# Trade  From National Markets to Global Markets [^1]

## Executive Summary

Increasing globalization of the U.S. economy has become a significant
factor in the evolution of the nation's transportation network. Between
1970 and 1999, the share of U.S. gross domestic product accounted for by
trade in goods and services has grown from 10.7 percent to 26.9 percent.
This growth in the importance of global trade to the U.S. economy is
primarily a reflection of four major trends:

-   Liberalization of world trade policies has occurred allowing
    industries and nations to use trade as a major source of economic
    growth;

-   Multi-national trade blocks have developed solidifying the trade,
    transportation, and institutional links within broad regions of the
    world (e.g., the Americas, Europe, the Pacific Rim);

-   Supply chains have become globalized as industries seek out the cost
    and market advantages that different parts of the world offer for
    different elements of the supply chain; and

-   Advanced information technologies allow these far-flung supply
    chains and distribution channels to be better integrated in time and
    space.

Globalization has major implications for transportation systems:

-   Changes in the geography of U.S. trade will create needs for
    investment in infrastructure along the high growth trade routes;

-   There will be increasing pressure on trade gateways that are already
    experiencing congestion, lack of suitable land for expansion, and
    pressures for operational improvements;

-   Far-flung production and distribution systems will be increasingly
    reliant on highly efficient transportation networks that are
    supported by advanced information systems; and

-   There will be a need for further harmonization of trade policies and
    practices to avoid creating unnecessary trade barriers.

The paper[^2] identifies three major issues that face DOT and the
nation:

-   How will future capacity shortfalls at gateways and along trade
    corridors be addressed and how will improvements in these critical
    facilities be financed in a transportation decision-making process
    that has become increasingly local in focus?

-   What more can be done to further harmonize regulatory practices,
    trade documentation paperwork, and customs procedures to facilitate
    more efficient trade transportation?

-   How will the volatility of international trade policies impact
    long-term transportation decision-making?

## Trends in World Trade

Over the last several decades, there has been a shift in U.S. economic
activity from relying on domestic markets to one that recognizes the
increasing importance of global markets. The growing importance of trade
in the U.S. economy is a reflection of world economic trends. Between
1960 and 1999, world merchandise trade (exports and imports) grew at an
average annualized rate of over 10 percent (in current dollars) (see
Figure 1). This trend toward globalization has also been a significant
element of recent growth in the U.S. economy. While the U.S. share of
global merchandise trade has remained at around 12 percent to 14 percent
between 1960 and 1999, trade has grown as a share of the U.S. economy
during this period. As a share of gross domestic product (GDP), U.S.
trade in goods and services has grown from 10.7 percent in 1970 to
26.9 percent in 1999 (in constant 1996 dollars). This trend in the
importance of trade to the U.S. economy is illustrated in Figure 2.

The growth in world trade, its significance in the U.S. economy, and the
changing characteristics of trade partnerships can be traced to a number
of factors, including:

-   Liberalization of world trade policies;

-   The growth of multinational trade blocks and multinational
    corporations; and

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-   Accelerated adoption of advanced information technologies.

Figure 1. World and U.S. Merchandise Trade

![](media/image1.wmf)

Source: Figures for 1960 to 1990 obtained from NCHRP Report 421 (1999),
page A‑14; figures for 1999 obtained from Merchandise Trade Section,
Statistics Division, World Trade Organization.

Figure 2. U.S. Trade (Goods and Services) as Share of U.S. GDP

![](media/image1.wmf)

Source: Compiled from official statistics of the U.S. Department of
Commerce, Bureau of Economic Analysis.

The 1980s and 1990s heralded a new era of free trade and liberalization
of trade policies around the world. An important influence during the
late 1980s and early 1990s was the end of the Cold War and the collapse
of communist regimes around the world. During the same period, less
developed economies in the Asian Pacific and in Latin America entered
into the global marketplace to take advantage of what trade offered
their expanding economies. This change in the political landscape has
led to increasing political and economic cooperation among nations and
opened up possibilities for a new set of trading relationships. The
growing importance of East-West trade routes in the U.S. to support
trade in the Pacific Rim is a clear reflection of these global economic
trends.

