Trade: From National Markets to Global Markets[1]

Executive Summary

Increasing globalization of the U.S. economy has become a significant factor in the evolution of the nation's transportation network. Between 1970 and 1999, the share of U.S. gross domestic product accounted for by trade in goods and services has grown from 10.7 percent to 26.9 percent. This growth in the importance of global trade to the U.S. economy is primarily a reflection of four major trends:

• Liberalization of world trade policies has occurred allowing industries and nations to use trade as a major source of economic growth;
• Multi-national trade blocks have developed solidifying the trade, transportation, and institutional links within broad regions of the world (e.g., the Americas, Europe, the Pacific Rim);
• Supply chains have become globalized as industries seek out the cost and market advantages that different parts of the world offer for different elements of the supply chain; and
• Advanced information technologies allow these far-flung supply chains and distribution channels to be better integrated in time and space.

Globalization has major implications for transportation systems:

• Changes in the geography of U.S. trade will create needs for investment in infrastructure along the high growth trade routes;
• There will be increasing pressure on trade gateways that are already experiencing congestion, lack of suitable land for expansion, and pressures for operational improvements;
• Far-flung production and distribution systems will be increasingly reliant on highly efficient transportation networks that are supported by advanced information systems; and
• There will be a need for further harmonization of trade policies and practices to avoid creating unnecessary trade barriers.

The paper[2] identifies three major issues that face DOT and the nation:

• How will future capacity shortfalls at gateways and along trade corridors be addressed and how will improvements in these critical facilities be financed in a transportation decision-making process that has become increasingly local in focus?
• What more can be done to further harmonize regulatory practices, trade documentation paperwork, and customs procedures to facilitate more efficient trade transportation?
• How will the volatility of international trade policies impact long-term transportation decision-making?

Trends in World Trade

Over the last several decades, there has been a shift in U.S. economic activity from relying on domestic markets to one that recognizes the increasing importance of global markets. The growing importance of trade in the U.S. economy is a reflection of world economic trends. Between 1960 and 1999, world merchandise trade (exports and imports) grew at an average annualized rate of over 10 percent (in current dollars) (see Figure 1). This trend toward globalization has also been a significant element of recent growth in the U.S. economy. While the U.S. share of global merchandise trade has remained at around 12 percent to 14 percent between 1960 and 1999, trade has grown as a share of the U.S. economy during this period. As a share of gross domestic product (GDP), U.S. trade in goods and services has grown from 10.7 percent in 1970 to 26.9 percent in 1999 (in constant 1996 dollars). This trend in the importance of trade to the U.S. economy is illustrated in Figure 2.

The growth in world trade, its significance in the U.S. economy, and the changing characteristics of trade partnerships can be traced to a number of factors, including:

• Liberalization of world trade policies;
• The growth of multinational trade blocks and multinational corporations; and
• Accelerated adoption of advanced information technologies.

Figure 1. World and U.S. Merchandise Trade

Source: Figures for 1960 to 1990 obtained from NCHRP Report 421 (1999), page A-14; figures for 1999 obtained from Merchandise Trade Section, Statistics Division, World Trade Organization.

Figure 2. U.S. Trade (Goods and Services) as Share of U.S. GDP

Source: Compiled from official statistics of the U.S. Department of Commerce, Bureau of Economic Analysis.

The 1980s and 1990s heralded a new era of free trade and liberalization of trade policies around the world. An important influence during the late 1980s and early 1990s was the end of the Cold War and the collapse of communist regimes around the world. During the same period, less developed economies in the Asian Pacific and in Latin America entered into the global marketplace to take advantage of what trade offered their expanding economies. This change in the political landscape has led to increasing political and economic cooperation among nations and opened up possibilities for a new set of trading relationships. The growing importance of East-West trade routes in the U.S. to support trade in the Pacific Rim is a clear reflection of these global economic trends.

In today's global marketplace, protectionist policies are largely taking a backseat to strategies aimed at advancing economic development and consumer welfare through free trade. Historically, protectionism was a frequently used policy for encouraging domestic industrial and agricultural development without competitive pressures from foreign businesses. Ownership laws, tariffs, and import restrictions limited foreign competition. With the growth of industrialization worldwide and increased access to global resources, business has sought overseas markets and the dismantling of protectionist policies. This trend has accelerated in the last decade with the end of the cold war and the growth of economies in the Americas, Asia, and Africa. However, trade policy can be fickle as trade disputes continue, and, in some cases, have escalated after new suppliers have entered into formerly closed markets.

