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Chapter 4: Globalization

"In the Year 2025, all of the transportation modes will continue to play critical roles in the global economy, whether for transporting goods over long distances between nations or for shorter movements to and from intermodal terminals."

Secretary Rodney Slater
October 2000

"Transportation is the industry that connects other industries ... it is the key to globalization."

Lawrence H. Summers, Secretary U.S. Department of Treasury
International Transportation Symposium
Oct. 10, 2000, Washington, DC

In the last quarter-century, a host of political, economic, and technological changes noticeably accelerated the trend toward globalization. Political changes included the end of the Vietnam War (1975) and the Cold War (with the fall of the Berlin Wall in 1989 and the Soviet Union in 1991). Complementing these political develop-ments, an increasing number of countries abandoned their policies of protectionism and lowered barriers to free trade. At the same time, technological innovations in communications and transportation facilitated the flow of goods, people, and information across the globe. Today, the rise of Internet commerce is driving the expansion of the global marketplace, underscoring the need for a transportation system that is international in reach.

Faster and cheaper transportation systems allow multinational corporations to build manufacturing facilities across the globe while maintaining scheduled, frequent deliveries of parts and finished products. For example, advances in the aviation system allow businesses to substitute just-in-time deliveries from remote manufac-turing plants in place of large inventories. Today, about one-third of world trade consists of shipments between branches of multinational companies [UN Annual].

The extent of this manufacturing expansion is visible in many countries, including Mexico, China, India, South Korea, Indonesia, Thailand, Turkey, and Pakistan. In 1980, manufactured goods as a share of exports exceeded 50 percent only in India and South Korea, and were as low as 2 percent in Indonesia (figure 4-1). However, by 1997, manufactured goods exceeded 70 percent of exports in seven of these eight countries. The exception was Indonesia, where manufactured goods grew from 2 percent to an amazing 42 percent of exports by 1997 [World Bank 1999].

Recognizing the need for a bolder vision to realize a truly global transport system, Transportation Secretary Rodney Slater hosted two international conferences in 1999 and 2000: Aviation in the 21^st Century _ Beyond Open Skies Ministerial, in Chicago, and the International Transportation Symposium, in Washington, DC. Each attended by representatives from more than 90 countries, these conferences created an environment conducive to addressing global challenges of the coming decades.

Growth of the Global Economy

The world's economy has grown enormously, with the sum of all nations' Gross National Product (GNP) rising from $1.3 trillion in 1960 to $29 trillion in 1997 [Worldwatch Institute 2000a]. During the same period, the Gross World Product (GWP) increased from $10 trillion and $37 trillion and exports' share of the GWP grew from 7 percent to 15 percent [Worldwatch Institute 2000b]. Today, the transportation sector represents 11 percent of the overall U.S. Gross Domestic Product and accounts for "1 in 7" jobs in the U.S. economy.

This pattern was evident in the United States. According to the U.S. Department of Commerce (USDOC), in the last 25 years, U.S. imports and exports grew from $726 billion in 1975 to $2.6 trillion in 1999 —well over 300 percent (figure 4-2). Transportation equipment was the second largest import sector in 1998, accounting for 19 percent of all U.S. merchandise imports [USITC 1999].

China, with which we had limited trade in 1975, is now our fourth largest trading partner, surpassed only by Canada, Japan, and Mexico (table 4-1). South Korea, Singapore, and Taiwan have joined the top 10 list of U.S. trading partners. Iran, the Netherlands, and
Venezuela have dropped from the top 10 list.

Investment by foreign companies in the United States has grown as has U.S. investment abroad. In fact, U.S. foreign investment has grown, in real terms, from an average of $45.3 billion per year in the 1970s to an average of $117.5 billion in the first half of the 1990s (in constant 1990 dollars), and from 1.04 percent of our Gross Domestic Product (GDP) to 1.64 percent [PPI 2000]. Figures 4-3 and 4-4 show U.S. investment abroad and foreign direct investment into the United States, respectively, for 1998.

