December 22, 2024 • 44 mins
In this episode of Logistically Speaking, co-hosts Scott Case and Cameron Roberts sit down with Paul Bingham, Director of Global Intelligence and Analytics, Transportation Consulting for S&P Global Market Intelligence, to dissect the potential impact of sweeping new tariff proposals following the November 2024 U.S. presidential election. The discussion centers on how proposed tariffs - ranging from a global 10% import duty to targeted levies of up to 200% on specific trading partners - could reshape international commerce and supply chains. Bingham reveals how S&P Global has recalibrated their economic models to account for these dramatic policy shifts, offering insights into what businesses might expect in 2025 and beyond.
The conversation explores the ripple effects these tariff changes could have throughout the global economy, from consumer prices to fuel costs, and examines how different sectors might adapt to this new trade landscape. Cameron details the means by which the administration can promulgate some of these proposals on day one based on the power vested in the Executive Branch by Congress.
Bingham shares detailed analysis on how these policies could impact critical trade relationships, particularly with Mexico and Canada under USMCA, while also addressing concurrent challenges in global shipping, including Red Sea disruptions, evolving air cargo capacity, and the ongoing transformation of international supply chains. The discussion further examines the intersection of tariff policy with other key economic factors, including the CHIPS Act implementation, de minimis trade rules, and the potential responses from BRICS nations.
About Paul Bingham:
Paul Bingham serves as the Director of Global Intelligence and Analytics, Transportation Consulting for S&P Global Market Intelligence. With decades of experience in economic and transportation analysis, Bingham is a recognized expert in global trade patterns and supply chain economics. He regularly provides strategic guidance to both public and private sector clients on transportation and trade policy issues. His work at S&P Global includes leading teams that develop economic forecasts and analyze global trade trends, helping organizations navigate complex international market dynamics and policy changes. Bingham is a frequent speaker at industry conferences and events, including the recent WESCCON gathering of customs brokers and freight forwarders.
Relevant Links:
USMCA (United States-Mexico-Canada Agreement) https://ustr.gov/usmca
S&P Global Market Intelligence https://www.spglobal.com/marketintelligence/en/
International Emergency Economic Powers Act (IEEPA) https://home.treasury.gov/policy-issues/financial-sanctions/sanctions-programs-and-country-information
CHIPS and Science Act https://www.commerce.gov/chips
Section 232 Trade Investigations https://www.bis.doc.gov/232
De Minimis Trade Rules & Section 321 https://www.cbp.gov/trade/basic-import-export/e-commerce/section-321-value-increases
Federal Maritime Commission (FMC) https://www.fmc.gov/
TIACA (The International Air Cargo As
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Transcript
Episode Transcript
Available transcripts are automatically generated. Complete accuracy is not guaranteed.
(00:00):
My name is Scott Case. I'm Cameron Roberts. And this is Logistically Speaking.
(00:10):
Hello, Cameron. How are you, sir? Very well. Thank you for asking, and I hope
everything's going well in Chicago. It absolutely is. Since the US elections on November 5th,
trade is looking like it's shaping up to be a game of percentages. 10, 25, 60, 100, 200 percent.
I mean, you could pick your percentage, but the president-elect returning to the White House for
(00:32):
a second term, he set down some early figures, all of which would inevitably be passed along
to the ultimate purchaser. Canada and Mexico, who he claims are responsible for a bevy of problems
facing America, including, but not limited to, drugs, immigration, and unfair automobile imports,
were among the first to be singled out. Even with the governing regulatory framework in place
(00:53):
for the USMCA, he still proposed a 25 percent tariff on imports from Canada and Mexico,
currently the US's two largest trading partners. Along with tariff targets placed on America's
border neighbors, he's proposed an additional 10 percent on goods of Chinese origin, 100 percent
on automobile imports, and specifically a 200 percent tariff on automobile imports from Mexico.
(01:17):
So, Cameron, they're talking about a range of tariffs, starting as low as a 10 to 20 percent
blanket on all imports, 25 percent on Mexican and Canadian imports, which to your two biggest
trading partners, when you're in a multilateral trade agreement with them, seems like a bad idea,
up to 100 percent on automobile imports, and as much as 200 percent on Mexican auto imports.
(01:43):
And I know we're joking about this, but most things happen in the US because of either
congressional approval or executive authority. How would they do this, especially with what
the president-elect has been saying about putting these things in place literally on day one?
Well, first, I think Congress has already made a decision. You know, the Constitution of the
(02:06):
United States vests the power over tariffs trade to Congress, but Congress has passed a number of
statutes that transfers that power to the executive, mostly at the behest of the executive,
to be able to act quickly and with efficiency to address urgency, emergency situations,
(02:27):
crises. And, you know, what is or is not a crisis is really how you frame the issue.
And certainly, the president-elect has done a good job of framing border security as a,
quote-unquote, emergency. And I think there would be a lot of consistency in what he said on the
campaign trail, what he said in 2019 when he threatened Mexico to impose tariffs if they
(02:52):
did not address the continuing border, quote-unquote, crisis stemming from illegal
immigration into the United States. Back in 2019, there was a deal that was struck that
prevented the use of these tariffs, whether they be long-term or short-term. The AIPA,
International Emergency Economic Powers Act, would give the president the authority
(03:15):
on a short-term basis to implement these sort of broad across-the-board tariffs in a situation
where they can deal with an extraordinary threat. The Section 122 balance of payments authority
would also allow the president to impose an additional 15 percent tariffs on imports for
(03:35):
150 days whenever the fundamental international payment problems required special import
measures to restrict imports. And this can be used in various examples, but that's another option.
Then Section 338 of the Tariff Act of 1930 offers, again, broad powers to block imports completely.
(03:58):
It's more of a sanctions type of play, but there's a variety of different tools in the
president's toolbox. And what he talks about all the time is the number, tariffs, tariffs,
tariffs, X percent, Y percent. But he never talks about what the legal basis for those tariffs are.
So which of these tools, whether it's Section 338, Section 122, Balance of Payments Authority,
(04:26):
International Emergency Economic Powers Act, the 301, the 232s, these are all available to
the president. And what he chooses to use is at his discretion and what his advisors tell him to do.
So I think it'll be really interesting to see which of these tools he uses.
(04:48):
I don't think it's a matter of if, it's which tools are justifiable for the circumstances as
they present themselves. No question. In October, S&P Market Intelligence's Paul Bingham,
speaking at the annual Wescon gathering of customs brokers and freight forwarders,
provided his company's estimates for growth in 2024. When asked, he said those figures
(05:10):
were based on a continuation of global trade policy and tariffs into 2025 and beyond.
Paul and his team went back to the models, and this podcast will be one of the first
airings of their findings and predictions based on the saber rattling that's happening today.
This episode will be focused on a number of things. First, we need to explore and explain
(05:31):
the authorities by which tariffs can be increased and which ones can be done unilaterally by the
executive and which ones, if any, are going to require congressional approval. Second,
as the administration's policymakers and agency leaders are being named and their policies are
coming into focus, what impact will that have on the US and global economies? And what are the key
(05:51):
elements that bear watching? Thirdly, an interesting phenomenon is taking shape,
shipyards and carrier order books coming into 2025. In a note on November 26th, S&P Global
Intelligence, who Paul works for, said, quote, the most pressing issue confronting the container
shipping market as 2024 draws to a close is very likely the impact of the surge of new vessel
(06:14):
deliveries that occurred this year and last and when and to what extent it will weigh down the
shipping market in 2025. Some 3.15 million TEUs and new deliveries are expected this year,
following the 3.16 million TEUs in 2023. There's only so much extra tonnage required by the Red
Sea route diversions, and it's reasonable to assume that at some point in the future,
(06:37):
traffic will return to that route. Our guest today is Paul Bingham, Director of Global
Intelligence and Analytics, Transportation Consulting for S&P Global Market Intelligence.
So, Paul, what have you been doing the last month and a half or two months?
Well, obviously, there's been a lot of recalibration, let's put it that way,
(07:01):
since we've seen the results of the election here and globally, some other things happening.
We've had a prime minister removed in France, and it's not as if only the United States has had
an election and some political issues affecting the outlook for policy, affecting trade
and the economy generally, in that time. But let me back up first and say,
(07:25):
thank you for the welcome. It's great to join you and good to catch up after what we had discussed
with the folks that were able to be there at WESCON. In the last six weeks or so, company-wide,
not just me, but there's many economists in S&P Global and all of them having to try to
(07:46):
basically update models and forecasts with not only the latest data that we capture on an ongoing
basis, but also making some assumptions about implementations of policy. And we don't know
with certainty what's going to happen in terms of some of these policy developments.
Obviously, some of the language used during the campaign was probably more a negotiating stance
(08:11):
than what we expect to see actually enacted when we get into 2025. But we've had to make some very
clear assumptions to be more realistic about the modeling that we do to provide forecasts
to the customers that are going to reflect reality and our best estimate of what that might be.
So, we have a forecast council within the company, within our division, and there's an
(08:36):
agreement back and forth with negotiations between our economists about what assumptions
should be for baseline and alternative scenario forecasts that we update in some cases every
month. And consequently, our latest forecast reflects some assumptions, which we subject to
further revision every month as we see further developments and more certainty about what
(08:58):
the policies are going to be. And their timing, as you mentioned, also matters quite a bit.
