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U.S.-China Trade War of 2019 Spills into 2020 for Ports, Shippers and Manufacturers

U.S.-China

U.S.-China Trade War of 2019 Spills into 2020 for Ports, Shippers and Manufacturers

The Jan. 15 signing of a U.S.-China Phase One agreement did spawn a sigh of relief among those troubled by the trade tensions between the two nations. But six days later, a warning came from a couple experts closely watching the unfolding events on behalf of ports, shipping lines and manufacturers. The crux of that warning? Stay tuned.

“This is a truce,” said Phil Levy, chief economist at Flexport, a San Francisco-based freight forwarding and custom brokerage company. “This is not the end of the trade war.”

Levy shared that opinion as he joined his company’s CEO Ryan Peterson in leading a webinar on Jan. 21 that was listened in on electronically by some of their 10,000 clients in more than 200 countries. Those who rely on the company’s expertise in ocean, air, truck and rail freight, drayage & cartage, warehousing, customs brokerage, financing and insurance–all informed and powered by Flexport’s unique software platform—heard Levy say of the U.S.-China trade war: “We haven’t seen a retaliatory escalation of this magnitude in the post-World War II era. … This really was a 2019 story that worsened throughout the year.”

He pointed to a graphic that showed trade between the world’s two biggest economies fell markedly last year, and that no one overseeing trans-Pacific supply chains were immune from economic harm. Many webinar participants could relate as 64 percent of Flexport’s customers rely on the trans-Pacific trade routes, according to Peterson.

Yes, the Phase One deal was a positive first step, but Levy pointed to some examples of lasting victims from the trade war. It exposed the continued “decay,” as the economist put it, of the World Trade Organization (WTO), which is supposed to prevent the escalation of trade disputes. The “keeper of peace” amid trade tensions was largely frozen out of U.S.-China talks and, therefore, silent as events transpired.

A second heavy blow came in December 2019, when the WTO’s appellate body ceased to function, according to Levy, who noted that the formation of the “WTO system was one of core achievements since World War II.”

Peterson found equally worrisome the first-ever disappearance of peak season when it comes to shipping. As many known, imports grow during the fall and really heat up by November’s holiday shopping season. That not happening in 2019, couple with a steady decline is U.S. imports from China after years of solid growth, is a reason for concern, according to the CEO, who maintained, “global trade is down due to tariffs.”

For one thing, not having a peak season to rely on, coupled with steadily declining trade, “from our perspective makes life very hard to plan for,” Peterson said.

He did see on the horizon what many may view as a green lining: lower freight fees and consumer prices. “Lower prices do sound good,” Peterson conceded, “until someone goes bankrupt. We want stability, predictability. Things getting too cheap is unpredictable. You are playing with fire.”

Feel the burn? Peterson called our current “degree of uncertainty relatively unprecedented. We learn about things in a tweet. Was that really implemented or not?” As an example, he cited France proposing a digital tax and President Donald Trump striking back with threats of tariffs on cheese and wine. “Is that policy or not?” Peterson asked rhetorically. “Right now it’s a tweet. It makes it very hard to plan for.”

Levy warned “there is no safe play.” You can withstand the brunt of the tariffs and see what that does to your bottom line, or you can figure out a way to work around them and then have a trade deal come along with no way to return to normal operations quickly enough.

As Peterson pointed out, it’s not just the sting of the tariffs but the amount of paperwork and other adjustments one must handle while trying to remain agile. That time takes away from other things you need to be doing with your business.

Speaking of time away, Levy believes there will be no further movement in deescalating trade tensions between the U.S. and China until after America’s November presidential election. He suspects that China agreed to the Phase One conditions, which were much more weighted against that country than the U.S., “to buy a year of peace.” He added that China could be playing it coy in the weeks ahead as Beijing awaits the outcome that determines whether they will continue to deal with Trump or a new White House occupant. “If Trump loses, it’s likely the trade agreement will change anyway,” Levy said.

In the meantime … uncertainty. Peterson noted that one Flexport client had to close a manufacturing plant due to the tariffs. Levy held onto the hope that an eventual U.S.-China trade deal will be beneficial economically, pointing to markets that opened up with the U.S.-Mexico-Canada Agreement replacing the North American Free Trade Agreement. But you never know, as evidenced by USMCA having also resulted in some restricted trade, particularly in the automobile sector. “That was disappointing,” he admitted.

Don’t be surprised if the pain ultimately spreads, as Levy predicted what will happen after the U.S.-China trade war comes to a head. “There are a lot of signs the president will turn his trade policy focus away from China and toward Europe,” said Levy, who later noted Trump has also begun accusing Vietnam of cheating when it comes to trade.

So what to do about all this?

“My stance is there is nothing more important than agility, the ability to adapt,” Peterson said of dealing with tariffs, real or threatened. “It can mean restructuring a supply chain or seeking exemptions.” Companies that foster a culture with an ability to adapt can look at these challenges, Peterson says, and respond: “Bring it on, bring on the change.”

phase one

The Phase One Deal: How We Got Here And What Is Next

President Trump announced that the United States and China had reached a partial “Phase One” trade deal in mid-October, signaling a pause in the trade tensions that have steadily grown over the past two and half years.  While the precise goals of the President’s trade action against China have always been vague, there was an unquestionable desire to change certain structural issues of the Chinese economy, particularly with the country’s intellectual property and forced technology practices.  

To put the proposed Phase One deal in its proper context, this article breaks down (1) the various stages of escalation since President Trump took office, (2) what’s known about the contents of agreement, and (3) the potential risks that could derail the deal from being signed.  

