The case for U.S. bulk exports
A small investment in infrastructure could yield significant economy-wide benefits to the U.S.
| Walter Kemmsies chief economist, Moffatt & Nichol |
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Given the recent political turmoil in many countries over rising food prices and America's need to reduce its trade deficit, it is somewhat surprising that bulk exports do not receive more attention in public discourse. This may soon change as the long-term value of dry bulk exports become better known.
Due to demographic trends, which result in stronger demand growth and lower production costs in emerging markets compared to developed economies, manufactured goods industries will continue to relocate outside the United States, leaving it increasingly dependent on imports. This isn't to say the United States would not continue to produce and manufacture exported goods. It will as long as those goods are capital intensive rather than labor intensive. This is because U.S. labor is relatively more expensive and capital is relatively cheaper than in emerging markets. For example the 10-year U.S. Treasury bond yield is less than 4 percent while in many emerging market economies yields on government bonds exceed 10 percent. And American labor is generally more expensive than our competitors' labor.
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However, it is unlikely that manufactured goods exports would have much of an impact on the trade deficit, since they are likely to be industrial goods and therefore less able to reach the same volume level as consumer goods.
As such, the U.S. trade imbalance is already unsustainable. Exported American services produce a surplus, but that surplus is dwarfed by the five-fold goods trade deficit. The goods trade deficit could be lowered by as much as 40 percent if the United States did not import oil. But even if that happened, the goods trade deficit would still be nearly three times the level of the services sector surplus. Since the United States is headed towards increased import dependency it needs to increase its exports to avoid economic turmoil down the road.
U.S. exports of agri-bulk and forest products fit this bill, not only because they are capital-intensive, but also because the United States has a natural advantage in the form of relatively more abundant water in a world where it is an increasingly scarce commodity. Furthermore, ag and forest products are consumer-oriented and therefore could generate volumes that improve the trade deficit. Coal is also a good export candidate. China has recently become a net coal importer for the first time, and given its growth prospects, is likely to become a larger demand source. However, agricultural export volumes are likely to be greater.
Although U.S. bulk exports, particularly ag-bulk, have been growing strongly, there is evidence that volumes could have been higher were it not for freight movement constraints from the U.S. interior to its borders.
This has attracted international attention:
' Last December, after rains cut the quality of the harvest in Canada and Australia, Abdolreza Abbassian, an economist at the U.N. Food and Agricultural Organization, said in an interview, 'Right now, the only country that would have such supply to compensate for the downgrade of Australia and also Canada would be the U.S. The problem is that the capacity in the U.S. for terminals to absorb enough milling wheat for shipment, it's just not there.'
' The U.S. Army Corps of Engineers said it is likely to run short of funds as early as this spring to fully dredge the Mississippi waterway, potentially slowing the movement of key imports and exports and raising shipping costs. U.S. exporters have warned of mounting silt at the mouth of the Mississippi River threatening commerce, according to a Jan. 27 Associated Press report.
' According to the Wall Street Journal in December, 'To pay for the work in past years, the Corps diverted funds intended for repairs on locks, dams and other projects in other parts of the country. But the agency says it can't do that this fiscal year due to expected budget cuts and repairs elsewhere it can't put off any longer.'
Imports tend to be high-value manufactured consumer goods. The infrastructure to support those largely containerized goods is large scale and different than that for lower value bulk exports and high value large project cargo. Most recent investment to support bulk and project cargo has occurred in smaller facilities that aren't as well positioned to compete for containerized imports.
Beyond bulk-specific facilities, other infrastructure to support growth of containerized commodity exports are needed. Containerization of agri-bulk exports has been increasing for several reasons. The United States increasingly exports genetically modified grain and oilseeds that require special handling for various technical reasons. Containerizing the product is one of the best solutions to achieve this.
Consumers also prefer containerized shipments since often they do not need a whole shipment arriving on a large bulk ship. Shippers may also prefer to have the capability to export their product in containers, which reduces handling, is more secure, has less risk of contamination and perhaps most importantly, offers the option to ship via the lowest cost means (sometimes bulk rates are lower than container rates and vice-versa). Anything that lowers the cost of shipping U.S. bulk products makes exporters more competitive in the world market.
Instead of competing for consumer products, why not compete where there is a comparative advantage?
While many kinds of U.S. exports can compete in the world marketplace, it is worth focusing on ag and forest products since they are the low-hanging fruit. Many emerging market economies are growing at high rates and this is improving household incomes there. As more manufacturing activity becomes outsourced to those destinations, incomes will continue to rise. Meat consumption is very elastic, and it is no surprise U.S. meat exports have been rising along with grains used to feed the livestock in emerging markets. In some countries, like China, droughts are an ongoing problem for the stability of the food chain, which could be relieved via U.S. agricultural exports.
Clearly, a small investment in bulk exports could yield significant economy-wide benefits to the United States.
Walter Kemmsies is chief economist of Moffatt & Nichol, a marine infrastructure engineering firm. He can be reached at (212) 768-7454, or e-mail, [email protected].
