2020 Outlook: New Year, New Frenemies – U.S. Trade Policy — Panjiva
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2020 Outlook: New Year, New Frenemies – U.S. Trade Policy

Ags - Softs 103 Brazil 304 Brexit 116 China 2230 Cons. Discr. - Autos 803 Cons. Discr. - Durables 214 Cons. Discr. - Retailing 228 Consumer Staples 508 Elections 65 European Union 524 Health Care 146 India 365 Indonesia 60 Info Tech - Tech Hardware 509 Japan 459 Outlook 61 Tariffs 1514 Thailand 92 Trade Deals 813 U.S. 4002 USMCA 404 United Kingdom 240 Vietnam 236

U.S. trade policy has become steadily more protectionist under the Trump administration. The coming year may bring a resolution to relations with China, Japan, Canada and Mexico but may be the year of heightened tensions with the EU, U.K. and emerging markets across southeast Asia. Overhanging all those negotiations however are November’s elections.

Backdrop – Elections get in the way

The impact of trade deals and the trade war may be a centerpiece of electioneering around the Trump administration’s economic record, particularly if there’s a downturn. The Chinese government may have designed their reprisals against U.S. section 301 tariffs that way.

Panjiva analysis shows that states that voted for President Trump saw a 0.4% year over year drop in exports to China in the 12 months to Oct. 31 for each percentage point of Trump’s margin of victory.

North Dakota and Wyoming were hit the worst, losing 70.1% and 62.7% of exports to China respectively – both voted solidly for Trump. The case may become interesting for more marginal states. For example, Florida and Wisconsin which were both +1% for Trump have seen exports slump by 35.8% and 20.4% respectively. 

MARGINALS MAY SEE TRADE POLICY BECOME AN ISSUE 

Chart compares change U.S. imports from China in the 12 months to Oct. 31 to margin of President Trump’s victory in 2016 elections.  Source: Panjiva 

China – It’s about time, for decoupling

As discussed in Panjiva’s research of Jan. 16, the Phase 1 trade deal between the U.S. and China is unlikely to lead to a phase 2 deal. Indeed, from an election perspective it’s more important that President Trump shows success in his trade policies without losing the “tough on China” mantle to his competitors. 

That’s one reason tariffs will remain place along with the resulting drag to trade. U.S. imports of list 1 to 3 products fell 35.6% year over year in November while list 4A products saw a 29.2% slump. The degree of changes would suggest supply chains are already decoupling between the U.S. and China.

Yet, if talks to reach a phase two deal collapse – or if compliance with a phase 1 deal fail – we’re likely to see an acceleration of non-tariff measures between the two countries. The basis of the trade war between the two countries is the undeclared technology arms race between the two countries.

That’s driving new Commerce Department rules that will create a CFIUS-alike for technology exports. The implementation of such policies have already led to limits on exports of AI-related software code. When combined with the continuation of existing tariffs the risks of a supply chain decoupling between the two countries will increase.

Another complicating factor for a wider trade deal between the U.S. and China is that any future deal between any part with an emerging market will require approval from the other two. That’s unlikely to be the case while Canada’s spat with China continues.

TARIFFS ALREADY LEADING TO SUPPLY CHAIN CHANGES

Chart segments U.S. imports from China by section 301 tariff line.  Source: Panjiva 

USMCA – All over bar the Senate

The big success for the Trump administration in late 2018 was the agreement to reform NAFTA into the U.S.-Mexico-Canada Agreement. It’s taken over a year to complete the passage of the enabling legislation into law. That’s a cautionary tale for those looking to sign quick but comprehensive trade deals. 

There are a few mechanical steps left for passage in the Senate and of course the President’s signature. Those might be delayed by the impeachment trial but unlikely to be abandoned. The deal also needs to be approved in Canada.

The biggest impact at the industrial level will likely be on the automotive sector. New rules of origin will push automakers to bring more production to North America as well as specifically bringing some part of their supply chains wholly to the U.S. A particular area of focus – and sign of compliance – will be in the steel and aluminum segment where there are strict “pour in America” rules.

