Since the end of the Cold War, trade liberalization and globalization have increased at a very rapid pace. As a result, the United States and Europe have become increasingly dependent on Asian imports to satisfy domestic consumer demand, aided by Asia's continuing appetite for U.S. and European financial assets, especially in the form of sovereign debt.
Two countries in particular, the United States and China, have developed a very close trade and financial relationship, but their economic strategies differ. The United States continues to borrow, import, and run up public debt, with important negative implications for the long-term sustainability of the U.S dollar as an international reserve currency. Meanwhile, China, by contrast, has been saving, exporting, investing, and purchasing U.S. debt.
Article Figures
[Figure 1] Global composition of GDP and consumer spendingEnlarge this image
China has the "comparative advantage" of production and assembly of low-value-added consumer goods, which it exports to North American and European markets. China's exports are also aided by a foreign-exchange policy that keeps its currency devalued against the U.S. dollar to encourage and sustain exports in key sectors. The United States, on the other hand, has so far opted for a consumer-driven growth model. (For more about the principle of comparative advantage, see "Monetary Matters" in the Q3/2012 issue of CSCMP's Supply Chain Quarterly.)
Until recently, infrastructure investments and exports were the primary engines of China's economic growth; since 2001, investment has been the largest contributor to the growth of the country's gross domestic product (GDP). However, in October 2012, China's National Bureau of Statistics reported that private and public consumption accounted for over 50 percent of GDP growth in 2011 and during the first three quarters of 2012. It appears that the Chinese economy is finally making the transition to a more consumption-driven economic model, with investment playing a secondary role.
A tale of two consumers
While historically the U.S. consumer has been a key driver of trade patterns, China's move toward a more consumption-based economy foreshadows its future importance as a consumer market fueled by accumulating wealth and a growing middle class. That change is happening faster than many would have anticipated. In 2011 private per-capita consumption in China stood at US $1,863. That is expected to steadily increase, as consumer spending adjusted for inflation is forecast to grow, on average, 7.75 percent per year for the next 10 years. Looked at from another perspective, the potential influence of China as a consuming market becomes even clearer. In 2001 Chinese consumers represented only 3.0 percent of global consumer spending, but by 2011 they had come to represent 6.1 percent of the total. IHS Global Insight is forecasting that by 2021 Chinese consumer spending should grow to almost 13 percent of global spending. That means the Chinese consumer gains a two-fold increase in the percentage share of global private consumption every 10 years. Further, consumer spending as a share of China's GDP is projected to increase from 33.2 percent in 2010 to 37.3 percent by 2020.
Contrast this with the United States, where consumer spending per capita in 2011 stood at US $34,347. Meanwhile, consumer spending adjusted for inflation is expected to grow, on average, slightly above 2.0 percent per year for the next 10 years. In 2001 American consumers represented 36.4 percent of global consumer spending; by 2011, however, they represented 26.9 percent. IHS Global Insight forecasts that by 2021 the United States will represent only slightly more than one-fifth of global consumer spending. Moreover, U.S. consumer spending as a share of GDP is expected to drop slightly from its current standing of 70.5 percent to 69.5 percent by 2020.
Global consumption patterns shifting
Although it is likely that U.S. consumers will still claim the highest percentage share of global consumption in 2021, the global distribution of consumption shares is diversifying beyond the mature economies that have long dominated consumer spending. India, Latin America, China, and emerging Eastern European nations will gain in terms of global GDP and consumer spending shares—indeed, China's GDP is expected to equal that of the United States in the near future—while the shares held by the United States, Japan, and Western Europe are forecast to decline. (See Figure 1.)
Worldwide changes in consumption are likely to result in some production rebalancing during the next 10 years, but those changes may not be as significant as some might expect. It is anticipated that some multinational corporations will relocate production facilities to the United States or elsewhere in the Western Hemisphere, or move operations to Vietnam from China, but this shift will be relatively minor. In addition, the expected growth in the number of consumers and their spending power in markets like China and Vietnam may help to keep production facilities nearby.
The coming changes in global consumption and production should have a major, largely positive impact on supply chain risks. During the worldwide financial and economic downturn, low-value-added production continued to be concentrated in emerging markets, while consumers were concentrated in the more economically advanced parts of the world. But as the 2011 earthquake in Japan and floods in Thailand showed, there are substantial risks associated with global supply chains that link highly concentrated production in emerging economies with consumption in developed regions.
Such risks of supply-chain disruption have not been mitigated, let alone adequately addressed. However, as the consumer base broadens and diversifies across many countries, demand-side disruptions will not be as dramatic and should help mitigate any shocks emanating from a single nation. In other words, the U.S. consumer's declining global consumption share could be interpreted as a "blessing in disguise," as it will allow for a more balanced distribution of the effects of a sudden consumption or production shock.
A final note: A key feature in the future pattern of production and consumption across nations will be the global monetary arrangements adopted by markets and policy makers. In an environment where capital and financial markets continue to become more closely integrated, currency and exchange-rate manipulations are bound to further lose market legitimacy. Therefore, market participants need to pay close attention to developments related to sovereign debt and the worldwide competition for international currency-reserve status.
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.”