Second and Third-Order Tariff Impacts: Shutting the Gate Damages Us All

The implications, as the Singaporean trade minister noted, can be hard to calculate.  For instance, American importing companies will need to increase the amount of the continuous bond they hold with US Customs.  In some cases, bond levels may be 20-100 times higher than prior to Trump’s tariff wars began. Shipping volumes have fallen off dramatically.  This has left firms paying more for transportation as well. So it is not just 25% tariff rate increases that affect firms.  The second- and third-order implications are just starting to appear. In the short run, exporting firms have several options to limit risk and exposure to higher tariffs.  They can do nothing and bear higher costs, hoping to ride out a short conflict.  They can work with their importing partners to effectively “share” the costs of higher tariffs. Firms should be reexamining their options to ensure that they understand their current supply chains, tariff classifications and possible sourcing alternatives.  It may be prudent to tweak existing processes to move products into new tariff classifications by, for example, adding or subtracting manufacturing steps in the supply chain from one location to another.

Window of Hope Towards ASEAN Economic Integration

There is unfortunately no ‘stick’ to compel member states to meet deadlines. Nonetheless, the trade community in each member state can pressure trade policymakers. Reduced red tape in cross-border trade, especially eradicating the submission of repetitive information, will be of extra benefit to small and medium enterprises (SMEs), who are often resource strapped. Since SMEs account for more than 95% of business establishments in ASEAN, the opportunities brought about by the ASEAN Single Window (ASW) makes it a cause worth fighting. Given that ‘a chain is only as strong as its weakest link,’ the success of the ASW is dependent on the quality of NSWs of each member state. The ASW has only experienced incremental progress thus far. Member states should take advantage of digitalization and be relentless in accelerating the progress of the ASW. The grit needed to underpin the ASW will be worthwhile as success of this milestone will bring the region closer to the coveted goal of establishing an integrated market and regional platform.

Where Are We in Global Trade?

This has been an interesting, mixed, two weeks in trade.  On the one hand, the system continues to receive new shocks, particularly from US President Donald Trump.  On the other hand, trade integration is also moving forward.  The net result continues to highlight the increasingly unsettled global environment.  Firms need to focus on how to mitigate the risks facing their business operations.
Let’s start with the bad news. Two separate hearings have wrapped up in Washington.  The first focused on product categories for an additional $16 billion in 25% tariff rate hikes against goods coming from China. Regular readers may recall that the Americans first produced a list of items totaling $50 billion for new tariff increases.  The list was revised on the basis of hearings.  The first $34 billion in tariffs have already gone into force (and were met with retaliation by China on a similar amount).  But $16 billion in products were contested, resulting in a new list from the USTR. Now that hearings on the revised list of products has been completed, tariffs can be imposed at any time.  Expect them to be announced on Friday (since this seems to be the preferred approach of the Trump administration).  These new Section 301 tariffs will likely be met with $16 billion in matched retaliatory tariffs by China. 

Japan-EU Trade Agreement – 1/3 of Global GDP Included

The EU and Japan have been building up a formal set of economic cooperation agreements since 1987.  (Appendix 1). Today, the EU is the third largest trading partner of Japan, while Japan is the 7th largest trading partner of the EU. Both sides see significant economic potential for deeper cooperation, in terms of job creation and export revenue. However, absent free trade agreement (FTA), exporters still faced some substantial import duties and difficulties in compliance, particularly with standards. This prompted the establishment of JEEPA, the first FTA between the two parties. The commitment between the two to get this through is obvious. A large part of JEEPA negotiations was focused on regulatory issues or non-trade measures. Chapters are dedicated to addressing newer challenges of global trade like e-commerce, capital movements, intellectual property and corporate governance.

What to Expect? Benefits for Goods & Services Coming in EU-Japan

Broadly, we assess the usefulness of the Japan-EU Economic Partnership Agreement
(JEEPA) based on the breath and extent of tariff cuts, where we assume that better quality
trade agreements have steeper tariff cuts over shorter time periods.  Looking at the tariff schedules of the two parties, Japan appears to be more conservative in cutting tariffs.  Its tariff schedule has a longer phase out period of 20 years versus the EU’s, which 15 years. It also has more exclusions in its tariff schedule than the EU – various goods in 12 chapters are not covered, compared to 6 for the EU. Japan only agreed to eliminate tariffs for 62 chapters of goods upon entry into force (EIF) whereas the EU promised 67. Compared with the status quo, however, EU-Japan still provides some significant benefits for exporters in both markets.  Tariff rates on specific products of key interest can be high and any reductions are likely to result in new market access for both.