Will U.S. Rail Volumes Take A Hit From The Proposed U.S. Tariffs On China?

An additional $300 billion in proposed U.S. tariffs against China could result in lower railroad freight volume in the agricultural, manufacturing and intermodal sectors, but economic uncertainty and competition from trucks appear to be bigger threats for rail volumes as the second half of 2019 approaches next week.

"I've nosed around the market talking to people, and I've not heard much commentary on tariffs having much impact on rail volumes to date," a transportation consultant said. 

If trade uncertainty between the U.S. and China is underpinning rail volumes, then the effects would be seen in the agricultural, manufacturing and intermodal sectors, with intermodal being hit the hardest, a rail consultant said. If U.S. tariffs affect the purchase and imports of consumer goods and manufacturing parts, that would reduce intermodal traffic from both coasts inland. 

If the tariffs make U.S. manufacturers non-competitive because they can't get or afford parts from China, then that could reduce volumes of manufactured goods, the rail consultant said. Tariffs could also impact exports of agricultural products, which could hurt rail volumes, he said.

Meanwhile, the trade groups representing the commodities that could potentially be affected by the implementation of new U.S. tariffs next week say rail volumes could take a dent if the tariffs get implemented and trade talks occurring in Japan during the G20 summit hit an impasse. U.S. President Donald Trump is expected to meet this week with China's President Xi Jinping. 

"As U.S. trade policy has negatively impacted the U.S. chemicals trade, reduced demand for U.S. chemical exports means reduced demand for rail services," the American Chemistry Council (ACC) told FreightWaves. ACC is one of several hundred trade groups or companies that testified before the Office of the U.S. Trade Representative this week and last week on the proposed $300 billion in tariffs.

The U.S. chemicals industry, just like other industries such as the U.S. soybean growers, has built and expanded new manufacturing facilities in anticipation of meeting export demand. Cheap and plentiful U.S. natural gas has helped enable the chemicals industry to grow as it has, the ACC said, with 334 chemical industry projects worth $204 billion announced since 2010.

"Because only about half of the new capacity could be consumed domestically, many of the new investments are export-oriented," the ACC said. "These new investments position the chemical industry for growing exports and a rising trade surplus, but the direction of trade policy and imposition of tariffs on global supply chains is introducing a significant amount of uncertainty and could delay or prevent the industry's expansion from fully realizing its potential."

The National Retail Federation doesn't track rail volumes specifically, but it has said that about 60 percent of goods facing the potential tariffs are consumer products. According to NRF-commissioned research, consumers could pay $4.4 billion more for apparel, $2.5 billion more for footwear, $3.7 billion more for toys and $1.6 billion more on household appliances. 

"The difficulty of moving sourcing out of China is particularly relevant to apparel and footwear. For example, sweater production requires higher capital investment for linking and looping equipment than for a garment that just requires stitching. More importantly, sweater production requires workers skilled in the ‘linking' production process. These capital and labor requirements make it more difficult to shift production outside of China," said David French, NRF senior vice president of government relations, in testimony for the U.S. Trade Representative.

"It would be impossible for all market participants in our industry to simultaneously move sourcing to other countries. The capacity does not exist. Those that have the maturity to produce these goods are already doing so," French said.

The Class I railroads might speak more about U.S. trade uncertainties during their second quarter earnings calls in July. But for now, Union Pacific UNP chief executive officer Lance Fritz was reported as saying that the proposed tariffs would be a "pretty significant risk," even though their effect on the company's revenues remains uncertain.

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