The 2018 peak shipping season has seen a rush of activity as the January 1st increase in US tariffs on imports from China looms. As noted recently by the Journal of Commerce, the trans-Pacific trade route between the US West Coast and Asia is preparing for new challenges once the 25% tariffs on a wide range of imported Chinese goods goes into effect.
Freight Forwarders are understandably concerned. But if the logistics industry is looking for a silver lining ahead of the new year, the amended North American Free Trade Agreement could be cause for hope.
To recap, the North American Free Trade Agreement, or NAFTA, is an agreement between the United States, Canada, and Mexico, that creates a low-barrier trade bloc with the goal of making trade between the neighboring countries easy and beneficial to all.
In an effort to reduce the trade deficit created by NAFTA, President Trump announced that he intended to renegotiate the agreement shortly after his election. The details of the renegotiation are complex, but through most of 2017, little progress was made towards a new deal. Both Canada and Mexico pushed back against some of the proposed revisions, raising the threat of increased tariffs -- or that NAFTA would collapse altogether.
If NAFTA were to break down, many experts agreed that the effect would be damaging to trade and the logistics economy that facilitates it. Canada and Mexico are the US’s biggest individual country export partners, and two of the three biggest import partners. Uncertainty around whether the deal could be salvaged impacted the automobile, textile, and agriculture industries directly.
Then, after months of negotiating this past summer, the US and Canada announced in September that a preliminary deal had been reached. This deal, coupled with a previously-agreed “understanding” between the US and Mexico, kept the NAFTA bloc together and opened the door to more favorable terms for the United States. The agreement also preserved trade terms relating to the manufacturers most likely to be affected.
So what does the NAFTA saga tell us about what the US-China tariffs might mean for freight forwarders?
It’s important to remember that negotiations are procedural: just because it looks like we’re on the brink of adverse outcomes doesn’t mean we should automatically assume the worst is going to happen. There are larger factors at play that could ultimately facilitate a compromise. With NAFTA, it looked like the agreement was going to fall apart. And while no one definitively knows if the new deal will prove to be in everyone’s best interest, a replacement was eventually agreed upon. The US-China tariff standoff raises similar geopolitical and financial concerns that could help produce an amended solution before January 1st.
Of course, that’s not to say we shouldn’t worry. The US and China are playing a game of chicken, just like the US, Mexico, and Canada did. Part of the strategy with playing chicken is being prepared to follow through with your threats if you have to. China, though it values the US trading relationship, is in a particularly strong position given the size of its economy and population. Given China’s strong negotiating position, there is no guarantee that the current standoff will end as amicably as the NAFTA negotiations did.
How freight forwarders can prepare for uncertainty
The conventional wisdom is that tariffs will stifle trade. But there are also arguments that it will rationalize trade, leading to short-term pain but long-term positive growth. With that level of uncertainty in the outcome, how should freight professionals prepare for January 1st?
- Communicate. Talk to your clients about what a changed trade environment means to them: how might it affect production levels, pricing, and import/export preferences. Mutually explore possible solutions to address their changing business needs.
- Plan on parallel tracks. Minimize the risk to your business from new tariffs in the short-term, but plan for long-term growth. A great place to start is to double-down on your customer service so that your customers know you’re here to guide them through uncertain times. Meanwhile, look for a proper technology solution that could help you minimize the costs of a fluctuating trade environment for years to come.
With international trading dynamics changing so quickly, it is impossible to predict with any precision where we will stand in the coming months, years, and -- seemingly -- days. But one thing is for sure: with the growing world economy, demand for goods, and therefore for trade, will only grow. And although today’s political climate may require there may be short-term turmoil, we believe the longer-term outlook for logistics professionals remains bright.
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