In the early 1990s, about 20 percent of the total output of U.S. firms was produced outside of the country [The Economist 1998]; this figure seems likely to grow. In 1997, U.S. News and World Report reported that 82 percent of the money spent by U.S. businesses each year on fixed investment—plant and equipment—was spent in Asia, compared with only 33 percent 10 years earlier [Holstein et al. 1997]. A good example of globalization of economy is the automobile manufacturing industry—discussed in the following section.

The phenomenon of globalization is not without its drawbacks, however. As world economies become increasingly integrated and reliant on a transportation infrastructure that is responsive and flexible, transportation systems and the sophisticated electronic information and communications systems that make their day-to-day operations possible become more attractive as terrorist targets. Threats against highway, rail, transit, and aviation systems; piracy; disruption of the Internet and cyber-based information systems; and interference with Global Positioning Systems and Intelligent Transportation Systems are growing concerns that are discussed in detail in Chapter 7, National Security.

The Automobile Industry

The past quarter century was a period of turmoil and challenge for the nation's automobile manufacturers. Faced with an energy crisis that changed consumer buying habits, at least temporarily; continuing environmental pressures; and the growing success of Japanese and European imports, the industry retooled its manufacturing processes, cars, marketing, and financial structure.

In 1975, the United States had four major automobile manufacturers: Ford Motor Company, General Motors, Chrysler Corporation, and American Motors Corporation. Of these four manufacturers, Chrysler was hit the hardest by industry changes, needing both a federal intervention and wholesale management changes to survive. In 1987, Chrysler bought American Motors, and in 1998, Chrysler Corporation was acquired by Germany-based Daimler-Benz to form DaimlerChrysler. Today, only two U.S.-owned automobile
manufacturers—Ford Motor Company and General Motors—remain in an industry that has global connections and cross-ownership (table 4-2). Changing the essential nature of the "Big 3" as has been historically known — while still maintaining Detroit, Michigan, as the "Automobile Capital of the World."

Despite the many challenges in the auto manufacturing industry, vehicle purchases continued at a rapid pace in the United States. The introduction of the minivan in 1983 and the sport utility vehicle (SUV) in 1990 stimulated high demand in the domestic market. However, imports and transplants—foreign cars built in U.S. plants—now make up more than half of all new car sales (figure 4-5).

Individual companies have been seeking new markets in both developed and less developed countries. They are working with foreign partners to develop cars tailored to specific markets, as well as to produce cars that can be sold in all markets. At the same time, they are advancing efforts to harmonize vehicle standards around the world.

In 1975, the American automobile industry faced the challenge of developing cars to meet new emissions standards under the Clean Air Act of 1970 and to comply with the fuel economy requirements of the Energy Policy and Conservation Act of 1975, while still appealing to the American driving public.

By 1975, U.S. auto manufacturers were finding that higher gasoline prices and the memory of gas lines were eroding the traditional American desire for large, high-performance cars. Japanese and European imports were better suited to meet the new demand for smaller, more fuel-efficient cars. In 1975, 18 percent of the cars sold in the United States were imports, a market share almost 20 percent higher than in previous years, but well below future growth. No "foreign" cars were built in the United States [ORNL 1999]. However, the global networking of the industry had already begun with General Motors abandoning its policy against partnerships and alliances to acquire a substantial share in Isuzu Motors of Japan.

The American automobile industry continues to face the same major challenges of the last 25 years—producing fuel-efficient, low-pollution vehicles that appeal to the American public and compete with increasingly popular imports.

Industry globalization has pro-ceeded through the two-pronged trend of cross-ownership and cross-border manufacturing. In 1978, the first foreign car produced in the United States rolled off Volkswagen's assembly line in Westmoreland, Pennsylvania. Ford purchased a share of Mazda Motors in 1979. Tables 4-3 and 4-4 show data on current cross-border manufacturing facilities in the United States, Mexico, and Canada.

