US Customs Increasing Tariffs: How Rising Tariffs Are Reshaping International Shipping

Trade policies, including export and import tariffs, play a pivotal role in shaping the global economy. Rising tariffs, as presently witnessed in the US with the Biden administration extending Trump-era tariffs on other widely imported industrial goods, are bound to impact the shipping industry in significant ways.

Understanding these dynamics is crucial for overseas shipping businesses, consumers, and logistics providers alike.

About the Current Tariff Landscape in the United States

To grasp the full impact of the changes in tariffs in the United States, it’s crucial to understand the current tariff situation. The United States has implemented and increased tariffs on a wide range of imported goods, with a particular focus on imports from countries like China. These tariffs are essentially taxes on imported products, often resulting in higher prices for consumers.

Tariffs are ideally the government’s tool for regulating trade, protecting domestic industries, and addressing economic imbalances. However, imposing tariffs on any range of imported commodities can significantly impact their prices and affect consumer behavior by disrupting supply chains.

While tariffs are nothing new in global trade, their increasing prominence in the US has sparked debates and forced adaptations across the supply chain. Let’s dive into how these tariff increases are impacting the world of international shipping.

Direct Impacts on Shipping

Commercial cargo companies are typically on the direct receiving end of the impacts of import and export tariffs. Their response to such policy changes typically have a domino effect across the entire global economy.

Here is a look at how rising tariffs affect the shipping industry directly. 

·         Increased Costs

Perhaps the most immediate and visible effect of rising tariffs is the increase in shipping costs. As tariffs rise, so do the expenses associated with moving goods across borders. This increase isn’t just about paying the tariff itself; it also includes additional costs related to compliance, documentation, and potential delays at customs.

A good case in point is the tariffs imposed on imports from China. The US imports over $500 billion annually from China, and the Trump administration imposed tariffs on approximately half of those imports.

President Biden opted to keep the Trump-era tariffs on Chinese imports, further raising them on aluminum, steel, lithium-ion batteries, medical equipment, electric vehicles, and solar cells.

For instance, a company importing electronic components from China might now face not only higher tariffs but also increased costs for customs brokers to navigate the more complex regulatory environment.

According to Xeneta, a platform specializing in ocean and air freight rate analytics, the average spot rate for shipping a 40-foot container (FEU) from China to the US West Coast was USD 3837 on May 14, 2024. This marked a 162% rise compared to the same period the previous year.

These added expenses can significantly impact profit margins, forcing businesses to either absorb the costs or pass them on to consumers.

·         Changes in Shipping Volumes

The rise in tariffs has led to noticeable changes in shipping volumes across various industries. Some sectors have seen decreased shipping volumes as higher costs make certain trades less profitable or even unsustainable.

For example, in the aftermath of tariff increases on Chinese goods, some US retailers reported significant drops in import volumes from China. In 2019, the Port of Los Angeles reported a 19% year-on-year decline in import volumes, largely attributed to the US-China trade tensions and resulting tariffs.

These increased tariffs on US-bound Chinese goods have led to a 13% decrease in the value of imports from China. Recent trends include US importers shifting to increased domestic production or sourcing goods from other countries like Mexico.

·         Shift in Shipping Routes and Patterns

While domestic production is increasingly an appealing alternative for some companies, other US importers are altering their shipping routes or sourcing goods from different countries instead.

This situation is leading to changes in global shipping patterns, with increased red tape and higher costs are expected to continue for China. This shift is not just about changing the origin point of goods; it’s reshaping entire supply chains.

For instance, some manufacturers have moved production from China to countries like Vietnam, Malaysia, or Mexico to avoid US tariffs on Chinese goods. This has led to increased shipping activity in ports in these countries, while simultaneously reducing volumes in some Chinese ports.

Indirect Effects Of Rising US Tariffs on the Shipping Industry

The higher tariffs imposed on US imports have far-reaching effects than already discussed above. Here is a look at the indirect impact this situation has across various sectors of the economy.

·         Restructuring in the Global Supply Chain

As tariffs on goods from countries like China increase, many businesses are reconsidering their sourcing strategies, leading to significant shifts in global supply chains.

