Disfavored Nation

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Executive Summary

The consensus on trade with China has shifted dramatically since China received Permanent Normal Trade Relationships (PNTR) with the United States and was admitted to the World Trade Organization (WTO) two decades ago. China has not proven willing to abide by its WTO commitments or basic principles of openness and reciprocity. Instead, the country has pursued an aggressive and mercantilist trade policy deliberately designed to dominate strategically important global markets. Free trade has not resulted in a liberalized, democratic China, but it has resulted in American offshoring, deindustrialization, and severe supply-chain dependence on a hostile adversary. This situation is now widely recognized as an unacceptable state of affairs. The trade dynamic between the United States and China is, in brief, not normal.

This welcome recognition has resulted in congressional interest in rescinding China’s Permanent Normal Trade Relations (PNTR) status, which currently allows China to benefit from the advantageous tariff rates the United States affords all nations with which it has normal trade relations. This legislative instinct is correct, but it raises a larger question about what the U.S.-China trade relationship’s new normal should look like.

Answering this question will require policymakers to: 1. Grasp the necessary historical and policy background regarding China and PNTR; 2. Achieve clarity on their legislative purpose; 3. Design and implement a policy that achieves that purpose; and 4. Consider the constellation of other policy questions rescinding PNTR naturally raises. This paper is intended to offer policymakers insight into all four tasks.

Background
Policymakers must first understand how the American tariff schedule is constructed and how it operates. The structure of the U.S. Harmonized Tariff Schedule (HTS), which sets tariff rates on all goods imported into the United States, reflects the principles of U.S. trade policy. Nations with which the United States has PNTR enjoy advantageous tariff rates and other market access benefits, conditioned on those nations recognizing certain market principles. China does not abide by this expectation, and treating China as if it does has resulted in severe negative consequences for the United States—chief among them the threat of supply chain dependence on a hostile power.
Purposes and Effects of Rescinding PNTR
Policymakers must be clear about which problems rescinding China’s PNTR is best suited to solve, and which it is not. The primary result of rescinding PNTR from China will be to disfavor Chinese imports relative to others; the primary goal of such a policy should be to promote supply chain independence from China. This will require creating a new tariff schedule “column” specific to China. The two options currently offered by the U.S. Harmonized Tariff Schedule are inadequate: Column 1 reflects the advantageous rates China currently enjoys and Column 2 reflects rates that were largely set in the 1930s.
Designing and Implementing HTS Column 3
The structure of a new Harmonized Tariff Column (“Column 3”) must reflect the policy goal of supply chain independence. This goal is best served by distinguishing between strategic goods and non-strategic goods. A wealth of resources from the U.S. government, other nations, and China itself offer helpful guidance in making this distinction. An analysis of the effects of recent tariff rates on imports suggests a 25% tariff on non-strategic goods will result in a partial decrease in reliance on China for those goods, while a 100% tariff on strategic goods will result in severe or total reduction in reliance on China for those goods. These tariffs should be phased in over five years, with no exemption process, and China’s ability to evade them through cross-border production and transshipment curtailed through reformed rules of origin and enhanced enforcement.
Further Policy Considerations
Rescinding PNTR from China and replacing it with a newly constructed “Column 3” tariff schedule will naturally raise numerous questions that policymakers must consider. Policymakers should have clear answers on how the United States should respond to inevitable retaliation from China, how this policy should interact with other tariff programs, how to close existing trade loopholes, what to do with the revenue this policy would raise, how rescinding China’s PNTR relates to WTO rules, and what other tools they may need to create.

Free trade has not resulted in a liberalized, democratic China, but it has resulted in American offshoring, deindustrialization, and severe supply-chain dependence on a hostile adversary.

Three appendices help put this framework into action. Appendix I offers a step-by-step guide to identifying strategic goods, walking through a single chapter of the Harmonized Tariff Schedule as an example. Appendices II and III offer policymakers additional data that will be useful in applying this methodology to other HTS chapters.

Introduction

After decades of failed trade policy, U.S. policymakers are preparing to rescind China’s Permanent Normal Trade Relations (PNTR) status.¹ ² The 2024 Republican Party Platform included a plank to “Secure Strategic Independence from China” by “revok[ing] China’s Most Favored Nation Status” and phasing out imports of essential goods.“³ A bipartisan report from the House Select Committee on the Strategic Competition Between the United States and the Chinese Communist Party has recommended a similar course,⁴ as did the U.S.-China Economic and Security Review Commission in 2022.⁵ Several Members of Congress, including Rep. Chris Smith (R-NJ4),⁶ Rep. Jim Banks (R-IN3),⁷ and Rep. Kevin Hern (R-OK1)⁸ have also introduced bills to accomplish this goal. In September 2024, Senators Tom Cotton (R-AR), Marco Rubio (R-FL), and Josh Hawley (R-MO) introduced the Neither Permanent Nor Normal Trade Relations Act, which would rescind PNTR from China, construct a new tariff schedule column specific to China, and impose tariff rates of 100% on goods considered strategically vital to national security.⁹

American Compass has previously published papers on the need to rescind China’s PNTR status and reset our economic relationship with China.¹⁰ But the reversal of the major and misguided policy that has shaped the past 25 years of globalization is a classic example of “easier said than done.” PNTR is inappropriate for China, but what is appropriate and how should it be codified in law? Here we provide relevant conceptual and methodological guidance and recommend a specific solution: new tariff rates under a new “third column” of the Harmonized Tariff Schedule, designed to reduce our supply chain dependence on China.

To that end, this paper:

Briefly outlines the structure of the U.S. tariff system and the history of U.S.-China trade relations;
Assesses the various goals that might motivate rescinding PNTR for China and determines which the policy is likely to achieve;
Provides an approach to categorizing goods imported from China and suggests how best to implement a new tariff schedule; and
Reviews additional policy questions that policymakers should be prepared to address.

The paper’s Appendices also offer a detailed methodology for constructing a new tariff schedule for Chinese goods.

I. Background: The Harmonized Tariff Schedule and Permanent Normal Trade Relations with China

History, Purpose, and Design of the Harmonized Tariff Schedule

A fundamental task of trade policy is to govern the terms on which goods can enter a nation’s market. Categorizing goods in a clear and commonly understood manner is therefore essential. This is the purpose of the Harmonized Commodity Description and Coding System, or Harmonized System (HS). The HS is maintained and updated by the World Customs Organization (WCO), which is tasked by international convention with “harmoniz[ing] the description, classification and coding of goods in international trade.”¹¹ Over 98% of the goods traded globally are classified using the HS, and over 200 economies use the HS as the basis for administering their trade policies.¹² This system makes it easier to apply tariff rules consistently, implement monitoring systems, negotiate trade agreements, and collect trade statistics.

The United States has used the HS since 1989, when Congress enacted the new Harmonized Tariff Schedule of the United States (HTS) based on that system. The HTS, which is published by the U.S. International Trade Commission (ITC) and interpreted and enforced by U.S. Customs and Border Protection (CBP), provides the classification regime for applying tariffs and duties on goods imported into the United States. Its over 17,000 unique 10-digit entries (commonly referred to as “HS codes”) assign specific categories—and specific tariff rates—for “virtually every item that exists.”¹³ ¹⁴

Harmonized Tariff Schedule (HTS) Columns and Most Favored Nation (MFN) Status

The structure of the Harmonized Tariff Schedule reflects U.S. policy decisions along two dimensions. Tariff levels differ not only between various goods, but also based on the trade status of the countries from which those goods are imported. Differences in country status are reflected in the HTS “Columns,” of which there are currently two. Both columns list rates for every good classified in the HTS.

The general “Column 1” rates apply to nations that the United States has granted “Most Favored Nation” status, a legal designation meaning that country will receive the United States’ most favorable trade terms and most advantageous tariff rates.¹⁵ The United States grants MFN status to almost every country in the world, thus qualifying their goods for Column 1 rates. This reflects America’s commitment to “nondiscrimination” under the World Trade Organization (WTO) agreements, a core WTO principle which requires all WTO members to extend “Most Favored Nation” treatment to all other WTO members.¹⁶ Under the WTO agreements, American Column 1 rates cannot be raised higher than the maximum, or “bound,” rates, agreed to in the United States’ Schedule of Concessions.¹⁷ Because the United States has offered more concessions than any other WTO country, we maintain the lowest maximum tariff rates in our Schedule of Concessions—a 3.4% simple average.¹⁸

The “special” Column 1 rates, meanwhile, currently apply to specific American free trade agreement partners. This reflects a WTO agreement exception that allows nations to set lower, more favorable tariff rates than their MFN baseline tariffs with free trade agreement partners or developing nations under preference programs. These rates remain under Column 1 in the U.S. HTS but are distinguished as “Special” Column 1 rates.

