Air cargo braces for the impact of trade tariffs

21 / 06 / 2018

The introduction of trade tariffs is set to hit the air cargo industry, despite the possibility of an initial boost.

Reports have suggested that the various trade tariffs that have been introduced over the last few months could result in a rush to transport goods before they come into force, with airfreight the main benefactor.

However, this boost is expected to be short lived and, overall, in both the short and long term, the moves are expected to have negative consequences for the industry.

The tariffs, which started with the US introducing a 25% tariff on steel and 10% on aluminium, have seen various countries introduce charges on a range of products in response.

Separately, the US will also introduce 25% tariffs on almost $50bn worth of Chinese goods, with Beijing responding in kind.

Of the $50bn, tariffs on $34bn of goods will come into force on July 6, while a second tranche covering $16bn worth of goods, currently working its way through regulatory process, will be implemented at a later date, probably in the autumn.

And the issue could become even more serious, with US President Donald Trump threatening further duties on another $200bn worth of Chinese products and China promising more retaliatory moves.

While many of the products that have had charges imposed on them so far are not necessarily transported by air, there are knock-on effects.

US Airforwarder Association executive director Brandon Fried told Air Cargo News: “While the near and long-term impacts of the China-US trade tariffs are uncertain, initial import shipment volume on many of the listed items will most likely decrease as the duties take effect.

“In fact, the prospect of the tariffs has already had an adverse impact on some of the affected industries as participants are beginning to raise prices in anticipation of the increased costs.

“Ultimately, the consumer pays the price, resulting in less demand here in the US and reduced freight volumes as a result.

“Airfreight forwarding is an industry that serves a variable marketplace, both regarding delivery times and commodities shipped.

“While many of the targeted items may not use air cargo frequently, exceptions abound as forwarders often depend on airfreight to expedite related parts or the affected products themselves to the US.”

The situation could have been worse for air cargo. In an initial list proposed by the Office of the US Trade Representative (USTR) in April, consumer goods accounted for 12% of the total tariffs, according to the Peterson Institute for International Economics (PIIE) (see charts below).

PIIE said this had been reduced to just 1% in the second list published in June as a result of a public pushback.

(Chart from Peterson Institute for International Economics)

Flexport global head of airfreight Neel Jones Shah said: "There may be a brief spike in airfreight rates as demand picks up with importers looking to get their goods over before July 6.

“Further volatility could continue this summer with the second $16bn up for public comment, and some shippers begin to shift their supply chains around - the data will tell us as we get closer to peak season if there will be some stabilisation.

“Of course, we don't know if we've seen the end to new tariffs from China and the US - [President Trump] directed the USTR to bring another $200bn.

“It gets even trickier if fuel prices continue to go up, and we see ocean carriers implement more bunker surcharges. A few big carriers announced earnings recently and the outlook for the rest of 2018 isn't good for them.

“While these tariffs are acutely painful to a few of our clients, the majority aren't affected as the USTR has attempted to limit consumer exposure for now. We're still growing so the uncertainty doesn't seem to be affecting demand at this time."

The US National Retail Federation (NRF) has also warned against a further escalation of the situation.

“This is just what we predicted – a tit-for-tat trade war has erupted and American families are caught in the middle,” said NRF president and chief executive Matthew Shay.

“Higher prices for everyday essentials and lost jobs threaten to sap the energy out of the strong US economy just as most Americans are starting to enjoy the benefits of historic tax reform. This reckless escalation is the latest reminder that Congress must step in and exert its authority on trade policy.”

A study conducted earlier this year by the NRF found that tariffs on $50bn of Chinese imports would reduce US gross domestic product by nearly $3bn and lead to the loss of 134,000 American jobs, with four jobs lost for every job gained.

Zen Cargo chief executive Alex Hersham said Chinese exporters stood to lose the most from the introduction of more tariffs: “The threat announced by President Trump to impose a 10% tariff on $200bn worth of Chinese goods proves that China’s concessionary move to purchase more US exports and cut back on dumping is not paying dividends

“As President Trump doubles down on attempts to reverse the ongoing trade imbalances between the US and Asia and Europe, it’s Chinese exporters who currently stand to lose most in terms of export revenue. 

“The announcement proved to be extremely damaging for markets, with all major US indexes ending the day in red.  Amid mounting hostilities, the spectre of an all-out trade war refuses to go away.”

What types of products are included in the tariffs?

The list of products that will be affected by the various tariffs is extensive, far too long to publish here, but in general, the US tariffs on China are targeted at the country’s ‘Made in China 2025’ industrial policy, which covers industries such as aerospace, information and communications technology, robotics, industrial machinery, new materials, and automobiles.

In response, the Chinese tariffs target products including soybeans, fish and crustaceans, pork, fruits and nuts, dairy products, petroleum products and medical products.

The US aluminium and steel tariffs largely came into force on April 1, although some countries, such as the European Union (EU) members, Mexico and Canada, enjoyed an exemption until June 1 and others continue to be exempt.

Those benefitting from continued exemption – at least for now – include Australia, Argentina, Brazil and South Korea.

In response, the EU has outlined plans to introduce 25% tariffs on around $6n worth of US goods including bourbon, orange juice, tobacco, corn and other agricultural products, steel and industrial products, cosmetics, consumer goods, motorbikes, pleasure boats, snuff and chewing tobacco, cranberries and jeans, and a 10% tariff on playing cards.

The tariffs will come into force this week on June 22.

Canada announced 25% tariffs from July 1 on certain types of US steel and a 10% levy on items including yoghurts, whiskies, soya sauce, strawberry jam, mixed condiments, pizza, quiche, orange juice, soups, water, manicure and pedicure products, hair lacquers, shaving foam, toilet paper, dishwasher detergents, playing cards, felt-tipped pens, inflatable boats, lawnmowers, sleeping bags and roasted coffee.

Mexico will target goods including steel, cold cuts, pork legs, pork shoulders, sausages, berries, grapes, apples, grapes, blueberries, various cheeses and lamps. All have also reported the US to the World Trade Organization.

China has also responded to the steel and aluminium tariffs with a 15% tariff on products including fresh and dried fruits, nuts and sparkling wine. Scrap aluminium and pork products will be hit with a 25% increase.

India has proposed hiking tariffs on 30 US products, including almonds, walnuts, apples and certain steel and chemical products in response. A tariff on US motorcycles will also be increased.

How did this all begin?

The US has said it decided to introduce the tariffs on steel and aluminium on national security grounds. This is because of concerns that the market is being flooded with steel and aluminium products, which threatens US producers.

The US tariffs on Chinese products is a more complex issue. The US said that its decision is in response to “China’s acts, policies and practices related to technology transfer, intellectual property, and innovation” which it said are “unreasonable and discriminatory, and burden US commerce”.

“We must take strong defensive actions to protect America’s leadership in technology and innovation against the unprecedented threat posed by China’s theft of our intellectual property, the forced transfer of American technology, and its cyber attacks on our computer networks,” said US trade representative Robert Lighthizer. 

“China’s government is aggressively working to undermine America’s high-tech industries and our economic leadership through unfair trade practices and industrial policies like ‘Made in China 2025’.”

President Trump has also said that China has been benefitting from a trade imbalance with the US and during the elections said he would use tariffs to cut the deficit.

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