As nations have recognized the economic benefits of free trade, they have discussed and, in some regions, developed economic trade blocks to take advantage of collective resources and to encourage regional economic growth. The world's largest trading partners, the U.S. and Canada, signed a free trade agreement in 1989, which expanded with the inclusion of Mexico in the North American Free Trade Agreement (NAFTA) in 1993. Similar steps have been taken in Central and South America, including the Central American Common Market, the Caribbean Common Market, the Andean Pact, and the Common Market of the Southern Cone (MERCOSUR). A Free Trade Area of the Americas is also under discussion, with specific goals set by the leaders of all the countries to achieve steps towards integration by 2005. In Europe, the European Common Market has taken major steps towards economic integration since 1993 with the creation of a single currency and expansion of the power of the European Parliament. In November 1989, foreign ministers and economic ministers from the 12 Asia-Pacific countries began steps toward development of a trade block through the establishment of the Asia-Pacific Economic Community.

The growth of global trade and multinational trade blocks has also led to integration of production and distribution activities across national boundaries through the growth of multinational corporations and corporate trade alliances. Companies seek competitive advantages by expanding their operations to take advantage of local labor market conditions, availability of infrastructure, and access to markets and distribution networks.

Another factor that has promoted globalization of the world economy is the development and accelerated adoption of new information technologies. By reducing the cost of communication, information technology can assist in globalizing production and capital markets. Companies have sought to disperse their operations around the globe to take advantage of low-cost labor markets, raw materials supplies, high-skill labor markets, and access to distribution infrastructure, wherever these resources may present the greatest competitive advantage. This pattern of dispersed operations may occur through growth of multinational corporations with operating units throughout the world, or it may occur through alliances among firms in different parts of the world. In either case, advanced information technology facilitates the process by improving and speeding the information flow across global and corporate boundaries.

Implications for Freight Transportation Systems

The globalization of the world economy has had significant implications for worldwide and U.S. freight transportation.

• Changes in trade relationships have affected the domestic freight lanes that support world trade. For example, the growth in Pacific Rim trade, coupled with historically strong trading relationships with Europe, has benefited from the existence of the East-West transportation infrastructure in the U.S. Through connections to this well-developed network, coastal ports have been able to expand their hinterlands and create import-export links well inland. In the future, NAFTA trade and trade with Latin America will create increased requirements for north-south corridors.
• Expansion of world trade also is putting new pressures on U.S. gateways. Understanding the nature and magnitude of this trade will be important in planning the associated infrastructure and institutional changes that will be needed at the gateways.
• The increased outsourcing of business functions and the need to access global supply networks and markets have created far-flung supply chains for many industries. Transportation services have a steadily more crucial role, linking distant markets, functions, and supply sources into coherent commercial networks. This will lead to new demands for internationalization of transportation service providers.
• As trade increases, export-import policies and procedures will need to be further harmonized in order to avoid barriers to trade. The process of harmonization is complex, time consuming, and involves a myriad of political and diplomatic agreements that proceed at a pace that may frustrate the rapid demand for internationalism.

Emergence of New World Trade Routes

Relationships between the U.S. and its international trading partners have evolved considerably over the past century. With this evolution have come significant changes in the domestic infrastructure that supports trade. In the first half of the century, trade was dominated by the relationship between the U.S. and European markets. This led to the continued development of eastern port facilities and the railroad infrastructure that brought goods to and from the hinterland. In the aftermath of World War II, the U.S. began to see growth in trade in the Pacific, most notably with Japan, South Korea, and Taiwan. With the end of the Cold War and the liberalization of many Eastern European and Asian economies, trade began to shift to an even stronger relationship with the Pacific Rim and China. Most recently, the adoption of the NAFTA agreement and the growing importance of the Latin American trade blocks suggest that a new era of emphasis on north-south corridors may be upon us.

Consolidation of U.S. Domestic East-West Trade Routes

During the 1980s, the Far East became the largest foreign trade area for the U.S. This occurred at the same time that container shipping emerged as the dominant method of moving many of commodities traded along the east-west trade lanes. As shown in Figure 3, between 1984 and 1997, growth in container shipping from West Coast ports outstripped container traffic growth elsewhere in the U.S. Even the growth in container traffic at east coast ports reflects a change in trading patterns as over 35 percent of the growth in traffic at these ports occurred in Florida (primarily north-south trade with Latin America – an increasingly important growth market for the future). In 1984, the ports of Jacksonville, Miami, Port Everglades, and Palm Beach accounted for only 8.4 percent of container traffic at East Coast ports. By 1997, this had grown to 21.3 percent of East Coast container traffic.

