US-China relations have weakened for more than decade
But whether or not rolling back the zero-COVID policy or not, the future of the trans-Pacific is in trouble.
All signs point to escalating confrontation between the United States and China over Taiwan, but the seemingly cheery relationship between the two giants has been shifting — sometimes quickly, sometimes slowly — for years, dating back to the old administration.
The former President’s tariffs, which eventually escalated into a medium-sized trade war with China and a series of smaller skirmishes with Canada and the European Union, set off panicked behavior by U.S. importers that roiled the trans-Pacific. Companies accelerated the timelines on their purchase orders, “pulling forward” shipments that were originally scheduled to arrive after new tariffs took effect in order to avoid paying the duties. A logjam of volume increased rates, reduced schedule reliability, congested ports and filled warehouses, especially in Southern California.
In the summer of 2018, when the pull-forward effects were felt, the U.S. truckload market was still on fire, having been catalyzed by Hurricane Harvey the previous year and the ELD mandate’s tightening effect on capacity. The unpredictable volumes coming out of some of the country’s most important freight markets undoubtedly kept truckload rates higher for longer before the market ultimately began rolling over in October.
Supply chain chaos to ensue
A few key themes going forward: increased volatility in supply chains, in terms of freight volumes; capacity availability and transportation rates; less visibility into China’s economic activity; and a more diverse, less China-centric trans-Pacific trade.
The U.S.-China rivalry to express itself through gamesmanship in a number of spheres, including technology, international law, diplomacy, trade practices and military posture. The uncertainty and chaos of this changing trans-Pacific paradigm — from decades of decreasing friction and lower costs to a new trend of increasing friction and higher costs — will drive unpredictable and disruptive shipper behavior similar to that seen in 2018, 2020 and 2021. Stockouts will be followed by inventory gluts and vice versa, as importers pay too much to move their goods that are stored too long and arrive too late, compressing gross margins.
At the same time, outsider observers will likely see less of China’s real economic activity. Last year, China cut off foreign access to automatic identification system (AIS) data, preventing companies from seeing the real-time location of commercial vessels in Chinese waters. Official reports on economic activity coming out of Shanghai during the last COVID lockdown were anything but transparent, and much Western analysis relied on anecdotes and alternative data sources.
The CEO of China Beige Book, a firm that tabulates independent Chinese economic data, said last week that the country was undergoing a “paradigm shift” in its governance and economic models that will complicate its further development, including the end of debt-fueled growth. It will be difficult to track this shift accurately, given the unreliability of official data.
Finally, if the U.S. and China decide to pursue a policy of mutual divestment, we should expect a more diverse, less China-centric trans-Pacific trade. There are other exciting economies in the region that the United States is connected to, including Vietnam, the Philippines, Taiwan, Korea, Japan and Indonesia. Eastbound freight flows may have more widely distributed origins as China’s share diminishes. Ports like South Korea’s Busan, Malaysia’s Port Klang, Taiwan’s Kaohsiung and Japan’s Yokohama could become relatively more important.
The change in network structure could threaten the stability of the container-ship alliances that control capacity in the trans-Pacific and make the 20,000-plus twenty-foot equivalent unit mega-ships built to serve the largest ports harder to fill and less competitive. Capacity could structurally loosen on what are now the densest lanes, like Shanghai to Los Angeles, while slots could be harder to find on more obscure but growing lanes. The upshot here is that even a prudent trade strategy seeking to de-risk China by sourcing goods in other Asian countries will be exposed to knock-on effects from the challenges the U.S.-China trade is fated to face.
Importers and their transportation providers will need to build links between operations teams and strategic planners so that emerging trends in markets can be identified. Tariffs, embargoes and many other forms of economic warfare are potentially on the table.
For 20 years, the trans-Pacific was relatively easy, boring and cheap. Now it’s becoming exciting, difficult and expensive — and will probably stay that way for some time to come.