Honestly, Mr. President, do we look Chinese?
By Jock O’Connell
When I first sat down to consider a topic for this month’s commentary, I had two options. One involved taking a fresh look at the competition between the Northwest Seaport Alliance Ports of Tacoma and Seattle and their rivals north of the 49th parallel in British Columbia. But I also thought I could share some observations about the role U.S. national security policies during the last century played in helping ensure the long dominant but lately eroding position West Coast ports have held in America’s trade with the Far East.
But then the President tweeted.
After weeks of peddling a narrative in which America’s trade emissaries were steering bilateral talks with the Chinese toward a huge political win for Trump mutually beneficial settlement, a very large number of containers suddenly toppled from the ship of state.
The Chinese, it was alleged by our side, wanted to renegotiate all seven chapters of an agreement that our folks believed had been settled. So, far from a formal accord being inked within days followed by a triumphant summit with Chinese President Xi, we’re now pretty much headed in the opposite direction. Not only did Mr. Trump summarily increase to 25% the tariff on the $200 billion in Chinese products that had been charged a 10% import levy since last September, he also initiated the formal process for imposing steep import duties on most of the remaining goods the Chinese sent our way.
No matter that the President views ratcheting up of the cost of doing business with China as a mere “squabble”, it certainly looks like a trade war from here (and probably also from Beijing).
A ten percent tariff can be finessed without necessarily passing most or indeed any of the increased import cost on to customers, whether they be individual consumers, factories or organizations like hospitals or school systems. Chinese exporters could lower their prices to preserve a valuable market. And the near-steady appreciation of the dollar against the yuan renminbi since last spring did help buffer the impact of higher tariffs on U.S. importers, who might also have decided to absorb the increase to keep their customers happy.
A 25% tariff is an entirely different kettle of fish. Tariffs, after all, are taxes paid by the importer when the goods enter U.S. commerce. They are not a transfer of funds from the exporter to the U.S. Treasury. Higher tariffs, especially on products from a country whose goods we normally buy in enormous volumes, will bring pain in the form of higher consumer prices and perhaps even supply shortages. And, contrary to what the President fancies, those higher tariffs are not being paid by China any more than Mexico is paying for his border wall.
The impact of Mr. Trump’s latest round of tariff hikes will also be felt by U.S. exporters who had established markets in China. At least in the near-term, hitherto prosperous American soybean growers will become welfare recipients. Beijing has already announced a new set of retaliatory tariffs scheduled to take effect in just a couple of weeks. And, as seasoned exporters to China well know, tariffs are not the only means Beijing has at its disposal for discouraging the sale of U.S. products in China.
All of this has resulted in a great deal of handwringing and even a few bouts of headline hysteria about how badly various oxen will be gored before a deal is somehow resolved and the tariffs that both sides have imposed in the past year are rescinded. I have no idea how things will turn out, although I expect that we and China are in for a prolonged and bruising period of trade turbulence. What I can do, though, is to try to put the current trade dispute with China in a broader perspective.
Reviewing the situation, soberly and by the numbers: The U.S. Gross Domestic Product last year was $20.40 trillion. (In this year’s first quarter, GDP grew by an annualized rate of 3.2%.) America’s foreign trade last year totaled $4.20 trillion. Imports amounted to $2.54 trillion, while exports were valued at $1.66 trillion. Foreign trade, while certainly important, is not nearly as vital to the U.S. as it is to almost every other major economy. Germany, for example, exports nearly as much as we do, despite having an economy that is one-fifth our size. China, with an economy about 30% smaller than ours, exports about 35% more than we do.
U.S. trade with China last year stood at $659.84 billion. That represented 15.7% of America’s entire foreign trade. We exported $120.34 billion to China, while importing $659.84 billion from China. So, while China represented 7.2% of all U.S. exports, its share of U.S. imports was a much higher 21.2%.
So let’s take a closer look at how those imports and exports journey between the two trading partners.
On the outbound side, U.S. exports to China last year totaled $120.34 billion. Airborne shipments accounted for 35.8% ($43.05 billion) of that trade, while 29.6% ($35.8 billion) were containerized shipments that sailed from U.S. seaports. Non-containerized oceanborne exports to China held a 20.3% share, while “other” modes handled 14.3% of the trade. (“Other” includes aircraft flown to overseas markets under their own power as well as shipments that journey abroad via ports in Canada and Mexico.)
