The Growth Paradox

By Chief Economist Walter Kemmsies of Moffatt & Nichol

From various comments made by analysts, company decision-makers and other commentators, it seems that consensus
expectations for trade volumes over the next 12 to 18 months as well as longer term growth have been revised down due to poor current and prospective economic conditions.

Part of the reason for the severe global downturn is that the U.S. economy accounts for over 25 percent of world GDP and the world economy has been, and remains, heavily dependent on U.S. consumer spending, which is has declined and is unlikely to grow quickly.
U.S. households have lost a lot of wealth due to falling real estate values and depressed financial market trends, and are characterized by a large number of people who are currently of, and approaching, retirement age.

While U.S. government spending and intervention in some industries, such as autos and banks, has brought the economic freefall to a halt, this does not come without cost. Monetary policy stimulus carries a risk of igniting inflation and higher inflation and the burden of higher public sector (federal and state) debt could push interest rates to high levels. This is of concern because higher interest rates discourage investment, which is needed to sustain economic growth. Furthermore, regulatory uncertainty in a number of areas of economic activity is also high, which also dampens investment.

However, slow economic expansion does not mean trade growth will also be low. World Trade Organization data on the volume of world exports of manufactured goods show that it has consistently grown faster than global real (inflation adjusted) GDP since 1950 and for any five- year stretch during the past 58 years. Economic growth, and therefore consumer spending growth, is not the only driver of trade growth. Other factors, which have supported globalization, or the vertical integration of production and distribution, have mattered as much and may very well be the driver of economic growth.

Globalization drives trade volume growth
Companies have gone global, although not necessarily to reduce costs, but instead to maximize profits. Manufacturers of low-profit margin products have moved factories to lower labor cost locations, which indicates that globalization is to address cost reduction. However, it is important to understand why the labor is cheaper in certain locations.

Labor in emerging markets countries is often cheaper because the population is younger. China and India, for example, probably have more, younger, college graduates in its labor force than the U.S.

Younger people also spend more of their income on goods than older people do. U.S. data shows that prior to 1982 U.S. households were spending more on goods than on services. However, since then the opposite has occurred and the proportion of spending on services continues to gain share. It is reasonable to conclude that rising incomes in countries characterized by young people offer manufacturers of goods better volume growth prospects than markets in mature industrialized nations.

Given low transportation costs, it makes sense to locate factories in markets with higher growth potential because the products can be priced in those markets to leverage lower labor costs and the output can also be profitably exported to mature economies. Given that the demographic trends in place for decades prior to the current economic crises have not changed, globalization is likely to continue.
Therefore the paradox is that low consumer spending growth in the U.S. is likely to reinforce globalization trends and subsequently drive trade volume growth higher. However, one still has to be careful to distinguish between the overall level from the structure or pattern of economic activity.

Reasonable risk factors
Given that low economic growth in the U.S. could be offset by increased globalization, the main risk factors are those that impact the cost of trade, such as trade tariffs, transportation costs and domestic economic policies:

Trade tariffs have declined since the first Global Agreement on Trade and Tariffs was signed in January, 1948, thanks to various follow-up rounds of negotiations and expansion in the number of signatory countries. The next major hurdle is the Doha Round, which could boost global trade growth to new levels.

Transportation costs could increase significantly depending on the direction oil prices take and the impact of environmental legislation.
If emerging markets economies begin pursuing policies that boost domestic consumption of goods, then exports from mature industrialized economies, such as the US, could increase.

These factors deserve as much, if not more, consideration than the outlook for consumer spending in the U.S.

In This Issue

Up Front

News, Trends & Analysis
New Items

The Growth Paradox

Supply Chain
Industries to watch

Trade compliance in the workplace

Logistics costs dropped in 2008

Overseas trade experts have some tips for you

Five things you should know about U.S. trade policy

Supply Chain product review
Inventory container management

Features
Gateway at a glance U.S. Northeast

Bulk Up

Ports & infrastructure
Port of Seattle nets new container business

Clean trucks at your ports: How to pay for them?

Port Product Review
Project cargo equipment

Commentary
Are we thinking inside or outside the box?

On the horizon: Wave Energy - A future power source for your port

Casualties