There is Potential for Dramatic Political Change and Industry Consolidation
Most elected leaders face a problem after winning an election: they can’t stop campaigning. Slogans, rhetoric, victory and the adulation of fans at crowded rallies can be intoxicating, but at some point, reality sets in and the business of governing needs to be attended to.
On November 8, 2016, Donald J. Trump won the election for the U.S. presidency partly on a message that opposed the free-trade philosophy that has dominated US—and worldwide economic policy—over the past few decades. Now comes the tough part. How much can Trump deliver and what does it mean for industries like freight forwarding and international logistics?
Recently, a freight forwarding customer of ours whose business specializes in two-way trade between China and the United States asked us if we thought Trump would start a trade war with China?
The simple answer is no, it’s unlikely that there will be a trade war of any kind.
Here are a few reasons why:
China is the largest overseas market for US exports and the United States is the largest buyer of China’s exports. To put the U.S. demand for Chinese manufactured goods into perspective, Wal-Mart’s purchasing alone would make it China’s eighth largest export customer. This is not something that can be switched off or reversed quickly.
Market shifts cause changes in available skilled labor. Industries like garment manufacturing have been based in overseas markets like China and India for so long (nearly four decades in some cases) that the US labor markets can’t quickly provide the manpower needed to meet those jobs if they were brought back. Again, skilled labor isn’t the kind of resource that can be switched on or off on short notice.
Trade policies always have a domino effect associated with them. US tariffs on Chinese imports will raise the price of such goods, but the absence of an alternate producer means inflated prices for U.S. consumers.
Trade is always a two-way street. Tariffs on Chinese imports will be met with retaliatory tariffs on US exports to China. If rhetoric suggests that all the jobs are gone overseas” trade data tells us that US exports create domestic jobs by making markets far from home. Rising import costs impact US retailers. Rising export costs impact US manufacturers. Even if a corresponding pricing effect happens overseas in China, it doesn’t solve domestic concerns. Simply put: which American cares about the cost of a screwdriver in Shanghai when the retail price for the same tool went up in Chicago?
Where does this leave freight forwarding and logistics?
The US economy is in strong shape and will continue its growth for at least another 12 to 24 months. This bodes well for companies involved in containerized imports, not just from China but from other major markets as well. In fact, container rates as of January 2017 were at a 20-month high according to Drewry Shipping Consultants.
The combination of a strong dollar and weakness in overseas markets, however, does not suggest a very strong environment for US containerized exports in 2017 and possibly 2018. But, we’ve seen this before. After all, shipping and international trade is a cyclical process.
The biggest factor that will influence container rates in 2017 is industry consolidation. Maersk’s acquisition of Hamburg-Sud, the combination of Hapag-Lloyd and UASC, and the collapse of Hanjin, along with the growth of alliances in 2016 will allow steamship lines to exert more control over supply of containers and vessel slots.
Business as usual, right? Not exactly
Every single shipper we’ve recently met was unhappy about container pricing over the past few years. That’s right, rates fell and shippers were unhappy. Why? There are two reasons:
First off, shippers spend the same amount of time and resources shopping for rates when prices fall, as they do when prices rise. In fact, when rates fall logistics managers work harder because they’re forced to keep looking for the latest spot rates available.
Secondly, if rates are going to rise, shippers will have to accept it and react only when the bill comes in. Their biggest frustration is that freight forwarders and NVOCC’s are unable to provide any kind of accurate forecasting of future rates.
The potential for dramatic political change and industry consolidation make a great combination for freight forwarders and NVOCC’s to start using online platforms that enable process efficiency in ocean freight management. Platforms reinvest data on key business elements like pricing and market volume back into the industry. This enables forwarders and NVOCC’s to understand where rates are headed, how to act on those changes and how to grow revenue based on that information.
While we may not know what changes the Trump administration may bring, we know that we have to control our sales and operations processes to stay ahead of them. Let’s make 2017 the year we do this for ourselves and for our customers.