The incoming U.S. president’s pledge to raise tariffs is already affecting international cargo traffic, and trade flows are set to shift as they materialize. Yet another salvo aimed at ecommerce may hit even sooner.
Footwear and fashion accessories brand Steve Madden announced shortly after the result of the U.S. presidential election that it was clear it was working to shift its sourcing from China to other countries. Other firms have been less swift to react to the news, but polls show that many are considering their procurement options.
During the election campaign, Donald Trump pledged to slap a 60% tariff on imports from China and 10% on goods from other countries. In late November, he threatened Canada and Mexico with a 25% levy and signalled an additional 10% charge on imports from China.
By some estimates, the higher costs resulting from these tariffs will raise inflation in the U.S. by 1%. Elsewhere they are set to dent exports. A South Korean think tank estimated that the Asian nation could lose as much as US$44.8 billion in exports as a result.
The tariffs will cause shifts in global trade flows as companies try to circumvent these higher charges. Some U.S. firms have stated that they intend to shift sourcing from China to other countries in Asia.
In recent years, the number of companies that have embarked on a China-plus-one strategy to diversify their procurement has grown continuously.
However, some of those moves may not insulate them from U.S. tariffs. As one observer noted, the incoming president has a strong focus on bilateral trade deficits, which suggests that he could well target other countries with tariffs.
The recent threat of a 25% levy on imports from Mexico is a case in point. In part, this is motivated by immigration issues, but a major factor is the flow of goods from Mexico into the U.S. that incorporate parts produced elsewhere or are made by Mexican offshoots of Chinese manufacturers.
Mexico has attracted record inflows of foreign investment as a result of the nearshoring trend.
Mary Lovely, senior fellow at the Peterson Institute for International Economics in Washington, warned that the planned tariffs would spell uncertainty and disruption for cargo owners.
Initial ripples were already showing before the result of the U.S. election became clear. Demand for container shipping to the U.S. dipped briefly after the end of the peak season for this mode but took off again in October, sending up pricing.
Observers and carriers have attributed this to front-loading of inventory. This is likely in response to the possible resumption of work stoppages at U.S. East and Gulf Coast ports in the contract dispute between port employers and labour, but the plan to bring in merchandise ahead of tariffs is clearly playing a role in this.
Some retail firms have doubled or even quadrupled orders for goods from China to bolster inventory in preparation for tariffs.
This indicates ongoing elevated demand for shipping services, which should keep container rates high. According to numbers from ocean and air cargo intelligence platform Xeneta, the tariffs that the U.S. imposed on China in 2018 during the first Trump presidency led to a spike of more than 70% in container shipping rates.
“In late 2018, tariffs implemented by the Trump Administration caused a significant amount of vessel and container diversions, congestion and overall supply chain headwinds that, at the time, led to the most significant challenges ever to North American supply chains,” said Paul Brashier, the Fort Worth, Texas-based vice president of global supply chain for ITS Logistics.
“Shippers moved billions of dollars in goods to get ahead of those tariffs. From that event, we learned that the inland portions of container lifecycle mattered and drove the majority of costly, unplanned accessorial fees and costs.”
Moves to avert tariffs, such as funnelling parts to a third country for assembly and subsequent export to the U.S., typically result in increased shipping activity, longer routes and elevated logistics costs. As with increased front-loading, these changes in flows could also entail imbalances in container availability.
While companies grapple with these questions and uncertainty, there is a chance that international trade flows will be hit by another regulatory broadside from Washington.
The outgoing Biden administration announced in September that it was looking to change the regulations around the de minimis exemption from tariffs of goods worth less than US$800, which has been broadly used for ecommerce flows.
According to former White House Covid-19 supply coordinator Tim Manning, the government intends to present a notice of proposed rulemaking before the end of its term.
Once such a notice is published, there usually is a comment period of 30-60 days, which means that new regulations could be introduced as early as in February or March.
Removing de minimis exemption from a large swathe of import shipments would impose tariffs on these goods, but this in itself would likely have negligible impact on ecommerce flows, noted Judah Levine, the Jerusalem-based head of research at Freightos. The bigger hit would come from administrative costs and extended transit times, he said.
The filing costs would rise from about US$15 for an item to around US$50, he noted. In conjunction with the tariff, this would significantly elevate the price of many ecommerce shipments. Moreover, clearance could take up to a week, which in turn would stretch transit times from currently 5-7 days to two weeks, which would undermine the viability of using airfreight to move low-value cargo, Levine noted.
For airfreight carriers, this would be a disaster. Ecommerce has been the chief engine driving demand this past year, while industrial demand has languished in the doldrums, with manufacturing indices continuously showing contraction.
By Ian Putzger
Correspondent | Toronto
