Back to the Future


Upgrades & Downgrades jul-aug

By Jack O'Connell 10-08-2017 06:20:19

(Article originally published in July/Aug 2017 edition.)

Today’s world is all about independence and self-sufficiency. Use less. Waste less. Recycle. Me first. America first. We seem to be going back to an age when it was every man for himself and we’ll worry about the other guy later. “Me before you” and “me, not you” have become the memes of our age, appearing everywhere and defining a new set of relations between peoples and nations, yet one that hearkens back deep into the past.

Even the future of global trade seems in doubt. Recent developments, notably Brexit and the election of Donald Trump, have upended traditional thinking and undermined long-held assumptions. Cooperation and sharing used to be the order of the day. Now it’s dog-eat-dog and survival of the fittest. Dialogue and compromise used to be the way to resolve differences. Now it’s taunts and confrontation. Multilateral trade agreements used to be “win-win” situations. Now they’re viewed as a zero-sum game.

And if the future of global trade is in doubt, what does that mean for shipping? After all, as you savvy MarEx readers all know, “ninety percent of everything” is carried on ships. Absent a vigorous and thriving global trade picture, what will the future of shipping look like?


The first shot over the bow was Brexit, a decision that many Brits already seem to regret. And it didn’t take long before companies started announcing plans to move their operations out of London and to cities on the Continent that are part of E.U.-member countries. The fallout from Brexit also included a sharp drop in the value of the British pound and a weakening of the country’s bargaining position vis-à-vis its E.U. neighbors.

Brexit was the first manifestation of the new nationalism sweeping the globe, the first wave of a surging populist trend that threatens to engulf everything in its path. But its consequences are as yet unclear, and it will be several years before the Brexit process itself is complete – thankfully!

Meanwhile, other countries have time to assess the fallout and adjust their own thinking on the new nationalism. The first to do so was France, which after a period of uncertainty elected a centrist candidate as president and, along the way, basically killed Frexit and saved the E.U. from further damage, at least for not. President Emmanuel Macron brings a refreshing new view to government in Paris, and he is a youthful and energetic voice for moderation and common sense.


The new American president has certainly done his part to muddy the waters. One of his first acts was to pull the U.S. out of TPP, the Trans-Pacific Partnership, an agreement years in the making and designed to ensure America’s preeminent place in the growing Asian and Latin American markets. Now that place is being ceded to China – at least in Asia – by default. America’s unwillingness to go forward with TPP has left the door wide open for China to move in, and it is doing so fast.

Next on the Trump hit parade? NAFTA – the North American Free Trade Agreement. The President has tweeted numerous times on this topic, citing a “raw deal” and pledging to upend it. But cooler heads seem to have prevailed, at least thus far, pointing out that – among other things – roughly 20 percent of American cars are manufactured in Mexico and any tax on those imports would hurt not only the auto companies but U.S. car buyers, who would have to pay higher prices – roughly $1,000 per vehicle, depending on the amount of tax – as a result.

The threat of tariffs and import taxes could lead to a trade war, but so far that’s all they’ve been – threats. Meanwhile, U.S. trade is booming with record container cargoes flowing into East Coast ports as a result of the Panama Canal expansion and record U.S. exports of energy products flowing out through the expanded canal to power-hungry markets in South America and Asia. All good.

As for the Jones Act, it’s pretty clear the President is a strong supporter. After all, it fits nicely with the “America First” policy of the new Administration, and it’s a strong guardian of U.S. economic security by ensuring that ships transiting the nation’s inland waterways and ships delivering goods from one U.S. port to another, like crude oil from Corpus Christi, Texas to Bayonne, New Jersey, be not only U.S.-flagged but also U.S.-made and U.S.-crewed. The Jones Act is also a strong guarantor of domestic security and a necessity in times of war or conflict abroad, when U.S.-flag ships are needed to transport troops and military supplies.


