2019 Outlook: Decision Making In An Era of Uncertainty, Views from Across S&P Global — Panjiva
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2019 Outlook: Decision Making In An Era of Uncertainty, Views from Across S&P Global

Global 722 Outlook 42

S&P Global Market Intelligence Panjiva held a 2019 Outlook event on Jan. 31 in New York City. As well as summarizing our outlook for the year, discussed in Panjiva research of Jan.10, a number of new topics were addressed. This report covers the main questions and answers, as well as data-driven insights. A full replay of the event is available here.

The comments that follow are unattributed and are paraphrased from answers given at the event and do not represent the views of S&P Global Market Intelligence Panjiva.

Panel: The impact of U.S. Trade Policy in 2019

Beth-Ann Bovino, Chief U.S. Economist for S&P Global Platts
Mark Schwartz, Director of Strategy for Platts Analytics
Chris Rogers, Research analyst at S&P Global Market Intelligence Panjiva (Moderator)

Q: Does the U.S.-China trade war matter for the U.S. economy?

The trade war certainly has a significant impact on some parts of the economy, for example farming. That can have a political knock-on effect at the next elections. However, the U.S. economy is so large and so reliant on domestic activity that the “tit for tat” tariffs make only a marginal impact on S&P Global Ratings forecast of GDP growth of 2.3% for 2019.

Q: Will the trade war have an impact on oil prices?

The biggest issue for the oil price would be a recession, but even without that and trade policy there are a lot of moving parts to think about. One is that we are in the sixth year of growth in global supply with little sign of it stopping soon. There’s something of a disconnect with trade given that the world’s second largest oil consumer (U.S.) is also is fastest growing producer.

Across the commodity stack China is an expanding consumer including oil, liquefied natural gas (including U.S. exports), ethane and especially coal.

Planned Chinese purchases of U.S. oil as part of the solution to the trade war won’t have a significant impact given China will just buy less oil from other markets. It is nonetheless an easy concession given state-owned enterprises can make the purchases even if they are less cost effective due to extra transportation costs.

Q: Does the U.S.-China trade war matter for shipping markets, and if not what does?

Not especially given the products will just be shipped from other markets instead. The bigger issue for shipping being tracked by S&P Global Platts are the IMO regulations on sulfur emissions. There’s no sign that the rules, due to come into place from Jan. 2020, will be delayed. The challenge will come from the refining industry being able to keep up with demand for low sulfur fuels.

Challenges include ensuring fuel consistency, the logistical delivery issues, retooling refineries and higher costs. On the latter the spread between clean and dirty fuels is already widening as a response to relative demand. At the minimum there is a risk that, if the economy fades, the shipping industry will simply put the higher costs onto the consumer.

Indeed that could be transformative for pricing of fuels used for land freight and personal transportation too. Platts estimates that the impact on the cost of diesel could represent a tax of around 0.5% globally on consumer spending. That’s come despite an improvement in fuel efficiency of the economy with energy being 5% of consumer spending now from 8% in the 1980s.

Q: Is there a risk of the trade war resulting in higher inflation, and does the Federal Reserve care?

Tariffs on imports from China will have a negative impact on customers purchasing power given that tariffs are simply a tax. There is some sign of businesses absorbing the costs of tariffs rather than pushing them through to consumers.

The impact on inflation should therefore be limited in the context of Federal Reserve decision making. Arguably the risk of higher fuel prices already referred to is a bigger issue given the impact on consumer spending of higher prices and visibility of autos as consumption item.

Data insight: U.S. import prices deflated by 0.64% in December compared to a year earlier, in part due to lower oil prices but also as a result of modest price deflation on Chinese exports as a result of shippers sharing the burden of higher tariffs with their customers.

RETURN OF DEFLATION, COURTESY OF FUEL AND CHINA

Chart segments U.S. trade price inflation by direction and category. Calculations include Bureau of Labor Statistics data. Source: Panjiva

Q: Has the reformation of the U.S.-Mexico Canada Agreement had a material impact on the economy?

The original NAFTA has certainly had benefits with trade between the three countries having been increased four-fold since it was brought into position. Retaining it is vital and the impact on supply chains should it go are often underestimated. Indeed the debate over the state of the trade deficit may be looking at it the wrong way – for every $1 of imports from Mexico 40 cents came from products made in the U.S., for Canada the proportion is 25%.

Q: Would a reduction in the U.S. trade deficit be enough to satisfy the U.S.-China trade talks?

The bigger issue is that there is not enough saving going on in the U.S. and it’s consumption that is driving the increase in imports. Even if imports from China drop the imports from elsewhere will increase. From a political perspective there’s certainly a need to demonstrate a cut in the deficit, perhaps through increased Chinese purchasing, but that’s a necessary but not sufficient condition for success.

There’s a lot that China is already doing in terms of court hearings for Intellectual Property protection and changing investment rules for foreign firms. The process of liberalization of services can also make a difference to the overall deficit by aiding U.S. exports of services as well as goods.

Data insight: U.S. exports of services are certainly the junior partner to goods. Total exports of services reached $825.3 billion in the 12 months to Oct. 31, equivalent 49.3% of the exports of goods. Growth has also been much slower with an expansion of 4.6% year over year compared to a 9.5% expansion for goods.

SERVICES SMALLER BUT STEADIER

Chart segments U.S. exports between goods and services on a monthly and 12-month average basis. Calculations include U.S. Census Bureau data.  Source: Panjiva

Q: Have the costs of trade liberalization on employment and reduced industrial footprint been lost in the promotion of the benefits?

