27 June 2019
Will Waters | Tuesday, 25 June 2019
Escalating economic hostilities between the two countries is bad news for the transpacific container trade but should result in higher volumes of intermediate goods, notes Drewry
The escalating US-China trade war may be bad news for the transpacific container trade but should result in higher volumes of intermediate goods as supply chains become more fragmented with the diversion of manufacturing to other markets, according to analyst Drewry.
In an adapted extract from Drewry’s forthcoming Container Forecaster report, the company noted that when it comes to trade, any dispute between two countries, particularly when it is between the world’s two largest economies, has far wider ripple effects. Numerous countries and industries are involved at some stage of the supply chain to make sure the finished product ends up in a store in New York, even if customs only logs the last point of origin, Drewry highlighted.
“The fragmentation of production that really took off this century, thanks to advances in technology and China’s ascension, has been a massive boost to container shipping. The movement of intermediate items necessary to the make the final product account for over half of world trade in goods, according to the OECD,” Drewry pointed out. “More fragmentation means more need for transportation services and vice versa.”
Potential losers in this trade war will be those countries that provide the raw materials and semi-finished goods to China that go into the re-export of the final products to the US, Drewry noted, with the US itself potentially suffering because China uses up some US exports for re-exports. But Drewry added: “The thing is that China has developed its manufacturing capacity to such an extent that it barely needs inputs from the rest of the world to support its exports, which should limit the collateral damage.”
It continued: “Using data from the UNCTAD-Eora database that measure trade in value added to better apportion individual countries’ contribution to trade - something that gets lost in bilateral trade statistics - China’s share of foreign value added in gross exports (the amount of value added upstream in the supply chain previously by other countries) has been shrinking since the start of this decade from 19% in 2010 to 13% as of last year. Germany, the world’s largest exporter in gross value-added terms, requires far more inputs from abroad to support its highly fragmented car industry, with a foreign value-added ratio of 36%.”
Drewry said China’s “hogging of production” was partly responsible for the slowdown in world trade witnessed in the past few years, “and its ever-growing self-sufficiency makes us less fearful of the spill-over effects from the trade war on global container flows. This should be a fairly isolated affair with the transpacific bearing the brunt, compensated to some degree by trade diversion.”
Assuming this week’s G20 summit in Japan doesn’t suddenly reverse the situation and the US goes ahead with plans to subject all Chinese imports to extra duties, the new protectionist world “could bring some benefits to container shipping lines”, Drewry said, adding: “As final goods sourcing moves to countries currently without the same manufacturing eco-system as China, they will require more intermediate inputs, meaning more production fragmentation.
“Where those links establish themselves will determine how beneficial the process is for shipping lines. More intra-Asia trade will boost demand for shipping services and put a greater onus on smaller feeder ships, whereas greater regional trade in North America and Europe would be less advantageous due to overland opportunities.”
But Drewry said this was by no means the end of China’s export dominance, at least not in the short-term. “While we do foresee some erosion of its market share in outbound container flows to the US, the sheer size of its export machine means that it cannot be replaced overnight,” it added. “China was responsible for around one-third of all US finished goods imports last year, when measured in bilateral trade, twice as much as the rest of East Asia combined.”
Even the trade diversion from China to other countries that is already visible in customs statistics is “possibly a false flag for China’s supposed demise”, Drewry noted, adding: “Bilateral data shows that Vietnam is one of the fastest-growing exporters to the US, but the country’s government recently announced that it is cracking down on Chinese goods being relabelled with ‘Made in Vietnam’ tags.
“The rise in Chinese exports of intermediate goods to South East Asia does give credence to the allegations of tariff gaming. If true, this illegal practice offers shipping lines some welcome illicit extra business, but it does not suggest that places like Vietnam are anywhere close to being a ready-made export destination replacement.”
Drewry concluded: “There will be some short-term disruption to the container market as new trading links are developed, but further fragmentation of production will boost the need for shipping, assuming demand levels are sustained. For the foreseeable future, China will remain the world’s container export hub, albeit a slightly smaller one.”
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