International trade is slowing

International trade is said to be the blood flow of the global economy. For some time, the blood flow has been slowing, which affects supply chains and the dependent logistics services. And the situation can change in a matter of months.

At the end of 2018 importers in the US ‘front-loaded’ their orders, to avoid paying increased tariffs on goods from China. The result was a wave of imports that, even with a positive consumer sentiment towards buying ‘stuff’, increased national inventories.

However, another round of front-loading in 2019 has not occurred. Even with continued uncertainty about the imposition of more US import tariffs on goods from China. Instead, importers have bought less and changed their supply chains; and inventories have decreased.

The consequences of these actions has been: reduced trans-Pacific trade, with container ships withdrawn from the route; lower spot rates for cargo; reduced air freight volumes and declining volumes for US inland rail and trucks.

October has seen the worst reduction to date for the Port of Los Angeles (the nation’s largest container port complex). The year on year reduction in loaded container imports and exports has been just under 20 percent.

Another indicator of slowing US trade is the Cass Freight Index, which shows that year-on-year change has been negative every month since December 2018. The Index covers all US domestic freight modes and is derived from freight transactions processed by Cass, on behalf of its client base of large shippers. They include consumer packaged goods, food, automotive, chemical, retail and heavy equipment industries.

Cass notes that US spot pricing rates for transport has declined. Within this observation, ‘dry van’ truck volume (used for retailers) has remained relatively healthy. However, rates for other transport modes in the industrial economy e.g. flatbed trucks and chemical tankers, indicate that manufacturers have a low expectation that consumers will continue to buy at current levels.

Air freight volumes in Europe indicate that the region’s economy continues to slow. In Asia, airfreight volumes “were steady from June to October 2018, but have since deteriorated at an accelerating pace”.

As a leading indicator of future international trade volumes, the inbound freight volumes for Shanghai have decreased. Cass states “This concerns us, since it is the inbound shipment of high-value/low-density parts and pieces that are assembled into the high-value tech devices that are then shipped to the rest of the world”.

Future for the World Trade Organisation (WTO)

In early December 2019, the WTO could effectively cease to function. Its Appellate Body, which adjudicates trade disputes between countries, will be without a quorum. There is supposed to be seven member countries on the committee, but as current members complete their term, the USA has blocked new appointments. It has also threatened to block its subscription to the WTO’s budget for the next two years. If this scenario eventuates, the WTO will become ineffective.

This could potentially lead to the most powerful countries establishing their own trade rules concerning tariffs and non-tariff restrictions. Of course, there would be counter tariffs and non-tariff restrictions imposed by other trading countries.

Although some commentators have likened this to a 1930s situation, it may not eventuate, due to changes occurring in trade patterns. The term ‘globalisation’ is still mention in discussions about international trade; but, while it is still possible for a business to buy and sell on a global basis, the trend is to do so within regions.

Regional trade rather than global trade

A region can consist of:

• Member countries of a trade facilitation agreement (often called a Free Trade Agreement or FTA)
• Geographically adjacent countries as members of a trade facilitation agreement e.g. the EU and the US, Mexico and Canada Agreement (USMCA)
• Sub-regions – adjacent parts of different countries, such as the Greater Mekong sub-region, or sub-regions within a country, such as the USA

Multinational corporations (MNCs) have accounted for much of the growth in world trade. In developed market economies, MNCs that buy and sell products through their subsidiary businesses can account for over three-quarters of their home country trade flows. In countries which encourage inbound investment by MNCs (such as Australia), more than 50 percent of the country’s international trade is between related parties

The trade between related parties can often be in the form of ‘intermediate goods’ – that is parts, components and sub-assemblies. These can be more than half of the goods imported by the larger OECD economies and up to three-quarters of imports for larger ‘developing’ economies, such as China and Brazil. For the intra-Asian region trade ‘intermediate goods’ is estimated to exceed 70 percent of total trade.

The increasing likelihood for organisations to import their inputs from other countries in a region as ‘intermediate goods’ occurs due to: delivery time constraints; transport costs and the established supplier networks.

The supply chains of region economies are therefore becoming more intertwined.  As this occurs, agreements concerning trade behaviour and rules concerning tariffs and non-tariff barriers are likely to be negotiated within and between regional trade facilitation agreement organisations.

Adding to the increasing importance of regions is the likelihood of moving production closer to consumers; assisted by the development of manufacturing automation technologies and associated software. These can facilitate low volume production of multiple (but similar) products i.e. economies of scope, rather than economies of scale.

This scenario has many advantages for countries and businesses which can access investment capital; however, it will create problems for developing economies that are not members of an FTA. Their objective is to grow economies through the supply of inexpensive labour for manufacture and the export of low technology products e.g. apparel. Regions will need to accommodate this requirement to assist in the reduction of poverty.

So, for supply chain professionals involved or influenced by international trade, the future will continue to be a challenge. But, those with an understanding of geopolitics, trade agreements, the nodes and links of supply chains and the risks associated with these factors, will have an important role in steering their organisation through potentially troubled waters.