Heightened Possibility of Tea Tariff on Chinese Imports

On that date U.S. Trade Representative Robert Lighthizer announced a tariff increase from 10% to 25%, effective immediately, on 5,745 Chinese goods valued at $200 billion. About a quarter of these items are finished consumer goods including $11.3 billion in furniture and $6.6 billion in luggage. “The President also ordered us to begin the process of raising tariffs on essentially all remaining imports from China,” said Lighthizer. Coffee and tea are now listed among 3,805 categories, including mate and flowering tea, and may soon be subject to a U.S. imposed tariff. There are no distinctions regarding quantities and value. The effective date was not specified.

China responded the following Monday by increasing taxes on U.S. goods including tea and coffee. Tariffs rose from 10% to 25% on 2,493 goods that appeared on the initial list of goods to be taxed; an increase of 10% to 20% was applied to 1,078 list 2 goods; and an increase from 5% to 10% was announced on 974 goods that appear on list 3. The Chinese kept tariffs at 5% on 595 list 4 goods. China shipped $540 billion worth of goods to the U.S. last year but only $94.3 million of that was tea, up 1.2% since 2014. It is significant that every category on the latest U.S. list that was previously exempted during rounds 1-3, is included in round 4. The next round places a tariff on every single item shipped from China. This suggests there will be no exemptions.

The tariffs announced May 10 do not apply to goods already in transit from China, so most affected goods have not yet arrived on U.S. shores. Likewise, China’s latest action only takes effect on June 1, leaving a two-week negotiating window prior to enforcement. Talks continue. Lighthizer is in Beijing and President Trump confirmed that he intends to meet with China’s President Xi Jinping at the G-20 summit in late June.

Next Steps

President Trump’s May 10 order set in motion public hearings scheduled for June 17. The deadline for submitting comments is June 10. “Our position remains cautiously optimistic,” writes Peter Goggi, president of the Tea Association of the USA. “We have communicated to the USTR that the association is interested in preparing oral testimony in opposition to the imposition of any tariffs on tea,” writes Goggi. He then described a consensus rationale beginning with the observation that tax and duty-free import of tea was one of the founding tenets of the American Revolution. “The free and unencumbered import of pure tea from its origin is a centuries-old tradition,” writes Goggi. Including tea in the trade war does not advance the U.S. objective of changing China’s practices relating to technology transfers, intellectual property and innovation, he said. “Imposing punitive tariffs on tea would not be effective in changing these practices because tea exports are a very small part of China’s overall tea sector. Most tea that China produces is consumed domestically.  Further, punitive tariffs would have a disproportionate economic impact on small and medium-sized enterprises because most of the U.S. importers (those that pay the tariffs) are small businesses,” he writes.

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

There is room “to raise our prices and still be competitive” explains Hodge. “This is because our customers view tea as an affordable luxury. Expectations are related to quality more than price, so continuing to deliver on quality is our goal,” he said. “There is no question that small businesses would be hurt. Chinese tea ware would take a major hit,” he said. “Most of our brokerage customers are outside the U.S. and won’t be affected, in fact we have lowered our prices for those customers this year because we have expanded our catalog,” writes Hodge.

Metropolitan Tea, headquartered in Montreal, Canada, on Monday notified its 4,000 customers that “we are changing many of our green teas that had a Chinese base to a Japanese and in some cases Indian base.” No change will be made unless the resulting blend is “equal or better” writes Metropolitan. “Thankfully we carry large inventories, so we are able to make changes very quickly. The result likely reduces the exposure to this issue by about 50% or more,” according to the notice.

Metropolitan then cautioned: “There are some specialty teas or teas that have a unique taste profile which are only available in China. Regretfully these teas will be subjected to the 25% duty. Following are some indications: Artisan teas, China black teas, many oolong teas and some green teas (such as jasmine).

Market Impact

Goggi writes that the United States is not a tea producing nation. There is virtually no commercial tea grown that needs to be protected by tariffs, nor are there any farm-based jobs that would be protected. “Tea production long predates China’s rise as a manufacturing powerhouse – it is a rural-based, long-term crop that was not designed to capture foreign business. Its primary market is domestic, which will benefit from a rise in supply due to smaller exports. Further, the percentage of tea exported from China is minimal and China would not be impacted,” he notes.

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

The World’s Top Exports website, using data compiled from the U.S. Department of Agriculture, lists China as the world’s top tea exporting nation with a crop valued at $1.8 billion in 2018. The U.S. earned $124 million from high-value tea exports in 2018, about 1.8% of the world total. China is one of the top dozen countries that buy tea from the U.S. But Canada is by far the largest trading partner, purchasing approximately $75 million annually, a number that has increased by almost $50 million since 2005. A lot of tea originating in China is imported from Canada which sells more than $1 billion worth of tea annually to the US.

Buyers will certainly maintain their relationship with cross-border suppliers who have no say in the tariffs charged. Naming the origin is a legal requirement when shipping tea and suppliers will provide a list of all teas that are Chinese in origin and may be subject to the expected new duty charge. Retailers will see the additional duty added when receiving tea packages in the mail or on consolidated statements from customs brokers.

Outlook

The tea association, in its opposition to tariffs, will argue that “like wine, tea varies dramatically due to local terroir (geography, climate and local manufacturing techniques). China has many unique teas that are unavailable elsewhere, due to their unique cultivars, terroirs and processing methods. In the area of specialty tea, many teas are unable to be sourced anywhere else in the world,” writes Goggi. “The imposition of tariffs on Chinese tea will not impact the Chinese producer, exporter or government. However, it will negatively impact the U.S. consumer,” he concludes.

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

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

Teas Listed for Possible Tariff

Flower tea with a net weight of ≤ 3kg	9021010
Other green teas with a net weight of ≤3kg	9021090
Other green teas with a net weight > 3kg	9022090
Oolong tea with a net weight of ≤3kg	9023010
Other fermented, semi-fermented black teas with a net weight of ≤ 3kg	9023090
Other fermented, semi-fermented black teas with a net weight > 3 kg	9024090
Tea, mate tea concentrated juice and its products	21012000

Source: World Tea News