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Keeping Global Trade and Transport on Course

Frederick W. Smith

March 3, 2014

Good Morning. I’m honored to be the first speaker at what

promises to be a very dynamic meeting of ocean transport

professionals.

And it’s great to be in the Port of Long Beach, which has

enjoyed six straight years of air-quality improvement, due to

its environmental focus.

The port requires ships to connect to the electrical grid while

at berth. Plugging in one container ship for a day is the

equivalent of taking 42,000 cars off the road.

FedEx is on a parallel track in our industry. We’re changing

to larger, more fuel-efficient planes to reduce emissions.

We’re also adding more all-electric and hybrid vehicles to

our fleet to save money, improve the environment, and

reduce our exposure to oil price swings in the global market.

We could not have accomplished this without our more than

300,000 FedEx team members around the world who work

hard every day to help us reach our efficiency goals and

keep our Purple Promise: “I will make every FedEx

experience outstanding.”

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The FedEx vantage point

First, I’d like to review our FedEx portfolio of shipping solutions

to help you understand our unique vantage point on global

trade.

We began as Federal Express and created the modern air-

express industry 40 years ago. Our history spans the

most important era of the modern air cargo industry, and

today we have the largest all-cargo fleet in the world.

Besides FedEx Express, we have other operating

companies:

FedEx Ground, FedEx Freight and FedEx Services, which

contains our retail unit, FedEx Office. We also have FedEx

Trade Networks, dealing in air and ocean freight

forwarding, customs brokerage, and trade facilitation, and

it’s what gives us a seat at this conference table.

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I’d like to introduce Jack Muhs, our new CEO of FedEx

Trade Networks. (Pause and let Jack stand). Jack has 30

years with FedEx, and he succeeds Fred Schardt, who

recently retired after six years of doing a great job at the

helm of Trade Networks.

Because we transport by air, land, and sea, FedEx bears

witness to the global trends affecting all those areas. In

essence, all trade is interconnected regardless of mode,

so major global trends affect not only sea trade but air

and land as well.

From our standpoint, the reality is that global transportation has

changed dramatically over the last decade. The rise in fuel prices

as shown on this chart, has resulted in big changes in shipping

patterns—particularly since the Great Recession of 2008.

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If companies want to deliver something fast, like a new

personal electronic device, they choose door-to-door air

express, to race new technology to the marketplace.

But if cost rather than time is of the essence, more

shippers—particularly for heavier shipments--have turned to

slower maritime transport to save money. And, interestingly,

some container ships today take almost as long to cross

oceans as the Cutty Sark did more than a century ago.

However, due to improved ship- and goods-monitoring

technology, customers can now “slow steam” their cargo,

getting their goods to destination at precisely the right time.

With historically low global interest rates, this makes even

more sense as the carrying costs of inventory in transit is

not significant.

So the trend of higher fuel costs affects three different

segments differently.

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As you can see on this chart, both the air express and ocean

modes are growing, and they’re gnawing on the middle

segment, general airport-to-airport cargo.

In fact, we believe maritime shipping stands to gain even

more share due to two factors:

1) Over the years, ships have gotten bigger and much

more efficient.

2) The newest container ships run more than 3.5 times

the size of a football field. This, of course, has resulted

in lower unit costs at the expense of frequencies and

time-in-transit. Hence, the industry is in the midst of

establishing new carrier alliances.

3) Once the Panama Canal expansion is completed,

hopefully by early 2016, the new Post Panamax-sized

vessels can use the Canal to travel from Asia directly to

the U.S. East Coast.

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The Panama expansion could well be a new stimulus to

trans-Pacific trade, given the improved supply chain

efficiencies that will result.

In the air cargo sector, profound changes are underway: low

growth in the U.S. and Europe, increased China

manufacturing costs, electronics miniaturization, and the

increase in underbelly capacity in long-range widebodies is

putting great pressure on yields.

These trends, combined with the new efficient A330-200F,

777F and 747-8F, have resulted in 43 Boeing 747-400

freighters being parked in the desert and six more have

been scrapped. The respective figures for the MD-11F are 20

parked and 4 parted out to date.

Absent a reversal of these yield declines—which have been

inexorable over the last 20 years—further main deck

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freighter retirements will be required to balance supply and

demand.

 

History of U.S. maritime and freight forwarding

To better understand the present day global trade market, let’s

review briefly where we’ve been.

In February 1784 the Empress of China became the first ship

to sail from the United States to China. In its wake came a

steady flow of American merchants in search of wealth—they

wanted silk, porcelain and above all tea from China.

As more merchants began to trade with Asian countries in

the 1800s, “ship brokers” or middle men began to arrange

maritime transportation across oceans.

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Eventually some intermediaries began to function as export

freight forwarders, ship brokers, and customs brokers, the

forerunners of many companies represented here today.

With fits and starts trade has grown from these roots to

almost 30% of U.S. GDP and even more in other countries.

It’s important to note that after World War II, the United States

led the world in moving toward open markets, a factor important

to rebuilding countries devastated by war.

This effort was led by a famous Tennessean and Nobel Prize

winner, Secretary of State Cordell Hull.

