Trade War High-Stakes Game
By Mike King
When history is written, 2018 is likely to be remembered as the year the world’s two largest economies embarked on a trade war of unprecedented scale, at least in modern times. Indeed, if a year could be a place, then 2018 is Las Vegas.
The gambling protagonists — U.S. President Donald Trump and China’s President Xi Jinping — have spent most of the year embroiled in an intense staring contest with both steadfastly refusing to blink. And, even though this is a struggle that most analysts expect to be mutually damaging, each roll of the trade policy dice raises the stakes — and the potential losses.
Given the weighty risks and the tangible and intangible outcomes most economists associate with protectionism and mercantilism, make no mistake, this is high-stakes poker. The United Nations, no less, warns that the trade war between the U.S. and China could destabilize global movements of goods and commodities.
“While the prospects for seaborne trade are positive, these are threatened by the outbreak of trade wars and increased inward-looking policies,” said Mukhisa Kituyi, secretary general of the United Nations Conference on Trade and Development, or UNCTAD. “Escalating protectionism and tit-for-tat tariff battles will potentially disrupt the global trading system which underpins demand for maritime transport.”
For project shippers and their transport providers, the difficulties are two-fold: keeping up with rapid short-term changes to the trading landscape, while also planning for the long-term repercussions inherent in a trade war if the U.S. and China are unable to find common ground and strike a new trading deal.
Tariff Status Quo
First, what we do know. As 2018 has progressed, the value and volume of products subject to tariffs by China and the U.S. have exponentially increased. As Breakbulk goes to press, more than US$250 billion worth of Chinese goods imported to the U.S. are subject to tariffs. This represents about half of China-to-U.S. trade. Moreover, tariffs on most of these products will jump from 10 percent now, to 25 percent on Jan. 1, 2019.
According to Asia-headquartered financial services group Nomura, in the first US$34 billion tariff list applied by the Trump administration, the machinery sector bore the brunt, accounting for 41 percent of products hit with tariffs, while computers (32 percent), electrical machinery (18 percent) and transport equipment (9 percent) sectors made up the remaining 59 percent. “Chemicals and basic metals were added in the second tranche, comprising 22 percent of US$16 billion in merchandise exports,” the analyst added in a note.
The latest round of tariffs introduced in September 2018 and set at 10 percent before rising to 25 percent at the start of 2019 are likely to be more damaging for Breakbulk’s audience given their far wider scope.
“The initial round of tariffs from the U.S., at 25 percent targeting US$50 billion of Chinese imports, focused primarily on capital goods,” explained Nomura. “However, the new tariffs targeting US$200 billion effective from Sept. 24, are almost equally split between capital and consumer goods.”
Beijing has retaliated with its own punitive tariffs – a policy course President Trump has promised will result in further new tariffs on an additional US$267 billion of imports from China. There is no reason to believe, based on previous form, that this is a bluff by Trump.
This final step would essentially mean all Chinese imports to the U.S. would be subject to hefty tariffs. China, which has now mostly run out of non-critical U.S. exports to slap tariffs on, does still have cards to play, however.
“China still has some room to retaliate in case trade tensions further escalate,” Nomura said. “Should the U.S. impose additional tariffs and further escalates trade tensions with China, we would assign an increasing likelihood to China using non-tariff measures, in addition to tariff measures.”Reactions And Retaliations
For those in the business of trade, there is nothing positive to see here. Indeed, the escalating tariffs imposed this year have the capacity to redraw the global trading landscape and damage global economic growth.
According to Nomura, in the short-term China has the fiscal and monetary tools to limit the impact both of U.S. tariffs and its own anti-U.S. retaliatory actions on economic growth. Longer-term, the impact is likely to be more severe. “There could be bigger indirect impacts through rising uncertainty, especially when considering mounting domestic challenges – more credit defaults, a problematic property sector, overloaded debt and ill-planned financial deleveraging,” the analyst noted.
“Moreover, rising trade tensions may seep into investment, as exporters, including multinationals, could shift their factories to other countries to avert the tariff.”
In the U.S., Trump’s tariffs on China, and China’s various retaliatory tariff and non-tariff measures, are likely to impact the economy in various ways. At a basic level, tariffs increase the prices of goods because imports become more expensive and domestic and foreign manufacturers not subject to tariffs are able to charge higher prices. This will have a widespread impact on consumer and business decisions.
