Date: Thursday, September 9, 2021
Source: Cato Institute
According to numerous reports, skyrocketing global shipping prices and related transportation bottlenecks are hindering the U.S. economic recovery. Indeed, this “shipping crisis” is one of the summer’s most‐covered financial phenomena. Yet barely mentioned outside of a few industry publications is how brand new U.S. tariffs of more than 200 percent(!) are contributing to the problem. And U.S. trade law all but ensures that there’s little we – even the White House itself – can do about it.
American ports and rail terminals are struggling to cope with unprecedented surges of imports from Asia, a situation likely to continue into next year and contributing to both American companies’ supply chain woes and broader inflationary pressures. Shipping containers are piling up by the thousands, leading to port delays, higher shipping costs (both ocean and inland freight), and U.S. exporters – mainly of agricultural products – lacking the empty containers they need to send their goods abroad. Importers, meanwhile, are especially reeling. Firms like the Columbia Sportswear Company, Whirlpool, and Peloton have gone on the record about rising shipping costs and struggles to meet consumer demand. Small businesses are being hit particularly hard, facing the decision to pay three times the typical shipping rate for products that are unlikely to arrive in months. And peak shipping season has just begun. The disruption is such that the CEO of the American Apparel Association even urged consumers to do their Christmas shopping in the summer.
(Sorry, fellow procrastinators.)
Surely, a lot of the problem here is just the global pandemic – for example, a surge of Asian‐made consumer goods to meet an unexpected spike in U.S. demand, combined with still‐muted demand for U.S. products in countries with relatively few vaccinations – doing its thing. Until COVID-19 is under control around the world, supply chain hiccups (and more) will persist. Thus, many of these issues will simply take time to work themselves out – regardless of what the politicians might promise.
However, U.S. trade policy is also likely contributing to the current shipping crunch. In particular, the United States earlier this year imposed extremely high “trade remedy” duties on imports of truck chassis (which are used to haul containerized merchandise around the country) originating in China – by far the largest producer of such products. The duties resulted from antidumping (AD) and countervailing duty (CVD) investigations launched last year by the U.S. International Trade Commission (ITC) and Department of Commerce (DOC), the latter of which calculated for chassis produced by China International Marine Chassis (CIMC), the world’s largest chassis manufacturer, combined final duty of 221.37 percent (177.05 percent AD and 44.32 percent CVD). These estimated AD/CVD measures now apply to any Chinese chassis imports that have entered the from March 4 on. And they apply on top of the 25 percent tariffs that President Trump imposed on a wide range of Chinese imports in a separate “Section 301” case back in 2018.
(We say “estimated” duty rates here because, as discussed previously, the U.S. trade remedies system’s novel “retrospective” approach requires duties to be (1) adjusted periodically for imports that entered the United States during a previous period and (2) then assessed on those imports at the new, recalculated rate once the review is completed years later. This approach creates an additional “uncertainty disincentive” – as if a 221 percent duty weren’t enough! – to import from subject countries and companies. That said, usually rates change modestly during these reviews, so it’s unlikely that the current duty rates on Chinese chassis imports will be substantially lower anytime soon.)
According to importers and industry‐watchers, these duties are undoubtedly affecting the U.S. shipping market for two reasons:
- First, chassis available to U.S. freighters have been “stretched to [the] limit” in recent months at most of the biggest transit hubs in the country, including the ports of Los Angeles/Long Beach and New York/New Jersey, and rail terminals in Dallas, Chicago, St. Louis, and elsewhere. Major chassis providers like TRAC Intermodal have also reported shortages in regions like the Seattle‐Tacoma area and throughout the Midwest, where this situation is especially sensitive. Indeed, back in July, chassis shortages contributed to creating a clog of shipments in Chicago that forced Union Pacific and BNSF Railway, two of the largest railroad companies in the country, to temporarily restrict shipments from ports in the West Coast to said hub. As one recent report put it, “[s]hipments from Asia to the U.S. are experiencing extreme difficulties in getting their cargo delivered, mainly due to the acute shortage of chassis to effect delivery of their containers on the U.S. side.” (emphasis ours)
- Second, there simply isn’t enough non‐China chassis capacity to meet current U.S. demand. In particular, CIMC can produce 40,000–50,000 units per year, while the five North American chassis manufacturers that requested the U.S. AD/CVD investigations have admitted that it would take them “at least six to nine months” to increase their production to only 10,000–15,000 annual units, and that they would not be able to fulfill new orders until 2022. Refurbishing old chassis, moreover, isn’t possible because every usable unit in the country is being employed because of the current shortages.