In today's global marketplace, protectionist policies are largely taking
a backseat to strategies aimed at advancing economic development and
consumer welfare through free trade. Historically, protectionism was a
frequently used policy for encouraging domestic industrial and
agricultural development without competitive pressures from foreign
businesses. Ownership laws, tariffs, and import restrictions limited
foreign competition. With the growth of industrialization worldwide and
increased access to global resources, business has sought overseas
markets and the dismantling of protectionist policies. This trend has
accelerated in the last decade with the end of the cold war and the
growth of economies in the Americas, Asia, and Africa. However, trade
policy can be fickle as trade disputes continue, and, in some cases,
have escalated after new suppliers have entered into formerly closed
markets.

As nations have recognized the economic benefits of free trade, they
have discussed and, in some regions, developed economic trade blocks to
take advantage of collective resources and to encourage regional
economic growth. The world's largest trading partners, the U.S. and
Canada, signed a free trade agreement in 1989, which expanded with the
inclusion of Mexico in the North American Free Trade Agreement (NAFTA)
in 1993. Similar steps have been taken in Central and South America,
including the Central American Common Market, the Caribbean Common
Market, the Andean Pact, and the Common Market of the Southern Cone
(MERCOSUR). A Free Trade Area of the Americas is also under discussion,
with specific goals set by the leaders of all the countries to achieve
steps towards integration by 2005. In Europe, the European Common Market
has taken major steps towards economic integration since 1993 with the
creation of a single currency and expansion of the power of the European
Parliament. In November 1989, foreign ministers and economic ministers
from the 12 Asia-Pacific countries began steps toward development of a
trade block through the establishment of the Asia-Pacific Economic
Community.

The growth of global trade and multinational trade blocks has also led
to integration of production and distribution activities across national
boundaries through the growth of multinational corporations and
corporate trade alliances. Companies seek competitive advantages by
expanding their operations to take advantage of local labor market
conditions, availability of infrastructure, and access to markets and
distribution networks.

Another factor that has promoted globalization of the world economy is
the development and accelerated adoption of new information
technologies. By reducing the cost of communication, information
technology can assist in globalizing production and capital markets.
Companies have sought to disperse their operations around the globe to
take advantage of low-cost labor markets, raw materials supplies,
high-skill labor markets, and access to distribution infrastructure,
wherever these resources may present the greatest competitive advantage.
This pattern of dispersed operations may occur through growth of
multinational corporations with operating units throughout the world, or
it may occur through alliances among firms in different parts of the
world. In either case, advanced information technology facilitates the
process by improving and speeding the information flow across global and
corporate boundaries.

## Implications for Freight Transportation Systems

The globalization of the world economy has had significant implications
for worldwide and U.S. freight transportation.

-   Changes in trade relationships have affected the domestic freight
    lanes that support world trade. For example, the growth in Pacific
    Rim trade, coupled with historically strong trading relationships
    with Europe, has benefited from the existence of the East-West
    transportation infrastructure in the U.S. Through connections to
    this well-developed network, coastal ports have been able to expand
    their hinterlands and create import-export links well inland. In the
    future, NAFTA trade and trade with Latin America will create
    increased requirements for north-south corridors.

-   Expansion of world trade also is putting new pressures on U.S.
    gateways. Understanding the nature and magnitude of this trade will
    be important in planning the associated infrastructure and
    institutional changes that will be needed at the gateways.

-   The increased outsourcing of business functions and the need to
    access global supply networks and markets have created far-flung
    supply chains for many industries. Transportation services have a
    steadily more crucial role, linking distant markets, functions, and
    supply sources into coherent commercial networks. This will lead to
    new demands for internationalization of transportation service
    providers.

