Despite Dire Trade War Warnings, U.S. Supply Chains And Warehouses Aren't Suffering Yet

U.S. supply chains and the industrial sector haven’t been battered yet by a prolonged trade war with China, but analysts say times are still choppy and a deal can’t come soon enough.

The combined container volume passing through the Ports of Los Angeles and Long Beach in California was down 4.3% for the first four months of 2019, according to Transwestern. Morgan Stanley said Monday it sees a “credible bear case” for a U.S. recession in the next 12 months if trade tensions escalate further. 

But warehouse operators aren’t feeling a sting yet. 

Prologis Chief Investment Officer Michael Curless said during the industrial REIT's Q2 earnings call the logistics real estate market felt "no meaningful impact" from the trade disputes and tariffs.

Vacancy rates for Q2 were at a historically low 4.3%, net asking rents hit $7.50/SF — the highest since CBRE began tracking the metric in 1989 — and increased 6.4% since last year, 2% above the average growth rate since 2012.

That could still all change if a trade deal with China, one of the leading sources of goods imported into the U.S., isn’t reached in coming months, market experts say. 

“I think it’s going to take a lot of time to resolve, but there’s a lot riding on it. I think there will be a resolution by the end of the year because there has to be,” said Matthew Walaszek, CBRE's associate director of industrial & logistics research. “The impact to the global economy is too dire to persist.”

Morgan Stanley’s Monday warning said a prolonged trade war could lead to 0.1% negative growth in the U.S. in 2020, with uncertainty leading to discouraged businesses laying off employees and cutting investments. 

That uncertainty surrounding U.S. trade policy and whether the Trump administration would apply tariffs to countries beyond its usual sparring partners of China and Mexico has companies holding off on expansion plans into larger warehouses as they wait to see if a firmer global trade policy will emerge.

“It’s becoming a challenge for companies to plan,” Transwestern Executive Managing Director Walter Byrd said. “They may need a bigger distribution center but are also wondering if, out of left field, a tariff will be slapped on their goods.”

The International Monetary Fund revised its U.S. global growth forecast from 2.3% to 2.6% for 2019 Tuesday, but it cautioned against tariffs going forward.

“Countries should not use tariffs to target bilateral trade balances or as a substitute for dialogue to pressure others for reforms,” the IMF stated in its World Economic Outlook. “Risks to the forecast are mainly to the downside.”

Headwinds may loom but, despite the trade war, the U.S. industrial sector had a strong Q2. 

Even the decrease in container volume earlier this year at the Southern California ports had more to do with stabilizing from front-loading for tariffs at the end of last year. 

Many companies bought merchandise ahead of schedule at the end of 2018 to get in front of the 25% tariffs levied on $250B worth of Chinese goods. Port volume has since leveled off due to the higher-than-normal front-loading, Byrd said. 

“Clearly the threat of initial impact caused a wave of getting in shipments as early as possible before tariffs kicked in,” he added. “The downstream flow meant more goods coming in, a need to store and to move quicker.”

But the IMF’s report Tuesday warned of relying too much on the effects of economic conditions like front-loading that have kept warehouses packed with a higher-than-normal amount of goods.

“Domestic demand was somewhat softer than expected and imports weaker as well, in part reflecting the effects of tariffs,” the organization wrote. “These developments point to slowing momentum over the rest of the year.”

Silver Linings And A White Flag

Coastal ports like Long Beach may be exposed to more risk due to higher trade volume with China, but others stand to benefit as companies explore new sources of origin for their goods. Companies are looking to diversify their origin source points, rather than directly sourcing all merchandise from China, to countries like Vietnam, Malaysia, Bangladesh and India.

While Walaszek said shifting to new origin countries can slow down lead times for a supply chain, it could become a necessity if a new trade deal isn’t struck with China. 

The shift could even benefit some places like the Port of Oakland, where imports from Vietnam have increased 29% since 2015. Overall U.S. imports from Vietnam are up 36% this year, largely due to companies elsewhere in Asia rerouting goods through Vietnamese ports to avoid tariffs applied on goods from Chinese ports. 

“I’m not sure if anyone is benefiting, per se, but there are some winners,” Walaszek said. 

Another silver lining emerged Tuesday afternoon in reports the Trump administration will send trade negotiators to China next week to re-engage in trade talks. The move may send a positive message, but CNBC reports an actual trade deal may not be struck for months. 

For the business community, a deal can’t come soon enough. 

“The uncertain and haphazard nature it keeps moving around makes it much more challenging for a business to map out a strategy,” Byrd said. “We all hate uncertainty in all aspects of our lives.”