Shippers Pass along Additional Costs as Tariffs Bite into Earnings

March 7, 2019


Shippers are breathing a sigh of relief as the latest round of tariff increases have been delayed indefinitely. Originally, 25% tariffs on imported goods valued at over $250 billion were to have been implemented on Chinese goods beginning on January 1, 2019. However, the tariffs were delayed to March so that the U.S. and Chinese governments could come to an agreement concerning their trade dispute. And now, instead of 25% tariffs, shippers are faced with 20% tariffs on a long list of Chinese imports. But, even that may change if U.S. and China negotiations prove successful. As of early March, the Wall Street Journal reports that China is offering to lower tariffs and other restrictions on American farm, chemical, auto and other products while the U.S. is considering removing most, if not all, sanctions levied against Chinese products since last year. A formal agreement could be reached at the end of March and could also include speeding up the timetable for removing foreign-ownership limitations on car ventures and reducing tariffs on imported vehicles to below the current auto tariff of 15% – Good news for the U.S. automobile industry whose supply chain reaches around the world. A recent study by the Center for Automotive Research found that under a scenario where the USMCA (Renegotiated NAFTA awaiting government approval) is implemented in its current form, other tariffs continue unmodified, and the Section 232 auto and auto parts tariffs are imposed except on Canada, Mexico and South Korea, the following will likely occur:

  • A total of 366,900 U.S. jobs will be lost
  • S. light-duty vehicle prices will increase by $2,750 on average
  • S. new light-duty vehicle sales will drop by 1,319,700 units per year
Indeed, trade and tariff impacts on supply chains is damaging for industries and individual companies’ bottom line. 2018 was such a year as the U.S. government made good on threats and promises with the implementation of tariff hikes beginning early in the year for not only Chinese imports but also steel imports from the EU, Canada and other countries. By September, tariffs on Chinese imports had increased to 20% and the list of affected Chinese imports had grown as well. Countries impacted by US tariffs retaliated and implemented tariffs on U.S. goods. The result has been damaging to shippers.
  • Tesla noted that tariffs on Chinese parts could cost the company $50 million in its fourth quarter alone.
  • According to Ford’s CFO, metals tariffs took about $1 billion in profit from the automaker.
  • Fortune Brands Home & Security Inc. said tariffs are expected to cost it $2 million to $3 million in the fourth quarter.
For some shippers such as Mohawk Industries, an American flooring manufacturer, price increases have been announced to cover both the tariffs and other rising costs. The company also has revamped supply chains. Another manufacturer, Fortune Brands Home & Security Inc., also noted that it is also changing up its supply chain and focusing on locations such as Mexico that are unaffected by tariffs. Steve Madden is also raising prices as a result of the tariffs and “aggressively” move production out of China as fast as possible. However, moving production away from China is easier said than done. Shifting production can take years to complete – firms need to secure funding, find the right suppliers, sort out new logistics – all while dealing with new legal and accounting issues in a country they may not know well.  Having strong supply chain partners can be beneficial in such moves. Such partners can serve as trade consultants who often are knowledgeable on trade regulations, infrastructure requirements and partnering and working with local logistics providers as needed. The uncertainty in global trade relations has sparked a strong demand for supply chain expertise. Before the delay of the 25% tariff, shippers ordered goods early and in large quantities to avoid the additional tariff increase. The result was record imports for several ports including the two largest, Los Angeles and Long Beach, each ending 2018 with TEU increases of 1.2% and 7.0% respectively. Combined, these two ports handle almost half of all U.S. imports from Asia. Thanks to the Panama Canal, East Coast ports also benefited from record volumes such as the port of Savannah which reported an increase of 8.7% in TEUs and Charleston, which reported a 6.4% increase in TEUs. The effects of the existing tariffs extend beyond the ports and to the transportation networks and warehousing. Already faced with a healthy economy and strong customer demand, trucking and rail operators witnessed capacity constraints that resulted in increased rates. Not only did shippers have to pay more for their imports, they also had to pay more in transportation once the goods cleared customs. If that wasn’t enough, warehousing space to store the extra inventory also has reached beyond capacity levels as many shippers have opted to carry additional inventory in warehouses. From end-to-end, supply chains are facing increasing costs as they encounter disruptions such as tariffs. As we have noted here and on our blog, supply chain risks will only increase. Today’s environment is highly volatile as political, environmental as well as competitive risks are making it so that supply chains need to be agile, quick to respond and adapt to meet the needs of customers.