-   As trade increases, export-import policies and procedures will need
    to be further harmonized in order to avoid barriers to trade. The
    process of harmonization is complex, time consuming, and involves a
    myriad of political and diplomatic agreements that proceed at a pace
    that may frustrate the rapid demand for internationalism.

### Emergence of New World Trade Routes

Relationships between the U.S. and its international trading partners
have evolved considerably over the past century. With this evolution
have come significant changes in the domestic infrastructure that
supports trade. In the first half of the century, trade was dominated by
the relationship between the U.S. and European markets. This led to the
continued development of eastern port facilities and the railroad
infrastructure that brought goods to and from the hinterland. In the
aftermath of World War II, the U.S. began to see growth in trade in the
Pacific, most notably with Japan, South Korea, and Taiwan. With the end
of the Cold War and the liberalization of many Eastern European and
Asian economies, trade began to shift to an even stronger relationship
with the Pacific Rim and China. Most recently, the adoption of the NAFTA
agreement and the growing importance of the Latin American trade blocks
suggest that a new era of emphasis on north-south corridors may be upon
us.

#### Consolidation of U.S. Domestic East-West Trade Routes

During the 1980s, the Far East became the largest foreign trade area for
the U.S. This occurred at the same time that container shipping emerged
as the dominant method of moving many of commodities traded along the
east-west trade lanes. As shown in Figure 3, between 1984 and 1997,
growth in container shipping from West Coast ports outstripped container
traffic growth elsewhere in the U.S. Even the growth in container
traffic at east coast ports reflects a change in trading patterns as
over 35 percent of the growth in traffic at these ports occurred in
Florida (primarily north-south trade with Latin America -- an
increasingly important growth market for the future). In 1984, the ports
of Jacksonville, Miami, Port Everglades, and Palm Beach accounted for
only 8.4 percent of container traffic at East Coast ports. By 1997, this
had grown to 21.3 percent of East Coast container traffic.

Figure 3. U.S. Port Container Traffic

![](media/image1.wmf)

Source: American Association of Port Authorities, www.aapa-ports.org.

The need to link the U.S. East Coast and other inland markets with the
growing Asia trade, along with the continuing economic development of
the Western U.S. and associated domestic trade, contributed to the
development of the double stack rail system in the U.S. along mostly
east-west corridors with increasing service to key western container
ports. Expanded use of post-Panamax vessels (ships larger than those
that can transit the Panama Canal) that serve these markets, with
attendant needs for deep-water ports, could also contribute to the
growth of load center ports that would further concentrate freight
transportation activity along these domestic corridors.

#### Emerging Importance of U.S. Domestic North-South Trade Routes

The growth of NAFTA trade will certainly have an impact on future inland
transportation requirements in the U.S. As shown in Figure 4, trade with
NAFTA partners grew from 26 percent of total U.S. trade in 1990 to
almost 33 percent in 1999. North-south corridors will need to be
expanded to carry increased traffic, and border-crossing facilities will
need to be improved to handle the increased demands that will be placed
on these facilities.

Figure 4. Percentage of U.S. Trade to NAFTA

![](media/image1.wmf)

Source: U.S. Foreign Trade Highlights 1999 (Tables 6 and 7) for 1991 to
1999.

### Trade Pressures on U.S. Gateways

The changes in the importance of international trade and in the
characteristics of inland transportation routes have created increasing
freight traffic and congestion along trade corridors and at ports,
airports, and border crossings.

#### U.S. Ports

U.S. ports, for example, are facing an acute shortage of land suitable
for development into marine terminals due to both burgeoning cargo
volumes at existing facilities and the ecological sensitivity of the
marine environment. Expansion of port facilities in existing locations
also creates serious environmental justice concerns. The neighborhoods
adjacent to ports and those that are most seriously impacted by
expanding port traffic are very often those housing the poorest citizens
in the community. Many ports are under pressure to resolve their access
problems without creating additional disruptions to the local community.
Improved port access, technological investments by carriers and gate
operators, and longer operating hours would reduce the dwell time of
containers in terminals and relieve some of the expansion pressure, but
at a cost of investment in access routes and round-the-clock operations.
Another option that is being examined at ports around the country is the
"inland port" concept. Inland ports provide a location for staging
containers and can offer a variety of port services at remote locations.
These facilities can expand a port's hinterland and reduce local
congestion problems. But, at this point, there are few examples of how
to link these facilities across jurisdictional boundaries.

