For transportation providers understanding short-, medium- and long-term regulatory impacts on country-to-country flows is fundamental to network and fleet decisions across all transportation modes. For example, as China has grown its share of world non-bulk trade from around 11% in 2010 to about a quarter in 2023. To support this growth container shipping lines have invested in significantly larger ships. More and more freighters are being deployed to fly freight out of China. A shift to more intra-regional trade would require different capacity – smaller vessels, less planes, more trucks and provide increased opportunities for growth of rail services. Less trade overall would mean lower demand for capacity overall. Looming steep tariff increases are a legitimate cause for fear, but changes in the world trading system have been unfolding over many years. Less trade overall would mean lower demand for capacity overall. Sometimes there are winners and losers, other times just losers.
Most recently, the focus has been on the impact of tariffs – which are essentially a tax on imports. However, tariffs need to be viewed in conjunction with other measures ranging from domestic subsidies for industries or exporters, to quotas or outright bans on imports or exports of certain products and components.
Estimating the impact of tariffs as well as other measures is as complex as the underlying supply chains linked to each individual product. And because of this we suspect policy makers themselves have little idea what the actual impact of tariffs. Supply chains for key products groups such as automotive, computers, phones, pharmaceuticals, machinery and equipment, clothing and footwear form extensive geographically dispersed global value networks.
Thinking about tariffs – key questions to ask
- Are tariffs being applied equally to all trading partners? Where there are differences in application, this is likely to create incentives for rerouting traffic. If tariffs are applied on all origins for a certain product this may create incentives for more local production. Trade is likely to drop in the medium to long term for the affected products but may create new opportunities for components. India’s tariffs on vehicles are an example.
- Do they affect existing or future potential trade? For example, US tariffs on Chinese EV’s do not have an immediate impact as the US imports very few EVs from China. But they set an additional barrier to entry and consequently preclude any future growth.
- When will tariffs kick in? How long will they last? If tariffs are viewed as being temporary, then they are unlikely to have a long-term impact on supply chains.
- Are there product groups likely to be affected by future unannounced tariffs? This is important because it has an impact on the structure of future supply chains.
- Will tariffs lead to retaliation? They almost always do, so the impact of tariffs on one product may affect the flows of unrelated products. Think Chinese electric cars and French brandy.
- Does the product have substitute origins or destinations? For example, the pending export ban on live sheep exports from Australia due to be implemented in 2025 has already led to a shift of live sheep imports from Latin America into key destination markets in the Gulf.
- How quickly can supply chains adjust? Reorganisation of complex supply chains is a long term process. The emergence of China as the world’s primary producer of electric vehicles and supporting components (particularly batteries) has been a journey supported by government investment and tax breaks over many years.
Short- and Long-Term Effects are likely to be different
In simple terms, tariffs make sourcing goods more expensive. Whether that actually has an impact on trade flows depends on the time horizon and whether there are substitutes. Effects are likely to be different on the importing and on the exporting side.
For example, when China placed an import ban on a number of Australian exports in 2020, the effect was different across affected product groups. Australian coal shifted to markets in Japan and Korea, lobsters were exported to Hong Kong instead, but overall Australian wine exports dropped significantly. On the importing side, China replaced Australian with Russian and Mongolian coal, but did not replace wine and lobster exports with other origins. China dropped the ban in 2024 and wine exports from Australia have recovered and overall Chinese wine imports have increase.
US tariffs on automotive products from China applied in 2018 led to an initial surge before tariffs kicked in and then trade statistics show increased flows of products from Vietnam and Mexico. The drop in direct exports of automotive products from China decreased, but exports from China to Mexico and Vietnam increased.
In both of these examples cause and effect were clear, but in the longer-term things become blurry. How much of the increase in trade between Southeast Asia and the US is due to actual and expected increased regulatory barriers to direct China – US trade and how much would have occurred anyway given the need to de-risk supply chains and chase lower labour costs?
Underlying Long Term Trends
The global economic shifts we are experiencing today started more than ten years ago. The most recent UNCTAD World Investment Report published in June make a number of points that are relevant to understanding the long-term outlook for trade:
- Stagnation of foreign direct investment (FDI) started in about 2010 and has no longer kept up with the trend in global trade and GDP.
- Trade within global value chains (GVC) has also slowed. FDI and GVC activity are linked. This is highly relevant because GVCs linked to the top 100 multinational enterprises (MNEs) account for the majority of global trade.
- Most of the top 100 MNEs are in the US (19), Europe (53) and Japan (10).
- We are witnessing a deglobalisation of manufacturing investment. That is not the same as deglobalisation of manufacturing, but MNEs are investing closer to their home markets. Investment statistics indicate regionalisation and nearshoring, but trade statistics do not support this.
- Some of this change in investment flows is due to geopolitical factors, others are aimed at improving supply chain resilience.
- However, divestment trends amount MNEs do not release any clear relocation strategy. In other words, while geopolitics are making China sourcing more difficult, companies are not exiting the market given its strategic importance.
A 2023 paper on global trade patterns in four global value chain intensive sectors since 2005 tracked substantial changes in supply networks for communication equipment, electrical machinery, motor vehicles, textiles and apparel. Until 2015 all four segments experienced a general trend towards far shoring and growth in global value chains. Since then, network evolution has slowed and followed distinctly different trends.
- Communication equipment manufacturing has become more China focused and concentrated
- Electrical machinery has gone from bipolar US and Germany centred networks to a tripolar one including China.
- Motor vehicle supply networks remain largely bipolar and entered on the US and Europe. The importance of China has increased as has the importance of Mexico.
- The network supplying the textiles and apparel sector has remained relatively decentralised, with China being the main pole followed by a distant second Vietnam. South Asian production locations have gained in importance.
A key finding of the above study is that networks evolve over time rather than suddenly. As such tariff changes are likely to lead to price shocks (and lower consumption) rather than a wholescale immediate change of supply chains. Investment patterns indicate that collectively firms have been adjusting to a more regional and less global world.