But we can observe the industry's reacting right away, and we're capturing some of that in the
data in terms of supply chain managers and others making decisions in expectation to try to mitigate
risks and to deal with what's going to be coming no matter what the details are. So, let me start
(09:21):
actually with the top line is we've made some assumptions. Our baseline forecast right now
for the United States trade policy assumes that there will be a broad, unprecedented 10%
tariff applied on U.S. imports, and that mainland China will be subject roughly to a 30%
(09:45):
tariff rate. Both, you know, those are increases from where we are today, and most substantially
would be that 10% global import tariff, you know, just dramatic in terms of, you know, the scope and
range of the trade relationships and the commodities, both finished products for end
consumption and all the intermediates that feed manufacturing and other uses within the country,
(10:09):
you know, subject to that tariff. And importantly, for timing, we're assuming that takes effect
in the second quarter of 2025. We're not assuming that these take effect in January. We're assuming
it takes a little bit of time for the administration, even if they announced them on day
one, to actually have them take effect, you know, that that's going to take some amount of time,
(10:30):
because quite frankly, some of those imports are going to be, you know, on the water. They'll
already be en route here on January 20th. And we assume that some of that timing and the decisions
that affect them, you know, have to happen with a little bit of a lag. But by the second quarter
in 2025, we'll be seeing the economic impacts of tariff rates that are dramatically different.
(10:52):
We've had to make some other assumptions with that. It's not only assumptions about tariff
policy, we're making assumptions about tax policy, about interest rates, about the workforce
in relation to the threatened actions regarding immigration and even deportations in the United
States. Turning back to tariffs, we're making some assumptions about retaliation. We've already
(11:14):
heard some of the foreign country trade partners of the United States start to say that they will
react to tariffs imposed on them. In the case of mainland China, they're not even waiting for some
of the tariffs. We've seen some trade policy actions very recently regarding exports of
some of the rare earth minerals that the U.S. economy depends on that we get from China.
(11:35):
So some of the trade policy reactions are happening already, even before January 20th.
It's already affecting the economy, already affecting U.S. business.
And we sat down and we were looking at the numbers for America's trading partners. And
while certainly China is a large thing at $575 billion in 2023, in 2023 trading partners number
(11:56):
one and number two in order were Mexico at $798 billion and Canada at $773 billion. That is
everything from automobiles to produce to finished goods to a significant amount of oil and
petroleum products. What is your modeling showing if they move forward with, say, the 25 to 100%
that is being threatened? Well, we actually haven't done a complete set of forecasts for that
(12:21):
scenario on the whatever you want to call it, the fentanyl cross-border trade flow tariffs or
whatever the Trump administration might call them. But obviously, that would have a substantial
impact on U.S. trade by focusing, even if you ignore the threatened level of tariffs in China
embedded in that announcement. You know, with the top two trade partners, enormous amount of trade
(12:45):
flows back and forth across the border every day. We're talking billions, over a billion dollars of
cargo every single day that you add that kind of a tariff on top of. That is clearly inflationary
and would start to impede some trade flows. You know, that today are crucial to all three
economies in the continent. You know, an enormous proportion, over 80% of Mexican exports are
(13:08):
into the United States, an enormous proportion of their economy. And in fact, increasingly so over
the last decade or so has been focused on interactions with the U.S. market. And Canada,
obviously, you know, incredibly important role that the U.S. economy plays in the Canadian economy
and predicated on those trade flows. So we saw right away, you know, the Canadian government
(13:29):
react. And we expect those numbers have to be something where there's some negotiations about
what trade that would apply to or what the level would be. But of course, we don't really know,
you know, that it could vary. Well, one of the key imports into the United States is gas and oil.
And obviously, the president has spoken quite a bit about exploiting U.S. petroleum reserves,
(13:49):
increasing domestic production of gas and oil. But given the dependency that the United States
has on imported oil from Mexico, how long do you see the proposed Trump tariffs coming in to affect
the price of gasoline, if you've looked at that at all? Because, you know, that and diesel obviously
are key inputs into our listeners' industries. You know, everything we do is predicated on fuel
(14:16):
surcharges. And look at trucking, you look at any of the major sectors, whether it be rail,
whether it be ocean trucking, again, they all depend on the price of petroleum at some level
in fixing the rates that they charge their customers to move the goods from point A to point B.
Obviously, the price of diesel or gasoline is going to be impacted if there's a tariff on that
(14:40):
gas and oil. Have you looked at that at all? So it's possible that there would be some offset.
However, we're convinced very much so that it would still be inflationary. And inflationary,
primarily, like you said, immediately through the refined fuel product prices that would be then
sold at a higher price in very competitive markets. But they would go up because of that proportion,
(15:00):
that big proportion of feedstocks that would be faced with higher costs for producing the
petroleum products from the crude oil. And then that would pass through to all the users in
the economy. It's part of the story that we have and the modeling where inflation would be running
at a higher rate under imposition of tariffs through the economy, with some certainty and
(15:21):
enough so that it has big macroeconomic impacts that we can talk about. I mean, it's not just
affecting the transportation industry in terms of those increased fuel costs. It works very quickly
through the entirety of the economy through supply chains operating at a higher cost and products
being delivered to customers across the board being delivered at higher costs. It becomes
inflationary. That forces the Federal Reserve Board to slow down the easing that they've been
(15:45):
engaging in that they started two months ago. And in the face of higher inflation, you have
consumption and you have other impacts across industries in terms of price competitiveness.
And ultimately, it results in slower growth in the economy in 2025. And in fact, that's the new
baseline forecast. With those assumptions that we have in the alternative scenario that we've put
(16:07):
into place for higher tariffs, we have lowered the forecast growth rate for the U.S. economy as a
whole in 2025 and 2026 as partly a reflection of those tariff policies, even with some of the
other assumptions about policies that I made reference to earlier, like on tax policy that
otherwise would be stimulative. We still believe that overall the combination of policy assumptions
(16:29):
that we're making under the new administration in Congress are going to actually slow the economy
against the baseline that we had had prior back in October. Can we have a conversation around BRICS
in conjunction with this? Because I think that they've also made their way into the news the last
couple of days. Brazilian President Lulu has been in hospital with brain surgery. Some question
(16:51):
about his policies and his health moving into their elections, which I believe are in 26.
You certainly have the departure of the Assad regime in Syria. So Russia's trying to figure
their investment out there. India just managed to secure peace with their dock workers and I
believe five or six unions. So the labor concerns that were happening in India have
(17:11):
sort of subsided. But then you also had the president again stepping out and saying that if
they get the urge to move away from the dollar, that he'll just put 100 percent duty on top of
anything out of there, as if it's just like grounding a child for misbehaving.
Have you put any thought or weight or seriousness into that component of it? Or is that just
(17:33):
something that's just in the watch and wait bucket for the moment? Well, I think it's a little bit
more than watch and wait in terms of understanding that the new administration is going to have
a U.S. dollar exchange rate and the U.S. being used as the reserve currency for trade transactions
globally on their radar as one of the policy issues that they're going to monitor and use
(17:53):
in negotiations. Whether or not the administration would actually go through with that kind of
dramatic increase in tariffs against those countries collectively is a little less certain.
Certainly, there's a very different relationship in trade between Russia and the United States
and India and the United States or Brazil or China within the BRICS. And the BRICS includes
South Africa and there's sort of a greater BRICS that there's some other countries.
(18:16):
And also, we don't really see a dramatic move by those countries aggressively to try to replace
U.S. dollar. There's clearly in some of the trade sanctions evasion on the part of Russia and its
trade partners, an attempt to move away from the dollarization of that trade because of the great
restrictions being imposed not only by the United States, but some of the other Western allies in
(18:38):
terms of trying to increase the impacts of the sanctions against Russia and its trade partners
in those countries within the BRICS that continue to trade with Russia in some commodities.
But that having the foreign exchange rate and the use of the U.S. dollar as the default
currency for trade transactions as a factor is another one of the elements of trade policy to
(19:00):
watch in terms of how that could affect global commodity market prices, global commodity trade,
and therefore, ultimately for the United States, its position as an economy still engaged with
countries around the world. And some of those have been increasing their importance. Obviously,
we've noted some decrease in direct trades with China, as you've noted. Its position has fallen
(19:24):
in the ranks of U.S. trade partners. Clearly, Russia has fallen off to where the U.S. is trying
to eliminate it as a trade partner as much as possible. But a country like India, the U.S.
government has been moving closer to, as we've seen some of the changes in supply chains, the
of India has been increasing. And India as a country and their economy has been growing quite
(19:45):
strongly. And in fact, we're still forecasting it to be amongst the strongest growing economies
in 2025, even with the headwinds that they faced and continual institutional and some of the other
obstacles that India faces as a country and as their economy tries to engage more in foreign
trade. Paul, one of the things that we talked about before the show started was, you know,
(20:07):
who is going to be the winners, who are going to be the losers of the situation? And, you know,
I think we discussed it. Mexico clearly benefited from the first round of the Trump
administration tariffs by nearshoring and nearshoring ended up being, let's move everything
to Mexico for a final assembly and try to, where we can, exploit the USMCA opportunity.