Changes in freight transportation technology, such as increased use of
containerized shipping, larger trailers, and post-Panamax ships, have
also created new challenges at gateway transportation facilities. Larger
trucks operating on older access routes often have to deal with
short-signal cycles, inadequate roadway geometrics, and other local
roadway conditions. Larger container ships result in even greater peak
demand for truck and rail access on already congested access routes.

#### U.S. Airports

Airports have become increasingly important trade gateways as
import-export shipments shift towards higher value, small package
deliveries that are highly time sensitive. The pressures at these
gateways exist on both the landside and the airside. Of the major modes
of transport, airfreight is more closely tied to its passenger
counterpart than any other mode, simply because it often is an adjunct
to passenger carriage. Belly cargo services provide considerable
flexibility to freight forwarders and offer a reasonable cost
alternative to freighters and charter services. However, the capacity
and reliability of this alternative is suffering. A 1997 report by the
National Civil Aviation Commission expressed grave concern about the
ability of the aviation system -- air travel control and groundside
facilities -- to handle projected growth. Increasingly, cargo is being
squeezed from passenger air carriage forcing it to higher cost
alternatives. Many combination carriers have moved to smaller aircraft
in order to improve passenger space utilization. This often comes at the
expense of belly space for cargo.

Additionally, the hub system is putting more people into fewer airports,
concentrating the market for both passengers and air cargo. This has
created enormous congestion problems. In 1999, the Federal Aviation
Administration said about 28 percent of total departures were delayed.
This congestion is also evident on the landside, where, in many major
markets, air couriers are pushing back cutoff times because of highway
congestion. As in the case of seaports, lack of land for expansion is
also a problem at most international passenger airports, where land
costs tend to be high and community opposition to expansion is often a
problem. This opposition has also led to operating hour restrictions in
many areas, which further limits the ability of airports and carriers to
expand operational capacity.

One solution that is being investigated is the conversion of former
military bases to all-cargo airports. However, these facilities are
often far from major shippers. Ultimately, many analysts believe that
expansion of existing international airports with new runways and cargo
warehousing and freight handling facilities will be necessary. But the
current system for financing these improvements may not be adequate for
the need.

#### Border Surface Issues

Another growing area of concern is congestion at surface ports of entry.
The growth in NAFTA traffic has created pressure on border crossing
facilities along the Mexican and Canadian borders. These facilities,
which serve important non-transportation functions, are often not
constructed or staffed and operated in a manner that provides for
efficient goods movement, given the growing volume of vehicles using the
facilities. In addition, the magnitude of the problem is not well
documented and understood. Methods of determining border-crossing delays
associated with different aspects of the process (e.g., impacts of
adequate roadway capacity, impacts of insufficient border staffing) are
still being investigated. The application of automated procedures for
border clearance is still in the early stages of deployment, and the
potential for use of these technologies to resolve current capacity and
operational constraints is promising. As NAFTA evolves through different
stages of implementation, the logistical process and routing of
commercial traffic will also continue to create new demands for
connector facilities linked to the actual border facilities.

### Internationalization of Transportation Firms

Globalization has also led to an increased demand for
internationalization of the freight transportation industry and freight
transportation services. One method of integrating far-flung supply
chains is for carriers themselves to internationalize. Globalization has
affected the freight industry in an obvious manner by bringing growth to
overseas operators, and to domestic carriers handling traffic to and
from the borders and coasts. The effects are evidenced both by
increasing demand for international freight services and by an
environment that stimulates alliances between U.S. and foreign
transportation firms. Carriers traditionally in the domestic market have
begun to internationalize, but more slowly and in delimited ways.

