Supply Chain Messages About the Trade War

Since early April, businesses and markets have been navigating disruptions from Trump tariffs implemented, paused, escalated, de-escalated and court-challenged. The prospect of a bruising U.S.-China trade war, in particular, drove global stock markets sharply lower after President Donald Trump announced the new trade policies on April 2nd.

Despite the tariff turmoil, the MSCI All World Country Index (ACWI) recovered from its sharp decline in April to hit new all-time highs in June. The question now is: Were markets correct in selling off or are they correct to have fully recovered those losses? The key may be whether there remains any future economic impact from increased tariffs. We're following the clues from the supply chain in Asia for potential economic and earnings impacts: tracking orders to production to inventories, then to Chinese ports and finally to ship arrivals in the U.S.

Higher tariffs may mean higher prices, slower growth

Although the reciprocal tariffs implemented by the Trump administration so far against trading partners including the European Union, Mexico, Canada and China may not be as high as initially announced on April 2nd, the average tariff level in the U.S. is still higher than it was at the start of the year. Because the tariffs are paid by the U.S. companies doing the importing—which may or may not pass the cost on to their customers in the form of higher prices—this could affect future demand for imported goods in the U.S. Lower goods demand from the U.S. could slow global trade and economic and corporate earnings growth in other countries, which could hurt the performance of international stocks.

What is the supply chain telling us?

Stages of the international trade cycle, or the global supply chain, are as follows: factories outside the U.S. receive orders, produce the good, then either stock the good in inventory or transfer the good for export. They then ship the good to a U.S. port, where it eventually makes its way through the U.S. economy to sale to U.S. consumers and businesses. Importers likely accelerated, or front-loaded, orders after Trump signed a presidential memorandum discussing reciprocal tariffs on February 13th. Where do things stand now? Let's explore each stage, focusing on China and Asian countries with strong trade ties to China.

Stages of the global trade cycle

Factory orders, as measured by the new export orders component of the Purchasing Manager Indexes (PMIs), ticked higher in China and South Korea in February and March 2025, before dropping off in April and slightly improving in May. Orders to Vietnam have experienced less volatility.

PMI manufacturing new export orders

Inventories in the U.S. Institute for Supply Management (ISM) Manufacturing report jumped higher in April as companies pulled forward deliveries and created stockpiles to be later worked down. The impact on inventories in China, South Korea, and Vietnam's manufacturing PMIs were less pronounced—levels in all three countries in the PMIs are below 50, suggesting declines in stockpiles.

PMI manufacturing inventories

Production outside the U.S. as measured by the PMI manufacturing output, had been generally increasing in the first quarter before dropping below 50 into contraction territory in April in China, South Korea, and Vietnam. May's releases show that Vietnam has already started recovering, while Korea may be hindered by automotive tariffs and the pull-forward of big-ticket purchases earlier this year. Recall that the de-escalation of tariffs on Chinese goods didn't happen until May 12th, so a rebound for Chinese output may be still yet to come.

PMI manufacturing output

China reported exports to the U.S. fell 34% year-over-year in May, the worst reading since the COVID-19 pandemic in 2020. Chinese exports in total rose 4.8%, so shipments to the rest of the world more than made up for the drop in shipments to the U.S. in May. Excluding the U.S., China's exports rose 11%, with strength continuing in some countries such as Vietnam. Exports from China to Vietnam rose 22%. Perhaps relatedly, exports from Vietnam to the U.S. rose 36% in May. Chinese factories can currently re-route shipments to Vietnam to take advantage of the lower tariffs there and transform them into products that create new value for the goods before potentially re-exporting to the U.S.

China offset the drop in exports to the U.S. by shipping elsewhere

Ship departures from China to the U.S. were strong in March, perhaps due to front-loading before tariffs. Tensions between the U.S. and China eased on May 12th, but it may have taken a while for container ships to return to Chinese ports and be redirected to the U.S. Ship departures ramped back up at the start of June, according to the Bloomberg data below. Although it's not yet reflected in the data below, arrivals at the Port of Los Angeles are expected to surge the week of June 15th to June 21st, according to the Los Angeles Harbor Department.

Container ships from China to U.S. may be on the rebound

Spot freight rates to ports in Los Angeles and New York took a sharp jump higher in mid-May, ahead of the peak season to get goods in place for both back-to-school and the December holidays. Presumably, shippers would want to take advantage of the lull in tariffs to rush shipments ahead of the July 9th expiration of the reciprocal tariff delay. The National Retail Federation and Hackett Associates Global Port Tracker forecast on June 9th that we may see a surge in U.S. imports in June and July before they trail off again.

Spot container freight rates to the U.S. jumped in May

The tariff negotiation deadline approaches

Where are we now in tariff negotiations? The court ruling on May 28th that blocked the Trump administration's reciprocal tariffs was stayed, meaning the reciprocal tariffs are currently in place while the legal battle ensues. Last week, the U.S. Court of Appeals for the Federal Circuit put the case on an expedited track, with arguments scheduled for July 31st. After that, should there be additional appeals, the Supreme Court may choose to hear the case sometime this fall. Also last week, Trump said he intends to send letters to trading partners over the next one to two weeks setting universal tariff rates, in a "take it or leave it" fashion.

Broad-based trade agreements tend to take time to put in place: Historically, the average U.S. trade deal has taken 18 months from launch to signing, according to the Peterson Institute for International Economics. As the July 9th deadline nears, there could be a flurry of trade frameworks—that is, broad-based outlines for what would be covered in a trade deal. This could allow some countries to keep tariffs at the current rates while trade deals are sorted out, rather than having tariffs ratchet higher to the April 2nd levels. This would effectively extend the pause past July 9th. Other countries, where the negotiations are more difficult and which may not have a framework in place by July 9th could see their tariffs revert to the April 2nd levels. Even so, the duration of this outcome may not be long. Recall that higher tariffs on goods from Canada and Mexico that were compliant with the United States-Mexico-Canada Agreement (USMCA) ended after just 13 hours on March 6th, and tariffs on Colombia ended after nine hours on January 26th of this year.

In summary

U.S. imports rose 43% in the first quarter of 2025, according to the U.S. Bureau of Economic Analysis, suggesting consumers and businesses pulled forward purchases. This could lead to some softness in demand in coming quarters. Additionally, there are signs that goods arriving from China to the U.S. may be accelerating, with shipments now on the way to stock U.S. store shelves in time for back-to-school and the December holiday season. Since these goods will now have higher tariffs associated with them, and there may be stockpiles of inventories, U.S. goods demand could slow from here. As a result, we may see reshuffling of trade like we saw with the increase in China's shipments to other countries outside the U.S. in May.

How much growth outside the U.S. slows in coming quarters is uncertain. If oil prices sustain a spike higher because of escalating geopolitical tensions related to the conflict between Iran and Israel, this could add a new headwind to growth in the global economy. The trade conflict is still ongoing. July has the potential for supply chain disruptions and impacts to factory production. The trade negotiations and tariff news may cause uneasiness, but investors may take a longer-term outlook and become less reactive to the negotiating tactics in deal-making.

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