As the trade war rages on, gain insights from experts on the frontlines
It’s been nearly a year since President Trump announced tariffs on up to $60 billion worth of Chinese goods, initiating a trade war that has resulted in billions of dollars in losses for both countries. From soybeans and automobiles to lumber and lobsters, industries across the board have felt the impact as the U.S. seeks to stimulate demand for its goods and China continues to press for greater global economic influence.
Critically, for U.S. businesses that ship products assembled in China, the tariffs have created a veritable minefield of manufacturing, logistics and customs challenges. Companies rushed to ship their goods during 2018 peak season to get them into the U.S. before since-delayed tariff hikes could take hold – and now businesses are dealing with a capacity crunch in the new year. The Ports of Los Angeles and Long Beach, as well as The Port Authority of New York/New Jersey, are experiencing extreme congestion as a result of the increased import volume. Many companies – including Under Armour, GoPro, and toymakers Funko and Hasbro – have explored or are moving manufacturing outside of China. And everyone is closely examining their products and corresponding HTS codes to understand the potential tax implications at customs.
Following negotiations in December, additional tariff increases were delayed to March, leaving looming uncertainty. And, as representatives from both the U.S. and China continue to meet, countless questions linger about how shippers can best manage and mitigate the unfolding situation.
As the Modern Freight Forwarder and one of the leading logistics partners serving the Transpacific, Sino Shipping has a unique perspective into the myriad ways the trade war is affecting customers and carriers. In this article we’ve brought together experts from across our organization in a roundtable discussion to share their insights and firsthand experiences to help guide you through the turbulent trade war landscape.
Our SINO SHIPPING expert contributors include:
Man Wong, VP of Customs & Compliance: A 20+ year leader in the fields of customs and compliance, who previously spent 17 years with SINO SHIPPING, is a licensed customs broker, and currently serves as a board member of the National Customs Brokers & Forwarders Association of America.
Bella Yang, VP of Global Accounts: Leader of Sino Shipping enterprise client engagements and an expert in global manufacturing who holds a joint MBA from Columbia Business School, London Business School and Hong Kong University.
Jean perri, VP/Global Head of Ocean Freight: A long-tenured industry veteran and ocean freight expert who, prior to leading at Sino Shipping, spent more than half a decade managing pricing at Kuehne + Nagel.
Tony Wang, Director of Air Freight Development: A 20+ year veteran in client development working with Seko Logistics and Phoenix International/CH Robinson, now responsible for driving growth and success for Sino Shipping air freight clientele. Tony Wang is a licensed customs broker and has extensive experience working with enterprise clients, with a focus on creating viable improvements to the order-to-cash cycle.
Vincent Chan, VP/Global Head of Customs Brokerage: Leader of Sino Shipping Global Customs and Trade Services business, former Founder/CEO of Shipster Inc., with 12+ years experience building businesses as an entrepreneur, investor and advisor. Vincent Chan holds business and engineering degrees from Harvard, MIT, and the University of Texas, Austin.
Reflecting on recent events and looking to the horizon of the U.S.-China trade war, our panel of tariff insiders offer perspectives into what matters most as shippers battle the uncertainty that lies ahead.
What has surprised you most about how the trade war has evolved over the last nine months?
Vincent Chan, VP/Global Head of Customs Brokerage: When it comes to the current trade environment, pretty much everything is surprising! But what’s maybe most surprising is that trade tensions have continued to escalate without any real progress or concessions from opposing sides. It’s all a bit erratic.
Tony Wang, Director of Air Freight Development: Typically, when you hear these kinds of conversations, they don’t actually turn into such meaningful change. So, the surprise for me is the speed at which this all went through – and then the corresponding lack of time shippers have had to prepare for the impact.
Jean Perri, VP/Global Head of Ocean Freight: It’s amazing how quickly things have changed. From implementing tariffs to postponing increases, the uncertain future makes it very difficult for shippers to plan. And, because the tariff increase wasn’t implemented on January 1st, it’s also likely that some shippers won’t trust future threats of tariff increases.
Bella Yang, VP of Global Accounts: I’m also surprised by the level of uncertainty at present, which is something that we haven’t seen recently in a trade environment. It’s become so important to incorporate as much contingency planning as possible.
