Disconnecting the Dots

Disconnecting the Dots

Is the day coming when the U.S. will need to get back into the business of subsidizing container shipping to support exports? Change may be in the wind.

The U.S. is the world’s largest agricultural exporter. The Department of Agriculture forecasts exports will grow to $113 billion and run a $31 billion trade surplus in fiscal 2011. Given the frequency of natural disasters and growing wealth in Asia, U.S. farmers increasingly will be called upon to supply high-quality rice, soybeans, wheat, cotton and other commodities to world markets.

Agricultural exports, moreover, increasingly move through the container system, both to ensure segregation of specialized product and to take advantage of container shipping’s’ inherent supply chain benefits.

But a major question that has come to a head in the past year is whether the free-market container shipping industry is able to provide the capacity and rates needed to ensure U.S. exports are competitive on the global market. Year after year, with little letup, the same complaints are heard from agricultural exporters: Containers are not available when they are needed, where they are needed, or in the quantities needed to allow for fluid movement of agricultural exports.

Carriers say basic economics are at play and they are not obligated to provide service if it’s not remunerative. And it often isn’t. Fields in North Dakota are remote and nowhere near the Midwest distribution centers handling containers from Asia, so someone has to pay to bring the crops and the boxes together.

Carriers won’t do it unless it’s profitable, and the losses the liner industry piled up in 2009 only hardened carriers’ resolve to avoid loss-making activities in pursuit of market share. Lines such as Maersk have withdrawn from serving many inland U.S. points, because they’re not profitable.

The carriers argue the U.S. export market is a backhaul, with the key decisions on deployment of vessel capacity driven by the demands of the larger and better paying import trade. Exports are heavy, restricting vessel utilization; the rates on average are more than 50 percent less than inbound rates; and exports tie up containers needed to handle the next import load. This became evident in the spring when importers clamored for boxes as shippers restocked inventories and accelerated shipments to avoid peak season delays.

With the growing need for export capacity, a U.S. economic policy increasingly focused on exports, and a shipping system that offers no guarantees of capacity at a price that will make agricultural goods competitive, there is a clear disconnect here.

Is subsidizing shipping the answer? Countries throughout history have subsidized shipping to promote exports, and continue to do so today. During the post-war period, when the U.S. consistently ran a trade surplus, Washington was an active subsidizer of shipping and continues to subsidize a commercial U.S.-flag merchant fleet, although that is primarily for military preparedness. There would be practical difficulties in re-establishing subsidies for commercial purposes — U.S. shipping companies now are small in number and have little real impact on the international market, and giving money to foreign-based lines would seem politically remote.

But economics will determine whether some kind of government intervention is needed. If Asian buyers are willing to pay prices high enough to make the trans-Pacific westbound market a head-haul trade, that is, a market that determines carrier decision-making, the issue will resolve itself. That means Asia must continue to become richer, and it wouldn’t hurt if the dollar were to fall dramatically against Asian currencies, particularly China’s renminbi. That would not only make all U.S. exports more competitive, but would make the U.S. an attractive location for manufacturing, including goods liable to be exported.

“A key component is whether Asian consumers of U.S. exports will be able to pay enough to generate the kind of revenue that the carriers will need to support exports as the head-haul,” said Peter Friedmann, executive director of the Agriculture Transportation Coalition. “Exports will not be the head-haul unless the carriers get the money they need.

“The question is, will the Asian demand for our exports generate that revenue — that is a big question.”

U.S. consumers may be retrenching right now, saving more and spending less, but that might be short term. If exports remain a backhaul trade, if the Chinese are unwilling to allow a significant devaluation of their currency, and if imports follow the historical pattern of dominating U.S. container, pressures on the export system will only intensify.

Exporters need import rates to be strong so the U.S. is an attractive market for carriers to invest. That casts the debate over the future of antitrust immunity in an interesting light. If elimination led to a freefall in rates the way it did in Europe after elimination of the bloc exemption, it will be harder for carriers to justify investing in the U.S.

And with that, the disconnect will grow even larger.

Peter Tirschwell is senior vice president for strategy UBM Global Trade. Contact him at ptirschwell@joc.com and follow him on Twitter at www.twitter.com/PeterTirschwell.