(Bloomberg) --
Chinese factories are normally at their busiest during the third quarter, cranking out production of everything from Barbie dolls to miniature trucks in time to ship them over the ocean to the U.S. ahead of the all-important holiday shopping season. This year’s different.
Even with President Donald Trump delaying tariffs on $160 billion of toys to smartphones to spare the Christmas boom for U.S. retailers, the damage has already been done. That’s because big toy purveyors like Walmart Inc. have already piled up inventory given the uncertainty over how the trade war will pan out, according to industry officials.
“We will be among those bearing the brunt,” said Justin Yu, a foreign trade manager at Pinghu Mijia Child Product Co., a maker of toy cars and kids’ scooters in Zhejiang, China. “The influence is definitively huge.”
Yu now plans to find new customers in Europe, Middle East and Africa to make up for the U.S. shortfall. The company is considering reducing North America’s significance to its revenue to avoid future tariff hits. Yu said he currently sends $25 million of goods a year to U.S. retailers including Target Corp. and Walmart.
Retailers started a buying frenzy a year ago as trade tensions began to heat up -- shipping cargo volume to North America from Asia rose 7.9% in the second half of 2018, according to data compiled by Bloomberg. That growth has slowed significantly this year -- to just 0.2% in the first half -- as U.S. warehouses filled up.
And pointing to a continued slowdown in goods volume, China’s exports to the U.S. dropped 6.5% in July from a year earlier in dollar terms.
That means U.S. shoppers are likely to see fewer new items in stores during the holiday season as retailers limit purchasing to reduce stock toward normal levels, said Rahul Kapoor, head of research and analytics at IHS Maritime & Trade in Singapore.
“There won’t be any empty shelves,” Kapoor said. “Inventory level is very high.”
In mid-August, Trump postponed planned tariff hikes on Chinese products such as smartphones, laptops, and children’s toys until Dec. 15 from Sept. 1, saying the delay had been made “so it won’t be relevant to the Christmas shopping season.” Yet just 10 days later, he hit the retail sector with a new blow: The new levies will be higher than initially planned as retaliation after China threatened to impose additional tariffs on American goods.
Yu, the trade manager in Zhejiang, said the delay in tariff hikes was positive news, but since the increase is taking effect eventually, he expects to lose business. He also expects customers to request that the higher tariff costs be split between the buyer, the manufacturer and middlemen -- which could hurt producers’ prices.
Shipping Blow
Another industry getting hit, shipping, is cutting capacity as volumes shrink. CMA CGM SA, the world’s third-biggest container-shipping company, will pull out two vessels of its Asia-Europe services as early as this month. Orient Overseas Container Line Co., owned by China’s biggest shipping company, also halted some services to the U.S. and Europe from July.
Adding to their woes, the slowing volume has pushed shipping fees down at a hefty pace. Rates to move cargo on major trade lanes have fallen 7.4% this year, with those for the U.S. slumping 26%, according to Drewry World Container Index.
“This peak season is going to be challenging,” said Um Kyung-a, a shipping-industry analyst at Shinyoung Securities Co. in Seoul. “Some shipping companies probably are not able to cover their costs.”
Shares of Orient Overseas have lost 33% in the past six months, its peer Cosco Shipping Holdings Co. is down 19% and A.P. Moller-Maersk A/S, the world’s biggest shipping line, has lost 6.8%.
A further concern is that the trade war will spill over to next year, hurting consumers’ eagerness to go shopping. The International Monetary Fund last month cited trade tensions as one of the biggest risks to the global economy as it downgraded its growth forecast for this year and next, while Goldman Sachs has said there’s growing concerns that the trade war will trigger a U.S. recession.
“Next year is much more concerning on the demand side,” Kapoor said. “This doesn’t go away easily.”
©2019 Bloomberg L.P.
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