MENU

Panjiva_research_logo

3Q 2019 Policy Outlook: Change is The Only Constant

Brexit 143 China 2604 Cons. Discr. - Autos 954 Consumer Staples 625 Elections 106 European Union 660 G20 31 Info Tech - Comms Equip 172 Japan 518 Mode - Seaborne 1601 Outlook 68 Tariffs 1648 Theme - Rates 181 Trade Deals 907 U.S. 4633 USMCA 430 United Kingdom 284 Vietnam 288 WTO 103

The global trade policy landscape will continue to throw out risks for global supply chains throughout the rest of 2019. This report looks at 10 major events that could occur over the coming six months.

#1 The U.S.-China trade war is set to continue. Negotiations have restarted but the situation is similar to that in Dec. 2018 – talks could break down with little notice and tariff increases are still on the cards. An earlier-than-normal peak season for shipping may be one result from the ongoing uncertainty.

#2 The ratification of USMCA has been completed in Mexico but not in Canada or the U.S. The latter may jeopardize the process if tariffs on Mexican exports are applied in relation to migration policy where a decision could be made from Jul. 23 or Sept. 6. Exporters of laptops from Mexico worth $49.6 billion in the 12 months to May 31, including Foxconn and Wistron, would be exposed.

#3 A decision in the Trump administration’s section 232 automotive review isn’t due until November, but may trigger additional Congressional oversight. Carmakers in the meantime are following business as usual with imports of autoparts down 7.4% year over year in May with marked declines from Daimler and Toyota.

#4 Trade negotiations with Japan may accelerate after the latter’s elections with a tariff-focused deal covering five sectors the likely outcome. Meeting the President Trump’s targets for cutting the Japanese trade surplus may prove challenging – the surplus is equivalent to 73.5% of U.S. exports to Japan in the 12 months to May 31.

#5 EU-U.S. negotiations have taken three steps backwards due to the automotive tariffs, reformation of the European Commission and another round of aerospace-related tariff consultations. U.S. tariffs regarding the latter could spread to cover whiskey exporters from the EU led by Diageo and Pernod Ricard who had expanded shipments by 42.2% and 58.5% respectively in the 12 months to May 31.

#6 The EU-Mercosur trade deal that has just been negotiated needs to clear 31 national parliaments and EU parliament, assuming a completed legal text becomes available in a timely manner. A deal is needed given bilateral trade fell 3.5% year over year in the 12 months to Apr. 30.

#7 Brexit will remain a running sore for regional supply chains with uncertainty likely to last all the way to Oct. 31. British imports – especially of pharmaceutical products – have slumped since the most recent delay but will soon need to pick up.

#8 Within Asia the RCEP trade deal is unlikely to make much progress. India is in the midst of a post-election review of trade policy while Japan and South Korea are at loggerheads in a historic dispute that has now spread to the electronics industry. That comes as a trade recession looms with regional exports down 1.6% year over year in 1Q and by 3.2% in April.

#9 By December a solution to the WTO dispute panel’s future will be needed – there’s already 11 cases under review, 12 where the panel’s authority has lapsed and another 58 in flight. Without new dispute panel members the regulatory system underpinning global trade could fail.

#10 The logistics industry has started to see a recovery in profitability, but risks continue to swirl ranging from the geopolitical – for example the Straits of Hormuz crisis – to the economic with new fuel arrangements due to start from Jan. 2020.

U.S. China Deal – Open-ended uncertainty

The restart of negotiations between the U.S. and China following the G20 meeting between President Donald Trump and President Xi Jinping provides some hope of de-escalation. Yet, as outlined in Panjiva’s research of Jul. 1, the agreement is similar to those reached in May 2017 and Dec. 2018.

While an agreement is reportedly closer to be reached than before the lack of details on timing or structure of talks, combined with the sudden failure of prior rounds of discussions, leaves considerable uncertainty for industrial supply chains.

As a result it would not be a surprise to see an earlier-than-normal increase in shipments ahead of the peak import season. Panjiva data shows U.S. seaborne imports from all countries normally have a double peak in July / August and then again in October. It’s possible that the port congestion seen in late 2018 when inventory pre-loading ahead of tariffs coincided with peak season, will be repeated.