Column 2 of the HTS defines the tariff rates applied to nations to which the United States does not extend MFN status, which for many years only included Cuba and North Korea, but after recent congressional action now includes Belarus and Russia as well. These rates are generally—but not always—meaningfully higher.

While the global trading system and most other countries continue to use the term “Most Favored Nation,” the United States no longer does. In 1998, Congress replaced statutory references to “Most Favored Nation” with the new term “normal trade relations” (NTR) and later added the additional word “permanent.” This change was driven by members of Congress who supported permanent Most Favored Nation status for China but wanted a less politically charged term.¹⁹ ²⁰

The World Trade Organization and Permanent Normal Trade Relations with China

Both the World Trade Organization (WTO) and current U.S. trade policy grew out of the General Agreement on Tariffs and Trade (GATT), originally signed by 23 nations in 1947. This agreement largely encompassed democratic market economies seeking to hedge against the growing consolidation of Soviet bloc countries after World War II. Each party to the agreement agreed to grant all others Most Favored Nation status, consistent with the principles of non-discrimination and national treatment. The understanding was that member nations would treat each other equally under their trade laws (non-discrimination) and not engage in protectionist or mercantilist behavior that favored their own industries over imports from other parties to the agreement (national treatment).²¹

As communism spread, the United States took additional action to prevent Soviet-influenced nations from receiving favorable trade status under the GATT. In 1951, Congress directed the president to suspend MFN status for all nations under Soviet or communist influence. This would have included China, an original signatory of the agreement, but it had already withdrawn from the GATT in 1950 after falling to communism in 1949.

Originally, under the Trade Expansion Act of 1962, restoration of a country’s MFN status was a congressional prerogative.²² The Trade Act of 1974, however, authorized the president to temporarily move what the law described as a “non-market economy” country from Column 2 to Column 1 under certain circumstances. Specifically, under the Act’s Jackson-Vanik amendment, MFN status was denied to current and former non-market economies that failed to adhere to certain freedom-of-emigration requirements.²³ Under that amendment, the president could extend conditional MFN to these countries if he determined they were not in violation of the freedom-of-emigration requirements or if he chose to waive those requirements.²⁴ More specifically, the president’s conditional waiver needed to be reissued annually, and Congress could vote each year to overturn it.²⁵ Pursuant to this legislative scheme, only an act of Congress could result in permanent MFN status.²⁶

In 1980, the president began granting China an annual waiver, conferring temporary MFN status on China and subjecting goods imported from China to the lower Column 1 tariff rates. Congress had the prerogative to overturn a presidential waiver, but failed each year to do so, despite heated debates and close votes on the matter, especially after Tiananmen Square.²⁷ ²⁸

In the meantime, after the GATT of 1947, there were eight successful rounds of negotiations among the growing GATT membership to improve the trade system, culminating in the establishment of the World Trade Organization (WTO) under the Marrakesh Agreement of 1994. Over this time, parties to the agreement grew from 23 to 128, and the establishment of a formal WTO transformed the agreement from a Cold War economic strategy into a vision for worldwide cooperation on trade. The new arrangement included many countries that did not align with market-based economics and had no history or policy of fair trade. Not surprisingly, since the WTO was established, there have been no successful negotiations to fundamentally change the agreement given the vast disparity in interests and views on trade. The trade system of the 2020s largely operates under a framework first conceived in the post-World War II period and further developed in the 1990s, despite the many economic, technological, and geopolitical changes since.

Instead, the United States embraced China in support of its self-declared “peaceful rise” and helped normalize its economic integration with the world, agreeing to deal with future trade concerns through the WTO dispute resolution process instead of a potential suspension of normal relations.

During the 1990s, free trade advocates began pushing to discontinue the annual waiver process for China and grant it MFN permanently—or, under the new language, Permanent Normal Trade Relations (PNTR). These advocates argued that because China had already enjoyed MFN tariff levels since 1980, albeit on a yearly basis, nothing would change for the United States except greater and safer access to the Chinese market.²⁹ They eventually prevailed, supported by hopeful foreign policy thought leaders and business interests seeking to use the low-wage and low-standard manufacturing base of China, and in 2000 Congress voted to grant China PNTR. This win paved the way for China to fully join the World Trade Organization in 2001, a goal China had sought for 15 years.³⁰

America’s posture was decisive in China’s accession to the WTO. While only a two-thirds majority of WTO members is necessary for a final accession vote, a consensus vote is necessary at earlier stages of accession negotiations and general WTO protocols call for consensus.³¹ In other words, the United States had the power to block China’s entry to the WTO. But even if China’s accession was allowed, the United States (and others) could have invoked Article XIII of the WTO agreement, which allows members to deny MFN treatment to new members at the time of their accession to the WTO.³² Instead, the United States embraced China in support of its self-declared “peaceful rise”³³ and helped normalize its economic integration with the world, agreeing to deal with future trade concerns through the WTO dispute resolution process instead of a potential suspension of normal relations.

Politicians and experts predicted that China would be a “responsible stakeholder”³⁴ and abide by its new WTO obligations, including its bilateral commitments with the United States,“³⁵ open its economy, and respect intellectual property rights while suspending its market access restrictions, industrial controls, and subsidies. Indeed, as American Compass has documented in “Wrong All Along,” optimism was unbridled and widespread across a bipartisan elite that successfully overwhelmed those voices that questioned the path’s wisdom.³⁶ Unfortunately, China joined the world trade system not with reciprocal magnanimity, but with an aggressive strategy for exploitation.³⁷

The Consequences: Supply Chain Dependence

Obviously, China did not liberalize or democratize. Instead, it conditioned limited access to the Chinese market, in violation of its WTO commitments, on forced technology transfers and joint venture agreements. It also pursued an aggressively mercantilist industrial policy that sought to seize leadership in vital industries while hollowing out western economies. These policies continue now, unabated, to the detriment of American economic resilience, American industrial strength, and the wellbeing of American workers.³⁸ The American trade deficit with China exploded, American industries offshored, and American production capacity declined as dependence on Chinese supply chains became entrenched.

American reliance on Chinese lithium batteries, casting and forging, and microelectronics threatens U.S. defense procurement.

Economic integration with China has rendered the United States increasingly reliant on an adversarial non-market economy under the control of a hostile Communist government for essential goods and advanced technologies that underpin the American economy. Examples abound:

A 2022 report from the Department of Defense found China “dominates the global advanced battery supply chain, including lithium hydroxide (94%), cells (76%), electrolyte (76%), lithium carbonate (70%), anodes (65%), and cathodes (53%).”³⁹ The Department of Defense further found that American reliance on Chinese lithium batteries, casting and forging, and microelectronics threatens U.S. defense procurement.⁴⁰
The Department of Energy found, “China also controls 61% of global lithium refining key for battery storage and electric vehicles. China also controls 100% of the processing of natural graphite used for battery anodes.”⁴¹
A 2023 report by the U.S.-China Economic and Security Review Commission found that China is the leading source of 24 nonfuel mineral commodities for which the United States is more than 50% net import reliant. It supplied 72% of rare earth imports to the United States from 2019–2022.⁴²
A study by the Oxford Institute for Energy Studies found that, in 2019, China accounted for 70% of the world’s rare earth element production and 90% of rare earth element processing.⁴³
The Department of Homeland Security reported that in 2018, “China [led] the world in global sales of [Printed Circuit Board (PCB)] manufacturing, with a 52.4% share ($32.7 billion) of the market…In contrast, approximately $2.88 billion worth of PCBs [were] produced in the United States…[with] U.S. global production share of PCBs…at an estimated four percent.”⁴⁴
The Administration for Strategic Preparedness and Response at the Department of Health and Human Services estimates “90 to 95% of [generic sterile injectables] used for critical acute care in the U.S. rely on [key starting materials] and drug substances from China and India.”⁴⁵ A March 2023 report from the House Committee on Homeland Security and Government Affairs also points out that the number of Chinese-based Active Pharmaceutical Ingredient (API) manufacturers registered with the FDA more than doubled from 188 to 445 between 2010 and 2015. The report further notes that 80% of generic APIs are now produced outside the United States, though it also notes that the “Defense Logistics Agency, which purchases drugs for the U.S. military, said with the exception of three drugs that rely on API manufacturers based solely in China, it is ‘unable to determine with certainty if any of the drugs it purchases rely solely on sources in China or India.’”⁴⁶
Another report by the Department of Transportation found “[t]hree Chinese companies account for 96% of the world’s dry cargo containers and 100% of the refrigerated containers.”⁴⁷
The U.S. Department of Agriculture estimates that China is the primary source for over 70% of certain active pesticide inputs, some of which lack a U.S. source altogether.⁴⁸