In 1982, the Japanese government voluntarily initiated an import control program to protect the U.S. auto industry while it retooled. These controls reduced imports from 28 percent of the market to 19 percent. However, the production of transplants rose from 1.4 percent of the market to more than 16 percent [ORNL 1999]. Japanese car manufacturers, alone, have invested more than $14 billion in U.S. manufacturing facilities. Today, excluding exports to Canada, Japanese name-brand cars comprise more than half of the vehicles exported from the United States, and Honda is the single largest exporter of cars from the United States, [Japan Auto 1999]. Imports peaked in 1986 at 4.2 million vehicles—more than 26 percent of the automobile market. Eighty percent of these imports were Japanese, which made up 20 percent of the total market [USDOC 2000].

U.S. auto manufacturers fared better in the 1980s as memories of the energy crisis faded, and much of the American public returned to larger cars and luxury vehicles, categories dominated by domestic products. The American manufacturers surpassed their foreign competitors with the introduction of the minivan by Chrysler in 1983 and the SUV by Ford in 1990. Both of these products were quickly embraced by the American public. But it was not long before foreign manufacturers followed suit. By the late 1990s, foreign minivans and SUVs of varying sizes began appearing in the market. Meanwhile, the distinction between domestic and foreign vehicles has continued to fade. Not only was the manufacturing industry becoming more global, but parts suppliers were as well. Cars built in the United States may contain parts built abroad. General Motors' recent contract with Honda to supply engines for its small cars built in the United States is symbolic of this long-term trend.

Despite the steady loss of U.S. market share during the past three decades, General Motors and Ford still rank as the top two manufacturers in the world, by production [USDOC 2000]. However, Industry Week ranks them behind DaimlerChrysler in revenue [Industry Week 2000b].

The industry has become a global network of partnerships, alliances, and joint ventures over the past 25 years. The biggest of these moves, the Daimler-Benz acquisition of Chrysler in 1998, kicked off a new round of global consolidation. This acquisition was quickly followed by Ford's purchase of the car manufacturing division of Swedish luxury carmaker Volvo. Volvo then bought Renault's U.S. Mack Truck manufacturing business, and, in turn, gave Renault a 15 percent stock ownership stake in Volvo. The combined Volvo-Mack Truck line leads the European market and is the second largest seller in the United States, with 25 percent of the large-truck market.

General Motors has alliances with three Japanese companies, owning 10 percent of Suzuki; 20 percent of Fuji Heavy Industries, maker of Subaru [Fiat 2000]; and 49 percent of Isuzu. Additionally, General Motors, Isuzu, and Suzuki together make the Opel, the most popular car in Europe [GM 1999]. General Motors also owns 20 percent of Fiat in Italy and all of Swedish Saab. General Motors is moving into the fast-growing Asia Pacific region with new plants in China, supplied by parts from Michigan in the United States, and Thailand.

Ford owns 33 percent of the Japanese company, Mazda [Ford 1999], and it has taken over Sweden's Volvo and Britain's Jaguar and Land Rover operations. Ford operates 12 major assembly plants in Europe and has moved into India [Industry Week 1999], with 78 percent ownership of Ford India.

Keys to the Future

The globalization trend in the automobile industry likely will continue in the coming years. With Asia-Pacific and Latin America projected as the fastest growing regions, automakers will be seeking ways to enter those markets. However, the U.S. market remains the largest, and automakers continually will seek new ways to sell cars in this country.

The global auto market continues to be determined by consumer preferences and government regulation. The divergence between the two sometimes creates problems for auto manufacturers attempting to develop a global brand and to cut costs by producing the same vehicle worldwide. The American consumer preference for larger vehicles with luxurious interiors is shared only in Canada, Mexico, and Saudi Arabia. Consumers in the rest of the world buy smaller cars that are more fuel efficient and have more modest interiors. Attempts are underway to develop global vehicle standards.

