US tariffs to hit trans-Pacific imports hardest in 2020
Mark Szakonyi, Executive Editor | Oct 18, 2018 9:18AM EDT, excerpted from JOC.com
“I’m not optimistic we are going to see a grand bargain with all the tariffs coming off,” Lance Noble, senior analyst at Gavekal Dragonomics, said at the TPM Asia Conference on Oct. 10. (Above: The Port of Oakland.)
The last-minute rush of US imports from China ahead of higher tariffs that take effect Jan. 1 marks a point of no return for the trans-Pacific trade. The increase in US tariffs to 25 percent from 10 percent won’t have immediate impact on volume, but there is little sign of a de-escalation of the trade war between China and the United States.
Unlike with the reworked North American Free Trade Agreement(NAFTA), now dubbed the US-Mexico-Canada Agreement, there are fewer avenues for the Trump administration to win some concessions and still allow China to save face. The US frustration with China’s role in trade, from state-owned enterprises to tech theft, goes deep. China may be smarting from a drawdown in economic growth and signs of the first stings from US tariffs, but few China watchers expect a climbdown in President Xi Jinping’s resistance to trade pressures.
“I’m not optimistic we are going to see a grand bargain with all the tariffs coming off,” Lance Noble, senior analyst at Gavekal Dragonomics, said at the TPM Asia Conference on Oct. 10.
That puts trans-Pacific shippers in the middle of a drawn-out battle, in which suspect cargo holds by Customs officials and procedural delays are the collateral of war. US imports from China aren’t expected to decline significantly next year, according to conversations with more than a dozen beneficial cargo owners (BCOs) and several carrier executives.
Retailers and others are still determining just how much cost they can pass on to customers. They are taking a sharp look at their competitors’ sourcing strategies to gauge how much their rivals will increase prices. That measuring and the fact that some BCOs can’t raise prices since they’ve already sold for 2019 suggests the volume sting won’t come until 2020.
“I’m optimistic about 2019,” Marc Bourdon, CEO of CMA CGM Shipping China, said, noting that US consumer confidence is strong. “Long term, there is a question mark. Do goods become substantially more expensive and does that impact consumer confidence?”
There won’t likely be a major shift in sourcing from China to Southeast Asia over the next two years, carriers and BCOs told JOC.com. Shippers say it will take at least two years to significantly shift production to sites with the necessary transport and near suppliers. Carriers say they don’t expect to shift capacity next year to the US away from China to other countries such as Vietnam, Bangladesh, and Myanmar.
Shippers — forced to pass on higher costs
With no dramatic changes in sourcing or the state of trade tensions, shippers will be forced to pass on more cost to customers. The filtering down of the higher cost of goods and pricier gasoline could dampen US consumer confidence in 2020, decelerating volume growth in the trade.
“We have moved a tremendous amount of volume up this year, and we’ll continue to do so,” because of the tariffs, Alan McTaggart, vice president of global logistics for Techtronic Industries, told the TPM Asia Conference.
Retailers expect merchandise imports to remain at near-record levels through the end of the year and then slow in early 2019, according to the latest Global Port Tracker, published by the National Retail Federation and Hackett Associates.
The Global Port Tracker expects imports to end the year up at least 4.5 percent from 2017. How carriers manage what’s shaping up to be a weaker-than-usual restocking period before Lunar New Year celebrations — beginning Feb. 5 and marking the closing of Chinese factories for at least two weeks — will resonate in upcoming trans-Pacific service contract negotiations.
So far, carriers individually and with their alliance partners have kept capacity better matched with demand — and been restrained in the number of extra-loaders they’ve deployed to grab share. Some of that capacity restraint has come from miscalculating the initial impact of US tariffs and higher fuel costs, which force carriers to think twice before deploying more capacity. There were at least twice as many blank sailings in the trans-Pacific in the third quarter than in the same period in 2017, with 16 to the West Coast and nine to the East Coast, according to Seaintelligence Consulting.
The timing and severity of capacity curbs — down 6 percent to the West Coast and about 1.3 percent to the East Coast — frustrated shippers who have seen their contracted cargo rolled, or pushed onto later than booked sailings, and had to renegotiate for slots this peak season. Carriers’ ability to keep that discipline when volume becomes scarcer will signal to BCOs whether the resolve was a fluke or resilience taking shape.