For breakbulk shippers, just to take one example, higher input prices and uncertainty about future costs are expected to delay or cancel big ticket infrastructure and engineering, procurement and construction projects. But all areas of the economy will be impacted in myriad known and, at this stage, unknown ways as business verticals adjust and supply chains are reimagined.
Beating The Tariffs
The impact on container, bulk and tanker trades has already been pronounced. U.S. importers have, for example, been front-loading retail imports to beat various tariff schedules, a trend that is likely to continue ahead of the further escalation of tariffs on Jan. 1, 2019. Chinese buyers of soybeans have shifted purchases to Brazil and U.S. crude oil exports to China fell off a cliff in August.
“The tanker shipping industry is hurt when distant U.S. crude oil export destinations like China, are swapped for much shorter hauls into the Caribbean and South, North and Central America,” said Peter Sand, BIMCO’s chief shipping analyst. “The trade war is all around us now. What appeared on the horizon half a year ago is now impacting many seaborne trading lanes. All commodities may be impacted regardless of them being officially tariffed or not.”
Longer-term, more fundamental shifts in trade are expected to follow as manufacturers realign production to avoid tariffs. For example, more production could be moved back to the U.S., and away from China, while U.S. manufacturers might shift some production abroad to avoid tariffs on exports to China, but also to evade the higher costs of inputs such as steel. Indeed, these trends are already apparent.
A number of carmakers with plants in the U.S. have already began shifting manufacturing capacity aimed at export markets overseas. Iconic American motorcycle brand Harley-Davidson has said it will be forced to follow suit.
Much the same is happening in Asia:
• Komatsu is moving the manufacturing of hydraulic shovel parts out of China to Japan and the U.S.;
• Toshiba Machine Co. recently announced plans to shift production of U.S.-bound plastic molding machines used for making plastic components such as automotive bumpers from China to Japan or Thailand; and
• Mitsubishi Electric is transferring production of U.S.-bound machine tools used in metal processing to Japan from its manufacturing base in Dalian.Project Sourcing Questions
Not all these trends have yet been reflected in project and breakbulk freight markets.
But if, for example, demand for U.S. energy or agriculture exports declines, then investment in those industries will also fall with obvious implications.
“The projects business is not as volatile as the consumer goods sector, of course, and industrial projects are planned many years in advance,” said Erik Hutter, global head of energy and project solutions at Panalpina. “So far we have seen no immediate impact of the tariffs on our projects business. However, it remains to be seen if, for example, higher prices for steel and different sourcing patterns will impact the business in the mid and long term.”
Felix Schoeller, general manager of AAL, said there would be multilayered impacts on global trade for multipurpose vessel operators. He said tariffs on Chinese steel had seen customers sourcing elsewhere, while forestry products, machinery, manufactured products and backhaul bulk cargoes such as soybeans exported from the U.S. would also be affected. “Then of course there are U.S. project cargoes, which are a bit more of a complex thing because they are not really directly affected by specific tariffs, but of course they are very much affected by the business climate and investment decisions.
“For instance, the Keystone XL expansion project. We computed that it would be, with the tariffs in place, roughly US$300 million more expensive to build this pipeline (because of higher steel import costs). And, of course, the question then becomes, do you really want to go ahead with that decision?”
Schoeller believed that the industry is now in a situation where many projects will simply not happen because they have become too expensive.
“When we talk to our project customers, companies that organize the supply chain for building large projects, oil and gas, pipelines and such, they definitely see the implications. Also, of course, in our line of business we often talk to the engineering, procurement and construction companies that actually build the sites. They say the same thing,” Schoeller said.
Schoeller see the impacts as twofold. Firstly, investment decisions on energy projects had already been pushed back because of the depressed oil price — the numbers didn’t add up. Now those projects have been pushed even further out because of the uncertainty on whether raw materials for projects can now be sourced within the cost boundaries of the project.
Secondly, tariffs on already-manufactured pieces from China will affect many of the modularized oil and gas or energy plants that have been built over the last few years, which mostly come in from Chinese or Korean industry firms and are then assembled in North America. North America does not have the capacity to pick up the production or engineering slack, hitting in-progress projects hard.
“So people are very conservative about making an investment decision on these large projects,” Schoeller concluded.
With no sign that the U.S. or China will back down on trade policy any time soon, simple uncertainty, even with all the negative business implications it brings, might not be the worst scenario. As a number of analysts have noted recently, any further escalation in the stakes could quickly move past trade and into diplomatic and perhaps even military conflict.
Michael King is a multi-award winning journalist as well as a shipping and logistics consultant.
Photo credit: Kyodo/Newscom
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