Biden Slaps China With an $18 Billion Tariff Hike. But Will It Punish Small-Business Supply Chains?

The Biden administration is smacking China with an $18 billion tariff increase to protect industry segments such as electric cars and solar energy. But those tariffs could also shock supply chains for small American companies, raising their cost of doing business.

President Biden announced the suite of tariff increases on Tuesday, which include quadrupling tariffs on imported electric vehicles, tripling tariffs on steel and aluminum items, and doubling tariffs on semiconductors.

The White House said the tariff increase is needed to “protect American workers and businesses.”

The White House fact sheet cited a familiar litany of trade violations: “China’s unfair trade practices concerning technology transfer, intellectual property, and innovation are threatening American businesses and workers. China is also flooding global markets with artificially low-priced exports.”

The tariffs aren’t necessarily a surprise: In an election year, the president wants to exhibit strength by being tough on China, keeping some of his predecessor’s tariffs while implementing new ones of his own.

The tariff increases will phase in over the next few years. Tariffs on battery parts, along with lithium-ion EV batteries, for example, will jump from 7.5 percent to 25 percent this year. Lithium-ion non-EV batteries will face the same tariff increase, but not until 2026.

Solar cells and ship-to-shore cranes face tariff increases as well this year. So do certain medical items, such as syringes and facemasks. 

But American entrepreneurs who work with businesses in China or source goods there may suffer some whiplash from the decision. China could retaliate by levying tariffs of its own, making it more expensive for the U.S. companies to conduct trade. Such was the case when China exacted a 25 percent tariff in 2018 that targeted U.S. goods including soybeans and salmon.

And if your company is sourcing from China in one of the sectors affected by the tariff hikes, it will increase the cost of doing business–at least temporarily. That can leave businesses with the prospect of passing rising costs on to customers in the form of higher prices, if they can. 

But that might not be the long-term case, according to Anne Clawson, a principal at Cascade Advisory, a Washington D.C.-based consulting firm. This isn’t China’s first trade rodeo–and Chinese companies are apt at side-stepping tariff hikes, she says. “What we’ve seen to date is that Chinese firms are evading the tariffs by setting up manufacturing outside of China to send goods to the U.S,” Clawson says.”In the medium to long term, Chinese companies can probably evade most of these tariffs by moving their production outside of China,” Clawson says. 

China has recently increased the velocity of goods shipped to Mexico, rather than directly to the U.S. Mexico still has its own tariffs in place for Chinese goods, but those rates are not as high as those imposed by the U.S., making it a win for China: same destination at a bargain rate. 

Even if supply chain disruption does become a longer-term challenge for entrepreneurs, it could also prompt them to look to their home turf and source new suppliers domestically. A common refrain from the Biden administration is its intent to expand U.S. manufacturing and innovation. That helps explain the increase in subsidies to American companies. Just last week Vice President Kamala Harris unveiled a fresh $100 million funding round for small auto-parts firms as the U.S. tries to catch up with China’s competitive advantage in EV production.  

The administration’s hope is that the tariff hikes could end up being good news for entrepreneurs, even if they may face some snags in their supply chains and be forced to look elsewhere. “This potentially opens more space for innovators to advance U.S. technology, which is lagging behind Chinese tech in some of these spaces,” Clawson says.  “Any advancements made by a small business or entrepreneur would probably need large-scale investment to scale in the future, but the opportunity is there.”