China trade deal sparks "demand shock" fears
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With the China trade deal in hand, there could be a surge of new orders in coming days, as businesses release months of pent-up demand.
Why it matters: That could be just as bad for supply chains as the trade war was in the first place.
The big picture: Trade in goods between the U.S. and China collapsed in the wake of the original 145% tariff. Sailings were canceled while containers sat empty after demand evaporated.
- The Port of Los Angeles, the biggest U.S. point of entry for goods-laden containers, currently estimates year-over-year double-digit declines for two of the next three weeks.
- Businesses started losing their nerve months ago when President Trump ratcheted up tariffs on China, losing it entirely when he raised duties to 145% in early April.
Yes, but: Imagine what happens when every single U.S. merchant who does business in China tries to place orders at the same time, get them across the ocean at the same time, and deliver them to warehouses at the same time.
- "The manufacturers are not going to just magically be able to meet that demand," Jason Miller, a professor of supply chain management at Michigan State University, recently told Axios.
How it works: "Demand shock," when a sudden surge in demand overwhelms the system, can be just as dangerous as "supply shock."
- As the Peterson Institute noted in February 2024, demand shocks in the post-pandemic era played a clear part in the inflation of the period.
- It was only last fall that high freight rates threatened global supply chains, according to the United Nations.
- Rates are now a small fraction of what they were a few months ago, but things can change quickly if everyone is trying to book the same ships.
State of play: Ocean shipping rates are expected to soar, followed by trucking rates, as importers pounce on another reprieve.
- But that may come too late — and prompt deals and bankruptcies — for port truckers and other haulers that have already struggled through a three-year freight recession.
Flashback: The pandemic and its ensuing disruption proved that money is more fungible than supply chains, wrote Jason Thomas, the head of global research and investment strategy at Carlyle Group, in a recent report.
- A household could spend money earmarked for a cruise on camping equipment or a hot tub instead, Thomas notes.
- But it was not as easy to transform that unused cruise ship capacity into tents, sleeping bags, air jets or spa pumps.
- "Thankfully, the 'truce' should spare us having to relearn the same lesson again in a somewhat different context," Thomas tells Axios.
What to watch: Look for a quick reaction from businesses that want to refill their inventories before any more major changes happen.
- Indices that show container demand in China and trucking demand in the U.S. could start to move sharply in coming weeks.
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