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.
2019 outlook: US policy — 2 disappointments, 2 delays and 1 high-wire act
Five major trade policy actions that matter for the administration of President Donald Trump in 2019. The first two — passage of the U.S., Mexico and Canada Agreement, or USMCA, and the automotive section 232 review — may not go the way the administration wants. Passage of USMCA is dependent on the support of the Democratic Party-led Congress, though Canadian elections in October may prove the more challenging hurdle. As for the review, it may fall foul of restrictive actions by any or all of the U.S. Court of International Trade, the Government Accountability Office and both houses of Congress. Its effectiveness will also be limited by narrow coverage that excludes Canada, Mexico, the European Union and Japan.
The administration’s ongoing trade negotiations with the EU and Japan could unlock $12.40 billion and $4.16 billion of tariff reductions for U.S. and its respective trading partners. Yet, the fact that the trade deal reached between the EU (which will get a new Commission in November) and Japan took four-and-a-half years to complete would indicate a finalization in 2019 is unlikely.
That leaves a potential deal with China, for which talks are scheduled to run through March 1. Given that a five-fold increase in U.S. exports of energy and agricultural products to China will only cut the U.S. trade deficit with China by one-fifth, more than just purchase commitments will be needed to avoid a snapback in tariffs. The Chinese government has shown some willingness to adapt intellectual property and other practices. The U.S. electronics industry is the biggest potential loser should tariffs be increased to 25% from 10%.
2019 outlook: Global trade policy — Golden age followed by tarnished deals
Asia's launch of the Comprehensive and Progressive Agreement for Trans-Pacific Partnership, or CPTPP, and a series of bilateral deals in 2018 may prove a high point for global trade policy, with 2019 offering a more challenging outlook. The impact of the U.K.'s departure from the EU, expected on March 29, will depend on whether the British Parliament approves the agreement with the EU. If it does not, there will be significant disruptions to supplies of the 70.8% of British food and 76.8% of medicines that are sourced from the EU.
Negotiations to create the China-led Regional Comprehensive Economic Partnership may falter if South Korea pursues CPTPP membership instead. Arguably China may be better off in CPTPP too. India would be the loser in that instance, though with general elections due in April it may start scaling back import tariffs anyway as a reflationary measure. Protectionism may deepen in the steel sector as responses to U.S. tariffs widen. The EU already has safeguarding measures in place but has seen steel imports rise 15.4% year over year in the 12 months to Oct. 31.
A more fundamental concern for world trade is that the future of the World Trade Organization remains in doubt. Reform of its dispute settlement process is needed as two of the remaining three judges on the appeals panel members’ terms end on Dec. 10, a situation even more worrisome given that the largest number of disputes in 20 years was filed in 2018.
Apple's crunch should not be a surprise
Apple Inc. has cut its revenue guidance for the most recent fiscal quarter by 5.6% to 9.6%. CEO Tim Cook has cited "rising trade tensions with the U.S." as one reason. A tariff-inspired slowdown in China’s trade with the U.S. has been evident since mid-December with China’s bilateral trade having risen year over year by just 1.0% in November compared to 10.3% in the prior three months.
A slowdown in the wider smartphone market was apparent in an 8.2% drop in Chinese handset exports by all manufacturers in the three months to Nov. 30 compared with the year-ago period. Yet that has been offset by rising values per handset, resulting in the dollar value of exports rising 20.8% over the same period. Selling less for more may be the future for smartphone makers, including Apple.
Toyota and Nissan exports slump, weak sales not tariffs are the problem
Japan’s big seven automakers are experiencing declining exports, with a 6.7% drop in shipments in November compared to a year earlier and following a 3.3% decline year over year in the prior three months. Exports by Toyota Motor Corp. and Nissan Motor Co. Ltd., which fell 19.7% and 16.1%, respectively, in November 2018, are to blame and include weak shipments to North America. An 8.5% decline in U.S. imports of autos and light trucks from Japan in November 2018 confirms that trend, while a potential rebound in December 2018 may be linked to concerns about the Trump administration forthcoming section 232 review. Nonetheless, weak sales of foreign autos and light trucks in the U.S., which fell 1.7% in November 2018, should be a bigger concern.
The next story in toys may be a move to Vietnam from China
Hong Kong-based toy manufacturer Wah Shing Toys Co. Ltd. may move production from China to Vietnam or India where it sees a "great" supply of labor, should the U.S. apply tariffs to Chinese exports in 2019. However, there is a low likelihood at this stage of tariffs on toys happening, given U.S.-China trade talks are ongoing until March and the political optics of applying tariffs to toys. The bigger issue is a slowing market for toys in the U.S. — seaborne imports rose just 2.1% year over year earlier in 2018. Wah Shing did better than others, with an 11.1% rise, although its shipments were half its 2016 levels. A move to lower cost labor markets may make sense for Wah Shing even without tariffs if it wants to build supplies to existing buyers, including Spin Master and Mattel.
Nestlé, NSK win tariff reprieve as exemption rate reaches 78%
The U.S. government has granted exemptions from its 25% duties on Chinese imports to 101 companies, relating to 18 product-line requests. In comparison, 1,258 requests have been formally denied so far. The 78.2% accept-deny ratio may give hope to importers, which have 10,198 requests outstanding.
The largest product lines where exemptions have been granted include valve bodies such as those for air-brakes, whose total imports from China in the 12 months to June 30 were worth $755.8 million. Shipments of ice-making equipment, including those by Nestlé SA, worth $445.0 million and unground ball bearings — including NSK Ltd.'s — worth $283 million have also won a reprieve from tariffs.
It is notable that imports of unground ball bearings from China account for around one-fourth of all U.S. imports in the 12 months to end-October. That would suggest company-specific matters are as important for the exemption process as those relating to the products themselves.
(Panjiva Research - Capital Goods)
China finds 706 ways to reflate the economy via tariff cuts
The Chinese government has instituted a third round of import tariff reductions, most likely in early 2019, as part of wider efforts to reflate the economy. Imports of the 706 products covered will see an average reduction in tariffs to 2.5% from 6.6%. The aggregate value of tariff reductions — defined as import value in 2017 times the tariff rate reduction — could be worth as much as $11.6 billion.
The move will target a wide range of industrial and consumer products. The largest tariff reductions in dollar terms include light fuel oils, for which rates have been cut to zero from 9.0%, providing importers with a reduction worth $927 million. Other major reductions include a 7.0 percentage point cut for TV components, 13 percentage points for digital cameras and 10 percentage points for baby food.
Christopher Rogers is a senior researcher at Panjiva, which is part of S&P Global Market Intelligence. 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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