The U.S. Department of Commerce projects that auto imports will rise in the United States during the next several years with improved products offered at competitive prices [USDOC 2000]. American consumers have shown an increased willingness to pay more for import cars than for domestic vehicles, paying 63 percent more in 1999, compared to 20 percent in 1992 [USDOC 2000]. Table 4-5 shows sales of the top 10 cars and trucks in the United States, including imports.

The Council on Competitiveness has expressed concerns that higher demand for fuel-efficient or advanced-fuel vehicles outside the United States could lead to greater investment in research, and result in faster marketing opportunities there. Although U.S. manufacturers have joined with the government to produce fuel-efficient vehicles, the relative low cost of fuel—if it continues—is unlikely to lead to massive consumer demand. Except for China, fuel costs are higher in other major nations because of higher taxes.

Also in the coming years, the auto industry may face the challenge of surplus production capacity, particularly in Europe, while production growth is taking place in Asia and Latin America.

International Passenger Travel by Air

Over the past 25 years, U.S. policy has favored a more open international aviation system, and much of the world has followed. In 1975, flying between countries was governed by bilateral agreements that were restrictive and designed to protect national flag carriers from competition. While the basic framework of bilateral agreements remains in effect, the U.S. government has advocated "open skies" agreements aimed at increasing competition, lowering fares and cargo rates, and increasing service.

Changes in global aviation began in 1978 when U.S. airlines were deregulated, while the international system remained tightly regulated. The International Air Transport Association (IATA) set fares and rates, subject to government approval, until 1979 when the Civil Aeronautics Board (CAB) withdrew "blanket" antitrust protection from IATA. International fare-setting continued to be subject to case-by-case approval of the CAB and, later, the U.S. Department of Transportation (USDOT). But, as competition improved, the USDOT cut back its supervision of international pricing, effectively deregulating first charters, then cargo transportation. Today, after decades of pressing for marketplace fare setting, foreign governments rarely attempt to disapprove U.S. carrier pricing initiatives and pricing regulation in U.S. international markets is largely a thing of the past.

In 1975, only four U.S. carriers—Pan American (PanAm), Trans World Airlines (TWA), Northwest, and Braniff—had authority to fly overseas. Departure points for overseas flights were Kennedy Airport in New York for transatlantic destinations; Los Angeles or San Francisco for transpacific flights; and Miami for Latin American flights.

After deregulation, several more U.S. carriers—American, United, Delta, and, for a time, Eastern—obtained new international authority from CAB/USDOT and acquired some international routes from PanAm, TWA, and Braniff. Domestic flights linked up to the international flights at the four traditional gateways. American, United, Braniff, and Delta also brought international flights to other hubs, expanding the number of U.S. gateways.

Over the past quarter century, U.S. airlines have extended their reach. For example, between 1983 and 1993, the number of international city-pair markets flown by U.S. airlines grew by more than one-third [60 Federal Register 21841]. New technology made new gateways possible with smaller planes, which could fly longer and more frequently to more distant locations. These flights replaced the use of fewer, larger planes, which only flew to a few major airports.

During the last 25 years, a number of airlines throughout the world, including British Airways, went from "state" to private control. A 1997 Foreign Policy article estimated that while "the state was the majority owner of most airlines in the 1950s and 1960s, private investors now control 75 percent of the airline industry." It predicted that "the remaining holdovers will likely be privatized within the next few years [Juan 199798]."

The European Union (EU) achieved full-airline deregulation for intra-EU service in 1998. Throughout the world, airlines are becoming less of a national political symbol and more of a business, with increasing cross-border investments. However, most countries still retain national ownership rules.

