Because they impact trade flows, tariffs have implications for port, road and rail systems. This could end up stimulating investment in new infrastructure capabilities.
Trump's Tariff Proposal: A Moving Target
During the 2016 US Presidential campaign, familiar rhetoric by Donald Trump was the need for the US to re-evaluate trade deals such as the North American Trade Agreement (NAFTA) as well as several bilateral trade agreements with the intention to improve domestic employment and industries.
In line with this protectionist view of international trade, on 1st March 2018, President Trump announced his plan to enforce a 25% tariff on steel and a 10% tariff on aluminium imports. Post-announcement, the US and global equity markets sharply pulled back over global trade concerns, with the S&P 500 index falling 1.3%.
Since this initial announcement, several trade negotiations have taken place, and on March 22nd, the Trump Administration announced that it would suspend the steel tariffs on select countries, namely; Canada, Mexico, the European Union, Australia, South Korea, Brazil, and Argentina until 1st May 2018.
On that same day, under section 301 of the US Trade Act of 1987, President Trump also issued a memorandum directing his Administration to take several actions related to concerns about technology transfer, intellectual property and innovation, including:
- Restrictions on Chinese investment in the United States
- Imposition of higher customs duties on imports from China
This announcement sparked global concerns over a potential trade war between the US and China which resulted in a sharp drop in global equity markets, with the global benchmark MSCI All Country World index falling 2%.
As trade negotiations continue, the outcome of Trump’s tariff proposals, and the Administration’s broader trade policy, remain unclear with many market participants believing that a ‘watered down’ version of the initial proposal may be implemented. As long-term global listed infrastructure specialists, this is a macroeconomic issue we are closely monitoring.
Impact on Infrastructure
Theoretically, the enactment of a tariff changes the trading dynamics between economies, which in turn, changes the flow of trade. For the importing nation, the local consumer will have to seek out domestic alternatives or pay a higher premium for imported goods. From the perspective of the exporting economy, on the assumption that the volume of goods produced remains unchanged, these goods can be re-directed to other countries. This redirection of trade flow has a net positive impact on infrastructure. Let’s explore why.
From a global perspective, user-pay infrastructure, specifically port, road and rail operators, move goods throughout the global economy as well as domestically. Given tariffs impact trade flows, these companies are set to be the most exposed to the impact of a US tariff on Chinese imports.
We believe that in the event the proposed tariff on Chinese imports is imposed, it will likely change the direction of trade flowing out of China rather than the volume. In other words, it’s likely that the goods will be shipped to other countries instead of the US.
For port operators, this could mean that shipping volume could remain neutral, or, in fact, could stimulate the need for greater shipping which positively impacts the infrastructure needed to support the redirected trade. For instance, the frequency of the China to US route might be replaced by increased China to Europe shipments. As an extension of this, where the goods land will require a recalibration of that economy’s infrastructure to account for the increased goods coming in and then the movement of these goods around that economy. Domestic freight rail operators, warehousing and storage providers, may have to increase their capacity to account for the increased trade.
From the perspective of the US, fewer goods being imported from China may see long-haul rail companies see a reduction in freight volumes, however, domestic intermodal operators might see increased activity domestically as US consumers switch to alternative products. This will result in a need to re-calibrate US infrastructure. Trump’s infrastructure proposal, if passed by Congress, will help make capital available for the recalibration of US infrastructure.
As it relates to Trump’s trade policies and protectionist stance, RARE sees some cautionary elements to consider:
- The actions of the Trump Administration since taking office have heightened US political risk. Some market participants believe that the recent share price movements signal that the equity markets are factoring in this heightened risk, that is, it’s less about trade, more about general policy uncertainty (particularly given the number of high-level personnel changes at the Administration).
- Infrastructure assets are typically characterized and lauded by investors for their long useful lives and stable cash flow profile. Tariffs, in contrast, are often short-lived and thus have a limited impact. For instance, in early 2002, the Bush administration imposed steel tariffs of up to 30 percent on the import of steel. Similar to Trump’s tariffs, the 2002 Steel tariff was highly controversial, with many market pundits fearing a global trade war. In November 2003, the World Trade Organisation (WTO) ruled against the steel tariffs siting that they had not been imposed during a period of import surge and the tariff violated the US WTO tariff-rate commitments. Given a looming $2 billion penalty in sanctions coupled with trade retaliation from the European Union, the US withdrew this tariff in December 2003. This tariff was only enforced for an eighteen-month period.
- The enactment of a tariff may not completely remove the comparative advantage some economies have in the production of certain goods. For instance, relative to the US, Australia has a comparative advantage in the production and exportation of steel (predominately in the cost of transportation from the point of origin – East Coast Australia – to the final market – the US West Coast). As such, the implementation of a steel tariff, for instance, is highly unlikely to completely erode this and thus may not result in the intended redirection of steel trade flows.