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Threatened levy on Mexican imports to pressure 3PLs

Cargo containers with Chinese and United States flag

Third-party logistics providers, companies that work with shippers and carriers to facilitate trade and transportation activity, will experience a 1 to 2 percent decline in demand for each 5 percent increase in tariffs the Trump administration threatens to levy on Mexican imports, the head of a leading consultancy for the 3PL industry said Friday.

Evan Armstrong, president of Armstrong & Associates, Inc., said 3PL volumes are already slated to decline by 5 to 6 percent starting in January 2020 due to the impact of the ongoing trade war between the U.S. and China. The loss of business would rise to close to 8 percent if the levies on Mexican imports take effect, Armstrong said. Both countries are large trading partners with the U.S., and are important trade lanes for intermediaries like 3PLs, which corporations rely on to manage multiple aspects of their business such as transportation, warehousing and distribution, and customs brokerage, to name the most important functions.

Armstrong said his forecasts of declining demand are based on the first full year after the tariffs take effect. For Mexico, that would start on January 1, 2020. Tariffs on China were first imposed in 2018 and were increased earlier this month to 25 percent from 10 percent on $200 billion of Chinese imports. China retaliated today with its own set of tariffs on U.S. imports.

President Trump stunned virtually every one when he announced late Thursday that the U.S. would impose a 5 percent duty on all Mexican imports, effective June 10, to punish Mexico for what the administration said is its failure to curb the influx of illegal immigrants entering the U.S. Trump said he would increase the size of the levies over time until the flow of immigrants stops. At this point, there appears to be no public plan aimed at stemming the tide of immigrants moving northward. Nor is there a stated level of immigration activity under which Trump would feel comfortable eliminating the levies.

Because the announcement came out of the blue, there is little that 3PLs can do right now but “roll with the punches,” Armstrong said. Virtually every 3PL would be affected because of the sector’s collective importance in the cross-border trading ecosystem, he added.

The dual trade conflicts threaten to curb, at least for now, the long-term growth roll that the 3PL industry has been on. Businesses grappling with supply chain complexity and a lack of in-house staff due to years of corporate downsizing increasingly depend on 3PLs to handle what for most is a non-core competency. The 3PL sector has racked up impressive gains as a result. In 2018, net revenue in the U.S. 3PL market grew 11.8 percent to $86.2 billion. Net revenue is gross revenue minus the cost of purchased transportation. Gross revenue rose 15.8 percent to about $127 billion, the largest year-over-year growth rate since 2010, Armstrong said.

DHL Supply Chain, a unit of German company Deutsche Post DHL (OTCMKTS: DPSGY), and Ryder System, Inc., (NYSE: R), two big companies with significant cross-border exposure, declined comment, saying they were still studying the ramifications of the administration’s proposal. UPS Inc. (NYSE:UPS) said there was nothing to publicly discuss as the tariffs haven’t been implemented and the announcement is less than a day old.

In a statement, XPO Logistics, Inc. (NYSE:XPO) Chairman and CEO Brad Jacobs said that “tariffs force markets to adjust, rather than adjust naturally. Tariffs on Mexican trade would add costs to certain supply chains and may well trickle down to consumers.” The impact on transport and logistics providers, Jacobs said, “remains to be seen. For example, changes in the automotive supply chain would affect many different sectors. Other types of tariffs could have a more selective impact.” XPO offers multiple cross-border services.

Eric Kulisch, a journalist who has covered the logistics and automotive sectors, said the impact on the auto industry and the 3PLs that support it would be enormous. So many goods crossing the southern border today qualify for zero-duty treatment under the 1994 North American Free Trade Agreement, which was renegotiated last fall as the United States-Mexico-Canada agreement, or USMCA. Even products not eligible for NAFTA zero-duty treatment pay a duty of no more than 2.5 percent, Kulisch noted. Trump’s initial threat would double even the highest duty levels, he said.

3PLs would be hit hard by the levies because they handle much of the parts and components flow across the border, Kulisch said.

The administration’s action is another impediment for automotive companies and their suppliers that during the past 28 months have been whipsawed by NAFTA withdrawal threats, steel tariffs, and proposed increases in regional content and wage requirements for original equipment manufacturers under the new North American accord, according to Kulisch. “Mexico might have been bailout option for some in regard to the China tariffs, but that’s now less appealing,” he said.

Mark Solomon

Formerly the Executive Editor at DC Velocity, Mark Solomon joined FreightWaves as Managing Editor of Freight Markets. Solomon began his journalistic career in 1982 at Traffic World magazine, ran his own public relations firm (Media Based Solutions) from 1994 to 2008, and has been at DC Velocity since then. Over the course of his career, Solomon has covered nearly the whole gamut of the transportation and logistics industry, including trucking, railroads, maritime, 3PLs, and regulatory issues. Solomon witnessed and narrated the rise of Amazon and XPO Logistics and the shift of the U.S. Postal Service from a mail-focused service to parcel, as well as the exponential, e-commerce-driven growth of warehouse square footage and omnichannel fulfillment.