(20:31):
But India certainly was not far behind in being a beneficiary as well. Do you see any other
countries other than Mexico and Canada overall benefiting from tariffs to serve the US and the
Canadian and then sort of the USMCA market? But you're not only depending upon Mexico as
you're offshoring, you're serving other markets in Europe and elsewhere from factories that may
(20:55):
no longer be in mainland China, but are not necessarily reshored to the end market.
And that means the onshoring back into the United States of production is still very limited in
terms of what the potential in our forecast for that. It's more likely to see this continual
evolution of trade production to other countries of which, you know, India is one position to
benefit. But Mexico is positioned to benefit in their relationship to US and Canada, perhaps
(21:21):
not so much globally in terms of Mexico becoming a factory floor to serve everywhere. But I want
to add to that Mexico has free trade agreements with other countries outside of the hemisphere,
and they are benefiting somewhat from that, that there are some companies that are looking
to production in Mexico to not only serve the US and Canadian markets as well as Mexico,
but to also have some proportion of their production go even, say, to Europe.
(21:45):
I just wanted to finish this thread because, you know, it's always been surprising to me that,
you know, we don't have something of a newer version of the Monroe Doctrine where we're
expanding our relationship southward and taking advantage of what is arguably an
underutilized labor pool in South America. It seems to me that, you know, because of the
migration issues and some of the narco issues could be resolved if they had stronger economies
(22:10):
in those particular regions of the world. And yet we don't really see that happening as readily as
I would have thought. Are you seeing any shifts down into central South America and developing
that region, if for no other reason than to address some of the belt and road expansions
that the Chinese have tried to put in? And certainly we saw the administration kind of,
(22:32):
shall we say, get its bristle, if nothing else, at the involvement of China building the port in
Cairo, Peru, which resulted in, you know, quite a big splash over the Trump administration just
prior to Thanksgiving. Well, I think the Latin American story remains one that goes beyond
Mexico in terms of being an opportunity for the United States. I think the challenge for
(22:56):
the United States is sort of at the foreign policy level has been, you know, the frustrations
where it really hasn't been a regional level effort. I mean, if we look at Europe trying to
negotiate a free trade agreement with Mercosur, with Latin America, you know, they've been at it
for 25 years and it's still not done and it still faces some political headwinds. Very difficult to
regionally have bilateral or regional level trade agreement equivalent to USMCA with the rest of
(23:20):
Latin America. So instead you end up dealing country by country and there there's great
extremes in terms of the potential for doing that. I mean, we had already put into place free
trade agreements with Chile and with Panama and there's others that are possible. But if you look
at like a country like Venezuela, you're not going to be able to advance much of anything.
So it becomes then incumbent on the US and for supply chain managers to deal with the opportunities
(23:45):
as they exist country to country, where there's country risk, there's volatility, you covered some
of the factors that exist at risk. There's others in terms of workforce and even transportation
access, as you mentioned, you know, the competitiveness and the reliability. But long
term, that potential within the hemisphere still remains. And I don't think any of the
longer term policy strategy development people that exist in Washington, D.C.,
(24:09):
you know, give up on Latin America as a potential long term partner, not only as a source for
imports, but also as a continuing source for exports from the United States competitively,
able to reach it in some ways much more easily than some of the more competitive markets we
may face trying to export into in Asia or other continents around the world.
Wanted to ask you, the US steel and aluminum industry was, I think, one of the advocates
(24:34):
for increased duties, more protectionism with the idea that we would see increased domestic
production. Obviously, based on the 232 goals, that's going to be kind of part and parcel with
our national defense. Can you comment at all whether that's been a success based on what
has happened in the last four years and the last eight years? What has been the impact of these
(24:56):
tariffs thus far on the US domestic aluminum and steel industries? Well, it has meant those
commodity prices domestically are higher than they would have been, you know, absent those tariffs.
It has protected some of the jobs in manufacturing, the primary steel and aluminum metals
manufacturing companies in the United States that otherwise would have been subject to the
(25:20):
foreign competition and likely existed with lower production, lower sales and lower employment.
So I don't think there's any dispute that that's been successful defined narrowly in terms of
protecting those jobs. As an economist, you look beyond that, though, to say, OK,
was that the priority that as a country, you know, we chose to prioritize those jobs over,
(25:42):
say, other jobs in, say, metal fabrication or other sectors of manufacturing where perhaps
employment is much larger that our consumers and users of steel and metals as inputs to their
manufacturing activities, their export sales, their employment. And that's where economists
look at it with some skepticism in terms of did that achieve bigger picture goals successfully?
(26:07):
But, you know, if that's the decision that politically we've worked out as a country,
that we're putting prioritization on preserving that, and that can include that element that you
mentioned of national security. You know, we don't want to put ourselves at risk as a country to not
have the capability to produce those those goods here at home if we need applications where we
and need to have them for use in the military sector. But that comes at a cost and that comes
(26:32):
at a price. And understanding, you know, that that's inflationary in that in that sector.
It also makes some of the other export sectors within the United States perhaps less competitive
trying to compete and sell their manufactured exports to overseas markets when they have to
embed in it the higher cost inputs from the tariff protected U.S. production.
A question for you, Paul, around the Infrastructure Act, which was passed here in
(26:56):
and has been giving out a lot of support and both infrastructure and chips rather.
So the incoming administration has made noise that any money that's not been awarded so far,
they're interested in taking back or clawing back in some fashion, given how they're trying
to centralize everything and make sure that it's here in America, here in America, particularly,
you look at the restrictions on AI chips and chip fab equipment going into China. Do you see that
(27:21):
just posturing at this point or do you see them willing to just sort of like forego that in the
interest of finding other ways to sort of boost American manufacturing? There's a level of
production where those goods, those actually have to move offshore and come back to the United
States. So the industrial policy is tricky and very difficult to achieve, to have, you know,
the U.S. government presume that it knows how to manage these supply, these global supply chains.
(27:46):
You know, when the U.S. government is focused on the U.S. markets and the manufacturers are
focused on global markets, you know, all the customers everywhere and all the potential
suppliers everywhere, which makes that, you know, Congress trying to dictate that or the
administration from the White House trying to influence it quite challenging to achieve those
goals that they have. Still acknowledging that there may be national security and some other
(28:06):
concerns that are quite valid and may be that collectively the United States as a whole chooses
to follow through on to actually implement and say, you know, we need to have this capacity
under the control of the United States and therefore we're going to, you know, put federal
and government funds towards these industry sectors that we've selected and identified as
critical for national security reasons. Well, I know the U.S. committed $52 billion to the
(28:31):
semiconductor industry back in 2022 through the CHIPS Act. Are we seeing the dividends of that,
Paul? On de minimis, you know, clearly we've seen that being exploited in ways that were never
anticipated and likely will result in some reaction on the part of Congress to reduce the,
you know, the loophole, if you think of it that way. I don't, as an economist, it seems somewhat
(28:55):
arbitrary. Whatever that is, it's not a loophole. It's the way the trade rules are set up and that
volume of trade is following the rules and consumers are smart enough to be able to react
and have services offered to them, which then allow them to engage in the e-commerce that they've been
trained to do through the pandemic and, you know, continue to take whatever options are given them.
(29:17):
So I suspect politically there will be some reduction in de minimis if they lower that
value substantially. There's also that question on de minimis, is it, you know, also, you know,
hiding some of the criminal elements in terms of overwhelming the U.S. government's ability to
actually enforce security? And I know you've discussed that in other contexts, but from an
(29:39):
economics perspective, it may also be that, you know, more incentive for the government to revert
back towards older, lower values of de minimis exclusion and therefore, you know, force some of
that commerce back into the tariff world or at least reduce some of the demand so that you don't
have the current volumes that we're seeing moving through that mechanism, you know, as a portion of
(30:01):
U.S. trade. And it has lots of repercussions in the economy elsewhere. You know, it's upset the
air cargo markets for the conventional traditional air cargo because they've been squeezed out
competing with this enormous volume of de minimis. And that's been complicated by the production
problems with Boeing, where we literally don't have globally the production capacity of aircraft
(30:21):
to provide the demand. I mean, these are the classic supply chain issues where, you know,
one factor leads to another, leads to another. So you've had higher air cargo rates that affected
sectors like pharma and others that traditionally depend on air cargo. That affects those sectors of
the economy. You know, we can we can trace all of this through and you say, well, you know,
when Congress was setting up de minimis values, you know, they weren't thinking about any of that.
(30:45):
You know, that wasn't part of the consideration. But now you say, OK, this has implications in
the economy. What do we do about it? And let's make sure we recalibrate to try to deal with the
realities that we're faced with in combination. And that's not just in the United States. I'm
sure in Europe and elsewhere they're looking at similarly, you know, what the impacts are going
to be going forwards and how the country wants to take a stance to try to control that without
(31:09):
being completely unrealistic. Underlying fundamental reason to have that de minimis
exclusion, you know, still exists and is still practical. It's just obviously the level didn't
work out so well for the United States when they're trying to think about how to manage
what's been the flood of e-commerce with the technology developments and the foreign exporters
that have been able to exploit it. And I think this is really where the conversation takes place
(31:30):
is our perspective, you know, working with the logistics companies out there, how do they
predict and work around these predicted models, changes, forecasts? What do you see the logistics
service provider trying to focus on for its customer base with respect to what you see
(31:51):
happening? Do you see a large increase? Like one of the things we talked about at one point was
we're going to see a surge in ocean transportation to quote-unquote beat the tariff. Is that borne
itself out based on the numbers that you're looking at, Paul? And what do you forecast for
the first and second quarter to the extent you've done that? And what do you think is going to happen?
