Tag Archives: logistics

Slow Trade Growth is the New Normal

The World Trade Organization forecast on April 2 that merchandise trade will grow a modest 2.6 percent in 2019, with risks to the downside. The outlook for next year is only slightly better, with trade projected to expand 3 percent. These are disappointing numbers: international commerce, the WTO anticipates, will expand no faster than the world economy this year and will be only slightly more robust than global GDP in 2020.

The WTO’s director-general, Robert Azevêdo, blamed the unhappy news on uncertainty caused by protectionist bluster. “Of course there are other elements in play, but rising trade tensions are the major factor,” he told the press. But Mr. Azevêdo may be overstating the case. There is reason to think that slow growth in goods trade is not an aberration caused by protectionist rhetoric, but is the new normal, due to factors that have nothing to do with trade wars.

For most of the past half-century, exports and imports grew far faster than the world economy. Merchandise trade, less than one-third of the world’s GDP in the 1980s, climbed to more than half in 2008 as China developed into the world’s workshop. China’s factories consumed vast quantities of imported fuel, ore, and chemicals; shipped a quarter or more of their output abroad; and then imported waste paper, used electronic equipment, and scrap metal for recycling into yet more manufactured goods.  Each part of this cycle involved long-distance trade, which is why demand for container shipping increased an average of roughly nine percent per year.

Exports and imports of goods plummeted in 2009, and they have grown since then on a much lower trajectory then before. It seems likely that in the years ahead, international trade will grow more slowly than the world economy as a whole, a distinct divergence from the pattern since World War Two.

Several forces are driving this trend. One is a change in consumer behavior. As personal incomes rise, households tend to shift their spending away from physical products toward services and experiences, from education and medical care to adventure vacations.  Call it the Marie Kondo effect, the belief that having things brings us less joy than doing things. This shift in spending patterns is positive for trade in services, but it is unambiguously negative for merchandise trade.

Another cause of slower growth in trade is a reconsideration of global supply chains. Starting in the late 1980s, lower transport and communications costs and better information technology made it practical for manufacturers and retailers to stretch their supply chains around the globe in search of lower production costs. Intermediate goods—things made in one country and shipped to another for further processing—account for a large share of all merchandise trade.  But in recent years supply chains have become more costly and less reliable. Importers have responded to increased risk by keeping more inventory on hand and by building redundancy into their supply chains, measures that make trading more expensive.

A third factor weighing on trade is automation. The great relocation of factory production to China, Mexico, and Eastern Europe since the early 1990s was, in good part, a search for lower labor costs. But production labor matters far less than it used to as robotics and artificial intelligence enable computers to take on more of the work. Additive manufacturing, more widely known as 3-D manufacturing, lets manufacturers make some goods with very few workers on the factory floor, and important experiments are underway to produce some types of apparel and footwear in highly automated factories.  These developments are making it feasible to locate factories near end markets rather than near cheap labor, and they are likely to suppress the growth of international trade.

All this means that cross-border movement of goods will probably be far less buoyant in the years ahead. Services and ideas, not things, account for a growing share of global commerce; since 2012, exports of commercial services have grown twice as fast as exports of goods. Ship lines, ports, and railroads that have invested in expectation of an every-increasing volume of containers may need to adjust their expectations.  Even if protectionist pressures recede, the next stage of globalization will be quite different from the last one.

Delivering the Goods

Perhaps more than any other industry, trucking should demonstrate the virtues of capitalism. Almost anyone can become a driver or start a trucking company. Since the federal government’s economic regulation ended in 1980, truckers have been able to drive whatever routes they wish, carry whatever type of freight is available, and charge whatever price the market will bear. Conversely, shippers can hire employees to drive company-owned trucks, can sign long-term contracts with trucking companies, or can hire an independent trucker to haul a single load. With hundreds of thousands of truck operators on the one side and hundreds of thousands of shippers on the other, the price of freight transportation fluctuates constantly based on supply and demand. This is the free market on steroids.

