For many people, myself included, the holidays are a time for reflection and looking ahead at what’s to come. And although I tend to think making specific predictions is an easy way to make oneself look foolish, as I look back on 2018, I do expect two of the same key themes to dominate headlines in the coming year.
Heightened Uncertainty. They say the only constant is change, but I would add that in supply chain and logistics, the only certainty is uncertainty. In other words, some level of risk is always to be expected, as capacity and price fluctuations, labor strikes, severe weather and other disruptions are bound to happen. Because cargo owners and transportation providers cannot eliminate such risks, it is those that are best prepared for disruption and use scenario-based contingency planning in order to mitigate the impact of such events that tend to be the most successful.
In terms of the international trading environment, however, uncertainty seemed to reach new heights in 2018, and 2019 doesn’t appear to be shaping up any differently.
Whether you agree with his tactics or not, at this point it’s fair to say that President Trump’s administration is unpredictable when it comes to how it handles international trade policy. In the last year alone, we saw revisions to longstanding free trade agreements like NAFTA, now dubbed the U.S.-Mexico-Canada Agreement (USMCA), and United States-Korea Free Trade Agreement (KORUS), the remaining 11 members of the Trans-Pacific Partnership sign a replacement deal that does not include the United States and the imposition of a slew of new and increased tariffs on U.S. imports that were followed by retaliatory duties on U.S. exports.
And depending on the outcome of the Justice Department investigation into his possible involvement with Russian interference in the 2016 election, there is still a slight possibility Trump may not even be in office by the end of the year. The general sentiment seems to be that this would result in a more stable trading environment, but the fact is that we simply don’t know how Vice President Pence would approach these issues in Trump’s absence.
All this translates to an international trade environment that is characterized by uncertainty. And because sourcing and shipping decisions are generally made on a long timeline, short-term uncertainty creates increased risk for shippers in the form of unforeseen costs and additional time and resources spent understanding and addressing these issues.
On the domestic front, uncertainty remains in terms of the kind of long-term infrastructure funding that will be necessary to keep supply chains running efficiently. The U.S. Department of Transportation recently awarded $1.5 billion in discretionary grants for transportation infrastructure projects for 2019, but Congress has yet to agree on a dedicated, sustainable solution to major annual shortfalls in the Highway Trust Fund and Harbor Maintenance Trust Fund.
Tariffs, Tariffs And More Tariffs. The Trump administration in 2018 imposed an unprecedented level of duties on products imported into the United States. According to government data compiled by Tariffs Hurt the Heartland, a nonpartisan anti-tariff advocacy group, U.S. companies paid $6.2 billion in tariffs in October, the highest monthly amount ever and a 104 percent increase from the same month a year ago, despite import values rising only 13 percent.
These import fees can be separated into two distinct categories: broad global duties and more targeted tariffs on exports from China.
Although it is impossible to know for sure, it seems current global tariffs on washing machines, solar panels, steel and aluminum are likely to remain in place. Many analysts, including some in the Canadian and Mexican governments, thought that perhaps exemptions would be granted for those countries that negotiate new trade deals with the Trump administration, but this hasn’t proven to be the case. What’s more, although Trump has said the aim of these duties is to bring back American manufacturing jobs, he has not set any specific or clearly defined goals with regard to these tariffs, so there is little reason to expect them to be lifted anytime soon.
And as shippers of these products have already discovered, these duties can add up quickly, taking a huge bite out of a company’s margins, and noncompliance or mispayment can be even worse, resulting in fines and even loss of import privileges.
Given this, it also will be extremely important for cargo owners and transportation providers to keep a close eye on any Commerce Department investigations like the current Section 232 inquiry into automobiles and parts, as they could result in even more tariffs.
The second category of tariff hikes — those targeting products made in China — has the potential to be even more disruptive in 2019.
Throughout 2018, U.S.-China trade relations have been labelled a “tariff battle,” “skirmish” and even a “trade war,” as the Trump administration has attempted to use escalating duties as leverage to gain concessions from Beijing. But no matter what you call it, the fact remains that more than $250 billion in Chinese goods now subject to import tariffs ranging from 10 percent to 25 percent and China has retaliated by imposing additional duties on roughly $60 billion in U.S. exports.
Trump and Chinese President Xi Jinping in early December agreed to a 90-day cease-fire as they attempt to negotiate a more peaceful resolution, but Trump has made it clear that he will not hesitate to add the remaining $200 billion in Chinese products to the list and increase those tariffs already in place should those talks fail to produce an agreement that addresses U.S. concerns about Chinese forced technology transfer, intellectual property protection, non-tariff barriers, agriculture, services and cyber practices.
These tariffs have pushed U.S. importers to front-load cargoes ahead of their imposition, resulting in an early and longer-than-usual peak shipping season and record import volumes at U.S. ports. The flip side of this, however, is that analysts are already predicting a significant slowdown in early 2019. And due to the uncertainty around the negotiations, it is almost impossible for ports and cargo carriers to predict exactly when the slowdown will occur and how severe it will be.
Should the heightened tariff environment continue, we also will likely see supply chain operators begin to shift sourcing from China to other countries such as Thailand, Vietnam and India, but there is only so much these countries can handle as they simply don’t have the same level of efficiency in production facilities and transportation infrastructure.
Despite the uncertainty surrounding tariffs and international trade relations coming into 2019, one thing we know for sure is that shippers will continue to find new and creative ways to deal with whatever the future brings. At their core, supply chain operators are problem solvers and you can bet they’re already preparing for any number of potential disruptions and changes in the short and long term.