Trade conflict with China could have big impact on American railroads

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A BNSF Railway intermodal train on the lower tracks heads passes a Union Pacific autorack train on the upper tracks through "Blue Cut" in California's famed Cajon Pass.
TRAINS: Steve Sweeney
WASHINGTON — American railroads are keeping a close eye on the escalating trade conflict between the United States and China, which could have a major impact on freight traffic.

In the weeks and months after President Donald Trump was elected in 2016, the railroad industry expressed cautious optimism that they would find common ground with the Republican in the White House. The one area where the industry was perhaps most leery of the businessman and reality television host-turned politician was trade, particularly after Trump campaigned on an isolationist agenda and threatened to pull out of international trade agreements.

Groups such as the Association of American Railroads, Class I railroad executives, and rail analysts have all said in the past that railroads benefit greatly from international trade, especially the movement of export agricultural products and imported consumer goods.

The United States and China have been going back-and-forth in recent weeks enacting tariffs on various goods that if fully enacted could kick off a full-on trade war against the world’s fastest growing economy. Since January, the Trump administration has enacted tariffs on washing machines, solar panels, steel and aluminum — all products widely produced in China. In response, the Chinese government announced it would put tariffs up to 25 percent on 128 different American products, including agricultural produce such as soybeans and pork. Last week, Trump signaled that he was considering additional taffis.

The potential for a trade war with China is especially concerning for the railroad industry, says intermodal and rail analyst Larry Gross.

“If we descend into a full-fledged trade war with China it would be substantially detrimental to the rails,” Gross tells Trains News Wire. “Roughly 58 percent of intermodal volume is associated with imports and exports and China is the largest participant. The inbound volume would be disrupted by the tariffs and the outbound volume of waste paper, scrap, and agricultural commodities would be disrupted by the Chinese retaliation.”

To find a similar situation in the past, Gross says you have to look back nearly 40 years to 1980 when President Jimmy Carter enacted a grain embargo against the Soviet Union in response to the invasion of Afghanistan. The embargo was later ended by Ronald Reagan, but not before putting the squeeze on American farmers and the railroads that moved their product.

The Association of American Railroads is among a number of organizations urging caution when it comes to making drastic changes to trade policy. Last year, it produced a report talking about the benefit of international trade to the rail industry, noting that 42 percent of carloads and intermodal units are directly associated with international trade and that 50,000 rail jobs, worth more than $5.5 billion in annual wages and benefits, depend directly on it. AAR and a number of Class I railroads have also touted the importance of staying in the North American Free Trade Agreement.

“Freight railroads and their customers have benefited from the globally integrated supply chain,” AAR representative Jessica Kahanek tells Trains News Wire. “While trade terms and agreements can always be revisited and improved, lawmakers must avoid policies that roll back American participation in global markets.”

A tariff on grain products such as soybeans will have a big impact on railroads. In 2017, 58 percent of U.S. soybean exports went to China, according to the U.S. Department of Agriculture. During that same year, soybeans accounted for 18 percent of revenue railroads earned from moving grain, according to AAR’s Rail Time Indicators, a monthly economic and traffic trends report sent to its members. Even if the tariffs don’t go into full effect, the report notes that threat of such taxes would could have a short-term impact because grain buyers and sellers may start looking at other markets and railroads won’t “know if or where (they’ll) be needed.”

The Rail Time Indicators authors point out that, in general, economists are optimistic about the state of the economy and that’s good news for the rail industry.

“Now all we need is our political leaders to keep their heads about them and refrain from starting a trade war,” report writers say.
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