On the import side, of the $539.50 billion the U.S. imported from China last year, 29.2% ($157.61 billion) arrived by air, and another 7.1% ($38.35 billion) first transited through Canada or Mexico prior to entering the U.S. Maritime trade involving U.S. seaports accounted for 63.7% ($343.54 billion) of the total import trade, but the lion’s share (61.6% or $332.10 billion) were containerized shipments.
Of those containerized imports, fully two-thirds entered the U.S. via the five major U.S. West Coast marine gateways: Los Angeles/Long Beach ($181.04 billion); the Northwest Seaport Alliance Ports of Seattle and Tacoma ($29.76 billion), and Oakland ($12.71 billion). Including all modes of transport, those five ports handled 41.4% of the nation’s $539.50 billion in imports from China last year.
Using a different metric (the declared weight of containerized shipments), the division of labor is somewhat different. USWC ports still control a majority of the import tonnage (58.7%). However, competing ports on the East and Gulf Coasts have been seizing an increasing share of the trade (as Exhibit D reveals). Last year, 47.3% of the containerized import tonnage from China came through the Ports of Los Angeles and Long Beach. Another 7.9% docked at the NWSA ports, while Oakland’s share was 4.1%. Altogether, USWC ports handled 59.3% of the containerized tonnage that arrived from China last year.
The five major USWC ports also handled $19.86 billion of the nation’s containerized exports to China last year. That represented a 57.1% share of all containerized shipments from U.S. ports to China. But because containerized shipping constituted a relatively small portion of the nation’s export trade with China, the five USWC ports were involved in shipping a comparatively small 16.5% of the entire $120.34 billion in U.S. merchandise exports to China in 2018. In terms of declared weight of containerized shipments to China, the five USWC ports last year handled 52.8% of all U.S. containerized export tonnage to China.
Clearly, tariffs and other impediments to trade would, despite a steady loss of market share, have a disproportionate impact on USWC ports and the intricate supply chains that link those ports to markets throughout North America. How severe the impact will be remains to be seen, but pessimistic views currently seem to be outweighing optimistic outlooks. To be sure, Americans will continue to buy Chinese products even as their prices increase, in many cases because their only choice is to go without. And, owing to the economy’s impressive expansion to date, Americans have the luxury of spending to get what they want. Those considerations no doubt account for the update forecasts we’ve been seeing for container imports from the National Retail Federation and Global Port Tracker, which figures April TEU numbers to be 7.7% higher than a year ago. Container imports in May (+4.2%) and June (+3.7%) also seem to downgrade the significance of the tariffs.
Some forecasters are anticipating a re-run of last fall’s import surge as retailers and other businesses seek to get goods into the country ahead of new tariffs. However, the President is not leaving much time.
Of concern is whether upbeat forecasts, while discounting the effects of higher import duties, may also be relying too heavily on the expectation that imports will continue to be buoyed by steady economic growth. It’s an easy assumption to make when first quarter GDP rose by an annualized rate of 3.2% after a 2.2% increase in the previous quarter. And with unemployment at record lows, it is not unreasonable to expect demand for imports will remain strong even in the face of higher tariffs on Chinese goods. Still, it’s fair to ask whether the presumed correlation between GDP and employment numbers holds up in the face of a major trade dispute between the world’s two largest economies. After all, retail sales in April were off slightly (-0.2%) and manufacturing output similarly shows symptoms of decline.
One final note. It would be flippant to observe that USWC ports would likely have been more vulnerable to an interruption in maritime trade with China in years past when more than three-quarters of that trade passed over their docks. Over time, other mainland ports have grabbed off steadily larger portions of the trade. Still, while we’re here, it’s worth documenting in numbers just how much USWC shares of the China trade have diminished in the past decade and a half.
As Exhibit D indicates, the five major USWC ports have seen their collective share of the China import trade entering U.S. mainland seaports diminish over the past fifteen years from 75.8% in 2003 to 59.4% last year.
As Exhibit E similarly shows, USWC ports have also sustained a decline, albeit less steady, in their combined share of America’s container export trade with China, from a high of 64.1% in 2004 and again in 2007 to a low of 57.1% in 2018.
The commentary, views, and opinions expressed by Jock O’Connell are his own and do not reflect the views or positions of the Pacific Merchant Shipping Association. PMSA does not endorse, support, or make any representations regarding the content provided by any third party commentator.