Executive Summary
- Trump campaigned on dramatically raising tariffs which could accelerate decoupling with China and re-ignite
trade wars.
- There is still a lot of uncertainty around tariff levels, policy timing, and the net impact to industrial markets.
- We believe regions including East and Southeast Asia (excluding China) and Mexico will continue to capture
important share, though we could also see a surge in U.S. manufacturing.
- Consumption trends have remained healthy and port volumes and e-commerce sales continue expanding,
which should support growth for U.S. industrial logistics.
President-elect Trump campaigned on dramatically raising tariffs
to 10%-20% on all trading partners, including Mexico, Canada,
and the E.U., and has also notably threatened to increase tariffs
on the $500 billion of annual imports from China to as high
as 60%.1
This would be an escalation of the first set of Trump
tariffs that were held in place by the Biden administration and
even expanded at certain points. However, the new proposal is
substantial and could accelerate the decoupling between the
world’s largest manufacturing and consumption superpowers and
re-ignite trade wars.
There is still uncertainty around what the Trump administration
will do, the level of tariffs, policy timing, and the net impact to
industrial markets, but a drastic rise in tariffs (to levels not seen
since the Great Depression) would almost certainly have a ripple
effect on multiple layers of the economy, including inflation,
consumption, investment, interest rates, exchange rates, and
overall domestic output.
HISTORICAL U.S. TARIFF RATE
Source: The Tax Foundation, November 2024.
While the impacts could be both positive and negative depending
on the industry and its position within the economy, the net risk
could be mostly negative because of trade retaliation, business
uncertainty, and consequential inflation. What could this mean for the industrial and logistics sector? It is our view that certain
regions will continue to capture import share, including East and
Southeast Asia (excluding China) and Mexico, and we could also
see a surge in U.S. manufacturing investment, both of which
should continue supporting growth for the U.S. logistics market.
LOOKING BACK FOR DIRECTION
Recent ‘trade war’ policies added up to an estimated $79 billion in
annual tariffs, most of which came from China. As a result, China
has lost a nearly 9% share of U.S. imports (goods) since 2017, or
a 30% decline in import dollar volume when adjusted for inflation.2
SHARE OF U.S. IMPORTS BY COUNTRY
Source: U.S. Census Bureau, Clarion Partners Investment Research, October 2024
This effectively knocked China from the top importer position
it held for over 14 years and cleared the way for Mexico (+3%
import share gained, +26% gain in real dollars) and other East
and Southeast Asian countries (collectively +5% share, +35%
gain in real dollars) to capture share. The response from Chinese
firms has been noteworthy with the rise of Asian 3PLs in the U.S.,
the shipping of smaller packages directly to consumers from
China (below taxable threshold), and investments into assembly
and logistics facilities outside of China in places like Mexico – all of which are likely an attempt to avoid or reduce additional costs brought on by tariffs. Despite the shift in trade volumes, these developments and a resilient U.S. consumer have lessened the negative impact on the U.S. industrial market.
The shift in trade patterns has also stirred discussions about
industrial demand, market selection, and the long-term viability
of existing gateways. It remains our view that while a decoupling
or material reduction in trade with China could negatively impact
near-term demand in markets like Southern California, the sharp
rise observed in trade with East and Southeast Asia (excluding
China) could soften the shortfall and preserve occupancy in
gateway markets. Additionally, the perceived risk of higher
tariffs, along with other possible supply chain disruptions like the
recent port strikes, appears to have started a push to stockpile
inventories which could subsequently improve warehouse
utilization and warehouse demand as firms try to minimize supply
chain disruptions. This may result in increased reliance on third-party logistics across a broader range of tenants as they look to
outsource the complexity of supply chain logistics. In fact, actual
net absorption was higher in 2017 and 2018 than we originally
expected, which is when the initial Trump tariffs were put in place.