But there’s more at work here than nationalism and populism and upending trade agreements. There’s a “me first” meme that hearkens back to an age of rugged individualism and self-reliance and even Adam Smith’s “invisible hand.” It’s a quest for self-sufficiency that says I’m more important than you and my needs come before yours, and if we all just take care of themselves everything will be hunky-dory. Extrapolate that to a whole nation and a whole world and you can see what dire results might ensue. But it’s not all bad.

My favorite restaurant now uses only locally sourced ingredients, and my favorite supermarket prides itself on selling fruits and vegetables from nearby farms. “Farmers markets” are springing up everywhere, as are farmed fish and farmed shrimp and “farmed” just about anything you can think of. It’s all part of the same phenomenon – a growing preference among consumers for locally sourced goods and services. Self-reliance, no long supply chain, no pesticides or herbicides, minimal processing, back to nature.

A corollary development is small-batch manufacturing. Companies – and consumers – are shying away from mass-produced products in favor of boutique offerings catering to specific tastes. Burt’s Bees instead of Vaseline. Method instead of Mr. Clean. Duke Cannon soap instead of Irish Spring. Duluth Trading Company jeans instead of Levi’s.

Contract manufacturing is growing by leaps and bounds. You have a new product idea? No problem – we’ll make it for you right here. How many do you want – 50, 100, 1,000, 10,000? We can do it all. Apple does this on a massive scale by contracting out its manufacturing to Foxconn, the company that produces all its iPhones. But millions of small entrepreneurs do it too, and in many ways it’s far more efficient and economical, saving transportation and labor costs and – most of all – time.

But all of this near-sourcing and small-batching can have negative consequences as well, especially when paired with advanced technological developments like automation, digitalization and robotics. When multiplied over a whole country or region, the impact on global trade can be significant.

As noted in my last column, Danish Ship Finance analyst Chris Rex and others believe that automation, 3D printers and the like will enable affordable, efficient production at home and reduce the incentive to look abroad for cheap goods. Increased productivity and efficiency will enable producers to do more with less, eliminate the middle man, and use fewer resources per dollar of growth. Rex calls it the “reshoring of production” and says it will lead to a slowing of world trade growth due to reduced demand for goods. Between now and 2030, he sees growth in trade volumes slowing to one percent a year rather than the two to four percent that most experts expect.

And then there’s energy – clean energy. No more dirty fossil fuels and carbon pollution. The future is wind and solar. Renewable and clean and – unlike nuclear power – safe. The growing demand for clean energy will eventually signal a decline in global crude and product shipments, adding further to the slowdown in global trade.


So where does all that leave shipping? In good shape, actually. As the industry recovers from its current slump, it has hopefully learned the lesson of overcapacity and oversupply. There will be fewer but bigger ships. Many will be electric or battery-powered or clean-burning LNG. Some will be unmanned.

Traditional categories – bulkers, containers, ro/ros – may stagnate, but there will be plenty of work in the offshore wind industry, which is growing by leaps and bounds due to new technology and lower costs. Wind has provided a remarkable lesson in economics as new technology is bringing down costs at a much faster rate than expected and slowly eliminating the need for government subsidies. Much like the shale industry, offshore wind demonstrates the incredible power of human genius and creativity in finding solutions to problems that were once considered insurmountable.

Europe is the undisputed leader in offshore wind power, but the rest of the world is starting to catch up – notably Asia, where China has taken the lead followed by Taiwan, Japan and South Korea. As for the U.S., it is slowly getting into the act with last year’s Block Island wind farm. The U.S. is already a leader in land-based wind with states like Texas and Iowa getting up to 30 percent of their electricity from wind, and it has a number of projects in the works offshore Massachusetts, New York, New Jersey, Maryland and Virginia.

All of these developments present new opportunities for maritime companies. Construction and crew and jackup vessels for initial installations, and then liftboats and maintenance vessels for regular inspections and routine care. Two companies in the U.S. have already announced the construction of the first Jones Act-compliant, jackup offshore wind installation vessel for delivery next year – a sign of things to come. It may be “back to the future” all over again, but the forecast is not entirely grim.  MarEx

The opinions expressed herein are the author's and not necessarily those of The Maritime Executive.