Tripping over tariffs

Retooling for nothing?

For now, increasing industrial activity in other markets has so far been insufficient to make up for sagging volumes out of China and Hong Kong. Many indicators suggest a greater pickup, still to come, may have been delayed as a result of previous forward-stocking. “Specifically, in the U.S., what has happened is that [shippers] tried to front-load prior to the various tariffs coming through, and inventories are at an all-time high, but volumes now are down,” said Mike Short, president of global forwarding, C.H. Robinson.

Forwarders are reporting higher LCL volumes out of major ports in Southeast Asia, but there is some debate as to whether these volumes foreshadow a boost in demand, or indicate faltering speed requirements stemming from saturated inventories. “Inventories are down from 2018-2019, the U.S. economy is robust, and companies are finally starting to replenish inventories,” said Shah, noting Flexport’s uptick in ocean volumes.

Robinson’s Short, meanwhile, sees the use of oceanfreight as a reflection of bloated inventories. “They have high inventories, so they don’t need it as fast,” said Short.

Regardless of whether another round of tariffs goes into effect, many manufacturers are operating according to contingency plans that will lean on airfreight as a mitigator of supply chain disruptions. Supply chain forecasts from at least two major footwear and apparel brands have called for increased use of airfreight for the remainder of the year. “We are going to reasonably increase the use of airfreight from Q2” said Harm Ohlmeyer, CFO, Adidas, during a first-quarter earnings call. Ohlmeyer added that Adidas suffered from supply chain shortages in Q1.

Anticipating a global rush to get product across the Pacific ahead of Tariffs, Lululemon is also working with forwarders to reserve capacity. “We are committing to higher airfreight usage as a hedge against disruption in ocean shipping lanes as we approach the key dates related to tariff increases,” said PJ Guido, CFO, Lululemon.

As port capacity is tested, airfreight may still find an ally in the inability of some ports to process an uptick in volumes. “Only so many containers can move through a port, at some point investment will be needed,” said Shah. Unlike the Chinese government which could match industrial growth with massive investments in logistics infrastructure, Southeast Asian governments do not currently have the resources to do so. Unfortunately, airports too will see their capacity limits tested without further investment.

Major brands are taking a lesson in contingency planning from the first rounds of tariffs, says FDRA’s Priest. While it is impossible to predict if and when additional commodities will be subject to tariffs, and what commodities will ultimately end up on the list, previous rounds of tariff implementation provide a few clues. On May 10, importers of certain commodities into the U.S. were told that if they could get product out of China by June 1, the consolidations would be subject only to the existing 10% and not the full 25% according to FDRA’s Priest.

“For shipments that couldn’t be brought into the U.S. ahead of the deadline by sea, airfreight was used,” said Priest. With the threat of tariffs on potentially any export from China, even commodities that typically wouldn’t travel by ocean could find their way onto an aircraft as part of a front-loading strategy.

Long-term, if an accord isn’t reached soon, industry elsewhere may pick up as well. “Southeast Asia has directly benefited from the first stage of the trade war,” said China Airlines’ Lin, referring to how quickly supply chains for consumer goods were able to gravitate towards the region. The threat of tariffs on high-tech goods such as mobile phones and laptops is now driving some production back to North Asian countries, like Taiwan. So far these types of shifts have been limited to increasing utilization of existing industrial capacity outside of China.

Shifting production, after all, is not quite a hole-in-one for mitigating the costs of the trade war. “Moving a supply chain is an incredibly complicated decision,” and for many high-value verticals, “the investment required for a new factory does not justify the costs of avoiding tariffs,” said Shah. China for the foreseeable future will remain a major force in industrial production.

Even if a G20 summit held in late June in Osaka produces a Sino-American trade accord, the export output from China is unlikely to pick up as quickly as it has dropped off. “There’s going to be a waiting period even when the dispute is over, said Imbriani. “People are going to be skeptical, could this come back, could it happen again?”