The Escalating Trade War

WHAT 3PLS NEED TO KNOW

Steve Kendall | ALLEN LUND COMPANY

In the most straight-forward terms, tariffs are taxes on imports charged as a percentage of the price a buyer pays to the foreign source of the product. For almost a century in the United States tariffs produced as much as 90 percent of our nation’s federal revenue. However, this was during a period when countries used military force to expand their borders and obtain new resources. With times changing, countries have not used tariffs as a weapon in a trade war for decades. The Trump administration has changed all that.

rawf8/ShutterstockBeginning in Oct. 2017 the U.S. International Trade Commission, the Department of Commerce1 and national security investigations have paved the way for a series of tariffs which have created retaliatory tariffs from other countries. These initial tariffs target about $50 billion in imports. All of the products listed in these early tariffs were industrial in nature. The list included Canada, China, Mexico, the European Union, South Korea, Brazil, Argentina, and Australia. Germany and Japan will be included if the tariffs on automotive imports are imposed.

After negotiations with many of these parties, the primary target of the more recent list of targeted products seems to be China. On Sept. 17, 2018 President Trump finalized a 196-page list of products for an additional $200 billion of imports.3 Even with such a seemingly comprehensive list the document states, “…The product descriptions that are contained… are not intended to delimit in any way the scope of the proposed action.”2 In other words, the Trump administration has reserved the right to add anything they might have initially overlooked. Unlike previous lists, this list is largely composed of consumer items. In spite of this, the administration insists these tariffs should have little if any impact on the typical American consumer.

Most economists disagree with the administration’s position and tactics. A battle of tariffs will not help the economic prosperity of either country involved. In fact, this type of trade war can result in immense damage to an economy, which is why the issue must be addressed. For some time, there has been increasing frustration with China as a trade partner. Other countries that have a free, unsupported economy struggle to compete with Chinese manufacturers that are receiving government subsidies, or are wholly state-owned. In addition, China has encouraged technology theft by rewarding companies that have the opportunity to reproduce another manufacturer’s product with subsidies, allowing them to undermine the market prices for that product. For these situations, using tariffs to level the playing field could make sense. The idea is that if the Chinese product with a tariff is no longer the lowest price option, domestic producers will have the opportunity to improve their share of the market for the product. This should, in theory, pave the way for higher domestic production and the creation of jobs. However, the logic falls apart if the domestic producer decides to raise profits instead of production. By simply matching the increased price of the Chinese product, they can boost their profits with no upturn in production or the necessity of hiring and training new staff.

Lower demand will create fewer orders and increase the downturn at ports which will lead to additional layoffs and losses of American jobs.

The immediate effects of the tariffs have already been felt by shippers and ports alike. Shipping capacity was tested because buyers recognized in advance that prices would increase, so they placed orders early to get product in before the tariffs went into effect. This caused a glut of shipping that could not be wholly supported. Many importers saw their product bumped from one ship to the next, thus delaying the arrival of the product. The ports saw an increase of early inbound containerized freight which created backlogs at the destination ports as well. This created container shortages as many outbound ships do not have room for all exported product due to hauling empty containers back to China and other shipping sources to provide for the newer orders still being processed. As reductions in orders for foreign product occur due to higher prices created by tariffs, port workers will face layoffs. Recent figures show that more than 23 million American jobs are supported by the import of goods, port operation, and transportation of imported goods.4 These jobs currently generate more than $320 billion in taxes every year. A downturn at the ports will have a ripple effect across the nation.

Boston is already experiencing issues with orders from China regarding necessary parts for the production of subway cars. These were ordered before the tariffs went into effect, but are now subject to the tariffs thus creating cost overruns and delays.

Cleveland has a school under construction that was supposed to be at a stage in construction this winter that would allow workers to finish the inside during the cold months. However, the roofing materials are from China and it looks like major snowfalls for the area may start before the roof is completed. This will create delays and cost overruns, thus the school could potentially be unavailable for use in the fall of 2019 as scheduled.

These are issues created by only the first wave of tariffs. The new tariffs from September will even more directly impact consumer pricing. Any downturn in consumer confidence will lead to a slowdown in spending. A slowdown in spending will impact the economy and create lower demand for products. Lower demand will create fewer orders and increase the downturn at ports which will lead to additional layoffs and losses of American jobs.

Let us hope that instead of escalating the tariff battle, every party can agree to search for a negotiated solution that will allow a robust world economy
to continue.

Steve Kendall is a Transportation Broker with Allen Lund Company, Inc. in Orlando, FL. He can be reached at steve.kendall@allenlund.com.

References

  1. Brown, Chad P, and Melina Kolb. “Trump’s Trade War Timeline: An Up-to-Date Guide.” PIIE, 24 Sept. 2018, www.piie.com/blogs/trade-investment-policy-watch/trump-trade-war-china-date-guide.
  2. “Ports Association Concerned Over U.S. Trade Tariffs.” Ports Association Concerned Over U.S. Trade Tariffs, 2018, www.aapa-ports.org/advocating/PRDetail.aspx?ItemNumber=22168.
  3. Tariff List. 2018, ustr.gov/sites/default/files/enforcement/301Investigations/Tariff%20List%20%2883%20FR%2047974%2C%20as%20amended%20and%20modified%20by%2083%20FR%2049153%29.pdf.
  4. “Ports Association Urges Caution On Increasing U.S. Trade Tariffs.” Ports Association Urges Caution on Increasing U.S. Trade Tariffs, 2018, www.aapa-ports.org/advocating/PRDetail.aspx?ItemNumber=22136.