The White House recently released the Presidential Proclamation on Adjusting Imports of Aluminum into the United States. This is a very important document that has the potential to change the game on international trade as well as directly affecting the shipping industry. As the main carriers of steel imports and exports across the globe, carriers need to pay attention to the declaration and the responses that it elicits.
President Trump has been known to break ground and set precedents on international trade. This is no exception because he made use of the Trade Expansion Act of 1962. This is a law that has been rarely used by previous presidents because of the fear of being accused of protectionism. At the time, the law was written in such a way as to give the president power to impose restrictions on the importation of steel and aluminum products. It seems extraordinary that this law has been in full effect since the 23rd of March 2018, .
The immediate responses from China were muted but hinted at possible retaliation. Steelworkers were at odds with their bosses because they expressed faith in the directive as being the only way to rescue the industry from the threat of foreign imports. In contrast, the industry leaders pointed out the potential dangers of retaliatory measures which could ultimately lead to unemployment in other sectors such as the shipping industry. Analysts are still studying the situation and waiting for more substantial responses as the order begins to bite imports.
Important Details to Note
There are a number of key provisions that will be of interest to the industry players as well as those that are given the task of implementing the directive. Some of the highlights are as follows:
(i) There will be a 25% tariff on all steel imports as well as a 10% tariff for aluminum
(ii) The order makes reference to shipments from Mexico and Canada as being exempt from the order
(iii) The order left room for other trading partners to engage in dialogue with the US Administration for purposes of receiving a tariff reduction or exemption
In reality, this order was partly inspired by the s. 232 reports on steel and aluminum from the Commerce Department which were released in January 2018. The president later opted to release the reports which indicated that the volume of imports and the circumstances in which they were imported were a national security threat. For example, the US imported 4 times more steel than it exported. Moreover, aluminum imports took up about 90% of the total primary demand in the US. In effect, this was a business and moral case for the measures.
Policy Goals and Objectives
The directive has clear policy motivations and implications. The US Administration has sporadically shared these with the press and they include:
(a) Boosting the domestic steel and aluminum industry
(b) Reducing the trade deficit with specific countries such as China
(c) Curtailing dumping practices which implicitly went against the spirit of international law
(d) Creating employment in the US for targeted workers
Industry watchers have highlighted that the order comes at the time when North American Free Trade Agreement (NAFTA) is being renegotiated at the behest of the Trump Administration. This order might be a potential threat and promise to be leveraged as a bargaining tool during the review of the treaty. An even more generous reading of the directive is that it is opening the way for further negotiations and trade agreements with other parts of the world.
Impact on Duty Rates and the Option for the Free Trade Zone
There is a possibility that the directive will increase duty rates which might, in turn, reduce the amount of business that is available for carriers. The same goes for shippers who may have to pay additional taxes as well as going through the verification measures before they can export or import certain products. The US government has already released a list of affected goods and components from China.
One of the options that may be open to shippers and carriers is to store goods in a Free Trade Zone. This is a warehousing option that is actually a legal way to avoid some of the harshest measures in the directive. The only condition is that the products must be re-exported after storage and not sold in the US.
What You Need to Do to Take Advantage of this Option
As soon as the cargo leaves China, ensure that it already has an Importer Security Filing (ISF). This should explain whether the shipment is intended for nationalizing cargo or is going through the free trade zone. You must also take note of the tariff and duty rate changes on water which are set by the decree from the executive branch. This gives you the option of changing it from nationalizing cargo and into the free trade zone. The end result is skirting around the new duties in a legal way. Some customers are already asking for their goods in the free trade zone to be re-exported in response to the new anti-dumping rules.
Potential Risks to the Shipping Industry
It is highly unlikely that the shipping industry will escape unscathed from this directive even though it was not the direct target. The effects demonstrate once again the interconnectedness of the various actors within the international trade system. For example, if the EU and China were to retaliate with tariffs of their own; it would mean that there would be less steel and aluminum to transport. The industry is fairly neutral about destinations and origins as long as the actors are paid for the transportation.
Estimates show that the tariffs could hit as much as 7% of all China-US trade. This amounts to roughly $50 billion worth of imports. The expected Chinese retaliatory measures could affect about 887,000 TEU of US container trade with China. That is about 6.6% of the trade with China and about 2.5% of the total US trade volume. Although both sides have given hints that they are willing to negotiate, it is not clear whether or not they will come to an amicable solution that does not impact on the trade levels.
Another very critical consideration is the possibility that carriers will now be held liable if there is any infringement of the rules as laid down by the directive. That might lead to fines and even suspensions. For an already shaky industry, this is an additional administration burden that is scarcely tolerable at this moment in time.
There are even wider ripple effects if the tariffs really begin to bite. The end result would be that importing raw materials becomes so expensive that some actors leave the manufacturing sector altogether. All that means that carriers no longer have business. Besides, the exit of major manufacturers will reduce incomes in the US and will mean that there are no shippers to target as potential customers for the shipping industry. This may come as a high price to pay for boosting the American steel industry.
Options for Retaliation
Nothing is set in stone at the moment but there are a number of potentially serious options that can be used to get back at the US for these restrictions. All these are not good news for the shipping industry:
- The targeted countries may experience declines in their sales and employment, meaning that there is less trade with the US after all.
- Trade routes to specific major suppliers of steel could be curtailed. These include the BRIC countries, South Korea, Turkey, German and Taiwan.
- Turkey is a major risk of retaliation since it accounts for about 5.7% of all imports of steel into the US. This is a sector that is worth about $1.2 billion. Some experts anticipate drops in exports to the US by up to 30%.
Many experts are hedging their bets because they do not really know what is going to come out of the Trump Administration next. Therefore, some of them have reiterated the importance of international trade and the potential dangers of protectionism. Some have spoken about the knock-on effect on industries such as shipping which ultimately also employ American workers. What is very clear is the fact that the spirit of internationalism that was previously considered to be an unshakable virtue is being seriously challenged by the US. It may end up being a case of each country for its own interests.
Roles for Shipping Industry Actors
Given the volatility of the situation, it is important for both shippers and carriers to monitor events. Specifically, carriers must learn the new regulations so that they do not fall foul of the regulations and face crippling sanctions. Where possible, it is imperative to take steps to protect your own businesses and your customers in order to remain competitive.