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Will we get a good deal for Christmas?

December 16, 2019

The US and China announced their Phase One trade deal on Friday, though it has not yet been signed by either side. The deal reduces some US tariffs on goods it imports from China while increasing Chinese purchases of US agricultural products and energy. US Trade Representative Robert Lighthizer told media on Sunday that, while there will still be some ‘routine scrubs’ to the text of the deal, the deal is “totally done, absolutely.”

 

Lighthizer announced that the USD 160 Bn of tariffs scheduled to be imposed on Sunday would be suspended. The 15% tariff rate already imposed on USD 120 Bn of Chinese goods will be halved to 7.5%. A further USD 250 Bn of Chinese exports to the US will still be subject to 25% tariffs.  He also said that China will increase its purchases of agricultural products from USD 24 Bn in 2017 to USD 40 Bn and USD 60 Bn in the next two years.  

 

Asked if the deal would stick, Lighthizer said that would depend on domestic Chinese politics. "If the hard-liners are making the decisions, we're going to get one outcome. If the reformers are making the decisions - which is what we hope - then we're going to get another outcome." He also noted the difficulty in matching the US private enterprise based form of capitalism with China’s prevailing state owned model.

 

At first sight the deal appears to be beneficial for the major cargo shipping markets. China can continue to supply the US with containerised manufactured goods.  It will buy more agriproduce from the US, which should support dry bulk trade, depending on which other suppliers to China are displaced; if they are further away, then tonne mile demand could fall because of substitution. China may reverse the cuts to its purchases of US crude oil which peaked in May 2018, supporting crude oil tanker demand, assuming that Chinese crude oil purchases continue to grow overall. US LNG producers may be looking at the Chinese market with excitement.

 

Not everyone is happy. The deal leaves US concerns with China’s alleged Intellectual Property misappropriation as ‘declaratory statements’ rather than legally binding agreements.  IP issues will be settled by bilateral technical consultations, which sounds a bit vague and looks a bit like long grass to hide disagreements. And the US will continue to run a large trade deficit with China.

 

So why do the deal now? The Republicans appear confident that Mr Trump will defeat the impeachment charges against him. Making progress on policy adds to positive political sentiment around the president, adding to his chances of re-election to a second term.

 

The deal is scheduled to be signed by the two sides in early January.

Meanwhile, the renegotiated US-Canada-Mexico trade deal is ready to go - as announced last Tuesday - but over the weekend Mexico expressed concerns about the permanent appointment of US trade inspectors to ensure that Mexico abides by its commitments. Jesús Seade, an undersecretary in the Foreign Relations Department, tweeted that Mexican law prohibits their appointment. It seems that the ticker tape will have to be on hold for a little while yet on that one.

 

I don’t want to get bogged down in the UK general election, except to note that President Trump told reporters that the US is also ready to agree a free trade deal with the UK as soon as it completes its exit from the EU.  The UK maritime sector has a geographical bias; its southern and eastern ports have flourished due to their geographical closeness to the EU, while northern and western ports have enjoyed lower rates of growth. Perhaps a US-UK trade deal, aligned with a promised increase in UK infrastructure spending, will go some way to improving the fortunes of great port cities like Bristol, Liverpool and Glasgow.

 

THE TAKE AWAY

 

I am not just risking repetition but deliberately repeating myself: shipping has to be in favour of trade deals. The interdependence of nations on each other’s raw materials, energy and manufactures creates demand for shipping, at least until we can send oil down the telephone wires and 3-D print everything we use (i.e. for ever). So these deals have to bee seen as good news for our industry.  There are nonetheless issues: we’d prefer trade deals to go through the WTO rather than to navigate through dozens of bilateral accommodations. The deals have fragile elements and may have limited shelf-lives before they have to be renegotiated. And domestic politics clearly will affect how well the deals are implemented. Still, even if a contract is just the jumping-off point for ongoing negotiations, it’s good to see the US engaging with its trade partners, so we’ll take that as a small Christmas gift from Uncle Sam to shipping.

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