The month of October may be remembered for the major trade policy event that didn’t happen, with Brexit averted at the end of the month. Our assessment of the continued political uncertainty and post-Brexit tariff landscape was one of the most read Panjiva research reports in October.
Aside from Brexit, the European Union also faced worsening relations with the U.S. as tariffs on EU exports were applied after a WTO ruling against EU subsidies for Airbus. U.S. policy developments were largely limited to a rapidly abandoned set of steel sanctions brought against Turkey. Meanwhile Malaysia’s government raised concerns that it may be next in the crosshairs for U.S. tariffs. Tariffs sometimes work in delivering government objectives – Apple started production of the iPhone in India.
Signs of the cost of the U.S.-China trade war were seen in a 7.6% year over year drop in U.S. imports from China by sea, while the freight forwarders and west-coast ports bore the brunt of the impact. The global slowdown in trade is partly down to the economy cycle, shown by slowing automotive exports from Japan.
The most read reports of the month overall though were our 4Q trade policy outlooks which covered the prospects for the trade war, USMCA and RCEP among others.
Political uncertainty surrounding Brexit may be increased by a new prorogation of Parliament. Assuming the Johnson administration abides by existing laws there will nonetheless be an extension of the Brexit deadline at least until year-end.
Whether the U.K. leaves or not and whether it is a “no-deal” Brexit or not the country’s importers will continue to be bound by antidumping and retaliatory duties applied by other countries resulting from the actions of prior British – and foreign – administrations. For example the U.S. already applies steel and aluminum tariffs – under the section 232 program as well three other cases – to $599 million of British steel exports in the 12 months to Aug. 31.
Furthermore U.K. exporters have been caught in the EU-U.S. aerospace subsidy case. The U.S. will apply 25% duties to $2.25 billion of British exports – based on shipments in the 12 months to Aug. 31 – in retaliation for EU subsidies for Airbus.
The largest export line covered is whiskey worth $1.75 billion where the largest exporter from the U.K. – based on Panjiva’s seaborne shipping data for the 12 months to Sept. 30 – was Diageo with 31.2% of the total. That was followed by Pernod Ricard with 19.3% and Bacardi with 15.8%. The next biggest product line covered is self-propelled diggers, potentially including those shipped by JCB as well as Hitachi and Sandvik.
DIAGEO LEADS BRITISH EXPORTS OF WHISKEY TO THE U.S.
The U.S.-China trade war is taking an increasing toll on U.S. imports. Seaborne imports from China fell 7.6% year over year in September, following a 4.6% slide in the prior three months. While shipments from Vietnam and India continued to improve, that couldn’t prevent total U.S. seaborne imports from falling 1.7% in September.
Consumer goods products are showing clear signs of tariff stress. Total U.S. imports of furniture fell 4.9% after tariff increases in May. Meanwhile shipments of apparel – where many products became subject to duties in September – increased by just 0.1% after a 7.5% rise in the prior three months.
The industrial sector has also continued to see lower imports with chemicals shipments down 9.9% in September compared to a year earlier. Capital goods have finally begun to reverse with a 4.4% drop following a 1.4% improvement in the prior three months.
TOYS NOT YET PART OF THE TARIFF GAME
The USTR has released the list of products affected by a recently approved WTO ruling against the EU in a long-running fight over airplane subsidies. Panjiva analysis shows $9.27 billion in imports covered over a 12 month period to Aug 31 are covered, mostly falling on France, Germany and the U.K.
Alcoholic beverages are the largest category of products targeted with $3.83 billion of products shipped, followed by aerospace at $3.13 billion as well as a wide range of food and capital goods products also covered.
There’s some evidence of stockpiling among the beverage manufacturers with imports by Mast-Jaegermeister having surged 167.9% year over year in 3Q 2019. Others have followed a more modest approach with Southern Glazer’s shipments having risen by 11.1% and Diageo’s whiskey imports up by just 5.4% year over year.
JAEGERMEISTER STOCKPILES FOR TOUGH TIMES
The first locally produced iPhones have gone on sale in India after Apple started production at Foxconn’s factory in Sriperumbudur. Apple had already been scaling back its imports of phones with a 69.2% year over year drop in July after an unchanged level in 2Q. It has however been scaling up its imports of the Mac line of computers.
While showing the success of the Modi administration’s “Make in India” strategy, India’s imports of telecoms components have not seen a similar surge. Total imports of components by all manufacturers – including those by Samsung and Flextronics – were unchanged in July after a 5.2% drop in 2Q. That’s included a 10.8% drop in imports from China in July in favor of a surge in shipments of parts from Vietnam, led by those for Samsung Electronics.
