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US-China Trade Tariffs: Impact on Shipping Industry

 
 

Trans-Pacific View author Mercy Kuo regularly engages subject-matter experts, policy practitioners, and strategic thinkers across the globe for their diverse insights into the U.S. Asia policy.  This conversation with Basil M. Karatzas – CEO of Karatzas Marine Advisors & Co., a shipping finance advisory and ship-brokerage firm based in New York City – is the 158th in “The Trans-Pacific View Insight Series.”

Explain the impact of U.S.-China trade tariffs on the U.S. container ship industry 

Trade negotiations between the U.S. and China are an ongoing process with many unknowns and even more variables that can change the framework going forward. Based on the tariffs imposed so far and based on pre-announcements for possibly further action, U.S.-imposed tariffs seem to target indiscriminately all end consumer products imported from China. End consumer products are usually shipped as containerized cargo, and accordingly, the container line industry is expected to experience material adverse impact. Namely, East-West routes (whether trans-Pacific to the U.S. West Coast or via the Panama Canal to the U.S. East Coast or via the Indian and Atlantic Oceans) are expected to be the most impacted market segment by the tariffs.

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Thus far, although there have been temporary increased cargo volumes to forerun the tariffs during the summer, container liner companies have been cutting down on the vessel availability in these routes, issuing volume and profit warnings, and generally positioning themselves defensively. Containerized cargo coming from China is considered front-haul and it’s much more important than the back-haul containerized cargo, which is a low business trade anyway, and it’s not expected to be impacted as much. The back-haul trade has excess capacity in even good times as much less cargo ships back to China.

What is the expected impact on China’s shipping industry?

Tariffs affecting the container line industry are expected to be material to all liner companies involved in the trade, whether Western companies (i.e. AP Moeller Maersk, MSC, etc.) or Chinese shipping companies, such as Cosco. As hinted in previous discussion, we suspect that Cosco may potentially find ways to increase its market share, especially for containers originating from China, at the expense of Western competitors.  Again, depending on how ugly the so-called trade wars will play out, this may mean getting a bigger slice of a shrinking pizza, so to speak, for a minimal absolute net gain.

As part of the Belt and Road Initiative (BRI), China has invested heavily in infrastructure overseas, which keeps providing a strategic advantage to China and Chinese shipping. Also, as part of BRI, China has invested heavily in the maritime industry. As currently the world’s second biggest buyer of ships in the secondary market, its worldwide market share of the maritime industry has kept increasing, not only for container ships but also for tankers and dry bulk tonnage. The Chinese fleet has grown by 13 percent so far in 2018, almost doubling in the last decade and now representing just less than 10 percent of the world fleet, by tonnage. In a business environment dominated by uncertainty of trade wars, such expansion in the shipping industry seems misplaced or ill-timed, at least in the short term. But, once again, if there is a national shipping industry best positioned to weather the fall-out from a trade war, probably Chinese shipping is the one.

What is the impact of tariffs on global logistical supply chains and shipping ports?     

As emphasized earlier, there are many variables that could impact future outcome from trade wars — not only the level of tariffs imposed, and the breadth of products affected by, but also reaction and possible responses from the affected countries. Accordingly, there is an innumerable amount of possible permutations that will be affecting supply chains and ports globally. For now, the odds for a catastrophic scenario of an outright trade war and collapse of international trade are considered almost negligible. The prevailing scenario is that trade wars will likely be more rhetorical than escalate to forceful action and reaction, and after some posturing and scoring some points here and there, that cooler heads will prevail.

In such an average scenario, trade volumes, although lower – by how much to be determined by the severity of tariffs – would be sufficient to keep supply chains almost intact. There will be disruption as trading partners will be forced to adjust their supply to the new reality to minimize the impact of tariffs. For instance, there is evidence that Chinese companies have been focusing on positioning their production outside China – to countries of South Asia – to avoid the “made in China” label and associated tariffs. The disruption in the supply chain is obvious in this example, as the established supply chains and shipping ports will not be ideal, and trading volumes will be shifted to new ports, not always established or optimized for big volumes or big ships.

And, taking a narrow view of the shipping industry alone, disruption of existing, optimized supply chains can be beneficial for shipping – as counter-intuitive as this may sound. A disrupted supply chain could mean having to ship products via longer distances or smaller ports that cannot accommodate modern ultra large container ships.

What industries will less or more impacted? 

The U.S. imports more than $500 billion per annum from China, and the Trump administration has so far imposed tariffs on approximately half of those imports, with further threats for escalation to impose tariffs on all imports in 2019. Computers, electronics, electrical equipment, apparel and textiles, furniture, plastics, and general manufacturing are the main imports – and all these products ship in containers, and all of them should be expected to see adjustments. Taking one step further down to the supply chain, if exports of these products to the U.S. are impacted, then, Chinese imports of raw materials and commodities that are used as input should be expected to decline, negatively impacting the tanker and dry bulk segments of the shipping industry.

On the other hand, China imports approximately $190 billion per annum from the U.S., mainly airplanes, machinery and equipment, agricultural products (prominently soybean), and vehicles. More recently, China has also developed into a major energy importer of shale oil and natural gas from the U.S. Obviously, China is outnumbered when it comes to imposing tariffs to U.S. products. However, most interestingly, so far China has imposed tariffs surgically on raw material imported from the U.S. – most notably soybeans and agricultural products, designed to have maximum political impact in the Corn Belt in the U.S. There has been little direct impact on the dry bulk market so far due to tariffs on American agricultural products. There have been no tariffs on U.S. energy imports so far (crude oil and natural gas), but there is increased talk that in an escalating trade war, the U.S. energy industry will likely be impacted, which will have negative implications not only for the tanker industry, but also on developing (and financing) energy infrastructure in the U.S. geared for a burgeoning energy export trade.

Why should U.S. policymakers and industry leaders be concerned with the consequences of U.S.–China trade dispute on the U.S. shipping business?  

Several Western countries, besides the U.S., had voiced grievances in the past about the business practices of the Middle Kingdom, most notably about intellectual property and technology transfers. However, trying to resolve such differences outside the guidelines of the World Trade Organization (WTO) by unilaterally taking action and imposing wave after wave of tariffs can be considered as setting an uncomfortable example. Trade wars and anti-globalization can spill over beyond commercial terms, and there have been recent examples where Hong Kong recently denied entry to a scheduled visit by an American warship and the cancellation of a top-level security summit in Beijing to be attended by U.S. Secretary of Defense General Mattis.

Trade wars can unexpectedly spill over and escalate in other fronts, with the unfortunate possibility of Thucydides’ Trap, whereby transfer of hegemony from one power to another must happen via military means. It would be most unfortunate if the 21st century is to be defined as the age when nations went to war for a pair of sneakers!

Even the Trojan War in antiquity had a more celebrated cause than that!

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