As of March 12, 2020 (at 9:46am ET), the novel coronavirus has infected approximately 129,389 people globally and resulted in approximately 4,749 deaths. Nations worldwide have implemented quarantines—Italy is the first to put a national quarantine in place—and international travel is severely affected because of strict country restrictions—including the U.S. travel suspension on certain individuals traveling from Europe, instituted yesterday. In addition, individual companies around the world are instituting travel bans for employees. Inventories for consumer goods are becoming dangerously low, and global stock markets are plummeting, signaling a possible global recession.
What does this mean for international trade and your business?
1. EU Travel Suspension
On March 11, 2020, President Trump announced from the Oval Office without any advance notice that the United States will temporarily suspend travel for certain persons from Europe to the United States for 30 days, in an effort to curb the spread of the coronavirus. The ban will take effect on Friday, March 13, 2020, at midnight, and is scheduled to be in place until April 12, 2020. The United Kingdom is not subject to the travel ban, nor are U.S. citizens, permanent residents, and certain others.
While the restrictions do not appear to apply to cargo coming into the United States from Europe, it is not clear yet how the U.S. government will handle crew onboard vessels and aircraft arriving in the United States from points/ports in the European Union (EU).
The surprise action by President Trump, taken without consultation with European leaders, was met with shock and anger by the EU. This morning, EU leadership issued a blistering statement condemning the move, noting that the coronavirus is "a global crisis, not limited to any continent and it requires cooperation rather than unilateral action."
2. Logistics and Movement of Goods
In China, the world's manufacturing hub, quarantines, factory closures, and severe trucking shortages have short-circuited the global supply chain. Chinese imports of both foreign goods and components for manufacturing have suffered as a result.
There is some hope yet. From the latest statements from shipping lines, it appears at least three-fifths of China's trucking capacity is now operational again, as provinces lift roadblocks and quarantines and major Chinese ports are nearly functioning at full capacity. The cancellation of more than 110 transpacific sailings to North America, however, has resulted in a container imbalance on both sides of the Pacific affecting both exporters and importers.
While the resumption of production by Chinese factories may ease some of these issues, the rest of the world is increasingly grappling with new epicenters of the virus and slowing economies. This means that as China resumes manufacturing and exports, and shippers try to restock inventory, transpacific freight rates are likely to skyrocket. In a typical market, this would result in shippers contracting early to lock in favorable rates, but with teetering economies, and the resulting slowing of demand, that is becoming increasingly untenable for shippers to do.
In the short term, until at least August 2020, freight costs may increase, as the supply chain blockages are alleviated, companies restock depleted inventory, and carriers attempt to address the overall economic impact. Furthermore, as imports into the United States resume, we expect U.S. trucking capacity to be tested with an influx of raw materials and inventory coming into the United States. Thus inland freight costs are also likely to rise in the short term. Longer term, however, especially given newly reduced fuel prices, transportation costs are likely to stabilize by the time inventories are restocked and shippers look to transport fresh inventory in preparation for the holiday season.
3. Contracting and Rate Management
In the near term, as shippers contract to restock inventories and import raw materials, they should be prepared for higher rates and surcharges, given the predicted increase in port congestion and freight costs into the second quarter of 2020.
When contracting longer term, once both demand and freight costs stabilize (as is hoped), it will become increasingly important to ensure that your contracts going forward— with shippers or carriers—are protected by a comprehensive Force Majeure clause that covers all contingencies, including specific references to quarantines, epidemics, and other governmental actions, whether such a Force Majeure event terminates the parties' responsibilities under the contract or simply suspends the same, notice requirements in case of an event and whether the parties must take steps to mitigate. We also recommend taking a second look at dispute resolution clauses and ensuring that they are not overly favorable to the counterparty to the contracts. In some cases counterparties may be willing to change the law and forum in the contract, from their home jurisdiction to large international centers such as London, New York, Los Angeles, or Hong Kong.
4. Other Potential Import and Export Issues
We are also aware that many companies that had already begun to move manufacturing out of China because of the Section 301 tariffs on Chinese goods sped up the process because of the coronavirus-related closure of Chinese factories. This has come with not only a host of contracting issues, but also related import and export issues, including determining the country of origin of the products being manufactured or assembled in a new country from parts sourced globally and, in connection with this, the country of origin marking on packages; U.S. Consumer Product Safety Commission testing; U.S. Food and Administration approvals; and lastly dealing with local country officials.
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Since the situation is changing rapidly, we will continue to monitor any developments and provide regular updates. In the interim, please contact Venable's International Trade and Logistics Group if you have any questions regarding how recent developments may impact your business.