US-China Trade War | Tariffs Continue To Impact Supply Chains

Last we updated our commentary on tariffs the US and China were on a tentative truce with minimal duties still in place. Since, we have refrained from consistent dialogue due to the ever-fluctuating rhetoric on the subject that, until recently, did not result in changes to policy. At that time, the US had 10 percent tariffs on $200 billion in Chinese goods. China had removed auto tariffs and increased the purchase of US goods. 

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What happened to US and Chinese Trade?

During a recent round of conversations, a breakdown in negotiations occurred. With the US Administration citing the purported reneging by the Chinese government on certain aspects of the deal, the US acted upon previously threatened tariff increases. The US raised their tariffs on the initial $200 billion from 10 percent to 25 percent. Additionally, they continue to threaten a 25 percent tariff on an additional $325 billion in Chinese exports that were otherwise untouched by the first wave of sanctions.

As has been common throughout the most recent trade war involving the two countries, China retaliated by announcing they will enact tariffs of as much as 25 percent on $60 billion in US goods. This wave of tariffs mostly affects the agricultural industry–consisting over 300 products–which has increased the angst felt by farmers as the downward pressure on commodity prices strengthens.

The potential increases on Chinese goods currently unaffected by the existing tariffs would extend to all Chinese goods exported to the US. The threat of additional tariffs on US goods from China should this increase be realized is unclear. Given the magnitude of these potential tariffs rises, it is reasonable to expect significant impacts on US manufacturing and production—whether that is primarily due to uncertainty in the markets, or actual costs associated with the tariffs remains to be seen.

Impacts of US and China Trade War on Supply Chains

During the previous round of tariffs, the Trump administration gave an indication of deadlines when tariff decisions and increases would be made. With softly bound timelines surrounding these decisions, companies had enough forewarning to formulate a strategy that maximized commerce before increases took effect. In this prior instance, many companies front-loaded 2019 orders in Q4 of 2018 ahead of the potential January 1 tariff increase—even though it was not realized according to plan. Regardless, companies ordered more inventory and adjusted their networks as best they could to avoid the consequences associated with tariffs as much as possible.

This time around, the jump from 10 percent to 25 percent came largely without notice and did not allow time for companies to get inventory pulled forward to avoid the increase.

That said, warehouses still have excess inventory from the last round of pulling freight forward. Even with forewarning for the most recent increase, inventories are maxed out and companies would have nowhere to store additional goods had they pulled them forward to avoid it.

Direct Impact of Tariffs to Consumers

The current tariffs are largely on material and input goods critical to manufacturing and production outputs—goods that do not directly hit the consumer. Furthermore, many retailers and manufacturers insulated consumers from the effects of the first round of tariffs by electing to absorb tariff hikes within their product margins. This will be an unsustainable practice with tariffs increasing to 25 percent, particularly for single category retailers affected by the change. If the Trump Administration enacts proposed tariffs on the extra $325 billion in goods—largely finished products consumers would pull directly off the shelf, such as electronics and appliances—consumers will be more directly affected.

US imports of goods from China have fallen significantly across categories of products affected by tariffs. This effect represents the demand response by both businesses and consumers as prices increase. The chart shows each round of tariffs during 2018, accompanied by its effective date which is matched by color. Each round of tariffs resulted in the total export values of the impacted goods falling by more than 25 percent through March 31, 2019. The tariff effective dates were: July 6, 2018, 25 percent on initial $34 billion list of goods, August 23, 2018, 25 percent on $16 billion list of goods, and September 24, 2018, 10 percent on $200 billion list of goods. Existing tariffs not impacted by these timelines are shown as “Other.”

If these goods experience price increases because of tariffs, consumption levels will likely decline, which will trickle down to decrease demand for freight. It is also important to consider how the overarching economic conditions for each round of tariffs differs. The first round of tariffs occurred during a time of robust consumer spending and advancing stock market behavior, and companies were still benefiting from the tax cut. Now, the economic climate is shifting. Uncertainty still weighs on consumers. Consumption, outside of a strong March, has been weaker than anticipated.

As lower consumption and consumer spending behavior couples with higher prices, purchasing will decrease. This will keep inventories at elevated levels, further reducing the demand for replenishment and thus, freight. Early estimates project tariffs will drop year-over-year growth in containerized freight by up to one percent. This will compound already slower-than-anticipated growth thus far into 2019 based on weak macroeconomic performance. Should these projections play out, demand across modes of transport will weaken, offering some downward pressure on freight rates as 2019 pushes on.

For shippers operating during a volatile marketplace, quickly changing political circumstances, and ebbing consumer behavior, understanding the risk in your supply chain is crucial to creating the most effective strategic roadmap for your network. Tariffs are one major factor to consider when looking through the end of 2019 and into your 2020 strategies. Being aware of how tariffs play into a more complex lattice of economic indicators will bring context to these dynamics and help drive actionable insights across your supply chain.