Trade: A Deeper Dive Into an Altered World Order

The United States and China recently imposed import tariffs on $60 billion worth of each other’s products and may add more in coming weeks. The U.S. has also threatened tariffs on imports from Europe, Canada and Mexico—old trading partners who likely will respond in kind.

A recent logistics study conducted by the industrial real estate firm CBRE notes that the new tariffs targeted at high-tech Chinese goods—such as industrial robots, radio transmitters, aircraft parts, computer hardware and electric cars— are designed to put economic pressure on Beijing’s “Made in China 2025” program, a Chinese government initiative to move the economy higher up the manufacturing value chain.

Beijing responded immediately with a 25% tariff on 545 U.S. products worth $34 billion, largely targeting the automobile and agriculture industries. According to Tim Savage, senior managing economist and principal data scientist at CBRE Econometrics Advisors, much useful news has been lost in the rhetoric.

“It’s important to remember that China entered the World Trade Organization in the 1990s, which was the same decade that the North American Free Trade Agreement was negotiated,” says Savage. “It takes many years to reverse these developments.”

So, while trade tensions are not to be entirely discounted, the focus should really be on other issues, Savage adds, such as automation and the ongoing dynamics of e-commerce and last-mile delivery.

“A worst case scenario would be for the U.S. to completely withdraw from NAFTA and to insist that China be ejected from the WTO— but this is purely hypothetical,” he concludes. However, no such dire tableaux is contained in another new study produced by industrial real estate giant Prologis.

The research paper, titled “Industrial Real Estate: Isolated from Recent Trade Action,” notes that while U.S. seaport markets have the biggest exposure to global trade, import centers are still only a fraction of total occupied space in these markets.

Among Prologis’ U.S. markets, Southern California and New Jersey contain the highest proportion of space used as import centers, with 25% or less. 

Researchers acknowledged however that major intermodal markets do have vital links to global trade. Both Chicago and Dallas, for example, represent key hubs for imported containers moved immediately out of the port via a combination of rail and truck without pausing at a local logistics facility.

“While these markets are positioned along global trade routes, they are also major consumption centers, with a combined population of nearly 60 million. Accordingly, the majority of space is used to serve local and regional consumption rather than acting as waypoints along global trade routes,” Prologis researchers concluded.

Walter Kemmsies, Ph.D., JLL’s managing director, economist and chief strategist, says that his firm has yet to produce a similar body of work on the impact of tariffs, but agrees with most of the findings gathered by CBRE and Prologis.

“The main take-away for shippers now is for them to keep their options open,” says Kemmsies. “Too much reliance on one or two ports, for example, is not smart. As all this tariff talk is reaching a crescendo, we may also expect ocean and air carriers to reconfigure their deployments and schedules. Our advice to them is simple: Be prepared.”

Mitigating risk

Last month, President Trump and European leaders agreed to negotiate a resolution over the steel and aluminum tariffs disputes, but the lack of clarity on the issue may already be disrupting U.S. manufacturing supply chains.

The global regulatory risk management firm Alvarez & Marsal’s (A&M) is also telling shippers that the time for managers to develop new business plans is now. A&M’s managing director Geoff Pollak points to the fact that both the George W. Bush administration and that of Barack Obama briefly imposed tariffs on these commodities to address trade imbalances.

“However, it was not a sweeping global policy like the one President Trump is promising,” says Pollak. “Some companies may be numbed by past pain, and have forgotten how disruptive this can be to their supply chains.” In the past, many U.S. manufacturers moved production to emerging nations with lower wages to save on cost.

Today, however, these same companies must now consider where they will face more exposure to risk from retaliatory tariffs. “No one expected trade conflicts to emerge with countries in the EU because of long and traditional relationships formed over a number of years,” notes Matt Stanfield, A&M’s senior director.

“However, the threat of revamping the duty structures on automobiles, for example, upsets that whole legacy.” Bechtel Corporation, Fluor, and Kiewit are among those global giants in the building and construction industries that are most vulnerable, says A&M. In the automotive sector, it’s General Motors, Ford, and Fiat Chrysler. 

“Consumer appliances made by Hitachi, Whirlpool and Electrolux have also warned shareholders about this issue,” says Stanfield. As a consequence, A&M is advising managers to reassess their sourcing, procurement and manufacturing strategies to identify and mitigate exposure.

This involves reviewing current contracts and “supplier engagement” beyond the 12-month deal. “We also advise the development of ‘what if ’ models to anticipate yet more trade compliance barriers,” says Stanfield. “Manufacturers in all these sectors should be asking themselves ‘what are my alternatives?’”

What next?

While shippers continue to deal with risk related to distribution, leaders of the world’s central banks are warning that the escalating trade tensions could “ricochet through financial markets and hurt the world economy,” says FTR analyst Steve Graham.

“The rising tensions have made it more difficult to start moving away from the easy money policies introduced at the beginning of the Great Recession,” Graham adds. Avery Vise, vice president of trucking for FTR, agrees, noting that among the multiple impacts anticipated by trade policies might include inflation.

“And if that happens, it will certainly be felt in the supply chain sector, as consumer demand falters and less freight moves on our roads and railways.” Furthermore, Vise takes issue with analysts who describe current negotiations with China as a chess match.

“It’s more like a game of ‘chicken,’ to me,” he says. “Neither side wants to back down.” Daniel Krassenstein, director of Asia operations at bulk packaging technologies provider Procon Pacific, notes that China has demonstrated its willingness to endure hardship in the past, and will let its economy “crash” before capitulating.

“U.S. trade policy is not in alignment with our Canadian allies, which also hurts us,” he says. “For example, when China found our lobsters too expensive, they began sourcing them from Newfoundland to avoid tariffs.”

Krassenstein also contends that a trade war will only serve to hasten a trend now set by China to manufacture goods in Vietnam and India. “These are the low labor cost countries now,” he adds. “But let’s keep an eye on Indonesia, Ghana, and Ethiopia as well.

The global value chain is constantly shifting, and U.S. shippers have to anticipate changes in trade policy to stay agile and responsive.” Jeff Weiss, a partner at the law firm Venable and former deputy director for policy and strategic planning at the U.S. Department of Commerce, describes the current trade situation as “fluid,” adding that it’s too soon to panic.

“But personality is policy,” he says. “Our president is using his own tough bargaining methods to leverage these global deals. Unfortunately, logistics professionals must adjust to these changes because our nation doesn’t integrate trade and transportation departments like other countries do.”

For the time being, however, The Macroeconomic Advisers of IHS Markit are relatively sanguine about any immediate danger related to current trade negotiations. “Second quarter GDP growth was reported at 4.1% in the Bureau of Economic Analysis’ advance estimate,” says IHS Markit economist Joel Prakken.

This was 0.7 percentage point below the firm’s previous base forecast, but the composition of growth was more favorable to the near-term outlook than previously estimated. “For U.S. shippers,” adds Prakken, “this sets up inventory restocking as a very likely contributor to GDP growth in the second half and beyond.”