How are you seeing shippers respond to the tariffs?
Man Wong, VP of Customs & Compliance: The tariffs are an attempt at moving manufacturing and jobs back to the U.S. But, this isn’t likely to happen; shippers have started looking to move manufacturing to the next – cheapest option. For a smaller shipper with one product – let’s say a simple phone case – it might be pretty easy to move manufacturing. For an enterprise, it’s much more complex and takes a lot longer. But at the same time, enterprises often have multiple manufacturing locations and plans in place to mitigate unexpected costs, such as those incurred from tariffs.
Wang: Almost every single one of the conversations we’re having with clients today revolves around sourcing from different locations, primarily out of Vietnam. In preparation for that, a lot of those conversations are around infrastructure, particularly with those companies who’ve already been impacted by the tariffs. At the same time, many companies are petitioning HTS codes in an attempt to try and exempt themselves from additional tariffs, which can be critical. Shippers are having to become much more educated regarding their products
Chan: I’m not sure there’s much that most companies can do in the immediate term. If your product has been impacted, it’s likely going to take time to adjust. If you’re a medium-sized company, you probably have the most flexibility, as changes can be daunting for smaller shippers with limited resources and time intensive for larger enterprises with complex supply chains. While shifting a supply chain takes time, we know that customers are considering it. But considering an option is easy, actually implementing one can be very hard.
Bella: You don’t just move your manufacturing overnight. It’s not like you flip a switch; there’s really a one to two-year transition, especially for larger companies. Some shippers have already been manufacturing goods in parts of Southeast Asia, such as Vietnam, which has minimized the negative impact of the tariffs on them. What’s happening now is that competitors are also coming to Vietnam and driving up prices because of the increased demand. I absolutely think, over time, this will negatively affect China, and it’ll be great for Southeast Asia. If the tariffs are removed down the road, many companies will have already moved manufacturing, and I’m not so sure that they’ll shift it back to China.
Jean Perri: We are seeing many more pricing requests for Southeast Asia and the Indian subcontinent; shippers are evaluating their options. Few actually moved their supply chains outside of China because this will take time, especially for larger shippers. However, Taiwan and South Korea are in a unique situation: Some manufacturing had shifted to mainland China in the last decade due to lower costs, but that infrastructure is still in Taiwan and South Korea. Some manufacturing may temporarily shift back there until Southeast Asia infrastructure catches up.
We also saw that many shippers moved up their shipments in anticipation of the January 1 tariff increase, but now [that the tariffs have been postponed by 90 days] they’re stuck with extra inventory in warehouses. There were over 30 extra loaders deployed in the market to deal with increased demand and this caused extreme congestion in Los Angeles and New York. Most of these ships also came during the holiday period when the port was closed for Christmas and the New Year holidays. Air freight has had tight capacity as a result, but now we’re seeing shippers shift back to ocean and even canceling future product orders. You can already see spot rates from China dropping quickly as a result.
Do you think the size of a given business relates to the impact of the tariffs? If so, how?
Wang: For small businesses, I believe the tariffs are actually discouraging a lot of entrepreneurialism. Likewise, the SMB and mid-market segments are being hit hard. These segments typically work with a smaller group of vendors, so they don’t have the option to move sourcing operations quickly. A larger company can quickly switch their strategy or more easily move more of their manufacturing to a different location. They have more at their disposal and a little bit more diversity in their supply chains.
Bella: The way a given shipper can and should respond to tariffs depends on two factors: Industry and company size. For certain industries, there’s only a select number of places that can produce the corresponding products. For example, China has somewhat cornered the market on solar panels. Manufacturers that want to remain competitive will have to re-negotiate payment terms through measures such as the ability to float working capital and to have longer payment windows. The larger the shipper, the more room there is to negotiate such terms. If you’re a small business or SMB shipper with one product, a tariff increase could have devastating effects
Jean Perri: Manufacturing has been slowly shifting to Southeast Asia for over a decade; this trend will continue regardless of tariffs or business size. Large importers have more bargaining power, but they have limited sourcing options because many suppliers in Southeast Asia don’t have enough capacity to meet their needs. Small importers have more options, but don’t always have the resources. As a whole, despite the considerable challenges the trade war has created, the tariffs have actually presented a great opportunity for customers to assess how they’re manufacturing and importing goods.
