Imagine a savvy business owner trying to predict international trade trends for the coming year. As they arrange air shipments for critical components, the escalating tariff war between the U.S. and China leaves them navigating treacherous waters—where one misstep could mean being swallowed by soaring costs. This uncertainty perfectly captures the current state of the global air cargo market.
Overview of the Air Cargo Market
Air cargo, or air freight, refers to the transportation of goods between countries or regions using aircraft. Renowned for its speed and reliability, this method is particularly vital for high-value, time-sensitive commodities like electronics, pharmaceuticals, and perishable goods. In global trade, air cargo serves as a crucial link connecting production, consumption, and supply chains.
The Rise of Short-Term Contracts
A notable trend has emerged in recent months: shippers and freight forwarders are increasingly opting for short-term contracts over traditional long-term agreements. According to an April 3, 2024 report by Xeneta, 79% of air cargo contracts signed in the first quarter had durations of three months or less—a nearly 20 percentage point increase from the same period last year. Additionally, freight forwarders are now routing approximately 45% of their cargo volumes through spot markets.
Drivers Behind the Shift
This trend reflects growing global trade tensions, particularly the U.S.-China trade conflict. The tariff policies initiated under the Trump administration and subsequent retaliatory measures have created significant supply chain uncertainty. Key factors include:
- Trade Policy Volatility: Frequent tariff adjustments make it difficult for businesses to forecast costs. Long-term contracts with fixed rates may become disadvantageous if tariffs change dramatically.
- Tariff Impacts: Reciprocal tariff hikes between the U.S. and China have directly increased import/export costs. For example, U.S. tariffs on certain Chinese goods could reach 245%, while China imposed equivalent countermeasures.
- De Minimis Rule Changes: The U.S. temporarily revoked duty-free exemptions for low-value shipments from China and Hong Kong, though plans to reinstate them remain uncertain. This affects e-commerce logistics—a major air cargo demand driver—prompting more flexible strategies.
Industry Perspectives
Niall van de Wouw, Xeneta's Chief Airfreight Officer, noted that while slowing freight rate growth typically encourages longer contracts for better pricing, current market conditions deter long-term commitments. Even with exit clauses, fixed annual contracts now carry substantial risk. "If companies plan a year ahead," he warned, "they may later find costs far exceeding projections."
Market Implications
The short-term contract surge carries multiple consequences:
- Increased Volatility: Spot market reliance makes rates more sensitive to supply-demand fluctuations.
- Overcapacity Risks: Potential de minimis rule changes could reduce e-commerce volumes, flooding the market with excess capacity and pressuring freight rates.
- Supply Chain Complexity: Frequent contract negotiations demand greater managerial resources.
Strategic Responses
Businesses can adopt several approaches:
- Monitor policy developments closely, especially tariff and de minimis adjustments.
- Balance contract types—combining long-term agreements for stability with spot market flexibility.
- Enhance supply chain efficiency through technologies like IoT and data analytics.
- Diversify transport modes (e.g., ocean, rail) to reduce dependency on air cargo.
- Strengthen partnerships with airlines and forwarders for better support during disruptions.
Background: U.S.-China Trade Friction
The air cargo market's challenges stem partly from the U.S.-China trade war that began in 2018. The U.S. cited national security and unfair trade practices (e.g., forced technology transfers, IP violations) to justify tariffs under Section 301 of the Trade Act of 1974. China retaliated with equivalent duties and WTO complaints. The conflict has depressed global trade volumes, disrupted supply chains, fueled inflation, and heightened market uncertainty.
The De Minimis Debate
The U.S. de minimis rule (Section 321 of the 1930 Tariff Act) allows duty-free entry for shipments under $800, facilitating cross-border e-commerce. Critics argue it harms domestic industries and enables tariff evasion. The policy's fluctuating application to China/Hong Kong shipments has created additional market instability.
Looking Ahead
The air cargo sector faces continued uncertainty from trade disputes, geopolitics, and pandemic aftershocks. As van de Wouw observed, "Everyone is waiting to see how de minimis changes and new tariffs will impact trade volumes. We must anticipate conditions worsening before improvement." Businesses must remain agile, leveraging data and diversified strategies to navigate this turbulent landscape.