Episode Transcript
[00:00:03] Speaker A: You are listening to the Freight Buyers Club, a home for those interested in international trade, shipping, procurement, logistics and air freight. In fact, all things supply chain in the Americas, Asia and beyond. This podcast is brought to you by your host, Mike King and produced in partnership with Demerco Express Group, a global 3 PL that specializes in managing logistics to from and within the Asia Pacific region.
[00:00:30] Speaker B: Hello everybody. Welcome to the Freight Buyers Club. And before we start, big thanks to the America Express Group for supporting this independent journalism. Today I'm joined by John McCauley, BTO consultant, JRC columnist and former Vice President of Transportation and Logistics at Cargill. John, welcome to the Freight Buyers Club.
[00:00:51] Speaker C: Good morning Mike, and thanks for inviting me to join and very happy to be able to have some some good discussions this morning about lot going on in our industry right now.
[00:01:00] Speaker B: There's news breaking all around us. We're talking today rather seismic news. The US and China have announced a 90 day de escalation of tariffs. The US will lower tariffs on Chinese goods to 30% from 145% and China will reduce duties on US imports to 10% from 125%. Now the details of all this are still coming through.
Apart from that US China tariff war that's been ongoing and might restart later in the year. We'll see how those negotiations continue.
We've also got a whole bunch of tariffs and exemptions from the US on most other countries. All of this creates a lot of unknowns for the months ahead. If you're in the business of planning supply chains, we've got this tapestry of different rules and regulations that are developing replacing this old world order.
So what advice can you give John, to US SME shippers about how they can balance supply and demand and manage all of this tariff uncertainty, especially if they import from Asia, what options do they have?
[00:02:05] Speaker C: Yeah, I think first of all it's good news that the US And China have been able to get to a provisional agreement on a level of tariffs that may be workable for both sides. So that's encouraging and you would expect that China may well and the US would then be looking to influence other Asian countries that have also been subject to significant tariffs to have trade discussions and bring those down as well. So if we talk Asia more widely with countries like Vietnam and Cambodia, where there's a significant amount of sourcing also for the US that could be a good thing as well to bring those numbers down. But, but the issue that people are facing is how do I manage my near and medium term demand?
And the first Thing is that we've seen a surge in imports over the last six months, even up until the most recent month. So it's very clear that many importers have boosted their stock levels, which is fine, in anticipation of tariff increases. And that's a good thing from the point of view of managing cost. We'll see what happens on the demand side. But the first thing is run down that stock. If you're an SME, that's the thing you want to do. Until these tariffs really start to level out and you're very confident that you actually understand what your playing field is, then best bet is keep your stock levels down. The other thing that's working in your favor and we will come on to that possibly is on the air freight side. So if you do need urgent shipments, if rate seems to be softening somewhat, so that can be helpful as well. The second thing that people need to be looking at is looking at their exposure in terms of risk for the cost of their goods. And by that I mean if you're an importer where you're importing fully produced product and then you're selling it, you're going to have a significant impact no matter what the tariff level is. If it's a part or a piece or part of your production, then clearly you're going to have an impact. The question is, how critical is that item for your production process? Is it readily available elsewhere? Could you source it elsewhere? So that's another way in which you can avoid some of the more punitive tariffs, assuming you can get it cheaper elsewhere. And also you want to look at it from the point of view of how much is that going to add to your cost of goods and therefore have an impact on your overall profitability.
So the key thing here is, Mike, you, you can think about, well, I'll pay the tariff, I'll know that my costs have gone up. Then the other side will be what is the appetite of your organization to accept increases?
So an increasing cost. Let's just assume that the SME in the US is absorbing all of the cost.
You could then look at it and say, okay, we'll absorb that. We can pass it on. Depends on the price elasticity of the item that you produce, competitive nature of it. Or you could decide to go further back upstream and ask your supplier to absorb part all of that cost increase relative to the amount of the tariffs.
The one thing that could well work in your favor, and I see that the US dollar is up again, so that could work, that the US dollar is regains a bit of its strength. But equally you might decide to source in in local currency. So you might say, well I'll, I'll source in ren or in.
In dong or whatever the currency is of the country that you are purchasing from. So there's a number of different options as to how you could mitigate.
But one, one thing for sure is somewhere along the supply chain somebody's going to take a hit and you know, it'll depend on how much you're able to pass on at the consumer end and then how much. If you're in the B2B business, your customer who then is answerable also to their consumers is able to absorb in their supply chains.
