Economy - BIMCO Bulletin


ECONOMY June 2020 Trade war: Phase One agreement failing to give shipping a boost By Mette Kronholm Frnde, Communications Manager and Editor at BIMCO When the Phase One agreement to ease the trade war between the US and China was signed on 15 January, it sparked hope of a much-needed boost to shipping markets on the long journey between the two countries. But, as figures for early 2020 emerge, it is becoming clear that the agreement is not working and adjustments are needed. While Phase One has eliminated some tariffs and halted new, planned ones from being implemented, questions about what happens when the agreement is not met are starting to surface. Import numbers are ticking in and testifying that the intended trade diversion the deal should deliver never materialised. The agreement already looked unrealistic before the pandemic hit world trade The deal already looked unrealistic before the Covid-19 pandemic hit world trade, and it has caused renewed strain on the relationship between the US and China, according to Peter Sand, Chief Shipping Analyst at BIMCO. As it stands, only an adjustment could get it back on track. For the Phase One agreement to make sense and bring hope to the shipping industry that volumes are going to increase, the US and China need to improve relations at all levels. As it looks now, trading relations have soured and the targets are never going to be met, says Sand. The shipping industry has benefited from the non-escalation of the trade war, but it has seen no good coming from the Phase One agreement. Revisiting the agreement could offer hope of more realistic targets, thereby giving a trustworthy incentive for China to increase imports of, for instance, US crude oil and soya beans, and for US farmers to plant enough soya bean to meet a potential increase in demand. Missed opportunity for crude oil and soya beans In accordance with the USD200bn agreement, officially signed in January 2020, the US lowered some tariffs on imports from China and put a stop to others being implemented, while China committed to increase imports from the US. Furthermore, after the Covid-19 outbreak, China lowered tariffs on some of its imports from the US. We have had the longest period without an escalation of the trade war, and that is good, but had the agreement worked, it would have added some stability and substance to the freight markets, and supported freight rates. It promised lots of high value and lots of exports, but it is simply not delivering on those promises, says Sand. Revisiting the agreement could offer hope of more realistic targets Take crude oil for instance. China took about 20% of total US crude oil exports up until the start of the trade war. In the first quarter of 2020, however, there has been virtually no Chinese imports of US crude not even small goodwill purchases. The jump needed to meet the agreement at this point after two months of importing none is so enormous that it simply looks ridiculous. Furthermore, with the collapse in fuel prices, exported volumes need to rise higher than originally estimated as the agreement was based on value, and the value of crude oil has since plummeted. Another problem is that the US cannot necessarily provide what is needed to meet the deal from its end. US soya bean farmers need to decide now whether to plant a bigger crop to meet the promised export numbers. That too is doubtful. There has been virtually no Chinese imports of US crude The US soya bean farmers are watching the deal fall apart or never really materialising and have a tough decision to make because they have been burned so many times before, says Sand. The million-dollar tonne-mile question For containerised goods, Phase One mainly brings lower repositioning cost levels to the container shipping industry, as higher volumes on the capacity-abundant, westbound transpacific trade lane, make little difference. In a striking difference to liner shipping, tramp shipping sectors are subject to real changes; it makes a massive change to the tonne-mile demand calculation whether China chooses to take its crude oil from the Middle East (a 5,800 Nm journey) rather than the US Gulf of Mexico coast (15,000 Nm). The much shorter voyage from the Middle East to China does not generate the same amount of shipping demand for a similar cargo. Agriculture poses a different challenge. The collapse in US soya bean exports to China, which are primarily exported in the fourth quarter of the year, are predominantly being replaced by exports from Brazil and Argentina, which export most of their soya beans in the first half of the year. Many of these long sailing distances from the US to China have been eradicated by the trade war. The basic idea of the Phase One agreement was not trade creation, it was trade diversion, says Sand. Photo (top): iStock / Tanita Chunsiripongpann Overall for shipping, demand would not be changed much from the deal when measured in million tonnes but, because the US is so far away from China, increased trade between the two countries, rather than between China and the Middle East or China and Brazil, would have resulted in more miles and more tonne-mile demand. And that is important for the shipping industry. Connect with BIMCO Facebook Twitter Linkedin YouTube