Have you noticed any changes in which modes shippers are choosing?
Wang: There’s been a huge shift in how people have moved cargo, particularly in the third and fourth quarters of 2018. Most companies that would have never considered air freight in the past have now looked at air freight as a viable option. That’s because when doing the comparative landed cost model of what the additional freight charges are versus what the tariffs mean for their products, in some cases it’s actually become a more financially responsible decision to move freight via air.
Bella: The impending tariff increase pushed many shippers to rely on air in the weeks leading up to January 1st. Freight forwarders helped significantly in these efforts, making it much easier to identify the right modes for a given shipment. Going forward, shippers will have to do a cost-benefit analysis to determine which mode and manufacturing location will provide the highest revenue.
Wong: It’s true that many shippers used air freight to get ahead of the January 1 tariff increases. But to mitigate tariff costs in the months ahead, it’s very possible that shippers who were previously using air freight exclusively will start to incorporate ocean, if there’s enough time to accommodate demand for inventory.
Jean Perri: Shippers are demanding better SKU-level visibility and the ability to manage their supply chains smarter using differentiated services. For example, ocean carriers launched premium services: Shorter transit time, faster discharge, expedited rail – they have been very successful because shippers were more concerned about service reliability. Some SKUs were moved to deferred services, and others moved to expedited ocean or even air freight.
Do you believe the tariff postponements will create an “extended peak shipping season,” wherein shippers continue to rush and ship ahead of potential tariff increases?
Wang: Absolutely. I think you will continue to see people bringing in inventory, especially as they look at replenishment after the retail season.
Jean Perri: Many shippers canceled orders once they found out they had more time before tariffs were increased. So, it’s likely that we’ll see shipments ramp up again just before tariffs are set to increase.
Bella: While many companies will continue to ship goods in anticipation of tariff increases, I think it’s also likely that we’ll see fewer discounts and a larger shift of costs to consumers. There’s no way a retailer can absorb a 25% increase in cost on products such as a refrigerator or washing machine.
If tariffs do increase from 10% to 25% in March, what options do you believe shippers have other than increasing prices on goods? What strategies might they employ to optimize their supply chains?
Wong: Aside from shifting manufacturing, shippers can try to renegotiate prices with their existing vendors. While it may seem like a stretch, vendors themselves are also reducing prices to retain customers, given the uncertain environment. Chinese manufacturers are losing business, so they’re more likely to be open to price adjustments. Also, shippers can look to the HTS classification of their products and consider shipping individual components to avoid paying tariffs on complete goods. For example, if filters have a tariff, but the water bottle that holds the filter doesn’t, the shipper could import the goods separately. If the final product is assembled prior to importing, then the entire value would be subject to tariffs. This type of analysis can be very complex and difficult to do well.
Chan: One of the positive things to come out of the trade war is that it’s pushing companies to think about their supply chains in unprecedented ways. This isn’t just for the near-term; I believe this environment will leave a mark, and companies are going to think more broadly about how to mitigate risks in order to protect themselves. From diversifying where products are sourced from or how those products 7 are made, to negotiating better contracts and flexible terms. Companies will become more sophisticated. This environment will also drive companies to use new technology and more data to plan their supply chains.
Wang: Working closely with freight forwarders to discuss forecasting will be critical. That means assessing what your demand will be for the next year and aligning it with how a freight forwarder can potentially support you with different carrier and service options. It’s also important to work side by side with your customs brokers to ensure that you are, in fact, properly classifying your goods and continually looking for alternative sourcing locations or different methods of bringing products into the U.S. It’s extremely important to be proactive and to build close relationships with those who can provide some consultative services. Technology is also key to being proactive and ensuring you have a comprehensive picture of your landed costs, including transportation and the cost of manufacturing goods.
Bella: From optimizing container usage to being able to track shipments at the click of a mouse with a platform like ours at Sino Shipping, there are a number of ways that companies can ensure they’re as efficient as possible, all of which depend on a shipper’s partnership with a dedicated forwarder. Many shippers have also looked to financial options like capital as a lifeline while they adjust their approaches. In this era of complete uncertainty, it comes down to diversification and partnering with a great freight forwarder
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