Trade between the United States and China (and other global trading partners) was already facing unprecedented challenges and structural changes when COVID-19 emerged in December 2019. Since then, COVID-19 has had a significant impact on global shipping and China’s export output. The pandemic has highlighted the risks of open borders and consolidated supply chains, forcing many companies to rethink sourcing and manufacturing strategies. A prompt and strategic response to these risks is essential to minimize the impact of global trade tensions on your company’s supply chain, customers and bottom line.
Many companies around the world were moving production in an effort to mitigate the retaliatory tariffs being imposed by the United States and China on imports from those countries. Those that had not already moved manufacturing may be seriously considering it now as output from Chinese factories plummeted in January and February.
Luckily, China’s production has ramped up since late February, and its supply chain is slowly recovering. At least three-fifths of China’s trucking capacity was fully operational as of March 12, 2020, and it has been reported that Chinese ports are now functioning at nearly full capacity.
However, when vessel shipments were canceled in January and February, containers built up on both sides of the Pacific, where they are currently incurring storage costs. Additionally, the western economies are likely to slow in the short term due to the pandemic, causing uncertainty in the shipping industry. While inventories are depleted, U.S. trucking capacity later this year is likely to be tested as an influx of inventory meets a workforce that will likely be weakened by the virus.
Generally, shipping costs would be expected to rise as a result of the Chinese ramp-up in production, and shippers would attempt to mitigate these rising rates by locking in contracts now. This would have the effect of normalizing rates for the short term. However, due to the uncertainty of the built-up empty containers and the slowing economy globally, shippers are hesitant to lock in any rates. All of these developments mean that freight costs are likely to rise in the short term and in the long term, when inventories are built back up.
Costs related to the retaliatory tariffs are also unlikely to see relief in the short term. In January, President Trump signed a preliminary Phase One deal with China, but that has yet to lead to significant duty reductions. Additionally, despite prospects for a Phase Two deal, both the U.S. and Chinese administrations may not have the bandwidth nor the desire to focus on the next phase due to the disruptions from the virus and continued tensions between the two countries on a variety of fronts. For example, China has openly complained about President Trump’s rhetoric concerning the source of the COVID-19 virus, while some senior Chinese officials have made statements blaming the United States for the outbreak of the virus.
There is some concern that China will not be able to meet its obligations in the Phase One deal with its slowing economy, although China is currently complying with its obligations. Specifically, China lowered tariff rates in February 2020 and, earlier this month, implemented a new tariff exclusion process for specific products.
For its part, the United States continues to grant some limited exclusions from the Section 301 tariffs on Chinese imports into the United States. The latest exclusions have prioritized medical products/devices, such as sanitary wipes, medical gloves, face masks and surgical gowns, needed in response to the virus outbreak. However, exclusions are limited so far, and various exclusions granted last year are expiring with very few being renewed. Therefore, despite the exclusions and Phase One deal, importers are unlikely to feel substantial relief.
Tectonic Shifts in U.S.-China Trade Patterns Continue
Notwithstanding the Phase One trade deal and the exclusion process, the U.S. administration and a bipartisan group of senators and representatives in Congress continue to closely scrutinize China’s trade, innovation and related policies that are perceived to threaten U.S. national security. In addition, some have called for continued restructuring of the U.S. supply chain and industrial base to strengthen the United States’ ability to respond to crises like the virus outbreak. For example, U.S. Trade Advisor Peter Navarro has called on the U.S. government to further limit reliance on global supply chains and encourage the domestic supply of medical products, and recently indicated that an executive order to this effect was being drafted. In calling for policies like these, Navarro and some in Congress have pointed to China’s dominance of certain key medical supplies, medicines and active pharmaceutical ingredients. Prior to the coronavirus, Chinese factories produced about half of the world’s output of masks. Now that they are up and running again, factories have increased production five-fold, but it is still not enough to meet global demand.
Finally, the United States and most other major trading partners have closed their borders to foreign visitors and are initiating programs and policies to protect or encourage domestic production of essential medical supplies like surgical masks and ventilators. Canada and the United States agreed to close the border to all non-essential travel, which President Trump clarified would not affect trade between the two nations. Bolivia and Paraguay canceled flights to Europe. Australia is requiring a 14-day time lag for visitors who recently visited China, Iran, South Korea or Italy. The European Union has restricted exports of protective masks, goggles, visors and medical garments. China, India and Russia have also imposed export restrictions on certain medical supplies. South Korea has banned the export of masks altogether.
Chinese factories’ willingness to try to meet global demand as well as the continued movement toward a Phase Two deal may be a silver lining to COVID-19‘s devastating impact on global trade. However, such a deal is far from a foregone conclusion, as developments easing and heightening U.S.-China tensions occur on a daily basis.
For companies with global supply chain concerns, it is critical to understand and respond prudently to these rapid developments. Consulting with legal counsel to develop comprehensive customs, trade and trade policy strategies can help your company manage supply chain risks and obtain tariff relief in these challenging times. It is also especially critical for companies with domestic manufacturing operations to keep an eye out for distortions in global trade, which can be particularly harmful, and which may be remedied by the filing of an antidumping and countervailing duty case.
As the number of cases around the world grows, Faegre Drinker’s Coronavirus Resource Center is available to help you understand and assess the legal, regulatory and commercial implications of COVID-19.