Q&A: Dr. Walter Kemmsies, The Kemmsies Group

Following comments made by United States Trade Representative Katherine Tai earlier this week, regarding the White House’s new approach to the United States-China bilateral trade relationship, Logistics Management Group News Editor Jeff Berman caught up with global trade economist Dr. Walter Kemmsies, president of The Kemmsies Group, a provider of industrial and logistics real estate brokerage and consulting services. Kemmsies is widely-known as one of the foremost experts on ports, rail, and infrastructure in the U.S., specializing in demand forecasting, maritime and overall global trade regulatory issues, public and private port and infrastructure financing, and long-term strategic planning and capital investment.

Kemmsies provided Berman with an overview of the USTR’s comment, the state of U.S.-China trade, as well as other topics. Their conversation follows below.

LM: What, in your opinion, are the big takeaways from USTR Katherine Tai’s comments?

Kemmsies: The first thing is that way back in the 1990s, China promised the U.S. and the world that it would do a lot of things, mostly related towards orienting the economy to be market-driven, as opposed to command economy-driven, meaning the government making the decisions. None of the market reforms that were promised were ever done. What the USTR pointed out is that the U.S. has protested that for the better part of 20 years now. People forget that President George W. Bush threatened to declare China a currency manipulator, which would have automatically imposed a lot of tariffs on imported Chinese goods. But he did not, because China would say “no, we are reforming and are working on it, give us a break,” and they never did. Under President Obama, dealing with China, China never made good on its promises. Obama tried a different approach, which was to create the Trans Pacific Partnership (TPP), which included every Asian nation except for China. That did not go anywhere and so then under President Trump we saw tariffs.

LM: How does this all reconcile with the USTR’s comments?

Kemmsies: What she basically said is that the U.S. is not backing down unless China starts becoming more market-oriented, and as opposed to stepping backwards like it has been, the tariffs are likely to remain and things could get even tougher on importing goods from China. That was how I read the message, and I think I heard it pretty loud and pretty clear. So, I would expect more measures taken to reduce U.S. dependency on Chinese-imported goods.

LM: USTR noted how China has leveraged its position for certain sectors like trade and agriculture to its advantage, in different ways. That said what sectors do you think have the most on the line, as it concerns the relationship between the U.S. and China?

Kemmsies: It is hard to talk about it in terms of U.S.-China, because it is a global world. So, when China says it is not going to buy soy from the U.S., it still needs to buy soy but will buy it from Brazil. China then bids high to buy Brazilian soy and tells America to take a walk, Now, the people Brazil was selling soy to do not have Brazilian soy, so who do they go to? They go to the U.S. It becomes a big [switching] game, along the lines of “I don’t buy from you; I buy from him, and I don’t sell to you, but I sell to them.” Consequently, that is what happens, but what it makes soy do is make soy more expensive for China, because it had to bid up to buy the other country’s soy. And for the other people who were buying soy from Brazil, they now have to pay more to get the soy from the U.S. All it does is it raises everybody’s costs, and it accomplishes nothing.

LM: Where does this leave things for China?

Kemmsies: Well, the fundamental problem for China us that it is not really a market-driven economy, and in the long run it is very hard for an economy to survive healthfully if it does not adapt to market circumstances. So, all those big steel producers in China are subsidized.

LM: How so?

Kemmsies: The Chinese government does need a lot of steel to build more railroads and roads and other infrastructure, because it is not yet a developed country, at least not in that sense. It makes sense that it has a lot of steel production capacity, but unfortunately whenever a lot is consumed domestically, a lot of the production ends up being dumped in the world market. That is a well-known problem within the steel industry. Their number one issue is that there is excessive world production capacity, mostly coming out of China. And with China’s central government trying to dictate things—instead of the market—you end up with an economy that is very dependent on producing goods that mattered, say, in the 1950s, more so than in the 21st century. If everybody went by a market system, it would be a lot easier to sign trade agreements and check that trade is fair. But what you have is a conflict of two systems. You have a central government-directed system in China, and a market-based system in the U.S. It is interesting that we get these remarks from OPEC that would like the U.S. to reduce its frack oil production.

LM: How would that work?

Kemmsies: We cannot do that, as it is a private sector thing, and the private sector chooses to produce as much as it does. If the government does not like it, there is not much the government can do about that. It cannot stop them, whereas in the Middle East and Russia the government seems to have to capacity to turn off and turn on the ability to produce. That is the other thing the USTR was alluding to, in that a lot of cooperation is needed here if China is going to persist with this central government interventionist policy towards its economy.

LM: It seems like the timing for what is happening now with China is less than ideal, given how imports are still rising and ports are still hampered by ongoing congestion issues. Is that fair?

Kemmsies: Well, we still have people spending. On a monthly basis, at the retailers, sales are up 20% per month now then what they were, on average, in 2019. Those retailers import most of the stuff that they sell, and that is why we see port volumes up 20% over 2019 levels. Until the consumers stop buying so much stuff, this craziness is not going to go away, and the volatility will continue. The reason for that is if you look at Asia, different ports have had to shut down, at different times, because of the pandemic. The number one solution to the problem for consumers is to get away from Amazon. Don’t buy anymore stuff, please. The data for September says consumers did both. They spent more money on services and still continue to buy more stuff at the retailers. There is no end in sight to this yet.

LM: When do you think that could happen?

Kemmsies: Maybe by the second quarter of 2022 of we don’t have any more stimulus, but then we will start having to worry about the ILWU (International Longshore & Warehouse Union) expiring on June 30, 2022.