We ask two experts ‘what is the extent of the US/China trade war and how significant is it for the global shipping industry?’
At the time of writing, the US and China were on the cusp of reaching a trade deal, with Vice-Premier Liu He set to travel to Washington for the latest round of talks. The deal will provide a short-term remedy for an on-going tussle between the world’s two largest economies and is far from the structural solution to the rivalry.
Experts are have warned that while the bilateral arrangement would be a positive step, it is far from the age of engagement that would see China begin to flourish again. Some are predicting that the trade war could lead to China becoming more closed and inward looking at a time when it was supposed to be opening up its markets and increasing accessibility of foreign investors.
As for shipping, and its role in the trade war, things are looking a little healthier. According to BIMCO: “The 25% tariffs on Chinese soya beans, imposed in July 2018, led to 96% lower soya bean exports to China in the second half of 2018 than the same period in 2017. And in the marketing year September 2018, and by the beginning of January exports to China were 97.7% lower than the same period in the 2017/2018 marketing year.
“However, by 21 March 2019, this gap was brought down to 81.9% on the back of higher exports in particular to China, in February and the first few weeks of March.
“In January, for the first time since October 2018, exports of US soya beans were higher than those in the previous month. Exports grew to 4.5 million tonnes in January 2019 from 3.7 million tonnes in December 2018. Despite increasing volumes, soya bean exports in January were 19.7% lower than the 5.5 million tonnes exported in January 2018.”
So what are the implications for the wider industry?
Peter Sand, BIMCO
“85.3% of Chinese seaborne imports from the US and 58.5% of US seaborne imports from China could become affected by the trade war, if the US and China implement tariffs on a further USD 200 and USD 60 billion worth of goods respectively.
The dry bulk shipping industry is the most affected in terms of volumes largely due to the Chinese tariffs, but the whole trade war still impacts only 1.9% of total dry bulk seaborne trade in 2017. 2,002 Handymax loads are now affected.
This is equal to the impact on the container shipping industry which also sees 1.9% of total containerized seaborne trade affected.
For the first time in this trade war, the latest round has seen China unable to respond equally to the USD 200 billion measures announced by the US. With China importing much less than it exports to the US, if the trade war continues to unfold, China will have to look away from tariffing imports to find its retaliatory measures.
This trade war is constantly developing, in size as well as shape, with nothing looking like an end game yet. The next steps – are likely to see China using new “weapons”. For example, including service sectors or targeting US investments in China. The next steps from the US are set to morph too. The impact on the global shipping industry will depend on the measures taken.
Lars Patterson, Pacomarine Limited
The main conflict has been around intellectual property rights going back many years since the days of President Clinton. Under the Trump administration a new dimension has been added which is partly based on the view that China is engaged in “economic aggression towards the US and its allies”. This is a wider issue that needs to take into account structural changes in the Chinese economy and the military aspect of Chinese and US foreign policy. Most economists argue (and evidence shows) that fair trade is beneficial for peace and economic prosperity for all parties involved. Not all members of the Trump administration hold that view.
The main tariff that may have an effect on the shipping markets is the imposed tariffs of 25% on steel and 10% on aluminium, but the tariffs would have a greater effect on some other countries, including allies such as many European countries, Canada and South Korea, than China.
Typically, China would import iron ore for its steel production (it is generally more cost efficient for China to import iron ore with higher iron content than to use iron ore with lower iron content mined in China). Brazil would be one of the main exporters of iron ore to China. China would also import coking coal used in steel production. As the growth in domestic demand for steel is slowing down, the reduced opportunity for China to export steel to the US will presumably have the effect of reducing shipments of imported iron ore and coking coal. This will reduce demand for dry bulk carriers like Capesize and Panamax ships. The impact on the crude oil tanker market will be minimal if any. China imports most of its Crude Oil from the Middle East (including Iran) as well as Indonesia and maybe some from Venezuela.
When it comes to oil products and liquid chemical products, the oil refinery capacity has moved from the US and Europe to the Middle East and to India and Indonesia. The effect of US - China trade war on this will also be minimal if anything at all.
The effect on shipping will be mostly on the trade in manufactured goods, where the cost advantage of China manufactured goods will be reduced by tariffs. Some reduction in the demand for container ship capacity may be the result of this, but bearing in mind that the relative cost benefit will still be there, tariffs alone will not have a decisive impact.
Finally, when it comes to agricultural products (soybeans, wheat etc.), the US exports less than is would like to China. As a result of recent trade talks, however China has agreed to buy more of these products.
The direct effects on shipping from the US-China trade war are currently very small, and mostly affecting manufactured goods shipped on container ships. The direct effect on other shipping sectors is at most very small. Overall less trade will have an effect on world GDP and the component of growth in world GDP made up of US-China trade will be reduced. The net effect of this will again be small. More worrying is the continuing devaluation of the Chinese currency. Whilst it may give the Chinese economy a short-term boost, the overall effect of it will be a slower pace of beneficial structural changes in the Chinese economy, higher inflation as well as lower productivity and wage growth.
Ironically, the uncertainty caused by a looming US-China trade war, may actually lead to higher freight rates and higher ship prices. The net result of the uncertainty may be a reduction in orders and subsequent deliveries of new ships. If shipping capacity grows at a slower rate than the demand for shipping capacity, freight rates will (during the cycle) go up.
This article was originally published in the Marine Trader, IMPA’s official journal for maritime procurement and supply chain management, in issue 02 of 2019. Head over to www.impa.net to find out more or simply read new issues on the go with the MT Journal app.