Recognizing the costs that free trade with China has imposed on the American economy and the vulnerabilities it has created, policymakers are now determined to rescind China’s PNTR status. Congress’s decision in 2022 to rescind PNTR status for Russia and Belarus, despite the former’s WTO membership, has also reminded American policymakers that sovereignty over trade with foreign nations belongs to the American public exercised through its elected leaders, not international organizations.

II. Purposes and Effects of Rescinding Permanent Normal Trade Relations

Rescinding PNTR would go beyond the trade actions pursued in recent years under the Trump and Biden administrations. Both administrations have pursued tariffs against China under Section 301 of the Trade Act of 1974 as leverage for a deal with China to end its trade abuses.⁴⁹ While the Trump administration successfully negotiated an enforceable “Phase One” deal that kept most of these tariffs in place, the deal has not been honored by China.⁵⁰ As noted in the United States–China Economic and Security Review Commission’s 2022 Annual Report:

After many years of attempting to engage China and persuade it to abandon its distortive trade practices, it is clear this approach has not been successful. The United States has an opportunity to develop a new strategy based on building resilience against China’s state capitalism and blunting its harmful effects rather than seeking to change it. With the WTO unable to introduce meaningful new rules and procedures, the United States can pursue approaches that advance its own national interests as well as cooperate with like-minded partners.⁵¹

It is evident that the United States can no longer rely on negotiations or targeted measures under the existing trade regime. The United States must declare trade independence from China.

After six years, a supply chain crisis during the COVID-19 pandemic,⁵² and little change in China’s behavior, it is evident that the United States can no longer rely on negotiations or targeted measures under the existing trade regime. The United States must declare trade independence from China. Rescinding PNTR and placing China in a third column represents a broad, decisive approach for recalibrating the U.S.-China trade relationship. It will ensure that China, as an aggressive non-market economy,⁵³ does not receive the same default tariff treatment as other market economies like the United Kingdom and Australia.

Clarity of purpose must guide policy design. This kind of clarity can be challenging in the context of trade with China, as political debates on the topic touch on a wide range of politically salient goals, from reindustrialization to national security to the creation of good jobs. This section aims to clarify the specific problems that creating a new column for Chinese goods is well-suited to solve and which problems require other tools.

The Inadequacy of Relegating China to HTS Column 2

Rescinding China’s PNTR status would deny its producers automatic access to the U.S. market at the low—and often zero—tariff rates under Column 1 of the Harmonized Tariff Schedule. But without further action, simply rescinding PNTR would move China into Column 2 of the HTS, which is ill-suited to the task of reducing dependence on Chinese supply chains. As a near-peer economy already intertwined with America’s economy, China requires different treatment that a newly designed third column of the HTS is better suited to provide.

The tariff rates prescribed in Column 2 are largely left over from the “Smoot-Hawley” Tariff Act of 1930.⁵⁴ Most of the higher tariff rates under Column 2 target agricultural and manufactured products that were strategically important in the 1930s. Meanwhile raw materials and inputs that are strategically vital in today’s economy enjoy lower rates and in some cases duty-free treatment. The tariff rate on uranium is zero in both Column 1 and Column 2, as is the rate for several chemical precursors to fertilizer. Even some of the Column 2 finished good tariffs are too low. For example, while the Column 1 tariff for cars is 2.5%, the Column 2 rate of 10% is not much better. So, while Column 2’s average tariff rate of 30% would be preferable for China versus Column 1, there are many examples of Column 2 rates that fall short of the broader goals of this policy change.⁵⁵

Furthermore, “specific tariffs” in both columns—levied as a fixed fee per item or by weight, as opposed to “ad valorem” tariffs that are calculated as a percentage of a good’s value—have not been adjusted for inflation. For example, HTS Column 2 imposes a tariff on crude oil of 21 cents per barrel—twice the Column 1 rate of 10.5 cents, but a trivial deterrent with a barrel of oil now trading around $80 on global markets and regularly fluctuating by more than $2 daily.⁵⁶ These kinds of outdated ad valorem and specific tariff rates render Column 2 less than ideal for disfavoring Chinese supply chains.⁵⁷ That is also why when Congress moved Russia and Belarus to Column 2, it also gave the president authority to proclaim tariff rates on Russia in excess of the existing Column 2 rates.⁵⁸

It is true that the United States is not economically dependent on any of the nations currently receiving Column 2 treatment, but that is not because of the strength of the Column 2 tariff regime. The four nations in Column 2 today also face sanctions and embargoes that further limit trade with the United States. Cuba was an original member of the GATT but lost MFN status under the Trade Classification Act of 1962 after it fell to communism. It is subject to a longstanding American trade embargo. Russia joined the WTO in 2012 but has been subject to multiple trade and financial sanctions—including the revocation of its PNTR status in 2022—since invading Ukraine.⁵⁹ North Korea is likewise subject to numerous sanctions by both the United States and the United Nations Security Council, which requires member states to limit trade with North Korea for over 80% of its potential exports.⁶⁰

Primary Objective: Reducing Supply Chain Dependence on an Adversary

The most direct effect of higher tariffs will be to reorient supply chains away from China. As explained, disfavoring Chinese supply chains is an urgent goal. It also is the goal most likely to be achieved through rescinding China’s PNTR status and placing China in a new HTS column.

Over the past 25 years, permanently favorable tariff rates gave U.S. companies the long-term security to outsource manufacturing to China en masse.⁶¹ Producers took advantage of lower production costs, promised access to the Chinese market, and financial incentives from the Chinese government to produce goods in China and then sell them back into the United States. This resulted in major offshoring of U.S. industries and increased dependence on Chinese supply chains. This dependence includes many industries—like electronics, machinery and components, chemicals, semiconductors, lithium-ion batteries, and rare earth elements—that provide key inputs for the U.S. military and will likely be vital to both the American and global economies in the 21^st century. It also includes a host of non-military goods vital for the well-functioning of American society like telecommunications equipment, computers, commercial shipping equipment, and medical products. China has focused strategically on attracting critical supply-chain nodes and technologies. Not coincidentally, dependence in these sectors directly undermines U.S. economic resilience.

As noted in American Compass’s report, “A Hard Break from China”:

The CCP has pursued an explicit industrial strategy to capture critical supply chains and leadership in the most promising industries. As Ambassador Robert Lighthizer noted in his recent testimony before the House Select Committee on the Chinese Communist Party, “The Chinese economic system is designed to exploit foreign commerce to advance China’s geopolitical power.” The CCP has used subsidies, market-access barriers, and outright intellectual property theft and espionage to manipulate American firms, talent, and funding into developing China’s industrial capacity while undermining America’s own. The CCP does not even bother to disguise the strategy. Its [Made in China 2025] plan, launched in 2015, describes the goal of becoming the global leader in innovation and manufacturing by 2049, the CCP’s centennial.

Permanently setting higher tariffs on Chinese goods would make clear that the new U.S. trade posture toward China is unlikely to change.

Many companies began reevaluating their supply chains after the Trump administration imposed tariffs under Section 301 in 2018. Permanently setting higher tariffs on Chinese goods would make clear that the new U.S. trade posture toward China is unlikely to change. It would further incentivize American businesses still producing goods in China either to reshore or move production to friendlier nations, and American businesses otherwise dependent on imports from China to pursue alternative supply chains. In economic terms, one might consider this an adjustment for externalities: U.S. reliance on Chinese producers creates serious national security and supply chain risks, which generate costs that importers of Chinese goods do not internalize. Higher tariffs are a clear and efficient way to require them to internalize those costs.

