China-US Trade: Is the Worst yet to Come?
The trade conflict with the United States and China continues to drag on. We’re now well beyond a slew of deadlines set by both powerhouses, and tariffs are gradually rising on goods from both countries.
In early May, President Trump approved a 25% tariff hike on almost $200 billion worth of Chinese goods, most notably more consumer goods. Retailers began to warn about increased costs that had mostly affected agriculture, automobiles, and metal industries before the most recent sanctions.
Tensions are high: talks have stalled, while leaders on both sides have accused the other of lying and generally acting in bad faith. President Trump unveiled yet another multi-billion dollar aid plan for farmers, which The New York Times suggested signals the trade conflict will continue.
With agriculture in need of bailouts, and consumers expected to see increased costs on household items, there are plenty of losers already in an economic clash between the two most influential economies in the world.
Unsurprisingly, freight professionals have been hit hard as well.
The International Monetary Fund (IMF) noted that revenue generated by tariffs has been paid almost entirely by U.S. importers. The IMF found that following the implementation of tariffs, import rates tended to skyrocket, but other prices along the supply chain remained mostly unaffected, suggesting that importers are footing the bill to keep a vital trade lane for many freight forwarding companies active.
U.S. importers are accepting reduced margins for now, and with President Trump suggesting tariffs on an additional $300 billion of Chinese goods could happen soon, the IMF believes there’s only one way higher costs can be alleviated: consumers will have to pay higher prices on virtually every item that comes from China.
Every New Tariff Threat Is an Opportunity
The IMF found that U.S. importers were more likely to front-load shipments in the pocket of time between the announcement and enactment of tariffs. While the same behavior wasn’t noticed in China, U.S. freight forwarding professionals are now operating as if every subsequent sanction threat will inevitably be enacted.
The threat of an additional $300 billion in duties could set off another front-loading bonanza, especially given the list of goods subject to new tariffs, which NPR wrote includes art goods, sporting goods, and more agricultural restrictions.
U.S. freight forwarding professionals are trying to hold off on passing tariff costs to consumers as long as they can by focusing their import activity on the slots between proposals and approval. But the strategy can’t last forever.
Are You Ready for More Tariffs?
If the additional $300 billion in tariffs go into effect, virtually all Chinese goods will face additional duties. It won't surprise us if the ultimate goal is to tax 100% of Chinese imports to close a trade deficit gap (which the IMF found hasn’t shrunk in any meaningful way yet).
Freight forwarding professionals can only foot the bill for so long; the freight procurement business works on thin margins during the best of times. Now, the world’s most profitable trade lane is getting closer to becoming unviable without higher costs across the entire supply chain on just about every good that sales via container.
Freight pros need to plan for more tariffs. Identify the goods that will be subject to price hikes, and consider front-loading as an actual strategy.
For freight forwarders, now is the time to find a partner that can give you consistency in your rates. Tariffs have already shown us that the freight forwarders will be hit first by increased costs: it isn’t going to get any better without a mutually-beneficial deal between the U.S. and China, and that feels more unlikely now than it ever has.
Talk to NVO’s and freight marketplaces to see what they can do to help protect you and your customers from a protracted trade war.
Plan as if the worst is yet to come. It’s looking more and more like that will be the case.
By: Fauad on May 24, 2019, 2:04 p.m.
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