Talk of a trade truce is rising as U.S. President Donald Trump and China President Xi Jinping prepare to meet at the G20 summit in Japan. Yet even under the best-case outcome, the consequences of the trade conflict will linger.
To better understand tariff fallout for the ocean shipping, trucking, and rail transportation modes, FreightWaves interviewed Paul Bingham, considered to be one of the leading transportation economists in the U.S.
Bingham has previously held positions at Global Insight, CDM Smith, and Economic Development Research Group. He is currently director of transportation consulting at IHS Markit.
The following is an edited version of an interview conducted on June 27, prior to the Trump-Xi Jinping meeting:
FW: We’re now in sort of round two here, or at least, round two in terms of major container shipping effects. Round one was the 10 percent U.S. tariff on $200 billion of imports from China in September 2018, which was originally set to rise to 25 percent on January 1, and that date turned out to be May 10. The initial notice of the January increase spurred U.S. importers to bring cargo forward, and we had that huge spike in the second half of 2018. With round two, we have the threat of tariffs on another $300 billion in Chinese goods. How is all of this affecting the transportation sector?
Bingham: “The irony of what happened in 2018 is that the tariffs acted as an external stimulus to the freight industry, because it brought forward some of the 2019 freight movements. Trucking rates were higher and capacity was tighter and volumes were larger and companies made more money in 2018 than they would have absent any kind of trade threat.
“In 2019, we get the payback. Rates are not where they were and demand growth is not there and it’s not just in trucking but also rail, and not just intermodal but also grain and soybean carloads. There are real impacts in 2019 lingering from 2018.”
FW: Why was May so much worse? There was this huge plunge in freight activity that month.
Bingham: “For the May story, I think that was partly about the tariffs on the existing categories going up from 10 percent to 25 percent. If you already moved goods in at 10 percent, you’re not going to bring more in at 25 percent. This reaffirmed that those companies who could accelerate their shipments and did so in 2018 were right to do so.
“Raising the tariff to 25 percent could also have slowed 2019 advance ordering because even if the fall in the renminbi [the official currency of China] offsets some of that extra 15 percent, you’d still expect to see import prices increase and you would expect some elasticity of demand, which would reduce demand, meaning that the same import quantities would not be warranted.”
FW: But what about the new threat in early May to put tariffs on an additional $300 billion in goods? Wouldn’t that have caused the same kind of reaction as in the second half of 2018, with importers bringing volumes forward again? Is some of that happening and was it just too early to see that effect in May?
Bingham: “I think there is some of that, and some of it hasn’t yet shown up in the data given the time it takes to produce goods and ship them across to ports of entry.”
FW: Do you also think some of the goods that were brought in early in the second half of 2018 were actually in this $300 billion batch that faces the new tariff threat, but didn’t back then? In other words, did those importers assume there was a threat to everything and then moved everything early, not just the $200 billion in goods that were facing the tariff increase from 10 percent to 25 percent?
Bingham: “Yes, I think there were clearly people who said, ‘There is a risk now. What’s the inventory cost to bring this in during 2018? We don’t know how this will play out. At least we’re hedged against a potential threat to our imports in 2019.’
“Last year, the [Trump] administration telegraphed an end game in which there would be a tariff on everything coming from China, and there’s a reason for people [even those not on initial tariff lists] to be uncertain about timing. Think about what happened with Mexico, with the tweet about tariffs to take place 10 days later. If tariffs are done under the Section 232 national security category [of tariff enforcement], you don’t necessarily have the same lead time. And that’s a credible threat given what happened with the steel and aluminum tariffs. If you can apply Section 232 to Canadian steel, you can certainly apply it to anything from China.”
FW: With all that in mind, do you believe there’s no possibility we’ll see the same level of beat-the-tariff-induced imports in 2019?
Bingham: “There’s diminishing returns in terms of additional tariffs having an additional stimulus impact on import volumes and moving cargo in advance. At some stage, you’ve accelerated or impeded trade to a point where raising tariffs further isn’t going to make a whole lot of difference. You’ve already either accelerated a portion of the imports or diverted the sourcing elsewhere.
“This year, I would characterize what will happen as more of an echo [than a repeat] of 2018. Some individual shippers are mimicking the behavior from last year, but you won’t see as much in aggregate. And any remaining stimulus you get will have to be weighed against the payback – the hangover – of what you pulled forward in 2018. So, on a net basis, it should be less.”
