Biden pressured to lift tariffs, Christmas at risk, world economy watches supply chain crisis
Monday Morning Wake Up Call
October 4, 2021
Pressure is growing on Biden to lift Trump's tariffs as supply chain problems worsen
(CNN) There's a quick move President Joe Biden could make to immediately help relieve the stress the pandemic-related supply chain crisis is having on US companies: Lift the tariffs imposed by former President Donald Trump.
Trump put tariffs on roughly $350 billion of Chinese-made goods -- and despite the change in administrations, those duties remain in place. American importers have paid more than $106 billion to cover the cost of those levies to date, and many of them are now facing skyrocketing shipping costs.
While the Biden administration has been conducting a comprehensive review of the US-China trade policy, it has said little about restarting trade talks or lifting punitive duties.
Now the pressure on the Biden administration to address the issue is ramping up, as supply chain problems are getting worse -- resulting in shortages and higher prices for everything from sneakers to furniture to cars.
"Tariff relief is a fast and easy way to help companies hurt most by the shipping crisis stay in business and keep people employed," said Steve Lamar, president and CEO of the American Association of Apparel and Footwear.
The trade association sent a letter to the office of the US Trade Representative last week imploring the administration to provide relief from the tariffs. It was followed by a similar request from four major manufacturing associations, acknowledging that the supply chain disruptions will require long-term fixes, but argue that tariff removal could provide some immediate relief.
The supply chain problems, compounded with the trade distortions created by the duties "are hurting the competitiveness of US manufacturers and stalling the US economic recovery," the groups wrote.
Tariffs are in place indefinitely At a minimum, US importers are urging the Biden administration to reinstate exemptions some of them received since 2018. When the duties were first put in place, companies could apply for waivers that were generally granted for items that could not be bought from a US manufacturer or somewhere else outside of China.
Some of those exemptions have been extended, like those for personal protective equipment in high demand due to the pandemic, but many others have expired.
There are currently tariffs on the majority of goods being shipped from China into the United States, including items like baseball hats, luggage, bicycles, TVs, sneakers and a variety of materials used by American manufacturers. The average rate is 19% -- more than six times higher than before the trade war began in 2018, according to the Peterson Institute for International Economics. Importers pay those tariffs and generally pass along some or all of the increased cost to consumers.
Trump used tariffs as leverage, meant to hurt China's economy and pressure Beijing to agree to a new trade deal that addresses unfair trade practices, such as intellectual property theft and forced technology transfers. He and Chinese President Xi Jinping reached what they called a Phase One agreement in early 2020. Some of those issues were addressed, but things like subsidies and state-owned enterprises were left untouched. The agreement also reduced the rate of some of the tariffs, but left them in place.
Empty shelves and higher prices The supply chain problems are hitting US companies at every step of the way. The surge of the Delta variant and the lack of access to vaccines in some countries have led to shutdowns of some foreign factories. There are backlogs at ports, like at the Ports of Los Angeles and Long Beach where ships are waiting off the coast to dock. A shortage of US truck drivers is causing another choke point.
All of those issues are driving up the shipping cost for companies, forced to pay freight charges that can be multiple times bigger per container than they were a year ago. Not only is the container more expensive but there are surcharges if an importer can't move the goods out of the port fast enough.
Bigger companies may find workarounds, like Costco, which has chartered three container ships. Smaller companies are at risk of paying shipping costs that eat away at their profits.
For retailers, fear is setting in that the problems will upend this year's holiday shopping season. Many experts don't expect the shipping problems to resolve for months or even years to come.
But lifting the tariffs could alleviate some of the pressure. "Lifting tariffs clearly won't undue all the lines at LA Long Beach," said Phil Levy, the chief economist at the freight forwarding company Flexport. "But what it would do is make life easier for groups that had had a very hard time recently."
To Read More: www.cnn.com/2021/10/03/politics/global-supply-chain-collapse-biden-tariffs/index.html
Christmas at Risk as Supply Chain ‘Disaster’ Only Gets Worse
(Bloomberg) It’s the beginning of October, just the start of what the retail world simply calls “peak.” But the industry is already in various forms of panic that usually don’t take hold until the weeks before Christmas.
Early in the year, the hope was that the bottlenecks that gummed up the global supply chain in 2020 would be mostly cleared by now. They’ve actually only gotten worse — much worse — and evidence is mounting that the holiday season is at risk.