VIETNAM GARNERING GROWTH FROM INDIA’S TELECOMS EXPANSION
The big seven Japanese automakers saw global production fall by 7.7% year over year in August, while their exports from Japan dropped by 6.2%. The latter marks a reversal from an 8.3% improvement in the three months to Jul. 31.
Honda was the worst performer with a 53.5% slump in exports while Subaru saw the fastest turnaround with a 22.4% drop in shipments in August compared to a 21.8% rise in the prior three months. The firm has blamed “reasons related to shipping vessel schedules” for the slowdown.
Panjiva’s seaborne shipping data shows that 86.4% of U.S. seaborne imports of vehicles associated with Subaru were handled by NYK Line in the 12 months to Aug. 31, followed by Mitsui OSK with 12.8%. Subaru may need to diversify its shipping suppliers to prevent future export interruptions.
NYK LEADS SUBARU’S U.S. SHIPMENTS, RECENT RECORD MAY NOT BE BEATEN SOON
The Trump administration is reinstating elevated tariffs of 50% on Turkish steel exports in response to Turkey’s military action in Syria. The leverage held by the U.S. is arguably limited given the U.S. accounted for just 6.3% of Turkey’s steel exports in 2018 – the EU by contrast represented 43.2%.
The higher tariffs may also make little difference to the U.S. steel industry given Turkey represented just 1.5% of imports in the 12 months to Aug. 31 after an 87.1% decline.
Borusan Mannessman could be the largest corporate loser with shipments equivalent to 56.4% of total U.S. seaborne imports associated with the firm in the 12 months to Sept. 30 after a 26.1% increase compared to calendar 2016. Shipments associated with ThyssenKrupp meanwhile fell 98.0% over the same period.
BORUSAN THE LARGEST SUPPLIER OF TURKISH STEEL, STILL MADE MAJOR CUTBACKS
The Malaysian Prime Minister, Mahathir Mohamad, has expressed concerns that the country may “be a target for sanctions” from the U.S., likely in the form of tariffs. That could be due to expanding exports to the U.S. and a sustained trade surplus with the U.S. of $26.3 billion in the 12 months to Aug. 31.
These concerns appear valid as Malaysia’s exports to the U.S. have risen sharply in the past months, contributing to a 4.6% year over year increase while U.S. exports to Malaysia fell 3.2%. The electronics sector is a major contributor to this increase, with U.S. imports of semiconductors having risen by 8.4% year over year in the three months to Aug. 31 to reach $4.09 billion.
Samsung Electronics’ shipments from Malaysia to the U.S. may be exposed to a tariff action – U.S. seaborne imports associated with the firm climbed 14.3% year over year in the third quarter. Similarly appliance manufacturer Dyson’s shipments jumped 66.6% over the same period.
SAMSUNG DIALS IN HIGHER MALAYSIAN EXPORTS, DYSON POWERS UP
The freight forwarding sector likely had a challenging third quarter. The airfreight sector globally suffered a 3.9% downturn in volumes compared to a year earlier in August after a 3.2% drop in July. Seaborne freight handling may have also decline with U.S. seaborne imports having fallen 1.7% year over year in September, bringing the 3Q total to growth of just 0.2% after a 0.8% rise in 2Q.
Among the major forwarders only DP-DHL and DB-Schenker saw improvements of 6.0% and 5.5% year over year respectively in 3Q, partly due to their lower-than-average exposure to China. Consolidation has not proven to be a panacea, with DSV-Panalpina reporting growth of 0.5% in 3Q after a 5.1% improvement on a pre-merged basis in 2Q.
Similarly Ceva Logistics, which has been acquired by CMA-CGM, saw a 6.1% drop in 3Q after a 1.6% rise in 2Q. The top three by freight forwarders all saw lower volumes compared to a year earlier, though at least CH Robinson, Expeditors and K+N all cut the rate of decline in 3Q compared to 2Q.
FEW WINNERS IN THE THIRD QUARTER
U.S. ports suffered a lackluster growth in inbound traffic in September, with volumes having risen by just 0.6% year over year. The U.S.-China trade war is likely to blame, and unsurprisingly that’s led the west coast ports to underperform. Los Angeles suffered a 2.2% drop in inbound shipping in September compared to a year earlier, following a 3.6% year over year rise in the three months to Jul. 31.
Shipments to Seattle and Tacoma also reversed with a 5.4% drop in September following a 2.1% rise in the prior three months. The east coast ports did better, with imports to Newark and New York having risen by 4.6% in September after an earlier decline.
