New US-China tariff rise expected in third quarter

Date: Tuesday, May 28, 2019
Source: Lloyd's List

The US and China will likely escalate their tariff war in the third quarter prompting transpacific frontloading and an early peak season this summer, says Nomura

Signs that the US and China will follow through on threats to further escalate their trade war are growing, according to global investment bank and trade analyst Nomura, potentially giving lines and shippers a short-term front-loading boost this quarter, but damaging trade on the transpacific and beyond over the next year.

Nomura said both the US and China now appeared to be preparing for a prolonged period of trade conflict and were downplaying the near-term need for a deal. 

President Trump also seems to have concluded that maintaining a hard line against China is preferable to striking a quick, narrow, deal, and he has bi-partisan support for his strategy.

As a result, Nomura now expects the Trump administration to move ahead with the final tranche of tariffs targeting roughly $300 billion in imports from China at a 25% rate.

“While we expect a short-term truce during and immediately after the G20 in late June, we think domestic pressures and constraints will drive both sides towards further escalation,” said a note from the analyst. “We believe that talks will ultimately break down later in the year, resulting in the US imposing the final round of tariffs, probably in Q3 2019, with a proportional response from China. 

“Without a clear way forward during an intensifying 2020 US presidential election, we see a rising risk that tariffs will remain in effect through end-2020.”

One short-term upside for the shipping community could be a resumption of the front-loading of freight from China to the US that boosted markets in 2018, although Nomura warned there would also be a repeat of the hangover suffered on the trade should that scenario materialise.

“Given the US tariff threats, Chinese exporters may start front-loading their US-bound shipments of goods immediately on the $300bn tariff list to avoid the potential tariff increase,” it said.

“This front-loading may boost China’s export growth in May and June, but the likely payback could significantly dent export growth in Q3. Specifically, we estimate export front-loading will add 0.9 pp (percentage points) and 0.1 pp, respectively, to the year-on-year growth of China’s headline exports and nominal GDP in Q2 2019, while the ensuing payback effects could reduce year-on-year growth in exports and nominal GDP by 0.8pp and 0.1pp in Q3, respectively.”

Lines will might welcome a short-term fillip even though the long-term implications of the tariff war are dire. OOCL last week became the latest line to announce transpacific service withdrawals, citing “expected low seasonal demand” as it pulled Pacific sailings on its PNW1 and ECC2 strings in response to slumping freight rates.

 

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