The Supply Chain Daily provides a curated overview of Panjiva's research and insights covering global trade policy, the logistics sector and industrial supply chains and draws from global shipping and freight data.
US-China phase-1 trade deal: Trimming tariffs, leaving doubts
The U.S. and Chinese governments have reached an outline phase-one trade deal covering a series of tariff reductions, policy changes, purchase commitments and an enforcement mechanism. This two-part report looks at the policy implications and purchase commitments in a deal that ends a trade war that entered its third year in September.
In terms of policy, the nine-chapter deal is now subject to legal and interpretation reviews, likely to run at least until January 2020. Prior experience over the past two years has shown success is far from guaranteed. The impact of the tariff rollback will likely be minimal, with list 4A duties cut to 7.5% from 15% on $124 billion of imports. Tariffs of 25% on $216 billion of shipments will remain in place.
There's also the potential for a "snapback" if negotiations or enforcement fails, casting uncertainties over corporate supply chain strategies. U.S. imports of list 4A products — focused on consumer goods — dropped by 29.7% year over year in October and have since passed their seasonal peak. Most companies won't have had, or taken, the time to alter their supply chains.
One exception may be televisions. The largest drop in list 4A imports in dollar terms was imports of televisions which fell by 67.8% year over year in October, including those associated with TCL Electronics Holdings Ltd. and TPV Technology (Suzhou) Co. Ltd. That's only partly been offset by a 52.4% year-over-year surge in imports from Mexico, including a 57.3% increase in imports from Samsung Electronics Co. Ltd. and a 69.2% jump by LG Electronics Inc.. Sony Corp.'s imports rose by a more modest 6.0% year over year.
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Trade War Show Season 3 Finale: The heroic quest for $100B
The U.S.-China phase-one trade deal calls for a series of policy changes and purchasing commitments from the Chinese government. The deal — which will only be fully detailed in January 2020 at the earliest — will also include enforcement mechanisms.
The U.S. has stated that China has committed to increase purchases of "manufactured goods, food, agricultural and seafood products, energy products, and services" by $200 billion in 2020 and 2021 versus 2017 levels. Reaching a $100 billion per year increase involves some heroic assumptions.
The largest opportunity lies in energy. Sending 100% of U.S. oil exports to China would add an extra $57.0 billion of exports per year on the basis of exports in the 12 months to Oct. 31. That would leave the U.S. accounting for 23.7% of all oil imports. Sending 100% of U.S. liquefied natural gas, or LNG, exports — based on the run-rate of October plus output from plants under construction — could add $9.44 billion of exports to China.
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U.S. exports of services already reached $64.4 billion in the 12 months to Oct. 31 and have proven resilient during the trade war. Opening up financial and insurance services as well as increased tourism will further increase services exports. Growth in exports to China equivalent to 15% of total U.S. exports of finance, insurance and tourism would add $19.0 billion to the total.
In agriculture, sending 100% of U.S. soybean exports to China and doubling all non-soybean exports would add $5.3 billion. Manufacturing may refer to electronics. U.S. exports of semiconductors and circuits to China already increased to $8.78 billion in the past 12 months from $5.91 billion in 2017.
Taking the five elements together — energy, food, services, agriculture and semiconductors — would be equivalent to $100 billion per year of additional exports, meeting the implied target for additional purchases. Presumably details from the governments, as well as enforcement mechanisms, will be available with the full trade deal early in the new year.
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The U.S. Treasury Department reported a 10.4% year-over-year increase in customs duties in November, bringing the total haul from tariffs that month to $6.94 billion. Panjiva's analysis shows the value of duties on Chinese imports under the section 301 program reached $4.89 billion, roughly unchanged from a month earlier. The newly announced phase-one trade deal will cut that figure by just $680 million, cutting total duties by 9.8%.
The impact of tariffs on U.S. consumers and businesses has been mitigated by a deflation in prices for imports from China. That's remained roughly unchanged since May at 1.7% year over year, suggesting list 4A duties were not passed through to Chinese manufacturers.
The deflation in imports from China, combined with lower commodity prices more broadly, has pulled total U.S. import prices down by 3.0% over the same period versus export prices, which have fallen by just 1.3%.
USMCA Watch: Toyota, Mitsubishi may face future Canadian complaints
The new U.S.-Mexico-Canada trade deal is not to everyone's taste. The Aluminium Association of Canada, or AAC, has warned the deal may mean Mexico is "more or less China's North American backyard to dispose of the products of its overcapacity." Specifically, the new rules for automotive sourcing require steel to be "melted and poured" in North America, but not aluminum.
The AAC's recourse will likely lay in future tariff actions rather than restructuring USMCA once more. Mexican imports of aluminum by the major automakers reached $560 million in the 12 months to Oct. 31, just one-fifth the level of steel but an 84.2% year-over-year jump in the past 12 months. The U.S. represented 74.7% of the total, while China was just 2.7%.
Among the automakers, General Motors Co. led the way with 56.4% of all shipments, predominantly from the U.S. Major importers from outside North America were Toyota Motor Corp. and Mitsubishi Motors Corp., with Toyota the main importer from China.
Beam Suntory aims to build whiskey sales in India with Oaksmith
Whiskey distiller Suntory Holdings Ltd. is launching a new India-only blended brand, Oaksmith, as it attempts to boost its market share in the expanding Indian market. Indian imports of spirits rose 15.9% year over year in the 12 months to Aug. 31, with whiskey the leading product representing 62.6% of imports.
The market has so far been dominated by Diageo PLC, which accounted for 30.7% of shipments. There has been a recent downturn in growth, though, to just 10.9% year over year in the three months to Aug. 31. That's driven by an 8.0% drop in shipments by Diageo and a 23.9% slump in shipments by Thai Beverage PCL.
Pernod Ricard SA, the second largest supplier by number of shipments, expanded shipments by just 2.0%. Beam Suntory, meanwhile, saw growth of 18.2%, presumably as it started building up the base-stock for the Oaksmith blend.
(Panjiva Research - Food & Beverages)
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Christopher Rogers is a senior researcher at Panjiva, which is a business line of S&P Global Market Intelligence, a division of S&P Global Inc. This content does not constitute investment advice, and the views and opinions expressed in this piece are those of the author and do not necessarily represent the views of S&P Global Market Intelligence.
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