[00:06:06] Speaker B: You mentioned air cargo there, John. One of the big factors for air cargo has been this big surge in demand resource during 2024 from Chinese E tailers Timo Sheen, Alibaba, a few others.
The US scrapped de minimis exemptions on goods valued at less than $800 on the 2nd of May. Now we don't know if this trade deal will include any changes to this regulation.
But how do you think shippers and e tailers will respond to that scrapping of that de minimis exemption? Based on what we understand at the moment, I think you need to look.
[00:06:45] Speaker C: At what the proportion of purchase that is made is done direct. So is it, you know, people buying direct themselves, individuals from those suppliers and then the other factor that we're going to think about is if they're not included in the current negotiation. So if the de minimis exemptions are removed, then I think we're going to start to see a different way in which those retailers start to supply the US market because they're not going to want to go away. They're significant players. I think there would be some, a lot of pressure on a competitive nature because this would put local e tailors in a very strong position because that could be if the tenures and the schemes are out of the way, then that's clearly going to give an open market for others.
So I think we can see that there's going to be a different approach to the supply chain from the Chinese suppliers potentially having warehousing and distribution based in the US but then still they're going to have some issue around how do they then supply. Do they then start using shipping containers and then bring over products that's going to lengthen their supply chain and their fulfillment that they will have for their individual customers.
So it will create different problems.
The one side benefit I can see is that airfreight demand, which is already softening, could well soften even further. So that should have a benefit for people who are struggling to get air freight right now.
[00:08:12] Speaker B: Benefit for shippers, not so good for the carriers.
There's plenty going on. There's plenty so much going on at the moment. Now again, I'm going to put the the rider. As things stand later this year, we are expecting significant poor fee surcharges on China built owned and operated ships calling at U.S. ports to enter force.
Avoiding these ships will be quite a nightmare for logisticians. You've written previously, what options do they have and why do you see it as a nightmare?
[00:08:42] Speaker C: Yeah, there's a few components to this, Mike. One is that generally speaking, if you're a medium, let's say medium size importer into the US you're going to be using probably a couple of different services into different ports depending on where your products end up. But you're not going to be largely single supply with one particular carrier.
So you may be working with say Maersk and msc, but you're probably going to be working with one of the alliances which will have vessels that are operated and owned by Chinese interests. Right, Costa, double OC on, et cetera.
Equally, even the Maerscs and MSCs will have vessels that were built in China. Boards have components. I mean, who knows how far this will go, right? So if you're trying to navigate and say, all right, who want, let's just start at the sourcing level. I am buying the freight in the first instance, who am I going to place my eggs with to have a balance across different carriers or different alliances so that I've got assurance of supply.
So that's the first part of this being a nightmare. The second part is that generally speaking there's not a disconnect that the people who are sourcing freight are not the people executing, I. E Making bookings, following up, chasing carriers for confirmations, et cetera.
So when you have that there's a disconnection just in communication, it's a natural thing that when people are going to operate and say, right, I need to book on this such and such a vessel, they'll need to know, can they book on this one? Can they not book on that one?
If there's a blank sailing, which inevitably is happening, can I then go to one that is Chinese built or operated or parts or whatever? And this is going to be a real headache for people to be able to do. And the communication required to make sure they get that right is going to be very intense. So I think that we're going to see a lot of hassle involved in this and at both the sourcing level and at the execution level. And frankly, I'm. I'm glad I'm not having to do that because I think it will be very, very tricky. They're going to have a long list of, if this happens, do that. If that happens, don't do that. You know, it'll be. It'll be tough going. And with the amount of blank sailings we're seeing right now out of China and out of South Asia as well, you know, this will only get more and more tricky and. And difficult for logisticians to. Particularly logisticians at the coal place, working directly with the carriers and making bookings and getting containers, et cetera.
[00:11:19] Speaker B: We could well see quite a lot of those blank sailings being, well, new sailings being announced very soon, depending on how this tariff agreement plays out and how people view it.
[00:11:31] Speaker C: Mike, here's another one for you which hasn't come up. Imagine that the administration says, well, now that we're bringing aluminium production back into the us, we're going to protect aluminium containers so that they're made in the US and we're going to put us. We're going to slap a sewer charge on aluminium containers that were built in China, because guess where a lot of them are built?
[00:11:52] Speaker B: All of them. I think more or less.
[00:11:55] Speaker C: There's probably a few around that work, but. Yeah, exactly. So I don't even want to go down that road. But if things go the wrong direction, the administration has shown its willingness to be very creative in the way that they disrupt things. Wow. And I'm not saying that in. I'm not saying that in a good way. Yeah.
