Ask The Experts: May 22, 2019
Independent Transportation Analyst and Consultant
Q: What impact is the US-China trade war currently having on the rail industry?
A: Trade – the big issue since….2017. Wrote the FT’s Global Insight columnist Edward Luce: “(President) Trump has staked his reputation on eliminating the trade deficit (as opposed to changing the intellectual property rules etc) with China. Most economists think that goal to be unattainable – and undesirable”. Remember that the much-publicized AAR figure of “42% of US rail volume is trade-related “greatly understates the total impact on the Class One industry. The recent heating up of the US-China trade war, only a few days ago thought to be resolved, is obviously not great news for rails – impacting ag, autos, consumer goods, plastics, etc. The chemicals sector is “particularly hard-hit” (the FT, again). The latest salvos have been estimated to include fully 50% of the trade between the USA and China – and The Economist notes that “China vows to fight to the end” on this issue. Q1 US exports to China were down 30%; imports from, down 9%. Overall global trade declined 1.1% for the first two months of this year.
Q: What are your thoughts on the current NAFTA 2.0 situation?
A: Border disruptions related to immigration and our declining relationship with Mexico have been estimated to cost ~$800mm/day (although that should lead to market share opportunity for rail!). AMLO, meanwhile is both underwhelming in his attempt at broad changes (for example on the use of the army – “meet the new boss, same as the old boss”) and going back even further in time to offer broad support to Pemex, which just received an $8B credit approval, which would constrain US refined products imports, a big growth prospect for KSU. Meanwhile, NAFTA 2.0 is getting push-back – from the US Democratic congress, and from Canada and Mexico who argue, rather convincingly, for the rollback of the metals tariffs (and clearly will not accept quotas as a “substitute”). Meanwhile, the US International Trade Commission, an independent government agency, pegs the impact of 2.0 (AKA “USMCA”) as minimal (increasing GDP by 0.35%) – which makes sense in that, despite all of the rhetoric, it really is an only slightly modified 1.0; they see the biggest, unquantifiable, benefit being the investment/regulatory stability that USMCA (NAFTA resolution) would bring – but “stability” seems like a distant goal from here….The US added tariffs to Mexican tomatoes – so clearly, following the price gyrations in Avocados, this sector of the trade war isn’t auto-focused, but rather, concerns salsa….
Q: Do you think regulation is a current threat to the rail industry?
A: (Re) Regulation. Its seems to be a rising threat – one prominent lawyer, one of my few conservative/communist friends, says that rail assessorial “abuse is rampant” – and the STB will soon be holding a hearing on the issue. But its not just the USA – Mexico has stepped up what we might consider anti-trust oversight and the CTA up north has taken the CN to task for since-corrected congestion in Vancouver. But it’s the USA that is really heating up, as we have discussed since STB Chairman Ann Begeman’s incendiary (but enthralling) speech at last year’s RailTrends. Their recent “Rail Reform Task Force” report was scary – but remember it’s Washington. Things move slooooowly. The AAR’s Jeffries stated it “lacked balance.”
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