Understanding Sector Specific Tariffs
In evaluating various sector-specific tariffs and related Administrative actions, it’s important to view each through the lens of President Trump’s America First Trade Policy. From a macro perspective, the President’s trade agenda and overall goals derive from four primary policy areas:
- Reciprocity (access/revenue)
- Domestic production (jobs/supply chains)
- Consumer costs (investment/pricing)
- Geopolitical supremacy (technology/AI race)
While the tariff announcements of the last week are seemingly focused on consumer costs, reciprocity and domestic production are both important considerations.
Pharmaceutical tariffs hit on all three of these issues. President Trump previewed his pharmaceutical focus this spring, setting a September 29 deadline for drugmakers to provide “most-favored nation (MFN) pricing to Medicaid, guarantee newly launched drugs be listed at the same price in the U.S. as in other nations and allow consumers to directly buy medicines at lower prices.” In parallel, the Administration launched a Section 232 investigation in April regarding the national security concerns of importing pharmaceuticals and pharmaceutical ingredients.
As has played out throughout the course of Trump 2.0, the President’s demands are often met with offers by both foreign governments and the private sector. Consistent with this trend, PhRMA announced a series of commitments on Monday, including a $500 billion investment in the U.S. by its member companies, and a promise to provide 10 million patients per year with financial assistance.
Yesterday, Pfizer became the first individual PhRMA member to reach a public agreement with the Administration, securing a three-year reprieve from the tariffs by offering to cut some drug prices by up to 85 percent and sell directly to the American public. Other members of PhRMA are reportedly engaged in similar negotiations with the Administration.
As stated, at the heart of the issue is consumer costs, but underlying the President’s decision on these tariffs are both reciprocity and domestic production. On the former, Belgium, Ireland, Singapore, and Switzerland all enjoy sizeable trade surpluses with the U.S. due, in large part, to pharmaceutical manufacturing exports (e.g., pharmaceuticals account for 45 percent of all Irish exports).
Thus, given the reciprocal issue at play, the silver lining for countries facing sectoral-specific tariffs is a presumption that if a country has reached a trade deal with the Administration, the tariff will not be additive. In fact, the lumber proclamation (50% on cabinets / 30% on furniture) proactively affirms this. The same is assumed, though not yet known, for the pharmaceutical tariffs. So while it cannot be relied upon in all cases, a reciprocal agreement does provide a good deal of cover to trading partners and industries that are domiciled therein.
The semiconductor tariffs, on the other hand, derive primarily from the goal of geopolitical supremacy vis-à-vis winning the AI race. The White House AI Action Plan released in July by Michael Kratsios, David Sacks, and Marco Rubio, serves as the primary source material for the President’s thinking.
That said, there are dueling opinions inside the Administration as to how best to export the American tech stack globally while also limiting access to China. These differing schools of thought played out in the Administration’s decision to allow Nvidia to again supply Chinese firms with the H20 chip. China has since balked at allowing its firms to import the chip given the CCP’s mandate become advanced technology self-reliant.
Complicating these decisions is the fact that the U.S. itself remains reliant on the import of advanced semiconductors. Domestic manufacturing (TSMC facilities in Arizona) and rare earth production (MP Pentagon deal) are still nascent; trade talks with the Taiwanese are ongoing; and critical mineral deals (e.g., Ukraine) and investment funds (e.g., Japan, Korea) are in their very early stages. In short, a more nuanced approach by the Administration and a potential bridge period for roughly the next five years is likely to ensure that trading partners and allies are reliant on an American tech stack as opposed to a Chinese tech stack by the end of the decade.
With all this in mind, and in addition to the Action Plan and its corresponding executive orders, there are two distinct Administration trade work streams on semiconductors:
- Section 301 investigation into the CCP’s coercive practices with respect to semiconductors (due December 10)
- Section 232 investigation into imports from all countries (due December 27)
While the latter gets to the AI race as mentioned above, the former is much more tied to the ongoing trade talks with China. Thus, the semiconductor tariffs are ultimately a complex component of the Administration’s direct trade talks with the CCP.
China Trade Talks
Treasury Secretary Bessent’s recent meetings with the CCP in Spain were limited to the divestment of TikTok US. Further progress on trade was deferred to future meetings, which Bessent has identified as next taking place in Frankfurt in November.