Or downers. Whatever economic theory says it should be, in the real world the trucking market is a mess. Shippers complain about terrible service, and their customers complain about blown schedules. Drivers, who often earn little or nothing when their vehicles are not moving, complain about congested highways and about having to cool their heels at a distribution center that is in no hurry to load or unload their truck. Trucking companies complain they can’t retain drivers. Meanwhile, many of the long-haul trucks on U.S. highways are running empty. Deregulation was supposed to put an end to that problem, but it didn’t. Local drivers now seem to spend much of their time making repeat deliveries to households that ordered online but weren’t at home when the order arrived, hardly a constructive use of capital and labor.

The extraordinary inefficiency of the trucking industry has not escaped notice. I recently spoke at a meeting organized by a company called FreightWaves, which is one of many trying to figure out how to create order out of trucking chaos. In addition to running a news service, it brings entrepreneurs touting solutions to the trucking industry’s problems together with investors who might finance their ventures and truck lines that might purchase their products. Some were selling software. Some were selling hardware. Some were selling services: Uber Trucking, which offers an app that a shipper can use to summon a driver, paid for dinner. Which is to say, Uber’s shareholders paid for dinner, because the company isn’t earning any profits that could cover such a bill.

The common vision of these visionaries is that technology can help squeeze the waste out of trucking. So far, though, their track record isn’t great. Trucking illustrates a paradoxical problem. The very things that economists praise about markets — the jockeying of many buyers and sellers to find the best deal, the constant pressure to innovate in order to eke out a profit, the dynamic benefits that arise from forcing prices down and inefficient players out — mean that there may be few commonalities among the participants. No one is in a position to coordinate or to impose order, so an innovation that may have great benefit overall — for example, a new system for matching drivers with loads or a device for keeping track of drivers’ hours — may not be used widely because it doesn’t serve the purposes of many industry participants.

In fact, once they’re done grousing, neither truckers nor their employers seem all that eager for change. Despite the purported driver shortage, the average weekly pay of long-haul truckers rose a scant 2% last year. After inflation, the year-on-year pay increase was zero. Even so, the number of people employed by general freight trucking firms reached an all-time high in 2018. This suggests the industry may not be quite as ripe for disruption as techno-optimists believe.

And what of the unhappy shippers? There’s an interesting development underway. Companies from WalMart and Amazon to your local furniture store seem to giving up on the industry’s ability to straighten itself out. They are buying more trucks, hiring more drivers as full-time employees, and handling a larger share of their freight transportation needs in-house.

This is a return to the old ways. Back before deregulation, about half of all over-the-road trucks were owned by the manufacturers and retailers who required their services. Even though these “private carriers” usually carried loads only in one direction and returned home empty, they provided cheaper, more reliable service than the regulated truck lines. In today’s environment, it’s likely cheaper for shippers to purchase trucking services than to manage their own truck fleets. They’re paying a premium for protection from a chaotic market that isn’t able to deliver the goods.

Thin Ice

The news that Maersk, the container shipping giant, is sailing a containership from Vladivostok to St. Petersburg along the northern coast of Russia has drawn new attention to the consequences of climate change in the Arctic. While the warming of northern climes is sadly real, it is unlikely to bring about a major change in container shipping.

For ship owners and their customers, the attractions of the Northern Sea route are obvious. By sailing north rather than south from Shanghai, Busan, or Yokohama, a ship bound for Europe can shave several thousand kilometers off the trip, saving a couple weeks of travel time, a great deal of fuel, and the need to pay a steep toll to pass through the Suez Canal. A small number of commercial ships have traveled this route over the past couple years, carrying commodities, heavy equipment, and other cargoes. Some ports in northern Europe have begun to dream of becoming centers for exporting to Asia.

