The week ahead: US tariffs make waves in global supply chains

06 May 2025

Tariffs have already led to a sharp drop in trade volumes from China to the US. This presents a potential opportunity for UK and European firms if US importers are looking for alternatives and cheaper goods become available in Europe.

It would also have the added bonus of weighing on inflation, which could allow the Bank of England to cut interest rates faster.

However, it also raises the risk of a broader trade war if European governments deem the arrival of Chinese goods as dumping. Given how complex supply chains are, we also cannot discount the risk of unexpected shortages in specific goods elsewhere.

Europe’s ports see some uptick

With the 145% US tariffs on Chinese imports threatening to wipe out most US-China trade, it’s no surprise that the Port of Los Angeles expects a year-on-year fall of 35% in arrivals this week. That drop is driving concerns in the US about empty shelves over the coming weeks. It therefore might not be the best time for that US holiday you were thinking about.

But those goods have to go somewhere. Unhelpfully, China is yet to publish data, but it seems likely that firms are stockpiling goods in case tariffs are rolled back. We’re starting to see some evidence of goods diverting to Europe, although not to a significant degree just yet.

The volume of ships arriving in Western Europe has started rising, but by no means are we looking at a swing equivalent to the collapse in the US. The week after the initial tariff announcement, cargo and tanker arrivals in the UK were up 14% year on year, but the data is volatile and it really is too early to expect to be seeing a significant upturn.

Changing global economic tides

One of the most timely indicators we do have is the manufacturing PMI supplier’s delivery times index. This measures how long firms are waiting for input products. So far it isn’t showing signs of surplus or shortages.

Looking ahead, the dial could move either way. Weaker global trade could free up shipping capacity, but shifting trade patterns could also disrupt supply chains and cause delays.

One benefit from the drop in global demand from tariffs is that shipping rates have been on a downwards path. That will help to alleviate some of the increase in inflation we expect this year.

Shipping rates will be one of the first places that an increase in demand for ships heading to Europe will show up, so we’ll be keeping a close eye on that.

Cheaper Asos orders? Not so fast

Given that tariffs were only introduced a few weeks ago, the picture remains hazy. But one potential implication of shifting supply chains is that the UK sees an influx of cheaper goods from China. This would make inputs and parts cheaper for manufacturers and allow retailers access to an abundance of cheaper products. That would prove to be a short-term boon for both firms and consumers going forward.

However, in the medium-term there’s a risk that an increase in cheaper goods from abroad increases the competition faced by UK and European firms. That might not worry policymakers if there’s an inflow of low value items, such as clothes and toys. However, if there’s a substantial increase in imports of cheaper cars and other high-value goods, governments would struggle not to respond with anti-dumping measures to protect domestic producers.

The threat to domestic industry is one reason Rachel Reeves is already looking at changes to the current de minimis rule, which exempts goods worth less than £135 from customs duties. In this scenario, rising trade barriers would change the outlook from a US-China trade war, which currently looks to be disinflationary for the UK, to a global trade war, which would be far more stagflationary and more difficult for policymakers to respond to.

At the same time, there is a risk that supply chain disruption leads to shortages of some goods. For example, China has been cancelling pork orders from the US as prices are now uncompetitive. In turn, China has already signed an agreement with Spain to allow increased access to the Chinese market. That could be inflationary both for China, where it now chooses to buy more expensive EU pork, but also for those in Europe, given the sizeable increase in demand for EU pork.

Across the pond however, that puts downwards pressure on US pork prices since EU regulations prevent the US surplus of pork shifting to Europe. This is one obvious example. The real risk is that disruptions rear their head in surprising places, snarling up whole industries.

In an extreme case, a surge in Chinese goods coming to Europe could result in UK port congestion, leading to delays on goods we already import, creating supply shortages, which could drive up the prices of regular products.

Impact on the economy

A surge in cheaper goods would dampen the rise in inflation that we expect this year. Indeed, falls in commodity prices, especially oil, and the weaker growth from a global slowdown mean we now think inflation is likely to peak at around 3.5% instead of closer to 4%.

Weaker inflation would allow the Monetary Policy Committee (MPC) to cut interest rates more aggressively to support the weaker growth outlook. You can read our analysis of the likelihood of this in our MPC preview.

Supply chain disruption is often revealed in unexpected places. Historically, signs of creaking supply chains show up initially in shipping rates, port congestion and firms reporting that goods are taking longer to arrive in business surveys. If any of those start flashing red, it could be a sign that supply chains are starting to seize up.

Ultimately, the epicentre of any crisis will be on the shelves of Walmart and other US stores. As it stands, we don’t expect a revival of the supply shortages we saw around Covid-19. If anything, it could become easier to get things because shipping lanes become less congested from a fall in demand, especially from the US. That means the impact could lean towards lower inflation, which would provide some respite for consumers and the MPC.

Tariffs mean another rate cut

It’s a near certainty that the Bank of England (BoE) will cut interest rates to 4.5% next week, probably in a 7-2 vote with two members preferring a 50bps cut.

The economy returned to growth in Q1 and inflation slowed. However, the BoE likely won’t put much weight on the Q1 data. The more important question is how has the recent tariff turmoil changed the picture. We already know business sentiment fell to its lowest level since 2022 and consumer confidence waned too. That suggests a material weakening in the economy. What’s more, the swift fall in global commodity prices will act to take the sting out of the coming rise in inflation.

Fortunately, the UK hasn’t retaliated with tariffs of its own, which would push inflation up further. This means that weaker growth and slightly weaker inflation give the Bank of England more headroom for rate cuts.

While tariffs have weakened the growth outlook and increased the likelihood of consecutive cuts in May and June, we think above-target inflation for most of this year will keep the MPC on its quarterly path leaving interest rates at 3.75% by the end of year.

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