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Shippers Pass along Additional Costs as Tariffs Bite into Earnings

March 7, 2019


Shippers are breathing a sigh of relief as the latest round of tariff increases have been delayed indefinitely. Originally, 25% tariffs on imported goods valued at over $250 billion were to have been implemented on Chinese goods beginning on January 1, 2019. However, the tariffs were delayed to March so that the U.S. and Chinese governments could come to an agreement concerning their trade dispute. And now, instead of 25% tariffs, shippers are faced with 20% tariffs on a long list of Chinese imports. But, even that may change if U.S. and China negotiations prove successful. As of early March, the Wall Street Journal reports that China is offering to lower tariffs and other restrictions on American farm, chemical, auto and other products while the U.S. is considering removing most, if not all, sanctions levied against Chinese products since last year. A formal agreement could be reached at the end of March and could also include speeding up the timetable for removing foreign-ownership limitations on car ventures and reducing tariffs on imported vehicles to below the current auto tariff of 15% – Good news for the U.S. automobile industry whose supply chain reaches around the world. A recent study by the Center for Automotive Research found that under a scenario where the USMCA (Renegotiated NAFTA awaiting government approval) is implemented in its current form, other tariffs continue unmodified, and the Section 232 auto and auto parts tariffs are imposed except on Canada, Mexico and South Korea, the following will likely occur:

  • A total of 366,900 U.S. jobs will be lost
  • S. light-duty vehicle prices will increase by $2,750 on average
  • S. new light-duty vehicle sales will drop by 1,319,700 units per year
Indeed, trade and tariff impacts on supply chains is damaging for industries and individual companies’ bottom line. 2018 was such a year as the U.S. government made good on threats and promises with the implementation of tariff hikes beginning early in the year for not only Chinese imports but also steel imports from the EU, Canada and other countries. By September, tariffs on Chinese imports had increased to 20% and the list of affected Chinese imports had grown as well. Countries impacted by US tariffs retaliated and implemented tariffs on U.S. goods. The result has been damaging to shippers.
  • Tesla noted that tariffs on Chinese parts could cost the company $50 million in its fourth quarter alone.
  • According to Ford’s CFO, metals tariffs took about $1 billion in profit from the automaker.
  • Fortune Brands Home & Security Inc. said tariffs are expected to cost it $2 million to $3 million in the fourth quarter.
For some shippers such as Mohawk Industries, an American flooring manufacturer, price increases have been announced to cover both the tariffs and other rising costs. The company also has revamped supply chains. Another manufacturer, Fortune Brands Home & Security Inc., also noted that it is also changing up its supply chain and focusing on locations such as Mexico that are unaffected by tariffs. Steve Madden is also raising prices as a result of the tariffs and “aggressively” move production out of China as fast as possible. However, moving production away from China is easier said than done. Shifting production can take years to complete – firms need to secure funding, find the right suppliers, sort out new logistics – all while dealing with new legal and accounting issues in a country they may not know well.  Having strong supply chain partners can be beneficial in such moves. Such partners can serve as trade consultants who often are knowledgeable on trade regulations, infrastructure requirements and partnering and working with local logistics providers as needed. The uncertainty in global trade relations has sparked a strong demand for supply chain expertise. Before the delay of the 25% tariff, shippers ordered goods early and in large quantities to avoid the additional tariff increase. The result was record imports for several ports including the two largest, Los Angeles and Long Beach, each ending 2018 with TEU increases of 1.2% and 7.0% respectively. Combined, these two ports handle almost half of all U.S. imports from Asia. Thanks to the Panama Canal, East Coast ports also benefited from record volumes such as the port of Savannah which reported an increase of 8.7% in TEUs and Charleston, which reported a 6.4% increase in TEUs. The effects of the existing tariffs extend beyond the ports and to the transportation networks and warehousing. Already faced with a healthy economy and strong customer demand, trucking and rail operators witnessed capacity constraints that resulted in increased rates. Not only did shippers have to pay more for their imports, they also had to pay more in transportation once the goods cleared customs. If that wasn’t enough, warehousing space to store the extra inventory also has reached beyond capacity levels as many shippers have opted to carry additional inventory in warehouses. From end-to-end, supply chains are facing increasing costs as they encounter disruptions such as tariffs. As we have noted here and on our blog, supply chain risks will only increase. Today’s environment is highly volatile as political, environmental as well as competitive risks are making it so that supply chains need to be agile, quick to respond and adapt to meet the needs of customers.

Blog Posts

  • Categories