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The Reality of a Trade War

The reality of the Trump administration’s concerted attack on trade and its linkage of trade to the U.S. deficit is finally beginning to impact trading relations. We must be realistic and accept that Trump believes trade to be a bad thing when he expounds on “America First.” This is an isolationist, inward looking strategy that was made clear by his speech at the U.N. General Assembly where he announced that the United States is not in favor of globalization.

The third round of tariffs is now in place, an increase in the level of tariffs is coming, and further tariffs have been threatened if China retaliates. Of course, China will apply pinpointed tariffs of its own as will the European Union and whoever else has a tariff applied to their exports.

European ports’ initial response to the reduction of China-U.S. trade was that it would mean increased volumes for them. Where do they think that demand is coming from in a political environment of populism that is putting downward pressure on consumer demand? Let there be no doubt – we shall see global trade in decline. The trade deficit has already worsened as pre-tariff buying of imports took off and U.S. exports declined.

In the United States, the ports, particularly on the West Coast, will be negatively impacted by declining volumes and consumer prices will no doubt start to rise in the face of 25 percent tariffs. Someone has to take the hit – the administration cannot afford to subsidize both exporters (farmers) and importers.

We are seeing this coming through in our models. Expected 2018 growth is now down to 4.4 percent for the ports monitored, with the second half of this year reversing the strong growth of the first half. The West Coast is projected at only 2.9 percent. More alarming is that the first half of 2019 growth compared with the same period in 2018 shows virtually no growth.

North American ports will need to adjust to fewer vessels calling as the carriers consolidate their cargos on larger ships. The shift of capacity into lay-up is on the rise as efforts to maintain freight rates become critical. Tough times are ahead for all concerned.

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