There has been an international outcry following the US Government’s decision to impose tariffs on several countries across the world including the European Union, China, Canada, and Mexico. China is one nation that has decided to hit back with retaliatory tariffs of its own. The result is widespread fear about the possibility of a trade war between the US and China, two of the largest economies in the world.
The problem with trade wars is the possibility of leading to unintended consequences for a number of industries including the shipping industry. The shipping industry, in particular, relies on the smooth transaction of international trade to levy fares and fees. If there is an overt or covert trade war, this might mean a reduction in business. There is about $34 billion worth of tit-for-tat tariffs at play. The first impact will be felt on the 6th of July when there is a levy on up to 6.2% of the China-US container trade or about 830,095 TEU. These tariffs are anticipated to hit US exporters much harder than importers.
Key Financials and Statistics of this Emerging Trade War
Statistics indicate that there is an additional $16 billion worth of commodities that will be affected on both sides. When this figure is included, the total impact is 8.1% of trade or 1.1 million TEU. That is not even including the anticipated retaliatory measures by India, Russia, the EU, Turkey, and Canada. These countries have opted to focus mostly on US aluminum and steel products.
Early estimates show that the US is targeting a higher volume of imports from China than vice versa. The problem is that the Chinese tariffs represent a more significant percentage of US exports to China. In total, about 25% of all trade is going to be affected. The US is doing $50 billion in tariffs or about 5.5% (734,877 TEU). China is doing 12.8% of US exports (351,479).
Shippers and carriers are watching the impact to get an idea about the result for them and their industry. David Bennett of Globe Express Services says they are yet to hear significant complaints from their partners and customers but all that could change depending on how the emerging trade war unfolds.
1. Impact on Cotton Exports
America has a long history with cotton production and export. This history gives leverage to both the US and China. China will be seeking to ensure that America’s image as the breadbasket of the world is damaged severely to the extent that it starts to revisit its “America First” policy. Meanwhile, the transportation of goods globally is going to be affected.
In actuality, the sector that is bound to face the most severe impact is air cargo. Shippers can book orders and get them into the USA before the cutoff date of July 6, 2018. The US has sought to target high-tech goods under China’s “Made in China 2025” program which aims to move the country away from manufacturing and into technology. These goods include surgical, medical, dental, and veterinary appliances and tools. They are also targeting computer parts, solar equipment, and other related accessories. These are high-cost goods, so the 25% tariff will bite.
2. Effect on Forage Products
Another area of potential targeting is that of forage production. The US sanctions are more diverse than the targeted China retaliation. That means specific industries such as the forage industry are going to be under the sharp gaze of the Chinese state. China has targeted the top 3 US exports to China (Cotton, soybeans, and animal feed) which make up 29.4% of the market and about 56.2% of all the trade from the US to China in 2017.
China has revised its lists to include: alfalfa, cars, fish products, sorghum, corn, tobacco products, fruits, nuts, and pork shoulders. It is not surprising that US exports to China fell by 21% in the first quarter based on the threat of tariffs. Now they are merely 64,232 TEU. It is possible that they will drop even more once the actual duties kick in.
3. Potential Impact on Soybeans
With its impressive farm belt, the US has an interest in exporting as much of its soybean output as possible, and China is interested in using this fact as leverage in the trade war. Tariffs on this particular product would place enormous pressure on rural farmers who are part of Trump’s base.
By contrast, the anticipated impact on China is anything but certain. For example, imports from China into the USA rose by 2.8% (currently 4.3 million TEU) in the first half of 2018. However, that rise is less than the 7.1% during the same period in 2017. These tariffs and the retaliation may create even more surprises.
4. Other Products Affected
Even when you take away the big players such as cotton, aluminum, and steel; plenty is at stake. The tariffs will soon start biting goods like alfalfa, cars, corn, and fish. There is still some uncertainty about another $14 billion worth of products whose status hasn’t been fully clarified. China will be looking to target US chemicals and plastics. These are part of the top 5 targeted commodities in the first three months.
Meanwhile, the US has set its sights on steel structures, parts, ironwork, plastic plates, sheeting, motors, and engines. These are big industries, and the impact could grow as the US tries to gain the advantage. Even worse, is the fact that the US has yet to release the final schedule of tariffs. Some industry insiders are of the view that the US government is still studying the initial impact before deciding what to target next.
When China announced its retaliation measures, President Donald Trump issued an order to the US Trade Representative to identify an additional $200 billion in potential tariffs on Chinese products coming into the USA. This might turn out to be a very long war.
What Shippers Must Do
Shippers and carriers have to be aware of the rules so that they can undertake their duties without falling foul of the law. Secondly, they must watch the trade volumes and assess how it affects their businesses. Where possible, the industry can engage in collective negotiations to persuade the two giants of the world economy from participating in a mutually costly trade war.