Recent history demonstrates that higher tariff barriers reduce import reliance on China. The International Trade Commission’s (ITC) report on Section 301 trade actions under the Trump administration showed that higher tariffs led U.S. importers to reroute their supply chains away from China and raised revenue without noticeably affecting consumer prices.⁶² ⁶³

A 2022 report from the generally anti-tariff Peterson Institute for International Economics also found:

Overall, the trade war has reduced US goods imports from China. Imports declined immediately after tariffs were imposed, falling further beginning in March 2020 as global trade collapsed in the wake of the COVID-19 pandemic, and have since recovered only slowly. Today, US imports from China remain well below the pre-trade war trend, as defined (conservatively) by US imports from the world, and have only recently returned to pre-trade war levels of June 2018. China is now the source of only 18 percent of total US goods imports, down from 22 percent at the onset of the trade war. …

As expected, the trade war has had the largest impact on imports from China of products hit with the highest US tariffs. US imports from China of goods currently facing a 25 percent duty (Lists 1, 2, and 3) remain 22 percent below pre-trade war levels. US imports of those same products from the rest of the world are now 34 percent higher.⁶⁴

In other words, higher tariffs have already proven effective in reducing our reliance on China.⁶⁵ The United States can neither continue to rely on China for essential goods, nor allow China’s deliberate strategy to dominate world supply chains and critical industries to go unchallenged. Properly designed tariffs provide the solution.

Secondary Objectives and Limitations

Rescinding PNTR with China and creating a third HTS column tailored to China is not a panacea for all the economic and security challenges China poses, but it is an essential step in solving them. The following objectives will be substantially aided by rescinding PNTR with China, but other policies will be needed to fully address the underlying concerns:

A. Reasserting Fair Trade Policy

U.S. trade policy should require its trading partners to adhere to transparent, open, and fair trade practices that serve American interests. China’s mercantilist policies, including its state-owned enterprises, market access restrictions, currency manipulation, labor abuses, and industrial subsidies, run directly counter to those interests. Rescinding China’s PNTR status would rightly reflect that China is a hostile non-market economy⁶⁶ that does not respect or abide by fair trade principles. It is also a step toward ensuring that the results of U.S. trade policy—and the WTO’s framework more broadly—line up with the expectations of those who set the rules.⁶⁷ This would further signal to other nations exhibiting non-market behavior that the United States will act to defend its interests against trade abuses going forward. China is not the only nation that engages in unfair trade practices to the detriment of American workers and industries.

B. Reducing the Overall U.S. Trade Deficit and Revitalizing Domestic Industry

This policy is an essential and significant step toward lowering the broader U.S. trade deficit, but will not resolve that deficit on its own. For example, while Section 301 tariffs have decreased the U.S. trade deficit with China, the overall trade deficit has remained high.⁶⁸ Moreover, much of the global trade deficit may still be driven by supply chains that ultimately flow from China.⁶⁹ ⁷⁰ ⁷¹ A more permanent increase in tariffs backed by Congress will signal that the United States is serious about keeping Chinese goods out of its market, regardless of how many stops they make on the way to its shores.⁷² With that said, policymakers will also need to address broader Chinese strategies to avoid U.S. tariffs,⁷³ establish local content requirements,⁷⁴ or increase tariffs on certain goods across U.S. trading partners to ensure Chinese companies are not able to simply reroute production through Southeast Asian and Latin American countries.

Furthermore, rescinding PNTR with China will incentivize the United States to rebuild its industries and compete with China in international markets, but the United States will also need to make large investments in research,⁷⁵ workforce development,⁷⁶ and industrial scaling.⁷⁷ It will need to reform or cut regulations and permitting rules that slow development and drive up energy and operating costs.⁷⁸ And it will also need to change misaligned incentive structures built into the American financial system.⁷⁹

C. Limiting Technological and IP Theft

Since granting China PNTR, the United States has directly supported China’s economic and technological rise through forced joint ventures and technology transfers. China’s systematic acquisition of American intellectual property and technology through conditional market access and industrial espionage has severely undermined U.S. competitiveness, and China’s theft of American intellectual property is estimated to cost the United States $600 billion annually.⁸⁰ To the extent that higher tariffs discourage American offshoring to China, they will also diminish the number of American companies participating in arrangements where their technology and industrial practices are at risk of being copied and stolen. This would reduce the CCP’s access to technologies that strengthen its regime and would protect American competitiveness. With that said, voluntary investment flows between the United States and China, as well CCP efforts to steal American IP through talent recruitment, cyber theft, and other methods still leave the United States vulnerable to technology and IP theft. Other policy measures must address these vulnerabilities.

D. CCP Economic and Cultural Influence Through Investment

Raising tariffs will make Chinese goods less competitive in the U.S. market, meaning China will have fewer U.S. dollars gained from sales revenue to use for purchasing U.S. assets. But rescinding PNTR will not prevent China from purchasing U.S. assets, nor U.S. companies from investing in China with the hope of selling into the Chinese market. As referenced above, such investment has often meant forfeiting technology or giving the CCP a seat at the boardroom table. The United States should further restrict investment between the United States and China to limit or block acquisitions of American assets, joint ventures, and technology transfers to Chinese-controlled companies. Beyond economic transactions, the United States should also stop admitting Chinese nationals with connections to the CCP’s Military-Civil Fusion strategy to its STEM graduate programs and allowing U.S. universities to become financially dependent on funding from China.

The Political Economy of Permanent Normal Trade Relations

While unfettered “free trade” is often presented as a default condition in the international economy, with which tariffs interfere, it is important for policymakers to recognize that such free trade exists nowhere in U.S. trading relationships today—nor has it ever been a tenet of U.S. policy or even the World Trade Organization framework. A Harmonized Tariff Schedule is the default, and the United States sets tariffs on a foreign country’s exports based on considerations of the national interest. PNTR should imply a trading relationship provides some benefit to the United States.

The question is whether a new schedule would improve upon the Column 1 rates, which were designed on the assumption that trading partners would not behave as China does.

Given China’s rampant abuses of the trading system and its threat to the U.S. national interest, it is increasingly difficult to argue that the appropriate trade policy toward China is an “open borders” model of unfettered imports, though some do. Thus, the question is what tariff framework to choose. The PNTR rates of Column 1, designed for trading partners in market economies? The residual rates of Column 2, applied to rogue nations under sanction? Or a new set of rates tailored to the nature of the China challenge? Inevitably, setting a new tariff schedule will be messy, and the result far from perfect. But that is no argument against doing so. The question is whether a new schedule would improve upon the Column 1 rates, which were designed on the assumption that trading partners would not behave as China does. Any schedule cognizant of that behavior and aimed at addressing it, even bluntly and imprecisely, will represent an improvement on the status quo.

III: Designing and Implementing HTS Column 3

Designing and implementing a new Column 3 to reduce American dependence on China requires four major policy choices:

Categorizing goods entering the United States from China;
Setting tariff rates for each category of goods;
Establishing a timeline for phasing in new tariff rates; and
Addressing Chinese economic practices designed to avoid U.S. tariffs

This paper argues for a two-tier categorization that identifies products as either strategic or non-strategic at the eight-digit HS subheading level. Goods in non-strategic categories should be tariffed at a 25% rate; goods in strategic categories should be tariffed at a 100% rate.⁸¹ These tariff rates should phase in steadily over five years with no exemptions. Updated Rules of Origin (ROO) should treat all goods originating in China, consisting primarily of content from China, or produced by a Chinese company as imports from China.

How to Categorize Goods

Reliance on China for lithium-ion batteries poses a different problem than reliance on China for plastic toys. In both cases, the United States relies heavily on Chinese supply chains. But in only the former does the reliance pose a serious threat to American resilience, prosperity, and security. If the purpose of rescinding PNTR is to counter that threat, a new Column 3 should distinguish between goods where such a threat is or is not present.

