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Trump trade war 2.0: What are the pros and cons for shipping?

  • 25% tariff on US imports from Mexico and non-energy imports from Canada
  • 10% tariff on US energy imports from Canada
  • US sources 62% of its crude imports from Canada and 7% from Mexico

Trump’s new trade war offers some positives for ocean shipping: Disruptions generally boost spot rates and more containerised cargo could be frontloaded ahead of expected future tariffs. The negative is that tariffs will likely hurt personal and business consumption, reducing future cargo demand

US PRESIDENT Donald Trump has officially pulled the trigger on his new trade war, which the Wall Street Journal editorial board dubbed the “the dumbest trade war in history”.

That’s bad news for consumers and businesses, but potentially positive — at least in the short term — for ocean shipping rates, which tend to rise amid trade disruptions.

At 0001 hrs on Tuesday, the US will place a 25% tariff on non-energy imports from Canada; a 10% tariff on imports of Canadian energy (primarily crude oil); and an incremental 10% tariff on imports from China, which already face an average tariff of 10%. Trump has also signed an executive order to place a 25% tariff on imports from Mexico, although it was pushed back by one month on Monday.

Mexico, Canada and China are America’s top three trading partners.

Trump’s executive orders also remove the duty drawback for imports from Mexico, Canada and China. US businesses that import foreign components and then export goods using those components are allowed to claim back the duties they paid on the imports. That allowance will no longer apply to imports from the three countries.

US tariffs could go even higher. Trump’s executive orders call for increased duties if there is retaliation.  

Canada announced $20bn in tariffs on US goods beginning on Tuesday, with an additional $85bn beginning in three weeks, equating to a tariff rate of 25%. China’s Ministry of Commerce said it will “take corresponding countermeasures”.

Container shipping impact

The vast majority of US imports from Canada and Mexico arrive by truck, rail or pipeline, not by sea. Consequently, any replacement cargoes sourced amid the Trump 2.0 trade war would be positive for ocean shipping demand, with the caveat that short-term replacement options would be limited.

In the medium and longer term, the trade war could convince some Canadian and Mexican exporters to diversity sales to more overseas buyers, just as the tariffs in Trump’s first term prompted China to shift more goods sales to Southeast Asia and South America, diversifying away from the US.

The future of North American trade might be less integrated within the continent, and thus, less land transport-based and more ocean shipping-based.

The latest events could also convince US importers that more tariffs are en route, which could have a more substantial near-term impact on container shipping spot rates.

Trump said on Friday that he “absolutely” plans to target the EU with new tariffs. He has also proposed a universal tariff that would offset US tax cuts. The Financial Times reported that US treasury secretary Scott Bessent favours a universal tariff that starts at 2.5% and rises in 2.5% increments over time to 20%, in a way that is scheduled and predictable to US importers.

US importers pulled forward some cargo in 2024 in preparation for tariffs expected after Trump’s inauguration, one reason why US inbound volumes were so strong. Importers could do so again in 2025, providing support for spot rates, which remain very high historically but have recently declined.

US businesses still have time to pull forward orders from Europe, a plus for transatlantic rates. Europe is a major provider of building supplies to the US. Meanwhile, the gradually escalating universal tariff concept cited by the Financial Times is a recipe for large-scale cargo frontloading in all container trade lanes.

Tanker shipping impact

The US imported 4.1m barrels per day of Canadian crude in January-November, representing 62% of total imports. The US imported an average of 466,000 bpd from Mexico during the same period, 7% of total imports.

During the first three quarters of 2024, 59% of crude exports of Mexico’s Pemex went to the US, 21% to Europe and 20% to Asia. The share of Pemex crude bound for non-US destinations should rise going forward due to tariffs, adding to tanker tonne-miles.

According to Stifel analyst Ben Nolan, “The US imports heavy Mexican crude, which could be replaced by crude with similar API [gravity] from areas like the Middle East, meaning Mexican crude to India and Saudi crude to the US, for example, which would obviously be positive for tankers.”