To overcome the barriers of national ownership rules, airlines have turned to global alliances (table 4-6) to help compete in the emerging global market. Using joint marketing and service arrangements—and, sometimes, code-sharing (box 4-4)—these alliances provide the means with which airlines can develop worldwide networks for their passengers and offer global service. In 1998, more than half of the world's airline capacity, based on available seats per kilometer, was involved in alliances [Boeing 2000].

In recent years, bilateral agreements have accommodated globalization through alliances, including code-sharing, and are beginning to be overtaken by open skies agreements. So far, the United States has signed 51 "open skies" agreements, which eliminate all restrictions on airline service between the signing countries (figure 4-6 and box 4-5).

In addition, the first ever multilateral open skies agreement was initialed in November 2000 by the United States and four other Asia-Pacific Economic Cooperation (APEC) economies (Chile, Brunei, New Zealand, and Singapore). With this agreement, we are beginning to move beyond the current system of bilateral aviation agreements and into the international aviation environment of the 21^st century while still maintaing the highest levels of safety as well as ensuring the needs of the workforce.

In 1975, 16.3 million passengers boarded international flights in the United States [ATA 1999b]. By 1998, that number had tripled to more than 53 million passengers (figure 4-7). Figures 4-8 and 4-9 show the extent of international air travel to and from the United States in 1998.

In 1975, the load factor—a measure of revenue-passenger "load" divided by passenger capacity for an aircraft—for international flights was 50 percent, and it has steadily increased during the past 25 years (figure 4-10). In recent years it has exceeded 70 percent [ATA 1999a]. This growth has substantially improved profitability and, therefore, reduced costs to consumers. U.S. flight destinations also have changed. Although Atlantic routes carry the most passengers, the Latin American and Pacific markets are expected to grow at a much faster annual growth rate between 2000 and 2011 [USDOT FAA].

Keys to the Future

The Boeing Company projects an annual growth of 4.7 percent in international air travel over the next 20 years [Boeing 2000]. According to Boeing, the greatest growth potential is in Asia, which has become an important tourist destination and also is home to emerging strong economies, such as those of India, China, and South Korea. To accommodate increasing passenger traffic, countries across the world, especially Asia, are enhancing capacity at existing airports and building new ones. For example, the Chek Lap Kok airport, built in Hong Kong at a cost of nearly $20 billion, went into operation in 1999.

A key challenge facing international aviation today and in the coming years is to create a system that fits the global economy. To address this challenge, public officials are looking beyond bilateral treaties that have governed international aviation relations for the past 55 years, to establish multilateral groupings of "open skies" nations. In 1999, the USDOT hosted an "Aviation in the 21^st Century—Beyond Open Skies Ministerial" Conference in Chicago, attended by representatives of 93 nations, to discuss a new international aviation policy architecture. The conference created new opportunities for growth in international aviation to pursue air service liberalization beyond the current bilateral system to foster the creation of expanded international multilateral partnerships. It also helped us create a bold new vision for international aviation—one that capitalizes on communications, information, and technological revolution of the 21^st century. This will help us achieve the safest, most secure, environmentally friendly, and efficient aviation system possible by 2025.

The record growth of world travel has also created heightened sensitivity to the safety and security of the global aviation system. To maximize safety, international standards need to be applied around the globe, and trouble spots need to be identified and addressed.

The operating structure of the scheduled passenger airline industry will change through further refinement of existing business models and the development of totally new business models. For example, low-fare carriers have fundamentally changed the competitive dynamic in U.S. and European domestic aviation markets, and it is entirely possible that low-fare airlines could expand to link continents. Airlines have learned that to maximize profits and shareholder value they must select the traffic segment that fits their cost structure and corporate strengths, rather than simply chasing all passengers in an effort to improve market share. In the next 25 years, the evolution of the industry structure will be guided by airlines optimizing the relationship between targeted passenger segments and their cost and business structures.

Aviation in the year 2025 will be marked by characteristics that differ from today's environment. These changes will be driven by consumer demand and the industry's need to meet those demands while creating shareholder value.