(32:14):
And one of those alliances, at least as of today, the FMC hasn't blessed off on yet.
I saw there was just a story within the last week or two that they're still working through
some of the details. I think that's the premier alliance. So you're supposed to have two and
only 50% of them are ready to go. Do you see from what you guys are hearing upstream about carriers
either putting back blank sailings that maybe they've taken out because of this amount of
(32:36):
stuff that's moved forward? But then also I wanted to ask you a little bit about order books for 25.
I mean, there are, I think at last count, like north of 3 million TEUs of tonnage on order
for delivery coming soon. Certainly people had to make an accommodation to add vessels to strings
because of what was happening in the Red Sea. At some point, you have to assume that that's
(32:56):
going to get resolved. It cannot remain in perpetuity. So now you push a bunch of maybe
what's on short or long-term charter back into the marketplace. You have new vessel deliveries
coming in as well. What does that then do for rates? Which again, it seems like there's a
geopolitical bump that's to everyone's benefit. And then it just sort of settles back to whatever
(33:18):
sort of the baseline is that people seem to think is the point of agreement.
Well, yeah, this is an issue for the liner industry where they've made profits,
not quite at the level that they were making in 2022, but they've had a very profitable year.
And as a consequence-
Don't give them any more ideas.
Well, and we've just seen another string of orders coming out of MSC for additional vessels
(33:40):
to be delivered starting in 2028. They're still putting capital into more capacity
in the order book. How that all gets deployed is a question. But to your point on how much
of the capacity in 2024 that got used up by that extra sailing distance, all those extra 10 miles
of sailing around Africa rather than Suez for enormous trades, the Asia-Europe trade, the Asia
(34:03):
Med, even for the pendulum services into the U.S. East Coast, that used up, what are we talking,
maybe 7% to 10% of that global fleet capacity that otherwise would have been not utilized to
the same degree. We would have had a very different rate situation, very different
capacity utilization story in 2024 had that not happened. But that was sort of a one-time event.
(34:26):
You don't close off another equivalent Suez Canal and force an additional demand for ton mileage
in 2025. And yet you have an order book that's still out there adding more tonnage. Every month,
there's still additional tonnage capacity coming into the market. So there's still a supply demand
risk that is ahead for the liner industry. And if you layer on top of that some imposition,
(34:49):
some barriers, and some additional friction on world trade, such as a higher protectionist tariff
regime with lowered trade demand, that makes for an even riskier story for the investments in that
capacity to continue to grow at the level that the liner industry has been adding it for international
container shipping. So there could be some dramatically different situations in the future
(35:11):
in terms of that supply demand balance, and therefore pressure on the global liner industry
in terms of how they deploy the capacity that they've still got coming on. You see the overcapacity
in ocean transportation offsetting the lack of capacity in the air, or is it really apples and
oranges? Well, it's mostly apples and oranges, and the volumes are so dramatically different.
(35:33):
In some ways, it doesn't matter, except at the very extreme end of the very high service liner
industry and some of the lower value air cargo that's not, that maybe you could think of as
discretionary if you could plan it and get it on a reliable vessel service that was fast enough to be
a substitute. There is some back and forth though at the margins, and obviously the liner companies
(35:53):
love the extreme high value shipping that they can try to compete with when there's such problems
and disruptions in air cargo. And there's no quick solution to the air cargo industry problem
where Boeing isn't magically going to be cranking out freighters next month. Maybe that de minimis
issue goes away with some of the demand, but you still got other disruptive factors such as having
(36:15):
to fly much longer routes around Russian airspace and some of the other tremendously disruptive
operational issues that have affected the air cargo industry going back to the pandemic that
have continued, that people don't even realize, that continues to be essentially a disrupted
market, running equipment that should have been retired at much less efficiency and much
(36:37):
higher cost in terms of the air freighter capacity or even belly capacity. So on the ocean shipping
side, that's actually a boost to the liner company that they've got some ability to pick
away a little bit of that very high paying cargo from the air cargo business, but still the
volumes are nowhere near the fundamental of what really moves in in containerized shipping. It's
(36:59):
still going to be dwarfed by the underlying fundamental demand for the commodities that
traditionally move in ocean container freight that are now facing tariffs and additional
protectionism. And perhaps weaker economies with slightly lower demand. And don't forget
that a couple of those carriers have gotten into the airline or into the air cargo business too
with their own leased or owned air, with their own leased or own equipment. I was in Miami last
(37:23):
month attending an event that TIACA has and Boeing released their semi-annual air cargo forecast.
And they're still anticipating a bump in air cargo over the next 30 years. But what's interesting is
that they see the growth in the express sector. And then there was another gentleman, Ryan from
Rotate, he's the CEO of that company. And he said that, again, to your point, Paul, about just there
(37:46):
not being enough aircraft out there because of delivery issues. And it's not just Boeing's
delivery issues. There's also some engine issues where a lot of people have had to go back and work
on their fleets because they're having engine issues. One of the things that they've noticed
is that other lanes that traditionally were rich with equipment, they're pulling into more
profitable lanes. So at least as long as that e-commerce is moving right now, that capacity
(38:09):
in that Mercosur space that we're seeing sort of between Latin America and Europe, which is like,
hey, we're going to need air cargo capacity here. Sorry, too bad. That's either running between, say,
Asia and Europe or Asia and the United States in support of air cargo initiatives. And people who
traditionally would take some of those older, more retired passenger aircrafts at the end of
their passenger service lives in 7.6s and 777s, that feedstock isn't available because the new
(38:34):
aircraft deliveries aren't coming online. And as a result of that fact, they're having to hold on to
these aircraft for longer than they anticipated as part of their fleet renewal programs.
Yeah, that's a great summary of the aircraft equipment where it's related to the passenger
aircraft market because of that tradition that you don't find in any other mode of transport,
where you take the older equipment and you actually retrofit it. You make it be able to
(38:58):
have a longer economic life, hauling freight after its days as a passenger piece of equipment.
And how that's been affected by the aircraft production problems that then flows indirectly
into the air cargo market and with no quick solution. Well, I mean, is Sri Lanka trying to
think of itself as a transshipment port between between North Asia and Europe? So, I mean,
(39:19):
you're right to your point. Is it Eastern? Do they have a stable government there?
Not this week. I haven't followed it, but I know that two years ago there was a coup d'etat.
Well, I mean, you run the same risk in Thailand. It's like, is it an odd number,
even number year thing or what? Well, the problem with being an island is you need to import
(39:42):
everything. And in Sri Lanka, we had some stranded cargo that needed to be incinerated.
But the fuel that they used to do the incineration wasn't available because of the Sri Lankan coup
d'etat. And as a result, they couldn't get oil because they couldn't destroy it. So we were
paying DND on a burned out hulk of a container sitting on it on the deck in Sri in Colombo,
(40:06):
Sri Lanka, which is kind of a weird aside that I get all that kind of stuff. But there you go.
I was there in 2023 and can tell you that if you could make things incendiary by humidity,
you wouldn't have needed to import anything. It is a very humid subtropical country with
amazing people who've been through a hell of a lot in their history.
(40:30):
Look at Scott going to Sri Lanka. I did not know. We'll have to explore that at some point.
Tick that box.
Paul, do you have any closing thoughts for our listeners about what we should be thinking about
for 2025 other than perhaps fasten our seatbelts? Because I see a very dynamic,
very while you predict this sort of flattening out, is that because there's going to be a wait
(40:54):
and see attitude by consumers to determine? And by consumers, I don't mean just like Joe
and Mary Public, but by logistics and supply chain consumers, people who are sophisticated buyers of
masses amounts of imported products, people who are really making an investment. Do I
carry my inventory and pay that carrying cost or do I take a risk and import during 2025?
(41:19):
Is patio furniture and Halloween decor out for 2025?
Well, actually, this really gets to the heart of the question for those folks that are not the
transportation carriers, perhaps, but the rest of the economy that's managing the supply chains
for everything where your sales levels, we've been through 2024, the US consumers been pretty
(41:43):
resilient, continuing to spend despite perhaps you survey them and their attitudes are not positive
and yet what their spending behavior reveals. It's been a strong holiday season.
Right. And so we have in the United States, a relatively weak manufacturing sector,
industrial production has not come back. But if you're trying to manage forwards and understand
(42:05):
what you're facing, having a better read, once you get through the first couple of months
of the year, I think the path for trade policy and all the other government policies that will affect
the economy and affect business and including both business and consumer attitudes, the perceptions
that you've identified correctly matter a lot in terms of what's the path that we're going to be on
(42:28):
collectively as an economy is going to become a lot clearer. And we're going to know by say,
you know, spring, what's likely going to be the road down which we'll be going on in terms of
the relationship with foreign trade partner countries, what will be the negotiating stance
likely outcomes, you know, where will we actually end up in terms of all of the implementations of
policies that were discussed during a campaign with a new Congress and Donald Trump back in
(42:54):
the White House. And importantly, the reaction, the retaliatory actions of trade partner countries
against anything that they perceive as negative, you know, with all the other factors that matter,
such as, you know, what is interest rate policy, what are what happens with foreign exchange rates,
all of which end up affecting that trade picture. You know, even central bank policy in terms of
(43:15):
interest rates that affects inventory carrying costs that affects your calculations on your
landed costs and your, you know, your management of your supply chains, it's going to require,
you know, very close due diligence and perhaps some painful, you know, late nights on the part
of a lot of supply chain managers trying to react quickly as the developments and the signals become
clearer. And for us, we know we're going to be updating forecasts regularly to try to capture
(43:39):
the latest actual developments and then look forward as best we can to incorporate all of that
to give the best quality forecast that we can for what to be expected across the board,
across all the economic indicators in the company that we produce a forecast for our customers.