U.S. INDUSTRIAL NET ABSORPTION
Source: CBRE-EA, Clarion Partners Investment Research, Q3 2024
The market remained above Long Term Average (LTA) net
absorption while vacancy rates remained near record lows
through 2019 given the resiliency of the U.S. consumer and
including robust e-commerce sales growth.3
Mexico’s proximity to the U.S. market and appealing relative
manufacturing costs have positioned the country to benefit as a
viable near-shore alternative. Today, Mexico is the largest source
of imports into the U.S. This has increased the investor appeal
for markets like El Paso, Texas, which have seen notable growth
recently.4
Despite increased attention to these rapidly growing
small border markets, our analysis of GPS logistics transportation
data suggests that incoming goods from Mexico largely flow
through established markets, such as Dallas-Fort Worth and
Houston, but also less obvious markets like Phoenix, Southern
California, and several U.S. Southeast and Midwest markets
given their logistics infrastructure and demographic reach. Similar
markets are also a top origin of exports to Mexico, often for
intermediary goods that are part of a greater bilateral value-add
manufacturing supply chain. We believe investment in these
more established markets provides exposure to growing Mexico
manufacturing (see markets table on the right).
SCENARIO A: A CONTINUATION
Under this scenario tariffs are increased modestly, and the
decoupling trend continues, impacting import growth rates
similarly to what has been observed since the initial Trump
tariffs. We estimate that China imports continue decreasing at an
average annual rate of 5%, or just over 20% over the next five
years. This would decrease China imports to levels not seen since
the early 2000s, effectively erasing more than a decade of growth
after adjusting for inflation.
Making the same continuous growth assumption, however, for
East and Southeast Asia (excluding China), or 5.5% growth
annually and just over 30% over five years, would more than
offset the drop-off from China. After all, the region’s import dollar
volume has remained above China’s since 2022.5
Mexico would
also be poised to see volumes grow more than 20% over five
years, keeping it at the top position by individual country and likely
benefiting the markets mentioned earlier.
Source: Clarion Partners Investment Research, U.S. Department of Transportation, International Trade Administration,
Advan, Q3 2024. Southern California includes Los Angeles, Riverside, San Diego, and Orange County. First column is
based on imports through Otay Mesa, El Paso, and Laredo.
SCENARIO B: AN ESCALATION
A scenario where all imports from China see a 60% tariff could
have a drastically different outcome. Building from the changes
seen since 2017, a 60% tariff would mean four to five times the
tariff cost burden on Chinese suppliers, importing U.S. companies,
and possibly consumers to the sum of $250 billion based on 2023
goods imports, equivalent to roughly 3% of U.S. total retail sales.6
While East and Southeast Asia (excluding China) and Mexico
should continue to capture growth as sourcing diversifies, it could
be disproportionate to recent periods given the possible tariffs
that each could face and their inability to respond to those levels
quickly given time and cost constraints. This could also accelerate
India’s export market given its relative low-cost structure and large
workforce. It is also worth noting that the Chinese government
is likely to step in with support (fiscal, monetary, exchange
rate controls, and regulatory policies) given the importance of
manufacturing and exports for Chinese GDP growth.
U.S. domestic manufacturing is likely to see considerable
growth and investment through policies and subsidies under
this scenario, but this will likely be focused on high value-add
industries and will come with a lag. Adding this level of capacity
to U.S. manufacturing would require a substantial amount of
time and hefty investment into areas like automation, ultimately
forcing companies to absorb much of the tariff cost in the interim
at different points of the supply chain. At least a portion of those
costs would likely be passed on to consumers through price
increases. The long-term impact depends on which policies
remain in place after 2028 and the severity of the bilateral fallout
between the U.S. and its import partners as well as the economic
impact.
CONCLUSION
U.S. consumption ultimately drives growth for industrial and
logistics real estate, and it has remained resilient over the last
six years despite historically higher tariffs and inflation, as well
as elevated interest rates and macroeconomic uncertainty. Real
retail sales have increased 20% since 2017 with real e-commerce
sales alone doubling over the same period.7
This has supported
rapid growth in import TEU volumes and lifted the ratio of both
e-commerce sales as a percentage of retail and real e-commerce
sales per industrial square foot. If consumption continues on a
healthy path, the growth prospects for industrial remain bright.
However, a pullback in consumer spending from inflation or an
economic slowdown could have a short-term negative impact
on the market. While there is a wide range of uncertainty on
future policy, it is our view that certain regions should continue
to benefit from the U.S. / China decoupling, including East and
Southeast Asia (excluding China) and Mexico. We also expect
additional growth in U.S. manufacturing investment which should
benefit the warehouse sector. Additionally, consumption trends
have remained healthy and port volumes and e-commerce sales
continue expanding, all of which should support growth for the
U.S. industrial logistics market.