A new Column 3 should therefore be designed around a simple distinction between strategic and non-strategic goods, with the understanding that the United States needs to be less dependent on China for both. Independence of U.S. supply chains for strategically essential goods should be the goal for raising tariffs through rescinding PNTR; increasing the incentive to reshore or diversify supply chains while raising revenue should be the goal for non-strategic goods. Ambassador Robert Lighthizer called for the implementation of a similar approach for a new Column 3 during testimony to the U.S. House Select Committee on Strategic Competition between the United States and the Chinese Communist Party in May 2023: across-the-board tariffs on Chinese goods, combined with targeted higher tariffs on “strategically important goods” from China.⁸²

Adopting this approach raises an obvious question: How should policymakers define a strategic good? Several U.S. government and foreign government reports aimed at supply chain security (assessed below) offer helpful examples and parameters. A synthesis of these approaches results in a definition of “strategic” that sweeps in at least four kinds of imports: 1. Military or obviously “dual-use” goods; 2. Advanced technology-related goods related to important industries; 3. Goods critical for American infrastructure, including the U.S. energy, public health, and transit sectors;⁸³ and 4. Key inputs for goods in the prior three categories, including commodities and basic manufactured goods.

Several existing lists from the U.S. government, allied nations, and China offer a good starting point for considering what goods are “strategic.” Some of them already categorize goods by HS code, offering policymakers a ready-made starting place for constructing a new Column 3, though policymakers will need to exercise judgement and consider a wider array of strategic goods.

U.S. Government Lists

Draft List of Critical Supply Chains
Pursuant to the Biden administration’s Executive Order 14017 (February 2021), the Commerce Department’s International Trade Administration (ITA) published a draft list of products in four critical supply chains: public health and biological preparedness, information and communications technology (ICT), energy, and critical minerals.⁸⁴ The ITA list identifies key products within those four sectors at the eight- or ten-digit HS code level. The ITA list is not without its limitations; by its nature, the list only identifies products within the four sectors it focuses on, leaving out other key strategic sectors that might be relevant for U.S.-China decoupling. Even within the four sectors, moreover, the list adopts a relatively narrow conception of what is strategic. For instance, despite focusing on the energy sector, the ITA list does not include any uranium-based products. Despite focusing on the energy and ICT sectors, the list does not include any phosphide products, which are important inputs for some batteries and semiconductors. As a result, the ITA list flags a narrow segment of eight- or ten-digit HS codes that policymakers might consider strategic. It offers a strong start in a few sectors, but more analysis remains needed.
Section 301 Tariff Lists
The U.S. Trade Representative’s Section 301 tariff lists for Chinese products identify, in part, products involved in Chinese industrial policy. For example, List 1 of these Section 301 tariffs, issued in 2018, aimed to target products supported by the Chinese government’s “Made in China 2025” industrial policy.⁸⁵ The most recent Section 301 tariff list, issued by U.S. Trade Representative Katherine Tai in May 2024 and finalized in September 2024, increased tariffs on steel, aluminum, semiconductors, electric vehicles, batteries, battery components, critical minerals, solar cells, ship-to-shore cranes, and medical products.⁸⁶ Like the ITA list, these lists cover many—though not all—strategic goods.
Section 232 Tariff Lists
Since 2017, the Commerce Department has conducted eight Section 232 investigations. Each of these investigations study the national security risks of U.S. import-dependence for a category of products (e.g., steel). At the conclusion of the investigation, the Commerce Department releases a report summarizing its findings and recommending next steps to remedy any national security risks it finds, including tariffs. These reports contain a list of HTS codes determined to be of importance to U.S. national security.⁸⁷
The Critical and Emerging Technologies List
Published by the White House’s National Science and Technology Council (NSTC), this list outlines high-level “critical and emerging technologies” that are “potentially significant to U.S. national security,” which is broadly defined to include “expand[ing] economic prosperity.”⁸⁸ The list identifies critical and emerging technology fields (e.g., advanced computing) and sub-fields within those fields (e.g., edge computing, supercomputing, cloud computing).⁸⁹ Many of the fields and subfields on the NSTC lists mirror those on other countries’ strategic technology lists, including those of Japan, the European Union, and China. While this list does not detail HS codes related to these fields and subfields, it provides useful guidance in identifying broad economic sectors that might be considered strategic. This would inform product-level HS code analysis.
CISA Critical Infrastructure Sector List
The U.S. Cyber and Infrastructure Security Agency’s (CISA) Critical Infrastructure Sector List details 16 sectors “whose assets, systems, and networks” are “considered so vital to the United States that their incapacitation or destruction would have a debilitating effect” on American society. These sectors include the chemical sector, communications sector, and emergency services sector. This list does not provide specific HS codes of products that fall under each sector, but the list nonetheless provides useful guidance for determining what sectors constitute vital U.S. infrastructure. This should inform product-level HS code analysis.⁹⁰
U.S. Commerce Department’s IPEF Supply Chain Agreement List
In August 2024, the U.S. Department of Commerce released a list of critical sectors to consider for cooperation under the Indo-Pacific Economic Framework for Prosperity’s (IPEF) Supply Chain Agreement.⁹¹ This agreement is intended to bolster supply chain resilience, sustainability, and diversification. The sectors highlighted in the report should aid policymakers in conceptualizing which goods are strategic to the U.S. economy. The broad sectors listed in the report include: agriculture, chemicals, consumer goods, critical minerals and mining, energy and environmental industries, health industries, information and communication technology products, and transportation and logistics. More specific categories of goods are also listed within each sector.
USGS Critical Minerals List
The U.S. Geological Survey’s (USGS) Critical Minerals List details 50 critical minerals, including aluminum, cobalt, graphite, lithium, neodymium, and titanium.⁹² In June 2024, the House Committee on Natural Resources also advanced legislation to fully enumerate and consolidate a definitive list of critical minerals, elements, substances, and materials to use across agencies, which would also be useful in designing a new tariff column.⁹³
Commerce Control List
The Commerce Department’s Commerce Control List (CCL) provides a detailed list of dual-use products and technologies that are potentially subject to U.S. export controls. Each specific product or technology on the CCL receives its own Export Control Classification Number (ECCN). Companies exporting products that fall under an ECCN must determine if they need a license to sell that product abroad.⁹⁴ Unfortunately, ECCNs are distinct from HS codes, but the CCL can nevertheless be used as a guide to identify dual-use goods.
U.S. Munitions List
The U.S. Munitions List contains “articles, services, and related technical data designated as defense articles or defense services pursuant to sections 38 and 47(7) of the Arms Export Control Act.”⁹⁵ The goods on the list range from missile systems to firearms to personal protection equipment (PPE). Importing most of the goods on this list from China should be banned outright but should also receive a default rate of 100% in the HTS.⁹⁶

International Lists

China
Chinese lists are also helpful guides. China’s Made in China 2025 (MIC 2025) policy lists ten key sectors for the contemporary economy, including biotechnology, railway equipment, and power generation equipment.⁹⁷ Separately, China’s Strategic Emerging Industries (SEI) strategy lists out key sectors for the future of the economy (so-called “industries of the future”). SEI strongly overlaps with MIC 2025 and focuses on nine industries, five targeted for immediate action (information technology, high-quality industrial equipment, biotechnology and pharmaceuticals, new energy vehicles and clean energy, and digital media) and four targeted for long-term action (space and ocean exploration, information networks, life sciences, and nuclear technology).⁹⁸ The main difference between the two plans appears to lie in their intent. MIC 2025 largely targets industries and capabilities already well established in other developed countries and aims to establish Chinese domestic companies in these sectors. SEI focuses on up-and-coming sectors and technologies where Chinese companies can be the first mover in the market.⁹⁹ China’s most recent strategy, the Innovation-Driven Development Strategy (IDDS), targets three core technological capabilities that the Chinese government believes will form the bedrock of future economic competitiveness: telecommunications, artificial intelligence, and data processing.¹⁰⁰
Japan
In 2022, the Japanese government enacted the Economic Security Protection Act (ESPA). ESPA provides government support for key supply chains that are: 1. Essential for the survival of Japan; 2. Currently predominately imported into Japan; 3. Might be subject to supply chain disruptions; and 4. Require government funds to maintain stable domestic supply.¹⁰¹ As of July 2023, 11 goods have been listed as meeting these criteria: semiconductors, rare earths, medical supplies, fertilizers, ship parts, liquefied natural gas, aircraft parts, cloud applications, antimicrobials, storage batteries, industrial robots, and machine tools.¹⁰² As part of the ESPA’s implementation, the Japanese government has also created a list of “critical technologies” similar to the White House’s NSTC list. This list details broad industries with strategic importance like biotechnology, medical and public health technology, and artificial intelligence. Finally, the ESPA implementation process also involved listing categories of Japanese critical infrastructure that need to be protected from foreign interference. Infrastructure sectors of concern include electricity distribution, gas pipelines, railways and cargo transport, air transport and airports, telecommunications, terrestrial broadcasting, postal services, banking, insurance, financial markets, and payment systems.¹⁰³
The European Union
In partnership with the United States, the EU has developed a list of military and dual-use goods as part of its efforts to limit inadvertent European support for Russia’s war in Ukraine. This list details products at the six-digit HS code level in the chemicals, machinery, electronics, and vehicle categories. This EU list is designed to help suppliers screen their supply chains for Russian sanctions-evasion schemes that seek to procure goods from European companies through third-country intermediaries.¹⁰⁴