Figure 3. U.S. Port Container Traffic

Source: American Association of Port Authorities, www.aapa-ports.org.

The need to link the U.S. East Coast and other inland markets with the growing Asia trade, along with the continuing economic development of the Western U.S. and associated domestic trade, contributed to the development of the double stack rail system in the U.S. along mostly east-west corridors with increasing service to key western container ports. Expanded use of post-Panamax vessels (ships larger than those that can transit the Panama Canal) that serve these markets, with attendant needs for deep-water ports, could also contribute to the growth of load center ports that would further concentrate freight transportation activity along these domestic corridors.

Emerging Importance of U.S. Domestic North-South Trade Routes

The growth of NAFTA trade will certainly have an impact on future inland transportation requirements in the U.S. As shown in Figure 4, trade with NAFTA partners grew from 26 percent of total U.S. trade in 1990 to almost 33 percent in 1999. North-south corridors will need to be expanded to carry increased traffic, and border-crossing facilities will need to be improved to handle the increased demands that will be placed on these facilities.

Figure 4. Percentage of U.S. Trade to NAFTA

Source: U.S. Foreign Trade Highlights 1999 (Tables 6 and 7) for 1991 to 1999.

Trade Pressures on U.S. Gateways

The changes in the importance of international trade and in the characteristics of inland transportation routes have created increasing freight traffic and congestion along trade corridors and at ports, airports, and border crossings.

U.S. Ports

U.S. ports, for example, are facing an acute shortage of land suitable for development into marine terminals due to both burgeoning cargo volumes at existing facilities and the ecological sensitivity of the marine environment. Expansion of port facilities in existing locations also creates serious environmental justice concerns. The neighborhoods adjacent to ports and those that are most seriously impacted by expanding port traffic are very often those housing the poorest citizens in the community. Many ports are under pressure to resolve their access problems without creating additional disruptions to the local community. Improved port access, technological investments by carriers and gate operators, and longer operating hours would reduce the dwell time of containers in terminals and relieve some of the expansion pressure, but at a cost of investment in access routes and round-the-clock operations. Another option that is being examined at ports around the country is the "inland port" concept. Inland ports provide a location for staging containers and can offer a variety of port services at remote locations. These facilities can expand a port's hinterland and reduce local congestion problems. But, at this point, there are few examples of how to link these facilities across jurisdictional boundaries.

Changes in freight transportation technology, such as increased use of containerized shipping, larger trailers, and post-Panamax ships, have also created new challenges at gateway transportation facilities. Larger trucks operating on older access routes often have to deal with short-signal cycles, inadequate roadway geometrics, and other local roadway conditions. Larger container ships result in even greater peak demand for truck and rail access on already congested access routes.

U.S. Airports

Airports have become increasingly important trade gateways as import-export shipments shift towards higher value, small package deliveries that are highly time sensitive. The pressures at these gateways exist on both the landside and the airside. Of the major modes of transport, airfreight is more closely tied to its passenger counterpart than any other mode, simply because it often is an adjunct to passenger carriage. Belly cargo services provide considerable flexibility to freight forwarders and offer a reasonable cost alternative to freighters and charter services. However, the capacity and reliability of this alternative is suffering. A 1997 report by the National Civil Aviation Commission expressed grave concern about the ability of the aviation system – air travel control and groundside facilities – to handle projected growth. Increasingly, cargo is being squeezed from passenger air carriage forcing it to higher cost alternatives. Many combination carriers have moved to smaller aircraft in order to improve passenger space utilization. This often comes at the expense of belly space for cargo.

Additionally, the hub system is putting more people into fewer airports, concentrating the market for both passengers and air cargo. This has created enormous congestion problems. In 1999, the Federal Aviation Administration said about 28 percent of total departures were delayed. This congestion is also evident on the landside, where, in many major markets, air couriers are pushing back cutoff times because of highway congestion. As in the case of seaports, lack of land for expansion is also a problem at most international passenger airports, where land costs tend to be high and community opposition to expansion is often a problem. This opposition has also led to operating hour restrictions in many areas, which further limits the ability of airports and carriers to expand operational capacity.