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He helped craft the post-World War II GATT policy that

opened our markets to world trade and helped rebuild

Germany and Japan.

America’s willingness to open our markets has been the key

to lifting billions of people out of poverty around the world.

Of course, the mid-20th century also saw a simple but huge

change in ocean transport that originated with my friend, Malcolm

McLean, who passed away 13 years ago.

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As you know, McLean invented the shipping container, a

contribution to maritime trade so phenomenal that he’s been

compared to the father of the steam engine, Robert Fulton.

I think even Malcolm McLean would be astonished at today’s

Panamax-class vessels that can transport around 16,000

TEUs, compared to the tiny ships he started with and even

those he used at the end of his career.

Another factor helping to spark trade was regulatory reform.

From the late 70s through the early 90s, regulatory changes

around the world made for easier entry into both air and

ocean international freight transport.

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History of air cargo

While maritime transport was evolving, so was the air cargo

industry, which had been chronically unprofitable despite its

seemingly great promise after World War II. However, a

confluence of three factors beginning in the 1970s transformed

the air cargo industry into a major world economic force:

The economic miracle of the four “Asian Tigers” and Japan;

The increased manufacture of electronic products in these

countries; and

The introduction of the Boeing 747 freighter which, as you

may know was an historical accident. More about that in a

minute.

Beginning in the 1960s, Japan, Hong Kong, Singapore,

Taiwan and South Korea, evolved into major manufacturing

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locations.

This was driven by the exploding market for electronics and

automobiles in the U.S. and Europe. Significant foreign

investment in these Asian countries, including modern

infrastructure and hi-tech factories, produced high growth

rates that continued into the 1990s.

The world economy was booming so much in the 1960s that

travel and transport demand had outgrown the airliners then

in service.

But in January 1970, Boeing introduced its 747 which

revolutionized aviation.

Its operating costs were 30% lower per passenger seat or

unit of payload than any other commercial aircraft.

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It was two-and-a-half times bigger than the largest jet

airliner in service at that time.

As I mentioned earlier, the 747 freighter was an accident.

Boeing had competed for the contract to develop a jumbo

freighter for the U.S. Air Force, but lost out to the Lockheed

C5-A. So they looked for other uses for their unique design

features for the military such as the aircraft’s iconic hump

that allowed a nose door for direct loading of the cavernous

main deck.

The layout for Air Force requirements proved ideal for Asian

loads—particularly dense consumer electronics which rapidly

became half of the total air cargo market.

The 747 could carry such high-tech, high-value items across

vast distances at significantly lower costs, particularly given

the decline in fuel prices during the 90s. In turn, this allowed

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fast supply chains to be efficiently centered on Asian

manufacturing.

The international air cargo market came to resemble the sea

freight market with large point-to-point freight

consolidations from major cities in Asia to a few distribution

centers in the U.S. and Europe.

As the 747 began to dominate long-haul services, an upstart

network called Federal Express began flying from Memphis

in spring 1973.

Our hub-and-spoke distribution system was uniquely

developed to deliver overnight express packages from one

point to any other on the network. Also, we created an

integrated air-ground express network that was a first in the

air cargo industry.

International air express emerged as a distinct major sector

as FedEx acquired Flying Tigers for its routes and facilities

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and combined them with door-to-door express pickup and

delivery networks for dutiable packages and light freight.

Other integrated networks such as those of DHL and UPS

became major players in this space as well.

China’s emergence as a manufacturing superpower changed

supply chains throughout Asia but continued these basic

global trends.

So, combined with deregulation in the 1970s, by the 90s all the

elements were in place for air express and air cargo to basically

change modern logistics.

In addition, late in the 20th century most international aviation

treaties were liberalized to allow freighter operations to align with

global trade flows.

All these transportation efficiencies helped the growth of

global trade, which on average exceeded GDP growth by two

and half times for three decades, up until the last few years.

In the same vein, the North American Free Trade Agreement

has seen economic activity among the U.S., Canada, and

Mexico almost quadruple over the past 20 years to more

than $1 trillion today.

The follow-on to the GATT, the World Trade Organization or

WTO agreement further integrated the world’s economies

and significantly increased global trade.

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China’s accession to the WTO—which FedEx strongly

supported—was a watershed event in this regard. As a

result, China is now the world’s largest trading nation,

exporting over $400 billion to the U.S. alone in 2013.

Today’s challenging environment

Unfortunately, the Great Recession of 2008, the rising cost of

fuel, higher wages in China, and low growth in the U.S. and

Europe have shrunk trade growth to a trickle in the last several

years, but we believe even modest growth is not a foregone

conclusion without a decisive change in direction by governments

around the world.

One of the biggest reasons trade is no longer growing

rapidly is the rise of protectionism. Over the last few years

almost every trading nation has instituted policies that

permit greater regulatory intervention in the trade process.

Unfortunately, history shows protectionism stifles

competitiveness, innovation, and consumer choice.

It’s discouraging to watch nations made prosperous by the

opening of markets and the growth in global trade attempt

to throttle the very forces that have created their prosperity.

