KUALA LUMPUR: US manufacturing is particularly vulnerable to US tariffs on imports from China because tariffs affect the large intermediate inputs, Moody’s Investors Service said.

       It said on Tuesday that furthermore, the US imports differentiated goods from China and US manufacturers may find it more difficult to source them elsewhere in large quantities or the products may be manufactured with imported inputs in more complex supply chains.

       In its report, the rating agency said that US-China trade relations remain contentious as the Biden administration's trade policy takes shape.

       Moody’s said on Oct 4, US Trade Representative (USTR) Katherine Tai outlined the Biden administration’s approach to the US-China trade relationship in the context of the administration's broader Build Back Better agenda.

       The administration intends to enforce the commitments China made in the Phase One trade deal it signed in January 2020 and will retain existing tariffs and protective measures.

       A review of progress on China's Phase One purchasing commitments may also prompt the US to develop new measures or impose new tariffs.

       To counteract the effect of ongoing tariffs, the USTR will renew the tariff exemption process for US companies, which eased the burden on some firms. In addition, the administration will raise concerns with China regarding “state-centered and non-market trade practices” and “work with allies to shape the rules for fair trade in the 21st century.”

       However, the scope and coverage of the exemptions process remains uncertain.

       The US expected the 2020 Phase One agreement to relieve the most adversely affected US sectors: agriculture, manufacturing and energy.

       However, the positive effect of increased purchases by China under the Phase One agreement is muted because China fell short of its 2020 purchasing targets, fulfilling only 57% of its target for purchases of US manufacturing goods, 82% for US agriculture purchases and 37% for US energy purchases.

       And, as of August 2021, trade flows suggest that China's 2021 US purchasing targets will also be missed: so far this year, it has met 39%of its full-year target for purchases of US manufacturing goods, 44% for US agriculture purchases and 21% for US energy purchases.

       Furthermore, Tai indicated that the future of the second phase of the agreement is uncertain.

       The scope and industry coverage for the new tariff exemption process is uncertain. Tariffs in addition to supply chain bottlenecks weigh on US producers and consumers, affecting more than half of all US-China trade flows.

       Moody’s said data suggest that changes in the tariff products lists under the US Section 301 may have contributed to fluctuations in the average tariff rate on Chinese imports last year.

       Another factor contributing to changes in average tariffs might be the US consumer shift toward imports and varieties excluded from the US tariffs.

       “The consumer shift supports academic research that tariffs have reduced the variety of goods available for US consumption.

       “Even if the renewed exemption process positively affects US companies granted the exemptions, ongoing tariffs increasingly burden US firms because they raise input costs, which pressure margins,” it said.