The Northern Sea route may well develop into a useful artery for bulk ships and other vessels on one-off voyages, but it seems quite unlikely to become a highway for containerships. First and foremost, ship lines employ their containerships in what is called “liner service,” meaning that they offer scheduled port calls at regular intervals. Between Asia and Europe, a carrier might create a “string,” a route calling at eight or ten ports from, say, Busan to Antwerp and back again, with enough identical vessels assigned to the string that it can guarantee an Antwerp-bound ship calling at Dubai every Tuesday and a Busan-bound ship dropping by Algeciras on Thursdays. The Northern Sea route is poorly suited to this sort of arrangement because, for the foreseeable future, it is likely to be navigable only a few months each year. If a ship line serves the route between June and September, what will it do with those ships the rest of the year? This is no small question: vessels are the most expensive part of running a container shipping operation, and ship lines that can’t keep their vessels operating near capacity tend not to survive.

A second challenge to the success of the Northern Sea route is that its most protected, least ice-prone areas, close to the Russian coast, have shallow water. This means that shipping companies would have to use vessels that are about a fifth the size of the biggest containerships in use between Europe and Asia today. The cost of providing a “slot” for a single container is much higher aboard a small ship than aboard a big one, so ship lines won’t be eager to employ such small vessels on lengthy routes. They could use larger ships by sailing farther from the coast, but that route is blocked by ice for a greater portion of the year and is more likely to require the use of icebreakers.

A third challenge is that there are no great population centers en route. Ship lines select the ports in each string carefully, estimating the average number of containers they will take on here and put off there, in an effort to keep their vessels as full as possible. There may not be enough cargo from Antwerp to Busan to justify running a ship that makes no stops in between.

As a recent study by economists at the Copenhagen Business School points out, my hypothetical trip between Busan and Antwerp covers 7,248 nautical miles via the Northern Sea route, 33 percent less than a voyage between the same points through the Suez Canal. In theory, there is money to be saved, even after extra costs for having icebreaker and emergency equipment on standby. But given the practicalities of container shipping, it’s going to be difficult for the Northern Sea route to live up to the headlines.

Who Owns the Curb?

How we define a problem often affects how we think about it. Consider the question of how we deal with the demand for curb space in our urban areas. If one were to approach this question as an engineer, one might look for ways to redesign our streetscape and reallocate the curb to certain users. If one were to approach this question as an economist, however, one might ask whether there’s a pricing problem.

As discussed earlier this month at the annual meeting of the Transportation Research Board (TRB), a government-sponsored research organization, this is an engineering problem. The assertion is that new ways of doing business have left us with too many vehicles at the curb. The growth of online shopping means more trucks making deliveries, and the growth of ride-sharing services has brought Uber and Lyft drivers waiting to pick up customers. Therefore, the logic goes, we need to provide more unloading zones for trucks and more pick-up locations for ridesharing vehicles. The presentations at TRB suggested that other uses, such as bus lanes, bike lanes, and parking of passenger vehicles, may have to give way.

The underlying assumption, you may have noticed, is that because consumers want online shopping and ridesharing, our streets should accommodate these uses. But there’s another way to look at the problem. Curb space is obviously of great value in some urban areas. That value belongs to local taxpayers. Every time a UPS truck parks at the curb to provide “free delivery” from Amazon, those local taxpayers are subsidizing Amazon customers unless UPS is paying the full market value of that parking space. Every time an Uber driver idles at the curb in Midtown Manhattan, she is occupying valuable real estate without paying for the privilege, and that subsidy is reflected in the artificially low cost of the ride.

Can the demand for curb space be met with economic measures rather than engineering? There is enormous pressure not to find out; in 2014, when Washington, DC, imposed a $323 annual fee for a decal that permits a truck to park in a loading zone, the trucking industry howled–even though that fee, about 88 cents per day, is far less than automobile drivers would gladly pay for a space one-third that size in many parts of the city. But perhaps if trucks and ridesharing vehicles paid the full value of the public assets they use, consumers would make less use of their services and businesses would save money by accepting deliveries at times when the value of curb space is low. Such changes could help relieve traffic congestion without remaking urban streets. There’s something to be said for paying full freight.