Applying the Strategic/Non-Strategic Distinction to the Harmonized Tariff Schedule

Policymakers must implement their definition of “strategic” goods by classifying each eight-digit subheading in the Harmonized Tariff Schedule as strategic or non-strategic. Appendix I provides a walkthrough of how policymakers should further categorize beyond the four-digit level by analyzing one full chapter of the HTS. Appendix II to this paper offers a “head start” on analyzing the entire HTS by highlighting all four-digit chapter headings that contain strategic goods. Appendix III contains the HTS codes listed in the government reports on strategic goods mentioned above.

Fully analyzing the Harmonized Tariff Schedule at the eight-digit level is a serious task, as there are over 10,000 HS subheadings at that level. While full analysis of the HTS at the eight-digit level is outside the scope of this paper, it could be accomplished by congressional staff with reference to the reports listed above and input from the public and the executive branch, or by the executive branch with specific delegated authority from Congress. After nearly 100 years, reassessing the HTS with an eye toward resetting U.S. non-MFN rates for strategic goods is long overdue.

Setting a Tariff Rate

To reduce American dependence on China, a tariff rate of 25% for non-strategic goods and 100% for strategic goods represents a sensible approach.

The appropriate tariff rate for each category depends on a policymaker’s goals. The higher the rates, the less competitive tariffed goods will be in the U.S. economy compared to domestically produced goods and non-tariffed imports. To reduce American dependence on China, a tariff rate of 25% for non-strategic goods and 100% for strategic goods represents a sensible approach. These rates should establish a new baseline and should not displace any additional tariffs levied under other provisions in existing trade law in response to specific trade abuses, such as Section 301, 232, and 201 tariffs or anti-dumping/countervailing duties.

Implementing a 25% tariff on non-strategic goods will create a partial decrease in reliance on Chinese goods in this category while having the added benefit of generating substantial revenue. Though independence in strategic sectors is the more urgent goal, broader diversification throughout supply chains remains highly desirable as well. A 100% tariff for strategic goods, meanwhile, is likely to eliminate or radically reduce U.S. dependence on China for the goods that fall under that category.¹⁰⁵

Three tariff programs provide a helpful guide for anticipating the effects of different tariff rates. First, the Section 301 China tariffs applied 25% and 7.5% tariffs on over $350 billion worth of Chinese imports.¹⁰⁶ These rates were calculated to impose a reciprocal cost on Chinese imports equivalent to the economic costs of the unfair Chinese trade practices described in the Section 301 report justifying the tariff action.¹⁰⁷ The 25% Section 301 duties created a significant decline in imports of tariffed goods from China, and are currently generating around $77 billion annually from imports that remain.¹⁰⁸ According to the International Trade Commission, in 2021 imports of semiconductors from China declined by 72%, auto parts by more than 50%, and electrical equipment by 40% due to the Section 301 tariffs.¹⁰⁹

Second, the Section 232 tariffs on steel and aluminum, which applied to Chinese and non-Chinese goods, imposed 25% tariffs on imported steel products and 10% tariffs on imported aluminum. These tariffs were explicitly designed to keep domestic steel and aluminum mills running at a roughly 80% minimum capacity. By 2021, the Section 232 tariffs on steel caused a 17.2% decrease in steel imports, and the Section 232 tariffs on aluminum caused a 19% decrease in aluminum imports.¹¹⁰

Third, a variety of anti-dumping or countervailing duties (AD/CVDs) impose high duties on specific imports that benefit from foreign subsidization or below-cost pricing used to establish market dominance. The effects of these duties—detailed every five years in International Trade Commission “sunset reviews”—provide important insights into the effects of tariffs greater than 25%. AD/CVD duty reviews are therefore helpful references for determining the level at which tariffs nearly or entirely eliminate import dependence.¹¹¹ For instance:

Biodiesel
In 2017, the United States imposed anti-dumping duties on biodiesel from Argentina. Imports from LDC Argentina S.A. received a rate of 60.44%, imports from Vicentin S.A.I.C. received a rate of 86.41%, and all other imports from Argentina received a rate of 74.73%.¹¹² The 2023 sunset review found that these tariffs caused imports of biodiesel from Argentina to decline 100% from 289 million gallons to none.¹¹³
1,1,1,2 Tetrafluoroethane
In 2017, the United States imposed a 167.02% anti-dumping duty on Chinese producers of 1,1,1,2 Tetrafluoroethane producers, with slightly lower 148.79% rates for select Chinese companies.¹¹⁴ As a result, imports declined by roughly 92.7%, from 25,451 short tons in 2016 to 1,859 in 2021.¹¹⁵
Low Melt Polyester Staple Fiber
In 2018, the United States imposed 49.93% anti-dumping duties on “low melt polyester staple fiber” from Taiwan.¹¹⁶ In 2023, the ITC’s five-year sunset review found that between 2018 and 2022, imports of goods subject to the anti-dumping duties declined by 96.5%, from roughly 1.5 million pounds to 52,000 pounds.¹¹⁷
Hardwood Plywood
In 2017, the United States imposed anti-dumping duties on all Chinese hardwood plywood producers at a rate of 183.36% with countervailing duty rates ranging from 22.98% to 194.90% depending on the producer.¹¹⁸ As a result, five years later, imports from China declined 75%, from 1.37 billion square feet to 341 million.¹¹⁹
CTL Plates
In 2017, the United States imposed anti-dumping duties of 74.52% on all Brazilian producers of certain carbon and alloy steel cut-to-length plate (CTL plate).¹²⁰ As a result, by 2021, imports declined 99.66% from 7,442 short tons to 25.¹²¹

The Section 301 and 232 tariff programs offer recent evidence that 25% tariff rates generally caused significant diversification in the source countries for tariffed goods,¹²² while tariff rates around or above 100% under AD/CVD actions generally resulted in dramatic or near-total reduction in importation of the relevant goods. Based on this evidence, a 25% tariff rate provides a reasonable baseline for a new Column 3’s treatment of non-strategic goods. This rate would help reduce dependence on China for all products in the U.S. economy, while limiting the temporary economic effects born by importers and consumers.

The overall price effects of tariffs are almost always much smaller than the tariff rates themselves, and these effects continue to decline over time as supply chains shift and new factories open.

Studies on the price effects of recent Section 301 and 232 tariff actions support this conclusion. Section 301 duties raised the average U.S. tariff on Chinese goods from 3.1% to 21%.¹²³ Despite this increase, analysis of the effects of the Section 301 tariffs on China from the pro-trade Peterson Institute for International Economics found that, at most, those tariffs only resulted in a one-time 0.26 percentage point increase in U.S. prices.¹²⁴ The International Trade Commission’s analysis of the Section 232 duties, meanwhile, found that those tariffs led to a 2.4% increase in steel prices and a 1.6% increase in aluminum prices.¹²⁵

The overall price effects of tariffs are almost always much smaller than the tariff rates themselves, and these effects continue to decline over time as supply chains shift and new factories open. Other analysts, such as Michael Stumo of the Coalition for a Prosperous America,¹²⁶ Alan Tonelson of RealityChek,¹²⁷ and American Compass chief economist Oren Cass¹²⁸ have likewise noted that Trump’s Section 301 tariffs had negligible effects on consumer prices.

