Here’s a crazy idea from the out-of-the-box desk (or an out-of-the-box idea from the crazy desk): subsidize U.S. export ocean freight rates.
I know, we need less government interference, not more. But it’s time to face a real problem. Liner carriers are less inclined to go out of their way to serve hard-to-reach customers whose cargo doesn’t even pay its own way.
There are initiatives by enterprising exporters and export groups that have managed to make their cargo more easily accessible to carriers, but there are still many more with products the world wants that face a difficult path to U.S. ports. And with the long-awaited ratification of free trade agreements with South Korea, Colombia, and Panama finalized in October, U.S. export demand can only grow.
So here’s the idea: let the government make export cargo more attractive to liner carriers struggling under their own financial weight.
First of all, why the government? Well, the easy answer is, who else? As much as ocean transportation rates are market-driven, the industry is still heavily regulated by the U.S. government, so it’s not as if a pure free market would be taken under the thumb of Washington.
Export shippers functioning on paper-thin margins don’t have the financial wherewithal to pay attractive rates. They’ve long relied on heavy U.S. import volumes to deliver millions of boxes to U.S. shores, some of which carriers like to have filled on the return to Asia. But that model is undergoing a stress test at the moment.
U.S. demand for goods from Asia is still growing, but sluggishly. Carriers, as mentioned before, are hurting financially and in no mood to pay to reach out-of-the-way cargo that rarely, if ever, covers costs. And the U.S. government is midway through a huge PR push to drive up export levels — the Obama administration’s National Export Initiative (NEI) aims to double exports from 2010 through 2015.
If slow import growth is here to stay for the mid-term, and if the objective is to grow exports — in essence, to better balance the value of trade on the transpacific — then the reality is that exporters need to start paying more.
But what if they can’t? No matter how much exports are rising — and rising they are, based on loaded outbound throughput numbers at key U.S. West Coast ports — they’ll still pale in comparison to import volumes for the foreseeable future.
“I have 11 carrier contracts,” Hayden Swofford, executive director of the lumber-focused Pacific Northwest Shippers Association, told the TPM Asia conference in Shenzhen last month. “The only reason I have so many is that carriers don’t look at our business and how they can help us. Every service is based on what the importer needs.”
The liner carrier OOCL, long considered one of the more U.S. export-friendly carriers, said container lines need from exporters “longer term and reasonably accurate booking forecasts to allow our planning for equipment availability.” The line also said increased use of electronic tools for booking, bills of lading, and payment would help, as well as elimination of duplicate bookings.
But even if carriers looked more at how they could help exporters, and even if exporters provided rock solid booking forecasts, exporters’ second class status won’t be changed overnight by the Obama’s NEI.
Increasing the availability or attractiveness of paying freight customers, however, is an area where the government could conceivably alter the market. There are a couple ways this could happen.
Idea one: outright subsidization of export ocean freight rates. If liner carriers aren’t compelled by the revenue they receive to reach shippers in export markets far away from the import markets where they (or third-party providers) deliver boxes, find a number that will compel them.
Of course, there’s a potential problem with this idea. Such U.S. subsidies would undeniably fall afoul of the World Trade Organization. Other countries with competing products or commodities may find the solution untenable.
Indeed, subsidies linked to the costs of international freight and internal transport subsidies applying to exports only, “such as those designed to bring exportable produce to one central point for shipping,” are watched closely by the WTO.
So here’s another idea: subsidization of the U.S. trucking and rail industry to move equipment from import markets to export markets, and then from export markets to intermodal collection points.
This would fill the primary gap in the system — the costly aspect of equipment repositioning to far-flung export origin points. It might still run afoul of WTO regulations, but it would be harder to call it an outright subsidy, since it could be characterized as a program that more efficiently channels equipment from import to export markets. The subsidies to trucking and rail providers wouldn’t have to come as outright rate boosts either. It could come in the form of tax breaks, or matching grants on capex programs. Things could get creative.
And how would the U.S. government’s involvement in such a program be any more of a WTO violation than, say, China’s central and local government spending its money to build a nationwide intermodal network? That is surely designed to aid Chinese importers and exporters in inland locales.
Peter Friedmann, executive director of the Agriculture Transportation Coalition, told American Shipper he wasn’t aware of any such export transportation subsidies in the United States, though Canada has had some.
But there’s a larger problem than the WTO, and it’s applicable to both ideas. Where would the money come from? It’s hard to even fathom how much it would take to fund either solution, especially given the present budget hardships in Washington. But the reality is that the current system is not working, or at least not well enough.
If the government can fund a Defense Department to the tune of trillions of dollars, can’t it fund a system to increase the attractiveness of U.S. companies in an ultra-competitive global market, and at the same time aid its domestic road and rail service providers? That could drive job growth in multiple categories that don’t rely merely on housing or construction.
And the idea that transportation networks shouldn’t be subsidized is inaccurate. Many of the world’s top international liner carriers, and by extension their logistics and transportation networks, are either directly or tacitly subsidized by national governments. Ports in other countries are often built on spec by local governments. Railroads are often state-owned.
Why can’t the U.S. fund a sort of container match-back initiative to cover the cost difference between what its exporters can realistically pay and what liner carriers would realistically like to be paid?
Subsidized export transport?
