How Trump Tariffs Could Affect Freight Forwarding

How Trump Tariffs Could Affect Freight Forwarding

Last week, President Trump announced that he would be levying tariffs on some of the country’s most important imports: 10% on aluminum and 25% on steel. Despite the fact that one of Trump’s main campaign themes was to get “tough on trade,” the news came as a surprise to industry, lawmakers, and even to some of his closest economic advisors.

The story is still developing, but as of the time of writing this post, it seems as if Trump will go ahead with at least some form of new tariffs by means of an executive order, which would not require the consent of Congress.

Update: President Trump signed the tariffs order shortly after this piece was posted. The new tariffs will go into effect on March 23rd.

Of course, any change in tariff policy is of interest, and most likely concern, to those of us in the freight industry. We’re not alone: Economics experts and policymakers have been near unanimous in their opposition, and a surprising number of Republicans -- including House Speaker Paul Ryan and Senate Majority Leader Mitch McConnell -- have announced strong opposition.

But before we leap to conclusions, let’s take a closer look at what these tariff changes could mean for our industry -- and for freight forwarders in particular.

The Details are Still Cloudy

Despite Trump’s bold statement, there’s precious little specific information about how, when, and to what degree this might be implemented. Would any countries be exempted? When would it take effect? Might other goods or commodities be excluded? The president has often announced aggressive policy initiatives only to water them down later or drop them altogether. Maybe that will be the case here.

It Could Mean Less Shipping

International trade is complex, and changing one piece of the economic formula can have multiple consequences. But some basic economic rules would seem to apply: Levying tariffs on imported goods makes them inherently more expensive for their American buyers, which would likely mean we buy less of them. It is effectively a “consumption tax.” Likewise, if trading partners levy reciprocal tariffs (as they’ve promised to do), that would mean less demand from other countries...and fewer overseas sales from America. All that combined means less overall trade.

Less trade = less shipping.

Margins for Freight Professionals Could Get Squeezed

Adding tariffs to the price of imported goods and the coinciding decrease in demand for exported goods would likely mean that the financial “pie” dedicated to international shipping will get smaller. Players with high fixed costs, such as carriers, must maintain revenue to cover those costs (and make a profit on top of that). But with less money to go around, who gets squeezed? Intermediaries like forwarders and NVOCC’s, who have little to no pricing leverage in the logistics chain. On the positive side, this may force logistics professionals to accelerate technology adoption to become more efficient and protect profits...but that takes time and its own investment.

It Could Spread

Aluminum and steel, surprisingly, only account for about 2% of world trade. And most steel imports into the US come from Canada, not China, as it has been implied. The focus on those metals is curious. Still, the global reaction was swift: The European Union wasted no time in threatening their planned response: they would slap tariffs on key American exports including shirts, jeans, certain tobacco products, certain produce, and bourbon, totalling about $3.5 billion in trade. Trade wars tend to spread quickly, and instability in trade has, throughout history, often preceded political instability. So this move could have outsized unintended consequences.

But Maybe…

Trump has multiple rationales, both stated and implied, for this move. There’s an emotional reason (“they’re taking advantage of us!”)...but there’s also the idea that it will save American jobs. With less demand for more-expensive imported goods, tariffs may stimulate the growth of domestic industries to provide replacement goods. There’s already talk of exempting Canada and Mexico, which would effectively neuter the steel tariffs. And U.S. Steel announced they would restart steel-manufacturing facilities in Illinois. Whether the benefit of those added jobs is enough to offset the increased prices of imports remains to be seen.

Plus, there’s a reason economics is known as “the dismal science.” Predictions are frequently wrong, and, as they say, past performance is not always indicative of future results. If this is true, then tariffs could indeed cause rebalancing of trade that, in the long term, should lead to more and better trade. Few economists agree with this point, but there’s always hope.

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By: Fauad on March 8, 2018, 2:34 p.m.