China and the U.S. are the world’s two largest economies and they have been locked in a battle over tariffs. Just recently, President Trump followed through on months of threats and imposed tariffs on China for alleged unfair trade practices. President Xi Jinping, for his part, set tariffs on billions worth of U.S. goods. Since then, there have been some attempts to come to an agreement. If neither party backs down, however, the result could be a full-blown trade war.
Tariffs are taxes on imports, which makes products more expensive in the country importing them. The rise in prices has many potential impacts. Tariffs imposed on Chinese goods, in theory, make products made in the U.S. more competitive than imported ones, thus encouraging consumers to buy American.
Both large and small businesses have been looking at ways to mitigate the impact of higher tariffs. U.S. companies can absorb the higher costs and accept lower profits or raise prices and pass on the increased costs of manufacturing to consumers. Any negative impact of higher tariffs is short-lived if substitutes, in the form of domestic goods or imports from other sources, are available at competitive prices.
Influence on shipping costs
The tensions between Washington and China have kept supply chain management departments in a range of industries on their toes for months. Exporters were pushing forward shipment dates (front-loading) to beat tariff hikes. Ocean carriers benefited from rush shipping rates as manufacturers and retailers front-loading orders against the 10% tariff hikes in 2018.
Carriers have to be able to adjust their fleet capacity to account for federal trade policies. The excess capacity that allowed them to benefit from the rush to beat the 2018 tariffs could become a problem if demand slows down. With rising fuel costs, higher tariffs, and older ships being scrapped to comply with environmental regulations, carriers could struggle to remain in business and might find it necessary to pass additional costs onto manufacturers and supply chains.
The tariff hikes also affected the air cargo industry with changes being seen in air freight patterns. Logistics executives and exporters confirmed the shifting of trade routes as factories rushed to get orders out before the 2018 tariff hike. Factors which affect industries like shipping and aerospace have a trickle down effect on companies that supply them with parts. For example, ARC Systems, Inc. is an electric motor manufacturer that designs and manufactures precision motors and components for both the maritime and aerospace industries. China and the U.S. both have a lot at stake. According to an official survey of large enterprises, China’s export orders shrank for the first time in over two years in November of last year. The presidents agreed to a trade war truce at the G20 meeting in Osaka, but since then the situation has escalated again as both sides appear unwilling to compromise. President Trump has warned that there may be no deal before the 2020 U.S. presidential election.