Tripping over tariffs
Temporary disruptor, or catalyst for supply chain revolution?
An effortless downswing launches a ball up into the sky where it bisects an incoming China Southern 747 freighter making its final approach toward the nearby airport’s eastern runway. Unbeknownst to the golfer, a footwear executive in town for an urgent supply chain meeting, she has more in common with the aircraft than their link to Tan Son Nhat – the name shared by the golf course and adjacent airport in Ho Chi Minh City. Both have been deployed in hopes of landing an ace of different sorts as part of a broader mission to Vietnam.
Although well outside the crosshairs of an escalating trade war between the United States and China, Vietnam’s potential to play a larger role in global supply chains is being rigorously tested as an indirect result. When souring trade relations between the world’s two largest economies led to a tit-for-tat tariff showdown in July 2018 when both countries began following through with punitive 25% tariffs on a first series of products, neither airfreight stakeholders nor the apparel industry were immediately concerned. Apparel was excluded from the first lists and so were most commodities that move by airfreight.
Just as a gust of wind can alter the trajectory of an in-flight golf ball, the latest squall from the U.S. Trade Representative (USR) now threatens to impose tariffs on virtually all commodities imported into the U.S. from China. Companies in virtually every industrial sector with exposure to China are suddenly finding it necessary to reevaluate their global supply chains in an attempt to mitigate the impact of tariffs. The China Southern freighter happens to be carrying pieces of factory machinery previously used by an apparel manufacturer in Guangzhou – the machines will soon be put to use as fuel for Vietnam’s growing industrial machine. Just over the fence from the tarmac, the footwear executive is departing Tan Son Nat Golf Course and is on her way to deliver a massive purchase order to a local supplier.
One popular option is to source product from elsewhere. “Partial relocation of manufacturing bases in China to neighboring countries,” and increased procurement from factories outside of China, “indeed that is what is happening right now,” said Toshiya Tamada, EVP global marketing, ANA Cargo. “A question you have to ask yourself is so what? Do we expect more air cargo volume is coming up from, for example, Vietnam or Thailand?” Perhaps just as important, what does this mean long-term for volumes ex-China and Hong Kong?
From the onset of the first tranche of tariffs in 2018, airfreight demand remained robust well into the year, until October 2018, when air cargo traffic began to lose momentum. By December, total market growth measured in freight tonne kilometers (FTKs) turned negative, dropping 0.5% year-over-year, according to IATA. By April, International FTKs were down 5.4% compared to April 2018, and 3.4% year-to-date. Only this year have trans-Pacific volumes ex-China and Hong Kong begun to react to the increased trade friction.
As for volumes out of Vietnam and other gateways in Southeast Asia, although tonnage continues to climb, growth alone will not suffice. “If you look at it, the growth in airfreight out of Thailand and Vietnam, Cambodia, Malaysia, it’s been double-digit for years,” said Neel Jones Shah, SVP and Global head of air, Flexport.
To counterbalance softening volumes out of China and Hong Kong, Vietnam’s air cargo market needs an albatross to outperform already high expectations. Despite industrial momentum driving exports, many carriers and forwarders Air Cargo World spoke with have been thus far underwhelmed with air cargo uptake out of Vietnam. “Volumes out of Hanoi (HAN) destined for the U.S. were not up significantly – and volumes ex-Bangkok (BKK) meanwhile, were actually down,” said ANA’s Tamada. Trinity Logistics, a U.S.-based, fashion-focused forwarder which has chartered scheduled freighter flights between Southeast Asia and the U.S. since well before the trade war began reported some of the lowest load factors to date on flights ex-Hanoi this past May.
But it may not time to call a bogey on trans-Pacific airfreight for the remainder of the year just yet. While the latest round of tariffs has put a damper on some optimist sentiments, says Wilson Kwong, CEO of Hactl, “A pickup is still possible.” In an industry known for its ability to navigate volatility, leading carriers and freight forwarders are reordering their networks and service offerings in order to remain one step ahead of the supply chain shift.