Canadian crude exports to the US are overwhelmingly shipped by cross-border pipelines, so any trade changes would add to tanker tonne-miles. However, that upside is constrained by Canada’s limited export pipeline infrastructure as well as practical hurdles to US replacement of Canadian crude supply.

Canada debuted its 590,000 bpd TMX pipeline to British Columbia on the Pacific coast last May, complementing its older 300,000 bpd pipeline to that coast. Canadian crude exports from British Columbia have gone to either the US west coast or Asia. The tariff would push all of those exports to Asia, mainly to China, and ship-tracking data shows that this has already happened. All Canadian export cargoes now at sea are en route to Asia aboard aframaxes.

Canada cannot substantially increase crude exports via British Columbia in the near term due to its current infrastructure, but Trump’s tariffs might have a long-term effect on market dynamics.

Alberta premier Danielle Smith said, “We can no longer afford to be so heavily reliant on one primary customer.” She called on the federal government to “immediately commence a national effort to fast-track and build oil and gas pipelines to the east and west coasts of Canada” and construct liquefied natural gas export terminals.

The majority of Canadian cross-border crude pipeline exports to the US go to the landlocked Midwest states. To the extent Canadian flows are not curtailed, US buyers and Canadian sellers will have to share the tariff cost, because Canada can’t export what it can’t sell in the US Midwest (due to export pipeline capacity limitations) and Midwest refiners have limited replacement options. They’re specifically geared to take heavy, sour Canadian crude, not light, sweet US domestic crude.

Lane Riggs, president of Valero, said during the company’s quarterly call on Thursday, “If you’re a captive market, [the tariff] will somehow get shared between the refinery and Canadian crude producer, and there are some captive markets mid-continent.”

Some Canadian crude does flow via pipeline to US Gulf coast states, and there are refineries on Canada’s east coast that ship products by tanker to New York and Boston. In these cases, tariffs should cause a change in flows that is positive for tanker tonne-miles.

“On the US Gulf coast, you can source feedstocks from anywhere in the world,” said Valero chief operating officer Gary Simmons.

Regarding Valero’s refinery in Quebec City, Simmons said, “There are periods of the year when we’re long diesel and typically that goes to New York. We could place those barrels anywhere in the world. So, I wouldn’t expect to see a throughput reduction as a result of tariffs.”

According to Nolan, “The Boston area imports a good deal of refined products from nearby Saint John via tanker. If those volumes are now moved to Europe and replaced by European imports, it would be positive for tankers.”

Vortexa said, “We could realistically see some opportunities toward the US Atlantic coast opening up.” Gasoline cargoes from Northwest Europe to the US Atlantic coast on medium-range product tankers have recently increased and there is a “strong possibility” this was due to the tariff deadline, said Vortexa.

Disruption upside versus demand downside

The theoretical shipping effect of tariffs is a mix of trade-disruption upside and demand-destruction downside.

On one hand, shipping benefits from disruptions. The more economically efficient the global trade network, the fewer ships needed. The more that geopolitical events or government policies push cargoes to travel longer distances, the better for the “miles” in shipping’s tonne-mile equation.

On the other hand, lower economic growth is bad for shipping demand — it reduces the “tonnes” in tonne-miles.

Frontloading of cargo merely changes demand timing, pushing it up in the near term at the expense of the long term.

Shipping stock prices are forward-looking and have reacted negatively to tariffs, even if there is potential for short-term rate upside. Shipping stock sentiment and pricing appear to be more driven by the threat to future demand.

Shipping demand destruction is not immediate. Tariff costs are offset by currency depreciation in source markets. Some foreign sellers and US buyers cut their margins to reduce the pass-through cost to consumers and defend market share. Exceptions to tariffs (which were widespread in Trump’s first term) limit overall impact. To the extent tariffs do translate into pass-through costs, some inflation is acceptable to consumers willing to pay higher prices.

The negative impact on ocean shipping rates occurs when pass-through costs grow too high, compelling consumers to reduce purchases, and when margins for importers and exporters become uneconomical.

 

 

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