Latest / International Business with Fexingo: Global Trade, Cross-Border Deals, and Multinational Operations / How the Trade War Is Rewriting Container Shipping Contracts
Transcript
- Lucas: So the US trade deficit widened to 77.6 billion dollars in May, according to the latest data. That's up from 54.6 billion in April. One of the quieter forces behind that swing? The cost of moving goods by sea. Luna: Container shipping rates have been climbing all year, but I think a lot of listeners assume that's just demand — more goods coming in. It's more structural than that, right? Lucas: Much more. The trade war has fundamentally changed how carriers and shippers negotiate rates. For decades, the biggest ocean carriers — Maersk, MSC, CMA CGM — signed annual contracts with retailers and manufacturers. Fixed price per container, locked in for twelve months. That model is crumbling. Luna: Because no one knows what route a container will take six months from now. Lucas: Exactly. With tariffs shifting every few weeks — the latest threat from the White House involves adding pollution costs to Canadian imports — companies are rerouting cargo in real time. A factory in Shenzhen that used to ship directly to Los Angeles is now sending goods through Vietnam or Mexico to dodge duties. That changes the shipping lane, the port, the turnaround time. A fixed contract can't handle that. Luna: So what are the carriers doing instead? Lucas: They're moving to floating-rate agreements tied to spot indices. Some are even writing contracts that reset quarterly based on the Drewry World Container Index or the Shanghai Containerized Freight Index. I spoke with a logistics manager at a midsize German auto parts supplier last week. He told me his company signed a three-year deal with one of the top five carriers back in January. The rate was fixed at about 1,800 dollars per forty-foot container. By June, the carrier invoked a force majeure clause tied to 'trade route instability' and renegotiated to 2,550. Luna: That's a 42 percent jump in six months. And the carrier could do that because the contract had a clause for 'extraordinary rerouting costs'? Lucas: Exactly. Those clauses used to be boilerplate — never triggered. Now they're the norm. And it's not just one carrier. Maersk reported in its latest quarterly update that over 60 percent of its new contracts now include some form of index-linked pricing. That's up from maybe 15 percent two years ago. Luna: So the risk is shifting from the carrier to the shipper. The company that needs to move goods now bears the volatility of both tariffs and freight rates. Lucas: Right. And that has real consequences for inventory strategy. Retailers who used to stock up once a quarter are now sending smaller, more frequent shipments to stay flexible. That pushes up per-unit shipping costs even more. It's a compounding effect. Luna: And it shows up in the trade balance data. If shipping costs rise, the declared value of imports goes up, even if the volume of goods stays flat. That widens the deficit. Lucas: Exactly what we're seeing. The May deficit figure is the widest in over a year. And the dollar has weakened slightly — the trade-weighted dollar index is at 120.5, down from 120.75 last week — so that's not helping either. A weaker dollar makes imports more expensive in dollar terms. Luna: I want to go back to the contract shift for a second. Are we seeing any pushback from shippers? I mean, a 40 percent rate increase mid-contract is brutal. Lucas: There is pushback. Some large retailers — think big-box home improvement chains — are forming buying consortiums to negotiate as a bloc. They're pooling volume to get better terms. But for mid-sized exporters, especially in Europe, the leverage just isn't there. The carrier knows you can't easily switch because capacity is tight. Vessel utilisation rates are above 90 percent on most major routes. Luna: And the alternative routes aren't cheap either. Sending goods through the Suez Canal is still risky because of geopolitical tensions. The Cape of Good Hope adds days and fuel costs. Lucas: Right. So shippers are stuck. And this is creating a two-tier market. The biggest players — the Walmarts and Amazons of the world — can absorb or hedge these costs. They have dedicated logistics teams and derivative desks. But a mid-sized manufacturer in Italy or Indiana? They're seeing margins squeezed on both ends: tariff costs on the goods and higher freight costs on the transport. Luna: Let's talk about one concrete example. The German auto parts supplier you mentioned — what's his play now? Lucas: He's doing two things. First, he's shifting more production to a facility in Mexico. That's the nearshoring trend we've talked about before. Second, he's locking in shorter contracts with multiple carriers — six-month terms instead of three years — and accepting the higher cost as a cost of doing business. He told me, 'We used to plan logistics for cost. Now we plan for certainty.' Luna: That's a telling phrase. Certainty over cost. And that mindset change is probably going to outlast any particular tariff regime. Lucas: I think so. The container shipping industry is fundamentally restructuring. The old model assumed stable trade routes and predictable policy. That assumption is gone. Carriers are now effectively insurers of route flexibility, and they're pricing that risk explicitly. Luna: And the data backs that up. The China Containerized Freight Index is up about 18 percent year-to-date. That's not just demand — it's the cost of uncertainty being passed through. Lucas: Exactly. And if you look at the bigger picture, this is yet another way the trade war is reshaping global commerce beyond the headline tariff numbers. The plumbing of trade — the contracts, the routes, the risk allocation — is being rewritten in real time. Luna: You know, listening to you break that down, it really hits home how much the day-to-day work of global business has changed. If these conversations have moved your thinking forward in some small way, it's worth mentioning that listener support is what keeps this show ad-free and independent. You can find us at buy me a coffee dot com slash fexingo. Lucas: Absolutely. And honestly, the more we dig into these structural shifts, the more value there is in having a place to step back and connect the dots. So thank you to everyone who makes that possible. Luna: So, back to the German supplier. He's in Mexico now — but does that really solve the shipping cost problem? Lucas: Partially. Shipping from Mexico to the US is cheaper than from Asia, but it's still subject to the same contract volatility. The Mexican port of Manzanillo, for instance, has seen rate increases of about 15 percent this year. The advantage is speed and flexibility — a three-day transit instead of three weeks — which lets him hold less inventory. That's the certainty he's paying for. Luna: So the new normal is: higher per-unit shipping cost, but lower inventory risk. That trade-off is becoming the baseline for multinational operations. Lucas: I think that's right. And it's happening quietly, contract by contract, route by route. The aggregate effect is what we see in the trade numbers. The US is importing roughly the same volume of goods as last year, but paying more to move them. That's a tax on global trade, and it's embedded in the cost structure now. Luna: And that tax doesn't show up as a tariff line — it's buried in the freight bill. But it's real, and it's permanent until the industry finds a new equilibrium. Lucas: Right. And finding that equilibrium will take years. For now, every logistics manager and CFO has to assume that shipping costs are structurally higher and more volatile. That changes decisions on where to build factories, how to price goods, and even which markets to enter.