As the inauguration looms near, many Americans (and probably a good portion of the globe’s population) are concerned about how the new president will affect them. President Trump will have a lot of power and influence on the world stage, so there’s a great deal of wondering going on. Luckily for people in the logistics industry, the president-elect has already made statements about many of the policies he hopes to implement so we at least have some idea of the Trump effect.
How will Trump’s presidency potentially affect the American trade?
The incoming Trump administration is already greasing the wheels to put Donald’s policy program into effect. “Trade” was one of the biggest promises of his campaign, and it is one promise that he might actually keep. According to a report from Trump’s Council on Foreign Relations, the newly elected president opposes some US free trade agreements like the North American Free Trade Agreement (NAFTA) and the Trans-Pacific Partnership (TPP). He’s called NAFTA a “disaster” and “the worst trade deal” ever signed. This opposition could mean that he will either terminate the agreements, or that he will push for major changes on the rules implied.
Trump and his Council on Foreign Relations have been outspoken about his lack of love for NAFTA and the TPP, so there’s plenty of material to analyze. Here are a few of the most important changes we could be seeing due to implementations of Trump’s policies:
5% tariff on imported goods
According to a CNN report from December 2016, there will be a 5% tariff imposed on all imported goods once the new president takes office. It is unclear whether the 5% would be on top of current import taxes, or if they would replace the current levels. This cost increase will probably not have a direct impact on the rates of logistics services but it will impact the import demand. Therefore, it is probable that a slow-paced change will affect shipping routes and rates within six months.
Higher import costs
Donald Trump’s vision includes 7 Point Plan to Rebuild the American Economy by Fighting for Trade. The first point of the plan is to “Withdraw from the Trans-Pacific Partnership, which has not yet been ratified.”
The TPP is a trade agreement reached among 12 Pacific Rim countries in 2015. The agreement excludes China. The TPP countries signify 85% of the US agricultural exports and 44% of the US goods exports. It is extremely important for the US. TPP involves the liberalization of protected sectors, standardization of customs and regulations, promotion of competitive business laws, and the enforcement of environmental and labor standards. It bolsters trade amongst the dozen partners, and each country benefits – including the US.
If the US withdraws from the TPP, importers might turn to other countries that can supply goods along with low-cost manufacturing. This will involve new supplier sourcing costs and changes in shipping routes and rates.
Higher export costs
The opposition to the TPP will also affect the huge amount (more than $500 billion) of dollars that China is selling to the USA on an annual basis. According to a Forbes report this December, the USA is critically important to China because the value of its exports to the West represents one fifth of China’s total exports. That’s a lot of business to potentially lose. The report also gives a positive expectation from Trump’s moves, asserting that the relationship between these two countries will only become stronger because the USA will take a strong position on the trade re-structure.
Exporters would also suffer from such agreement changes, since the US export tariffs would probably be affected. China would look to other countries for cheaper imports. This would be an obstacle for US firms and farmers.
Higher labor costs
The 4th point of Trump’s 7 Point Plan states:
“Tell NAFTA partners that we intend to immediately renegotiate the terms of that agreement to get a better deal for our workers. If they don’t agree to a renegotiation, we will submit notice that the U.S. intends to withdraw from the deal. Eliminate Mexico’s one-side backdoor tariff through the VAT and end sweatshops in Mexico that undercut U.S. workers.”
This statement indicates that Trump will punish US companies that move their manufacturing to other countries. For example, he will impose 35% tax on goods exported to the US from new US manufacturing plants offshore. The main reason US companies choose to move manufacturing out of the US is the low labor costs. Labor costs are higher in the US, therefore a domestic production will lead to an inflation - an increase in the price of goods. The export trade will also be hit with price increases and possible competition issues.
Automatization of production in the US
The increased cost of manufacturing abroad may become a big problem for US firms, which might lead to a search for different options to avoid increased tariffs. One of the options could be to imitate some Asian countries, like Vietnam, in automatizing the production processes once in the US in order to avoid higher labor costs. For people who are worried about replacing human workers with robots, this is nightmarish.
All of the above scenarios still need to be confirmed. Like the rest of the globe, we will have to wait and see – despite how uncomfortable that may be. The new president has strong initiatives, yet the final decisions remain to be seen. In all likelihood, some parts of these negotiations will take years (perhaps even long enough for a new administration to step in). We also have to keep in mind that the agreements would still need to be approved by international organizations, such as the WTO. These international organizations are unlikely to accept new tariffs immediately. In the end, for business owners as well as logistics professionals, we now must wait, keep up to date on the developments, and finally accept the new administration’s decisions on trade.