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What I learned about tariffs from a supply chain expert
With the US imposing 145% tariffs on China, the two largest economies in the world are effectively in a trade embargo. Shipping volumes from China are completely freezing up. Many compare this situation to the Covid supply chain shock we experienced just a few years ago.
To better understand what’s truly going on and how to effectively analyze the situation, I had Craig Fuller, CEO and founder of FreightWaves, on Forward Guidance this week to unpack all things shipping and logistics.
Here are my top takeaways from our interview:
Covid vs. today
Craig was quick to emphasize that there won’t be toilet paper shortages or food shortages. He was also quick to emphasize that the US is highly self-sufficient in that realm and the bigger impact will be on hard goods.
As Craig told me:
There's unlikely to be a food shortage. I remember in early Covid you would go to the grocery store and there wouldn't be meat, there wouldn't be chicken. Those types of things just aren't real here. And one of the things to keep in mind is everybody keeps talking about supermarket shelves being empty and that's not going to happen.
We produce 88% of the food we eat here in the United States. So the idea that you're gonna go to the grocery store and not have food is not credible.
Shipping volumes drying up from China
Due to the Chinese tariffs, shipping containers heading to the US are already down 35% year over year and accelerating.
What’s crucial is understanding how the second-order impacts will affect the US economy.
Craig was quick to mention that some of the first things to spike will be trucker and distribution center layoffs:
The volume that would've come over is not coming, and now we're sort of in the thick of it where we are seeing sharp volume drops going to major shipping ports.
And so let's talk about what happens from there. There’s half a million people in Southern California that work in logistics. They're just simply not gonna have as much work. So the ports union contracts have a little bit more…sort of staying power. They can do maintenance around the port, but then you've got this sort of dependency of the truckers that are in and out of the ports. They're gonna see a sharp drop. So you're going to see reduced order counts that will quickly shift into mass layoffs.
How long does Trump have to negotiate before it’s too late?
The big question for many: How long can the economy weather this storm and draw down inventories until the store shortages become more apparent and we hit the point of no return?
Although Craig was quick to highlight that a point of no return is not the right way to think about it, he did imply that things can still revert if tariffs normalize by the summer:
So let's say we get a trade deal in a couple of weeks. Those orders that would have come over for back to school can easily be sent over and inventory stockouts just probably aren't a major concern. But if we get later into the calendar and we're starting to look in July and certainly August, this is where ‘would be orders’ are a problem because what's happening is US companies are not placing orders to Chinese contract manufacturers because they're not placing orders to contract manufacturers. The lead time, if we were to get a deal, would be about a month to put the economy back in line and those products that were ordered to come back and flow over. So if trade can somewhat normalize by July or August, the economy would be able to look through this.
There’s a lot more to the interview, so I recommend giving it a watch. But to summarize the framework I learned for how to think about this supply shock:
There are more differences than similarities between this shock and the Covid shock, and it’s really more a convenient comparison.
Shipping volumes are drying up and will quickly trigger layoffs and inactivity in wide swaths of the shipping industry.
The Trump administration has until summer to get a deal done. Otherwise, the negative impacts of this trade war will be set in stone to a certain degree.
— Felix Jauvin
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