Contributing author: Aram Karagueuzian, Senior Manager, Traffic and Economic Statistics, ACI World
In his 1905 book, The Life of Reason, George Santayana, the Spanish-born American thinker, poetically professed, “Those who cannot remember the past are condemned to repeat it.” In their present-day trade disputes, economic superpowers seemed to have overlooked this long-standing principle. To date, the escalating tariffs between the United States and China are expected to yield no lasting net benefits and, in fact, the poker style bluff appears to have resulted in a zero-sum game.
In the early stages of the Great Depression, following the 1929 stock market crash – one of the worst economic downturns on record – the United States implemented the Smoot–Hawley Tariff. Named after the two American politicians who sponsored it, there is general agreement among economic historians that the tariff was a misguided policy. In fact, it was among several factors that further exacerbated the 10-year slump across major industrialized nations.
In our present-day context, as economies like the United States experience the longest economic expansions in history, fears of a pending recession have already set in. With global economic growth already slowing, the New York Federal Reserve’s recession probability model has hit a ten-year high (by mid-year this year). The last time it reached that level was in 2009, when the US economy experienced a global credit freeze leading to the Great Recession. The US administration’s plan to levy an additional 10% tax on $300 billion of Chinese imports will likely turn out to be not only bad policy, but bad policy at a bad time.
The implementation of the Smoot-Haley Tariff was also notorious for its bad timing. Beside the fact that the tariff was imposed on all trading partners (as opposed to bilaterally), a key difference here with the earlier protectionist measures and the 1930s downturn is that present-day supply chains are vastly interdependent across nations. World trade is so fundamental to the global economy and thus, the tariff war between the US and China has a recessionary effect that is multiplied across a spectrum of trading partners. Both a leading indicator of economic activity and a casualty of the existing trade dispute, the transborder shipment of goods by air has suffered from the resultant tariff walls.
Air cargo is often regarded as a leading indicator of economic conditions since it is linked to business confidence through inventory build-ups and the export orders of purchasing agents. These volumes shipped by air are also affected by changes in the relative prices for other modes of delivery as well as changes of currency movements especially with respect to international freight. As compared to other modes of delivery, the reliability factor plays an important role for on-demand deliver but does comes at a premium. Historically, over the last decade, air cargo volumes have experienced both significant high and low points. As compared to passenger traffic, air cargo volumes shipped by air are more sensitive (or elastic) to changes in the broader economy.
From December 2007—when the world economy slipped into recession—to the lowest point of the cycle, air cargo traffic experienced a pronounced contraction and decreased as much as 23% by December 2008. After the Great Recession up until 2014, several factors have hindered the growth of air cargo. The weakened global economy from 2008 and a sluggish global trade environment were definite deterrents to growth. A substitution effect boosting the delivery of goods by alternative modes of transport also has been omnipresent. While shipments of raw materials and perishables have predominantly moved away from air cargo services to ocean freight, the modal shift has also had an adverse impact on shipments of high-tech and machinery parts by air. The largest trade flow from Asia experienced the weightiest shift away from air cargo. The cumulative effect of this mode shift could be observed up until 2014, when some volume gains were restored. An upsurge thereafter is clearly apparent, especially in 2016 and 2017, coinciding with the industrial production boom and the rise in global trade. The time-efficiency guarantee associated with express-parcel deliveries generated by online purchases is also an important driver in the upward surge in cargo volumes shipped by air. There is no doubt that a temporary transport-mode diversion back away from ocean cargo in 2016 and 2017, which resulted from marine-industry consolidations and bankruptcies, also helped to boost air cargo volumes in the short term. Businesses’ reliability requirements for time-sensitive deliveries in the relatively recent economic climate have also represented an important factor in the pre-2019 gains.
Chart One shows the vulnerability of air cargo services in the major exporting economies and the adverse effect of certain economic and political events. Monitoring these nations’ air cargo traffic provides a good barometer of the state of international trade in high-value-added items and merchandise.
Chart 1: Evolution of cargo traffic – major exporting countries (2000–2018)
According to the Air Transport Action Group (ATAG), a not-for-profit association that represents all sectors of the air transport industry, air cargo represents 0.5% of the volume of traded shipments by all modes of delivery. However, 35% of the value of goods shipped are attributed to air cargo. Many of these commodities are high value goods that are time sensitive or perishable. The economic multiplier affect of the air cargo industry are widespread but require cooperation and a proper functioning of global and regional trade regimes. A retreat from trade liberalization with protectionist barriers hinder international trade flows and limit the far-reaching benefits of trade.
Airports located in countries that are major exporters of manufactured goods handle almost 75% of global air cargo volume. A distributional breakdown between loaded and unloaded international freight is illustrated by region in Chart Two. Whereas the Asia-Pacific, which is home to many export-oriented economies, loads more than 55% of international freight, regions such as North America and the Middle East have higher proportions of imported air freight and unloaded international freight. For airports with available data, Chart Three shows a selection of the busiest airports in the world for international freight. Hong Kong (HKG) and Shanghai-Pudong International (PVG) loaded the preponderance of the overall volumes they handled, loading 65% and 60% respectively. This means those airports’ air cargo volumes were exports destined for major markets such as North America, Europe and within Asia.
Chart 2: Loaded and unloaded international freight as % of total international freight by region (2018)
Chart 3: Loaded and unloaded inter national freight for selected airports (2018)
The global economic slowdown – and a weakening in cross border trade – is evident and is reflected in the movement of international freight volumes. Moreover, beggar-thy neighbour policies through the form of imposed tariff walls on trading partners have disrupted global supply chains. The raised trade costs between the US and China, one of the largest trade corridors in the world, has also threatened other nations in the supply chain network pushing them into a potential economic tailspin. The burden of tariffs is already felt on volumes in the latter half of 2018 and into 2019 and could have a recessionary impact on the global economy. This is a major contributing factor to the downside risks to a global economic downturn. The descent in quarterly growth figures for international freight volumes are apparent across all regions of the world in 2018 and 2019. By the first quarter of 2019, year-over-year growth in volumes declined by 3.5%. The largest declines were observed in both the Asia-Pacific region and North America with declines of 5.8% and 3.1% respectively (See Chart 4)
Chart 4: Quarterly traffic growth in international air freight volumes (2018 – Q1 2019)