Of course, that may come after a potential meeting between President Trump and President Xi at the APEC Summit in South Korea. The White House has announced that the President will travel to Malaysia, Japan, and Korea from October 26-29. Should a meeting between Trump and Xi happen, it could very well take place on October 29.
Conversely, US Ambassador to China, David Perdue, told CNBC in an interview this morning that an in-person meeting is unlikely this year, though both sides are still trying (logistics/protocols appear to be a holdup). The Ambassador’s 10+ minute interview on Squawk Box is worth watching to understand the Administration’s latest thinking on China. It’s also worth noting that Trump confirmed he’d be meeting with Xi in “four weeks” this afternoon on Truth Social.
Thus, the Frankfurt meeting(s) will likely be the venue for trade actions, however big or small, between with U.S. and China.
In short, we remain in a fragile trade war détente through at least early November, with both sides attempting to “buy some time” and cautiously “co-exist” (i.e., not outright decouple). Some small concessions have been made to date (e.g., tariff pause, Chinese students, magnet exports, Google anti-trust investigation, etc.), while smaller-scale provocations continue (e.g., Commerce’s entity list/review expansion*, Chinese shipping fees, Texas Instruments investigation, Nvidia anti-monopoly ruling, etc.).
*Commerce’s interim final rule published yesterday would for the first time subject any entity that is at least 50 percent owned by one or more entities on the Entity List or Military End-User List to restrictions. In addition, “significant minority ownership” will be treated as a “red flag” that will trigger additional due diligence for exporters.
Meanwhile, larger-scale issues remain unresolved, particularly applying secondary Russian sanctions to China (and India) and purchasing agreements (particularly soybeans). The secondary sanctions hinge on the EU and G7 also adopting Trump’s proposed 100 percent tariff-the President will not go it alone. This appears unlikely for now as the EU does not believe it has the legal authority to do so (nor the buy-in of Hungary, Slovakia, and Spain) and instead prefers sanctions as a forcing mechanism with respect to Russia and Ukraine.
To that end, the EU’s top sanctions expert, David O’Sullivan, was in DC early in September to discuss an energy-sector strategy with Secretary Bessent. While the EU is open to actions against the CCP, it has no appetite for applying a 100 percent tariff on India, which it is actively engaged in trade negotiations with.
The question remains what is a mutually beneficial outcome for both countries?
- On the U.S. side, a unified trade bloc to rival the Chinese on commerce and tech for the foreseeable future is the ultimate goal. Progress towards that goal has been met in part with the reciprocal agreements to date, as well as those that are expected shortly (i.e., India, Switzerland, Taiwan). Continuing the flow of Chinese rare earths until the MP deal can allow for self-reliance and securing Chinese trade concessions on purchasing agreements and overcapacity is a secondary goal. One discernable win out of the Spain talks was the deal on TikTok, assuming it does, in fact, include the algorithm. The U.S. cannot “win” the AI race if its citizens remain subject to CCP algorithms and/or hardware.
- On the Chinese side, the CCP appears to be shoring up their own trade bloc, growing increasingly close to Russia, Iran, and BRIC nations (particularly Brazil), while still fighting for an Indian alliance. Ultimately, their biggest ask will be an assurance on Taiwan. What that looks like remains unclear, but national security for both sides is existential, though hopefully not irreconcilable.
- Importantly, the superpowers are somewhat aligned on a few tactics, admittedly with differing goals: the CCP creating a self-reliant consumer economy (which matches up with the US goal of limiting overcapacity) and the CCP’s creation of its own tech stack (which matches up with the US goal of chip export controls).
Finally, it’s important to factor in the Supreme Course IEEPA case when evaluating the potential Trump/Xi visit and upcoming Frankfurt talks. The Court has laid out its timeline for expedited consideration of the IEEPA tariff cases: opening briefs (due September 19), response briefs (due October 20), oral arguments (November 5).
Should we be able to read into the oral arguments as to how the Court might rule, that could either weaken or strengthen the Administration’s hand in the upcoming talks. It’s noteworthy that Congress has tied its own hands here with House Republican Leadership putting in place a moratorium on IEEPA-related votes until March 31, 2026. In other words, Congress has a limited role in the overall China trade agenda.