Import tariffs are a blunt instrument. There is no subtlety to them. They are a tax established most often on an ad valorem basis. This means they are assessed on the purchase price of an import (denominated in the importer’s currency) set at f.o.b. origin. A U.S. tariff is printed for the whole world to see in the Harmonized Tariff Schedule of the United States (HTSUS). At that point it is up to the importers, working with their customs brokers, to try to find ways to avoid the tariff. Of course, one country’s action in imposing trade restrictions can precipitate a reaction from the affected country or countries. So, in a similar manner export flows from the United States can be affected. These are the opening skirmishes of a tariff-centered trade war. The U.S. and China are the main combatants at this point.
Caught in the middle of the tidal changes in trade flows are the ocean ports. They see and feel the real-world implications of trade disputes. Ocean ports are a bellwether for the economy. In fact, that statement is true for the entire freight transportation industry. If inventories are building up too fast (i.e., signaling a slow-down in the economy), for-hire transportation will be promptly cut back. If inventories are nearly drawn down (i.e., signaling an economic recovery), for-hire transportation will promptly pick up. In this way, transportation is a pro-cyclical activity – its trend in the cycle precedes that of the general economy. Moreover the cyclical trend in transportation tends to have larger amplitudes. This means the cycle’s peaks and valleys tend to be more pronounced than in the general economy. This is especially true for U.S. ocean ports because they are connected to practically every global supply chain that deals with the nation’s containerized freight and bulk commodities. Theirs is a volatile business when the economy approaches a change in economic conditions. Currently, the rumblings indicate the possibility of a global economic slowdown combined with adjustments to supply chains in the face of tariff uncertainty.
The Port of Los Angeles reported a year-over-year increase in twenty-foot equivalent units of cargo (TEUs) of 4.1% on imports this past August. On the other hand, export TEUs dropped by 10%, which served to raise empty container backhauls by 14%. The nearby Port of Long Beach, by contrast, saw a 5.9% decrease in import containers and a 4.5% increase in export containers. Of course, 2018 was a record-high year for the port so 2019 is still likely to be one of its best years. The executive directors of both ports have noted publicly that each of these surges was likely due to U.S. importers increasing their volumes in anticipation of further U.S. import tariffs assessed against China. It is certainly a wise theory to hold. The importers and customs brokers were no doubt working overtime on their cargo manifests and other support documentation to bring about these surges. The ports of Los Angeles and Long Beach also reported year-to-date declines of 9.3% in containers from China and a similar percentage rise in containers from other Far East Asia countries (e.g., South Korea, Taiwan and Vietnam). Export flows to China were down 22%. Supply chains are starting to adjust to the emerging trade war. But a 9.3% drop in imports from China represents a much larger loss in volume than can be made up from the other nations (because their roughly 9% increase is on top of a much lower base volume). In other words, we are seeing two effects from the impending trade war here: (1) an import surge from the tariff-targeted nation; followed by (2) a decline in imports as importers pin down new foreign sources and draw down accumulated inventories from point (1). In the midst of all this activity, the ports are sure to see changes in carrier schedules, container traffic and port utilization as supply chains recalibrate.
Tariffs, like any federal tax, can be enacted with the stroke of a pen. But unlike taxes, which arise from Congress and have a lot of lead time for the public to react before they are signed into law, tariffs have increasingly become the purview of the President and not Congress. The Executive Branch usually justifies this by referencing the Trade Act (1974) and the President’s power to retaliate against foreign countries deemed to be “unduly burdening and restricting” U.S. foreign trade. So, with shorter lead times and uncertainly over the precise ad valorem rate, it becomes all the more difficult for importers to determine the landed cost of their freight. This uncertainty spreads to the for-hire carriers and to the ports as well.
In the theory and practice of international trade sometimes things have to get worse before they can get better. For example, the President’s expressed policy is to reduce the U.S. trade deficit (mostly China’s share of it) and to encourage a lower value of the U.S. dollar to spur exports. Again, policies can change faster than the real-world mechanics of supply chain management. Tariffs and a falling U.S. dollar both serve to make imports more expensive. But, in the short run, before importers can substitute away from the tariff-targeted countries, they will be paying more. If import volumes do not fall faster than the price of those imports it is possible that the trade deficit could rise. Why? Because the trade deficit is measured in dollars and not tons or TEUs. Only after the supply chains have adjusted fully might the trade deficit fall. Economists call this a J-curve effect. This means that things go negative before than can go positive. Again, chalk that up to policies changing faster than supply chains can adjust. The more policy action and reaction in a trade war, the stronger these J-curve effects can be.
These ebbs and flows in trade policy and freight activity will be a part of daily life at U.S. ports for some time. For-hire carriers, and the ports that serve them, are intermediaries between importers and the exporters who sell to them. Intermediaries are caught in the middle when one or more ends of this market is affected by uncertainty. Expect very choppy waters as the trade war steams ahead.
