As US-China relations worsen, expect supply chain chaos

The trans-Pacific trade lane connecting the world's most important countries is a pillar of the global economy, but now it's becoming an epicenter of supply chain, financial and geopolitical risk

• China's zero-COVID policies and recent tensions over Taiwan have accelerated this confrontation, which could lead to further decoupling between the U.S. and China.
• During the pandemic, ocean container spot rates skyrocketed from approximately $1,000 per 40-foot container to nearly $20,000 last fall before plunging again to $2,720 last week.

China’s zero-COVID policy is fighting a losing battle

• Xi Jinping has continued the zero- COVID policy for the foreseeable future, which has severely disrupted both his own economy and trans-Pacific trade.
• Although the Chinese state adapted its tactics on a case-by-case basis, the governance mechanism remained the same
• Centralized algorithms looked for signals in endless oceans of public health, location, and social media data
• As a result, recommended policy actions were increasingly ineffectual and mismatched to realities on the ground
• The unintended consequences of this policy include food shortages, real estate insolvency and bank runs

US-China relations have weakened for more than a decade

• Obama used the Trans-Pacific Partnership (TPP) as a pivot to Asia
• Tariffs on Chinese imports roiled the trans-Pacific
• Companies accelerated purchase orders
• Trucking market was on fire from Harvey and the ELD mandate

Expect more military activity

• Although Trump sometimes styled his protectionist tariffs as merely the pragmatic bargaining chips of a consummate dealmaker looking out for the American people, his military moves revealed a deeper, strategic understanding of the trans-Pacific.
• His administration emphasized the U.S. Navy's ability to secure vital trade routes and increased patrols in heavily trafficked areas and freedom of navigation exercises, placing additional pressure on those operations to perform.

Supply chain chaos to ensue

• Increased volatility in supply chains, in terms of freight volumes
• Capacity availability and transportation rates
• Less visibility into China's economic activity
• A more diverse, less China-centric trans-Pacific trade
• Tariffs, embargoes and many other forms of economic warfare are potentially on the table
• If the U.S. and China decide to pursue a policy of mutual divestment, we should expect a more diverse

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