CSCMP's Supply Chain Quarterly
January 21, 2019
Forward Thinking

What, me worry about tariffs?

Many international traders are concerned about the possibility of a trade war with China. Their worries may be overstated.

Threats of punitive tariffs between the Trump administration and China have set the international trade community on edge. Exporters of agricultural products, and retailers whose businesses depend on imports, worry the trade tit-for-tat will jeopardize their profitability or even their survival. However, some industry observers say it's unlikely the dispute will mushroom into a full-on trade war.

Although the U.S. trade deficit with China reached record levels in 2017, the U.S. position relative to trade with China has improved in some respects as China becomes less focused on exports and more on internal expansion and development, according to Mario O. Moreno, senior quantitative economist, maritime research, for the maritime research and consulting firm Drewry. For example, in 2006 the U.S. imported 4.5 ocean containers from China for every box it exported, Moreno said. In 2016, the ratio was 3.4 to 1, he told the Coalition of New England Companies for Trade (CONECT) Northeast Trade and Transportation Conference in Newport, R.I. late last week.

The value of Chinese products affected by the U.S.' "Section 301" tariffs, proposed in response to China's policies on the transfer of U.S. companies' technology and intellectual property, was about $50 billion in 2017, while the value of U.S. exports affected by retaliatory tariffs was approximately $47 billion last year, Moreno said. This is on top of tariffs on steel and aluminum previously imposed under "Section 232" authority, which relates to national security.

Although both countries continue to ratchet up their rhetoric, several factors indicate a full-on trade war is unlikely, Moreno said. China's proposed tariffs are already close to the total $130 billion value of U.S. exports in 2017. This suggests the Chinese government would have to find other ways to retaliate, such as devaluing its currency to make U.S. products more expensive in China or using regulations to make it more difficult for U.S. companies to do business there.

However, the impact of such actions could reverberate far beyond U.S.-China trade, according to Moreno. For example, trade with other nations would also be affected by any currency devaluation. If the U.S. were to compensate affected industries, such as agricultural products, with subsidies, other countries would file complaints with the World Trade Organization (WTO) and potentially take punitive actions against the United States.

"In my view, the situation is very unlikely to become an all-out trade war because both countries have so much to lose," Moreno said.

Peter Friedmann, CONECT's Washington Counsel and principal of the Washington, D.C., international-trade lobbying firm FBB Federal Relations, said he does not think a trade war will actually come to pass. On April 12, the day Friedmann spoke at the conference, the National Retail Federation and 106 other industry associations, including CONECT, sent a letter to the House Ways and Means Committee asking it to prevent the imposition of tariffs and find other ways to force China to change its policies.

Friedmann said the two countries' supply chains are so interconnected that any major retaliation by one country against another's industries would almost certainly hurt both sides. For example, U.S. automakers have very successful manufacturing and assembly plants in China to serve the domestic market, he said. In addition, U.S.-based Smithfield Foods, the world's largest producer of pork products and a major exporter of U.S. pork to China, is wholly owned by Chinese company WH Group Ltd.

"There's not going to be any retaliatory tariffs ... there is so much integration that it's not going to happen," Friedmann predicted. In his view, it will be more important to President Trump that he be able to say when he runs for reelection that he stood up to countries like China, South Korea, Mexico, and Canada, solving trade disagreements and protecting American interests.

So what's a shipper to do while all this gets sorted out? There are "too many unknowns," Drewry's Moreno said, but, he concluded, perhaps the best course is to "watch what they do, not what they say."

Contributing Editor Toby Gooley is a freelance writer and editor specializing in supply chain, logistics, material handling, and international trade. She previously was Editor at CSCMP's Supply Chain Quarterly. and Senior Editor of SCQ's sister publication, DC VELOCITY. Prior to joining AGiLE Business Media in 2007, she spent 20 years at Logistics Management magazine as Managing Editor and Senior Editor covering international trade and transportation. Prior to that she was an export traffic manager for 10 years. She holds a B.A. in Asian Studies from Cornell University.

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