Leslie Levesque focuses on forecasting and analysis of the Canadian economy at IHS Global Insight. She previously worked for Putnam Invest ments and Bain Capital. Levesque has a master?s degree in International Economics from Suffolk University.
What's the world's largest bilateral trade relationship? You might be surprised to learn that it does not involve China. The biggest bilateral economic trade occurs in the Western Hemisphere, between the United States and Canada. These two neighbors exchanged goods and services valued at more than US $700 billion in 2009.
The strength of U.S.-Canada trade is not simply a matter of proximity, although that certainly plays a role. The relationship also revolves around cultural, geographic, economic, sociological, and political similarities and disparities (asymmetry).
In terms of per-capita economic growth, the United States and Canada are similar, with the Americans slightly ahead of their northern neighbor in most economic categories. Canada's percapita income, at purchasing power parity (PPP), is approximately 80 percent of the U.S. level, due primarily to the United States' greater competitiveness and productivity. PPP is the rate of currency conversion that eliminates the price differences between countries.
The asymmetry between the two countries can mainly be found in their comparative economic size, which has important implications for the economy of the smaller economic partner. Thus, the combined trends in the health of the U.S. economy and in developments affecting supply chains have a disproportionate impact on Canada.
Cross-border integration Canada's proximity to the United States offers insights into the level of integration between the two countries' economies and supply chain activities. Approximately 90 percent of Canadians live within 100 miles of the U.S. border, while 85 percent of Canada's 20 largest cities are located within 110 miles of the border. Many Canadian production and distribution centers are situated closer to major U.S. markets than their American counterparts are.
Cross-border integration
Canada's proximity to the United States offers insights into the level of integration between the two countries' economies and supply chain activities. Approximately 90 percent of Canadians live within 100 miles of the U.S. border, while 85 percent of Canada's 20 largest cities are located within 110 miles of the border. Many Canadian production and distribution centers are situated closer to major U.S. markets than their American counterparts are.
There are more than 15,000 Canadian-owned companies in the United States, and many of them depend on integrated, cross-border supply chains that handle high-value-added goods and services. Trade liberalization has been an important factor in this development. The first substantial trade liberalization agreement between the two nations was the Automotive Agreement of 1965, which eliminated tariffs on automobiles and parts. The Canada-U.S. Free Trade Agreement of 1989, which eventually morphed into the North American Free Trade Agreement (NAFTA), eliminated most nonagricultural tariffs.
The level of economic similarity, geographic proximity, and bilateral trade liberalization between the two countries has also increased economic trade flows in similar manufactured goods. Approximately 50 percent of all merchandise trade consists of intermediate production inputs, and more than 33 percent of cross-border shipments are intracompany transfers. This is one reason why supply chain connectivity in certain sectors more closely resembles a web than a chain. Automotive parts, for example, frequently cross the border six or more times before entering the final assembly stage.
The flow of some commodities and finished goods, however, is unidirectional—mostly southbound trade destined for the U.S. market. One example is energy, which is a huge component of U.S.-Canada trade. Approximately 25 percent of U.S. petroleum imports are from Canada, and over 90 percent of Canada's energy exports are destined for U.S. consumers and businesses. The southbound energy flows from Canada to the United States are highly integrated, and the energy infrastructure serving the two countries is wellconnected and efficient. In addition, the neighbors' strong economic and political relationship and peaceful border allow significant crossdependence relative to energy inventories, thus helping to reduce the United States' dependence on volatile energy markets. In this sense, unidirectional trade has benefited both countries.
Retailers look northward
One of the significant asymmetries between the United States and Canada is the role trade (exports plus imports) plays in each economy. In 2009, trade as a percentage of gross domestic product (GDP) was approximately 18 percent for the United States; for Canada it was 48 percent. Exports to the United States alone represent 18 percent of Canada's GDP. This exposure to the U.S. economy, and therefore to the U.S. consumer—remember that consumer spending represents 70 percent of U.S. GDP—places Canada in a very vulnerable position and exposes the country's economy to U.S. economic cycles. This was easily observed during the recent recession. As the housing and financial crisis was working its way through the U.S. economy, retail sales plummeted, thereby constricting both Canadian and U.S. manufacturing. However, Canadian consumption expenditures did not experience the same downturn that was seen in the United States. (See Figures 1 and 2.)
A major reason for the smaller slump in Canada's consumer spending was the country's regulatory control over the way Canadian financial institutions manage mortgages. That policy shielded Canada from some of the massive dips in the economy seen in the United States. Because consumers were less affected by the downturn than their U.S. counterparts, they were able to take advantage of falling interest rates and increased their spending. This ultimately helped drive Canada's economy out of recession, but it has led to record levels of debt among Canadian households.
The Canadian consumer's resilience has many U.S. retailers eyeing a possible expansion across the border. U.S.-based companies that have already entered the Canadian retail space include American Apparel, Bath and Body Works, and Aldo. Recently, Target, Express, and Zumiez have confirmed plans to expand into this market.
