What are the global logistics implications of China’s changing economy?

What will global trade patterns look like in the near future? With the heat generated by Donald Trump’s threats over tariffs and trade wars it can be hard to discern the underlying forces that really determine the flow of goods around the world. However, it is likely that the world economy is arriving at some sort of juncture that will reshape the logistics sector.

From 1980s onwards, the major trend was the growth of the ‘China Trade’. World merchandise trade patterns were characterised by imports into China of higher-value cargoes, usually from Japan or South Korea, followed by exports from China to North America and Europe. This applied to both air and sea freight.

This might be changing. The Beijing-based economist Michael Pettis commented this month that “China’s debt problems have emerged so much more rapidly and severely this year than in the past that, combined with swirling rumours about the country’s leadership, a growing number of analysts believe that this may be the year that China’s economy breaks”. In addition, the impact of the US Federal Reserve’s comparatively aggressive monetary policy and the consequent rise in the value of the dollar may also amplify any change. The nature of such a “break” is unclear. China is not a free market economy and therefore banking collapses are controlled, as was the case in the late 1990s.

At present it appears what may happen is that the debt-fuelled infrastructure and industry boom of the past couple of decades may become unsustainable and China will have to shift to consumer demand as a driver of growth. Such an option does present problems. The losers would be the subsidised industries propped up by cheap credit from state-controlled banks and the ‘vested interests’ who benefit from this. This could make any shift bumpy.

However, the implications for global logistics of such a scenario are significant. With an increase of the flow of consumer goods into China there will be an opportunity to improve the utilisation of cargo capacity on air and sea by a better balance of traffic. Yet to exploit consumer demand there will be an increased need for efficient consumer logistics within China, something which is not yet quite available. At present the initiative in this sector is with the likes of Alibaba and JD.com. It is unclear if they can deliver what is a huge undertaking. Others may see an investment opportunity.

Further, the patterns of trade are also not likely just to be reversed. Regions such as South East Asia and possibly India, may become significant sources of exports to the new trade-deficit China in addition to the US and European economies. The dominant ‘China trades’ are likely to be replaced by a larger number of comparatively smaller routes. All of this will require new logistics capabilities.

The prospects for the logistics sector are probably improving but assuming that the existing business models will continue to work even in the near-term is dangerous.

Source: Transport Intelligence, September 11, 2018

Author: Thomas Cullen


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