One solution that is being investigated is the conversion of former military bases to all-cargo airports. However, these facilities are often far from major shippers. Ultimately, many analysts believe that expansion of existing international airports with new runways and cargo warehousing and freight handling facilities will be necessary. But the current system for financing these improvements may not be adequate for the need.

Border Surface Issues

Another growing area of concern is congestion at surface ports of entry. The growth in NAFTA traffic has created pressure on border crossing facilities along the Mexican and Canadian borders. These facilities, which serve important non-transportation functions, are often not constructed or staffed and operated in a manner that provides for efficient goods movement, given the growing volume of vehicles using the facilities. In addition, the magnitude of the problem is not well documented and understood. Methods of determining border-crossing delays associated with different aspects of the process (e.g., impacts of adequate roadway capacity, impacts of insufficient border staffing) are still being investigated. The application of automated procedures for border clearance is still in the early stages of deployment, and the potential for use of these technologies to resolve current capacity and operational constraints is promising. As NAFTA evolves through different stages of implementation, the logistical process and routing of commercial traffic will also continue to create new demands for connector facilities linked to the actual border facilities.

Internationalization of Transportation Firms

Globalization has also led to an increased demand for internationalization of the freight transportation industry and freight transportation services. One method of integrating far-flung supply chains is for carriers themselves to internationalize. Globalization has affected the freight industry in an obvious manner by bringing growth to overseas operators, and to domestic carriers handling traffic to and from the borders and coasts. The effects are evidenced both by increasing demand for international freight services and by an environment that stimulates alliances between U.S. and foreign transportation firms. Carriers traditionally in the domestic market have begun to internationalize, but more slowly and in delimited ways.

The U.S. trucking industry has experienced a modest degree of internationalization with a few of the larger firms commencing overseas operations. Canadian and U.S. truckers operate on both sides of the border, and extensive alliances have developed between United States and Mexican truck lines. Downsides include the constraints imposed by immigration and cabotage laws, and the delays and complications associated with border crossing. The bottom line is that trucking is still a domestic business gradually moving into the NAFTA arena, where networks may be enlarged to a degree, but not migrating overseas unless drawn there by customers.

Class I railroads are maintaining their roles as domestic wholesalers to steamship lines, continuing international sales efforts, but not offering overseas service. Short-line operators, often used to managing portfolios of disconnected properties and taking advantage of privatization opportunities, have entered foreign markets. However, even in these cases, the companies operate more like multinational alliances than fully integrated international carriers. The NAFTA picture is very different, however, because of the possibility of joined networks. The Canadian National and Canadian Pacific railroads both have had a presence in the U.S. for many years, chiefly in border states; and U.S. railroads still maintain a few routes into Canada. Through the privatization of the state railroad in Mexico, several U.S. Class I carriers have begun to participate in a wider range of Mexican services. While operations tend to be highly uncoordinated and physical connections are limited, network integration is likely to increase.

Ocean shipping is changing as well, as lines under the U.S. flag have largely disappeared from international trade. The past few years have seen the acquisition by foreign carriers of Lykes and APL, and more recently portions of SeaLand and Crowley; these outright takeovers had been anticipated by vessel sharing arrangements. The separation of SeaLand from CSX and the spin-off of U.S. distribution services by APL suggests that synergies between steamship and inland operations are not strong, and operating integration is not viewed as important. The future model of ocean shipping is still an unanswered question.

Airfreight plays a key role in the competitiveness of most global and industrial businesses. Air carriers have been among the quickest to internationalize, as evidenced by companies like DHL, linking more than 635,000 destinations in more than 220 countries. Still internationalization of companies and services faces a variety of difficulties. FedEx and UPS invested heavily in information technology to bolster international service through foreign affiliates, after struggling with company-owned operations. Many corners of the world lack the modern roadways to support the rapid pickup and delivery efforts of the air carriers.

Harmonization of Trade and Regulatory Policies

Globalization of the international economy and the freight transportation systems that support it has focused new attention on the need to harmonize trade and regulatory policies. At the highest level, the whole issue of ensuring fair trade practices in an era of greater global interaction is still an evolving element of world trade policy. Assuming continuation of general support for expansion of global trade, much work remains in the area of documentation and customs processing to facilitate rather than hinder trade. In North America, where the highest level of economic integration through trade is likely to be witnessed, a host of regulatory issues remain unresolved after NAFTA. The implications of these issues for freight transportation systems are considerable.

