with Walter Kemmsies
As the United States struggles to recover, it is clear that increasing exports, supported by larger vessels to offset high fuel costs, can help the process; however, investment needed to support this activity goes beyond making seaports capable of handling the larger vessels. Exports are unique and export-specific infrastructure investment is required.
The U.S. trade deficit has improved thanks to the decline in the oil trade deficit and growing exports. However, even if the oil trade deficit were to go away, the deficit in non-fuel goods trade is still twice the size of the service sector’s trade surplus. The goods trade deficit has worsened substantially since the late 1990s and it is no surprise that employment levels following the 2001 recession took almost four years to return to their pre-recession level. In addition, more consumer goods are likely to be produced in the emerging, younger economies than in the mature western economies.
U.S. Census Bureau, Moffatt & Nichol.
Workers who were displaced by imports have not been absorbed by the service sector and have not found sufficient employment opportunities in industries that export their products. What are their best prospects?
Those goods that require little labor, because of mechanization or automation, are likely to see higher growth and are candidates for U.S. export leadership. At the top of the list are raw materials, such as agricultural goods and fuel sources, and high-end capital goods like airplanes, construction equipment or petroleum drilling equipment. Agricultural goods are at the top of the list because the United States has comparative and competitive advantages owing to scale economies due to larger farm sizes, land availability where water is relatively abundant, leadership in biotechnology/genetic modification, quality control and a low cost of capital which supports investment in automation and research.
It should also be noted that the U.S. dollar has lost value against most currencies during the last decade and a half, and has moved in tandem with the trade deficit. This is increasing the cost of imported goods. Given the tsunami of retiring Baby Boomers, which will raise the retired population’s share to almost 20 percent over the next 10 years, and the level of government debt which will make it harder to fund social benefits, a rising cost of imported consumer goods is a likely possibility
While the production of capital-intensive goods like food, bulldozers and airplanes does not directly employ lots of labor, the support services for those industries do. Agriculture needs weather analysis, seed development and selection, financial risk management and transportation/logistics services, among other services to be globally competitive.
Since the best U.S. export candidates tend to have a low value to weight (for example, athletic shoes cost more per pound than soybeans), it is important that ocean carriers continue to invest in larger vessels. Up to 90 percent of the delivered price of agricultural goods is due to transportation costs. Scale economies offset fuel costs that drive up the delivered price of low-value/heavy-weight goods. It is good news that U.S. ports are investing in the capacity to handle these larger vessels.
But when it comes to the infrastructure needed to support these heavy export goods, the United States is not prepared. This was highlighted in last month’s column
(pages 40-43) which focused on U.S. inland waterway infrastructure. It should also be noted highways need to be upgraded to handle heavier loads, particularly bridges. The recent American Society of Civil Engineers’ infrastructure report card indicates that 24.9 percent of the nation’s bridges are in some state of disrepair. One might interpret this as meaning that up to 25 percent of bridges will be a barrier to exports of heavy freight.
MAP-21 legislation started a national process to address actual performance of highway and bridge links in the overall supply chain.
Across the country, states and counties are taking action, requesting studies from transportation consultants to help them allocate scarce public sector funds to infrastructure investments oriented towards stimulating the local or regional economy. Oftentimes the needs and opportunities, particularly for exports, are not clear to policymakers. In addition, there are bills before Congress to revise important legislation such as the Water Resources Development Act.
This is the time for all participants in the freight movement supply chain to communicate and educate policymakers—at the local, regional, state and federal levels—about the potential for the freight movement industry to support economic growth by helping them prioritize the allocation of scarce capital among infrastructure projects, and especially those pertaining to exports. The trade balance, export-oriented infrastructure and larger vessels are related and require investment to be planned carefully.
Kemmsies is chief economist at Moffatt & Nichol, a marine infrastructure engineering firm. He can be reached at (212) 768-7454 or by email.