Freight Markets Brace for Potential Impact of Proposed Tariffs

Dina Youssef

Current State of Freight Demand in the U.S.

Domestic freight demand in the United States has shown impressive growth, as evidenced by data from SONAR, trade agencies, and industry experts. However, despite these optimistic indicators, many carriers report feeling skeptical about this trend, as their own experiences reflect an industry facing considerable challenges. Some may even see similarities between this and recent economic narratives, where Americans were told their concerns over rising costs were more perception than reality.

This article takes a different approach, focusing on the factors shaping the freight industry as it braces for the effects of the proposed tariffs under President-elect Donald Trump’s administration. Here, we explore both the immediate impacts and longer-term implications these tariffs could have on freight demand, capacity, and rates within the trucking industry.

Record Imports and the Strain on Freight Markets

For months, U.S. importers have been strategically frontloading shipments to dodge anticipated tariff hikes. This influx has pushed the trade deficit to its highest levels since April 2022, resulting in a flood of freight within the domestic market. While this may suggest a bustling market for carriers, the sentiment among many remains low.

The key lies in understanding the dual nature of the market—both supply and demand. Although demand has exceeded the bearish forecasts from prior years, it has yet to catch up with the substantial surplus of carrier capacity, which continues to oversaturate the market. This mismatch between abundant supply and strong demand has led to depressed carrier rates, which have remained stubbornly low, fostering pessimism within the industry. The irony here is that, despite ample freight, too much capacity has driven down profitability for carriers, creating a challenging operating environment.

Inflation and Consumer Spending’s Role in Freight Demand

In addition to overcapacity, another factor weighing on carrier sentiment is a noticeable slowdown in consumer spending on goods compared to pre-pandemic years. Between 2017 and 2019, inflation-adjusted consumer spending on goods grew at an annual average of 3.7%. In 2024, however, this growth has nearly halved to around 2%. Spending on durable goods—key drivers of truckload demand, including appliances and furniture—has dropped from an average yearly growth of 5.6% to 2.5% this year.

The rapid consumer spending surge of 2020-2021 fueled today’s overcapacity. This spending was followed by inflation that escalated in 2022 due to the Russian invasion of Ukraine, which left many Americans with depleted savings, turning to credit to cope with rising expenses. In response, the Federal Reserve raised interest rates at an unprecedented pace to combat inflation, inadvertently making it more challenging for businesses to secure capital for growth.

Freight demand is closely tied to the industrial economy, particularly manufacturing and construction, which are highly sensitive to elevated interest rates. While the Fed recently cut rates for the second time in this cycle, rates remain high, and manufacturers continue to report low confidence, resulting in fewer shipments to carriers. The situation illustrates a broader trend where elevated interest rates and cautious consumer spending exert downward pressure on trucking demand, limiting potential growth in the sector.

A Surge in Imports Amid Softening Domestic Manufacturing

Interestingly, despite softening demand from domestic manufacturing, 2024 has witnessed unprecedented growth in U.S. imports. For nearly two weeks in September, U.S. import volumes exceeded those recorded during the historic peaks of 2021 and 2022. This surge has brought U.S. ports and supply chains close to congestion levels seen at the height of the pandemic, underscoring how significant this year’s import boom has been.

However, this import growth has also widened the U.S. trade deficit to its largest in over two years. Although the trade deficit often carries a negative connotation in political and economic discussions, it’s not without benefits for the freight industry. A higher deficit generally indicates robust consumer spending on imported goods, which subsequently drives demand for trucking and intermodal transportation services.

Still, there are underlying risks to consider with this reliance on imported, freight-intensive goods. While international trade is typically mutually advantageous, relying heavily on imports becomes risky when trading partners’ geopolitical interests conflict with those of the U.S. As the Trump administration has shown a proclivity for protectionist policies, the likelihood of volatility in global trade is high, particularly with proposed tariffs on Chinese imports and potentially broader tariffs across the board.

Preparing for Potential Tariff Impacts

Anticipation of tariff hikes has driven many shippers to frontload imports, evident from consistently high import bookings since mid-2024. This trend extends to containerized intermodal shipments, which have surged since June. Data from the Logistics Managers’ Index (LMI) reveals that warehousing capacity utilization has increased significantly, as shippers prioritize stockpiling goods over rapid transportation to final destinations.

The trucking industry has only moderately benefited from this import boom, as much of the freight is warehoused or transported inland at a slower pace via rail. This subdued demand in trucking suggests that shippers, while keen to avoid tariffs, are less concerned with the speed of delivery, opting instead to store goods until demand justifies distribution.

Short-Term vs. Long-Term Effects of Proposed Tariffs

The short-term impact of Trump’s proposed tariffs on freight markets is already observable, but the long-term implications are more ambiguous. If these trade policies achieve their goal, the U.S. manufacturing sector may accelerate its gradual shift toward reshoring, which has been underway since the 2008 financial crisis. Several factors are driving this shift, notably the disruptions from the 2018 trade war and the COVID-19 pandemic, which highlighted the risks of relying on foreign manufacturing, especially in China.

Chinese labor costs have risen dramatically, reducing the cost advantage that once made China attractive for manufacturing. Analysis from Bank of America shows that China’s hourly manufacturing wages increased by 700% between 2006 and 2021, while wages in Mexico rose by only 5% over the same period. This wage disparity strengthens the case for relocating manufacturing operations closer to U.S. markets, particularly within North America.

However, Trump’s tariff proposals, particularly the 60% tariff on Chinese goods and a blanket 10% tariff on all imports, have sparked concerns about renewed inflationary pressures. Bond yields rose following the election results, indicating that financial markets foresee potential inflation and fiscal deficit growth due to the combined effects of tax cuts and tariffs. Should inflation rise significantly, the Federal Reserve may be compelled to halt rate cuts or even implement new rate hikes, posing further challenges for the manufacturing and freight industries.

Navigating an Uncertain Future for the Freight Industry

The freight industry’s future hinges on the outcome of these tariff policies. While some fear tariffs could lead to inflation and higher interest rates, others see a potential silver lining. In the short term, tariff concerns will likely sustain high demand as shippers expedite imports before implementation. Once tariffs take effect, however, demand may taper, and freight volumes will increasingly rely on domestic production and lingering inventories in storage facilities.

As the trucking market adjusts to a likely downturn post-tariff, the overcapacity that has plagued the industry for over two years may finally dissipate. Meanwhile, manufacturers are expected to continue their reshoring initiatives, gradually shifting production to North America. This transition is expected to bring about a stronger and more resilient domestic freight market, poised to experience another boom in demand as manufacturers ramp up production.

If the industry sheds excess capacity during the anticipated downturn, it will be better positioned to meet future demand. This reduction in supply could eventually drive up carrier rates, making the trucking sector an attractive market once again and restarting the supply-demand cycle that defines freight markets.

Conclusion: A Cyclical Future for Freight Markets

In essence, freight markets are preparing for an impactful period of transition. The proposed tariffs under President-elect Trump’s administration have already influenced short-term strategies as shippers rush to avoid potential price increases. While the longer-term impacts remain uncertain, the freight industry can expect a mix of challenges and opportunities as the reshoring of manufacturing gains momentum. This transformation may offer a more stable foundation for freight demand, assuming that the industry can balance its capacity to avoid the pitfalls of the current overcapacity crisis.

Freight markets stand on the cusp of change, facing both risks from potential inflation and interest rate hikes and rewards from increased domestic production. As the trucking industry braces for these changes, the importance of strategic planning, capacity management, and adaptive strategies has never been more evident.

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