Well, Paul, we would ask you not to be a stranger. And if you see something that's sort of
a wild swing of the pendulum that you feel like that the world at large needs to hear about it,
(44:04):
we hope that we're amongst the folks that you're willing to come and have that conversation with
once again, because you and your team watch it significantly more closely than most of the world
does. And a lot of people make a lot of critical decisions based on what you and the folks at S&P
do. So thank you very much for that. Thank you, Scott. Thank you, Cameron. I hope to be back soon.
Paul, thank you for your insights, how our listeners can move forward in 2025 and utilize
(44:28):
the information you've provided. Thanks so much. For Cameron Roberts, I'm Scott Case.
This has been Logistically Speaking.
My name is Scott Case. I'm Cameron Roberts. And this is Logistically Speaking.
(00:10):
Hello, Cameron. How are you, sir? Very well. Thank you for asking, and I hope
everything's going well in Chicago. It absolutely is. Since the US elections on November 5th,
trade is looking like it's shaping up to be a game of percentages. 10, 25, 60, 100, 200 percent.
I mean, you could pick your percentage, but the president-elect returning to the White House for
(00:32):
a second term, he set down some early figures, all of which would inevitably be passed along
to the ultimate purchaser. Canada and Mexico, who he claims are responsible for a bevy of problems
facing America, including, but not limited to, drugs, immigration, and unfair automobile imports,
were among the first to be singled out. Even with the governing regulatory framework in place
(00:53):
for the USMCA, he still proposed a 25 percent tariff on imports from Canada and Mexico,
currently the US's two largest trading partners. Along with tariff targets placed on America's
border neighbors, he's proposed an additional 10 percent on goods of Chinese origin, 100 percent
on automobile imports, and specifically a 200 percent tariff on automobile imports from Mexico.
(01:17):
So, Cameron, they're talking about a range of tariffs, starting as low as a 10 to 20 percent
blanket on all imports, 25 percent on Mexican and Canadian imports, which to your two biggest
trading partners, when you're in a multilateral trade agreement with them, seems like a bad idea,
up to 100 percent on automobile imports, and as much as 200 percent on Mexican auto imports.
(01:43):
And I know we're joking about this, but most things happen in the US because of either
congressional approval or executive authority. How would they do this, especially with what
the president-elect has been saying about putting these things in place literally on day one?
Well, first, I think Congress has already made a decision. You know, the Constitution of the
(02:06):
United States vests the power over tariffs trade to Congress, but Congress has passed a number of
statutes that transfers that power to the executive, mostly at the behest of the executive,
to be able to act quickly and with efficiency to address urgency, emergency situations,
(02:27):
crises. And, you know, what is or is not a crisis is really how you frame the issue.
And certainly, the president-elect has done a good job of framing border security as a,
quote-unquote, emergency. And I think there would be a lot of consistency in what he said on the
campaign trail, what he said in 2019 when he threatened Mexico to impose tariffs if they
(02:52):
did not address the continuing border, quote-unquote, crisis stemming from illegal
immigration into the United States. Back in 2019, there was a deal that was struck that
prevented the use of these tariffs, whether they be long-term or short-term. The AIPA,
International Emergency Economic Powers Act, would give the president the authority
(03:15):
on a short-term basis to implement these sort of broad across-the-board tariffs in a situation
where they can deal with an extraordinary threat. The Section 122 balance of payments authority
would also allow the president to impose an additional 15 percent tariffs on imports for
(03:35):
150 days whenever the fundamental international payment problems required special import
measures to restrict imports. And this can be used in various examples, but that's another option.
Then Section 338 of the Tariff Act of 1930 offers, again, broad powers to block imports completely.
(03:58):
It's more of a sanctions type of play, but there's a variety of different tools in the
president's toolbox. And what he talks about all the time is the number, tariffs, tariffs,
tariffs, X percent, Y percent. But he never talks about what the legal basis for those tariffs are.
So which of these tools, whether it's Section 338, Section 122, Balance of Payments Authority,
(04:26):
International Emergency Economic Powers Act, the 301, the 232s, these are all available to
the president. And what he chooses to use is at his discretion and what his advisors tell him to do.
So I think it'll be really interesting to see which of these tools he uses.
(04:48):
I don't think it's a matter of if, it's which tools are justifiable for the circumstances as
they present themselves. No question. In October, S&P Market Intelligence's Paul Bingham,
speaking at the annual Wescon gathering of customs brokers and freight forwarders,
provided his company's estimates for growth in 2024. When asked, he said those figures
(05:10):
were based on a continuation of global trade policy and tariffs into 2025 and beyond.
Paul and his team went back to the models, and this podcast will be one of the first
airings of their findings and predictions based on the saber rattling that's happening today.
This episode will be focused on a number of things. First, we need to explore and explain
(05:31):
the authorities by which tariffs can be increased and which ones can be done unilaterally by the
executive and which ones, if any, are going to require congressional approval. Second,
as the administration's policymakers and agency leaders are being named and their policies are
coming into focus, what impact will that have on the US and global economies? And what are the key
(05:51):
elements that bear watching? Thirdly, an interesting phenomenon is taking shape,
shipyards and carrier order books coming into 2025. In a note on November 26th, S&P Global
Intelligence, who Paul works for, said, quote, the most pressing issue confronting the container
shipping market as 2024 draws to a close is very likely the impact of the surge of new vessel
(06:14):
deliveries that occurred this year and last and when and to what extent it will weigh down the
shipping market in 2025. Some 3.15 million TEUs and new deliveries are expected this year,
following the 3.16 million TEUs in 2023. There's only so much extra tonnage required by the Red
Sea route diversions, and it's reasonable to assume that at some point in the future,
(06:37):
traffic will return to that route. Our guest today is Paul Bingham, Director of Global
Intelligence and Analytics, Transportation Consulting for S&P Global Market Intelligence.
So, Paul, what have you been doing the last month and a half or two months?
Well, obviously, there's been a lot of recalibration, let's put it that way,
(07:01):
since we've seen the results of the election here and globally, some other things happening.
We've had a prime minister removed in France, and it's not as if only the United States has had
an election and some political issues affecting the outlook for policy, affecting trade
and the economy generally, in that time. But let me back up first and say,
(07:25):
thank you for the welcome. It's great to join you and good to catch up after what we had discussed
with the folks that were able to be there at WESCON. In the last six weeks or so, company-wide,
not just me, but there's many economists in S&P Global and all of them having to try to
(07:46):
basically update models and forecasts with not only the latest data that we capture on an ongoing
basis, but also making some assumptions about implementations of policy. And we don't know
with certainty what's going to happen in terms of some of these policy developments.
Obviously, some of the language used during the campaign was probably more a negotiating stance
(08:11):
than what we expect to see actually enacted when we get into 2025. But we've had to make some very
clear assumptions to be more realistic about the modeling that we do to provide forecasts
to the customers that are going to reflect reality and our best estimate of what that might be.
So, we have a forecast council within the company, within our division, and there's an
(08:36):
agreement back and forth with negotiations between our economists about what assumptions
should be for baseline and alternative scenario forecasts that we update in some cases every
month. And consequently, our latest forecast reflects some assumptions, which we subject to
further revision every month as we see further developments and more certainty about what
(08:58):
the policies are going to be. And their timing, as you mentioned, also matters quite a bit.
But we can observe the industry's reacting right away, and we're capturing some of that in the
data in terms of supply chain managers and others making decisions in expectation to try to mitigate
risks and to deal with what's going to be coming no matter what the details are. So, let me start
(09:21):
actually with the top line is we've made some assumptions. Our baseline forecast right now
for the United States trade policy assumes that there will be a broad, unprecedented 10%
tariff applied on U.S. imports, and that mainland China will be subject roughly to a 30%
(09:45):
tariff rate. Both, you know, those are increases from where we are today, and most substantially
would be that 10% global import tariff, you know, just dramatic in terms of, you know, the scope and
range of the trade relationships and the commodities, both finished products for end
consumption and all the intermediates that feed manufacturing and other uses within the country,
(10:09):
you know, subject to that tariff. And importantly, for timing, we're assuming that takes effect
in the second quarter of 2025. We're not assuming that these take effect in January. We're assuming
it takes a little bit of time for the administration, even if they announced them on day
one, to actually have them take effect, you know, that that's going to take some amount of time,
(10:30):
because quite frankly, some of those imports are going to be, you know, on the water. They'll
already be en route here on January 20th. And we assume that some of that timing and the decisions
that affect them, you know, have to happen with a little bit of a lag. But by the second quarter
in 2025, we'll be seeing the economic impacts of tariff rates that are dramatically different.
