Companies are stockpiling before the tariffs hit

American companies are stockpiling. Purchasing managers expect heavy import tariffs soon after the inauguration in January, and corporate treasurers are trying to get ahead of them by bringing forward orders from Asia and Europe.

Customs rules explain the urgency. Duties are generally charged at the rate in force when goods are formally entered into the country for consumption, not when they were ordered or shipped. A container that clears the port before a tariff takes effect pays the old rate; one that arrives a day later pays the new one. With no date yet announced, the only safe strategy is to land goods as early as possible.

Three reasons to order early

The tariff threat is the largest of several pressures pulling orders forward. The campaign promised a levy of at least 10 per cent on all imports and 60 per cent on goods from China. Dockworkers on the East and Gulf Coasts struck for three days in early October, and the deal that ended the walkout only extended their contract to 15 January, leaving open the risk of a second stoppage days before the new president takes office. Shipping lines are also still sending vessels around the Cape of Good Hope to avoid attacks in the Red Sea, which lengthens voyages from Asia to the East Coast and makes lead times harder to predict.

Existing duties add to the pressure. The Biden administration raised tariffs on several Chinese products, including electric vehicles and solar cells, in September, and kept most of the duties imposed during the first Trump term. Importers of those goods have already absorbed one increase this year and have little appetite for a second.

Paying now to save later

The rush to import early is pushing up container shipping rates and tying billions of dollars up in working capital. Buying ahead lets companies protect near-term margins and secure stock before the duties land. It also drains cash and borrows demand from the future. Once tariffs are in force and warehouses are full, import volumes will probably fall off sharply.

The arithmetic of an early order is simple. A company that pays a supplier several months ahead of normal has to fund the goods, the freight and the warehouse space for that extra period, usually by drawing on a revolving credit line. With the federal funds rate at 4.50–4.75 per cent even after this month's cut, short-term borrowing is far dearer than it was when firms last built buffers during the pandemic. The saving is the tariff avoided, so the trade pays only if the duty is large and arrives on schedule.

The balance sheet shows the strain. Inventory sits on the asset side, funded by payables, credit lines or equity. When a company buys early, its cash conversion cycle, the time between paying suppliers and collecting from customers, lengthens. Analysts watching working capital will see receivables unchanged, inventory swollen and cash reduced. For a retailer operating on thin margins, a few extra weeks of stock can absorb a large share of a quarter's operating cash flow.

The effect on the national accounts is similar. Imports subtract from GDP, but goods placed in inventory add to it, so the net effect on reported growth is roughly neutral while the stock builds. The reversal is just as confusing. When companies draw down their stock instead of importing, the fall in inventories subtracts from growth while the drop in imports adds to it, and in practice the two rarely net out neatly from one quarter to the next. Economists will need to look past several quarters of distorted figures to see what is happening to underlying demand.

Two earlier gluts

The first Trump trade war produced the same pattern. When tariffs on $200bn of Chinese goods were due to rise from 10 to 25 per cent at the start of 2019, importers rushed shipments across the Pacific in the closing months of 2018. The increase was postponed until May 2019, and imports from China fell that year as companies worked through their stock and shifted some sourcing to Vietnam and Mexico. The front-loading flattered trade and inventory figures for a short spell and then reversed.

The more painful precedent is 2022. After two years of shortages, big retailers over-ordered just as consumer spending swung from goods back to services, and in the spring of that year Walmart and Target both cut their profit forecasts because they were carrying too much stock. Target went on to mark down goods and cancel orders to clear its shelves. Excess inventory is expensive to hold and more expensive to clear, and the cost lands on margins in the very quarters that stockpiling was meant to protect.

Who gains from the rush

Container lines, freight forwarders and warehouse owners are the immediate winners, collecting higher rates while volumes surge. Large retailers with strong balance sheets and cheap credit can stockpile at scale; smaller importers with thin cash buffers cannot, and will face the full duty when it arrives. The trade figures will look odd for months, with a surge in imports widening the deficit this winter and a later slump narrowing it for reasons unrelated to any revival in American manufacturing.

Consumers may benefit briefly. Retailers holding plenty of pre-tariff stock can keep prices steady through the spring while rivals that did not stockpile raise theirs. Once that stock is sold, prices will reset to reflect the new duties, so the relief is temporary. Companies that stockpiled the wrong goods, such as fashion items that go out of style, will have to discount them, handing some of the saving to shoppers in clearance sales.

If the tariffs slip

The case for stockpiling is that it is cheap insurance against a tariff that could be very large. If duties arrive on time and at the promised rates, companies holding months of stock will have bought time to renegotiate with suppliers and move production. The weak point is timing. Tariffs that arrive later, narrower or riddled with exemptions leave companies holding costly inventory without the saving that justified it, and the first clues will come from monthly import data, container bookings and the executive orders signed after 20 January.

Stockpiling is a costly hedge. It will flatter trade figures this winter and leave companies with too much inventory by the spring, when import orders are likely to slump. Expect import volumes to fall sharply in the second quarter of next year, and retailers with the fattest inventories to report weaker margins by the summer.