China, Trump, war, deglobalization: The supply chain risk mix ahead

How tariffs, trade disruptions and geopolitics could affect shipping rates, import flows and inflation.

Photos: Flickr/Thomas Classen (left); Flickr/Steve Baker (right)

With all the focus on wars in Europe and the Middle East, ship attacks in the Red Sea and the Panama Canal drought, it’s easy to lose sight of the elephant in the room for supply chains: the severely strained ties between the U.S. and China and how the U.S. presidential election could worsen those relations.

For perspective on this issue – and how the more volatile geopolitical landscape impacts supply chains in general – Inside Shipping spoke in-depth with Paul Bingham, S&P Global Market Intelligence’s director of transportation consulting, a highly regarded expert on U.S. trade flows.

The big takeaway: The supply chain crisis may be long gone, but this is definitely no time for complacency. Importers face “enormous risks from disruptions,” he warned.

US presidential election and future tariff risk

INSIDE SHIPPING: After Donald Trump was elected president in 2016, tariffs impacted ocean volumes from China, as well as freight rates. The market was stronger in 2018 as U.S. importers rushed to beat the tariff deadline, then weaker in 2019 due to the inventory hangover from pulled-forward cargo. Trump is now leading in the polls, and talking about a 60%-plus tariff on imports from China. Could this lead to a pre-emptive pull-forward of imports even before the election?

BINGHAM: “I think this is already in the discussion. You don’t need to wait until November, let alone 2025, to have some of the supply chain management folks say: ‘OK, we’ve learned our lesson. If this is going to happen, what’s our Plan B?’

“Once you’re convinced the probability is fairly high and you’ve looked at the cost implications of building inventory early, you may say: ‘Let’s pull forward.’ Because you’ve lived through this before. This is not one of those situations of ‘it’s a politician just saying something in the campaign.’ This is a case – unusually – where you have the credibility to say: ‘This is not an idle threat. He has been in office before and it happened before.’ 

“You wouldn’t wait until the January 2025 inauguration and for executive orders to start to flow. You’d start to prep as soon as you could and take whatever actions you need to in advance.

“Because if you suddenly face accelerated, expanded, broad-scale import tariffs, that’s going to be at the top of your risk-management list. Some politicians may characterize tariffs differently, but there’s no getting around the fact that a tariff is fundamentally a tax on imports, and the one who’s hit first is the one who’s paying the tariff, which is the importer.”

So, you think this could actually be a positive for peak season volumes this year, as importers pull forward cargoes ahead of a threatened 2025 tariff?

“Absolutely.”

US supply chains remain heavily exposed to China

Despite the tariffs enacted by Trump – and kept in place by Joe Biden – U.S. containerized imports from China remain very high. They peaked during COVID and they’re up again recently. This January, Chinese imports accounted for 39.8% of total U.S. containerized imports, according to Descartes – the highest proportion since September 2022, at the peak of the COVID boom.

So, U.S. supply chain exposure to China is extremely high. And in addition to the threat of incremental tariffs in the case of a Trump win, we’ve had military exercises by China off Taiwan since 2022, China aligning with Russia on the Russia-Ukraine war, and increased trade tensions with China involving the EV market.

Clearly, there’s more pressure than ever on U.S. importers to diversify supply chains away from China. Are you seeing progress on diversification?

“It doesn’t happen overnight. But there is a lot of momentum, and even if Trump doesn’t win and we don’t see incremental tariffs, you’ll still see more supply chain diversification over time, despite increased capital costs and pressure from inflation and other negatives pushing back against that. Look at Mexico: We’ve seen growth in Mexico-U.S. trade to the point where Mexico has risen to be the number-one U.S. trading partner.”

The concern is that there’s still so far to go with diversification of China trade, the threat of a Chinese invasion of Taiwan remains, and that event could happen before enough diversification progress is made. It’s hard to even imagine what the supply chain effect of such a conflict would be.

“Right. We don’t know how things could permute out of the South China Sea. There’s a lot of talk right now about what happens in the Middle East: Does it permute into a broader conflict in the region?  How can the U.S. bear the load if it’s already strained from Ukraine and Russia and that expands into the Middle East and then into Asia? There’s speculation that this actually adds to the odds of something happening in Asia, because the leadership of some Asian countries may think the U.S. has a more limited ability to deal with something in Asia if it is already tied up in both Eastern Europe and the Middle East.

