It has been only one month since Donald Trump was officially confirmed as the 47th US President. Given the strong mandate that was handed to him by the US electorate, it is likely that Trump’s conviction to enact his policies will, this time, come with stronger execution and precision. Sensing that, the world is already busy preparing for his return and self-proclaimed favourite word: “tariffs”.
For instance, Canada pledged to devote more resources and personnel to its border after a Mar-a-Lago dinner between Trump and Prime Minister Justin Trudeau aimed at starving off a tariff fight. Looking at Europe, European Commission President Ursula von der Leyen has already suggested that a viable way to deter the U.S. President-elect from imposing new tariffs is for Europe to procure more liquefied natural gas (LNG) from America. European Central Bank Chief Christine Lagarde echoed this sentiment, stating that EU needed “not to retaliate, but to negotiate” with regards to the threat of a blanket tariff of up to 20% on all non-Chinese US imports. Also, it was reported in early December, Malaysian’s deputy trade minister had urged Chinese companies to refrain using the Southeast Asian nation to sidestep Washington’s tariffs via relabeling products. Firing another unexpected salvo, Trump bluntly warned the BRICS coalition that US would not tolerate the existence of a new currency as an alternative to using the greenback, and touted threats to levy a 100% tariff on them if they did.
Some of these developments suggest we are moving towards a world and trade order whereby unpredictability should no longer be a shock rather than a norm to take in one’s stride. Furthermore, the pace of change could be faster than we expect, not in a linear progression, which can manifest across various dimensions (see below).
Above all, the main question for the dry bulk community is how all this could come back to China and consequently impact the bulkers market which has been losing some of its mojo since mid-2024.
Non-negotiable Trends
That being said, a couple of macro trends should persist into the next four years.
Firstly, the trend of ‘re-shoring/friend-shoring’ the supply chain should continue, and maybe at an even faster pace to avoid collateral damage amid geopolitical tensions. This will have long-term ramifications on trade patterns (for both raw materials and finished goods). Secondly, with more tariffs down the road, the topline growth of global trade volumes will likely slowdown, which will have a drag on shipping (including bulker) prospects. But that could be cushioned/offset to a certain extent, by bottom-up support from an increase in structural inefficiencies stemming from disrupted trades etc.
Already, China’s annual import growth for dry bulk commodities has decelerated over the past few years and is estimated to be just below 3.0% across 2024. This is lower than the 4.5% annual growth rate posted across 2018 to 2023, not to mention the 6.1% averaged from 2015 to 2018.
Given the well-documented headwinds facing China’s economy in the coming years, and now Chinese exports (an important avenue for forex earnings) are facing considerable headwinds, any overtly optimistic projection in China’s GDP growth needs to be taken with a pinch of salt. Beijing has targeted around 5% growth for 2024. However, in early December, a prominent Chinese economist, Gao Shanwen was reportedly saying that growth is likely lower than official figures suggest and a realistic outlook for the coming years would be 3-4%.
For the last few months, Beijing’s rhetoric on stimulating its economy has, unfortunately, mostly not been matched by concrete follow-through (at least in the eyes of international watchers). Whether this perceived ‘grandstanding’ of policies is 1) An indirect admission that past economic tools and apparatus are no longer effective in engineering shock-and-awe comebacks or 2) A calculated move to save ‘ammunition’ for a subsequent showdown with US, the ability to rekindle confidence across different stakeholders in the Chinese economy needs to be addressed. This includes the latest effort to raise the fiscal deficit target next year.
Tariffs - Means or Ends?
Tariffs and treaties that were introduced and negotiated by Trump during his first presidency, were largely kept in place by the Biden administration. In fact, from 2021 to 2024, additional levies on Chinese goods such as EVs and solar panels were added. Hence, moving forward, the proposed 60% tariff on Chinese goods, in a way, can be seen as a continuation of the past two administrations. It is noteworthy that tariffs are not the end but the means for the US government to bring what they perceive as ‘unwilling / reluctant’ parties to the negotiating table. When the trade war between US and China in 2018 was ignited, both sides responded in a ‘tit for tat’ manner, escalating throughout 2019 before reaching a so-called “Phase 1” Trade deal. In that deal, the US agreed to cut some tariffs on Chinese goods in exchange for pledges to purchase more American agricultural products, energy and manufactured goods. However, in the intervening period, China has drawn itself closer to Brazilian grain.
Hence, it is important to note that the future depends not only on Washington’s plans, but also how Beijing will react to new tariffs. Back in September 2024, during a campaign rally Trump suggested that he will make sure that China follows up on its side of the aforementioned deal. So how would President Xi react to Trump’s needs in 2025? Currently, grain analysts suggest that Chinese imports of US farm goods could be hit again if tariff hostilities resume, with China having a lower appetite for returning its US grain imports to pre-2017 levels.
On paper, that appears logical, and we have discussed this in Issue 143. Indeed, China is more well-prepared from a grain procurement standpoint . Beside soybeans, to reduce its dependence on US grains, in 2022 Beijing approved imports of Brazilian corn. Furthermore, earlier this year, it approved corn purchases from Argentina, enabling its first corn shipments in 15 years and the most substantial wheat trade since the 1990s. On the sorghum side (which tends to fall outside the radar), US producers depend heavily on China, where it is used in animal feed and the production of the liquor baijiu. However, late last month, China began allowing sorghum imports from Brazil. Although Brazil has historically exported little sorghum, its production has doubled over the last four years according to the Brazilian Association of Corn and Sorghum Producers (Abramilho).
Nonetheless, it is important to highlight that the Chinese economy President Xi is managing now is radically different from 7 to 8 years ago. In the wake of tightening access to Western high-technology, deflationary pressures, and an underwhelming real estate recovery, we cannot dismiss the possibility of Beijing making concessions in Trump’s second presidency. Furthermore, back in 2017, Trump was a fresh-face in international politics and an unknown variable. Now all foreign leaders have some idea of the consequences of engaging/retaliating against him. In addition, unlike his first term, Trump should be now better placed to execute his policies, since his team is now all hand-picked by him plus the Republicans have majorities in the Senate and Congress. As the famous saying goes, ‘Personnel is Policy’, Trump’s incoming cabinet is filed with hawkish characters picked to implement his ‘America First’ agenda. Hence, ‘tit-for-tat’ for trade discussions need not necessarily be the sole way forward despite the inevitable rise in tensions.
Accordingly, there is now a likelihood that Beijing could unexpectedly hike its purchases of US grains, especially if Beijing subsequently decides it is more practical to not test the limits of Trump’s homecoming to the Oval Office. Such a development will definitely disrupt the dynamics for subcape vessels in the North and South Atlantic region. The freight market had seen this script played out before during the trade negotiations conducted in 2018/2019.
Overall, we find ourselves at an inflection point in history. The era of relentless globalization that followed the end of the Cold War is quietly coming to an end. This shift isn't marked by dramatic events but by a series of reciprocal policy choices. Each decision appears logical on its own, yet together they gradually dismantle the framework of the previous global order that shipping had got accustomed to. Meanwhile, as the unsavory freight performance over the past few months stripped away forward optimism, FFA contracts for 2025/2026/2027 have relinquished gains that were painstakingly accreted over the past two years. As we prepare for his second term, market participants in the shipping derivatives markets are now handed a fresh slate to speculate on how bulker rates will dance to the tune of Trump’s tariffs and his other policies.