Strategic View: Transitioning is fraught with uncertainty

   Over the last half century, a confluence of factors, such as infrastructure investments and policies to promote international trade, have helped create a larger and more prosperous global economy. The good news is that the best is yet to come. However, growth comes at a cost, not just the cost of investing to grow the world economy, but also having to tolerate the increased uncertainty that the transition to such a state causes. This is particularly true for the freight movement industry that has to make long-term investment commitments in the face of uncertainty. When uncertainty becomes overwhelming it helps to step back and identify the long-term sustainable trends that should influence investment decisions, as well as factors that can cause deviations from expected outcomes.
  
Long-term sustainable trends. Barring unforeseeable events, such as natural catastrophes and pandemics, it is likely that the world population will continue to grow for the next several decades. More people means more consumption and, therefore, more production and transportation of goods. It is also worth noting that declines in mortality rates have been sustaining population growth. Therefore, the share of the population that is of retirement age will continue to grow. This is particularly the case for advanced industrial economies.
   Since older populations tend to retire and spend more on services such as leisure and healthcare than on goods, it is not surprising that many factories relocated to emerging market economies with younger populations and more abundant labor. Increased employment opportunities in factories located in urban areas combined with mechanization of farms and mines has seen a global migration from rural areas to urban locations. Manufacturing jobs usually pay better and, therefore, the migration of factories to emerging markets is helping to increase the size of the global middle class.
   Rising productivity from technological advances, which allow greater economies of scale to be achieved, and improved resource recovery techniques, such as hydraulic fracturing to extract oil, allows more to be produced to meet the demands of the growing middle class.
   Other forms of technology have evolved to support growing demand in often congested urban areas. The advent of smartphones, sold all over the world in conjunction with urbanization, has allowed retailers to change their selling strategies to focus on e-commerce.
   The freight movement sector as a whole is making a significant effort to adapt to these sustainable trends. Larger vessels, deeper navigation channels, increased cargo handling at terminals, as well as railroad network capacity, standout as visible examples.   

Factors impacting adjustment to a larger global economy. While emerging market economies have grown significantly in the last few decades, their consumer base is not yet sufficiently large or stable enough to offset slowing trends in developed economies. Emerging market economies are a larger share of world GDP compared to a few decades ago, but developed economies as a group still dominate the charts. It is hoped that emerging market economies will grow fast enough to overcome the deceleration of developed economies. 
   Strong economic growth often motivates investment in production capacity. Oftentimes the growth of productive capacity is characterized by booms and busts, particularly during periods of low or declining interest rates, as has been the case since the turn of the century in some commodity markets. Economic growth similarly suffers when booms become busts, as has been the case in the last 18 months following the decline in commodity prices. It is likely that there will be more booms and busts in the future.
   Commodity cycles can be particularly difficult for marine terminal planning. In order to be competitive for specific bulk products, it is usually necessary to invest in specialized freight-handling and storage facilities. However, when commodity prices and foreign exchange rates vary, a country can change from being an importer of some types of bulk to an exporter, and vice versa. For example, the rise in the value of the U.S. dollar over the last year, combined with lower transportation costs, has coincided with higher imports relative to purchases of domestic-produced steel, and despite low domestic prices for corn, some regions in the United States preferred to import due to the lower cost.  
   As the global economy recovers from bouts of over-investment and shifts in manufacturing locations, it is not unlikely that some policymakers will react poorly. During periods of high economic growth, it is relatively easy to support foreign trade; however, during slow periods it is more difficult. Efforts to promote the growth of domestic economies can involve protectionist policies. While these efforts may be fleeting, they have to be monitored.

In the long run. Despite the likelihood of bumps in the road, the overall long-term assessment for global trade is positive because of the sustainable trends described above. It is important to factor these trends, particularly those impacting global trade logistics on both the landside and waterside, in longer-term investment plans. It is important not to allow the negative factors to dominate reasonable expectations about sustainable trends when making investment decisions. With increasing urbanization and growing populations, it is likely that congestion and chaos will worsen if investments that need a long planning horizon are postponed due to myopic focus on shorter-term uncertainties.