“I think it just adds to the overall level of geopolitical risk that flows down to supply chain managers and adds to pressure from investors who say: ‘OK, what’s your risk plan? Show me that your company is resilient.’”

Setback for globalization

Looking at the overall geopolitical picture and how it relates to trade and ocean shipping, there seems to be a real change. For the first two decades of this century, the countries of the world played nice with each other and economies benefited from globalization. Now the world seems to be bifurcating, with trade splitting between various blocs.

From an Economics 101 perspective, the benefit of globalization is that countries produce the products they’re best suited to produce, through their comparative advantage, and consumers benefit from reduced costs. Doesn’t this mean that a material pullback from globalization is inflationary?

“The big-picture story is: Yes, if you reverse globalization and you have Balkanization or regionalization of trade, that in theory is inflationary. You have fewer gains from trade because you are not taking advantage of the potential comparative advantages that you could collectively enjoy if you had truly globalized trade.

“But the devil’s in the details, because it all depends on source supply and who’s participating in regional trade groups and how this affects each market. For example, I don’t think the U.S. market is that affected if we don’t trade with Russia anymore, or if we don’t trade with some other countries that join regional groups besides the North Koreas of the world. So, the top-level impact would be inflationary, but the real answer is more complex.”

I also wonder if the big-picture inflationary effect of deglobalization may be offset by counterbalancing deflationary effects, such as, for example, lower demand growth. If you look at bulk commodity shipping, tankers are sailing much longer distances due to geopolitical issues, and that’s supporting higher freight rates, but the price of oil is down from its highs and is around where it was at this time in 2018, despite wars in Europe and the Middle East. Energy consumers are not currently feeling the effect of higher tanker rates and inefficient shipping routes. In the same way, perhaps future goods consumers wouldn’t necessarily feel the effect of reduced globalization if prices were pushed down for other reasons.

“Right, it may be muted by deflationary forces that offset some of the inflationary pressure that would come from deoptimized world trade from the perspective of lower comparative advantage.”

Demise of ‘just in time’ supply chains

With all these disruptions – not just geopolitical unrest but also the drought in Panama and the risk of a dockworker strike later this year at East and Gulf Coast ports – U.S. importers should really be investing in risk management.

But have importers learned their lesson from COVID? I wonder to what extent they will still essentially roll the dice, given the cost of making supply chain changes, how that affects the KPIs of current management, and the fact that it takes time for those changes to pay off. Maybe they don’t want to take that cost on their watch? An analogy from the public sector: Education is such an obvious investment, but there’s underinvestment in education because the payoff doesn’t come during current elected officials’ time in office.

“That tension [between management of future risk and near-term cost] exists up to the CEO level in many of the manufacturing and retail companies that struggle with that balance. It ebbs and flows over time, even within the same organization.

“But I think retailers and wholesalers and others now face enormous risks from disruptions. They need to incur a higher inventory carrying cost as an insurance policy. They cannot go back to the pure, lean ‘just in time’ supply chain model from years ago because the repercussions from disruptions are just so huge. Companies have to have more of a buffer, and incur higher inventory carrying costs.

“I think there is going to be an acceptance of or bias toward the safety stock concept. The ‘just in case’ approach is going to be something that is tolerated by CFOs and CEOs even though they face higher costs by doing so.

“What happened during COVID cost companies enormously. In some cases, it was so bad that it damaged brand value. And OK, COVID’s gone and the impact on the supply chain is gone, but now we’ve got the Red Sea and the Panama Canal and who knows what will happen in the South China Sea, and supply chain managers have to manage against those risks. You never want to get to the point where you’re suddenly scrambling for air charters to keep your factories running or to avoid stockouts that cripple your stores.”

Does that mean the ultra-lean ‘just in time’ supply chain model never comes back?

“I just can’t imagine anybody pushing that. I think the idealized world of supply chain management – where you have infinitely globalized supply chains and you’re purely chasing the lowest landed cost – is gone. Not only because of COVID but also because of this succession of disruptions since COVID.”

It would require the world to cooperate. And it seems we’ve crossed a threshold where the countries of the world are not going to settle back into peaceful coexistence and disruption-free trade anytime soon.

“The consensus that existed almost all the way up to the pandemic is gone. Managing supply chains is going to be more complex. You inherently have to cope with more scenario planning around risks. I just can’t see us getting back to a world where you discount away all the disruptions.”