Trade Policy

Global competition in some industries has become fierce and the procedures for regulating this competition in a more integrated global economy are still evolving. Competitive and monopolistic practices are producing the same threat globally that once encouraged domestic regulation. As a result, trade agreements and organizations are developing to ensure fair trading practices and reduce unfair tariffs, regulation, and protectionism. Agreements like the General Agreement on Trade and Tariffs (GATT) and organizations like the World Trade Organization (WTO) are opening up greater access to markets for transportation providers. But concerns about the effectiveness and intentions of trade agreements and their implementing agencies, as well as anxieties about international business conglomerates, have led to renewed calls for protectionism and isolationism. While these tendencies could threaten international freight providers in the future, the actual potential for such actions is remote.

Customs and Tariffs

Barriers to successful international business include the complexity of customs regulations, duty payments, and the time required for inspection and clearance of goods. Customs processing seriously slows the transit time that air shippers are paying to speed. Paperwork, inspections, duties, and limited hours of customs service combine to produce cascading delays. Trading blocks, such as the European Community established and the United States instituted with NAFTA, in part, are a large-scale response to this. More moderate initiatives include the Entry Revision Project (ERP), which proposes a credit card approach to payment of importers. This is designed to streamline the customs process to cope with the time demands of business.

In addition, the International Trade Commission is simplifying the Harmonized Tariff Schedule of the United States. The result should help shippers, as the vast number of classification errors are due to the complexity of the current code system, which subjects many of these shippers to failed U.S. Customs Service compliance audits.

Cabotage and Vehicle Standards

Implementation of NAFTA trucking provisions has been postponed for U.S./Mexico trade (note: the Bush Administration proposes to open the southern border by January 1, 2002), keeping Mexican trucks and drivers restricted to a 25-mile commercial zone along the border of the United States. After delivering a load to a final destination point in the U.S., a Canadian trailer can legally haul a load en route to Canada, but the Canadian driver cannot pull it. Where cabotage rules have been changed to promote transborder movements of goods, immigration laws have not. Integration over our borders is not yet realized, and this is creating inefficiencies in service and the cost of shipping.

Issues for the Future

Among the most serious issues that will need to be faced, if the U.S. is to take full advantage of the economic benefits of participation in a global economy, is the need to address infrastructure capacity shortfalls. All modes that serve international trade are experiencing growing congestion at key hub facilities. Experts in the field note that, for much of the past 20 years, the growth in international trade has been accommodated through growth in modal productivity. But this cannot be the only answer in the future. As noted previously, ports are finding it difficult to obtain land for expansion; air traffic systems are already overloaded in many key international airports; on-dock rail and access for double-stack intermodal services need to be expanded; and the surface access to these facilities for trucking almost always occurs over congested freeways and principal arterials. Border crossing facilities have seen increasing queues as NAFTA trade has expanded and the implementation of pre-authorization systems and electronic credentialing has not kept pace with demand.

Financing gateway and trade corridor freight infrastructure presents its own challenges. Most of the public funding that could be available through TEA 21 is programmed at the state and local level. Freight projects with regional and national significance, but with local impacts, are often difficult to fund through the current metropolitan planning process. Targeted funding, such as is available through the National Corridor Planning and Development Program and the Coordinated Border Infrastructure Program, has begun to address some of the funding needs of gateway and trade corridor infrastructure. But eligible applications for funding have typically asked for more than 10 times the amount of funding that has been available. Additional problems are posed by the fact that many of the facilities are owned and operated by private entities. Creative financing methods are being developed to address the capital needs of these entities, but these have seen limited application.

The problem of true harmonization of regulatory practices, trade documentation paperwork, and customs procedures is one that will require considerable attention from the federal government. The increase in trade volumes and the introduction of Internet technology and other advanced communications systems are accelerating the need for paperless transactions among shippers, carriers, brokers, and customs agencies. This change in business at the border must be supported with appropriate harmonized legal structures to protect trade and ensure safe transfer of goods.

A final area of concern is the potential volatility of trade policy. There is no guarantee that the current atmosphere favoring free trade will continue. Historically, trade policies have moved in cycles. If the world economy experiences a significant slowdown, retrenchment may occur with respect to free trade. While some economists argue that the existence of advanced information technologies makes it more difficult for governments to protect their markets and businesses, there are also signs of distrust of the various non-government organizations that have been established to promote and police free-trade. Although it is likely that some return to a more protectionist set of world trade policies could arrive at some point in the future, it is even more likely that the globalization of the world economy is, by and large, here to stay.