The U.S. trucking industry has experienced a modest degree of
internationalization with a few of the larger firms commencing overseas
operations. Canadian and U.S. truckers operate on both sides of the
border, and extensive alliances have developed between United States and
Mexican truck lines. Downsides include the constraints imposed by
immigration and cabotage laws, and the delays and complications
associated with border crossing. The bottom line is that trucking is
still a domestic business gradually moving into the NAFTA arena, where
networks may be enlarged to a degree, but not migrating overseas unless
drawn there by customers.

Class I railroads are maintaining their roles as domestic wholesalers to
steamship lines, continuing international sales efforts, but not
offering overseas service. Short-line operators, often used to managing
portfolios of disconnected properties and taking advantage of
privatization opportunities, have entered foreign markets. However, even
in these cases, the companies operate more like multinational alliances
than fully integrated international carriers. The NAFTA picture is very
different, however, because of the possibility of joined networks. The
Canadian National and Canadian Pacific railroads both have had a
presence in the U.S. for many years, chiefly in border states; and U.S.
railroads still maintain a few routes into Canada. Through the
privatization of the state railroad in Mexico, several U.S. Class I
carriers have begun to participate in a wider range of Mexican services.
While operations tend to be highly uncoordinated and physical
connections are limited, network integration is likely to increase.

Ocean shipping is changing as well, as lines under the U.S. flag have
largely disappeared from international trade. The past few years have
seen the acquisition by foreign carriers of Lykes and APL, and more
recently portions of SeaLand and Crowley; these outright takeovers had
been anticipated by vessel sharing arrangements. The separation of
SeaLand from CSX and the spin-off of U.S. distribution services by APL
suggests that synergies between steamship and inland operations are not
strong, and operating integration is not viewed as important. The future
model of ocean shipping is still an unanswered question.

Airfreight plays a key role in the competitiveness of most global and
industrial businesses. Air carriers have been among the quickest to
internationalize, as evidenced by companies like DHL, linking more than
635,000 destinations in more than 220 countries. Still
internationalization of companies and services faces a variety of
difficulties. FedEx and UPS invested heavily in information technology
to bolster international service through foreign affiliates, after
struggling with company-owned operations. Many corners of the world lack
the modern roadways to support the rapid pickup and delivery efforts of
the air carriers.

### Harmonization of Trade and Regulatory Policies

Globalization of the international economy and the freight
transportation systems that support it has focused new attention on the
need to harmonize trade and regulatory policies. At the highest level,
the whole issue of ensuring fair trade practices in an era of greater
global interaction is still an evolving element of world trade policy.
Assuming continuation of general support for expansion of global trade,
much work remains in the area of documentation and customs processing to
facilitate rather than hinder trade. In North America, where the highest
level of economic integration through trade is likely to be witnessed, a
host of regulatory issues remain unresolved after NAFTA. The
implications of these issues for freight transportation systems are
considerable.

#### Trade Policy

Global competition in some industries has become fierce and the
procedures for regulating this competition in a more integrated global
economy are still evolving. Competitive and monopolistic practices are
producing the same threat globally that once encouraged domestic
regulation. As a result, trade agreements and organizations are
developing to ensure fair trading practices and reduce unfair tariffs,
regulation, and protectionism. Agreements like the General Agreement on
Trade and Tariffs (GATT) and organizations like the World Trade
Organization (WTO) are opening up greater access to markets for
transportation providers. But concerns about the effectiveness and
intentions of trade agreements and their implementing agencies, as well
as anxieties about international business conglomerates, have led to
renewed calls for protectionism and isolationism. While these tendencies
could threaten international freight providers in the future, the actual
potential for such actions is remote.