LOOKS LIKE A NORMAL YEAR OF GROWTH, FOR NOW

Chart segments U.S. seaborne imports by month.  Source: Panjiva

USMCA – All down to Dems, and migrants

Prior threats made by President Donald Trump to apply tariffs on Mexican imports in relation to migration policy continue to hang over North American supply chains. Assessments of progress by the Mexican government to cut northbound migration are likely around 45 days and 90 days after a preliminary deal was reached – namely Jul. 23 and Sept. 6.

The possibility of tariffs will hang over imports of consumer electronics going into the peak season including shipments of computers, televisions and phones. Leading shippers of laptops from Mexico shipped $49.6 billion of laptop computers to the U.S. from Mexico in the 12 months to May 31. So far there’s been no sign of a rush to increase imports with shipments unchanged versus a year earlier.

The performance between manufacturers has been marked though with Hon Hai Precision accounting for 28.7% of shipments in the 12 months to May 31, and having increased its exports by 28.9% year over year in May. Number two exporter Wistron meanwhile, with an 8.1% share cut its shipments by 7.6% in May after a 15.0% slide in the prior three months. Lenovo is still a distant third with 4.7% of exports despite growth of 12.3% year over year in May and 115.3% in 2018.

While the Mexcian Senate has already ratified USMCA the application of tariffs could cause a change of heart, as well as causing problems in the U.S. House of Representatives. Passage through the House will depend on whether the Democratic Party caucus will approve it when enacting legislation is brough, which could be as soon as Jul. 9.

While negotiations between Democrats and the administration are ongoing regarding details ranging from labor rights to pharmaceutical patents success if by no means guaranteed.

HON HAI HEADING HIGHER

Chart segments Mexican exports of computers to the U.S. by shipper for Hon Hai, Wistron and Lenovo on a monthly and three-month average basis.  Source: Panjiva

Autos section 232 – Still a crash waiting to happen

After more than 12 months since the Jun. 2018 launch of the section 232, “national security”, review of the automotive sector a decision has still not be taken by the Trump administration on whether to apply tariffs or not. A decision on whether to apply tariffs is due by mid November, and the administration has previously shown a willingness to use the maximum timeframe allowed in order to use the tariffs as leverage in other trade negotiations.

The review has been received poorly in the U.S. Congress and has triggered the arrival of bills in both the House and Senate to increase oversight of the administration’s use of section 232. Yet, those seem unlikely to get anywhere given cohabitation and the forthcoming elections.

The threat of tariffs will nonetheless overshadow trade talks with the EU and Japan as well as introduced planning challenges for the automotive industry. 

So far though car-makers have continued with business as usual, including a cutback in seaborne imports of components by 7.4% year over year in May after a 0.4% increase in the prior three months. That’s been led by a 32.7% slump in shipments by Daimler and a 25.4% cut by Toyota in May. Even Nissan, which had previously been increasing its shipments, has made a cut of 7.8%.

DAIMLER DIVING, TOYOTA ON THE SKIDS

Chart segments U.S. seaborne imports of automotive components by shipper for Daimler, Nissan and Toyota on a monthly and three-month average basis.  Source: Panjiva

U.S.-Japan trade deal – Momentum matters for TPP-lite

Following the G20 summit it would appear that out of all the trade negotiations the U.S. is engaged in it will be those with Japan that have the highest chance of reaching a successful conclusion this year. So far there are indications that this will take the form of tariff reductions for a handful of sectors rather than being a full services and regulations deal like the Trans-Pacific Partnership which President Trump previously withdrew from.

Yet, success will require more than just a piece of paper. Ratification in Japan will depend on the Abe administration’s position in the Diet following elections on Jul. 28.

Additionally the deal will need to firmly address the Trump administration’s target to cut the Japanese trade surplus with the U.S. That reached the equivalent of 6.69 trillion yen ($61.9 billion) in the 12 months to May 31, Panjiva analysis of Japanese government data shows. Cutting that meaningfully could require a massive increase in Japanese imports – indeed cutting it by half would require a 36.8% increase in Japan’s imports from the U.S.

RISING IMPORTS YET TO MAKE A MEANINGFUL DENT IN THE SURPLUS

Chart segments Japanese trade with the U.S. between imports and trade surplus on a monthly and 12-month average basis. Calculations include Ministry of Finance data.  Source: Panjiva

EU-U.S. trade deal – Two step backwards, one step back

A trade deal between the EU and U.S. has never looked further away, with at least three major hurdles to overcome at this stage. From a timing perspective the reformation of the European Commission will mean there is technically no-one for the U.S. to negotiate with until November. That coincides with the timeframe for the automotive section 232 review outlined above which has already attracted a hostile response from the European Commission.

