Comments and Letters

Businesses, meet the ocean carriers. Is trade slowdown permanent?

Businesses, meet the ocean carriers

   Years ago, at one of our Ag Shipper Workshops, frustrated with lack of carrier service the logistics managers for one of our large ag corporations was accompanied by the vice president for international sales, who was armed with an MBA from Stanford University. The VP took the senior ocean carrier officer, who was our guest at the workshop, aside and said, “If we were to offer to pay you $X per container (as I recall, about 300 percent of the then going rate) to deliver three empty refrigerated containers to our facility every Thursday and failure to do so will trigger a $2X penalty for each container not timely delivered, would this be of interest?” The carrier executive said he didn’t think he could do it, since it wasn’t like any of the filed tariff rates, and so his line would have to get approval from the other carriers. The VP was exasperated, declaring “You’re telling me you are going to share my offer with your competitors? You all decide what kind of deals you sign with your customers? Well, now I understand—you are ocean carriers, not businesses!”
   When challenges arise, it is usually the private sector which seeks to apply creative approaches, urging the government to be flexible in the interests of avoiding additional expense, disruption to business, and unnecessary regulatory burdens. The private sector will ask the government agency to better understand business practices. Finally, the private sector will ask the government regulators to clearly define the problem which the regulations are designed to address and solve. But this Safety of Life at Sea (SOLAS) convention container weight debate shows that, at least in the context of international maritime regulation, everything is upside down.
   Here, it is the U.S. Coast Guard which is pointing out that there isn’t a safety problem here in the United States. It is the private-sector ocean carriers who swear there is a problem, but who are unable or unwilling to identify even one specific example of a safety problem due to overloaded containers.
   Under the new SOLAS rule, the ocean carriers are demanding information from shippers, which the shippers are already providing under numerous federal and state legal and regulatory requirements. The Coast Guard is pointing out these and other longstanding regulatory mandates imposed on carriers, shippers, truckers and terminals, and saying they are sufficient, while the ocean carriers are seeking yet another layer of regulation and mandates.
   Currently, the ocean carriers are refusing to allow or consider any flexibility in application of the container weight rule. Usually the private sector seeks flexibility. But now the tables are turned—the ocean carriers oppose the flexibility the Coast Guard is offering, namely that the shipper will provide cargo weight and the carrier provides container weight. In fact, the ocean carriers claim to be “appalled” by Coast Guard Adm. Paul Thomas’s rational and helpful approach, and has even written to his commandant demanding that the agency refrain from a flexible interpretation.
   The ocean carriers are not acting like businesses. The Coast Guard is. Seems that VP was right—the ocean carriers are not really engaged in “business,” rather they are engaged in “international ocean shipping.” Meanwhile, exporters and importers, farmers, and manufacturers, who generate the cargo which the carriers need, are actually engaged in “business.” That’s why they can’t understand how carriers can oppose flexibility in the application of the SOLAS container weight rule.
    
   Peter Friedmann
   Executive Director,
   Agriculture Transportation Coalition,
   Washington, D.C.
    
   American Shipper welcomes feedback from shippers, carriers and logistics services providers regarding the SOLAS container weight verification issue.
    
Is trade slowdown permanent?

   There was widespread agreement at the Journal of Commerce’s 16^th annual TPM 2016 conference in March that the container-shipping industry will have to grapple with slower growth.
   Nariman Behravesh, chief economist for IHS, said global and U.S. economic growth is “stuck” in low gear. He predicted global economic growth will be about 2.5 percent in 2016, similar to the 2.5 to 2.7 percent growth experienced in the past four years.
   The U.S. economy was neatly summed up, he said, by an executive who said the U.S. energy sector was in depression and manufacturing was in a recession, but that the U.S. consumer is doing well.
   “Best guess, consumer spending, after you adjust for inflation, in the U.S. is 3 percent. That is really solid growth. So the consumer, which represents 70 percent of the economy, is driving growth,” Behravesh said. Housing adds another 10 percent.
   “Income growth is good, job growth is good, interest rates are low, and gasoline prices are low, which is helping put money to support these sectors of the economy,” he said. The drop in gasoline prices amounts to about a $1,000 annual cut in taxes to consumers.
   Mario Moreno, senior economist global trade at IHS, forecasted containerized imports will jump from 4 percent last year to 5.3 percent in 2016, well below the 2000-2007 average of 10 percent.
   Trade from Asia to the United States, the focus of the TPM event, is one of the healthier segments of the liner business, and Moreno said it will increase 5.5 percent this year. Many of those imports are housing-related: furniture imports were up 6 percent, plastic products increased 8 percent, and sheets, towels, and blankets rose 10 percent.
   However, Moreno predicted containerized exports will decline for the third year in a row, dropping 1.5 percent in 2016 compared to the 3.8 percent decline in 2015 and the 2.3 percent decline in 2014. Between 2000 and 2007, volumes grew annually by 8 percent.
   Behravesh said the strong dollar is a drag on U.S. exports.
   The U.S. economy has taken a hit from the strong drop in capital spending by the oil industry. It only accounts for 2 percent of the U.S. economy, but has been halved in a short period.
   Demand for transportation is also being affected by a glut of inventory, with the retail inventory-to-sales ratio at its highest level since 2009.
   The European economy is doing better, but Behravesh warned there are “thunder clouds” on the horizon: Greece’s economy, the migrant crisis and the referendum this June on whether the United Kingdom should exit the European Union.
   Consumers in China are “doing fairly well,” but he said China’s industrial sector is suffering from huge overcapacity in industries such as shipbuilding and steel.
   China’s growth is slowing. Behravesh said estimates range from 4 to 6.5 percent.
   A decade from now, he predicted the best China will be able to do is 5 percent growth. He noted, however, “China is a much bigger economy now than it was 10 or 15 years ago,” so that 5 percent growth would be equivalent to 10 to 15 percent 15 years ago.
   Global trade will probably not recover this year, but may in 2017 or 2018. But he said trade is unlikely to recover to the levels seen in the 1990s or 2000s when global trade volumes grew about 7 percent annually, twice GDP growth.
   “Recently it’s been around 2 percent, which is less than GDP growth,” he said.
   Cyclical factors are driving 50 to 70 percent of the drop in global trade, Behravesh estimated.
   Weak global demand, including the Chinese industrial recession, is part of the reason for the drop in trade.
   “That tells you that the pull from China is gone—it is in reverse. That is a huge deal in terms of trade growth,” Behravesh said.
   The drag from China’s industrial recession will begin to ease in the next two years, but he cautioned structural factors driving the decline in global trade that will not necessarily reverse. One of those is the transition of China to a service economy.
   “China’s role in terms of global trade patterns will change and diminish in some sense—this is a long-term trend,” he said.
   Supply chains are shortening, resulting in a decline in intermediary goods trade.
   “What we are seeing is a lot of producers producing in the market for the market—in China, for China; in India, for India,” he explained.
   Economic gains from transportation and the Internet will not be as great going forward. And, with higher wages in China and India, the cost advantage of producing in those developing countries will diminish.
   “The big era of globalization that we saw in the 1990s and the 2000s may even be behind us,” he said. (Chris Dupin)