[00:12:14] Speaker B: Creative in a negative sense.
John, you said in. In one of your JAC columns that the trick to navigating tariffs or any other disruptions is. Is managing your poison. What do you mean by that phrase?
[00:12:28] Speaker C: Yeah, it's really a case that. Because as we talked earlier, Mike, the. The different options that you've got around. Do I absorb cost increases because of tariffs myself? Do I pass it on to my customers? Do I make my suppliers pay it? Do I share that? You know what? There's no good answer out of this. So you choose your poison, right? Do I choose this poison or that one or that one? Because all of them are poison. None of them should have happened, really.
I'm not suggesting that the administration is not going in the right direction to get industries producing those key industries that are important for their country produced in, in the U.S. i think that's absolutely fair enough.
[00:13:11] Speaker B: Pauses in the sense about your industrial base or your secure which also then lends itself to your security setup, right?
[00:13:17] Speaker C: Absolutely, absolutely. But if you, if even Scott Besant has come out and said we're not interested in bringing, I think it was toys or something back production back into the U.S. you know, they, they're looking at different things. So, so this sort of very blanket approach has made it very difficult for people. And that's why I'm saying no matter what happens, you need to choose the poison that's going to best fit your business and know that you're going to have to something's going to be unpleasant one of the way. You don't have to kill yourself, you just have to. It's going to be unpleasant, that's all.
[00:13:47] Speaker B: This is the big confusing thing. If you don't want toy production back in, well, why have tariffs on toys if you don't? If you can't produce coffee, why tariff coffee?
Yep, very strange and never quite understood that myself.
Are we all missing the point here a bit, John, about we talk about the risk to trade or shipping volumes or logistics demand and how to plan your supply chain around all this. Is the real risk really stagflation or vastly lower demand? When. Because when you start playing around with the leading economy in the world's ability to trade with the rest of the world, there's some big risks, isn't there? And they're sort of, they slightly outweigh the ones that we tend to talk about, which is lower volumes and things that affect logistics demand. I mean we're talking about big seismic possible impacts on the economy, the macro economy, globally.
[00:14:37] Speaker C: Yes. The specter of stagflation is something that has not really occurred since the 1990s in Japan. And the only time that the US has ever really had it was in early 70s in the oil crisis.
So the preparedness of any of those countries, and let's look at that on a wider basis than say OECD countries too, to be able to deal with that is pretty low. Not because they're not intelligent enough, it's just that if you don't have an experienced it then you won't know what it's like.
The combination of low growth which can be zero point something or negative inflation.
Pick your number. Right, but right now the Fed is showing that inflation numbers in the US are well above 2%, well above their target.
But the other one, which I think the US could find itself more rapidly suffering from is unemployment and high unemployment.
Consumption goes down, inflation potentially goes up because then you have businesses going out. I'm painting the worst case scenarios here.
And your economic growth goes down. So your instruments are two first of all, the pressure is then on to stimulate growth, reducing unemployment and increasing growth.
But in stimulating that, you will usually stoke inflation. So there's not. If you try and attack inflation, then you will typically hit growth and unemployment. And the US labor market is very agile as we know, so unemployment can move quite quickly. So I'm absolutely convinced that the demand side and with that potential of at least of increasing continued inflation and potential growth is the real challenge that businesses are going to be facing in the near to medium term.
Will the demand be there? People will have a really close eye on credit card debt, mortgage defaults, things like that. Because there's only so much, as we used to say in Asia, there's only so much you can have in terms of share of wallet. You know, people have only got so much, even assuming they've got credit that they can spend. And if they spend it on things that they absolutely have to spend on, they're not going to be spending it on your goods, assuming they're discretionary.
So I think this is the big concern on the demand side and this specter of at least sustained inflation, if not stagflation, is a real worry for.
[00:17:00] Speaker B: The U.S.
john Corley, VCO consultant and foundation former VP for transportation and Logistics at Cargill. Thanks for joining me today on Freight Buyers Club.
[00:17:10] Speaker C: It was a pleasure, Mike.
[00:17:13] Speaker B: And big thanks also to Jamaica Express Group for supporting independent journalism. Thanks to you all for tuning in. Please do like follow and subscribe. There's a bell down there somewhere. We've now got over 4,000 subscribers, including 3,000 plus on YouTube alone. So please do hit those subscribe and like buttons. You're part of a growing community.
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