Creuset and his team anticipate that a cycle of inventory destocking is about to begin and could continue into the third or fourth quarter of this year. Although trade held up in the first quarter, as importers made purchases ahead of expected import levies, this destocking is likely to show up in the data soon.
Ultimately, once inventories drop far enough and shelves start to get bare, restocking will become unavoidable. Importers will pivot, and trade will pick back up, even if that means accepting higher costs for tariffed goods. There may be some permanent demand destruction, especially if the global economy slows, and increased rerouting through other countries with lower tariffs. But Chinese goods will continue to be vital. “Given the scale of China’s manufacturing capacity and dominance in a number of categories, in the restocking phase we expect the prior Asia-to-US flow of goods to resume,” Creuset writes.
In a research report last year, Creuset found that the center of gravity of global trade remained in Asia after 2018, despite tariffs and other post-pandemic pressures that seemed to favor bringing supply chains closer to home. Even amid talk of deglobalization, the fastest-growing trade routes in recent years all originate in Asia, reflecting trends such as increased commerce between China and the Global South, Creuset’s research shows.
The impact of the highest US import tariffs in a century
How might the current phase of tariffs differ from, or resemble, previous episodes of trade tensions?
Difference: With average tariffs on US imports higher than at any time since the Smoot-Hawley tariffs almost a century ago, the scale of the trade disruption that’s imminent is far beyond what was seen during President Donald Trump’s first term.
Asia-US trade has only fallen three times in the past quarter century, most notably during the global financial crisis in 2008-2009 and during supply chain disruptions related to the pandemic. This time, the decline in trade could be deeper, especially if US policymakers are willing to accept slower GDP growth and higher inflation.
Similarity: The earlier round of tariffs on China had prompted the rerouting of goods through other countries such as Vietnam or Mexico. This is likely to happen again. The incentive to pursue such roundabout routes is, if anything, stronger than before because of the huge differential between the tariffs levied on China and those levied on its Asian neighbors. Rules that establish country of origin for tariff purposes recognize that “substantial transformation” in a specific country qualifies the product for that country’s tariffs. This may mean that intermediate goods from China could be assembled elsewhere and enjoy lower tariffs.
Source: goldmansachs.com