Third is the ongoing spat regarding the aerospace sector where the WTO has declared both sides have provided support for their “national champions” Airbus and Boeing. That’s led to a round of escalating tariffs, most recently with the U.S. Trade Representative identifying $4 billion of products to assess for retaliatory tariffs on top of $11 billion identified in April.

The new round of products covers 89 categories which could have tariffs of up to 100% applied.  Panjiva analysis shows U.S. imports of those products were nearer $4.70 billion in the 12 months to Apr. 30.

The biggest product line included is whiskey, accounting for $2.19 billion of imports or 46.6% of the total. That’s followed by metals (mostly copper) equivalent to 14.6% of the total, meat (frozen pork) equivalent to 8.4% as well as pasta (7.7%) and coffee (4.6%).

AMERICAN IMPORTS OF EU WHISKEY HAVE BEEN BUZZING

Chart segments U.S. imports from the EU targeted for new tariffs by product category.  Source: Panjiva

The new list is a clear example of tit-for-tat tariff application. Leading whiskey shippers to the U.S. are paying the price for EU tariffs on bourbon exports, including Brown Forman’s Jack Daniels that were applied as part of the earlier retaliation for U.S. section 232 steel and aluminum duties.

U.S. seaborne imports of whiskey from the EU had been accelerating. Imports by Diageo, the number one shipper by volume, were up 42.2% year over year in the 12 months to May 31. Those by Pernod Ricard soared 58.5% higher at the expense of Bacardi which saw a 33.9%. It’s worth bearing in mind those figures include shipments from Scotland, which presumably will not be eligible for those tariffs should Brexit proceed (see more below).

WHISKEY SHIPMENTS SOON TO BE WRECKED ON TARIFF ROCKS

Chart segments U.S. seaborne imports of whiskey from the EU by shipper for Bacardi, Diageo and Pernod Ricard on a monthly and three-month average basis.   Source: Panjiva

EU-Mercosur trade deal – Done doesn’t mean done, could come undone

The outgoing European Commission had one last big deal to announce with the EU-Mercosur trade deal. That’s far from completed though and so it’s too early to count on the benefits given: 

the legal text has yet to be fully framed; ratification is required through the 31 post-Brexit constituent countries plus the European Parliament; most tariff benefits are being phased in over several years; and quotas will also be applied at least in the interim, as is the case for autos. 

The parliamentary process could prove the undoing of the deal – an outcome that was only narrowly avoided in the similarly agriculture-focussed CETA deal with Canada. Uncertainties regarding the voting patterns in the newly reformed European Parliament are a particular concern.

Panjiva analysis of Eurostat data shows total trade between the two regions was worth 85.3 billion euros ($96.3 billion) in the 12 months to Apr. 30, down 3.5% year over year. The deal is essentially between Brazil and the EU though – the pairing accounted for 75.2% of the total bilateral trade, followed by Argentina with 19.6%.

Most multinationals already have well-established regional supply chains in both countries, limiting the potential upside from Trans-Atlantic trade outside of tariff reductions.

BALANCED, BUT LACKLUSTER, TRADE

Chart segments EU trade with Mercosur by direction. Calculations based on Eurostat data.  Source: Panjiva

Brexit – Down to the wire, assume the worst

Negotiations to avoid a “no-deal” Brexit are likely to go to the last minute of October 31. At a minimum there’s still no certainty as to who the new Prime Minister, who will steer the process, will be. The leading candidates – Boris Johnson and Jeremy Hunt according to betting markets – are both committed to a “no-deal” Brexit if the EU doesn’t renegotiate the Withdrawal Agreement and / or Parliament refuses to pass it.

Supply chain managers will have to continually assess the Brexit process – in theory October 31 is a deadline not a point-in-time for a decision and so Brexit or a deal could be reached at any time. The impact of uncertainty can be seen in the past two months official data for trade in the U.K.

Imports of pharmaceuticals and other healthcare products were slashed in April with a 28.3% year over year reduction. That included a 31.9% drop in shipments from the EU and 41.2% from Switzerland – part of the European Economic Area. Imports from the rest of the world actually increased by 10.6%.