Across Europe, retailers such as apparel chain H&M can’t meet demand because of delivery delays. In the U.S., Nike cut its sales forecast after Covid-19 triggered factory closures in Vietnam that wiped out months of production. And Bed Bath & Beyond’s stock plunged amid shipping woes, with Chief Executive Officer Mark Tritton warning that disruptions would last well into next year. “There is pressure across the board, and you will hear about that from others.”
Covid outbreaks have idled port terminals. There still aren’t enough cargo containers, causing prices to spike 10-fold from a year ago. Labor shortages have stalled trucking and pushed U.S. job openings to all-time highs. And that was before UPS, Walmart and others embark on hiring hundreds of thousands of seasonal workers to take on the peak of peak.
Now comes the rush of goods into the U.S. for Santa’s sleigh, which will only exacerbate all of this. It’s going to be a daunting holiday season — one that investors appear to be shrugging off despite analysts raising concerns that margins will likely take a hit. The S&P Retail Select Industry Index, which encompasses 108 U.S. companies including Amazon, Macy’s and Best Buy, is up about 40% this year and almost doubled since the start of 2020. Its combined market cap is $3.3 trillion, just a sliver below a record high from earlier this year.
That jubilance clashes with what’s happening behind the scenes. Retailers have resorted to buying goods made a couple years ago to make sure they at least secure some inventory, according to Steve Azarbad, co-founder and chief investment officer of the hedge fund Maglan Capital, which invests in retailers and distressed companies. In normal times, these items would be liquidated at closeout stores or in foreign markets, but not now.
“Retailers are having a really hard time filling their shelves,” Azarbad said. “I talk to a lot of suppliers, and they're telling me ‘I just can't fill all the orders I'm getting.’”
On the supplier side, Jay Foreman’s been making toys with manufacturing partners in China for more than three decades, and he’s never seen anything like this. His mid-sized toy company, Basic Fun, is on pace for its best year ever — possibly reaching $170 million in sales. There is no shortage of demand, with parents loading up on gifts as the pandemic drags on. But a dearth of cargo containers has left thousands of the company’s Lite Brites and TinkerToys waiting to be shipped. At just one factory in Shenzhen, there’s roughly $8 million worth of finished goods that could fill 140 containers.
“I got Tonka trucks in the south and Care Bears in the north,” Foreman, the company’s CEO, said of logistical troubles in China. “We’ll blow last year’s numbers away, but the problem is we don’t know if we’ll get the last four months of the year shipped. The supply chain is a disaster, and it’s only getting worse.”
MGA’s Larian is willing to pay more than $20,000 per shipping container — up from about $2,000 a year ago — and counts his blessings that he runs a private company that doesn’t have to answer to shareholders. He’s having trouble simply getting goods off cargo ships in the port of Los Angeles. MGA recently had more than 600 containers, filled with toys like its top-selling L.O.L. Surprise dolls, waiting to be unloaded for more than six weeks.
“There will be a shortage of toys this fall,” Larian said. “It’s going to be a tough year for retailers.”
When the pandemic knocked the global economy down in early 2020, factories slowed output or closed. Turns out, that was the easy part. Re-starting has been much more difficult. The supply chain has been choked by so many events, such as the Suez Canal blockage, and market dynamics like labor shortages and the spike in transportation costs that it feels like there’s been one “black swan” event after another, according to Lee Klaskow, a logistics analyst for Bloomberg Intelligence.
“The supply chain has never had the opportunity to get back to normal,” Klaskow said.
One of the better scenarios for the fourth quarter is that big retailers drastically increase spending on logistics — including resorting to using costlier air freight or chartering entire cargo ships — but still maintain their sales targets. That will likely mean they’ll see a hit to profit margins, but it could also lead to taking market share from smaller competitors who can’t match their deep pockets.
“We feel better than most that we'll get our product here for holiday," said Michael Mathias, chief financial officer for apparel chain American Eagle Outfitters. The retailer has spent more on air freight to secure goods for Christmas. “There will be some players out here who might not even get their product.”
Ken Hicks, chief executive officer of Academy Sports and Outdoors, is counting on that advantage to boost results. The chain, based in Katy, Texas, has been using its scale to prep for this peak season for months. That’s included importing goods sooner, moving shipments away from the overwhelmed west coast to ports like Galveston, Texas, and booking cargo capacity earlier in the year.
But even with all those mitigation efforts and the scale of a company that generated $4 billion in sales last fiscal year, Hicks said inventory levels were only “adequate.” There’s enough items to meet its sales goals, but he estimated the retailer is about 10% below where he’d like it to be. During the peak of the pandemic last year, the chain simply couldn’t source items like bicycles, exercise equipment and fishing rods. Now it can, just not as much as it wants. For example, each store would ideally have seven treadmills in stock, but it’s actually about half that, he said.
