Q3 of 2019 has come to an end. We’ll brush up on some topics originally introduced in our 2019 Industry Forecast post published at the beginning of the year. However, so much has changed since then that some things that mattered in Q1 have long since passed our interest. Here’s what’s going on in supply chain, logistics, and transportation now.
Little progress has been made in major trade deals (USMCA or China) since we reported after the second quarter.
Americans expected tariffs to go into effect, but we expected 10 percent tariffs. Instead Americans saw 15 percent tariffs on about $112 billion of Chinese goods on September 1 and were told to expect another round of tariffs on October 1, 2019.
On September 11th, President Trump announced via tweet that “as a gesture of good will” he would delay the next tariff increase of 30 percent tariffs (up from the original 25 percent) on $250 billion of goods to October 15th. Additionally, as it currently stands, we should still expect roughly $160 billion imported goods to receive a 15 percent tariff increase on December 15th. The Trump administration hopes a tariff increase that late in the year should continue to encourage consumer spending leading up to the Christmas holiday.
While it feels like almost all goods are being slapped with tariffs, here is a list of tariff-exempt goods from the Federal Register:
Notice of Product Exclusions and Amendments: China’s Acts, Policies, and Practices Related to Technology Transfer, Intellectual Property, and Innovation
Who Feels the Trade War Effects
The uncertainty of the trade war has almost had a worst effect on the economy than the actual trade war itself. The feet-dragging on USMCA ratification combined with tariff threats and corresponding retaliations from China have severely hurt American farmers. Even the new trade deal Trump struck with Japan is expected to only help farmers “get back to even after Trump’s TPP exit” rather than begin to make up for China’s retaliations.
Midsize businesses, who employ millions of Americans, are also feeling the pressure. Halfway through September, Politico reported that:
“The U.S. Chamber of Commerce in partnership with RSM US LLP, an audit and tax consulting firm, released a quarterly survey report on Thursday showing that 40 percent of midsize company leaders say Trump’s tariffs on imported goods are posing challenges for their business. Twenty-six percent also reported being hurt by retaliatory tariffs that China and other countries have imposed in response to Trump’s duties over the last two years.”
Additionally, as tariffs increase and companies continue to source their supplies from China (either because the supplies cannot be sourced elsewhere*, or for other reasons), companies must pay those tariffs regardless. It is yet to be determined if companies will absorb those costs themselves, or if they’ll pass those costs along to consumers by increasing prices. More than likely, it will be a combination of both, depending on the manufacturer, distributor, or product(s).
*The October 2nd Notice of Product Exclusions and Amendments has considered particular products that can only be sourced from China, which should help ease some financial stress.
What to Expect
The only thing the market can depend on is unpredictability, and that has everyone skittish. While at IANA 2019, Dave Gross, managing director of equity research, global transportation, and logistics for Stifel, made the comment: “From a freight standpoint, I’m predicting a little bit of a slow down.”
University of Tennessee’s professor of supply chain and logistics Ted Stank recommended shippers be prepared for “a very aggressive and active risk management profiling process in their supply chain, given the many things that can disrupt global supply chains.” In the same Logistics Management article where Professor Stank is referenced, author Jeff Berman gave some pointers to how shippers should prepare for a continued unpredictable trade environment.
Proposed Hours of Service Changes
The Federal Motor Carrier Safety Administration has opened comments for changes to the HOS. Up for revisions are:
The window for comments are open until October 7, 2019. For more information or to submit your own comment, go to https://www.federalregister.gov/documents/2019/08/22/2019-17810/hours-of-service-of-drivers.
The Spot Market and Contract Business for Q4
The spot market has been on the decline in Q3, but the contract business has remained fairly good, reports the American Trucking Association’s Bob Costello. That could have been due to a variety of scenarios, such as tropical storms and hurricanes, and Costello isn’t too concerned as the spot market is a small segment of the trucking industry. Regardless, DAT reported a strong final week to the quarter and the spot market is going into Q4 with a strong start.
The decline of the spot market means freight brokers can negotiate competitively, but it’s important to not squeeze your carriers too much. LDI’s Nate Cross recommends referring to the DAT’s Broker Benchmark to negotiate with carriers. Negotiate a fair rate to operate with comfortable margins during this period, but do not gouge your carriers. LDI’s Joe Adinolfi always emphasizes that relationships are key in this industry, and even while the market is in your favor, continue to treat your partner’s right. Likewise, take this time to educate your customers about the logistics of supply and demand to allow them to negotiate as well, with the understanding prices will have to go up again.
Considering the uncertain state of the trade war and the alarming rate of carrier companies shuttering their windows, we need to keep prices fair and negotiate cleanly. Brokers can ride this wave, and we also want to be treated fairly when the tables have turned again.
What’s New at LDI
If you’ve been following us, you’ll see that we’ve had a lot going on at LDI this year! 2019 has been #blessed with a flurry of humbling awards, agent-oriented initiatives, and awesome people doing awesome things. We’ll do a full roll call during our Q4 Industry Update, but until then, here’s what you’ll want to know going into the last part of the year: