President Donald Trump’s tariff offensive has been shaking Washington and Wall Street for nearly a month. If the trade war persists, the next disruptions will be felt much closer to home.
Sharp Decline in Shipments
Since the US raised tariffs on China to 145% in early April, cargo shipments have plummeted, by an estimated 60% according to some sources. This drastic reduction in goods from one of America’s largest trading partners hasn’t been felt by many Americans yet, but that’s about to change.
By mid-May, thousands of companies – both large and small – will need to replenish their inventories. Retail giants like Walmart Inc. and Target Corp. told Trump at a meeting last week that consumers will likely see empty shelves and higher prices. Torsten Slok, Apollo Management’s chief economist, recently warned of impending “Covid-like” shortages and significant layoffs across trucking, logistics, and retail industries. While Trump has shown signs of flexibility regarding tariffs imposed on China and other countries in recent days, it may be too late to prevent a supply shock from reverberating throughout the US economy, potentially lasting until Christmas.
Key Impacts on the Supply Chain:
- Approximately 40% reduction in cargo vessels from China to the US since early April
- One-third decrease in shipped containers since the tariff announcement
- Roughly 30% cancellation of orders from China to the US
- About 80 canceled sailings from China to the US in April, 60% more than during any month of the COVID pandemic
“The clock is absolutely ticking,” says Jim Gerson, president of The Gersons Companies, an 84-year-old supplier of Christmas decorations and candles to major US retailers. The Kansas-based company sources more than half of its products from China and currently has approximately 250 containers waiting to be shipped.
“We have to get this worked out,” said Gerson, who represents the third generation of his family running the company with annual sales of around $100 million. “And hopefully very soon.”
Risks in Restarting Trade
Even when tensions ease, restarting transpacific trade will bring additional challenges. The shipping industry has reduced capacity to match weaker demand. This means a surge of orders prompted by a reconciliation between the superpowers will likely overwhelm the network, causing delays and increasing costs. A similar scenario unfolded during the pandemic when container prices quadrupled and ports became congested with shipping traffic.
“There will be a surge in ports and consequently for trucks and rail creating delays and bottlenecks,” said Lars Jensen, CEO of shipping consultancy Vespucci Maritime. “Ports are designed for stable flows, not for intermittent volume fluctuations.”
The US tariffs on China came at a critical time for the retail industry. March and April are when suppliers begin increasing inventory for the second half of the year to fulfill orders for back-to-school shopping and Christmas. For many companies, the first holiday merchandise should be shipping to the US in approximately two weeks.
Economic Consequences
Uncertainty is partly why economists say a US recession is almost a toss-up. Forecasters surveyed by Bloomberg expect imports to fall at a 7% annual rate in the second quarter – which would be the largest decline since the beginning of the pandemic.
The looming supply shock has prompted economists to revise their inflation forecasts upward as it could drive prices higher. Executives say prices for goods from China could double on some items. This would come at a time when consumer sentiment is rapidly deteriorating.
“We are paralyzed,” says Jay Foreman, CEO of toy manufacturer Basic Fun in Boca Raton, Florida, which supplies major retail customers like Amazon.com Inc. and Walmart. He called the tariffs a “de facto embargo” and said customers are currently pausing orders, but he expects them to start canceling if the China tariffs remain at this level much longer.
