How big drop in trade deficit as tariffs hit imports looks inside U.S. supply chain and economy

CNBC

2 days ago

The U.S. trade deficit fell by the largest amount on record in April as imports fell by over 16% after a surge in orders to beat President Trump's tariffs, but there's a worrying flip side for the consumer. As the trade war whipsaws global economic activity, supply chain data shows that the retail inventory crunch could be next. From freight orders to inventory and warehousing, the latest logistics data shows the inability of importers to make decisions on adding to inventory levels.
One closely watched data point is the widening gap between inventory levels and inventory costs. These metrics generally track together, according to the Logistics Managers' Index. In 2024, the average space between these metrics was 12.1 points. But in May 2025, the gap has expanded to 26.8 points, the third-highest in the history of the index, said Zachary Rogers, associate professor of supply chain management and Colorado State University Supply Chain Management Forum director.
When inventories are high and quickly expand, warehouses cost more. Traditionally, when warehouse inventories decrease, warehouse costs slow down as well. But because of the front-loading of products ahead of the tariffs in the January-March period, inventory is flat, with replenishment orders not coming in. But costs are still up because the inventory is being held longer.
"The situation we're in now, inventories are up, and they're sitting there," said Rogers. "Essentially, imports in January, February, and early March looked a lot like what we would normally see in August, September, and early October."
Normally in mid-October, holiday sales kick into gear, which would move inventory out of the warehouse. But given the uncertainty in tariffs and concerns about the financial health of the consumer, retailers have told CNBC they are not placing full orders.
"Warehousing capacity is tight, which means there is no inventory movement, and the associated costs (e.g., warehousing prices and inventory costs) are much higher than what we would normally see at this time of the year," Rogers said. "This means the inventory is getting more expensive to hold."
Ocean freight orders from around the world to the U.S. show the pause button in product orders continues.
As President Trump and Chinese President Xi Jinping held their first call since a raft of new tariffs on China in an initial attempt to de-escalate the trade war, data on Chinese ocean freight bookings to the U.S. shows a picture similar to the softness in global orders after the surge.
A recent drop in freight vessel sailings from China drove up the cost for imports as there has been less capacity available on ships. Peter Sand, Xeneta chief shipping analyst, said the recent 88% increase in ocean freight spot rates on the China to U.S. trade route indicates demand of some shippers willing to pay to pull forward their freight during the 90-day tariff pause.
"However, this will not last because [vessel] capacity is heading back to the Transpacific and the desperation of shippers to get supply chains moving again will ease once boxes are on the water and inventories begin to build up," said Sand. "Spot rates are expected to peak in June before downward pressure returns."
The conditions in the freight market resulted in an advantage for larger firms over small businesses, according to Rogers. "Smaller firms were boxed out during the big rush of imports in Q1, so they have had to bring inventories over later, resulting in higher costs," he said.
But since the larger companies aren't continuing to stock up, as the surge ends it is impacting smaller supply chain companies directly too. The smaller firms in the Logistics Managers' Index survey sample are representative of the "middle mile" in supply chains, wholesalers and logistics service providers as the points in the supply chain where freight is transported between a supplier's warehouse, distribution center and the final point of delivery, which could be a retail store or a customer's doorstep.
They get hit when large manufacturers and retailers avoid inventory as much as possible — unlike Covid, they are running leaner inventory overall, which further squeezes the "middle mile."
"Essentially, it is the small businesses of America that are bearing the brunt of the tariffs right now," Rogers said. "This could change as inventories move downstream to retailers if costs could be passed down to the consumer," he added.
Recent Federal Reserve survey data shows many firms planning to pass on price increases resulting from tariffs to customers.
But the ability to pass on price increases to customers varies business to business, and based on end customer. Helen Torkos, president and owner of Regent Tek Industries, which manufactures pavement markings, tells CNBC the global trade war has greatly impacted the cost of importing the raw components needed to manufacture the highest grade of thermoplastic road markings, the product that is on state, city, and local roads and highways.
"The majority of our components are now being tariffed," said Torkos. "Our cost has gone up tenfold. We cannot pass on these costs to some of our customers because they cannot afford the increases. We also cannot source these products domestically."
Torkos said the uncertainty of future tariff costs has also led to the cancellation of key projects.
"The recent removal from several bid processes due to the tariffs causing rising material prices further underscores the impact of these tariffs on our operations," Torkos said.
To address the swings in tariffs, and in an effort to offer more certainty on possible freight costs, logistics firms are launching tariff analysis tools. C.H. Robinson and Flexport are among companies to roll out technology that allows businesses and consumers to model tariff impact on price.
Wine for Europe is one example that can impact both the business and consumer. The EU was threatened by President Trump in a social media post of a 50% tariff, only to have that threat walked back by the president, delaying that increase from June 1 to July 9.
According to the Flexport Tariff Simulator, if a container with bottles of Chianti from Italy was processed by U.S. Customs on June 2, the wine would be under a 10.24% tariff rate. The duties for one 20-foot container filled with 0.75L bottles of Chianti would be $27,024. If the tariff were increased by another 50%, the tariff bill would soar from $27,024 to $132,624. The tariff rate was based on a wholesale value of $264,000 ($20 a bottle w/13,200 bottles in a container.)
Then, there is the stacking of multiple tariff layers already implemented during the trade war. These duties have pushed up costs to import retail goods much higher than the 30% associated with the tentative agreement.
Using an example of a common summer retail purchase, Flexport data shows a 20-foot container storing 60 fully assembled aluminum chaise lounge chairs with a wholesale value of $60,000, departing from China on June 2 and arriving on July 15, would face a 70% tariff — that includes Section 301 tariffs at 25% under the 1974 Trade Act's unfair practices policy; Section 232 tariffs on steel and aluminum at 25%; and the national emergency powers fentanyl tariffs at 20%. The total amount in tariffs for that single container would be $42,000.
"It's not that simple to calculate," said Ryan Petersen, Flexport CEO. "There's still a lot of uncertainty about what's going to happen. For example, it may not be on the tip of everyone's tongue right now, but July 8 is the end of the reciprocal tariffs pause. That could end, and tariffs may not be 10% everywhere. Commerce Secretary [Howard] Lutnick has made comments he is committed to making the tariffs higher."
A women's top imported from India faced a tariff rate on June 2 of 42%. After the reciprocal tariff deadline is lifted, the same top will be taxed at 58%.
Mike Short, president of global forwarding at C.H. Robinson, said for companies to save on tariff costs, they need to have the ability to search their SKUs and identify the product's point of origin so they can tabulate tariff costs.
"Based on that information, they could then quickly compare their total duty spending versus various alternative sources," said Short. "Knowing the spending scenarios can provide businesses with clarity on where to focus their efforts to achieve savings and diversification, down to the individual product level."