As a result of these two market realities, the new U.S. duties will do only two things, neither of which is good for the U.S. shipping crunch: (1) further discourage importers and freighters from bringing new capacity online (thus maintaining the chassis shortage and related shipping bottlenecks); and/or (2) dramatically raise shipping costs, as freighters (importers, ocean carriers, truckers, etc.) suck it up and just buy Chinese chassis then pass on those costs to their customers. On the latter point, freight companies estimate that the new duties alone will add more than $25,000 to the price of each chassis they buy, effectively tripling their price. None of this is good for shipping‐reliant U.S. companies (or consumers) and current inflationary concerns – especially when these higher inland freight costs are combined with higher ocean freight costs brought on by the pandemic.
As one U.S. trucking company representative put it when the new duties were finalized this Spring, “The timing couldn’t be worse.”
Why, then, did the U.S. government (DOC/ITC) not take these unique factors into account when determining whether to apply the new duties? Why not perhaps hold off on implementing them, at least until the shipping crunch abates next year? Given that ports are likely to be jammed up for the foreseeable future and chassis pools are already stretched thin, it would make sense for the government to let freighters purchase additional units of chassis at relatively competitive prices, thereby easing the current chassis shortages, reducing the “detention and demurrage fees” (for holding goods until equipment becomes available) that U.S. consumers are already bearing, and alleviating some of the brutal price pressures and bottlenecks in the current domestic shipping market. Such results would surely be in the national economic interest.
They would also be consistent with the Biden administration’s own stated priorities in the shipping sector. In particular, President Biden issued a July 9 Executive Order targeting (among other things) the very “detention and demurrage” fees that may be exacerbated by a lack of available chassis to transport incoming shipments from ports to their inland destinations. The Federal Maritime Commission is also now fielding a complaint by the American Truckers Association over alleged anti‐competitive practices by ocean liners and chassis providers to restrict truckers’ choice over chassis to haul shipments.
Holding off on the new chassis duties thus seems like a total no‐brainer, right?
Alas, as discussed previously U.S. law prohibits the DOC and ITC from taking these important economic and policy issues into account when determining whether to apply trade remedy measures on subject imports. Instead, the U.S. system effectively runs on autopilot, delivering rents to a small number of well‐connected firms and labor unions regardless of current market conditions or how an agency decision might affect the long‐term health of the U.S. economy or other domestic policy priorities. Many other national trade remedy systems have just this type of “public interest” test; the United States unfortunately does not. And it’s undoubtedly a big reason why we’re one of the biggest users of AD/CVD measures in the world.
To be clear, none of this means that the Chinese government’s subsidization of domestic firms like CIMC must be condoned or ignored. And the United States, just like all other World Trade Organization members, has the right to use its trade remedy system to offset injury to domestic firms caused by dumped or subsidized imports (though of course we at Cato have long complained about these laws’ merits and implementation). But a system that requires U.S. administering agencies to blindly enact 221 percent tariffs (on top of 25 percent tariffs already in place!) on badly needed chassis, while the economy reels from a massive shock to the global and U.S. shipping systems caused by a once‐in‐a‐generation pandemic, makes zero sense – especially when it contradicts the White House’s own economic priorities. Moreover, chassis are relatively unsophisticated pieces of equipment, not jet fighters or nuclear reactors that might possibly raise credible national security concerns that warrant trade restrictions regardless of their economic costs.
A sane trade remedy system would allow for these and other considerations and permit the administering agencies to reduce, delay, or decline to impose duties where doing so would be in the public interest – for example during a shipping crisis that’s hindering the economic recovery and adding to already‐serious inflationary pressures.
Alas, the United States has no such thing.