Statistically Speaking: Rising Trade Costs: How High Will they Go?

December 6, 2021  by HFBusiness Staff in Business Strategy, Industry   

Drops in imports and exports began in 2019 partly as a result of “tariff wars” with China and declined further during the first half of 2020 due to pandemic shutdowns. Once factories reopened, a surge in demand overwhelmed an already stressed supply chain causing price hikes of imported goods, increased duties/tariffs and soaring freight costs. Pre-pandemic, many companies turned to manufacturing in Vietnam to combat China’s tariffs and that has only increased, despite Vietnam’s problems keeping factories open with employees fleeing to home villages. In 2021, high container costs and shipping delays have furniture companies looking closer at Mexico as a viable option in these uncertain times. This article updates article Statistically Speaking’s Sept/Oct 2020 Pandemic Slows Flow of International Goods.

 

After a rocky year, U.S. furniture imports finished 2020 at $30.7 billion wholesale – 3.1% up from 2019 (Tables A and B). At $26.8 billion in August 2021 and four months of data to go in the year, import dollars will far exceed 2020 and likely be much higher than peak imports of 2018. Both imports and exports plummeted in 2019, 6.1% and 3.9% respectively, with tariff wars raging. During 2020, exports tanked even further, dropping 10.9%. Although not up to pre-pandemic levels, U.S export dollars were $2.4 billion as of August—up 25.1% from $1.9 billion in August of 2020.

 

Cost to Import Goods
The customs value is the price of the imported goods and does not include additional duties and tariffs, nor insurance & freight. Historically the add-ons have been small compared to the customs value. In recent years, tariff wars have ushered in high duties from China and more recently the exorbitant freight costs. As shown in Table C, duties and tariffs shot up 124.7% in 2018 and 183.1% in 2019. Initially, customs value and insurance and freight dropped in 2019 and 2020. Now with such high demand and supply chain difficulties, freight charges are up 85.5% (2021 Aug YTD) and the total cost of imported goods has increased 38.3% from 2020.

In 2017, add-ons of duties and tariffs, as well as insurance and freight charges, totaled only 7.7% of the cost of importing. This year August year-to-date, the add-ons reached 16.1% (Table D).

Duties and tariffs are part of the total cost of goods, but levied based on the total general customs value and exclusive of freight and insurance. Duties and tariffs stayed steady at 1.1% of customs value from 2015 to 2017 before beginning the climb of 2.2% in 2018 and ultimately to 8.0% by August year-to-date (Table E).

Over 97% of the duties and tariffs the U.S. pays to other countries to import products is to China. This year, August year-to-date, China represents 36.1% of all U.S. imports, but 97.1% of all duties and tariffs the U.S. pays. China receives an additional 21.5% of its customs value in additional duties and tariffs (Figure 1).

In addition to high duties from China, freight costs have skyrocketed globally in 2021. As of October 7, 2021, inbound spot freight rates from Shanghai to Los Angeles were up 175% over last year and up 210% from Shanghai to New York. Outbound was not much better – up 155% from Los Angeles to Shanghai and 103% from New York to Rotterdam (Figure 2). While the pandemic has been the catalyst to the supply chain explosion, most economists agree the shipping industry has been running at full capacity with no margin for error for a long time. The well-publicized chaos in international shipping, a major contributor to higher prices and rising inflation, is predicted to last well into 2022.

Household Furniture Growth Exceeds Office and Institutional
All furniture industry imports – household, office and institutional – dropped in 2019. Then due to the post-COVIDshutdown surge in demand in the second half of 2020, imports began to increase again before exploding in 2021. U.S. imports of household furniture (excluding mattresses) was up 54.4% as of August year-to-date, followed by institutional furniture at 34.9% and office furniture at an 18.6% increase over 2020 (Table F). Among household furniture categories, the demand and value of upholstery skyrocketed in 2021 – up 77.2% in August year-todate. Nonupholstered wood furniture increased by 48.9%, followed by metal furniture at 41.9% and all other household furniture categories at 40.7% (Table G).

As shown in Table H, the product mix for imported household furniture has changed very little over the last five years. Upholstery stumbled during the pandemic but made up for it in 2021, accounting for 32.4% of imported household furniture by August. With the exception of mattresses, imports of all furniture categories increased from 2020 August YTD to 2021 Aug YTD (Figure 3).

Imports by Country
Of the 161 countries shipping household and institutional furniture to the U.S. this year, four countries control 76.9% of imports with China leading the pack at 38.7% in 2021 August yearto-date (Table I). As recently as 2018, China controlled 57.9% and the percentage has fallen each year. Noted previously, tariff wars beginning in 2019 spurred U.S. companies to move operations to Vietnam, which has grown from 13.6% of imports in 2018 to 28.6% this year despite the factory shutdowns that plagued the country during the summer and into the fall of this year.

As shown in Figures 4 and 5, Vietnam is seeing the highest growth from U.S. furniture imports at $7.7 billion this year through August — up 76.3% from the same period of 2020. In reaction to the exorbitant freight costs, more companies are turning to Mexico for their manufacturing needs. Proximity has become a huge appeal and being able to develop product from Mexico is an advantage during supply chain uncertainty. At $1.5 billion in U.S. furniture imports, Mexico is on track to exceed pre-pandemic levels and is up 46.4% over the first eight months of 2020.

Among major furniture categories, upholstery is the biggest contributor to Mexico’s jump in U.S. furniture imports, increasing by 114.7% over the past year. However, Vietnam still accounts for 43.8% of product category sales and is also up over 110%. Vietnam also accounts for the vast majority (50.2%) of nonupholstered wood household furniture. China still leads the way in metal, household furniture (except wood and metal), institutional furniture and office furniture (Figure 6).

While the shipping crisis is ongoing, product keeps flowing in. But many believe there is a reckoning coming, especially in the U.S. John Porcari, the port envoy to the Biden-Harris Administration Supply Chain Disruptions Task Force, is quoted as saying, “We’re living on our grandparents’ investments. As global commerce increased, as the e-commerce economy increased, we haven’t made infrastructure investments keep up.”