The Escalation of the Trade War

The President’s most high-profile actions against China have been his use of long-thought-defunct trade authority, Section 301 of the Trade Act of 1974 (“Section 301”).  Section 301 grants the President the authority to impose tariffs on countries if it determines that the acts, policies, or practices of a country are unjustifiable and burden or restrict U.S. commerce.  

Following a lengthy investigation, the Office of the U.S. Trade Representative (“USTR”) officially determined in March 2018 that China’s policies result in harm to the U.S. economy.  Simultaneously, President Trump signed a Presidential Memorandum outlining a series of remedies that his Administration would take in response to these findings, most notably the imposition of tariffs.  

President Trump’s Section 301 tariffs currently cover most products imported from China, after having been rolled out in four different lists:  

-List 1 of the Section 301 tariffs went into effect July 2018 and imposes a 25 percent tariff on $34 billion worth of goods from China.  

-List 2 went into effect August 2018 and imposes a 25 percent tariff on $16 billion worth of goods.  

-Following China’s retaliatory tariffs on Lists 1 and 2, the United States announced List 3, which began imposing a 10 percent tariff on $200 billion of Chinese products in September 2018.  The List 3 tariffs were increased to 25 percent after negotiations between the two countries fell apart.

-List 4 could hit almost $300 billion more of Chinese products.  Part of the list (“List 4a”) went into effect on September 1 and imposes 15 percent tariffs on $112 billion of Chinese products.  The U.S. is scheduled to impose 15 percent tariffs on the remaining $160 billion of the list (“List 4b”) starting December 15.  

The Trump Administration has taken aggressive action to increase pressure on China that goes well beyond the Section 301 tariffs.  Since President Trump took office, he has targeted China’s steel and aluminum industries through global tariffs on these products. He has (at least temporarily) sanctioned major Chinese tech firms or restricted their ability to do business with the United States.  He has sanctioned Chinese individuals and entities connected to North Korea and others related to the treatment of the Uighurs in western China. He signed into law a major expansion of authority for the Committee on Foreign Investment in the United States (“CFIUS”), which has immediate and future implications for Chinese investment in the United States. 

Additionally, the Administration has moved closer to Taiwan. President Trump has authorized significant military sales to Taiwan, and as President-elect, he took a call from Taiwan’s leader Tsai Ing-wen, the first such call by a U.S. President or President-elect since the 1970s. The Administration has either directly or indirectly made clear that these restrictions, sanctions, and geopolitical relationships can be used as points of leverage in the trade negotiations.  

The Phase One Deal

Many details about what is included in the Phase One deal remain unknown.  In announcing the deal, President Trump said “We have a great deal. We’re papering it now.  Over the next three or four or five weeks, hopefully, it’ll get finished. A tremendous benefit to our farmers, technology, and many other things — the banking industry, financial services.”  As the two sides “paper” the agreement into finalized text, what is known about the deal has come largely from statements made by both sides. We know that as part of the deal, the United States will not pursue plans to increase the List 1-3 tariffs from 25 percent to 30 percent. We also know China plans to make large purchases of U.S. agricultural products.  

There are reports the Phase One deal could also delay or cancel the planned List 4b tariffs. Other reports suggest that China is seeking additional eliminations or reductions of the Section 301 tariffs.  

As for the structural changes to the Chinese economy sought by the Trump Administration, it seems as though they could be mentioned in the Phase One deal, but the real work will be addressed in subsequent phases.  

What Comes Next

The stars were aligning for President Trump and President Xi to sign the Phase One deal at the Asia-Pacific Economic Cooperation (“APEC”) meetings in Santiago, Chile this week.  Unfortunately, the APEC meetings were unexpectedly cancelled due to protests in the country, highlighting that a few weeks can feel like an eternity for sensitive trade talks.  

Assuming the U.S. and China can find another location, there are still risks out there that could prevent the deal’s signing.  

One big risk to the deal is the events unfolding in Hong Kong. The Trump Administration has been notably quiet on the protests, outside of President Trump expressing his faith in President Xi to satisfactorily resolve the situation.  The strongest statement from the Administration came from Vice President Pence, who recently said, “[T]he United States will continue to urge China to show restraint, to honor its commitments, and respect the people of Hong Kong.  And to the millions in Hong Kong who have been peacefully demonstrating to protect your rights these past months, we stand with you.”

According to multiple reports, President Trump pledged to Chinese President Xi Jinping that his Administration would remain quiet on the Hong Kong protests throughout the trade talks.  However, the Administration’s hand could be forced if the protests escalate into more sustained violence or if, as is expected, Congress passes legislation in support of Hong Kong with veto-proof majorities.  

Another risk is more vocal opposition from so-called “China hawks” that are dissatisfied that Phase One doesn’t get to the heart of the problems they have with China’s economic practices.  Senate Minority Leader Chuck Schumer (D-NY) cautioned the President that he “shouldn’t be giving in to China unless we get something big in return.” Senator Marco Rubio (R-FL) doubted China’s commitment to the deal long-term, saying, “I do believe that [China] will agree to things they don’t intend to comply with.” There are reports that China hawks within the White House are also pushing the President to reject the deal, notably Director of the Office of Trade and Manufacturing Policy Peter Navarro.  

A deal to end or pause the trade tensions between the United States and China would provide the private sector with more certainty as they make decisions about 2020 and beyond.  The Phase One deal looks to provide at least a pause, but geopolitical actions or domestic opposition could still derail the agreement before it is signed.   

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Rory Murphy is an Associate at Squire Patton Boggs, where his practice focuses on providing US public policy guidance, global cultural and business diplomacy advice that helps US and foreign governments and entities with doing business around the globe.