Implementation may already have begun. The U.S. automakers have already cut U.S. seaborne imports of steel by 24.5% year over year in the three months to Nov. 30, Panjiva shows. That’s been led by a 33.9% drop in shipments linked to Toyota and a 61.4% slide in imports associated with Ford. In the near-term though a bigger issue may be the challenge of weakening demand after a decade of expansion.

FORD, TOYOTA RAPIDLY CHANGE STEEL SOURCING

Chart segments U.S. seaborne imports of steel by automaker.  Source: Panjiva 

Europe – Trade war in waiting

The most disruptive trade policy development of 2020 could be a trade war between the U.S. and European Union. Relations could easily dissolve as a result of the implementation of digital services taxes – initially in France – as well as the implementation of a European carbon border tax as part of the EU green deal. Even a basic agreement on the terms of a wider trade deal could prove controversial.

So far the main loser in EU-U.S. rivalry has been the luxury goods sector with tariffs applied to a wide-range of products. There’s no reason to suspect it won’t continue to be a major target for further tariff salvoes from the U.S.

The largest single sector of imports is wine / spirits with $11.7 billion of imports in the 12 months to Nov. 30 after a 6.1% expansion in shipments by companies including LVMH, Diageo, and Pernod.

Beverages are followed by personal care with $5.4 billion of shipments where shipments linked to shippers including LVMH, Coty and Interparfums only grew by 0.6%. In third is food including cheese and chocolate imports worth $1.71 billion. Shipments by firms such as Barry Callebaut, Lactalis and Ferrero have already dropped by 2.3%.

BEVERAGES CONSUMPTION GROWING AHEAD OF TARIFFS

Chart segments U.S. imports from the EU by product (HS-4) on a monthly and three-month average basis.  Source: Panjiva 

United Kingdom – Unhealthy attraction

A major justification for Brexit is the ability of the U.K. to deliver independent trade deals with the rest of the world. Prime Minister Boris Johnson will therefore be under pressure to deliver a deal with the U.S. in short order.

A major stumbling block will be the health care sector. There’s popular support for the state-run NHS and tremendous resistance to providing foreign access. Rules on harmonization of standards will run into potential conflicts with an EU trade deal while convergence in drug prices will be a non-starter for the cash-strapped NHS.

The opportunity on the U.K. side is improved access to U.S. health care provision. In the pharmaceutical sector there’s already been a 10.3% year over year decline in exports from the U.K. to the U.S. to reach $3.65 billion in the 12 months to Nov. 30, hurting firms including Reckitt Benkiser, Norbrook and GlaxoSmithKline.

There’s also been a 1.6% slide in exports of medical equipment to $653M while shipments of implants slumped 18.5% lower to $247M and includes devices makers such as Smith & Nephew, Elekta and Varian.

BRITISH HEALTHCARE EXPORTS TO THE U.S. LOOKING SICKLY

Chart segments British exports to the U.S. by sector (HS-4).  Source: Panjiva 

Japan – Ghost in the USMCA-CPTPP shell

The initial U.S.-Japan “mini deal” will be developed into a fuller form. The U.S. Trade Representative has stated that “both Governments will begin consultations early next year in order to enter into further negotiations on a broader trade agreement“. The main challenge will come from a likely Japanese insistence on removal of all automotive tariffs. There’s also going to be the difficulties associated with harmonizing rules alongside those of USMCA and CPTPP given Canada and Mexico are members of both while the U.S. leads the former and Japan the latter.

There’s already been a decline in Japanese exports of autoparts to Mexico of 12.1% year over year in the 12 months to Nov. 30 whereas exports from U.S. rose by 2.3%. Further limits may be driven by the USMCA rules of origin outlied above. The cutback is mostly down to reduced shipments by Nissan and Mazda of 29.6% and 29.5% respectively. Toyota has been an outlier with a 15.4% improvement.