Over the last few years, U.S. retailers entering the Canadian market have tweaked their domestic supply chain networks to handle northbound goods. Because most Canadian businesses and major cities are clustered near the border, U.S. retailers that expand into Canada are well-positioned to efficiently serve their new customers. Another advantage to expanding within North America: U.S.-based distribution operations can keep costs lower because they will have shorter distances to cover than they would if they expanded overseas. As the automotive industry's experience shows, there are also opportunities to keep costs low through the exchange of manufactured goods across the border.
In light of the demand shock U.S. retailers suffered during the past two years, moving into Canadian markets seems like a natural and logical diversification of risk. Moreover, the reduction of the Canadian corporate tax rate from 18 percent to 16.5 percent on January 1, 2011, and the further reduction to 15 percent scheduled for January 1, 2012, make Canada even more attractive to U.S. companies. Still, with Canadians becoming more cautious about spending, American companies expanding northward will have to make keeping costs low one of their top priorities.
Residents and businesses along the Florida panhandle today are keeping a close eye on Tropical Storm Helene, which is forecasted to strengthen into a major hurricane by the time it strikes the northeast Gulf Coast on Thursday.
Hurricane and storm surge watches are already in effect for that area, which could see heavy rain and flash flooding across portions of Florida, the Southeast U.S., Southern Appalachians, and the Tennessee Valley, according to predictions from the National Hurricane Center.
The storm would come a month after Hurricane Debby delivered drenching rainfall for days over Florida in August and after Hurricane Beryl hit Houston in July, knocking out power across the region.
As Helene continues to gather strength from the warm waters of the Gulf of Mexico, experts are warning that the storm’s impacts could include the Port of New Orleans, agricultural operations throughout the Southeast, and additional citrus and fruit farming business in Florida, according to a report from Everstream Analytics’ chief meteorologist Jon Davis.
From a supply chain perspective, additional disruptions could include rail and road transportation stoppages, closures of interstate highways I-10 and I-75, widespread power outages, and shutdowns of offshore energy operations in the eastern portion of the Gulf of Mexico, Davis said.
As the third potential hurricane to hit the area within as many months, the arrival of Helene shows that extreme weather events aren’t just anomalies, but rather they’re the new normal for shipping companies and port authorities, according to Frank Kenney, Director of Industry Strategy at the technology consulting firm Cleo.
To cope with that constant battering, businesses need to adopt a new mindset, he said. “The only way to keep supply chains running smoothly is to build resilience into every aspect of operations. This starts with diversifying logistics strategies. If a shipper is dependent on a single route or port, they’re setting themself up for trouble. Instead, it’s crucial to have multiple backup routes and options ready to deploy when the unexpected happens,” Kenney said.
Following that strategy, inland ports such as Savannah and Macon, Georgia, will likely gain importance in coming years since their locations offer proximity to ocean ports while also providing access to major highways and some protection from coastal flooding. “In short, the storm isn’t going away, but by embracing diversification, leveraging technology, and ensuring supply chain visibility, U.S. ports and shipping companies can stay ahead of the curve. The companies that prepare for these challenges now will be the ones that continue to thrive, no matter how extreme weather events rock the boat," Kenney said.
Container imports at U.S. ports are seeing another busy month as retailers and manufacturers hustle to get their orders into the country ahead of a potential labor strike that could stop operations at East Coast and Gulf Coast ports as soon as October 1.
Less than two weeks from now, the existing contract between the International Longshoremen’s Association (ILA) and the United States Maritime Alliance covering East and Gulf Coast ports is set to expire. With negotiations hung up on issues like wages and automation, the ILA has threatened to put its 85,000 members on strike if a new contract is not reached by then, prompting business groups like the National Retail Federation (NRF) to call for both sides to reach an agreement.
But until such an agreement is reached, importers are playing it safe and accelerating their plans. “Import levels are being impacted by concerns about the potential East and Gulf Coast port strike,” Hackett Associates Founder Ben Hackett said in a release. “This has caused some cargo owners to bring forward shipments, bumping up June-through-September imports. In addition, some importers are weighing the decision to bring forward some goods, particularly from China, that could be impacted by rising tariffs following the election.”
The stakes are high, since a potential strike would come at a sensitive time when businesses are already facing other global supply chain disruptions, according to FourKites’ Mike DeAngelis, senior director of international solutions. “We're facing a perfect storm — with the Red Sea disruptions preventing normal access to the Suez Canal and the Panama Canal’s still-reduced capacity, an ILA strike would effectively choke off major arteries of global trade,” DeAngelis said in a statement.
Although West Coast and Canadian ports would see a surge in traffic if the strike occurs, they cannot absorb all the volume from the East and Gulf Coast ports. And the influx of freight there could cause weeks, if not months-long backlogs, even after the strikes end, reshaping shipping patterns well into 2025, DeAngelis said.
With an eye on those consequences, importers are also looking at more creative contingency plans, such as turning to air freight, west coast ports, or intermodal combinations of rail and truck modes, according to less than truckload (LTL) carrier Averitt Express.
