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October 29 2018

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4 The Journal of Commerce | October 29 2018 Mark Szakonyi Letter From the Editor THE LAST-MINUTE RUSH of US imports from China ahead of higher tariffs scheduled to take effect on Jan. 1 marks a turning point for the trans- Pacific trade. The increase of US tariffs to 25 percent from 10 percent won't have immediate impact on volume, but there's little sign of a de-escalation of the trade war betweenChina and the US. Unlike with the reworked NAFTA agreement, now dubbed the US Mexico Canada Agreement, there are fewer avenues for the Trump adminis- tration to win concessions and still allow China to save face. US frustra- tion with China's role in trade, from state-owned enterprises to theft of intellectual property, runs deep. China may be smarting from a slow- down in economic growth and signs of the first stings from US tariffs, but few China watchers expect President Xi Jinping to give in to the pressure. "I'm not optimistic we are going to see a grand bargain with all the tariffs coming off," Lance Noble, senior analyst at Gavekal Dragonom- ics, said at the TPM Asia Conference in Shenzhen, China, on Oct. 10. That puts US importers from China in the middle of a drawn- out battle, in which suspect holds on cargo by customs officials and procedural delays are the collateral of war. US imports from China aren't expected to decline significantly next year, according to conversa- tions with more than a dozen beneficial cargo owners (BCOs) and several carrier executives. For US commodity exporters, the tariffs spell immediate hits to demand. Retailers and others are still determining precisely how much in tariff-related costs they can pass on to customers. They are taking a sharp look at their competitors' sourcing strategies to gauge how much their rivals will increase prices. That analy- sis, coupled with the fact that BCOs can't raise prices because they've already sold for 2019 suggests the sting in trade volumes sting won't come until 2020. "I'm optimistic about 2019," Marc Bourdon, CEO of CMA CGM Shipping China, said, noting that US consumer confidence is strong. "Long term, there is a question mark. Do goods become substan- tially more expensive and does that impact consumer confidence?" A major shift in sourcing from China to Southeast Asia over the next two years also is unlikely, carriers and BCOs told The Journal of Commerce. Shippers say it will take at least two years to shift significant amounts of production to sites with the necessary transportation infrastruc- ture and that are close to suppliers. Carriers say they don't expect to shift capacity next year to the US away from China to other countries. With no dramatic changes in sourcing or a reduction in trade tension, shippers will be forced to pass on more costs to customers. The filtering down of the higher cost of goods and pricier gasoline could dampen US consumer confidence in 2020, leading to a slowing of growth in trans-Pacific cargo volumes. For now, carriers can enjoy spot pricing power in the final days of the peak season, with rates above $2,000 per FEU to the West Coast and $3,000 to the East Coast for the 10th straight week through the first week of October, according to the Shanghai Containerized Freight Index. "We have moved a tremendous amount of volume up this year, and we'll continue to do so," because of the tariffs, Alan McTaggart, vice president of global logistics for Techtronic Industries, told the TPM Asia Conference. Retailers expect merchandise imports to remain at near-record levels through the end of the year and then slow in early 2019, accord- ing to the latest Global Port Tracker, published by the National Retail Fed- eration and Hackett Associates. How carriers manage what's shaping up to be a weaker-than-usual restock- ing period before Lunar New Year celebrations — beginning Feb 5 and marking the closing of Chinese fac- tories for at least two weeks — will resonate in upcoming trans-Pacific service contract negotiations. So far, carriers individually and with their alliance partners have kept capacity better matched with demand — and been restrained in the number of extra sailings they've deployed to grab market share. Some of that capacity restraint has come from miscalculating the initial impact of US tariffs and higher fuel costs, which force carriers to think twice before deploying more capacity. There were at least twice as many canceled sailings in the trans-Pacific in the third quarter than in the same period in 2017, with 16 to the West Coast and nine to the East Coast, according to Seaintelligence Consulting. The timing and severity of capac- ity curbs — down 6 percent to the West Coast and about 1.3 percent to the East Coast — frustrated shippers who have seen their contracted cargo bumped to later sailings, and who had to renegotiate for slots this peak season. Carriers' ability to main- tain that discipline when volume becomes scarcer will signal to BCOs whether the resolve was a fluke or a resilience taking shape. JOC email: twitter: @MarkSzakonyi Point of no return The Journal of Commerce (USPS 279 – 060), ISSN 1530-7557, October 29, 2018, Volume 19, Issue No. 22. The Journal of Commerce is published bi-weekly except the last week in December (printed 25 times per year) by JOC Group Inc., 450 West 33rd St., 5th Floor, New York, N.Y. 10001. Subscription price: $595 a year. Periodicals postage paid at New York, N.Y., and additional mailing offices. © All rights reserved. No portion of this publication may be copied or reprinted without written permission from the publisher. POSTMASTER: Please send address changes to The Journal of Commerce, Subscription Services Department, 450 West 33rd St., 5th Floor, New York, N.Y. 10001. So far, carriers individually and with their alliance partners have kept capacity better matched with demand.

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