Consumers lose because their options are limited
Making smart decisions on shipping and supply chain was enough for Janine Stichter, an analyst for Jeffries, to recently upgrade shoemaker Steve Madden to a “buy” after having a “hold” on it since starting coverage at the beginning of 2018. The company has shifted about half its production to Mexico and Brazil, reducing exposure to Asian markets, such as Vietnam. Making goods closer to the U.S. has made its lead times twice as fast as competitors, she said.
“Supply chain issues are getting continually worse,” Stichter said. For the rest of the year, “the key success factor will be the ability to supply product on time, or relatively on time.”
Meanwhile, Bank of America last week downgraded department-store chain Kohl’s from the equivalent of a buy rating to a sell and cut its target price on the shares by about a third because of mounting logistical costs.
The bigger, more systemic risk — one that could hurt every retailer — is that American spend less than expected because there isn’t enough inventory. The available goods may also not be all that enticing. The boom in shipping prices has forced manufacturers to make hard decisions about what to transport. Hicks, the Academy Sports CEO, predicted that shoppers “will have to settle more because they just won’t have as good of a selection.”
Shipping big items and goods with lower value don’t make as much economic sense right now. iPhones are small and pricey, making them an ideal good to ship or air freight amid spiking transport costs. But the same case can’t be made for low-end furniture or big stuffed animals. At Basic Fun in Boca Raton, Florida, Foreman is exporting a lot more Mash’ems because $135,000 worth of the small, squishy collectibles can fit on a single container. He’s moving far fewer Tonka trucks because they are bulky and take up more space, limiting the dollar value that can go in a container to just $36,000.
At Whom Home in Los Angeles, CEO Jon Bass said he had to remove about 70% of the company’s products — totaling thousands of items including wall decor and furniture — from the websites of retail partners such as Walmart and Wayfair because the company can’t source them. Or in some cases, surging costs for materials and transportation made an item pricer than a retailer was willing to pay.
“Consumers lose because their options are limited,” said Bass, who has been manufacturing goods for three decades. “It’s not a normal time in the business world. There is no stability.”
Rising costs in the supply chain, such as cotton prices hitting a 9-year high, and labor are also likely to boost what consumers pay, which could dampen spending. Or it might cause a bigger shift from hard goods to experiences and services — a trend already in place this year as Americans get back to traveling and eating out. The industry also expects much fewer promotions than usual because inventories are tight, which will turn off bargain hunters.
Add that consumer expectations are sky high, thanks to the ease and speed of e-commerce, and the retail industry is primed to severely disappoint the masses. If last holiday season was dubbed “shipageddon,” what will this year be called? It’s easy to see a boom in gift cards out of frustration as Americans tire of out-of-stocks and logistic mishaps.
“There is a certain amount of underappreciating for the risk” to the results of retailers, said Jennifer Bartashus, an analyst for Bloomberg Intelligence whose coverage includes mass merchants. “Supply chain affects everybody. Meeting customer expectations in an environment where everything is up in the air is nearly impossible.”
Some investors are wising up. Short interest in the SPDR S&P Retail exchange-traded fund, which mimics the S&P Retail Select Industry Index that’s surged this year, recently hit the highest level since late 2019.
But the retail industry has seen this coming. Large firms with the financial wherewithal have been storing goods in their own warehouses or renting space to make sure they can start filling shelves over the next few weeks. It’s another example of how “scale will be the pivotal differentiator” this holiday season, Bartashus said.
There’s also a push to get Americans to shop sooner for the holidays. One effort is trying to create a new shopping event in early October that will include retailers such as Guess? hosting livestream events on their websites. However, this seems like a gargantuan task considering e-commerce has trained the masses that purchases arrive in a few days like clockwork. Retailers have also traditionally saved some big promotions for the week before Christmas to drive a late spending push.
“Consumers might see news about port backups, but that won’t hit home until they try to buy the toy of the year and can't get it," Bartashus said. “That’s when they’ll hit crisis mode.”
Many retailers are already there.
To Read More: www.bloomberg.com/news/features/2021-10-04/out-of-stock-shortages-for-christmas-shopping-put-retailers-at-risk
‘A perfect storm’: supply chain crisis could blow world economy off course
(TheGuardian) It was all going so well. Successful vaccination programmes were driving the post-pandemic recovery of the global economy, stock markets were back at record highs, and prices were rising just enough to make deflation fears a thing of the past.