(10:52):
We've had to make some other assumptions with that. It's not only assumptions about tariff
policy, we're making assumptions about tax policy, about interest rates, about the workforce
in relation to the threatened actions regarding immigration and even deportations in the United
States. Turning back to tariffs, we're making some assumptions about retaliation. We've already
(11:14):
heard some of the foreign country trade partners of the United States start to say that they will
react to tariffs imposed on them. In the case of mainland China, they're not even waiting for some
of the tariffs. We've seen some trade policy actions very recently regarding exports of
some of the rare earth minerals that the U.S. economy depends on that we get from China.
(11:35):
So some of the trade policy reactions are happening already, even before January 20th.
It's already affecting the economy, already affecting U.S. business.
And we sat down and we were looking at the numbers for America's trading partners. And
while certainly China is a large thing at $575 billion in 2023, in 2023 trading partners number
(11:56):
one and number two in order were Mexico at $798 billion and Canada at $773 billion. That is
everything from automobiles to produce to finished goods to a significant amount of oil and
petroleum products. What is your modeling showing if they move forward with, say, the 25 to 100%
that is being threatened? Well, we actually haven't done a complete set of forecasts for that
(12:21):
scenario on the whatever you want to call it, the fentanyl cross-border trade flow tariffs or
whatever the Trump administration might call them. But obviously, that would have a substantial
impact on U.S. trade by focusing, even if you ignore the threatened level of tariffs in China
embedded in that announcement. You know, with the top two trade partners, enormous amount of trade
(12:45):
flows back and forth across the border every day. We're talking billions, over a billion dollars of
cargo every single day that you add that kind of a tariff on top of. That is clearly inflationary
and would start to impede some trade flows. You know, that today are crucial to all three
economies in the continent. You know, an enormous proportion, over 80% of Mexican exports are
(13:08):
into the United States, an enormous proportion of their economy. And in fact, increasingly so over
the last decade or so has been focused on interactions with the U.S. market. And Canada,
obviously, you know, incredibly important role that the U.S. economy plays in the Canadian economy
and predicated on those trade flows. So we saw right away, you know, the Canadian government
(13:29):
react. And we expect those numbers have to be something where there's some negotiations about
what trade that would apply to or what the level would be. But of course, we don't really know,
you know, that it could vary. Well, one of the key imports into the United States is gas and oil.
And obviously, the president has spoken quite a bit about exploiting U.S. petroleum reserves,
(13:49):
increasing domestic production of gas and oil. But given the dependency that the United States
has on imported oil from Mexico, how long do you see the proposed Trump tariffs coming in to affect
the price of gasoline, if you've looked at that at all? Because, you know, that and diesel obviously
are key inputs into our listeners' industries. You know, everything we do is predicated on fuel
(14:16):
surcharges. And look at trucking, you look at any of the major sectors, whether it be rail,
whether it be ocean trucking, again, they all depend on the price of petroleum at some level
in fixing the rates that they charge their customers to move the goods from point A to point B.
Obviously, the price of diesel or gasoline is going to be impacted if there's a tariff on that
(14:40):
gas and oil. Have you looked at that at all? So it's possible that there would be some offset.
However, we're convinced very much so that it would still be inflationary. And inflationary,
primarily, like you said, immediately through the refined fuel product prices that would be then
sold at a higher price in very competitive markets. But they would go up because of that proportion,
(15:00):
that big proportion of feedstocks that would be faced with higher costs for producing the
petroleum products from the crude oil. And then that would pass through to all the users in
the economy. It's part of the story that we have and the modeling where inflation would be running
at a higher rate under imposition of tariffs through the economy, with some certainty and
(15:21):
enough so that it has big macroeconomic impacts that we can talk about. I mean, it's not just
affecting the transportation industry in terms of those increased fuel costs. It works very quickly
through the entirety of the economy through supply chains operating at a higher cost and products
being delivered to customers across the board being delivered at higher costs. It becomes
inflationary. That forces the Federal Reserve Board to slow down the easing that they've been
(15:45):
engaging in that they started two months ago. And in the face of higher inflation, you have
consumption and you have other impacts across industries in terms of price competitiveness.
And ultimately, it results in slower growth in the economy in 2025. And in fact, that's the new
baseline forecast. With those assumptions that we have in the alternative scenario that we've put
(16:07):
into place for higher tariffs, we have lowered the forecast growth rate for the U.S. economy as a
whole in 2025 and 2026 as partly a reflection of those tariff policies, even with some of the
other assumptions about policies that I made reference to earlier, like on tax policy that
otherwise would be stimulative. We still believe that overall the combination of policy assumptions
(16:29):
that we're making under the new administration in Congress are going to actually slow the economy
against the baseline that we had had prior back in October. Can we have a conversation around BRICS
in conjunction with this? Because I think that they've also made their way into the news the last
couple of days. Brazilian President Lulu has been in hospital with brain surgery. Some question
(16:51):
about his policies and his health moving into their elections, which I believe are in 26.
You certainly have the departure of the Assad regime in Syria. So Russia's trying to figure
their investment out there. India just managed to secure peace with their dock workers and I
believe five or six unions. So the labor concerns that were happening in India have
(17:11):
sort of subsided. But then you also had the president again stepping out and saying that if
they get the urge to move away from the dollar, that he'll just put 100 percent duty on top of
anything out of there, as if it's just like grounding a child for misbehaving.
Have you put any thought or weight or seriousness into that component of it? Or is that just
(17:33):
something that's just in the watch and wait bucket for the moment? Well, I think it's a little bit
more than watch and wait in terms of understanding that the new administration is going to have
a U.S. dollar exchange rate and the U.S. being used as the reserve currency for trade transactions
globally on their radar as one of the policy issues that they're going to monitor and use
(17:53):
in negotiations. Whether or not the administration would actually go through with that kind of
dramatic increase in tariffs against those countries collectively is a little less certain.
Certainly, there's a very different relationship in trade between Russia and the United States
and India and the United States or Brazil or China within the BRICS. And the BRICS includes
South Africa and there's sort of a greater BRICS that there's some other countries.
(18:16):
And also, we don't really see a dramatic move by those countries aggressively to try to replace
U.S. dollar. There's clearly in some of the trade sanctions evasion on the part of Russia and its
trade partners, an attempt to move away from the dollarization of that trade because of the great
restrictions being imposed not only by the United States, but some of the other Western allies in
(18:38):
terms of trying to increase the impacts of the sanctions against Russia and its trade partners
in those countries within the BRICS that continue to trade with Russia in some commodities.
But that having the foreign exchange rate and the use of the U.S. dollar as the default
currency for trade transactions as a factor is another one of the elements of trade policy to
(19:00):
watch in terms of how that could affect global commodity market prices, global commodity trade,
and therefore, ultimately for the United States, its position as an economy still engaged with
countries around the world. And some of those have been increasing their importance. Obviously,
we've noted some decrease in direct trades with China, as you've noted. Its position has fallen
(19:24):
in the ranks of U.S. trade partners. Clearly, Russia has fallen off to where the U.S. is trying
to eliminate it as a trade partner as much as possible. But a country like India, the U.S.
government has been moving closer to, as we've seen some of the changes in supply chains, the
of India has been increasing. And India as a country and their economy has been growing quite
(19:45):
strongly. And in fact, we're still forecasting it to be amongst the strongest growing economies
in 2025, even with the headwinds that they faced and continual institutional and some of the other
obstacles that India faces as a country and as their economy tries to engage more in foreign
trade. Paul, one of the things that we talked about before the show started was, you know,
(20:07):
who is going to be the winners, who are going to be the losers of the situation? And, you know,
I think we discussed it. Mexico clearly benefited from the first round of the Trump
administration tariffs by nearshoring and nearshoring ended up being, let's move everything
to Mexico for a final assembly and try to, where we can, exploit the USMCA opportunity.
(20:31):
But India certainly was not far behind in being a beneficiary as well. Do you see any other
countries other than Mexico and Canada overall benefiting from tariffs to serve the US and the
Canadian and then sort of the USMCA market? But you're not only depending upon Mexico as
you're offshoring, you're serving other markets in Europe and elsewhere from factories that may
(20:55):
no longer be in mainland China, but are not necessarily reshored to the end market.
And that means the onshoring back into the United States of production is still very limited in
terms of what the potential in our forecast for that. It's more likely to see this continual
evolution of trade production to other countries of which, you know, India is one position to
benefit. But Mexico is positioned to benefit in their relationship to US and Canada, perhaps
(21:21):
not so much globally in terms of Mexico becoming a factory floor to serve everywhere. But I want
to add to that Mexico has free trade agreements with other countries outside of the hemisphere,
and they are benefiting somewhat from that, that there are some companies that are looking
to production in Mexico to not only serve the US and Canadian markets as well as Mexico,
but to also have some proportion of their production go even, say, to Europe.
