Flight or Freight?

‘Instead of fostering an environment that enables business to thrive, governments are making running a business more difficult. In years gone by, our concerns with our government were centred on taxes and their regulation of shotgun and firearm ownership. Today, the UK’s relations with other nations affect what products we can trade, with which countries we can trade and the costs of bringing in products we sell or exporting products we make or distribute.

Internationally, the impact of two government initiatives, sanctions and trade wars are growing and the driving force is the USA. Right now, there are six nations sanctioned by the US. They are: Burma (also known as the Union of Myanmar), Côte d’Ivoire, Cuba, Iran, North Korea and Syria. The reasons for the sanctions are generally the countries’ breaches of human rights but also include other political reasons, with Iran and North Korea being targeted for their moves in strategic weapons. Partly because of the size of the country’s oil production, the most wide-ranging of the sanctions in place are those against Iran.

In the UK, despite sanctions being in place under the deal from which the US has withdrawn, the UK government states that you can apply for a licence to export to Iran. There has been set up a special purpose vehicle by EU signatories to the Iran nuclear deal to ‘get around’ US sanctions. As I write this, the UK’s trade secretary, Jeremy Hunt, is on his way to Iran to discuss how UK companies can avoid US sanctions. I am a US citizen, and it is not any loyalty to the country but my experience of doing business with customers and suppliers in the US that tells me everyone dealing with Iran needs to heed the Iran sanctions.

Sanctions are being enforced by the Office of Foreign Assets Control (“OFAC”) of the US Department of the Treasury, which “administers and enforces economic and trade sanctions” based on US foreign policy and national security goals against targeted foreign countries and regimes, terrorists, international narcotics traffickers, those engaged in activities related to the proliferation of weapons of mass destruction, and other threats to the national security, foreign policy or economy of the United States.

OFAC acts under presidential national emergency powers, as well as authority granted by specific legislation, to impose controls on transactions and freeze assets under US jurisdiction.” If you look at the Federal Register you can scroll through the press releases announcing the more important individuals caught by these sanctions. The number of people affected and their locations is vast. On the same Federal Register also you can begin to see the measures being taken in the US’s trade war with China. The list of anti-dumping and tariff actions seems endless and my search produced 7,119 documents, the most recent on the first screen documenting actions against Cambodia, Libya, Belize, Canada, Mali and Cyprus.

Ignorance of any of these and complicity with those found flouting regulations can be extremely costly in both time and money. In the gun trade, exporting and importing is becoming a risky business without doing your ‘due diligence’ first. SPIRE from the Department of Trade is your first port of call, but you also need to check the state of play with the USA. For this, the Federal Register is a good place to start. This ‘due diligence’ can help you avoid a sudden loss of supply or non-payment from a sale, which could just be because you got caught in a chain.

Obviously, there is a limit to this work – sometimes there is no other source for a particular part and it is many stages back in production – but knowledge is key to being caught unawares. Now let’s consider the impact of changes in markets and regulation on a key facet of the gun trade, transportation. No manufacturer or retailer or distributor does business without being impacted by freight costs.

Increasingly, air cargo is the choice for those in the gun trade. Currently, 35 per cent of global trade goes by air and the value of goods carried by airlines is expected to exceed $6.2 trillion this year. This represents some 62.5 million tons, up from 59.9 million tons in 2017. It accounts for one per cent of world trade by volume but over 35 per cent by value, as the smaller, more valuable items tend to shipped by air. Air cargo grew 9.3 per cent in 2017 but is expected to have slowed to 4.5 per cent growth in 2018. This seems to reflect the slowdown in China’s trade.

Nearly 60 per cent of the world’s air freight is carried on routes between North America, western Europe and south-east Asia and the fastest growing route is between China and North America, which has seen growth of more than 10 per cent year on year since 1995.  The US remains the largest air freight market with China second. Based on these numbers, it seems possible that the past under capacity in air freight could change.

The China-USA route may lose its dominance, though this is tempered by the predominance of consumer goods and high tech products in China’s shipments to the USA. The possible short-term decline in use of the China-USA corridor, together with the current downward trend in crude oil prices, could provide room to negotiate lower air freight rates in the coming months. Low value items, relatively heavier goods and less time sensitive items tend to be transported by sea and this is reflected in the fact that 90 per cent of trade, when measured other than by value, is transported by ship.

Anecdotal data seems to point to a reduction in ship traffic this autumn.  Certainly until June, Shanghai’s Yangshan port and Qingdao and Ningbo were all experiencing berthing delays of two to two-and-a-half days, but this has eased somewhat. There appears to be an opportunity to negotiate lower sea container rates, though the volatility in pricing full container loads will remain a constant.

In the gun trade, necessary, internationally-sourced product and the exporting of products from the UK became more risky during 2017. Volatile UK exchange rates, particularly to the US dollar, have more than set off any potential advantage of lower Chinese exchange rates or the ongoing decline of the Turkish lira.   It seems likely that this is a time for negotiating lower freight costs.  On the other hand, the overhead of study and risk of getting on to the ‘wrong list’ in the US by ignorance has increased and continues to do so. When are they going to make business easier.

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