• The distinction between domestic and international aviation will be nearly nonexistent in the key forms it exists in today: ownership and control, licensing, and competition policy. The thousands of bilateral air transport agreements between national governments will give way to regional/plurilateral pacts that will probably evolve toward a multinational regime. By 2025, the airline industry will have followed other industries in becoming truly global, even on the production side. In short, we will see the complete deregulation of the industry on a global basis and normalization of the airline industry as an economic sector.
• In an effort to enhance productivity and efficiency, airlines will substantially rationalize hub-and-spoke systems. This will be done not only through consolidation, but also through airline planning and operating changes and innovations, such as dynamic scheduling, which provides for capacity management changes close to flight time. Long-term efficiency gains will be possible by operating fewer, larger aircraft into permanently constrained hubs.
• Airlines will successfully use new aircraft and information technologies to transition from planning their business based on traffic pools to focusing on passenger profiles, seeking to provide a range of products and services that more effectively match a passenger's needs, not just his/her willingness to pay. Airlines may evolve into "lifestyle" management companies in an effort to further leverage their individual brands and effectively meet the needs of more granular market segments.
• As airlines become comfortable with not competing for every passenger segment, the rationalization of the hub-and-spoke networks on a global scale will create new opportunities for other innovative services that will be largely point-to-point, but will have the ability to focus on the needs of a particular market segment.

The role of the government will be to facilitate this process, providing leadership to steer toward promising regional/plurilateral arrangements and away from forums that might regress from the open-skies standards. Where stakeholder interests are mutually exclusive, the Department should secure the public interest on the basis of a long-term vision, ameliorating the long-term negative effects of short-term corporate policies—both of which are inherent when an industry is in fundamental transition.

Air Cargo and Express Services

One of the most significant transportation developments of the past quarter century has been the rapid growth of air cargo, and, as a result of that growth, development of global integrated express carriers. Lower shipping costs and more frequent service have made air cargo a major factor in the way business is conducted. Consequently, air freight's share of U.S. international merchandise trade grew from 16 percent by value in 1980 [USDOT BTS 1999] to 28 percent in 1997, valued at $433 billion (figure 4-12). Although this represents less than 1 percent of tonnage, domestic ton-miles of air freight have tripled since deregulation in 1977, and international ton-miles have grown nearly fivefold [ATA 1999b].

Air cargo has grown in importance as more U.S. businesses replace traditional inventory stockpiling practices with lean inventories and just-in-time deliveries. Electronics and computers are the largest single air-freight category, comprising nearly 20 percent of the market (table 4-7). While high-value, time-sensitive goods are moved by air, especially critical goods may be sent by integrated express carrier, such as Federal Express, United Parcel Service (UPS), DHL, Airborne Express, CF/Emery, Burlington, and, increasingly, by the U.S.

Postal Service (USPS). Modern information technology allows customers to receive door-to-door tracking information from integrated express carriers.

In 1975, the express services industry was just getting started, and its potential was not widely foreseen. Domestic air cargo, already growing rapidly in 1975, amounted to about 2.8 billion revenue ton-miles that year—five times greater than in 1960 [USDOT 1977]. By 1999, revenue ton-miles had grown to 11.5 billion, at an annual growth rate of 6.1 percent. At the same time, international revenue ton-miles by U.S. carriers increased from 2.2 billion to 13.6 billion (figure 4-13). This phenomenal success of both air cargo and express carriers was spurred by the Airline Deregulation Act of 1978, discussed in chapter 2, which created conditions that allowed both competition among carriers and basic changes to the air-industry structure.

FedEx was founded in 1973. It used a then novel hub-and-spoke method to move air cargo at night to a central hub and distribute it before the end of the next business day through integrated air and truck service. At that time, FedEx was delivering to 25 U.S. cities. UPS (founded in 1907) gained permission in 1975 for its trucks to deliver in all 48 contiguous states. At that time, it was still a ground-based North American company; its first venture into Europe did not come until the following year. DHL pioneered door-to-door foreign express deliveries in the early 1970s, starting service to the Philippines, Japan, Hong Kong, Singapore, Australia, and Europe.

