UPS warns of "enormous" trade disruption as US-China tensions escalate

Investing.com -- United Parcel Service (NYSE:UPS) executives issued stark warnings about the impact of escalating trade tensions between the United States and China during the company’s first-quarter earnings call Tuesday. CEO Carol Tome delivered perhaps the most sobering assessment, stating that "the world hasn’t been faced with such enormous potential impacts to trade in more than 100 years," as the logistics giant navigates uncertain waters amid new tariff threats.

The Atlanta-based shipping company revealed that its China-to-US trade lanes, which account for 11% of UPS’s total international revenue, are its most profitable business channels. Tome emphasized that "the real point of uncertainty is this China tariff matter," adding that she hopes for clarity by the end of the second quarter as customers anxiously await policy developments.

Small and medium-sized businesses appear particularly vulnerable to the brewing trade war, with Tome noting that "many of our small and medium-sized businesses are 100% single-sourced from China." These smaller enterprises, lacking the financial resources of larger corporations, face difficult decisions as they contend with potential tariff increases that could significantly impact their operations and profitability.

UPS executives disclosed that customer behavior is already shifting in response to trade tensions, with clients increasingly moving from air freight to ocean freight to manage costs. The company also reported seeing exports from Europe, Vietnam, Thailand and other countries growing by nearly double-digit percentages to the United States, indicating an accelerating "China plus one" diversification strategy among global shippers.

The logistics giant expects China-to-US shipments to decline by nearly 25% in the coming period, according to CFO Brian Dykes, though he noted this would be "offset by material improvements in China to rest the world and rest the world to the US." This trade lane realignment reflects the complex and rapidly evolving nature of global supply chains as businesses adapt to new economic realities.

Despite the challenging trade environment, UPS reported that demand shifted downward more significantly than expected in February and remained at that lower level through March. The CFO acknowledged the "macro environment is highly uncertain due to changing trade policy and tariff uncertainty," complicating the company’s ability to forecast with confidence beyond the current quarter.

UPS is responding to these challenges with significant operational restructuring, with Tome announcing the company "will complete 164 operational closures, including 73 building closures by the end of June." This aggressive move, alongside the managed decline of less profitable Amazon (NASDAQ:AMZN) volume, which fell 16% in the first quarter, reflects UPS’s strategy to adapt to changing market conditions while improving profitability.

For the second quarter, UPS forecasts consolidated revenue of approximately $21 billion with an operating margin of around 9.3%, while average daily volume is expected to decline roughly 9%. The company’s cautious outlook underscores the significant uncertainty facing global logistics providers as international trade relationships undergo their most dramatic reconfiguration in a century, with potentially far-reaching consequences for businesses across the global economy.

This article first appeared in Investing.com