For strategic goods, tariff rates must be set higher to eliminate China as a significant supplier. The review of AD/CVD rates suggests that for some products like biodiesel, tariffs between 60 and 80% eliminated all or almost all import trade while, for others like hardwood plywood, tariffs of nearly 200% still left one-quarter of trade volume intact. Given this variation, a Column 3 tariff rate of 100% for strategic goods represents a reasonable starting point, but tariff rates should be evaluated every five years to ensure they are successfully helping reduce U.S. supply chain dependence on China.

Phase-ins and Exemptions

Another major decision left for Column 3 designers is whether to phase in the new Column 3 tariffs or provide temporary exemptions. The longer the phase-in or more frequent the use of exemptions, the longer American dependence on China will persist. With a shorter phase-in or fewer exemptions, businesses have less time to shift their supply chains out of China while minimizing economic disruption.

Phase-ins and exemptions are not novel in U.S. trade policy. Since 1947, tariff cuts from trade agreements have typically been phased in over scheduled periods. Tariff increases have been phased in as well. List 3 of the Section 301 tariffs imposed on China during the Trump administration, for instance, started at 10% and eventually rose to 25%. The Trump administration also used a limited, temporary exemption process for some goods, which allowed interested parties to petition the U.S. Trade Representative (USTR) for an exemption from Section 301 tariffs. In evaluating these petitions, USTR considered the availability of the product in question from non-China sources, attempts by the importer to source the product from the United States or third countries, the extent that Section 301 tariffs would cause severe economic harm to the importer or other U.S. interests, and the strategic importance of the product to “Made in China 2025” or other Chinese industrial policy programs.¹²⁹

A five-year phase-in would give businesses time to adjust to the new tariff programs. This could be done on a graduated basis, with tariffs on strategic goods increasing to 10% after one year, 25% after two, 40% after three, 65% after four, and 100% after five years. For non-strategic goods, the rate could simply increase by 5% each year. This phase-in would give importers time to reshore or find alternative sources and should be implemented without exemptions. There has been bipartisan agreement for years that the United States cannot remain dependent on China, and businesses have already had six years since the Trump administration first imposed tariffs on China to evaluate their supply chains.

Targeting Tariff Evasion

Chinese producers will attempt to avoid tariffs through fraudulent transshipment, minor modifications or assembly, or cross-border production. Though commonly conflated, these three practices are distinct trade behaviors that can determine applicable tariff rates. Fraudulent transshipment refers to a form of country-of-origin manipulation, wherein a producer ships finished goods through a third country before shipping them on to the United States, presenting them as originating from the third country rather than from the actual country of origin to avoid higher tariffs. This action can result in import duty evasion due to declaring an incorrect country of origin.

While bold, such measures may be necessary to ensure U.S. dependence on China does not continue through production based in third countries.

With that said, minor modifications that occur in the third country are sometimes sufficient to comply with a traditional trade rules that define a product’s country-of-origin as the last place in which it underwent a “substantial transformation.”¹³⁰ In certain cases, these small modifications may undermine tariff actions by providing a legal loophole for goods that are largely composed of Chinese inputs and require little manufacturing to qualify for a change in country of origin.

“Cross-border production” is a separate practice involving more substantial manufacturing activities. To engage in cross-border production, a Chinese company could open a new factory in a third country that in fact produces goods for export to the United States, perhaps acquiring components from China before substantially transforming them in the third-country factory. Those goods are considered, for tariff purposes, to be imported into the United States from the third country because they underwent a substantial transformation there. U.S. Customs and Border Protection (CBP) issues product-specific rulings as to when a product has sufficiently transformed to be considered a product originating from a country for tariff purposes.

Chinese companies are already engaging in these practices to skirt existing U.S. tariffs. To avoid tariffs on solar panel products, for example, Chinese producers are circumventing AD/CVD duties by assembling Chinese inputs into final products in Cambodia, Malaysia, Thailand, and Vietnam, according to the U.S. Department of Commerce.¹³¹ To avoid electric vehicle tariffs, meanwhile, Chinese auto companies are planning to open new cross-border production facilities in Mexico, where they could sell vehicles tariff-free into the U.S. market without further U.S. action.¹³² While the U.S.-Mexico-Canada Agreement (USMCA) roughly requires that 75% of auto parts be locally sourced, many Chinese auto part providers are already moving to Mexico, and little can be done under USMCA to prevent the Chinese companies from subsidizing subsidiaries in third countries.¹³³

At minimum, the United States should better fund the detection, investigation, and prosecution of customs fraud and trade crimes. While CBP has the authority to combat fraudulent transshipments and duty circumventions, detection is difficult as the U.S. government has limited insight into supply chains in countries like Vietnam, Malaysia, and Thailand where Chinese producers are active. Deterrence is also important: large U.S. companies that knowingly or repeatedly import goods with a fraudulent country of origin should face steep fines and criminal prosecution.

Another useful approach would be to allow the Commerce Department to determine when Chinese economic activity in a given sector of a third country (e.g., Vietnamese solar panels) is “pervasive” or “substantial.” In such cases, CBP could then treat goods in that sector imported from a third country as Chinese for tariff purposes, unless an importer can conclusively prove their products are not substantially produced with Chinese capital or content. CBP or the Department of Commerce could then adjudicate claims that an importer’s products have no connection to China through an audit of financial documents and production facilities, similar to those conducted in anti-dumping investigations. Any company importing goods from that third-country sector would have to either pay the higher tariff rate or prove that their goods have no connection to China or Chinese-controlled entities.

To further ensure Chinese cross-border production is “legally” practiced and doesn’t threaten U.S. national or economic security, the United States should continue to monitor for goods with explicit security concerns to completely ban, such as Chinese hardware (e.g., Huawei and ZTE). The United States should also address instances of strategic U.S. trade dependence on any country with extensive ties to China through the “anti-monopoly tools” proposed in the final section of this report. The United States should continue to monitor for direct subsidization and dumping across trading partners, with a closer eye on partners with deeper trade ties to China.

Lastly, the United States should apply Column 3 tariff rates to goods produced by Chinese-owned and -controlled entities in third countries. A 2024 bill proposed by Sen. Josh Hawley (R-MO), for instance, would apply higher automobile tariffs to any car made by a Chinese automaker regardless of where the car is manufactured.¹³⁴ A bill offered by Sen. Marco Rubio (R-FL), similarly, would treat motor vehicles produced by a foreign adversary or its controlled entities as originating in the territory of the foreign adversary.¹³⁵ PNTR legislation could build off of the logic of these bills and apply Column 3 tariff rates to any goods made in China, made by a China-based company anywhere in the world, or made by a company substantially controlled by a China-based entity anywhere in the world—at least for goods deemed strategic to U.S. national and economic security. This would represent a substantial shift in U.S. trade strategy and require significantly altering and renegotiating other trade agreements with third countries, including the USMCA and commitments under the WTO agreement.¹³⁶ While bold, such measures may be necessary to ensure U.S. dependence on China does not continue through production based in third countries.

IV: Further Policy Considerations

Designing, enacting, and implementing a Column 3 will not resolve all trade issues with China. A host of ancillary trade tensions outside the scope of what a new Column 3 can address will persist, and new ones will arise as Chinese producers seek to skirt the new tariff schedule. The following problems should be considered by policymakers and solutions incorporated into legislation to rescind PNTR where possible.

Retaliation

In response to the revocation of PNTR and the implementation of a new Column 3 tariff schedule for Chinese imports, the Chinese government will likely retaliate with new tariffs and import restrictions on U.S. producers. For example, during the Trump administration, China responded to each tranche of Section 301 tariffs by increasing equivalent tariffs on U.S. goods. Between 2018 and 2020, the average Chinese tariff on U.S. goods increased from 8% to 21.8%.¹³⁷ While Chinese retaliation was limited by the fact that U.S. exports to China are much lower than Chinese imports to the United States, and by China’s own import dependencies, China nonetheless designed its retaliation to create maximal political pain, targeting agricultural goods in Republican states and other products in swing states. As discussed below under “Use of Revenue,” addressing this reality should be a consideration for policymakers in determining how to deploy funds raised from new Column 3 tariff rates.