UNHEALTHY HEARTBEAT FOR BRITISH PHARMACEUTICAL IMPORTS

Chart segments British imports of medicines and other healthcare products by origin on a monthly and three-month average basis. Calculations include Office of National Statistics data.  Source: Panjiva

Intra-Asia trade deals – Busy going nowhere as Japan and South Korea fight

The latest round of negotiations regarding the Regional Comprehensive Economic Partnership (RCEP) in Asia, including China, Japan, India and South Korea among others, came with a commitment to completing a deal in 2019, Xinhua reports. Sadly that’s been an annual occurrence for at least the past two years.

The next waymarker for the negotiations will be a ministerial-level meeting scheduled for the Sept. 3 to Sept. 11 ASEAN summit. Progress on RCEP, and similar extensions to the CPTPP trade deal, have proven glacial in part due to the sheer number of countries – and issues – that have to be negotiated.

Indian trade policy for example has been a stumbling block for two reasons. First is the uncertain nature of the Modi administration’s trade policies following the election. Historically it has been highly interventionist, causing friction in particular with China. Second is that it’s recommendation so far, including for rules of origin, appear to be fundamentally different to those aspired to by other RCEP participants according to Economic Times

A tougher issue for both RCEP and “CPTPP+” is the worsening spat between Japan and South Korea. The Japanse government has imposed export restrictions on three materials used in the manufacture of displays and semiconductors to South Korea. That’s reportedly due to the worsening relations relating to the 1910 – 1945 occupation of the Korean peninsula by Japan, according to Yonhap.

South Korea will appeal to the World Trade Organization, though that will be a slow process. In the meantime exports of semiconductors from both Japan and South Korea have been a steady decline for several months.

The slowdown in semiconductor trade and the lack of progress towards a free trade deal comes as trade across the region is already slowing down. S&P Global Market Intelligence shows there has been a coordinated slowdown in Asia-wide export growth with a 1.6% drop in exports in 1Q.

That’s been followed by a 3.2% slide in April and with seven of 11 countries that have reported data for May having seen a decline. Vietnam has been the only significant outlier as the result of a shift in manufacturing out of China as a result of the trade war with the U.S.

ASIAN TRADE RECESSION APPROACHES

Chart segments year over year change in exports by region. Calculations based on S&P Global Market Intelligence data.  Source: Panjiva

World Trade Organization – Unappealing prospects

The mandate for the World Trade Organization’s dispute settlement appellate body lapses on Dec. 3 after nearly 18 years of negotiations, Inside Trade reports. There are currently 11 cases in appeal with another 12 where authority for panel has lapsed and 57 where the review process has started.

The challenge is that the dispute panel requires three members to be quorate and the U.S. is insisting on a reformation of rules applying to the panel before allowing new members to be voted on.

In many regards the WTO dispute is emblematic of the dichotomy in trade policy being seen globally. There’s been several trade facilitating measures – including new trade deals, bilateral investment treaties and reduced tariff rates – in much of the world, offset by restrictions applied by the U.S. and India among others.

In the 12 months to May 31 the balance of restrictive and facilitating measures was neutral across the G20 according to a WTO report in terms of the number of measures. Yet, the net value of new restrictive measures covered $817 billion of bilateral trade versus $613 billion of facilitating measures – global trade is becoming less free.

TRADE MEASURES BALANCED BY NUMBER NOT BY VALUE

Chart segments new G20  trade measures according to whether they restrict or facilitate global trade. Calculations based on World Trade Organization filings.  Source: Panjiva

Logistics – More money, less certainty

The logistics industry is at the forefront of managing the supply chain uncertainties resulting from the swirling trade policy environment. Yet, it also faces its own specific political and regulatory issues in the coming months which could offset the improved profit margins that were achieved in the first half of the year. Uncertainty over volumes to be transported has led to a later-than-usual pickup in seasonal rates though.

From a geopolitical perspective there is a clear risk of conflict around the Straits of Hormuz. That could disrupt trade in both energy and non-energy commodities and has already led to higher insurance costs and the application of war risk surcharges. 

Costs associated with environmental improvement will also beset the shipping industry from January 2020 as a result of the IMO’s new regulations regarding sulfur emissions. Even once those are passed – a delay looks unlikely – the industry will need to start planning for tighter greenhouse gas emission rules.

PEAK SEASON PICKUP SLOWER THAN PRIOR YEARS

Chart segments China outbound container shipping rates by week during the year. Calculations based on Shanghai Shipping Exchange data.  Source: Panjiva

Copyright © 2020 Panjiva Supply Chain Intelligence, a product offering from S&P Global Market Intelligence Inc. All rights reserved.