Asia’s supply chains experienced their sharpest downturn in 17 months in May as trade tariffs prompted retrenchment in China, according to the latest GEP Global Supply Chain Volatility Index. The composite index fell to -0.46, down from -0.39 in April, indicating rising unused capacity worldwide.

Tariffs bite as China drags on Asia

Supply chain activity in Asia deteriorated further in May, with GEP’s regional sub-index falling to -0.40 from -0.32 in April, its lowest reading since December 2023. The drop reflects a sustained retrenchment in purchasing activity, particularly among Chinese factories, which have now cut raw material and component orders for a second consecutive month.

The latest data reinforces a pattern first flagged in GEP’s April report and covered by CTMfile last month, which noted that Asia’s supply chains were already showing clear signs of slowdown as tariffs and trade uncertainty took hold. May’s reading confirms that this softening is becoming more pronounced, with China at the centre of the decline.

This marks a contrast to earlier in the year, when Asia had remained relatively stable while North America and Europe bore the brunt of trade frictions. Asian manufacturers had until recently appeared to have been somewhat insulated, but that buffer is now eroding, with suppliers facing rising slack and declining input demand.

US and Europe part ways on recovery

In North America, overall slack remained but showed slight improvement as the index climbed to -0.24 from -0.34. This uptick reflects stronger raw material purchases in the US, where manufacturers appear to be building safety stock to hedge against price increases or future disruptions.

While US manufacturers showed signs of renewed activity, driven in part by precautionary stockpiling, conditions in Canada and Mexico remained subdued. This divergence held back a broader recovery in North America. The modest uptick in the regional index was largely fuelled by increased purchasing in the US rather than a wholesale rebound across the continent.

Across the Atlantic, Europe’s index held close to April’s -0.29, dipping only slightly to -0.30. That stability aligns with a cautiously improving industrial outlook, partly supported by Germany’s recent move to relax its debt-brake rules and fund infrastructure and defence through increased issuance of Bunds. This fiscal pivot appears to be providing moderate support to manufacturing in key European economies, at least in comparison to the deeper distress seen earlier this year.

The UK, meanwhile, continues to record deep supply chain slack. May’s reading of -0.97, up only slightly from April’s -1.12, indicates persistent underutilisation. While the rate of retrenchment may be slowing, manufacturing activity remains severely depressed, with little evidence yet of a broader recovery.

How supply chains are hedging risk

The index’s component data reinforces the broader narrative. Inventories remain exceptionally lean in Europe, reflecting a deliberate shift by manufacturers towards more cost-efficient warehousing. This contrasts with North America, where safety stockpiling has stayed above long-term averages for a second consecutive month. US firms appear to be continuing their strategy of proactive stock accumulation, aimed at mitigating the impact of future supply or pricing shocks.

Material shortages remain subdued globally. GEP’s indicator tracking the availability of critical commodities and components remains below its long-term average, suggesting vendors are well positioned to meet demand. Labour conditions also remain broadly stable. Reports of rising backlogs due to staffing shortages ticked up slightly in May, but overall workforce capacity appears sufficient to meet current demand levels across global suppliers.

Transportation costs in May were broadly in line with historical norms. This stability follows a period earlier in the year where firms were watching closely for signs of cost escalation. The fact that logistics costs are not spiking suggests that, despite regional differences in procurement activity, global trade infrastructure is not currently under pressure.

Procurement under pressure

GEP’s May index highlights escalating procurement uncertainty due to tariffs. Companies are increasingly front-loading orders and stockpiling inventory, while also diversifying supplier bases and adjusting sourcing strategies to mitigate trade risks.

These patterns are consistent with GEP’s April findings, which noted early signs of customer hesitation in Asian supply chains. In May, however, the dynamic has intensified: Asia saw further procurement reductions, while North American firms continued building safety stock.

For treasurers, these developments underline the importance of revisiting contract terms, reassessing inventory financing arrangements, and integrating strategic supply data into cash-flow models. The shift from reactive procurement to proactive resilience is becoming more central in volatile trade conditions.

Managing capacity, liquidity and supplier relationships

Supply chain volatility levels at -0.46 indicate ample spare capacity overall, which is a useful buffer for treasurers managing liquidity. Lower capacity utilisation often softens price negotiations, potentially easing input cost pressures.

That said, concentration of slack in Asia highlights geographic risk. Firms with Chinese suppliers should assess contract flexibility and plan for alternative supply routes if tariffs persist.

Inventory policy may also deserve recalibration. Asia’s sharp slowdown suggests opportunities to delay inbound provisioning, whereas North American firms may need to finance elevated stock levels via working capital tools such as inventory financing or supplier credit lines.

For treasurers, the data underline the value of integrated spend and cash forecasting. As procurement shifts and regional divergences emerge, financial models must adapt to capture trade‑driven cost volatility and regional buffer strategies.

“US-China trade talks come at a critical moment - Chinese factory demand has dropped sharply, and US manufacturing is weighed down by excess capacity,” said John Piatek, VP Consulting, GEP. “This isn’t just macro noise. Tariffs are already reshaping procurement strategies as companies front-load inventories, diversify suppliers, and brace for a longer game of economic decoupling.”