(21:45):
I just wanted to finish this thread because, you know, it's always been surprising to me that,
you know, we don't have something of a newer version of the Monroe Doctrine where we're
expanding our relationship southward and taking advantage of what is arguably an
underutilized labor pool in South America. It seems to me that, you know, because of the
migration issues and some of the narco issues could be resolved if they had stronger economies
(22:10):
in those particular regions of the world. And yet we don't really see that happening as readily as
I would have thought. Are you seeing any shifts down into central South America and developing
that region, if for no other reason than to address some of the belt and road expansions
that the Chinese have tried to put in? And certainly we saw the administration kind of,
(22:32):
shall we say, get its bristle, if nothing else, at the involvement of China building the port in
Cairo, Peru, which resulted in, you know, quite a big splash over the Trump administration just
prior to Thanksgiving. Well, I think the Latin American story remains one that goes beyond
Mexico in terms of being an opportunity for the United States. I think the challenge for
(22:56):
the United States is sort of at the foreign policy level has been, you know, the frustrations
where it really hasn't been a regional level effort. I mean, if we look at Europe trying to
negotiate a free trade agreement with Mercosur, with Latin America, you know, they've been at it
for 25 years and it's still not done and it still faces some political headwinds. Very difficult to
regionally have bilateral or regional level trade agreement equivalent to USMCA with the rest of
(23:20):
Latin America. So instead you end up dealing country by country and there there's great
extremes in terms of the potential for doing that. I mean, we had already put into place free
trade agreements with Chile and with Panama and there's others that are possible. But if you look
at like a country like Venezuela, you're not going to be able to advance much of anything.
So it becomes then incumbent on the US and for supply chain managers to deal with the opportunities
(23:45):
as they exist country to country, where there's country risk, there's volatility, you covered some
of the factors that exist at risk. There's others in terms of workforce and even transportation
access, as you mentioned, you know, the competitiveness and the reliability. But long
term, that potential within the hemisphere still remains. And I don't think any of the
longer term policy strategy development people that exist in Washington, D.C.,
(24:09):
you know, give up on Latin America as a potential long term partner, not only as a source for
imports, but also as a continuing source for exports from the United States competitively,
able to reach it in some ways much more easily than some of the more competitive markets we
may face trying to export into in Asia or other continents around the world.
Wanted to ask you, the US steel and aluminum industry was, I think, one of the advocates
(24:34):
for increased duties, more protectionism with the idea that we would see increased domestic
production. Obviously, based on the 232 goals, that's going to be kind of part and parcel with
our national defense. Can you comment at all whether that's been a success based on what
has happened in the last four years and the last eight years? What has been the impact of these
(24:56):
tariffs thus far on the US domestic aluminum and steel industries? Well, it has meant those
commodity prices domestically are higher than they would have been, you know, absent those tariffs.
It has protected some of the jobs in manufacturing, the primary steel and aluminum metals
manufacturing companies in the United States that otherwise would have been subject to the
(25:20):
foreign competition and likely existed with lower production, lower sales and lower employment.
So I don't think there's any dispute that that's been successful defined narrowly in terms of
protecting those jobs. As an economist, you look beyond that, though, to say, OK,
was that the priority that as a country, you know, we chose to prioritize those jobs over,
(25:42):
say, other jobs in, say, metal fabrication or other sectors of manufacturing where perhaps
employment is much larger that our consumers and users of steel and metals as inputs to their
manufacturing activities, their export sales, their employment. And that's where economists
look at it with some skepticism in terms of did that achieve bigger picture goals successfully?
(26:07):
But, you know, if that's the decision that politically we've worked out as a country,
that we're putting prioritization on preserving that, and that can include that element that you
mentioned of national security. You know, we don't want to put ourselves at risk as a country to not
have the capability to produce those those goods here at home if we need applications where we
and need to have them for use in the military sector. But that comes at a cost and that comes
(26:32):
at a price. And understanding, you know, that that's inflationary in that in that sector.
It also makes some of the other export sectors within the United States perhaps less competitive
trying to compete and sell their manufactured exports to overseas markets when they have to
embed in it the higher cost inputs from the tariff protected U.S. production.
A question for you, Paul, around the Infrastructure Act, which was passed here in
(26:56):
and has been giving out a lot of support and both infrastructure and chips rather.
So the incoming administration has made noise that any money that's not been awarded so far,
they're interested in taking back or clawing back in some fashion, given how they're trying
to centralize everything and make sure that it's here in America, here in America, particularly,
you look at the restrictions on AI chips and chip fab equipment going into China. Do you see that
(27:21):
just posturing at this point or do you see them willing to just sort of like forego that in the
interest of finding other ways to sort of boost American manufacturing? There's a level of
production where those goods, those actually have to move offshore and come back to the United
States. So the industrial policy is tricky and very difficult to achieve, to have, you know,
the U.S. government presume that it knows how to manage these supply, these global supply chains.
(27:46):
You know, when the U.S. government is focused on the U.S. markets and the manufacturers are
focused on global markets, you know, all the customers everywhere and all the potential
suppliers everywhere, which makes that, you know, Congress trying to dictate that or the
administration from the White House trying to influence it quite challenging to achieve those
goals that they have. Still acknowledging that there may be national security and some other
(28:06):
concerns that are quite valid and may be that collectively the United States as a whole chooses
to follow through on to actually implement and say, you know, we need to have this capacity
under the control of the United States and therefore we're going to, you know, put federal
and government funds towards these industry sectors that we've selected and identified as
critical for national security reasons. Well, I know the U.S. committed $52 billion to the
(28:31):
semiconductor industry back in 2022 through the CHIPS Act. Are we seeing the dividends of that,
Paul? On de minimis, you know, clearly we've seen that being exploited in ways that were never
anticipated and likely will result in some reaction on the part of Congress to reduce the,
you know, the loophole, if you think of it that way. I don't, as an economist, it seems somewhat
(28:55):
arbitrary. Whatever that is, it's not a loophole. It's the way the trade rules are set up and that
volume of trade is following the rules and consumers are smart enough to be able to react
and have services offered to them, which then allow them to engage in the e-commerce that they've been
trained to do through the pandemic and, you know, continue to take whatever options are given them.
(29:17):
So I suspect politically there will be some reduction in de minimis if they lower that
value substantially. There's also that question on de minimis, is it, you know, also, you know,
hiding some of the criminal elements in terms of overwhelming the U.S. government's ability to
actually enforce security? And I know you've discussed that in other contexts, but from an
(29:39):
economics perspective, it may also be that, you know, more incentive for the government to revert
back towards older, lower values of de minimis exclusion and therefore, you know, force some of
that commerce back into the tariff world or at least reduce some of the demand so that you don't
have the current volumes that we're seeing moving through that mechanism, you know, as a portion of
(30:01):
U.S. trade. And it has lots of repercussions in the economy elsewhere. You know, it's upset the
air cargo markets for the conventional traditional air cargo because they've been squeezed out
competing with this enormous volume of de minimis. And that's been complicated by the production
problems with Boeing, where we literally don't have globally the production capacity of aircraft
(30:21):
to provide the demand. I mean, these are the classic supply chain issues where, you know,
one factor leads to another, leads to another. So you've had higher air cargo rates that affected
sectors like pharma and others that traditionally depend on air cargo. That affects those sectors of
the economy. You know, we can we can trace all of this through and you say, well, you know,
when Congress was setting up de minimis values, you know, they weren't thinking about any of that.
(30:45):
You know, that wasn't part of the consideration. But now you say, OK, this has implications in
the economy. What do we do about it? And let's make sure we recalibrate to try to deal with the
realities that we're faced with in combination. And that's not just in the United States. I'm
sure in Europe and elsewhere they're looking at similarly, you know, what the impacts are going
to be going forwards and how the country wants to take a stance to try to control that without
(31:09):
being completely unrealistic. Underlying fundamental reason to have that de minimis
exclusion, you know, still exists and is still practical. It's just obviously the level didn't
work out so well for the United States when they're trying to think about how to manage
what's been the flood of e-commerce with the technology developments and the foreign exporters
that have been able to exploit it. And I think this is really where the conversation takes place
(31:30):
is our perspective, you know, working with the logistics companies out there, how do they
predict and work around these predicted models, changes, forecasts? What do you see the logistics
service provider trying to focus on for its customer base with respect to what you see
(31:51):
happening? Do you see a large increase? Like one of the things we talked about at one point was
we're going to see a surge in ocean transportation to quote-unquote beat the tariff. Is that borne
itself out based on the numbers that you're looking at, Paul? And what do you forecast for
the first and second quarter to the extent you've done that? And what do you think is going to happen?
(32:14):
And one of those alliances, at least as of today, the FMC hasn't blessed off on yet.
I saw there was just a story within the last week or two that they're still working through
some of the details. I think that's the premier alliance. So you're supposed to have two and
only 50% of them are ready to go. Do you see from what you guys are hearing upstream about carriers
either putting back blank sailings that maybe they've taken out because of this amount of
(32:36):
stuff that's moved forward? But then also I wanted to ask you a little bit about order books for 25.
I mean, there are, I think at last count, like north of 3 million TEUs of tonnage on order
for delivery coming soon. Certainly people had to make an accommodation to add vessels to strings
because of what was happening in the Red Sea. At some point, you have to assume that that's
(32:56):
going to get resolved. It cannot remain in perpetuity. So now you push a bunch of maybe
what's on short or long-term charter back into the marketplace. You have new vessel deliveries
coming in as well. What does that then do for rates? Which again, it seems like there's a
geopolitical bump that's to everyone's benefit. And then it just sort of settles back to whatever
(33:18):
sort of the baseline is that people seem to think is the point of agreement.
