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Tit for tat US – China tariffs stoke trade war fears for shipping

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Tariffs, or rather the prospect of trade disruptions because of them, are “rocking the boat” in a big way.

Equity markets, which rose steadily during the first year of the Trump administration, are now gyrating by moves of sometimes 2% daily, upwards and downwards, depending on sentiments about an upcoming trade war. Like everything in this Trumpian era of news and dissemination of ideas, the dominant voices filtering through all the noise lurch from one extreme to another.

The “doom and gloom” camp, which includes many prominent members of Trump’s Republican faction, invokes the Great Depression years of the 1930’s, the time of Smoot Hawley tariffs, and worldwide retaliations that choked trade.

The “don’t worry” camp insists that Trump’s loud calls for extensive tariffs to punish goods dumpers are simply a political gambit, an opening salvo in a bargaining process that will target a few egregious offenders in narrow categories, but leave the trade lanes basically wide open. Discussions are complicated - Trump’s base in manufacturing states, including the “Rust Belt” which once dominated steel production, could benefit, yet other large industries, for example, energy producers/ transporters who import steel pipes, would suffer due to higher input costs.

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Economic slowdown worries

At this point, in early April, the worriers’ concerns about economic slowdowns resulting from restrictions on international trade are appearing increasingly legitimate.

For shipping, potential impacts might be spread across multiple sectors. Speaking at a Morgan Stanley Investor Conference in late March, notably before the latest escalation of voices from Washington, DC and Beijing, Robert Bugbee, president of Scorpio Bulk Carriers, told the audience: “So far China has not taken the bait regarding U.S. tariffs and excluding an all-out trade war the dry bulk sector should be okay. A trade war would have more immediate and detrimental effects on the containership industry than on dry bulk.”

At the same event, Safe Bulker’s President, Lukas Barmparis, said: “We don’t see recent US tariffs as having a major effect on the dry bulk industry, unless there is a further escalation.” However, this now exactly what we see happening.

Tit for tat tariffs

The latest volleys in a match that started three months ago with Trump imposing tariffs on washing machines and solar cells, and then escalated to tariffs on steel and aluminum imported from certain countries- which took effect in late March, see the US threatening to impose duties of 25% on around 1,300 products imported from China.

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Read more:Trump steel tariffs: Reinforcing bars, campaign promises, and thinking out loud

Trump’s trade tariffs could hit 200,000 teu of transpacific container volumes

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China, meantime, has now spoken up threatening to place increased duties on imports of items including aircraft, sorghum products, orange juice, cotton, some types of wheat, various US produced vehicles, and plastics. The timing of these further tariffs, which might simply be the opening gambits in a discussion/ negotiation between the US and China, is not certain.

Energy to be dragged into the mix?

Analysts at Cowen & Co, where analyst Sam Margolin and his team follow energy and shipping “names”, have expressed concern that energy could now be dragged into the mix. They opine, in an early April memo to clients: “While crude oil and LNG are not on the list of goods China could impose tariffs on from the US, propane and certain petchem products are.” They note: “propane and several products in the petrochemical array (including aromatics, poly-ethylene, and PVC, among others) are exposed.” The Cowen analysts point out, further, that: “Total US propane exports and propane exports to China grew 17% and 20%, respectively, in 2017, and are 2x and 7x 2010 totals, respectively.”

It is important to note that bi-lateral trade dust-ups may result in import trades may shifting to different origins, rather than going away altogether; this has been the case historically with US steel tariffs. The Cowen analysts point out: “Should the tariffs be imposed, global trade would likely shift and the displaced US propane exports would find another home as supply from other regions moves to China, but it could be disruptive for an intermittent period.”