COVID-19 Alters U.S. Trade Patterns

COVID-19 Alters U.S. Trade Patterns

Authors: Mike Salerno, Vice President, International Banking

As countries begin to reopen in the wake of the COVID-19 pandemic, our thoughts remain with those who have been impacted. While we understand that COVID-19 is first and foremost a health crisis, we have also seen firsthand how related closures have affected businesses, including those involved with global trade, where shifting patterns and declining demand could persist well into 2021.[i]

As we look toward the future, here are the trends we are seeing in global trade and how businesses are responding.

China’s Slow Bounce Back Has Widespread Impact

While China began reopening their economy and businesses in April of this year, trade with the country has not rebounded as quickly as many anticipated. Imports into China fell 5.9 percent from January to April, leaving the country well short of the $12 billion a month import quota imposed as part of the Phase 1 China Deal.

U.S. exporters were not the only ones to feel the pinch, however, as Chinese exports contracted 9 percent for the January to April timeframe.[ii] Declines in consumer spending were much to blame, with electronics shipments plummeting nearly 6 percent, apparel falling 20 percent and furniture exports witnessing a 15.7 percent decline during the first four months of the year.[iii]

In March, we reported that many U.S. ports were expected to handle 20 percent less cargo this quarter. We are now seeing the true impact of COVID-19 related closures and declines in China trade.

According to Vantec Hitachi, Los Angeles port volumes are down 13-14 percent compared to one year ago. Across the board, year-over-year comparisons for the industry fell 17.4 percent in March and 1.7 percent in April, according to JOC.

With falling demand for many consumer goods, there has been an increase in blank sailings, which are sailings that have been canceled by the carrier. A blank sailing could mean a vessel is skipping one port, or that the entire string is canceled. Carriers scheduled a total of 123 blank sailings from early April through July to ports on the east and west coast.[iv] While the number of blank sailings has surprised industry professionals, the number of cancelled sailings seems to be levelling out between four to seven each week to the West Coast and two to five each week to the East Coast.[v]

Given the uncertainty with the U.S. economy, retailers, carriers and industry analysts hesitate to make projections for the August to October peak shipping season, especially since many shipments that were underway just prior to business closures in the U.S. now sit on U.S. docks or in storage. Of particular note, however, is the fact that carriers are currently grounding fleets, sparking an artificial increase in rates expected to continue through July, according to Vantec Hitachi.

With container imports held up at major ports, the trucking industry has seen significant declines in long-haul trips, while local trips under 100 miles have increased more than 100 percent.

Unfortunately, rail has not seen an uptick since our last report. With volumes down 10 percent for the first 16 weeks of the year compared to the same time period in 2019, major Class I railroads are turning their thoughts toward controlling costs and service to position for recovery. For example, CSX is storing 400 locomotives and has reduced the number of train starts by 23 percent since March to cope with a 25 percent decline in volume.[vi]

U.S. Global Trade in the Near Term

Due to the lengthy negotiations associated with the Phase 1 China deal, many U.S. importers and exporters were already in the process of seeking alternative markets to source or sell goods. The COVID-19 pandemic may serve to strengthen that resolve.

One of the purported goals of the 2019 trade talks with China was to level the playing field for U.S. exporters, allowing more American goods to pass through to the country. In 2018, the U.S. imported a record $539.5 billion in goods from China. That includes $117 billion in machinery and $18.4 billion in agricultural imports.

In contrast, the U.S exported only $120.3 billion of goods to China during the same time period, down 7.4 percent ($9.6 billion) from the year before.

As COVID-19 related closures at Chinese manufacturing facilities disrupted supply chains across the U.S. throughout the beginning of 2020, questions were raised about our country’s dependence on Chinese goods, particularly as access to critical medical equipment, supplies and medicines was weakened due to trade disruptions.

Many U.S. manufacturers have begun shifting their purchasing power to other Asian countries, sourcing critical parts and supplies from Vietnam, Indonesia, Malaysia and India. Exporters are reacting in a similar fashion, seeking more stable ports of entry for their goods.

U.S. based manufacturers are also taking another look at China as a base of operations. “We are seeing a lot of manufacturing now moving into other locations — toys and cameras are going to Mexico; personal computers, we’re seeing those go offshore from mainland into Taiwan,” said Patrick Winter, Asia Pacific managing partner at Ernst and Young in a statement to CNBC. “Other manufacturing (like) automotive manufacturing (is moving) down into Thailand, Vietnam, and India and so, we’re seeing manufacturing move out of China.”

As for exporters, the U.S.-Japan Trade Agreement implemented on January 1, 2020, promises to open market access for U.S. farmers by reducing tariffs on an additional $7.2 billion of U.S. food and agricultural products, such as pork, beef, frozen poultry, wine, frozen potatoes, oranges, fresh cherries, cheese and whey, ethanol, egg products and tomato paste.  The U.S. has reached similar deals with Morocco and South Africa. The recently signed USMCA will continue to make trade attractive with Canada and Mexico.

As global trade moves away from China and other countries begin to recover from the COVID-19 pandemic, economists are making a wide range of predictions for a recovery to global trade, with growth forecasts anticipated to shrink from 0.7 percent to 6 percent. Fortunately, from what we’ve seen, American businesses have already begun to make the changes necessary to stunt the impact by making smart moves to shore up global supply chains and to secure viable alternative markets.

Source: Vantec Hitachivolvolume

[/content/fnbo-dot-com/en/commercial-team/salerno-michael] Bill Mongelluzzo. “Retailers Project Double-digit Import Declines into Fall.” JOC.com, May 21, 2020. Web.

[ii] Finbarr Bermingham. “Coronavirus: China’s Exports in Surprise Jum in April, but Imports Tumble.” South China Morning Post, May 7, 2020. Web.

[iii] Finbarr Bermingham. “Coronavirus: China’s Exports in Surprise Jum in April, but Imports Tumble.” South China Morning Post, May 7, 2020. Web.

[iv] Bill Mongelluzzo. “Trans-Pac Blank Sailings a Harbinger of Soft Summer Imports.” JOC.com, May 14, 2020. Web.

[v] Bill Mongelluzzo. “Trans-Pac Blank Sailings a Harbinger of Soft Summer Imports.” JOC.com, May 14, 2020. Web.

[vi] Ari Ashe. “Facing Grim Intermodal Forecasts, Rails Focus on Costs, Service.” JOC.com, Arp.23, 2020. Web.