Well, yeah, this is an issue for the liner industry where they've made profits,
not quite at the level that they were making in 2022, but they've had a very profitable year.
And as a consequence-
Don't give them any more ideas.
Well, and we've just seen another string of orders coming out of MSC for additional vessels
(33:40):
to be delivered starting in 2028. They're still putting capital into more capacity
in the order book. How that all gets deployed is a question. But to your point on how much
of the capacity in 2024 that got used up by that extra sailing distance, all those extra 10 miles
of sailing around Africa rather than Suez for enormous trades, the Asia-Europe trade, the Asia
(34:03):
Med, even for the pendulum services into the U.S. East Coast, that used up, what are we talking,
maybe 7% to 10% of that global fleet capacity that otherwise would have been not utilized to
the same degree. We would have had a very different rate situation, very different
capacity utilization story in 2024 had that not happened. But that was sort of a one-time event.
(34:26):
You don't close off another equivalent Suez Canal and force an additional demand for ton mileage
in 2025. And yet you have an order book that's still out there adding more tonnage. Every month,
there's still additional tonnage capacity coming into the market. So there's still a supply demand
risk that is ahead for the liner industry. And if you layer on top of that some imposition,
(34:49):
some barriers, and some additional friction on world trade, such as a higher protectionist tariff
regime with lowered trade demand, that makes for an even riskier story for the investments in that
capacity to continue to grow at the level that the liner industry has been adding it for international
container shipping. So there could be some dramatically different situations in the future
(35:11):
in terms of that supply demand balance, and therefore pressure on the global liner industry
in terms of how they deploy the capacity that they've still got coming on. You see the overcapacity
in ocean transportation offsetting the lack of capacity in the air, or is it really apples and
oranges? Well, it's mostly apples and oranges, and the volumes are so dramatically different.
(35:33):
In some ways, it doesn't matter, except at the very extreme end of the very high service liner
industry and some of the lower value air cargo that's not, that maybe you could think of as
discretionary if you could plan it and get it on a reliable vessel service that was fast enough to be
a substitute. There is some back and forth though at the margins, and obviously the liner companies
(35:53):
love the extreme high value shipping that they can try to compete with when there's such problems
and disruptions in air cargo. And there's no quick solution to the air cargo industry problem
where Boeing isn't magically going to be cranking out freighters next month. Maybe that de minimis
issue goes away with some of the demand, but you still got other disruptive factors such as having
(36:15):
to fly much longer routes around Russian airspace and some of the other tremendously disruptive
operational issues that have affected the air cargo industry going back to the pandemic that
have continued, that people don't even realize, that continues to be essentially a disrupted
market, running equipment that should have been retired at much less efficiency and much
(36:37):
higher cost in terms of the air freighter capacity or even belly capacity. So on the ocean shipping
side, that's actually a boost to the liner company that they've got some ability to pick
away a little bit of that very high paying cargo from the air cargo business, but still the
volumes are nowhere near the fundamental of what really moves in in containerized shipping. It's
(36:59):
still going to be dwarfed by the underlying fundamental demand for the commodities that
traditionally move in ocean container freight that are now facing tariffs and additional
protectionism. And perhaps weaker economies with slightly lower demand. And don't forget
that a couple of those carriers have gotten into the airline or into the air cargo business too
with their own leased or owned air, with their own leased or own equipment. I was in Miami last
(37:23):
month attending an event that TIACA has and Boeing released their semi-annual air cargo forecast.
And they're still anticipating a bump in air cargo over the next 30 years. But what's interesting is
that they see the growth in the express sector. And then there was another gentleman, Ryan from
Rotate, he's the CEO of that company. And he said that, again, to your point, Paul, about just there
(37:46):
not being enough aircraft out there because of delivery issues. And it's not just Boeing's
delivery issues. There's also some engine issues where a lot of people have had to go back and work
on their fleets because they're having engine issues. One of the things that they've noticed
is that other lanes that traditionally were rich with equipment, they're pulling into more
profitable lanes. So at least as long as that e-commerce is moving right now, that capacity
(38:09):
in that Mercosur space that we're seeing sort of between Latin America and Europe, which is like,
hey, we're going to need air cargo capacity here. Sorry, too bad. That's either running between, say,
Asia and Europe or Asia and the United States in support of air cargo initiatives. And people who
traditionally would take some of those older, more retired passenger aircrafts at the end of
their passenger service lives in 7.6s and 777s, that feedstock isn't available because the new
(38:34):
aircraft deliveries aren't coming online. And as a result of that fact, they're having to hold on to
these aircraft for longer than they anticipated as part of their fleet renewal programs.
Yeah, that's a great summary of the aircraft equipment where it's related to the passenger
aircraft market because of that tradition that you don't find in any other mode of transport,
where you take the older equipment and you actually retrofit it. You make it be able to
(38:58):
have a longer economic life, hauling freight after its days as a passenger piece of equipment.
And how that's been affected by the aircraft production problems that then flows indirectly
into the air cargo market and with no quick solution. Well, I mean, is Sri Lanka trying to
think of itself as a transshipment port between between North Asia and Europe? So, I mean,
(39:19):
you're right to your point. Is it Eastern? Do they have a stable government there?
Not this week. I haven't followed it, but I know that two years ago there was a coup d'etat.
Well, I mean, you run the same risk in Thailand. It's like, is it an odd number,
even number year thing or what? Well, the problem with being an island is you need to import
(39:42):
everything. And in Sri Lanka, we had some stranded cargo that needed to be incinerated.
But the fuel that they used to do the incineration wasn't available because of the Sri Lankan coup
d'etat. And as a result, they couldn't get oil because they couldn't destroy it. So we were
paying DND on a burned out hulk of a container sitting on it on the deck in Sri in Colombo,
(40:06):
Sri Lanka, which is kind of a weird aside that I get all that kind of stuff. But there you go.
I was there in 2023 and can tell you that if you could make things incendiary by humidity,
you wouldn't have needed to import anything. It is a very humid subtropical country with
amazing people who've been through a hell of a lot in their history.
(40:30):
Look at Scott going to Sri Lanka. I did not know. We'll have to explore that at some point.
Tick that box.
Paul, do you have any closing thoughts for our listeners about what we should be thinking about
for 2025 other than perhaps fasten our seatbelts? Because I see a very dynamic,
very while you predict this sort of flattening out, is that because there's going to be a wait
(40:54):
and see attitude by consumers to determine? And by consumers, I don't mean just like Joe
and Mary Public, but by logistics and supply chain consumers, people who are sophisticated buyers of
masses amounts of imported products, people who are really making an investment. Do I
carry my inventory and pay that carrying cost or do I take a risk and import during 2025?
(41:19):
Is patio furniture and Halloween decor out for 2025?
Well, actually, this really gets to the heart of the question for those folks that are not the
transportation carriers, perhaps, but the rest of the economy that's managing the supply chains
for everything where your sales levels, we've been through 2024, the US consumers been pretty
(41:43):
resilient, continuing to spend despite perhaps you survey them and their attitudes are not positive
and yet what their spending behavior reveals. It's been a strong holiday season.
Right. And so we have in the United States, a relatively weak manufacturing sector,
industrial production has not come back. But if you're trying to manage forwards and understand
(42:05):
what you're facing, having a better read, once you get through the first couple of months
of the year, I think the path for trade policy and all the other government policies that will affect
the economy and affect business and including both business and consumer attitudes, the perceptions
that you've identified correctly matter a lot in terms of what's the path that we're going to be on
(42:28):
collectively as an economy is going to become a lot clearer. And we're going to know by say,
you know, spring, what's likely going to be the road down which we'll be going on in terms of
the relationship with foreign trade partner countries, what will be the negotiating stance
likely outcomes, you know, where will we actually end up in terms of all of the implementations of
policies that were discussed during a campaign with a new Congress and Donald Trump back in
(42:54):
the White House. And importantly, the reaction, the retaliatory actions of trade partner countries
against anything that they perceive as negative, you know, with all the other factors that matter,
such as, you know, what is interest rate policy, what are what happens with foreign exchange rates,
all of which end up affecting that trade picture. You know, even central bank policy in terms of
(43:15):
interest rates that affects inventory carrying costs that affects your calculations on your
landed costs and your, you know, your management of your supply chains, it's going to require,
you know, very close due diligence and perhaps some painful, you know, late nights on the part
of a lot of supply chain managers trying to react quickly as the developments and the signals become
clearer. And for us, we know we're going to be updating forecasts regularly to try to capture
(43:39):
the latest actual developments and then look forward as best we can to incorporate all of that
to give the best quality forecast that we can for what to be expected across the board,
across all the economic indicators in the company that we produce a forecast for our customers.
Well, Paul, we would ask you not to be a stranger. And if you see something that's sort of
a wild swing of the pendulum that you feel like that the world at large needs to hear about it,
(44:04):
we hope that we're amongst the folks that you're willing to come and have that conversation with
once again, because you and your team watch it significantly more closely than most of the world
does. And a lot of people make a lot of critical decisions based on what you and the folks at S&P
do. So thank you very much for that. Thank you, Scott. Thank you, Cameron. I hope to be back soon.
Paul, thank you for your insights, how our listeners can move forward in 2025 and utilize
(44:28):
the information you've provided. Thanks so much. For Cameron Roberts, I'm Scott Case.
This has been Logistically Speaking.
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