History Lesson With Fred Smith: American Trade April 2016

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History Lesson With Fred Smith: American Trade

April 2, 2016


Typically this write-up would be reserved for the Scratch Notes section, but I thought the deep history and great detail warranted broader distribution.

The WSJ opinion piece was adapted from remarks made by Fred Smith, founder/chairman/CEO of FedEx Corporation, to the Yale 1966 class reunion.

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How Trade Made America Great (WSJ 3.26.16)

Early 1960’s in America

  • Most Americans had not traveled abroad, as foreign travel was ‘exotic, expensive and rare’, and largely reserved for the affluent
  • “Long-distance phone calls were expensive, international call prohibitively so.”
  • American brands dominated consumer spending
  • Early signs of trade boom: Volkswagen Beetles and the ‘amazingly small’ Sony portable transistor radios

Reversal of Smoot-Hawley

“In the early 1930s, President Roosevelt and Secretary of State Cordell Hull believed in liberalized trade as a path to world peace and cooperation. With strong administration support, Congress in 1934 passed the Trade Agreement Act, which allowed Hull to negotiate reciprocal trade treaties with numerous countries, lowering tariffs and stimulating trade.”

  • The Smoot-Hawley Tariff Act, passed in 1930, led to a 66% decline in world trade from 1929 to 1934
  • 1947 General Agreement on Trade and Tariffs (GATT) signed by 23 countries
  • Post-WWII policy focused on creating access to the ‘giant US market’

Cutting Trade Costs

“In April 1966 Malcolm McLean launched his first international Sea-Land container operation between New York and Rotterdam. McLean’s shipping-container revolution cut the cost of seaborne trade by a factor of 50 versus loose-cargo stevedoring.”

  • ‘Revolutionary’ jumbo 747 widebody Boeing airplanes entered service in 1969…
  • 2.5 times bigger than the Boeing 707, and ‘cut overseas travel costs by 70%’.

“The 747’s hump allowed a freighter version to load cargo through a nose door under the cockpit and into the cavernous fuselage. Because of the cargo-carrying 747F, costs for trans-Pacific airfreight were dramatically reduced, a major factor in the extraordinary GDP growth of the Asian “tiger” economies of Hong Kong, Taiwan, Singapore and Japan beginning in the 1970s. Electronics and other high-tech/high-value-added goods from these emerging markets could be distributed and sold in the U.S. and Europe in a few days—an amazing development.”

1970’s and 1980’s Technological Advancement

“During the 1970s and 1980s, while container ships and planes became increasingly efficient with each successive model, newly developed fiber-optic cables (patented in 1966) began running underseas, connecting the world at the speed of light, lowering voice and data-communication costs by orders of magnitude. Financial markets became globally integrated and transactions multiplied at an astounding rate.”

WWII Foes

  • Germany and Japan became economic titans on the back of a more open US economy
  • Exchange rates and political pressure pushed Japanese car makers to produce in the US, mostly in the South
  • Panasonic, Sony and Hitachi became global giants, first via the US, but then globally

Deregulation

  • 1977 – Air cargo
  • 1978 – Passenger air services
  • 1980 – Interstate truck and rail transportation
  • 1994 – Federal pre-emption of intrastate trucking
  • 1985 – Civil Aeronautics Board (CAB) abolition
  • 1986 – Interstate Commerce Commission abolition
  • Staggers Act of 1980 allowed rails halved rates while ‘restoring financial stability’
  • Flexible truckload common carriers industry developed to ‘meet the needs of emerging big box’ retailers such as Wal-Mart and Target
  • ‘Just-in-time’ supply and ‘fast-cycle’ manufacturing developed solely because of trucking deregulation
  • Logistics costs fell from 16% of GDP in the 70’s to 9% by 2000

Global Trade Growth

  • Travel and trade grew 2.5 times GDP for 25 years
  • US imports and exports grew from $50 billion in 1966 to more than $4 trillion today
  • Shipping rates per pound are 1/500th of rates in the 1960’s
  • Global trade now $15 trillion annually

Five Key Drivers of Global Trade Growth

  1. Massive increases in computing power, supporting the enormous increase in number of global financial transactions
  2. Internet development
  3. Evolution of global oil market
  4. Integration of US, Mexican and Canadian economies via NAFTA
    • (In the 20 years since NAFTA, US trade with Mexico and Canada rose from $737 billion to $1.2 trillion)
  5. China’s emergence as global superpower

China = Japan?

“China, however, has followed Japan’s mercantilistic practices, which have led to a $300 billion trade surplus with the U.S., thanks to state support of Chinese industry and restrictions on foreign competitors. These policies have created a strong political backlash in the U.S., which made the recent congressional renewal of Trade Promotion Authority—which allows the president to negotiate trade treaties and was for years a routine process—extremely difficult.”

Uncertain Global Trade Future

“Today, given low growth in most of the world, rising wages in China and petroleum costs declining because of U.S. fracking technology, the trajectory of the world’s commerce is somewhat uncertain. Trade and global GDP are now growing roughly at parity. Following the 2008 financial crisis, protectionism has shown a troubling popularity in many countries, including the U.S. Stringent new security regulations have also slowed goods crossing many borders.”

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Smith’s observations and vision pair well with Martin Wolf’s recent opinion piece “China’s future challenge for the world economy”, which I reviewed yesterday on the Scratch Notes page.

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