An MIT study showed that China’s entrance to the WTO did cost the U.S. jobs, but that came at the same time as a technological revolution that may have led to the jobs being lost anyway. Addressing the employment impact of trade is something that policy makers need to do a better job in addressing. Looking ahead we may be seeing a shortening of supply chains, mediated by technology such as 3D printing, that could change the game once more. This example of technological innovation need not be negative if we can learn to adapt to this new game.

Fireside Chat: Decision making in an era of policy uncertainty

Doug Peterson, CEO of S&P Global
Eric Cantor, Vice Chairman of Moelis & Co.
Josh Green, Co-founder of S&P Global Market Intelligence Panjiva (Moderator)

Q: Should the trade tensions between the U.S. and China be a worry for the Federal Reserve?

The trade tensions can reduce business confidence. Historically the Federal reserve has focused on two main indicators of employment and inflation. Increasingly though business confidence is becoming a part of their mandate – if anything though we maybe seeing an increase in confidence.

The tensions should be seen through the lens of the the trade policy motivations of the Trump administration. Actions so far can be divided into three buckets, all of which meet both policy and political aims: steel and aluminum tariffs – a symbolic but small industry; the automotive industry which is huge economically but also symbolic for the President; and the great rivalry with China. It’s the latter that’s the most relevant.

Q: If the trade war is really about a great powers struggle between the U.S. and China, has the U.S. already lost?

There’s a serious debate to be had whether it is too late. We have gotten to the current position in part because of Chinese policies towards intellectual property and use of other trade barriers such as investment restrictions. Going forward it’s important to ensure a level playing field as the next generation of technological advances arrive.

Q: Does President Trump even want to get to a yes? Does the Huawei court case matter?

China has just completed a 40 year process of economic development, and three years ago it decided there was a need to improve the welfare of non-coastal cities by widening the consumption economy. That’s led the Chinese government to become more import minded. The soybean industry provides a great example of both the Chinese government’s willingness to act in promoting imports while also using purchasing as a political weapon.

From a political perspective the agricultural sector is also right at the heart of the trade debate, and may become a challenge for President Trump in the run-up to the next elections. With $12 billion of support already provided the President may be willing to strike a deal if it contains a strong agricultural component.

Access to the market for services will also be important – particularly as this has been an under-regarded area of debate which has so far focused on trade in goods. Recent moves to liberalize overseas provision of financial services is an encouraging sign here.

The White House has insisted that the Huawei case is separate as it involves breaking the law and sanctions rather than being directly associated with trade negotiations. It does nonetheless complicate the geopolitical situation.

There’s also been a knock-on effect from the China-U.S. trade war on the investment market, with a noticeable slump in Chinese-outbound M&A over the past two years.

Data insight: Soybeans have been at the heart of the U.S. China trade war. U.S. exports to all countries in the 12 months to Oct.31 fell 10.2% year over year. Brazil meanwhile, which displaced the U.S. as China’s largest supplier, saw an increase of 23.1%.

BRAZIL’S BEANS BOUND AHEAD OF AMERICA’S

Chart compares exports of soybeans by origin.  Source: Panjiva

Q: What are global businesses worrying about at the moment – does the trade war figure?

The World Economic Forum in Davos this year was much more focused on business rather than politics, but the number one risk flagged was Brexit, with many businesses appalled about the lack of a plan of development. Industries that are panicking include airlines, the automotive industry and pharmaceuticals. Finance may be a bright spot given the agreement between ESMA and the FCA to continue services “pass-porting”.

Other major concerns include addressing the rise of a populist backlash against continued globalization – arguably a driver of Brexit as well as protests in France and strikes in India. There’s also increasing concerns about the risks of a recession.

Data insight: The European Union accounted for 77.0% of the U.K.’s imports of medicines in the 12 months to Nov. 30, equivalent to £19.2 billion ($25.1 billion). A rush to build inventories has been left late though – imports in November were only 2.4% higher than a year earlier.

PAST PEAK DRUGS AHEAD OF BREXIT

Chart shows British imports of medicines on a monthly and 12-month average basis. Calculations include Office of National Statistics data.  Source: Panjiva

Q: What has the current U.S. administration gotten right and wrong?

The decision to withdraw from the TPP trade deal has resulted in the U.S. being left behind as that deal expanded to include Japan, Canada and Mexico among others. Staying engaged with TPP would have been a great way to encourage the expansion in services.Arguably the U.S. should re engage with free trade agreements – as it is doing in negotiations with Europe and Japan. It is vital to continue to process of not allowing China to set the rules of global trade.

Q: What can businesses do manage through uncertainty?

The first point is to think long-term – many of the worries discussed throughout the conference such as tariffs are essentially short-term in nature. Second is to remain customer-focused and shape you business processes, strategy and supply chain to best serve your customers. Third is to manage what you can control, and accept that there are external risks that can be mitigated but not always offset.

Q: Will this be the year that Republicans in Congress assert themselves?

The application of section 232 duties on the automotive industry could change everything politically, and could lead to a revolt on Capitol Hill given the scale of the industry and the depth of its supply chain. There’s also risks to the passage of the U.S.-Mexico-Canada Agreement (USMCA) – should the Trump administration make good on its threat to cancel NAFTA unless USMCA is passed it may find a newly emboldened Democratic House may vote against it in March.

Data insight: The automotive industry accounted for $297.1 billion of U.S. imports when including vehicles and parts in the 12 months to Oct. 31. With 43.4% accounted for by USMCA, 19.4% by the EU and 17.3% by Japan – all of whom are exempt from the new tariffs, in theory – it isn’t clear whether the remaining targets led by South Korea and China will be “worth” the political cost.

MOST U.S. AUTOS IMPORTS ALREADY EXEMPTED FROM TARIFFS

Chart segments U.S. imports of vehicles and auto-parts by origin on a rolling 12-month total basis.  Source: Panjiva

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