News #110 - Rising costs and tight capacity amid tariff turbulence

Rising tariffs on China are expected to have a significant impact on airfreight capacity between the Asian nation and the United States. Historically, similar changes have led to temporary disruptions in air cargo operations, resulting in reduced outbound cargo capacity and increased air freight rates in the US, as well as flight cancellations.

Currently, Rates from China to the US have been increasing and airlines have been reducing flights.  Higher tariff rates often translate to increased consumer commodity costs, which could also drive-up air freight expenses, making it a less attractive shipping method in the long term. Additionally, with air freight demand forecasted to grow by approximately 4-6 percent this year, capacity constraints could further pressure pricing and availability, potentially leading to extended lead times for shipments.

“Increased tariffs on China (and elsewhere) will force companies to look for other alternatives to source their products,” Jacques Nijankin, Head of Airfreight Americas, Rhenus Logistics, stated. “Nearshoring, by definition, is relocating business operations to a nearby country or region, that will become center stage. We also could see significant changes for SEA countries, if they reach a negotiable deal with the US, It could lead an export boom from SEAPAC region as trade dynamics shift with the relocation of some shippers to SEAPAC region.

“While China remains a manufacturing powerhouse, companies are balancing cost, risk, and geopolitical stability by seeking alternatives. Many companies are already looking at moving operations and investing in regions such as SEAPAC – Vietnam, Malaysia, and Indonesia. For some of these companies, this may take years and further investments to make these decisions on shifting sources.

“Many companies have invested in nearshoring for a while now. For example, in Brazil and Mexico, we’ve been seeing this particularly with the automotive industry during the pandemic.

“A few of the many benefits nearshoring offers to US importers are faster lead times from Latin America reduced delays compared to trans-Pacific shipping, lower transportation costs, and from a sustainability point of view lower emissions due to shorter distances. Nearshoring also lessens the impact of higher tariffs and provides better trade preferences.

Preparing for higher production volumes

Infrastructure gaps in certain regions can present challenges when managing higher production volumes. Limited port capacity, underdeveloped road and rail networks, and potential congestion issues can contribute to supply chain slowdowns.

Industry experts note that global freight forwarders play a critical role in mitigating these disruptions by working closely with clients to identify alternative routes, warehousing solutions, and ensuring trade compliance and customs brokerage support. Maintaining open communication helps in identifying early challenges and risks, allowing for the development of new strategies in response to market shifts.

“Like many, Southeast Asian and South American countries, have infrastructure limitations or regulatory complexities and geopolitical risks. These regions also present challenges due to distance and time it takes for product to reach the end user.  There can also be challenges in air capacity with less options to utilize from these areas,” Nijankin expressed.

“Many companies have been diversifying their suppliers before covid, and see which trade agreements to optimize duties and tariffs make sense for them. We have been helping our customers by advising them on the best solutions we currently see in place for them.

“We have seen the shift in sourcing before 2019 and it has accelerated more after the pandemic for many industries like automotive, electronics and semiconductors, industrial machinery and equipment, renewable energy, and consumer goods to name a few.

“We have a huge global network, including in countries in Southeast Asia and South America, and we are well established in those regions we have close relationships with carriers to provide multi-modal modes of transportation if necessary.”

Avoiding the impact

Importers can defer, reduce, or eliminate tariffs by utilising foreign trade zones (FTZs), which allow goods to be stored or processed before entering the market. Storing goods in an FTZ can improve cash flow, and avoid port congestion-related costs, which provides more flexibility despite high import duties.

“Companies should adapt a proactive and flexible approach due to the uncertainty of these changes that may follow in the upcoming months and partner with their freight forwarder on cost-saving strategies such as utilising a bonded warehouse to defer duties until their goods are sold or re-exported to improve cash flows. Building inventory surplus lessens the impact of tariffs,” Nijankin revealed.

“Many of our customers shipping goods to Latin America utilise our FTZ warehouse in Miami, FL, which spans over 160,000 sq ft and is strategically located adjacent to Miami International Airport,” Nijankin revealed.

Long-term impact

Any shift to a different origin or location will naturally change the dynamics as it relates to capacity and demand. With respect to Mexico and Canada, there may be more cross border transportation via truck or rail rather than airfreight to reduce cost.

The current agreement between Mexico and Canada may also stimulate nearshoring to these countries due to the duty-free trade enjoyed.

“It is currently a wait-and-see approach, it all depends on tariff renegotiations and the USMCA agreement. We may see this topic for the rest of the year,” Nijankin declared.

“It is important for companies to have formal discussions with their logistics providers and provide if possible, a forecast of what is expected in the next six to 12 months.  This would allow the logistics providers to properly plan ahead of time and ensure movement of product without too much delay.

“Currently rates between China and the US keep going up and changing every week.  Capacity is also tight due to high demand and the e-commerce market ramping up as expected.

“The ongoing trade uncertainties continue to impact supply chains, with increasing trade challenges between Mexico and Canada affecting cross-border industries such as the automotive sector,” Nijankin declared.

Source: https://aircargoweek.com/rising-costs-and-tight-capacity-amid-tariff-turbulence/

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