“While some importers and exporters have already rerouted shipments to West Coast ports or delayed shipping altogether, there are still significant volumes of cargo en route to the East and Gulf Coast ports that cannot be rerouted. Unfortunately, once cargo is on a vessel, it becomes virtually impossible to change its destination, leaving shippers with limited options for those shipments,” Averitt said in a release.
However, one silver lining for coping with a potential strike is that prevailing global supply chain turbulence has already prompted many U.S. companies to stock up for bad weather, said Christian Roeloffs, co-founder and CEO of Container xChange.
"While the threat of strikes looms large, it’s important to note that U.S. inventories are currently strong due to the pulling forward of orders earlier this year to avoid existing disruptions. This stockpile will act as an essential buffer, mitigating the risk of container rates spiking dramatically due to the strikes,” Roeloffs said.
In addition, forecasts for a fairly modest winter peak shopping season could take the edge off the impact of a strike. “With no significant signs of peak season demand strengthening, these strikes might not have as intense an impact as historically seen. However, the overall impact will largely depend on the duration of the strikes, with prolonged disruptions having the potential to intensify the implications for supply chains, leading to more pronounced bottlenecks and greater challenges in container availability, " he said.
A coalition of freight transport and cargo handling organizations is calling on countries to honor their existing resolutions to report the results of national container inspection programs, and for the International Maritime Organization (IMO) to publish those results.
Those two steps would help improve safety in the carriage of goods by sea, according to the Cargo Integrity Group (CIG), which is a is a partnership of industry associations seeking to raise awareness and greater uptake of the IMO/ILO/UNECE Code of Practice for Packing of Cargo Transport Units (2014) – often referred to as CTU Code.
According to the Cargo Integrity Group, member governments of the IMO adopted resolutions more than 20 years ago agreeing to conduct routine inspections of freight containers and the cargoes packed in them. But less than 5% of 167 national administrations covered by the agreement are regularly submitting the results of their inspections to IMO in publicly available form.
The low numbers of reports means that insufficient data is available for IMO or industry to draw reliable conclusions, fundamentally undermining their efforts to improve the safety and sustainability of shipments by sea, CIG said.
Meanwhile, the dangers posed by poorly packed, mis-handled, or mis-declared containerized shipments has been demonstrated again recently in a series of fires and explosions aboard container ships. Whilst the precise circumstances of those incidents remain under investigation, the Cargo Integrity Group says it is concerned that measures already in place to help identify possible weaknesses are not being fully implemented and that opportunities for improving compliance standards are being missed.
By the numbers, overall retail sales in August were up 0.1% seasonally adjusted month over month and up 2.1% unadjusted year over year. That compared with increases of 1.1% month over month and 2.9% year over year in July.
August’s core retail sales as defined by NRF — based on the Census data but excluding automobile dealers, gasoline stations and restaurants — were up 0.3% seasonally adjusted month over month and up 3.3% unadjusted year over year. Core retail sales were up 3.4% year over year for the first eight months of the year, in line with NRF’s forecast for 2024 retail sales to grow between 2.5% and 3.5% over 2023.
“These numbers show the continued resiliency of the American consumer,” NRF Chief Economist Jack Kleinhenz said in a release. “While sales growth decelerated from last month’s pace, there is little hint of consumer spending unraveling. Households have the underpinnings to spend as recent wage gains have outpaced inflation even though payroll growth saw a slowdown in July and August. Easing inflation is providing added spending capacity to cost-weary shoppers and the interest rate cuts expected to come from the Fed should help create a more positive environment for consumers in the future.”
The U.S., U.K., and Australia will strengthen supply chain resiliency by sharing data and taking joint actions under the terms of a pact signed last week, the three nations said.
The agreement creates a “Supply Chain Resilience Cooperation Group” designed to build resilience in priority supply chains and to enhance the members’ mutual ability to identify and address risks, threats, and disruptions, according to the U.K.’s Department for Business and Trade.
One of the top priorities for the new group is developing an early warning pilot focused on the telecommunications supply chain, which is essential for the three countries’ global, digitized economies, they said. By identifying and monitoring disruption risks to the telecommunications supply chain, this pilot will enhance all three countries’ knowledge of relevant vulnerabilities, criticality, and residual risks. It will also develop procedures for sharing this information and responding cooperatively to disruptions.
According to the U.S. Department of Homeland Security (DHS), the group chose that sector because telecommunications infrastructure is vital to the distribution of public safety information, emergency services, and the day to day lives of many citizens. For example, undersea fiberoptic cables carry over 95% of transoceanic data traffic without which smartphones, financial networks, and communications systems would cease to function reliably.
“The resilience of our critical supply chains is a homeland security and economic security imperative,” Secretary of Homeland Security Alejandro N. Mayorkas said in a release. “Collaboration with international partners allows us to anticipate and mitigate disruptions before they occur. Our new U.S.-U.K.-Australia Supply Chain Resilience Cooperation Group will help ensure that our communities continue to have the essential goods and services they need, when they need them.”