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  May 15th, 2024 | Written by

U.S. Tariffs on China: Echoes of History and New Supply Chain Challenges

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Global supply chains are bracing for further disruption and increased costs following U.S. President Joe Biden’s announcement of new tariffs on Chinese imports today. The tariffs, targeting a wide range of products including semiconductors, batteries, electric vehicles (EVs), and solar cells, will be implemented in stages from 2024 to 2026.

Read also: US China tariffs: a play by play

Peter Sand, Chief Analyst at Xeneta, suggests that the new tariffs may be a repeat of history. “The new tariffs under President Biden may be a case of history repeating. If so, businesses will brace for increasing supply chain costs, ultimately affecting U.S. consumers.”

In 2018, the U.S. under President Trump imposed broad tariffs on Chinese imports. China retaliated, leading to a tit-for-tat escalation that saw ocean freight container shipping rates from China to the U.S. West Coast soar by more than 160%. Although rates began to decline towards the end of 2018, they never returned to previous levels, establishing a new, higher-cost status quo.

In light of the latest tariffs, Sand believes businesses may seek alternative supply chain routes into the U.S. Notably, the demand for container shipping imports from China to Mexico rose by 34% in the first quarter of 2024 compared to the same period in the previous year, suggesting that some shippers may be using Mexico as a ‘back door into the U.S.’

Sand stated, “The ocean freight container market has seen incredible demand increases from China to Mexico, and the new U.S. tariffs could accelerate this growth. Hypothetically, at the current growth rate, by 2031, more containers could be imported from China to Mexico than to the U.S. West Coast.”

Additionally, U.S. shippers might turn to countries like Vietnam as alternatives to China, a trend that has been growing since the 2018 tariff hikes. However, these supply chain routes are less mature compared to the well-established Transpacific trade from China to the U.S. West Coast, leading to more complexity, volatility, and costs.

The timing of the new tariffs coincides with significant challenges in the ocean freight container shipping market, including conflict in the Red Sea and drought in the Panama Canal. As of May 14, the average spot rate for shipping from China to the U.S. West Coast was $3,837 per FEU (40ft shipping container), a 162% increase compared to a year ago. Rates for shipping from China to the U.S. East Coast have also more than doubled over the past year.

Sand noted, “Ocean freight routes from China to the U.S. East and Gulf Coast are still restricted by the Panama Canal’s limitations. The Suez Canal isn’t a viable alternative for most shippers due to conflict in the Red Sea. The last thing the ocean freight shipping industry needs now is more red tape and complexity.”

China’s response will be crucial. Sand emphasized, “This is an aggressive move by the U.S. against China. We could see a repeat of the 2018 tariff escalation, leading to more pain for shippers and ocean freight service providers. The new tariffs affect around $18 billion in annual imports, a relatively small fraction of U.S. trade, but if China responds similarly, we might enter another cycle of escalating tariffs, further straining global supply chains.”