Tariffs Will Cause Pain For The Transportation Sector

Parcel consolidators and freight forwarders have the highest exposure to the new tariff enforcement regime under the Trump administration. Section 321 - a provision within U.S. customs law that allowed companies to import goods valued under $800 duty-free. This allowance is commonly called the U.S. De Minimis Value. De minimis is a Latin term that means something is too small or insignificant to be considered. Imports under $800 were seen as being insignificant. So, to streamline international trade and reduce administrative burdens, these shipments were exempted from tariffs.

How the Regulations are Changing

Recent executive orders and new Tariff Act regulations have redefined what is allowable. $800 is still the threshold for many items, but goods that fall under Section 201/232/301 tariffs are no longer no longer eligible for de minimis, no matter how low the declared value.

• Section 201 Tariffs aim to protect domestic industries suffering “serious injury” from a surge in retail imports. These are often called safeguard measures. Unlike anti-dumping or countervailing duties, evidence of unfair pricing is not needed to trigger Section 201 tariffs. Solar panels and washing machines, for example, have fallen under these rules. These tariffs often last four to eight years.
• Section 232 Tariffs address potential national security threats. When the U.S. Department of Commerce deems certain imports—like aluminum or steel—could undermine defense capabilities, the President can impose tariffs or quotas without congressional approval. A recent example includes the 25% duty on steel from many foreign sources.
• Section 301 tariffs target countries - most prevalently China - for unfair trade practices, such as intellectual property theft or forced technology transfers. Forced technology transfers occur when a foreign government compels a US company to share their technology, often by being forced to create a joint venture with a local company, as the price of doing business in their country. China is the nation most often blamed for these practices. The US investigates alleged violations, and if negotiations fail, tariffs on billions of dollars of imports can be imposed. Goods are hit with rates often up to 25% - though recent measures have seen them climb as high as 50% or 100% on certain items.

Customs and Border Protection is now paying closer attention to repeated low-value shipments. They are checking to ensure that the imports are not undervalued and that the goods are not misclassified. This change closes a significant loophole used by eCommerce giants like Temu or Shein, which have shipped millions of small-value packages directly to U.S. consumers.

How Does This Affect the Transportation Sector?

Higher tariffs can lead to a lower volume of shipments. TD Cowen, an American multinational investment bank with an investment division, says that parcel carriers and forwarding have the largest exposure to the new enforcement regime because “global commerce touches every piece of their revenues base.”

The de minimis exemption drove “robust” airfreight volume in 2024 and strong growth in UPS's (NYSE: UPS) and FedEx's (NYSE: FDX) ground economy offerings. In contrast, Expeditors “has reportedly stayed away from de minimis shipments that the company felt did not satisfy the spirit of the exemption.” 42% of GXO’s volume is related to omnichannel commerce. These types of shipments are seen as having minimal exposure. 20% of CH Robinson’s revenue comes from freight forwarding with significant shipments originating from China.

Rail, according to TD Cowen, is not without exposure. Among the Class 1 railroads, crossings at the Mexican border offer a greater threat than the Canadian border because of how much Chinese freight gets transshipped through Mexico. For Union Pacific (NYSE: UNP), Mexican volume represented 11% of the company’s 2023 revenues. The railroad’s chief legal officer recently sold shares worth approximately $1.64 million, although that may be because UNP was trading high.

About 10%-15% of CSX’s revenue comes from Canada and Mexico, with Canada representing a slightly larger share than Mexico. TD Cowen believes the Norfolk Southern to have a similar exposure to Mexico as CSX.

When it comes to trucking, less-than-truckload carriers have a minimal exposure to these changing regulations. Truckload shipper Werner is exposed. TD Cowen believes that Mexican traffic represents a low teen percentage of their 2024 revenues.