NISSAN, MAZDA CUT BACK AUTO PARTS EXPORTS TO MEXICO

Chart segments Mexican imports of auto parts from Japan by shipper on a monthly and three-month average basis.  Source: Panjiva 

India – Few ways to curry favor

Unlike other deals, the U.S. negotiations with India may not result in a mini deal based around commodity purchases and minor policy changes. Indeed, India has been going through its own round of protectionism, with the recent withdrawal from RCEP showing an unwillingness to participate in tariff cutting trade deals. The U.S. may instead attempt to strike an early-win deal targeting areas with high tariff burden. 

Shipments of cotton, with a tariff rate of 25%, and nuts which have a rate of 41% could be enticing targets that help President Trump’s voting base in rural areas. Those are significant exports from the U.S. as well, with cotton exports to India worth $540 million dollars and nut exports $820.0 millions dollars in the twelve months to Aug 30. 

Other areas of high tariffs in India may be a harder fight. Vehicles carry a 125% rate with shipments of just $45 million and a strong Indian domestic industry. Denatured alcohol is taxed at 90% though shipments are still worth $340 million.

NUTS, COTTON AND ALCOHOL OFFER BIGGEST OPPORTUNITIES FOR TARIFF CUTS

Chart segments Indian imports from the U.S. and related tariff by product in the 12 months to Aug. 31.  Source: Panjiva 

Southeast Asia – Convenient enemies

The “mini-Chinas” in south-east Asia have picked up some of the gap where Chinese exports to the U.S. have fallen in dollar terms by $64.9 billion in the 12 months to Oct 31. Vietnam has been the largest with a 28.8% year over year increase in imports equivalent to $14.2 billion dollars. Imports from Cambodia grew by $1.3 billion dollars, or 36.8% year over year followed by increased exports from the Philippines, Thailand, and Malaysia also showed increases in imports.

While these countries have not offset the decrease in imports from China, the large relative increase in shipments may attract the attention of the Trump administration which is already looking for new targets for trade policies – including a potential Reciprocal Trade Act and further section 301 reviews. 

Many countries are therefore following self-defense strategies. Vietnam has been most active with government attempts to limit transshipments, while the Malaysian government has also shown signs of action.

VIETNAM THE BIGGEST WINNER FROM THE TRADE WAR

Chart segments U.S. imports by origin in the 12 months to Oct. 31.  Source: Panjiva 

GSP reviews – Gotta show potential for a trade deal

Similarly, the administration has already been active in reviewing the Generalized System of Preferences. That’s a wide-ranging program of reduced tariffs for 120 countries and 3,500 products as of Nov. 2019. Several countries are already under review plus withdrawal is being used as part of wider trade discussions. 

There’s already been a drop in U.S. imports of GSP-benefiting goods with a 7.1% year over year slide to $21.3 billion in the 12 months to Nov. 30. India and Turkey have already GSP access removed. Cambodia may lose access due to concerns about democratic freedoms while Thailand faces a partial withdrawal on labor rights. Expect more of the same with 9 further reviews already underway.

Thailand is still at risk as the largest beneficiary of GSP access with $4.76 billion covered, representing 16.9% of Thailand’s total exports to the U.S. There’s been a surge of 11.1% year over year in Thai GSP exports. 

Other countries at risk include Indonesia with $2.54 billion of GSP exports after growth of 19.5% year over year, though its total exports to the U.S. fell by 6.0% over the same period. Brazil is also a big GSP exporter at $2.33 billion though there was a 6.9%. Finally the Philippines had $1.57 billion, or 14.0% of its total trade, after growth of 8.6% year over year. 

THAILAND AND CAMBODIA HAVE MUCH TO LOSE IN GSP STATUS

Chart segments imports of GSP-eligible products by origin in the 12 months to Oct. 31.  Source: Panjiva 

Update (Jan. 16) Report was updated to include link to phase 1 trade deal research.

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