That’s largely been down to a jump in shipments from Asia ex-China, and in particular from Vietnam where shipments to New York surged 58.7% higher. Replacements for Chinese supplies beset by tariffs was likely the main driver, including higher shipments by Shop-Vac and Bob’s Discount Furniture among others.
ASIA EX-CHINA KEEPING NEW YORK’S GROWTH AFLOAT
U.S. trade policy is likely to become more rather than less complicated during the fourth quarter, with seven major issues to watch.
The passage of the U.S.-Mexico-Canada Agreement may be accelerated as a result of the impeachment process, but in the meantime the U.S. trade deficit with Mexico and Canada has been increasing and reached $118.6 billion in the 12 months to Jul. 31 from $69.3 billion in 2016 due to a rise in automotive and energy sector imports.
The U.S.-China trade war is moving beyond tariffs into the realm of investment controls and social-credit type assessment regimes. The next round of negotiations from Oct. 10 could be tripped up by tariff increases, and may result in a mini-deal focused on tariff reductions and purchasing commitments – a more indepth deal could be put off. There’s already signs of stockpiling in products where tariffs are due to be applied from December with a 10.5% rise in imports of toys and 39.3% in textiles in August compared to a year earlier.
Relations between the U.S. and EU will likely worsen as a result of new WTO-sanctioned duties to be applied by the U.S., though the USTR has left the door open to negotiations. The tariffs will target capital goods as well as food, and there’s some evidence of accelerated imports to the U.S. by JCB and Doosan Infracore of the products set to be covered.
The section 232 automotive sector review by the Trump administration is due to be completed by mid-November. It’s likely to be a damp squib given 71.3% of the $353 billion of imports it could cover have already been exempted through existing trade deals. The EU is the largest contributor to the remainder, but mostly in the form of vehicle shipments.
An expansion of the U.S.-Japan mini-deal could help cut tariffs for a wide range of capital goods importers. Some of the highest tariffs are applied to titanium products as well as basic valves and bearings imported by NSK and Jtekt among others.
Negotiations towards a mini trade deal with India are likely to be slow. India wants to regain access reduced tariffs under GSP in case its export growth to the U.S. – which has run at 10.2% in the 12 months to Jul. 31 – slows down. Most of that growth has been in non-GSP sectors including a 16.5% rise in pharmaceutical shipments – indeed it may be healthcare policy rather than trade policy that matters more for shippers including Aurobindo and Cadila.
Finally, there could be another section 301 review, this time focused on Vietnam which has been a notable winner from the U.S.-China trade winner. There’s been a marked surge in seaborne shipments from Vietnam to the U.S. in the case of furniture and apparel with a 43.2% and 46.3% rise respectively in the 12 months to Aug. 31 compared to 2016.
HOMEWARES DRIVE A SURGE IN U.S. IMPORTS FROM VIETNAM
Trade policy upheaval is by no means the sole purview of the U.S., with four major issues to consider outside the U.S. in the fourth quarter.
Brexit is evolving on a daily basis, but it hinges on a request for an extension due by Oct. 19. Assuming that is granted – which is not guaranteed – it could be followed by new elections before another round of negotiations. Customs clearance zones or a so-called “two border” approach managed by the Stormont Assembly are just two of many potential answers to the Irish border question. Ireland saw a drop in exports to the U.K. in 2018, with a 23.1% slump in shipments of pharmaceuticals being the main reason.
Reform of the World Trade Organization is needed by Dec. 10, with 30 existing cases in the dispute settlement process already. EU plans may not drive that reform for another 12 months, potentially costing it the chance to retaliate against U.S. aerospace subsidies. In the meantime, many of the outstanding cases refer to U.S. steel tariffs, which have proven successful in both cutting imports by 19.3% in the 12 months to Jul. 31 versus 2015 while raising capacity utilization.
The Brazilian government is facing a mix of challenges and opportunities. The Mercosur trade deal with EU is stumbling on Austrian concerns about deforestation. U.S. trade deal negotiations have yet to start. A South Korea – Mercosur trade deal is on the way. There’s already been a surge in exports from South Korea to Brazil of 24.3% year over year in the three months to Jul. 31, led by plastics and transmission systems.
In Asia, the biggest hope is the RCEP trade deal. However, a variety of regional disagreements, including the ongoing Japan-South Korea spat. likely mean it won’t see fruition in 2019. More serious geopolitical issues are also interrupting trade including India and Pakistan’s disagreements over Kashmir as well as Middle East tensions.
Those all come as global trade has entered an extended downturn, with global export activity down 2.2% year over year in the three months to Jul. 31 and by a further 2.3% in August. Yet, the situation is still nowhere near as bad as the downturn seen in 2015, never mind prior recessions in 2009 and 2002.