Tariffs and their impact on global shipping

The use of tariffs as a primary tool of foreign and economic policy, leading to considerable disruption and economic consequences.

The uncertainty surrounding Trump-era tariffs, and the broader global trade landscape they represent, has a significant and often unpredictable "bullwhip effect" on freight costs and the entire supply chain. This effect, typically seen when small demand changes at the consumer end lead to amplified inventory and production swings further up the supply chain, is magnified by sudden policy shifts.

Here's how this uncertainty impacts freight costs and leads to the bullwhip effect in various aspects:

Impact on Freight Costs

• Volatility and Spikes: The immediate impact of tariff announcements or changes is often a surge in freight rates. Companies rush to "front-load" shipments before tariffs take effect, creating sudden, artificial spikes in demand for shipping capacity. This leads to bidding wars for limited space, especially on key routes, driving up spot rates dramatically. Conversely, once the front-loading period ends, demand can plummet, leading to overcapacity and a sharp fall in rates.
• Increased Operational Costs: Tariffs on imported components (e.g., steel and aluminium for truck parts, or machinery for port equipment) directly increase the cost of operating transportation assets. These higher input costs are often passed on to shippers in the form of elevated freight rates to maintain carrier profitability.
• Diversion of Trade Routes: As companies seek to avoid tariffs, they may shift sourcing to different countries or regions. This can create new, less efficient trade lanes, or overload existing smaller routes, leading to higher costs due to longer transit times, increased fuel consumption, and potentially less optimised vessel or truck utilisation.
• Higher Insurance Premiums: The increased risk and uncertainty in global trade, including the potential for goods to be stranded or delayed due to tariff disputes or customs changes, can lead to higher insurance premiums for cargo.
• Increased Storage Costs: Businesses may opt to hold more inventory in bonded warehouses to defer tariff payments, leading to higher storage costs. If tariffs are suddenly imposed or lifted, it can cause rapid fluctuations in warehouse demand and pricing.

Bullwhip Effect on Operations:

The unpredictable nature of tariffs creates a significant bullwhip effect, rippling through various aspects of the supply chain:

• Impact on Scheduling:
  • Erratic Demand Signals: The core of the bullwhip effect is amplified demand signals. When tariffs are announced, importers anticipate price increases and rush to pull forward orders. This creates an immediate surge in demand for shipping, leading to overbooked vessels, trucks, and rail cars.
  • Congestion and Delays: This sudden influx of cargo overwhelms ports and logistics networks, causing severe congestion, longer dwell times for containers, and extended lead times. Carriers struggle to reposition assets efficiently to meet these volatile demands.
  • Blank Sailings and Capacity Shifts: When the tariff deadline passes and the initial surge subsides, demand can abruptly drop, leading to overcapacity. Ocean carriers might then implement "blank sailings" (cancelled voyages) or redeploy vessels to other, more profitable routes, further disrupting schedules for those relying on the affected lanes. This makes long-term freight scheduling extremely difficult and unreliable.
  • Reduced Predictability: The constant flux makes it almost impossible for freight forwarders and logistics providers to maintain stable schedules, leading to a perpetual state of reaction rather than proactive planning.

• Impact on Sales, Stocking, and Inventory:
  • Pre-emptive Stockpiling: To avoid anticipated tariff increases, businesses aggressively "buy ahead" and stockpile inventory. This creates artificial demand spikes, filling warehouses and potentially leading to excess inventory that may later become obsolete or costly to hold if tariffs change or demand patterns shift.
  • Inventory Volatility: When tariffs are suddenly implemented or adjusted, the cost basis of existing inventory changes, impacting sales margins and potentially leading to forced discounts or write-offs. Conversely, if tariffs are reduced, competitors who waited may gain a price advantage.
  • Erratic Sales Patterns: Consumers may also react to tariff news, either rushing to buy before price increases or delaying purchases if they anticipate price drops. This further distorts sales forecasts.
  • Forecasting Challenges: The uncertainty makes accurate demand forecasting extremely difficult, leading to either costly overstocking (tying up capital and incurring storage costs) or stockouts (missing sales opportunities and damaging customer relationships).

• Assets Redeployed to Make the Most of Opportunities:
  • Capacity Repositioning: Shipping lines and trucking companies constantly redeploy vessels, containers, and trucks to capitalise on short-term surges in demand related to tariff windows. For example, vessels might be shifted to Trans-Pacific routes if US-China tariffs are temporarily frozen, then quickly moved elsewhere if the window closes or new tariffs are announced.
  • Investment Hesitation: While some assets are tactically redeployed, the overall uncertainty can deter long-term investment in new, larger assets (like ships or warehouses) due to the unpredictable return on investment. Companies are wary of committing capital to infrastructure that might become unprofitable if trade policies suddenly reverse.
  • Nearshoring/Reshoring Exploration: Businesses with significant tariff exposure are actively exploring and, in some cases, investing in nearshoring or reshoring production facilities to reduce reliance on vulnerable global supply chains. This involves moving manufacturing closer to end markets, requiring re-evaluation of existing asset locations and potentially new investments in domestic logistics infrastructure.
  • Diversification of Sourcing: Companies are diversifying their supplier base across multiple countries to mitigate risks associated with tariffs from a single trade partner. This requires adjusting existing contracts with carriers and potentially investing in new logistics capabilities to manage a more fragmented supply chain.

In essence, tariff uncertainty transforms the supply chain from a relatively predictable flow into a series of reactive sprints and pauses, driving up costs, complicating operations, and forcing constant, often short-sighted, strategic adjustments.