The world is increasingly interconnected, and global issues significantly impact the transportation and logistics industries in the U.S., affecting everything from supply chain dynamics to fuel costs. During NATSO's annual Day on the Hill, attendees heard a panel discussion on transportation, political risk and macro trends.
During the session, moderated by NATSO CEO Lisa Mullings, Jonathan Hanak, a partner/principal with EY-Parthenon, Brian Lynch, EY America's transportation sector leader, and Courtney Rickert McCaffrey, EY global geostrategic business group insights leader, shared their perspective on critical international issues that will have a ripple effect on U.S. transportation.
Growth in Nearshoring
A reorienting of global supply chains is underway, which could increase truck traffic within the U.S. The COVID pandemic alone reinforced the need for onshoring and nearshoring, then the war on Ukraine hit and energy prices skyrocketed, creating more interest in shifting where products are sourced.
Hanak said significant manufacturing volume is moving to Mexico, which is increasing the number of trucks crossing the U.S./Mexico border and creating demand for warehousing. Currently, warehouses on both sides of the border are near 100% capacity. “In the last five years, the increase of annual trade from Mexico to the U.S. in imports has gone up by approximately $100 billion,” he said. “It is a pretty significant volume that is going to adjust trade lanes and routing of ground trucking into and through the country.”
Companies moving production closer to their U.S.-based customers are seeking increased reliability and a reduced total landed cost. "At a macro level, it should equate to more volume, more volume crossing the border and more freight volume that is going throughout the U.S. and North America," Lynch said, explaining that it should be positive for truckstop and travel plaza operators.
In recent history, port congestion has caused severe bottlenecks throughout the supply chain, but the backups have primarily cleared up. "We have a little bit less volume running through ports than we had prior, and the backup has cleared,” Hanak said, adding that companies serving U.S. consumers are moving more towards resilient supply chains from just-in-time inventory. “Companies are keeping a lot more inventory on hand, including in distribution centers, in urban centers in urban population areas.”
The pandemic was instrumental in pushing things closer to consumer demand points and population centers. Companies started using smaller warehouses and old storefronts for distribution. “What that will do to long haul in the long term is still to be determined. We don't have hard forecasts on that,” Hanak said.
There have been conflicting signals within the economy, including successive interest rate increases in the U.S. and abroad. “The interesting thing about this rate tightening cycle is that it is a synchronized, global rate tightening cycle, but it's not coordinated,” Rickert McCaffrey said, adding that her colleagues in the U.S. macroeconomics team are forecasting a mild recession later this year.
Hanak said the economy is already changing the trucking industry, with demand and rates dropping. That puts a lot of pressure on small freight and single rig operators. “We may see some rig operators put their rigs on the sidelines for a while and wait until rates come back at a moderate level where they can make a living,” he said.
The driver shortage has been a top concern for years, but Hanak expects it to ease given a decrease in trucking demand and an increase in shorter lengths of haul, which make trucking more appealing to drivers.
The Future of Fuel
While the U.S. has experienced spikes in fuel prices, it has been insulated from some of the severe global energy disruptions European countries and others worldwide felt. “That's because the U.S. has such a large source of domestic energy and diverse energy supplies here,” Rickert McCaffrey said.
Nevertheless, the government has remained focused on the issue of the energy transition. Governments are trying to play a balancing act in terms of ensuring short-term reliable supplies, keeping energy affordable, and boosting long-term sustainability, McCaffrey said.
There has been a lot of interest and excitement about electric vehicles and hydrogen, but both have unique challenges and are untested in the long-haul market. With electrification, there is more adoption in the final mile, Hanak said. “With long haul, it is still to be determined which fuel source will dominate or if we’ll end up in a multi-fuel service future.”
Demographics within the U.S. are shifting. Rickert McCaffrey said during the pandemic, immigration decreased, which affected labor in several industries. There have also been declining birth rates, and the population is aging. "The over-65 population is growing as a share of the total population, and the share of the working-age population is going down,” she said.
Urbanization has been steady in the U.S., and the pandemic created the ‘donut effect,’ with more people shifting to the suburbs. With remote work, fewer people are entering city centers, Rickert McCaffrey explained.
Additionally, some states are contracting while others are expanding. States in the South, including Georgia, South Carolina and Texas, are seeing a large inward migration, creating a need for more products to move into those areas and, as a result, services for trucking and professional drivers.
The Geopolitical Situation
The panel also provided an update on the geopolitical situation. The relationship between the U.S. and China is expected to remain tense across a range of issues.
There has also been a breakdown in communication between the two countries. "That is concerning because it risks exacerbating any challenges in the bilateral relationship…if they're not talking with each other," Rickert McCaffrey said. However, there are emerging signs of some communication channels reopening.
In addition, the U.S. and China are strategic competitors in the economic realm and there is still a lot of trade flowing between the two. Rickert McCaffrey expects to see continued export controls that the U.S. has put in place on certain products, such as advanced semiconductors, and she anticipates China to continue pursuing industrial policies to boost their self-reliance.
“We are seeing more and more countries around the world embrace and try to improve self-reliance in strategic products and sectors,” she said. “This is really a reaction to the…major crises that we've seen in the international system in recent years.”
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