FW: Let’s talk about changes in sourcing destinations. The consequence of tariffs has not only been to accelerate cargo movements, it has also been to change the sourcing to places other than China. What are you seeing on this front?
Bingham: “Companies have definitely been exploring shifting supply sources. They have said, ‘OK, down the road we could be targeted, so let’s start looking at Vietnam, or somewhere else.’ They wouldn’t have waited until 2019 – they would have started that process of finding alternatives last year.
“There’s no question that retailers and even manufacturers are trying to mitigate supply chain risk by diversifying their supply base. I would characterize some of the big retailers as being in a strong position to do that.
“But there were already pressures that had nothing to do with tariffs that were moving sourcing to places like Vietnam and Bangladesh, because China had already become a more expensive place to manufacture relative to southeast Asian countries. It’s not as if everything would still be manufactured in China if we didn’t have a trade war. These decisions were already underway. Footwear and apparel manufacturing had already fled.
“But in the same way some imports were moved forward last year to beat the tariffs, the shifts in production to other countries have been accelerated by the trade war. Companies may have already been doing site selection and supplier identification and were thinking they’d run the China plant for two more years and they said, ‘OK, we can’t wait two years. We have to shift in a year or however soon we can do it.’”
FW: Is the sourcing shifting from China to primarily southeast Asia, or is there more ‘nearshoring’ with some of that coming to Mexico and Central America? If so, that affects ocean shipping because vessel demand is roughly the same from other Asia sources versus China, but it’s much less if it’s shifting to the Americas.
Bingham: “There is definitely some nearshoring. I would say that some of the electronics and auto parts suppliers have looked at shifting to Mexico. People are also looking at Ecuador and even the Caribbean, although I don’t see footwear and apparel moving out of southeast Asia, except for some high-labor-content apparel that could move to some African countries under a trade initiative with the U.S.
“One of the arguments in favor of China used to be about [ocean] shipping – that there were more direct services and a higher frequency and variety of container services and if you shipped out of some other countries, you could face transshipment issues or higher rates due to less competition. But now, the container trade has grown and you see a lot more direct services from places like Vietnam and more north-south trades out of Central and South America, and that whole shipping argument in favor of China is going away.”
FW: You just mentioned the idea of shifting production from China to Mexico. The thinking on that must have changed given the recent tariff threat to Mexico, right?
Bingham: “After USMCA [the new version of the North American Free Trade Agreement] was agreed to, people really looked at Mexico as a safe harbor region. It was sort of a no-brainer to move there – until what happened last month when the Mexican tariff proposal came up. If a deal with Mexico doesn’t get done, there will not only be direct repercussions on some of the big existing supply chains – especially in the auto industry – it could also dampen further direct investment and reduce the shifting of manufacturing to Mexico. There would be cold feet.”
FW: As we speak, there’s optimism about a U.S.-China trade deal that will finally resolve the tariff issue. In the best-case scenario, does that lead to a surge in freight volumes?
Bingham: “I think the lesson from USMCA is that even if a big comprehensive deal with China is announced, a lot of the devil will be in the details, and it will also depend on whether people are confident that the deal will stick. People could worry that six months after the deal, the administration could have a different reason to slap tariffs on China, maybe for nothing to do with trade. Maybe because of something happening in the South China Sea – who knows – so I do think there will be skepticism even if the deal is announced.
“But I also think certain submarkets will react pretty strongly. I’m sure the ag markets will react favorably because presumably that will be central to what the administration would be looking for, and this could also bring back some farm equipment sales. And I think the US energy export business would react quite favorably, due to the likelihood of selling more LNG and crude oil to China, so there could be more investment in drilling activity.”
FW: Even so, the U.S. will never go back to highly centralized sourcing of imports from China, will it? That’s the takeaway?
Bingham: “Yeah, I think the most generalized lesson that many companies have gotten strongly is, ‘We’re never again going back to single-source supply risk, where we’re so beholden to bilateral trade relationships that it could put us at risk.’ I don’t see it ever reverting back to the idea of ‘Let’s concentrate and put everything in China because of economies of scale and shipping services.’
“There is already a much greater global diversification of sourcing strategies. It’s much more heterogeneous in terms of sourcing supply. Companies will continue to diversify supply, even if that incurs a higher cost due to not benefiting from the same economies of scale. It’s like an insurance policy. It’s a price companies will be willing to incur so they won’t face the same risks they’re facing now with these trade wars.”