January 24, 2017

Need to slash inventory costs will offset calls for protectionism, analyst says

Impact of higher interest rates, surge in e-commerce will propel global trade higher despite rising nationalist tide, Stewart says.

By Mark B. Solomon

Protectionist impulses by governments to restrict the growth of global trade and commerce will be outweighed by businesses seeking more cost-effective options to source and distribute as a way of tamping down rising inventory-carrying costs, an analyst said today.

Alexsander Stewart, managing director, transportation & logistics for investment firm Stifel, told the SMC3 annual winter meeting in Atlanta that, for the first time in a decade, companies will confront an environment of steadily rising interest rates. This is especially true in the U.S., where the Federal Reserve has prepared financial markets for several interest rate hikes over the next two to three years.

The benchmark federal funds rate, the overnight rate charged by banks and credit unions to lend to each other, is currently between 0.50 and 0.75 percent, and has moved little since the 2007-2009 financial crisis and recession. However, with an improving U.S. economy eliminating the continued need for ultra-low interest rates, some economists forecast the Fed will boost the fed funds rate multiple times by decade's end until the central bank reaches what it considers a normalized target rate of around 3 percent. In this climate, companies sitting on what is estimated at $1.8 trillion of global inventories could face a significant financial hit unless they can find ways to quickly and freely move goods to market, Stewart said.

In his presentation, Stewart of Stifel predicted an increase in re-shoring and near-shoring activities as businesses look to compress the time to market for their goods. This may result in large, global supply chains being replaced by networks supporting shorter, region-based trade flows, he said.

Businesses that have spent years, even decades, erecting and refining a global infrastructure may suffer, he said. "Companies with global networks are finding it difficult and costly to manage increasing customer demand for unique products with short cycle times and multiple reorder points," he said in his presentation.

Protectionist initiatives could also be overwhelmed by the rising tide of global e-commerce, Stewart said. Worldwide retail e-commerce sales will surpass $4 trillion by 2020, forecaster eMarketer said last August. Even then, e-commerce will represent just 14.6 percent of total worldwide retail sales, eMarketer said. The current level is between 10 and 12 percent today. Cross-border e-commerce today accounts for between 10 and 15 percent of the total volume, led by the Asia-Pacific region, Stewart said.

The expected tug-o-war between globalist and nationalist/protectionist ideologies began yesterday when President Donald J. Trump issued an executive order removing the U.S. from the Trans-Pacific Partnership (TPP), a 12-nation compact that supporters had said would jump-start U.S. export activity by removing thousands of tariffs and nontariff barriers imposed by foreign countries, but which critics said would lower U.S. barriers to foreign trade, thus killing U.S. jobs by making it cheaper to import goods than produce them at home. Trump also said he would seek to renegotiate the 23-year-old North American Free Trade Agreement (NAFTA), which he has also bitterly opposed as a job killer.

Frederick W. Smith, chairman and CEO of Memphis-based FedEx Corp., told Fox Business Network today that withdrawing the U.S. from the TPP was a big mistake, saying it will make it harder for American companies to sell to foreign consumers, and could cede trans-Pacific trade leadership to China. "The United States being cut off from trade would be like trying to breathe without oxygen," said Smith. "It's an essential part of our economy."

About the Author

Mark B. Solomon
Executive Editor - News
Mark Solomon joined DC VELOCITY as senior editor in August 2008, and was promoted to his current position on January 1, 2015. He has spent more than 30 years in the transportation, logistics and supply chain management fields as a journalist and public relations professional. From 1989 to 1994, he worked in Washington as a reporter for the Journal of Commerce, covering the aviation and trucking industries, the Department of Transportation, Congress and the U.S. Supreme Court. Prior to that, he worked for Traffic World for seven years in a similar role. From 1994 to 2008, Mr. Solomon ran Media-Based Solutions, a public relations firm based in Atlanta. He graduated in 1978 with a B.A. in journalism from The American University in Washington, D.C.

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