Interaction with Other Tariff Programs

Once a new Column 3 comes into effect, some officials may be tempted to remove the Section 301 tariffs already placed on China. That would be a mistake. The Section 301 duties were designed as a penalty to offset specific unfair Chinese trading practices like intellectual property theft and forced technology transfer. These practices impose costs on American society distinct from the broader costs a Column 3 are designed to address; namely, the costs and vulnerabilities associated with U.S. general dependence on Chinese goods. Removing the Section 301 duties in conjunction with the implementation of a Column 3 tariff schedule would thus conflate two distinct sets of problems and solutions.

Furthermore, other existing trade remedies that are more targeted in their approach will remain essential tools of the U.S. trade policy arsenal, especially in cases where the new base tariff rates under Column 3 still leave U.S. industries vulnerable to predatory trade practices.¹³⁸

Trade Loopholes

Chinese companies could also skirt new Column 3 tariffs by exploiting existing trade loopholes like de minimis. Presently, foreign vendors can export packages to the United States without paying tariffs or filing basic customs forms if they merely allege that the value of the package is under $800, as valued in their country. This is the highest threshold in the world: the EU’s de minimis threshold is around $200 and China’s is a mere $8.¹³⁹ Chinese companies like Shein and Temu exploit this loophole to sell goods tariff-free into the American market to great effect. In 2022, nearly half a billion packages from China were imported into the U.S. tariff-free under this exemption.¹⁴⁰ The federal government also makes little effort to track the cumulative value of these shipments, which is not included in calculations of the U.S. trade deficit. The Coalition for a Prosperous America estimates their annual value at $128 billion.¹⁴¹

Legislation that establishes a Column 3 should, at minimum, limit eligibility for the de minimis exemption to nations in Column 1. Congress should also reduce the de minimis threshold for Column 1 countries to a significantly lower threshold, which would further reduce the opportunity for Chinese companies to exploit de minimis customs treatment by transshipping goods through third countries like Vietnam and Mexico. As it stands today, the $800 de minimis threshold is akin to a free trade deal with the entire world for which the United States received no concessions in return.¹⁴²

Critical Minerals and Other Key Inputs

China currently produces a decisive share of a number of key industrial inputs, including critical minerals. Some may argue that these goods should receive an exemption from tariffs or a longer phase-in timeline. While the transition away from Chinese sources may be temporarily disruptive, our dependence on China for critical goods indicates a need for drastic action rather than a prolonged continuation of the status quo. The United States should immediately alter its approach to sourcing critical minerals and other inputs through decisive investment in these sectors domestically, perhaps in large part from revenue raised by the Column 3 tariffs, and deregulation, not extend its reliance on Chinese supply chains.

Use of Revenue

Even assuming that imports from China fall by more than half and the remaining volume of trade occurs entirely at the 25% tariff level, the U.S. Treasury would receive more than $50 billion annually.

Between 2018 and June 2024, tariffs imposed under the Trump and Biden administrations have raised over $240 billion, including over $221 billion from the Section 301 tariffs on China.¹⁴³ Total revenue from a new Column 3 would depend upon the selected rates and the response from importers over time. For instance, categories facing the highest tariffs might ultimately generate the least revenue, as the goal is to substantially reduce those imports from China. But even assuming that imports from China fall by more than half and the remaining volume of trade occurs entirely at the 25% tariff level, the U.S. Treasury would receive more than $50 billion annually.

Some of this revenue could offset relief or support for industries affected by retaliation or newly restricted market access.¹⁴⁴ Any such support should phase out after five years, as no U.S. sector should be reliant on demand from China for its long-term stability or profitability. Revenue could also go directly towards reducing the ever-growing federal deficit.¹⁴⁵ The rest should be used to underwrite domestic production incentives or to finance a national development bank, fund advanced and applied research & development, or address other trade-related challenges that withdrawal of PNTR cannot address by itself.

Further Questions

WTO Rules?

Some will question where this change would leave the U.S. with respect to WTO rules. As mentioned above, in 2022 the U.S. and other nations suspended PNTR with Russia. The United States defended this action on national security grounds, citing the essential security exception in Article XXI of the GATT. This provision allows members to implement measures inconsistent with the WTO agreement to safeguard “essential security interests.”¹⁴⁶ China would likely object to the U.S. using this provision, but both the Trump and Biden administrations have blocked appointments to the WTO’s Appellate Body since December 2019—largely due to concerns about American sovereignty—effectively rendering that body defunct.¹⁴⁷

The U.S. should continue to assert that “essential security” determinations are a matter of national sovereignty over which an international trade organization bears no authority.¹⁴⁸ ¹⁴⁹

Furthermore, the U.S.-China trade relationship has already largely existed outside of the WTO since 2018, when President Trump used Section 301 to impose tariffs without first seeking recourse through the World Trade Organization. Since that time, “legacy” WTO cases have been won and lost by both the U.S. and China, but they have had little bearing on the larger trade relationship. Neither the U.S. nor China currently feel constrained by the WTO.

To Ban?

Some existing tariff proposals to counter Chinese dominance increase tariffs far beyond 100%.¹⁵⁰ The key question for policymakers is whether the intention is to prohibit the import of Chinese goods no matter the cost, or to leave open a safety valve where Chinese supply is indispensable and preferred even at double the cost. If a prohibition is the goal, policymakers should employ an import ban rather than choosing an arbitrarily high tariff rate that in practice seeks to ensure no import occurs. This would build on the Trump administration’s executive orders that restricted the use of Chinese technology in the U.S. telecommunications and information technology systems.¹⁵¹ Products like railway and power plant equipment, certain electronics, and advanced aerospace and automotive parts may be candidates for this approach going forward.

Anti-Monopoly Tools?

As proposed in American Compass’s report, “A Hard Break from China,” Congress should authorize the Commerce Department and USTR to conduct “market power analysis comparable to that used for antitrust in the domestic context…identifying situations where Chinese imports dominate a market…and to impose tariffs targeting those products until market share of Chinese imports falls to an acceptable level.” This would strengthen the United States’ existing trade tools and complement this paper’s proposal, creating a failsafe for cases in which even a 100% tariff does not sufficiently shift behavior. This tool is best suited for case-by-case correctives and would not be enough to reset U.S. supply chains on its own.¹⁵² As noted above, non-MFN tariff rates for strategic goods should also be evaluated every five years to ensure rates are set at an appropriate level to achieve supply chain independence.

Audit Authority?

A Column 3 bill might also seek to develop an audit authority for the U.S. government to screen select U.S. companies for their supply chain exposure to China. This authority would build on recent bills and policies enacted for the defense industrial base. Section 867 of the 2024 National Defense Authorization Act, for example, established a pilot program to analyze and monitor the supply chains for key weapons programs.¹⁵³ Section 868 of that bill required the Defense Department to study their dependence on foreign entities for certain end items and components.¹⁵⁴

Geopolitical Considerations?

Rescinding China’s PNTR status may trigger a global reordering of trade routes. Tensions between the United States and Russia during the conflict in Ukraine have already cemented new trade ties between China, Russia,¹⁵⁵ India,¹⁵⁶ Saudi Arabia,¹⁵⁷ and Brazil.¹⁵⁸ China has also put economic pressure on its neighbors to the south, including Australia,¹⁵⁹ in response to actions it has perceived as hostile, and has made major investments along trade routes in Southeast Asia, Africa, Latin America, and the Middle East under its Belt and Road Initiative.¹⁶⁰ The United States should target opportunities for greater economic influence, especially throughout the Western Hemisphere, and seek to displace China’s influence where possible while still aiming to eliminate its persistent trade deficit.

Appendix

The authors thank Jamieson Greer, Stephen Vaughn, and Charles Benoit for sharing their perspectives during the drafting of this paper. No endorsement of this paper’s content is implied.

Mark DiPlacido

Mark DiPlacido is a policy advisor at American Compass.

Chris Griswold

Chris Griswold is the policy director at American Compass.

@Chris_Griz

Trevor Jones

Trevor Jones is a recent graduate of Harvard Law School. He previously worked in Washington, DC, and Taipei, Taiwan, as a researcher studying the Chinese defense industry.

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