Hitting the wall: Tariffs may bring a premature end to the cargo boom

Air cargo volumes over the past year achieved levels not seen in more than a decade as surging global economies fueled demand and reinvigorated the need for speed. Retailers and manufacturers seem to have been the prime users as increased business brought about by the e-commerce megatrend created the need for fast product delivery. Now, though, a few uninvited guests have entered airfreight markets and could be signaling an end to the party.

Recent reports from the International Air Transport Association (IATA) indicate that demand growth this past March was five percentage points lower than February and the slowest growth pace in 22 months. The reduction is reportedly due to the end of the inventory replenishment cycle – the period in which businesses quickly increase their inventory to meet unexpectedly high demand. Reports indicate the inventory-to-sales ratio in the United States has increased in 2018, suggesting air cargo’s boost from restocking is over.

Industry insiders know that airfreight volumes are traditionally significant economic indicators in global trade. Increasing levels generally serve as a bellwether for an improving economy, as shippers demand speed when filling unexpected orders and empty store shelves, while decreasing airfreight volumes tend to signal a reduction in demand urgency and the possibility of gloomier economic conditions ahead.

As economies improve, fuel prices and interest rates generally increase while demand spikes. Despite the optimistic prediction of a 4 to 5 percent growth in air cargo demand during the remainder of the year, IATA says that there are some apparent headwinds, including substantial oil price increases and uneven economic growth. The good news is that yields are up, taking some of the sting out of the bad news for carriers and their customers.

The most significant challenge, however, could be in the political arena, where a trade war between the U.S., Canada, Mexico and the European Union, as well as threatened  protectionist measures between U.S. and China, may knock out this robust economic expansion.

In global commerce, companies generally like to invest in a world of free and open markets. But free trade should also be fair trade, so the Trump administration is placing tariffs on imported goods from Canada, Mexico and the E.U. to decrease the trade deficit. The administration has also threatened the same against China, which would force the Chinese to address perceived disparities in foreign investment requirements, intellectual property rights and technology. Some may see this proposal as a tempest in a teapot, but in a business dependent upon trade, forwarders have cause for concern as industries targeted by the proposed tariffs may be less productive and have less cargo to ship.

The administration’s tariffs could result in some unintended consequences, including retaliatory action from the affected trading partners. As the promising new business-friendly tax law takes effect in the U.S., the imposition of tariffs could dampen forecasted explosive growth, and the imposition of the duties may discourage an expected surge in freight volumes. Inflation might also increase due to more expensive raw materials, which may cause American-built goods to become more expensive as a result.

Before adopting significant changes to existing programs, let’s work together to find alternatives that minimize damage to existing trade relations, but at the same time achieve the parity needed to assure long-term mutual success.

Reconsidering our nation’s involvement in the Trans-Pacific Partnership (TPP) and emphasizing the Generalized System of Preferences (GSP) are tools capable in helping to avert an economic calamity while forcing China to rethink its unfair trade practices.

During President Obama’s last term, the U.S. signed the 12-nation TPP pact, containing provisions to lower both tariff and non-tariff barriers to trade, but withdrew its signature after the Trump administration began. Some critics contend that participation may have adversely affected the U.S., which instead chose to negotiate bilateral agreements with each of the countries involved. However, the deal would have served the geopolitical purposes of reducing the participants’ dependence on Chinese trade and forcing China to preserve market share by addressing the disparities targeted in the tariff proposal.

The GSP is an American program designed to promote the economic development of disadvantaged countries by eliminating duties on thousands of products when imported from designated nations. The GSP is used today as a means to not only aid developing nations, but to help many U.S. businesses as well. Expanding and enhancing the GSP will encourage China, not a designee, to address the administration’s issues of concern to preserve its trading relationship with the U.S.

The current North American and European tariffs may indeed be a negotiating tactic designed to bring China to the table to address legitimate trading concerns. Markets are growing concerned that the saber-rattling may already be having an adverse effect, not only on manufacturing but the consumer confidence that drives cargo volumes. Regardless of political affiliation, freight transportation providers should contact lawmakers to express concern and seek alternatives before a trade war involves millions of America’s workers and dislocates crucial local and national commerce.