Tariffs: the next chapter of volatility

TRUMP: THE ‘TARIFF MAN’ COMETH

The key takeaway for the port industry from Trump being back in office, is that we have a new driver of volatility. As the industry has shown previously, volatility can cause significant problems in a logistic world where every bit of overcapacity has always been minimised where possible to boost profits.

Tariffs have a widespread disruptive effect economically. In many cases they will deliver inflation, as documented in a lot of research, plus in this round influential factors will come into play such as the frontloading of demand (to hopefully beat tariffs where possible) and similarly the rerouting of cargo flows. But, more importantly, this round of tariffs is accompanied by geopolitical and diplomatic earthquakes. This is making the level of trust between large powers take a beating: trade blocks and strategic nearshoring are logical and likely responses.

A WORLD DIVIDED INTO TRADING BLOCKS

Trade tariff actions are taking place at such a rapid pace that the media has little time to keep track of the latest developments. The same reality holds true for the commentary in this article.

Although time scales in international trade are much longer than media schedules, international trade also faces big issues in keeping up with and responding to the changes. All the more so as it is not known when this syndrome will end. With the changes coming at such a rapid pace we have probably just seen the beginning and international trade should be prepared.*

Shifts in international trade patterns have traditionally proved difficult to absorb by international logistic chains - as highlighted during the Covid-induced period of volatility. Available capacity in ports and shipping is typically closely aligned and planned well in advance. This next chapter of volatility yet again brings up the question of whether ports should plan in wave after wave of volatility and factor in a higher risk premium and higher tariffs to finance investments in infrastructure resilience.

Although the tariffs headlines are linked to Trump - proclaiming himself as ‘Tariff man’ – it is an interesting fact that President Biden did not overturn the tariffs introduced by Trump during his first administration. Biden replaced some of the tariffs with ‘tariff rate quotas’ (TRQs) for Japan, UK and the EU in 2022, but the general trend of protectionism remained under the democratic presidency. People that expect the tariffs to be (entirely) overturned when Trump leaves office in a few years, may need to adopt a more cautious approach..

Other geopolitical events such as the Russia-Ukraine war, the Gaza-strip unrest, but also provocations in the South China Sea are further dividing the world into distinct trading blocks. The impact of such trading blocks will be a less optimal economic equilibrium. This means either higher prices for goods or sourcing the goods from locations further away. Particularly if the freight-km increase this will impact the demand-supply balance in a set of trade corridors. On the other hand, it will be an interesting opportunity for setting up new production locations within the structure of the trading blocks.

STOPPING REROUTING

The previous round of tariffs, mostly directed at China, give a good indication of their impact. Did they work towards Trump’s objectives? To some extent they actually did. Since 2019 the share of non-oil imports from China to the US reduced (in the context of an overall nominal growth in imports).

These imports were replaced by production being shifted to Southeast Asian countries, and more importantly to Mexico and Canada. Partly this was the result of new production locations, but also rerouting into the US was a major cause for the witnessed effect. The additional logistic costs of route deviation are typically less than the cost of the new tariffs in place. This may have been in the back of Trump’s mind when imposing new tariffs (other than for example the marginal smuggling of fentanyl) at the Canadian-US border as reported by the international press e.g. https://www.bbc.com/news/articles/cvg93nn1e6go). In the new tariffs setup these alternative routes into the US are also subject to the tariffs. Part of these rerouted flows can now move back to US ports.

Another question is whether the 2019 tariffs supported domestic production and lowered the dependency on imports? An initial look at aggregated numbers may suggest that they did: US steel imports reduced when comparing 2023 to levels a decade ago. At the same time, however, US production did not seem to be lifted by the tariffs, with similar output levels to a decade ago. However, whether the tariffs worked or not is a complex question. The tariffs may have caused reduced consumption resulting in lower imports, rather than an even lower domestic production. At the same time the trends per specific type of steel are different again with not all categories of steel being produced in the US and hence always imported.

What can be concluded from the figures it seems, is that if there has been any impact, the effect on domestic production has been limited. The same can be expected from the current round of tariffs. Significantly scaling up domestic production is not easily achieved over a short amount of time. In particular for the first few years the tariffs will likely mainly just work inflationary. And who will then bet with their investments in production capacity that the tariffs will remain in place?

ATTACKING US EXPORTS

It is not only difficult to ramp up domestic production in a short space of time. but in many industries the new tariffs could likely impact US domestic production of the same industries. The tables below show the top 10 imports and exports from the US in conjunction with EU trade. What is most striking is that six commodity types in the Top 10 show up in both import and export activity. A similar picture is seen for some other trade partners. As such, if the EU might mirror the import tariffs, the same industries in the US would be hit. Secondly the remaining categories are typically high value goods and specially engineered goods with little possibility for alternative production locations, if not already produced in the US. This means prices going up and eventually higher interest rates, potentially hurting domestic production and investment.

It is, however, unlikely that the EU will directly mirror tariffs. Previously ‘typical’ American products and brands were targeted. Given various tech’ tycoons being associated with the current Trump administration, it would not be too surprising if new measures would be targeted at the big-tech surrounding Trump rather than the list below. And also nontrade (regulatory) barriers could be implemented.

US imports from the EU in 2024

US exports to the EU in 2024

Source: @Jesse Bijeveld

OPPORTUNITIES FOR THE EU

The key problem relating to recent announcements on tariffs is not necessarily the tariffs themselves but the distorted trade relationship they generate. As such, a likely reaction towards strategic nearshoring and focusing on other trade relationships is to be expected - to a level over and above that caused by tariffs alone. Examples of the first option can comprise a greater focus on establishing strategic industries back in Europe where the EU was previously relying on the US, pharmaceuticals for example. This would, in turn, push up shortsea shipping activity again.

For the second focus, the recent Canada-EU leader’s meeting is a noteworthy development. There are additionally opportunities with the EU having signed the CETA agreement and the recent EU-Mercosur Trade Agreement. For example Agri trades as well as fertiliser trades may present opportunities to divert Potash from Canada. Interestingly, this is a much-needed fertilizer used by US agricultural producers and agribulk exporters. However, even though these trade agreements may offer potential, ratification of both agreements remains incomplete and complicated.. Something that may be accelerated in the current global trade context. Quick ratification of such agreements and expanding existing trade agreements would perhaps be the best retaliatory action that US’ trade partners can take

*At the time of writing it is difficult to pinpoint the exact impact of the Trump tariffs. The developments are coming thick and fast, and have broad impacts. In any case volatility is to be expected, prompting shorter supply chains and the strategic rethinking of established chains. Trying to focus on realising new trade corridors and opportunities arising from the imposed tariffs, generally provides a more positive approach than retaliatory tariffs.