US Tariffs - A Crazy Ride For Chinese Manufacturers

In April, stakeholders involved in exporting Chinese products to the U.S. experienced significant fluctuations as the situation changed daily following President Trump’s announcement of “Reciprocal Tariffs.” This instability was evident in the official press release of China’s Manufacturing Purchasing Manager’s Index (PMI), which fell to 49.0 in April from 50.5. This decline not only signaled a return to contraction in the manufacturing sector but also marked a 16-month low, falling below the market consensus forecast of 49.7.

The direct impact of the tariffs and retaliations between the U.S. and China was particularly notable in the sub-index for new export orders, which plummeted from 49.0 to 44.7. Additionally, two other sub-indices also reflected contraction: the Overall New Order Index decreased from 51.8 to 49.2, while the Production Index fell from 52.6 to 49.8. Conversely, the employment sub-index, which has been in a contracting zone for three years, saw only a slight change, dropping from 48.2 in March to 47.9, indicating minimal shifts in the job market in China. Numerous analyses suggest that state planners have implemented various stimulus policies to support exports and employment, as they believe that the health and stability of the job market are crucial factors in the ongoing tariff war.

As early as November last year, when Trump won the presidential election, it was clear that he would reinstate tariffs as a tool for handling trade disputes with China upon returning to the White House. At that time, U.S. importers and Chinese manufacturers raced against the clock to ship goods to U.S. ports as quickly as possible, building up inventory to withstand the initial impact of the upcoming tariffs. Factories operated at full capacity, and China’s Purchasing Managers' Index (PMI) remained above 50 from November to March, with the exception of January, which may have been affected by the seasonal Chinese New Year. In fact, the PMI in March reached 50.5, the highest in 12 months, and the production sub-index rose to 52.6, indicating that manufacturing activity was accelerating, according to a press release from the National Bureau of Statistics of China.

However, this temporary manufacturing boom came to a halt when President Trump unveiled his plan for “Reciprocal Tariffs,” prompting swift retaliation from China. The escalating crossfire over tariff disputes led to over a hundred percent import tariffs being imposed on products shipped between the two countries, effectively freezing bilateral trade. Mega-sized cargo ships remained idle off the coasts of China, and containers began piling up at ports instead of sailing across the ocean to the U.S. after the tariff announcement. Shippers were concerned that their cargo would be affected by the high tariffs, prompting them to put shipments on hold and adopt a wait-and-see approach. Reports indicated that many shipping lines resorted to using smaller vessels in response to a dip in demand; however, even with this adjustment, the number of sailings from China to the U.S. dropped by 60% in April.

Shippers Running Around With Their Head Cut-off Due to Fluctuating Tariffs

The situation took a dramatic turn on May 12 when the US and China announced a mutual temporary reduction in trade tariffs following a two-day meeting of high-level trade delegates in Switzerland. Both countries agreed to a 90-day pause on tariffs and retaliations, reducing tariffs to 10% from both sides (though the US will continue to impose a 20% "Fentanyl Penalty Tax" on Chinese goods during this period).

While importers still face an additional 30% import tariff on Chinese products compared to previous levels, this new tax is manageable for them. As a result, all stakeholders in the supply chain are working diligently to bring Chinese products to the US as quickly and in as large quantities as possible. Just a month ago, US retailers and distributors were concerned about empty shelves and potential shortages during the upcoming buying seasons in the second half of the year, such as "back to school," Thanksgiving, and even Christmas. This rush extends beyond consumer goods; suppliers of industrial and semi-finished goods, like auto parts, are also racing to ship their products to US ports to replenish warehouses.

The surge in shipments has created capacity issues within the shipping industry. Container bookings from China to the US tripled in just one week following the May 12 announcement, as many stakeholders worried that the situation could change again and aimed to take full advantage of the "90-day paused period." Consequently, the off-contract spot rate for a 40-foot container from Shanghai to Los Angeles increased by 16% from the previous week. Shipping industry projections suggest that if demand remains high, rates could nearly double by June 1, potentially reaching the $6,000 benchmark as ship owners look to capitalize on rising prices.

Tempestuous Times are Not Over Yet

Although some news media—particularly those with optimistic views—described the May 12 announcement as an important milestone toward a deal between the US and China, in reality, it seems more like a temporary truce in their trade conflicts. Many believe that a meaningful and sustainable agreement is still far off, given the significant gap between the objectives and interests of the two countries. It is difficult to predict what President Trump may focus on in the coming days, and there may be unexpected developments that could catch Chinese manufacturers off guard. In the next 90 days, we can expect a large-scale movement of containers from China to US ports, as long as the shipping corridor remains open.