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Geopolitics
Will shortages hit before tariff tensions ease?
As many fret over tariffs, Simon Evenett asked two freight industry leaders to explore how global trade could play out in the months ahead and the consequences for businesses.
Those managing cross-border supply chains face unprecedented levels of trade policy uncertainty. Not since the COVID-19 pandemic hit has the potential for disruption and shortages been top of mind. As we wait for the smoke to clear, what actions should businesses take to defend their market positions and seize the opportunities of tomorrow?
To explore the ramifications of the emerging map of world trade, the 54th St. Gallen Symposium kindly invited me to chair a panel discussion titled âGlobal trade in uncertain times: how to keep the world moving?â with two experienced leaders from the freight industry â Stefan Paul, Kuehne + Nagel CEO, and Tim Scharwath, CEO of DHL Global Forwarding, Freight.
Here are six takeaways from our lively debate that shed light on what is happening and where the world of trade is heading.
During April, we saw a substantial decline in order bookings from China, particularly in sea freight into the US.
Uncertainty is here to stay, but weâre better prepared
Fundamentally, the freight sector is not witnessing some passing fad â elevated levels of risk are the new normal. This has implications for the way managers shape their operations and calibrate strategy. Thankfully, due to the COVID-19 pandemic in particular, companies are more prepared to cope with factors such as supply chain disruption and policy dissonance.
âFive or six years ago, this would have been a catastrophe â itâs not a catastrophe, itâs working,â said DHLâs Scharwath. âThe world is different. This uncertainty, this âVUCAâ, is here to stay. Yes, itâs difficult at the moment, but we are all equipped in the market to manage these situations because weâve learned over time.â
Kuehne + Nagelâs Paul concurred: âItâs really fascinating how quickly companies have adapted their sourcing strategies during the last couple of weeks.â
It could be worse than COVIDâŚ
Having said that, itâs clear there are significant risks stemming from President Trumpâs high-stakes approach to trade negotiations. Beyond the much-discussed possibility of higher consumer prices and weaker economic growth, there is a danger that global trade routes get âclogged upâ, as Scharwath put it.
This is because, on the one hand, large retailers in the US are biding their time before refilling their dwindling inventories in the hope that lower tariffs â and therefore lower costs â might be on the horizon. All the while, stocks are running down on the shelves, especially for anything low-cost produced in China.
âDuring April, we saw a substantial decline in order bookings from China, particularly in sea freight into the US,â said Paul. Combined with the ending of zero tariff treatment of low value shipments into the USA, the chances that shortages emerge in American shops during Q2 and Q3 of this year are rising sharply â unless China and the United States find some way to resolve their differences and reduce current levels of exceptionally high import taxes on each otherâs products.
Even if the trade dispute is resolved â and an agreement between the US and China to hold fire on tariffs following talks in Geneva this weekend is clearly a positive step â replacement orders will lead to a surge in deliveries to the US. Those shipments will face outdated port infrastructure that will slow processing, much as we saw during the pandemic: ships will queue up outside ports and global freight rates will surge. This could cause a squeeze that feels even worse than COVIDâs supply shock.
âWe believe that the demand being pulled in might be higher than we saw in 2020 and 2021,â said Scharwath.
âŚbut perhaps not
A spike in US demand neednât repeat COVID-era outcomes. Why? Businesses are better prepared post-COVID, and other nations can step up to fill gaps, at least to some degree.
âTrade is like water â it will always find a way,â Scharwath said. âThe products that have been produced in China will go to different markets [âŚ] People are more resilient â thatâs why we donât see such a big impact as we saw when COVID hit.â
Paul agreed, pointing to Southeast Asia as the main beneficiary. âGlobally, we do not see a fundamental change in trade activities.â
Ultimately, however, China is too big to bypass
In principle, it makes sense to bypass high tariffs by sourcing from economies that face lower import taxes in the United States. However, it is not as simple as that. Years of investment in port infrastructure have made it both cheap and efficient to source from Chinese suppliers. Potentially alternative sourcing locations, such as Vietnam, do not have this kind of infrastructure.
âIf you look at Southeast Asia, the infrastructure isnât competitive with China,â Scharwath said. âChina invested over decades into infrastructure. You could sense the country was preparing itself to be the backbone for producing and exporting to the world.â
In a nutshell, we heard that the world has become very reliant on low-cost goods from China. The depth of capacity found there cannot be replicated elsewhere in a hurry.
âFor our industry, the more complex the world, the better we can tailor services for our customers.â
Policy volatility is not good for (almost) anyone
The lack of clarity over the direction of travel is forcing many companies to adopt a wait-and-see approach because they are nervous about making expensive decisions that they might later regret. This hesitancy is understandable, but we learned that it will take its toll at some point, especially in industries with low profit margins.
âTariffs make a big difference on pricing because, in the end, no matter how you turn it around, the consumer will pay for it,â said Scharwath.
While many business leaders grapple with elevated uncertainty, the international freight sector reckons it is well-positioned for turbulence. Business models in the industry rely on helping customers smoothly navigate lots of âtouch pointsâ across their global supply chains. The more complex and challenging these become, the more freight clients need support and services to manage cross-border flows. âFor our industry, the more complex the world, the better we can tailor services for our customers,â said Paul.
Keep calm and carry on
Amid all this complexity, what should business leaders do as the tariff tensions persist in the months ahead? Paul warned against making any rash, knee-jerk decisions.
âMy advice is to stay calm,â he said. âIn the next 6-12 months, this needs to be solved.â
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