Watch Now

Tariffs have ‘crystallized a supply chain risk’

Companies are deploying contingency plans and building inventories to avoid the full impact of higher duties coming in January.

    Transportation executives said they have a busy three months ahead of them following President Trump’s announcement Monday that the United States will impose tariffs on an additional $200 billion of goods imported from China.
    The tariffs, on a wide swath of goods, will initially start at 10 percent next Monday, then rise to 25 percent on Jan. 1.
    While there is not much companies can do to avoid the tariffs that come into effect next week, executives at the annual expo of the Intermodal Association of North America (IANA) said they will take action to mitigate the higher tariff that goes into effect in 2019.
    Ron Brothers, senior director of global transportation at the sporting goods and apparel company Callaway Golf, said his company has been planning for the possibility of a third round of tariffs since it was first announced by President Trump in June.
    “Now we have to start deploying some of these contingency plans we have in place. That is probably going to start Monday,” he said. “Anything is on the table for us in terms of shifting capacity, shipping things early, moving capabilities around the globe where we have a presence.”
    Brothers was one of several transportation executives who spoke during a panel discussion Tuesday at the IANA Expo in Long Beach, Calif.
    “I think we are doing the same thing,” said Laura Crowe, senior director of logistics at Walmart. “In the short term, all you can really do is look at can you move up production, can you ship it early to get it into the port and make entry and if it is on a ship stop at a first port” so that a product clears customs before a tariff or tariff hike like the one planned for Jan. 1 kicks in.
    Mike Gavle, vice president of global operations at the shoemaker Rockport Group, said the tariffs are a reminder for companies to have contingency plans “dusted off and be good at executing them.”
    He expects that “inventory levels in the U.S. are going to spike really hard,” increasing demand for warehouse space.
    Steve Hughes, the president and CEO of HCS International, a consultancy to the automotive aftermarket and freight industries, said it can take years for the automotive industry to change supply chains. To bring back production of products to the United States of some items could take five to 10 years and double or triple costs to consumers, he said.
   “Shifting to another country is just as problematic. … It’s a challenge for virtually every industry and not something you can do overnight.”
   As president and CEO of Interstate Commodities, Greg Oberting heads a commodities merchandising firm that is involved in exports of U.S. agricultural products. He is worried that as exports from Asia to the U.S. surge and inventories build, six months from now demand may slacken. That could lead to more “blind sailings” in which carriers cancel a regular weekly voyage because of low bookings, especially if weak demand coincides with Chinese New Year on Feb. Many manufacturers shut down factories around that time, and it is not common for carriers already to reduce capacity then.
    Brothers said Callaway does a lot of its production in South China. He is also concerned about a “cliff event” early next year in which capacity suddenly falls. He said planning is complicated by the long production lead time for many of its goods, as well as cyclicality, and there being a fashion element to some of its goods.
    Meanwhile, the research firm Panjiva said the implementation of the tariffs “has crystallized a supply chain risk many companies had faced since March when the initial results of the section 301 review of Chinese IP practices was announced.”
    “The threat of tariffs — let alone the subsequent increase in duties to 25 percent due from January 1 — appears to have led most importers that were potentially affected to have started some form of stockpiling.”
    Panjiva analyzed more than 5,700 tariff lines and found in the three months ending July 31, imports increased on 81 percent of those product lines. For about a quarter of those product lines, imports were more than 25 percent higher in the three months ending July 31 than they were a year earlier.
    Electronics and building materials were among those most heavily stockpiled, but Panjiva also so significant increases in consumer products such as metal furniture (up 20.4 percent) and household freezers (31.4 percent).
    Panjiva added stockpiling likely continued into August. For example, it said U.S. seaborne imports of household freezers from China were 43 percent higher in August versus a year earlier.
  It speculated that reduced shipments from China may subsequently be covered by production in other countries and that this kind of “country hopping” may “trigger subsequent trade cases as was the case earlier this year for washing machines and solar panels.”
    Lawrence Burns, senior vice president of trades at Hyundai Merchant Marine and a speaker at the IANA Expo, said that the heavy volumes in the eastbound transpacific trade this summer were not just the effect of importers pulling forward inventory because of tariff fears, but the result of retailers expecting very strong sales during the Christmas season.
   Matthew Shay, the president and chief executive of the National Retail Federation, who also spoke Tuesday at IANA, said 2017 tax cuts had a “dramatically positive impact on our economy across the board — it’s good for our industry and consumers.”
   But Shay expressed concern that the president might be putting a lump of coal in consumers’ stockings this year.
   “We don’t want to see all those gains erased,” he said. He decried the idea that tariffs will hurt Chinese exporters, instead calling it “a tax on consumers.”
   NRF is one of many businesses groups supporting a publicity campaign called “Tariffs Hurt the Heartland” to highlight what they see as the harm tariffs are having on the U.S. economy in the form of higher prices, lost jobs and lower economic activity.
   He also was skeptical that the latest $200 billion round of tariff increases announced by the Trump administration on Monday would bring the Chinese to the negotiating table.
   “If we escalate, that doesn’t seem like a convenient opening for the Chinese to say, ‘OK, you’ve kicked us enough times, we are going to stop.’ I think it is just going to harden their resolve.”

Chris Dupin

Chris Dupin has written about trade and transportation and other business subjects for a variety of publications before joining American Shipper and Freightwaves.