But a supply crunch that initially put a question mark over the availability of luxury cars or whether there would be enough PlayStations under our Christmas trees is instead morphing into a full-blown crisis featuring a shortage of energy, labour and transport from Liverpool to Los Angeles, and from Qingdao to Queensland.
All the problems are in one way or another tangled up in the surge of post-pandemic consumer demand, but taken together they threaten what one leading economist calls a “stagflationary wind” that could blow the global economy off course.
Mohamed El-Erian, and adviser to the insurance giant Allianz and president of Queens’ College, Cambridge, says this week’s surprise fall in factory output in China was a clear warning that the world economy could slump while prices were still rising quickly, a doomsday double whammy that almost sank the UK in the 1970s.
“The supply chain problems are much more persistent than most policymakers expected, although companies are less surprised,” he said. “Governments are having to rethink quickly because the three elements – supply side, transport, labour – are coming together to blow a stagflationary wind through the global economy.”
Energy shortages are providing the starkest illustration of the problem, with increasing numbers of petrol stations in the UK running out of fuel, and cities in northern China having to ration power and force factories in the world’s number one manufacturing nation to shutter just when pre-Christmas demand is reaching a peak in the west.
Both countries have been caught out by not having enough reserves amid a scramble throughout the world for natural gas and for oil, which has almost doubled in price in 12 months to nearly $80 a barrel.
Along with ongoing Covid-related restrictions in some large manufacturing countries such as Vietnam, and a well-documented shortage of components such as computer chips, factories are simply not producing enough.
British car production dropped by 27% year on year in August as a lack of semiconductors and led to a big drop in the number of vehicles exported to Australia, the US and China. On Thursday, Volkswagen, Ford and Opel maker Stellantis announced fresh temporary closures in Germany because of the chip problem. Opel is closing a plant until 2022 – the longest such stoppage so far.
In Japan, an index of stocks of finished goods has dropped to levels not even seen in the wake of 2011 earthquake and tsunami disaster.
But even if they could get their hands on more sources of energy and materials, and factories could make more goods, it would still cost more to ship things. Drewry’s shipping index, which measures the cost of containers, is up 291% compared with a year ago. On some busy routes, such as from China to Europe’s biggest port Rotterdam, the cost of shipping a container has risen sixfold in the past year.
The problems don’t end when the goods arrive at a port, with labour shortages presenting a final problem in the increasingly tortuous journey of products to their final destination. A lack of truck drivers in many parts of Europe, partly because of disputes over conditions and partly because of ongoing Covid restrictions, is causing delays.
Flavio Romero Macau, a supply chain expert at Edith Cowan University in Western Australia, says that massive pent-up consumer demand in the wake of the pandemic has strained the world’s delicately balanced economic ecosystem.
“Consumers are crazy to buy things because the world is awash with dollars from government stimulus, higher savings and pent-up demand. PlayStations, laptops, phones, gym equipment – you name it people are trying to buy it,” he says.
“Higher demand and restricted supply equals inflation: there’s no way out of it. You put all these things together and its a perfect storm.”
While warnings increase about the threat of stagflation, more economists believe central banks might have to move more quickly to raise interest rates if inflation takes hold across the developed world.
The Bank of England has flagged that rates could go up next year, and the US Federal Reserve has at last signalled the end of its massive pandemic stimulus plan that could push up the cost of borrowing in 2022.
Neil Shearing, the chief economist at Capital Economics, said the UK and the US were most at risk from overheating into inflation, leading to central bank action.
“Risks are generally skewed to the upside and there is a real possibility that inflation increases to a much higher rate that would, in time, necessitate a more substantial tightening of policy,” he said.
A paradigm shift in monetary policy after years of cheap credit could be accompanied by a rebalancing of the global economy as countries seek to shorten supply chains and become more self-sufficient through more autarkist policies, which promote non-reliance on imports. Romero Macau believes many companies could take the chance to move manufacturing away from China, where the supply of cheap labour that launched its economic miracle is drying up, to countries such as Vietnam and Mexico. The latter, he said, has cheaper labour costs than China, making it attractive especially for American companies.
Richard Flax, the chief investment officer at digital wealth manager Moneyfarm, said the crisis was already prompting a rethink by policymakers and business leaders.
“Large corporates and governments are reviewing their supply chains for crucial goods, with a mind towards security of supply as well as cost. We would expect to see supply chains in some sectors shorten as a response to Covid, either via reshoring, or as companies try to diversify their sources of supply.”
Do You Need Customs Brokerage Help? You can contact us at firstname.lastname@example.org