This is the second Trade update for 2020. You can read the first part of this report here
The year 2019 proved to be a turbulent and unpredictable year in terms of international trade. Trade wars and economic sanctions, Brexit and other trade-related agreements were daily headline news. In fact, in no other time has international trade had this level of visibility.
Shippers and logistics providers have been directly affected by the ebb and flow of shipments based on last-minute international policy decisions, so much so that it feels as if we’ve been on a roller coaster ride for the past 12 months—and the next year should provide as much unpredictability if not more. With that in mind, here are some key international trade areas shippers need to keep their eyes on in 2020.
Retaliatory tariffs will continue in 2020, a fact that will hamper importers of certain goods from certain countries. There are two types of tariffs that have made the most headline news lately: Section 301 and 232 tariffs. Cases related to the Section 301 of the U.S. Trade Act of 1974 can be self-initiated by the United States Trade Representative (USTR) or they can be initiated through a petition filed by a company or industry group. All of the recent actions have been initiated by the USTR.
The Act also authorizes the President to obtain the removal of any act, policy, or practice of a foreign government that violates an international trade agreement or is unjustified, unreasonable, or discriminatory, and burdens or restricts U.S. commerce. We’ve seen the section 301 tariffs imposed on Chinese goods—in this case, because of intellectual property rights violations. The United States and China are still struggling to negotiate a deal, and it seems unclear whether any agreement will be achieved.
In October, 301 tariffs went into place on certain goods from the European Union because of a Boeing versus Airbus subsidy dispute. The World Trade Organization determined that the United States may impose up to $7.5 billion annually in retaliatory tariffs. Most of the goods being tariffed are food and consumer goods. There’s no end in sight for negotiations, so importers will feel the pain in 2020.
With regard to Section 232 tariffs, they’re part of the Trade Expansion Act of 1962 that authorizes the office of the President, through tariffs or other means, to affect the imports of goods from other countries if it finds there are quantity issues or a threat to national security. The Commerce Secretary can initiate the investigation, or a company or industry group may initiate an investigation through an application.
Most recently, the President issued additional import duties of 10% and 25% under Section 232 for steel mill and aluminum articles from almost all countries, claiming a national security threat. These duties were effective June 1, 2018.
South Korea, Argentina and Brazil have quotas in place with the United States and were exempted from the Sec. 232 steel and aluminum tariffs. However, the President recently flipped the decision on Brazil and Argentina and has imposed tariffs on steel and aluminum on products from these countries as well. Importers will most likely shift their sourcing for these products in 2020 as a result.
The current administration has been busy with applying restrictions to some very high-profile companies such as ZTE and Huawei, companies that rely heavily on U.S. semiconductor and components manufacturers. The sanctions have had far-reaching effects not only on the companies that supply directly to these restricted entities, but also on the vast number of telecommunications network product manufacturers that support these networks.
Many U.S. companies have been holding their breath as to what general licenses and extensions will be granted. This, of course, leaves their production and shipping in the lurch.
In regard to country-level sanctions, President Trump’s increasing reliance on economic sanctions to pressure certain countries politically is causing confusion. The current administration put increased pressure on Iran and Venezuela and has suggested the removal of some North Korean sanctions and then rapidly flip-flopped on sanctions against Turkey.
Companies and individuals are being added to the Bureau of Industry and Security’s (BIS) Entity List at a rapid pace. The effect has companies constantly checking to see if they’re able to ship or not ship based on changes to the list or sanctions for that particular day. This type of disruption to day-to-day operations will most likely continue for shippers and service providers.
In May of this year, President Trump issued an Executive Order (EO) entitled “Securing the Information and Communications Technology and Services Supply Chain.” This EO addresses the use of communications network equipment and technologies from certain types of foreign companies. Since Huawei is a leader in 5G telecommunications, we can assume this type of legislation is directed at them along with other major foreign 5G telecoms companies.
The EO states national security threats from “foreign adversaries” seeking to create and exploit vulnerabilities in U.S. information and communications technology and services “in order to commit malicious cyber-enabled actions, including economic and industrial espionage against the United States.”
Although no entities or countries have been named and no one knows how this EO will be implemented, all shippers need to keep this EO in mind. It will certainly affect the imports of foreign telecom equipment and ironically the export of U.S. components that are sent abroad for foreign assembly to be reimported into the United States.
Free trade turbulence. The ongoing saga of certain free trade issues will continue into 2020, such as Brexit and United States-Mexico-Canada Agreement (USMCA), the renegotiated NAFTA. Depending on if and how Brexit rolls out, the UK may have many new free trade agreements to sort out with the EU and other countries. U.S. companies with distribution out of the UK have obviously been anticipating this massive supply chain nightmare, but have been on pins and needles waiting to figure out how to manage the change.
Regarding USMCA, there seems to be a standoff between the House of Representatives and the President to make certain arrangements and concessions. Certainly, a 25-year-old treaty needs some updating, but there has been some heartburn. In addition to new labor standards, focus on intellectual property, rules of origin, agriculture and digital trade, it could have an impact on the flow of goods and services we know today.
Some changes seem to benefit U.S., Mexico and Canadian manufacturing such as limiting non-NAFTA inputs in textiles and apparel, but it’s unclear if this will help or hinder the industry sector and for which countries. If the U.S. Congress ratifies the agreement, it must still be ratified by Mexico and Canada, so we are still far from having a new trade agreement.
Committee on Foreign Investment in the United States (CFIUS) is a committee made up of 16 inter-government agencies authorized to review certain transactions involving foreign investment in U.S. transactions in order to determine the effect of such transactions on the national security of the United States. The 16 agencies include the International Trade Administration (ITA) and the BIS, which throw export controls into the CFIUS decision-making process.
This type of investigation has brought many companies to a standstill because of the intensive nature of scrutiny—as well as the not always predictable methods of the committee. Many emerging technology companies that are only exporting prototypes and samples are treated the same as well-established exporters. They may not necessarily have robust export compliance programs, and that leaves them scrambling to put policies, procedures and other compliance measures in place. Even if these companies have export compliance programs, CFIUS puts stress on a company’s ability to operate efficiently and affects their supply chain due to resources being sidetracked with the investigation..
BIS has initiated an investigation on emerging technologies and how to control the export of certain U.S. intellectual property, hardware and software. The new controls will most likely add licensing, end-use controls and reporting requirements for items related to areas such as artificial intelligence (AI), robotics, navigation and advanced surveillance technologies.
Many foreign companies are investing and creating joint ventures in the United States to develop these new technologies and are now facing CFIUS investigations. The new controls might throw companies for a loop if they’re not used to dealing with export controls.
Further, many of these technologies are being used globally without export controls so there is the challenge of trying to “put the cat back in the bag.” If licensing controls become too arduous, some foreign companies might retreat from the United States; thus also affecting the flow of U.S. supply chains.
The trade compliance landscape today swings broadly between shipping to an existing customer to not shipping at all. Shippers and service providers need to keep an eye on the latest information on tariffs, sanctions and other factors that greatly affect the supply chain.
Shippers can help provide freight forwarders and other service providers with changes to their supply chains and their supply chain needs. Freight forwarders and service providers can start creating advanced consulting services to help their clients navigate new distribution models that help mitigate the rapidly changing climate