Asian Trade Reveals Economic Distress

The views expressed here are solely those of the author and do not necessarily represent the views of FreightWaves or its affiliates. 

A recent "surge" in containers from China has created a plethora of bullish headlines signaling a possible turnaround. Well, don't pop the champagne yet. The flow of trade within a critical supply chain trade route will tell you to put that bottle of bubbly back on ice.

A line of drayage tractors wait to be unloaded at portside.
(Photo credit: Jim Allen/FreightWaves)

In reality, the delicate balance of supply and demand along the crucial intra-Asia trade lane is waving the economic distress flag. China, Vietnam, India, Malaysia, and Bangladesh make up this critical offshoring region and are responsible for the world's manufacturing and apparel industries, both finished and semi-finished products. This trade region is the last leg a product makes before it is finally exported. The volume of containers moving along the intra-Asia trade lane will tell you the strength of the world's consumer. More volume means more demand for products, less volume means less demand.

Based on the movement of these containers, year-on-year growth is at a dismal four million twenty-foot equivalent units (TEU) volume. This tells the story of more hardship ahead, which would translate into fewer containers being exported out of China to the United States and around the world.

"May volumes are bound to disappoint as well," explained BIMCO's Chief Shipping Analyst Peter Sand. "We have seen a record low level of manufacturing orders for export in recent months from China, so a return to 2019 levels will take much longer. High unemployment and lower consumer spending power, which are set to stick around for longer than the immediate health crisis, mean that a return to 2019 sales is not just around the corner." 

You could argue Sand is wrong but based on the trends and plans of retailers he is not. Traditionally, the retailing industry plans at least a season or two ahead, banking on what they think consumers will spend when placing their manufacturing orders. Based on the volumes of those orders, you can get a sense of what retailers are expecting for a healthy consumer to buy and how much.

Containers await pick-up.
(Photo: Jim Allen/FreightWaves)

According to Worker Rights Consortium (WRC), an independent labor rights monitoring organization, the intra-Asia corridor experienced order cancellations and refusal of retailers to pay for completed product and delivery as early as March. In response to the growing number of canceled orders and refusal to pay, the WRC along with the Center for Global Workers' Rights (CGWR) at Pennsylvania State University created the COVID-19 Tracker, publicly listing those companies that are paying and not paying for their goods.

"Major brands and retailers have retroactively canceled orders for billions of dollars in clothes that suppliers have already produced," explained Scott Nova, CEO of Global Workers' Rights. "U.S. apparel imports for April 2020 declined by almost half from the same month in 2019 ($6.2 billion to $3.4 billion). For example, Kohl's and Sears have both canceled more than half a billion dollars' worth of orders."

(Photo: Flickr/Mike Mozart)

Sears declined to comment on Nova's comments. Kohl's did not respond for comment.

As a result, retail and fashion industry consultant Rick Helfenbein said some suppliers in Asia are asking for cash before delivery (CBD) and some are only accepting letters of credit. "The pendulum of trust, trade, and commerce is now swinging in two directions," explained Helfenbein. "Earlier this year when retailers locked-down, orders were canceled and many suppliers in Asia were [unfortunately] left holding the tab. This is all unfolding in a marketplace glutted with too much-unsold merchandise and saddled with high unemployment. No matter how strong the stock market is, many in the industry really wonder how long it will take for the mythical Humpty Dumpty to put retail back together again. The retail business is destined to be on a very slow road to recovery."

The blue economy connects the world. Container growth has been consistent for the last 40 years thanks to the growth of globalization. Not since the 2008 financial crisis has global trade taken such a huge hit. COVID-19 has already proven to be just as destructive to global trade, and the year is only six months in.

Based on the current flow of trade along the intra-Asia route, fewer containers are expected. Just like bricks supporting the foundation of a house, containers are the bricks to the foundation of the world economy. If you take away the bricks, the foundation is weaker. The intra-Asia trade route, which is a brick in the trade foundation, is manufacturing less. Time for a fortification plan.