Consultant’s Insight: Retailers diversify supply chains ahead of potential tariffs

Steep duties on approximately $370 billion of imports from China annually, put in place in 2018 by former President Donald Trump , remain in place with additional tariffs added by President Joe Biden . If Trump is reelected in November, he has promised more tariffs: 10% across-the-board levies on all products imported into the United States from overseas, including a 60% or more levy on Chinese imports. [caption id="attachment_69752" align="alignright" width="233"] Cathy Roberson, Cargo Facts Consulting senior consultant and Air Cargo Next columnist[/caption] Since 2018, trade patterns have shifted because of growing geopolitical concerns and tariffs on Chinese imports. As a result, retailers have diversified their sourcing and manufacturing locations. “We are closely watching the risk of potential additional China tariffs and the rest of the industry,” Ralph Lauren Chief Financial Officer Justin Picicci told analysts Aug. 7. “We are well positioned following several years of proactive diversification into other supply markets and the development of nearshoring capabilities . Currently, China represents a high single-digit percentage of our finished goods coming into the U.S.” Floor & Decor Chief Executive Thomas Taylor said during the company’s second-quarter earnings call on Aug. 1, “When tariffs came the last time around, we were heavily dependent on China. ... When I joined the company, we were over 50% of what we got was out of China. That number’s down to less than 25% today and going down further.” Indeed, retailers continue to maintain a presence in China, but to a lesser extent than in 2018. Global trade patterns are shifting and are affecting ocean and air carriers. Shifting trade patterns UPS highlighted the top export markets during its Investor Day in March. The top three markets from 2017 to 2022 were: Association of Southeast Asian Nations (ASEAN), with an estimated growth rate of 5.2%; China, with an estimated growth rate of 4.1%; and Europe, with an estimated growth rate of 4%. According to UPS estimates, the top three export markets are expected to shift from 2022 to 2027 to: ASEAN, with an estimated growth rate of 4.5%; Other Asia-Pacific, with an estimated growth rate of 4.3%; and Latin America, with an estimated growth rate of 4.2%. China’s export market is estimated to grow 1.3% between 2022 and 2027. To take advantage of the forecasted trade shifts, UPS is investing in these regions and has announced various expansion plans in the Asia-Pacific region, including expanding its operations at Clark International Airport (CRK) in the Philippines and Hong Kong International Airport (HKG). UPS is also launching new flights within the region, such as between its intra-Asia hub at Shenzhen Bao’an International Airport (SZX) and Australia’s Sydney Kingsford Smith Airport (SYD). UPS is also witnessing growth in the LatAm region, which is included among its Americas group. During the second quarter, UPS’ Americas region reported a 5% increase in export average daily volume, the sixth consecutive quarter of growth. “As we see the shift in nearshore continue to take hold, our announced acquisition of Estafeta will further enhance our end-to-end services in Mexico,” UPS CFO Brian Dykes told analysts July 23. Nearshoring Mexico surpassed China as the U.S.’ biggest import partner in 2023, according to the U.S. Census Bureau . Through June of this year, Mexico continues to be the U.S.’ biggest import partner. The trucking market represents more than 70% of total cross-border freight movements. However, Mexican airports handled 1.1 million tonnes of cargo in 2023, a 4% increase from 2022, according to Mexico’s Federal Civil Aviation Agency . Much of the air cargo growth is from the Asia-Pacific region, perhaps to bypass U.S. tariffs and/or to take advantage of easier trade terms via the United States-Mexico-Canada Agreement, a free trade agreement that took effect July 1, 2020. For example, there are seven weekly Cathay flights from Hong Kong and three from Seoul through Korean Air Cargo to the Guadalajara International Airport (GDL). For the first four months of 2024, the electronics sector represented 34.1% of total cargo and 66.5% of the total cargo value at GDL. The potential for additional tariffs will cause supply chains to adapt and embrace all modes of transportation to ensure timely deliveries and maintain lower costs. While air cargo often costs more than other modes of transportation, it will prove valuable to supply chains for its speed and proximity to final consumption destinations.

Consultant’s Insight: Retailers diversify supply chains ahead of potential tariffs

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