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Trade wars: Stepping back from the brink

03/04/2018

Analysts believe China and the US can still pull back from a full-blown economic conflict that could leave supply chains and the global trading order in disarray

Despite the escalating threats, analysts believe China and the US can still step back from starting a full-blown trade war that could devastate transport demand and the global trading order.

As reported in Lloyd’s Loading List, stock markets tumbled last week after US President Donald Trump unveiled plans for tariffs of up to US$60 billion on Chinese products, a move that threatens to throw global supply chains into disarray.

In response to the early March hike of US tariffs on steel and aluminium, on Friday China’s Commerce Ministry announced plans to impose tariffs on around $3 billion worth of imports from the US, including a 25% tariff on US pork and recycled aluminium, and 15% tariffs on steel pipes, fruit and wine.

The Chinese tariffs would impact around 100,000 teu of US containerized exports to China, estimated one analyst, although further action on agricultural exports would push that number far higher. However, the threatened US tariffs on Chinese exports could potentially impact far more ocean freight boxes and a significant amount of valuable air freight.

Peter Sand, chief shipping analyst at Bimco, told Lloyd’s Loading List that “tariffs would hurt container shipping”, adding that “protectionism is outright bad for shipping”.

Speaking at a conference in China last weekend, Soren Skou, chief executive officer of A.P. Moller-Maersk, said any trade war would impact shipping negatively. “The case for free trade is very, very strong in terms of economic growth, in terms of job creation, in terms of benefits for producers and consumers,” he added.

However, a number of analysts contacted by Lloyd’s Loading List predicted that the two countries still had time to pull back from a major trade conflict.

“While a full-blown trade war is possible, I think it more likely that the Chinese will agree to some substantial-looking concessions so that Trump can declare victory,” said Gregory Nichols, Asia Principal at Tradewin, the trade consultant subsidiary of Expeditors. “In the end, this is about US electoral politics more than anything.”

Japanese investment bank Nomura noted that the earliest the US could enforce its latest raft of tariffs would be six weeks from now, while China’s announcement of retaliatory tariffs did not include an execution date, so there was still ample room for negotiation.

“The risk is that negotiations fail and these plans, on both sides, are fully implemented, which could trigger a trade war,” said the analyst.

According to Nichols, the negative impact of a trade war for China would be far greater than for the US. “If the Trump Administration expands the programme to include other categories of products then this could change over time, especially in Europe where affected citizens have more impact on policy,” he said.

“In terms of supply chain management, I expect that freight flows of steel/aluminum may reduce somewhat, but will likely shift more than they will reduce.”

Nichols said new tariffs would quickly see traders seeking ways to circumvent the rules. “There will also be a huge incentive for Chinese and other players to ‘game’ the system by mis-declaring the nature of the product or moving it through Canada and/or Mexico and declaring it as local origin,” he added.

“We see this already often times when anti-dumping duties are imposed. If the EU, China, and others do choose to respond to the steel/aluminium tariffs with new tariffs of their own, I would expect that they will be targeted to symbolic American products which do not have a huge real economic impact, for example, the bourbon and motorcycles the EU has been talking about.”

Analysing how the Trump tariffs on China would potentially impact exports and economic growth, Nomura said history provided some guidance. In 1989, the US triggered a ‘301 investigation’ (under the 1988 Trade Act) against Japan and subsequently imposed punishing tariffs which resulted in Japanese exports to the US falling 4.1% in 1990 after expanding 4.5% in 1989.

“China has never experienced a broad-based tariff on its exports before, but the one-off 2% appreciation of RMB against the US dollar in July 2005 may provide clues as to the effect on China’s exports − think of it crudely as a 2% tariff on all of China’s exports,” said Nomura. “Growth of US imports from China slowed from an average 28% year-on-year in the 12 months to July 2005 to 19% in the 12 months after July 2005.

“We can also see the negative impact on exports from sporadic cases. The US raised import tariffs on Chinese rubber tyres in 2009 and crystalline silicon photovoltaic products in 2012 − both led to a slump of US imports of the goods from China.”

Nomura said it was difficult to precisely gauge the overall impact of the latest US tariffs due to lack of data to identify the effect of the variation in tariffs on exports. But the analyst instead looked at how exporters might respond in various scenarios.

In the first scenario, Chinese exporters cut prices and fully absorb the impact of the tariff hikes, meaning that shipping and air freight demand on key East-West trades would be relatively unaffected, although Chinese GDP growth would drop 0.1%.”

The second scenario sketched by Nomura sees Chinese exporters refuse to take on the tariffs at all, which would see the American consumer forced to absorb around a 3% increase in the price of goods purchased from China, and US demand for Chinese imports fall by 3%.

“A more practical − and likely − middle ground could see China’s exporters adjust their export prices to try to maximise the result for themselves, with a more realistic estimate of the impact being a roughly 3% decrease in exports and 0.05-0.1 percentage point reduction in nominal GDP growth,” said Nomura.

“However, the overall impact on GDP is likely to be lower, as a fall in exports could reduce China’s imports as well given the amount of Chinese imports that are used as assembly components for exports. Moreover, the Chinese government may adopt micro policies to support targeted exporters, or there could be other buffers.

“First, exporters could explore alternative destinations for their exports to offset reduced demand from the US. Second, they may try to pass on the added cost along the supply chain to other Asian economies, given China is often the final downstream point of the processing and assembly value chain.”

Overall, Nomura said that if the planned US tariffs were fully implemented, the impact on China’s economy would be manageable. “The simple point is that China is a huge economy that is much more driven by internal demand, and a hefty one-third of its gross exports contain foreign value-added,” it said. “That is why we believe China is being cautious and selective in its response to these tariffs.

“Indeed, China may even choose to fly the free trade banner in the face of the Trump administration’s protectionism.”

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