Many importers are now opting for the diversification of suppliers across different countries as a key strategy to mitigate the impact of these tariffs. By sourcing from multiple countries, companies can mitigate the risk of being overly reliant on a single, highly-tariffed source such as China.

This diversification, however, comes with its own challenges, including managing relationships with multiple suppliers and potentially dealing with varying quality standards.

Such restructuring initiatives also affect shipping demands and routes in complex ways. For instance, some businesses are adopting a China Plus One strategy, maintaining some production in China while diversifying to other countries. Popular targets of the strategy include promising developing economies like Thailand, Turkey, India, and Vietnam.

Apple is a prime example of a company exploring a China Plus One strategy. It has been exploring moving some of its production out of China to countries like India and Vietnam. Such moves require establishing new shipping routes, working with different ports, and potentially using different types of vessels or transportation methods.

Nearshoring or reshoring of production is another trend emerging from these tariff increases. Some companies are moving their manufacturing operations closer to home or back to the US entirely to avoid hefty tariffs. While this can reduce tariff-related costs, it often comes with higher labor costs and significant upfront investments in new facilities.

Nearshoring and reshoring efforts result in increased complexity of logistics operations. Supply chain managers must now juggle multiple suppliers, potentially across several countries, each with their own shipping routes, regulations, and challenges. This complexity requires more sophisticated supply chain management and often leads to increased costs in logistics planning and execution.

·         Increased Complexity

The constantly shifting US tariff landscape has added layers of complexity to international shipping. As already noted, reshoring and restructuring in the global supply chain yields the need for more sophisticated logistics planning and documentation; in other words: complexity.

Shippers now need to be more vigilant about the origin of goods for quality purposes. They must also keep an eye out for the specific harmonized tariff codes used, and the potential for tariff engineering (legally modifying products to qualify for lower tariff rates).

This increased complexity has led to a rise in demand for trade compliance experts and sophisticated software solutions to manage the intricacies of international shipping in this new environment.

·         Rise of Transshipment

Some businesses are using transshipment strategies to avoid direct imports from high-tariff countries, changing the dynamics of international ports and shipping hubs. Transshipment involves shipping goods to an intermediate destination before sending them to their final destination.

For instance, to avoid direct shipments from China to the US, some companies might ship goods from China to Vietnam without entering the Vietnamese customs territory, where they undergo minor processing before being shipped to the US.

The minor processing at the third county; Vietnam in this example, involves repackaging the consignment and relabeling it as Vietnamese, so it appears to have originated from a non-tariff territory.

While transshipment is not a new phenomenon since it has been in use for decades, it has become a more prevalent strategy in recent years. The recent surge in transshipment is occasioned by the escalation of the US-China trade wars.

Source: Medium

This practice has led to increased activity in transshipment hubs like Singapore and has complicated efforts to track the true origin of goods.

Challenges for Shippers and Freight Forwarders

The rising tariffs present numerous challenges to various businesses in the overseas shipping world. Here are some key challenges that shipping and forwarding companies are most likely to face:

Unpredictability: The volatile nature of tariff changes makes long-term planning difficult for shipping companies and freight forwarders. Tariffs can be announced and implemented quickly, leaving little time for businesses to adapt. This unpredictability affects everything from route planning to pricing strategies.

Compliance challenges: Keeping up with changing regulations and ensuring compliance has become more challenging and resource-intensive. Shippers and freight forwarders must now invest more in staying informed about tariff changes and ensuring that all shipments are properly classified and documented.

Customer relations dilemma: Explaining price increases and potential delays to customers is a crucial part of maintaining business relationships. Freight forwarders and shipping companies now often find themselves in the position of educating their clients about the impact of tariffs and helping them strategize to minimize costs.

Impact of Rising US Tariffs on Global Shipping: Parting Shot

As US customs tariffs continue to evolve, the international shipping landscape is transforming in response.

For businesses involved in international trade, staying informed and agile will be key to navigating this evolving landscape. As always, working closely with experienced freight forwarders and logistics providers can help mitigate risks and identify opportunities in these changing times.