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Trade experts counsel measured response to China tariffs
The Trump Administration's decision to impose tariffs of 10 percent and 25 percent on some $250 billion worth of products imported from China has forced many U.S. importers to either raise their prices or absorb the added cost. But the tariffs' impact goes far beyond product costs and shrinking margins, according to speakers at the Coalition of New England Companies for Trade (CONECT) 23rd Annual Northeast Trade & Transportation Conference, held earlier this month in Newport, R.I. Shippers' attempts to avoid the tariffs proved disruptive across the supply chain, they said, and there could be more pain on the horizon: Although the imposition of 25 percent tariffs on $267 billion worth of Chinese goods is temporarily on hold, some observers worry that the new duties may become permanent.
The punitive tariffs are a serious threat for importers that source almost exclusively in China, explained Nate Herman, senior vice president, supply chain, for the American Apparel and Footwear Association, which represents manufacturers, retailers, and suppliers of apparel, footwear, and textiles. He cited the example of travel goods, such as luggage, backpacks, and travel accessories, which are sourced almost entirely from China. Previously, backpacks from China carried a duty rate of 17.6 percent on the product's value, Herman said. An additional 10 percent tariff brought that up to 27.6 percent. If raised by another 25 percent, the duty rate would reach 42.6 percent—nearly half the product's value.
When the Trump Administration in late September announced plans to raise the punitive tariffs on many Chinese goods from 10 percent to 25 percent, effective January 1, 2019, some importers went into overdrive, pushing their suppliers to ship as much merchandise as possible into the U.S. before the end of 2018. Ocean carriers put on extra sailings, and major seaports across the country saw record-high levels of imports in November, December, and into January. The Port of Long Beach, for example, experienced a "huge influx of import containers that strained our capacity," said Ken Uriu, the port's business development manager-import cargo. This unexpected wave of "beat the tariffs" cargo taxed not only seaports' operations but also those of ocean carriers, railroads, and drayage truckers. Delays, bottlenecks, and equipment shortages were widespread throughout the transportation system. Uriu said ports and terminal operators "didn't realize all of the downstream effects" the tariffs would have on their operations.
One importer that strove to bring in as much merchandise as possible before January was Bob's Discount Furniture, based in Manchester, Conn. The company shifted some 200 containers' worth of orders that had been planned for Q1 2019 delivery to Q4 2018. With so many other importers adopting a similar strategy, problems quickly developed. Some ocean carriers with which the retailer had contracts were able to accommodate added volume, said Amy Elmore, the company's director, international logistics. However, she said the additional containers often could not move at the contract rates, so freight costs were higher than usual. Some carriers were not able to take extra bookings, and Elmore said she and her team had to turn to ocean consolidators for additional capacity. Still, demand was so high that containers were regularly held at the origin port and rolled over to a later sailing.
"We put all this extra supply into the pipeline and then had to deal with the consequences," she said.
Although Elmore said some ocean carriers "did a remarkable job," she added that "there was not a lot of dialogue about how this all would play out at the destination. ... people kept saying 'yes' but didn't think through the consequences for the ports." The fallout included containers that arrived as much as two months later than expected, chassis shortages, and delays of two to four weeks in loading containers onto intermodal rail. All the while, accurate information about shipment status and realistic arrival times was hard to come by.
Based on her experience, Elmore shared strategies for managing through transportation disruption:
- Track "aging" shipments and expected milestones, and send carriers a daily list of what's overdue. "This forced the carriers to follow up with the terminals on our behalf," Elmore said.
- Work with your company's merchandising group to review and, if necessary, revise safety-stock policies, lead-time requirements, and policies on risk and service levels.
- Develop alternate routings to your distribution centers and options for in-transit cargo diversions. Adjust your booking allocations to leverage "non-stressed" ports.
- Demand accurate, up-to-date information from carriers. Some carriers did not change their estimated arrival dates for intermodal containers even though the gateway ports had weeks-long backlogs, Elmore said. "If I'd known that a container with a 'not available' status in January would not arrive on the East Coast until the end of March, I would not have been happy, but at least I could have made better decisions," she said.
Be prepared for more of the same
As for the tariffs themselves, there are several ways importers could potentially mitigate their impact, according to Herman. One is to shift sourcing to another country. That strategy—which has been underway for some time due to rising production and labor costs in China—has some drawbacks. For one thing, he said, "no single country has the capacity to replace China" as a supplier of apparel. For example, although approximately 13 percent of U.S. apparel imports now originate in Vietnam, there are not enough factories or transportation infrastructure to handle a huge increase in demand. Importers could also reduce the cost of goods sourced in other countries by taking greater advantage of free trade agreements, and by urging lawmakers to update laws to make apparel and footwear eligible for benefits under the Generalized System of Preferences (GSP), which reduces duties on certain goods from developing countries.
Erin Ennis, senior vice president of the U.S.-China Business Council, advised importers to be prepared to deal with continued uncertainty. It is "fully unclear" how far apart China and the U.S. are in the current round of trade negotiations, and "there is absolutely no clarity" on what will happen if there is no agreement, she said. It's uncertain what enforcement mechanisms would be adopted if an agreement is reached, she added. Ennis said she and other China watchers are concerned that President Trump will leave the tariffs in place if China does not fully accede to all of the administration's demands as laid out in a negotiating document that she said has been described to her as "detailed but not realistic." It is possible, she cautioned, that the punitive tariffs "may continue in perpetuity."
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