This is not a new phenomenon. Every nation wants to

promote exports and reduce imports to the advantage of its

national producers. French economist

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Frederic Bastiat bemoaned trade restrictions in the early

1800s.

His solution to the problem for France was to build ships, fill

them with locally made goods for export, then sail them a

few miles off shore and sink them! If you think about it,

Bastiat’s 200-year-old suggestion is not far off the trade

policies espoused by many of today’s politicians.

Here’s a sobering statistic: Last year, the top 20 world

economies passed 23% more protectionist measures than in

2009.

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o For example, Argentina has passed 168 measures since

2009. Could the recent crisis there be somewhat

related?

o While the United States’ skirts are not completely

clean, in most instances this country has abided by its

trade agreements and for geopolitical interests has

often sacrificed its economic interests to the

mercantilism practiced by other countries.

o In this regard, first Japan’s and now China’s trade

practices have eroded a great deal of political support

in the U.S. for more trade liberalization.

o China’s “Indigenous Innovation” policy is clearly

focused on protecting Chinese companies against

foreign competition.

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o Canadian interests recently opposed lifting de minimus

clearance limits, perceiving such a change as injurious

to their livelihood.

o A small topical example: FedEx couldn’t ship 3,000

pillows, which were in short supply, to Olympic athletes

in Sochi because Russian customs restrictions would

allow only five pillows to be imported with delivery in

six weeks! The result was a microcosm of the effects of

less trade: No one sold the desired pillows; no one

transported and cleared the pillows; and someone’s

quality of life probably suffered due to lack of sleep!

Journal of Commerce editor Chris Brooks last month reported that

the World trade Organization was lowering estimates for global

trade growth in 2014 because of protectionism around the world,

even though several large economies were gradually improving.

This is indeed unfortunate.

History shows that protectionism reduces prosperity.

Conversely, trade liberalization increases human well being

though there are often local losers.

The Peterson Institute for International Economics estimates

that ending trade barriers would increase U.S. income alone

by $500 billion.

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The key to the increase in global prosperity since World War

II is clear: political leadership that focused on the greater

good of expanding global markets rather than protecting

parochial interests.

So what should be done about the worrisome slowdown in world

trade? It’s clear we must attack root causes. The problem isn’t

cyclical—as noted before, it’s systemic and spreading around the

world.

Again, history proves that protectionism squelches

competition, and lowers economic growth. One only has to

study the history of the Great Depression of the 1920s and

30s to understand the consequences of “beggar thy

neighbor” policies like the U.S. passage of the Smoot-

Hawley tariffs of 1930.

To reverse course, all of us must redouble our efforts to

again move our governments toward trade liberalization.

It’s clear that recently the U.S. has not exerted the

leadership that began with Cordell Hull, the GATT, and the

WTO that held so much promise a few years ago.

There have been a few bright spots however. We commend

the recent World Trade Organization’s multilateral trade

facilitation agreement, the first in its 19-year history. While

certainly not comprehensive, its goal is to make global trade

simpler, more transparent, and more predictable. We must

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urge our government to work aggressively to ensure

compliance with the WTO by all participants, including

China.

Other trade pacts under discussion, such as the Trans-Pacific

Partnership (TPP) and the Trans-Atlantic Trade and

Investment Partnership (TTIP) could drive up world GDP by

as much as 5% just by simplifying trade regulations. If

enacted, that’s millions of new jobs around the world in

many different sectors including ours.

And the U.S. should join Mexico’s president and Canada’s

Prime Minister in their call for an expanded NAFTA “2.0”.

Of course in an ideal world, all countries would declare unilateral

free trade and be done with it.

Unfortunately, as we’re seeing with the TPP and TTIP trade

negotiations, it’s often mostly a negotiation of what will be

excluded from free trade.

Add to that the machinations of U.S politics. The Wall Street

Journal’s Kimberley Strassel noted last month that instead of

trying to fast-track the Europe and Pacific pacts, due to

domestic politics, many Democrats and Republicans are

opposed to even granting the President Trade Promotion

Authority or TPA, which allows Congress only an up- or

down-vote on trade deals. In years past, TPA has been

routinely afforded the Executive Branch to allow effective

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negotiations of U.S. trade agreements, and most other

countries have a similar provision in their laws.

Considering this, it is essential that the U.S. enforce existing

trade agreements as egregious violations will continue to

further erode congressional support otherwise.

And of course the politics of trade in other countries often

make the fighting in Washington look tame by comparison.

These are indeed challenging times for global growth, which begs

the question of what we in the industry can do.

  

I suggest all of us

speak out in favor of free trade and its demonstrable

benefits at every opportunity;

contact our politicians and policy makers and let them know

we stand behind them in supporting new trade pacts; and

work together through professional alliances around the

world to sell the advantages of open markets.

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Hopefully, such actions will help us regain a positive course for

trade expansion in years to come. In the interim, we hope this

year sees at least modest growth in global trade.

Baseball icon Yogi Berra once said, “The future ain’t what it used

to be.” And we agree. The future ain’t what it used to be, and it

will only get better, if we make it better. It will take

perseverance. It will take lots of hard work and very loud voices

from everyone in this room and those like us around the world.

At FedEx, we’re all in, and we hope you are too.