How global trade is shifting amid rising US tariffs

The series of tariffs announced this year are unprecedented in the modern era, exceeding those of the first Trump administration, when several rounds of import duties were imposed on China and other countries starting in 2018. Still, similarities between the ongoing phase of tariffs and the previous period of rising trade tensions can help investors know what to watch for, according to Goldman Sachs Research.

US retailers expect a drop of 20-30% in imports in the coming months, writes Patrick Creuset, senior research analyst for European transport, infrastructure, and construction sectors, in a report. This includes a double-digit drop in the volumes of transpacific shipments, between Asia and the US. A decline of that scale in US import cargo volumes forms Creuset’s base case, and it assumes tariffs stay mostly as they are, with China remaining as the focus, although that is far from certain.

Creuset and his team anticipate that a cycle of inventory destocking is about to begin and could continue into the third or fourth quarter of this year. Although trade held up in the first quarter, as importers made purchases ahead of expected import levies, this destocking is likely to show up in the data soon.

Ultimately, once inventories drop far enough and shelves start to get bare, restocking will become unavoidable. Importers will pivot, and trade will pick back up, even if that means accepting higher costs for tariffed goods. There may be some permanent demand destruction, especially if the global economy slows, and increased rerouting through other countries with lower tariffs. But Chinese goods will continue to be vital. “Given the scale of China’s manufacturing capacity and dominance in a number of categories, in the restocking phase we expect the prior Asia-to-US flow of goods to resume,” Creuset writes.

In a research report last year, Creuset found that the center of gravity of global trade remained in Asia after 2018, despite tariffs and other post-pandemic pressures that seemed to favor bringing supply chains closer to home. Even amid talk of deglobalization, the fastest-growing trade routes in recent years all originate in Asia, reflecting trends such as increased commerce between China and the Global South, Creuset’s research shows. 

The impact of the highest US import tariffs in a century

How might the current phase of tariffs differ from, or resemble, previous episodes of trade tensions?

Difference: With average tariffs on US imports higher than at any time since the Smoot-Hawley tariffs almost a century ago, the scale of the trade disruption that’s imminent is far beyond what was seen during President Donald Trump’s first term.

Asia-US trade has only fallen three times in the past quarter century, most notably during the global financial crisis in 2008-2009 and during supply chain disruptions related to the pandemic. This time, the decline in trade could be deeper, especially if US policymakers are willing to accept slower GDP growth and higher inflation.

Similarity: The earlier round of tariffs on China had prompted the rerouting of goods through other countries such as Vietnam or Mexico. This is likely to happen again. The incentive to pursue such roundabout routes is, if anything, stronger than before because of the huge differential between the tariffs levied on China and those levied on its Asian neighbors. Rules that establish country of origin for tariff purposes recognize that “substantial transformation” in a specific country qualifies the product for that country’s tariffs. This may mean that intermediate goods from China could be assembled elsewhere and enjoy lower tariffs. 

Similarity: In the same way that previous tariffs didn’t shift the center of gravity away from Asia, the US is likely to remain highly dependent on Chinese and Asian trade for a long time.

Creuset’s team points out that China’s manufacturing workforce is approximately five times as large as those in the US, Mexico, and Canada combined. Even an aggressive and effective reshoring of manufacturing could only make a small dent in that dependence in the near term. An analysis from Goldman Sachs Research’s economists shows that for 36% of the goods that the US imports from China, the US depends on China for over 70% of its supply.

How to track the impact of US tariffs on China

The inventory destocking-restocking cycle may offer indications of a positive inflection point in global trade. After inventories are drawn down, importers eventually will start buying again. That will show up in the US purchasing managers’ index. When the index starts to rise, imports will likely be picking up, a signal that may emerge before improvement is seen in other economic data. More immediately, this same data point can be tracked to see if the expectations of a decline in trade and drops in inventories are becoming a reality.

Other data points to watch include the volume of containers moving through China’s ports, which is available close to real-time.

Creuset notes that many key variables in the outlook for trade are impossible to know. One potential scenario “is a climb-down in tensions and tariff rates,” Creuset writes. In such a case, the trade conflicts of the first Trump term might be the best precedent to reference. The team’s previous research found that, five years after that episode of trade conflict, there had been little fundamental impact on transpacific trade.

The opposite scenario could also unfold, though, with broader tit-for-tat tariff measures. “In the second scenario, a number of second-order effects could worsen the outlook in terms of retaliation, geopolitics, and financial flows.”

 

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