#### Customs and Tariffs

Barriers to successful international business include the complexity of
customs regulations, duty payments, and the time required for inspection
and clearance of goods. Customs processing seriously slows the transit
time that air shippers are paying to speed. Paperwork, inspections,
duties, and limited hours of customs service combine to produce
cascading delays. Trading blocks, such as the European Community
established and the United States instituted with NAFTA, in part, are a
large-scale response to this. More moderate initiatives include the
Entry Revision Project (ERP), which proposes a credit card approach to
payment of importers. This is designed to streamline the customs process
to cope with the time demands of business.

In addition, the International Trade Commission is simplifying the
Harmonized Tariff Schedule of the United States. The result should help
shippers, as the vast number of classification errors are due to the
complexity of the current code system, which subjects many of these
shippers to failed U.S. Customs Service compliance audits.

#### Cabotage and Vehicle Standards

Implementation of NAFTA trucking provisions has been postponed for
U.S./Mexico trade (note: the Bush Administration proposes to open the
southern border by January 1, 2002), keeping Mexican trucks and drivers
restricted to a 25-mile commercial zone along the border of the United
States. After delivering a load to a final destination point in the
U.S., a Canadian trailer can legally haul a load en route to Canada, but
the Canadian driver cannot pull it. Where cabotage rules have been
changed to promote transborder movements of goods, immigration laws have
not. Integration over our borders is not yet realized, and this is
creating inefficiencies in service and the cost of shipping.

## Issues for the Future

Among the most serious issues that will need to be faced, if the U.S. is
to take full advantage of the economic benefits of participation in a
global economy, is the need to address infrastructure capacity
shortfalls. All modes that serve international trade are experiencing
growing congestion at key hub facilities. Experts in the field note
that, for much of the past 20 years, the growth in international trade
has been accommodated through growth in modal productivity. But this
cannot be the only answer in the future. As noted previously, ports are
finding it difficult to obtain land for expansion; air traffic systems
are already overloaded in many key international airports; on-dock rail
and access for double-stack intermodal services need to be expanded; and
the surface access to these facilities for trucking almost always occurs
over congested freeways and principal arterials. Border crossing
facilities have seen increasing queues as NAFTA trade has expanded and
the implementation of pre-authorization systems and electronic
credentialing has not kept pace with demand.

Financing gateway and trade corridor freight infrastructure presents its
own challenges. Most of the public funding that could be available
through TEA‑21 is programmed at the state and local level. Freight
projects with regional and national significance, but with local
impacts, are often difficult to fund through the current metropolitan
planning process. Targeted funding, such as is available through the
National Corridor Planning and Development Program and the Coordinated
Border Infrastructure Program, has begun to address some of the funding
needs of gateway and trade corridor infrastructure. But eligible
applications for funding have typically asked for more than 10 times the
amount of funding that has been available. Additional problems are posed
by the fact that many of the facilities are owned and operated by
private entities. Creative financing methods are being developed to
address the capital needs of these entities, but these have seen limited
application.

The problem of true harmonization of regulatory practices, trade
documentation paperwork, and customs procedures is one that will require
considerable attention from the federal government. The increase in
trade volumes and the introduction of Internet technology and other
advanced communications systems are accelerating the need for paperless
transactions among shippers, carriers, brokers, and customs agencies.
This change in business at the border must be supported with appropriate
harmonized legal structures to protect trade and ensure safe transfer of
goods.

A final area of concern is the potential volatility of trade policy.
There is no guarantee that the current atmosphere favoring free trade
will continue. Historically, trade policies have moved in cycles. If the
world economy experiences a significant slowdown, retrenchment may occur
with respect to free trade. While some economists argue that the
existence of advanced information technologies makes it more difficult
for governments to protect their markets and businesses, there are also
signs of distrust of the various non-government organizations that have
been established to promote and police free-trade. Although it is likely
that some return to a more protectionist set of world trade policies
could arrive at some point in the future, it is even more likely that
the globalization of the world economy is, by and large, here to stay.

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