It’s all about balance

   With the possibility of a Trans-Pacific Trade Agreement, and the competitive synergies that might result from such an agreement, global trade could see significant near- and long-term growth. This would be in addition to the organic growth of the global middle class, as projected by the Organization for Economic Cooperation and Development.
   If OECD projections for the global middle class to grow from about 2.5 billion people today to nearly 5 billion by 2030 are correct, then it is very likely that global trade will continue to grow at its current rates. A Trans-Pacific Trade Agreement could synergize and accelerate that growth.
   The beneficiaries of that growth, whether it is organic, or further stimulated by global trade agreements, will be those countries and regions that have invested in supply chain infrastructure.  China, Korea, and Northern Europe have made those investments, while the United States, India, Brazil and Russia have waxed and waned in their commitment to infrastructure generally and supply chain infrastructure in particular.
   With some notable exceptions, the current infrastructure necessary to support a global middle class of 5 billion people is outdated, deteriorating, and struggling to keep up with demand as evidenced by congestion and pollution concerns. In order to keep costs down and reduce externalities, how goods are produced and shipped will have to change. This is why ships, trains and trucks are getting larger since that reduces the emissions per ton-mile. Sharing large vessels on major global trade routes increases capacity utilization and, therefore, efficiency. There are also efforts to shift to fuels that have a lesser impact on the environment. 
   Congestion, however, is proving to be a more vexing and multifaceted problem.
   The race for scale is causing a lot of volatility since it upsets the balance between consumption and production growth. This is evident in several ways.
   Ocean carrier container-carrying capacity has been growing faster than demand for container shipments, which results in lower freight rates. Lower freight rates threaten the industry’s financial stability and make it hard for some to raise the capital to invest in larger vessels. If this negatively affects some countries’ access to the benefits from international trade, the projections for the global middle class increases may not be realized. Or, the benefits of a Trans-Pacific Trade Agreement may be unevenly distributed.
   Investment along commodity flow paths has not been balanced with under-invested segments becoming bottlenecks, such as chronic traffic congestion outside some port gates or agricultural products delivered too late, in insufficient quantity, or not at all. 
   Ocean carriers have not communicated their needs or projections to the larger supply chain stakeholders. There does not seem to have been much planning for increases in either average level of daily traffic nor of its volatility due to larger ships being unloaded and loaded with more cargo over shorter periods. Increased intermodal volumes require more track at rail yards; however, this often requires more at-grade crossings to avoid road and rail traffic congestion. More truck trips require more highly maintained chassis and well-trained drivers. Congestion not only raises costs, it also increases the environmental impact of freight movement.
   To produce higher volumes of goods and services it has become more feasible to invest in automation, due to technological advances in communication, information-processing and robotic technology. Many industries, including manufacturing, agriculture, medical and financial services, have increased their output while reducing labor costs. The freight movement industry is also involved via automated container terminals, attempts to deploy driverless trucks and warehouses operated by robots, and well-capitalized logistic firms.
   In addition to lowering costs, automation can increase quality, safety and reliability, which means less waste and, therefore, less externalities. Less waste means a larger amount of output is available for a growing middle class.
   Investing in scale and automation to achieve the desired volume with fewer externalities and balancing the investment along commodity flow paths or supply chains are necessary for the OECD projections for the global middle class and, therefore, demand for trade to be realized—with or without a Trans-Pacific Trade Agreement.  However, in modern democracies, those investments must be balanced to maintain acceptable levels of education, employment and environmental quality.
   Freight movement service providers like ports, rail and trucking companies, and ocean carriers need to invest in capacity ahead of demand. Given the scarcity of capital and trends in the ocean carrier segment, where rates have fallen as capacity has grown faster than demand, it is important to not get too far ahead. Phasing is the order of the day. And, of course, contingency plans have to be in place to handle the likely occasional periods where demand gets ahead of forecasts. 
   Kemmsies is chief economist at Moffatt & Nichol, an infrastructure engineering firm. He can be reached at (212) 768-7454, or email.

This column was published in the July 2015 issue of American Shipper.