemicals manufactured using mature processes. As such, ACA contends that imposing tariffs on this raw material category do not appear to support the USTR’s objectives concerning the “Made in China 2025” plan. And because these products used by ACA members are not “plastics or plastics articles” in the ordinary meaning, the broad and unnecessary inclusion of these tariff subheadings could effectively inflict unwarranted collateral damage on the coatings industry.
Deleterious Effect on Coatings Industry
The ITC panel, before which ACA offered testimony, was composed of six federal agency representatives from the U.S. Departments of Labor, Treasury, Homeland Security, State and USTR. ACA told the panel that the proposed tariffs will damage the coatings industry’s position as a strong export industry. ACA cited that in 2017, the U.S. coatings industry imported for consumption coatings valued at $838 million while exporting $2,172 million. This large positive trade balance in this manufacturing industry – more than +$1.3 billion – has been in place for a lengthy period.
ACA also maintained that the international competitiveness of the American coatings industry is a product of strong innovation, manufacturing efficiency, and robust supply chains. In this regard, raw materials comprise approximately 75 percent of the direct cost of manufacturing coatings, and price inflation affecting those inputs is a matter of great concern for the U.S. industry, and that imposing tariffs of this magnitude on such chemicals like resins – which comprise more than 40 percent of the raw material cost – could, as a practical matter, largely exclude these affected products from the U.S. market. The disappearance of even a relatively small portion of the supply for these polymers would in ACA’s view, inevitably result in significant upwards pricing pressure on this key input. The significant tariff increases proposed by the USTR in this regard will almost certainly impose costs on the U.S. coatings industry that will not only harm consumers and end users – including downstream U.S. based manufacturing customers – but will also damage the currently strong competitive position internationally of the paint and coatings industry. This outcome of increased prices could quite easily erode or dissipate the current strong trade position the industry enjoys, leading to decreased exports of coatings and/or increased imports.
Given the internationally competitive nature of paint and coatings industry, ACA contends that adding additional pricing pressure to the raw material supply chain that comprises most of the cost of manufacturing these goods will advantage foreign producers of these products and create new incentives for manufacturers to shift production outside the U.S. – particularly to NAFTA manufacturing sites, which will gain a likely competitive advantage from the likely increase in inflationary pressures that are the likely outcome of these proposed new tariffs.
While Chinese manufactured polymers do not currently comprise a large proportion of the polymers used in the paint and coatings industry, the proposed tariffs will have the effect of displacing these products to other markets. This could adversely affect U.S. manufacturers who currently are strong exporters of these products (due to advantages derived from current low feedstock pricing) who might then choose to reduce capacity, or decline to add new capacity, thus ultimately increasing pricing pressures on these materials for coatings manufacturers who use them in their formulations.
Instead of pursuing the blunt instrument of tariffs, ACA urged the USTR and current Administration to pursue more precise and strategic approaches such as enforceable bilateral trade agreements to address the issues facing manufacturers with respect to China. More specifically, ACA does not believe that increased duties on the series of HTSUS subheadings 3901 through 3914 will support the stated objective of influencing China’s acts, policies, and practices, and for reasons noted, will engender harm to U.S. interests, including small and medium-sized enterprises and consumers, that will far outweigh any potential trade benefits resulting from this proposed action.
Contact ACA’s Heidi McAuliffe for more information.
 Chapter 39 notes that the expression “plastics” means those materials of headings 3901 to 3914 which are or have been capable, either at the moment of polymerization or at some subsequent stage, of being formed under external influence (usually heat and pressure, if necessary with a solvent or plasticizer) by molding, casting, extruding, rolling or other process into shapes which are retained on the removal of the external influence.
 Chapter 39 defines “plastics and articles thereof” as “… those materials of headings 3901 to 3914 which are or have been capable, either at the moment of polymerization or at some subsequent stage, of being formed under external influence (usually heat and pressure, if necessary with a solvent or plasticizer) by molding, casting, extruding, rolling or other process into shapes which are retained on the removal of the external influence.” Note 8 does indicate that the category also includes “Liquids and pastes, including dispersions (emulsions and suspensions) and solutions.”
 Source: U.S. International Trade Commission, Interactive Tariff and Trade DataWeb.