Wait! Freight Rates Rebounded After New Tariffs Hit? What Just Happened

Introduction: The Post-Tariff Shipping Paradox

Demand is supposed to be dropping this week, but freight rates are rising. What’s happening in the international shipping market right now?

Many shippers assumed freight rates would start sliding in their favor once the late-July Section 301 forced-labor tariffs hit. After all, front-loading cargo to beat those tariffs bolstered demand and freight rates in the lead-up. Analysts thought demand would fall and had already predicted freight rates reached their peak weeks ago. Indeed, the Drewry World Container Index (WCI) showed a decline in freight rates over the last few weeks of July.

But freight rates started climbing to start August.

It’s too early to see this week’s, let alone this month’s, official numbers, but the early shipping demand was thought to eat into the normal August peak season demand. Lower demand is supposed to mean lower prices. However, the WCI rebounded a bit this week, increasing by 1%, and trans-pacific freight rates particularly were largely behind that increase with larger rises in freight rates that we’ll get into in just a moment.

Demand, of course, isn’t the only factor to look for increasing freight rates. Congestion at Chinese ports has been an issue for months, impacting capacity (supply) and freight rates. Then there’s the Iran War that, while having a minimal effect on ocean freight capacity, significantly increased oil prices. Even when those oil prices dropped close to pre-war levels, ocean freight carriers still had plenty of ammunition to charge Emergency Fuel Surcharges (EFS).

Carriers have brought a number of new August fees that we’ll get into later. Those, of course, pushed freight rates up this week. But if demand is actually falling, it will be difficult for carriers to maintain their increased rates for very long. However, there is some evidence that demand is actually holding stronger than expected, possibly in part because tariffs didn’t really jump the way the way many feared they would. Consider what Stuart Chirls wrote in a FreightWaves article published today:

[Freightos analyst Judah Levine] noted that the National Retail Federation estimated that demand in August would be well below July levels. “But steady East Coast rates together with some forwarder reports of surprisingly strong demand and this recent West Coast rate bump may indicate that peak season strength is lasting longer than anticipated on the trans-Pacific.”

Other analysts cite unexpectedly low inventory levels and stronger than anticipated consumer demand for helping push up rates.

“Another reason may be that the July 24 tariff deadline did not result in sharp tariff hikes,” said Levine. “Many U.S. shippers were frontloading peak season volumes ahead of the Section 122, 10% global tariff July 24 expiration date out of concern that duties could be higher soon after.

“Instead, Section 122 tariffs were immediately replaced by Section 301 tariffs on more than 60 trade partners, aimed at curbing forced labor imports, of 10% to 12.5% or about even with the expiring duties.”

Duties could return to emergency tariff levels as the U.S. Trade Representative is nearing completion of its Section 301 investigation into excess manufacturing capacity by 16 of the largest U.S. trading partners. 

“But even once the USTR shares its findings, it will take several weeks before the president could implement the recommendations,” Levine said. “This gap may be extending tariff frontloading by some shippers, likewise contributing to a longer than expected trans-Pacific peak.”

It’s unknown when the Section 301 investigation into excess manufacturing capacity will be complete, but that the parallel forced labor investigation being complete is a large part of what has trade experts believing this one will be done soon too. The unknown date of its completion perhaps adds extra urgency to shippers trying to beat it with their imports. Its absolute deadline is March 11th, 2027.

The Hard Numbers: Freight Rate Increases from China

Despite a 1% in the WCI, worldwide freight rates are not rising. Trans-pacific freight rates simply rose enough to make up for other shipping lanes staying flat or even declining.

Consider these numbers from Drewry:

• Shanghai to New York: $7,893 per 40ft container (Up 4% this week).
• Shanghai to Los Angeles: $5,894 per 40ft container (Up 3% this week).
• Shanghai to Rotterdam: $4,653 per 40ft container (0% / Flat).
• Shanghai to Genoa: $5,506 per 40ft container (Down 2%).

The usual assumption from such numbers would be an increase in demand from U.S. importers. August is right in the heart of peak season when shipping demand to the U.S. typically increases as businesses are stocking up for the holiday shopping seasons. But you know the old saying about assuming: A-S-S-U-M-E, make an ass out of you and me.

Since tariffs didn’t really rise much, with Section 301 ones basically just replacing the 122 ones, it could be front-loading demand is remaining high as Chirls pointed out as a possibility in his article. However, carriers also brought a surge of new charges to begin the month as well. We’re talking General Rate Increases (GRIs), Peak Season Surcharges (PSS) and Emergency Fuel Surcharges (EFS). The EFS alone range from $65 to $165 per container.

Whenever such charges are introduced, and at least a number of the first two types are always brought this time on U.S. importers, there’s a freight rate surge. The question always becomes how long carriers can maintain those freight rate increases. If demand actually is dropping, it will be difficult for carriers to maintain their new pricing hikes. Still, they have one other trick up their sleeves to maintain freight rates even when demand drops: blank (cancelled) sailings.

Ocean freight carriers have become adept at manipulating capacity (demand) in the shipping industry. The amount blank sailing carriers are doing right now indicates demand may not be as strong as freight rate prices indicate.

According to Drewry’s tracking numbers, carriers have scheduled 58 blank sailings across major East-West trades, representing an 8% capacity reduction between August 3rd and September 6th. They’re hitting trans-Pacific routes the hardest, with it accounting for 60% of the cancellations.

Simultaneous Bottlenecks: Typhoon Disruption in China & Geopolitical Friction in the Persian Gulf

Both of these have been mentioned above, so I won’t spend a long time on them on here, but there are two bottlenecks putting upward pressure on freight rates.

Chinese ports have been dealing with congestion for months, and they’ve been battered by two major typhoons, with Typhoon Noul just hitting in late July.

There’s extreme vessel bunching at the Shanghai Port, causing carriers to skip it, and multi-day delays in Ningbo, Shenzhen, and Hong Kong.

I probably don’t have to remind you about renewed hostilities between the U.S. and Iran in late July, but it basically halted shipping through the Strait of Hormuz again and triggered a new round of EFS from carriers.

With or without high demand from shippers, these bottlenecks create upward pressure on freight rates, and at the very least, give carriers something to point to as justification for any new rate increases they wish to implement.

Conclusion: Actionable Strategy for Shippers

Since the pandemic hit, the international shipping industry has shifted from a highly volatile market, riding the waves of demand shifts and intense carrier competition, to a highly disciplined one, marked by carrier capacity controls. Falling demand often doesn’t make freight rates fall the way it used to. The industry had been well on its way to this for years before the pandemic through carrier consolidation, mostly through carrier alliances but also through buyouts, mergers, and a major bankruptcy.

Shippers need to adapt to a structurally tighter environment.

Two steps U.S. importers can do right now are:

• Advance booking lead times to absorb Chinese port omissions currently taking place.
• Recalibrate minimum inventory to withstand blank sailings that are persistently removing 10 to 14% of global capacity, often disrupting or at least slowing goods delivery.

As for demand and freight rates, August and September will be very interesting months. Despite carrier controls, demand still does impact freight rates, though often slower than it used to. If demand truly is falling right now, it will be difficult for carriers to maintain the August freight rate increases they just implemented. They’ll certainly ramp up blank sailings even more if demand is dropping to stop a hard freight rate fall.

If, on the other hand, shippers are still increasing their shipping to beat the next round tariff hikes, expect this freight rate increase to not only hold but continue to rise.