Since 1975, the express business has become a global enterprise. UPS began its European operations in 1976, expanding to Asia in 1988 and Latin America in 1989; FedEx began its service to Asia and Europe in 1984; and DHL expanded to Latin America, Africa, the Middle East, and China by 1986. While these three companies are not the only ones providing domestic or international express service, they are the largest in the world.

With hubs across the globe, integrated carriers have perfected the use of the hub-and-spoke system for cargo transport (figure 4-14). Their delivery systems and schedules bypass airport congestion, which can be the source of many delays. UPS, the largest carrier, moves cargo through primary international hubs in Cologne, Germany, Hong Kong, Singapore, and Taiwan. FedEx has primary international hubs in Paris and the Philippines; DHL operates primary hubs in Brussels and Hong Kong.

According to a report by BT Alex. Brown, even with such extensive operations by cargo carriers, passenger planes still carry about half of all air cargo [Logistics Online 1999]. As a result, several passenger airlines are now separating their cargo operations from their passenger business to more efficiently accommodate increasing cargo traffic.

Express services continue to grow at a rapid pace; annual growth averaged nearly 20 percent from 1992 to 1997, and total volume doubled. Although it comprises only about 5 percent of the international air cargo market, express is the fastest growing segment. In 1999, FedEx reported delivering an average of nearly 2 million overnight packages and 282,000 international priority packages each day. UPS ranks as the ninth largest airline in North America based on number of jets [UPS 2000], while Industry Week places FedEx as the fifth largest airline in the world, based on operating revenue [Industry Week 2000a]. Today, these express carriers (UPS, FedEx, and DHL) deliver to more than 200 countries (figure 4-15).

Keys to the Future

Boeing projects an average annual growth of 6 percent in international air cargo during the next decade and 6.4 percent average annual growth for the next 20 years [Boeing 1998-99]. The most rapid growth is expected in Asian markets. MergeGlobal predicts at least 8.9 percent growth per year in the Intra-Asian market through 2004 [Clancy & Hoppin 2000]. But to continue to move cargo rapidly, growth in international air cargo may require airport construction and expansion. To avoid delays, companies will probably continue to seek cargo facilities that are separate from congested passenger airports.

To expand U.S. presence in the Asian market, USDOT in November 2000, proposed expansion in United States-China air service that will eventually lead to full liberalization. In a show-cause order, USDOT tentatively selected UPS as the fourth U.S. carrier authorized to serve China and extended the roundtrip flights of the other three airlines (United Airlines, Northwest Airlines, and Federal Express). These efforts will eventually result in "open skies" agreement with China after 2004.

The continued expansion of air cargo also will require additional aircraft. This projected growth in air cargo, coupled with a trend to seek airports that are clear of passenger aircraft

traffic, will likely result in the spread of noise pollution to areas that had previously enjoyed minimal disruptions. Although today's aircraft are about 80 percent quieter than their 1950s counterparts (see chapter 5), aircraft noise pollution can still interrupt conversations and disrupt sleep.

Boeing predicts that used and converted passenger aircraft will be the primary source of freighters. Boeing also projects:

• continued use of lower hold cargo capacity on passenger airplanes; and
• a need for 190 additional large-capacity freighters, 155 medium-capacity widebody freighters, and 140 small freighters (Airbus has forecast the need for 300  additional freighters) [Sobie 2000].

Others in the freight field are considering new designs to save unloading time. Some are also discussing the possibility of an amphibious freighter as another solution to airport capacity concerns. Overall, it is clear that overcoming capacity constraints will drive creative solutions and investment decisions.

Maritime Shipping

The ocean shipping industry has been dramatically transformed in the past 25 years. Ships have generally become faster and larger, and intermodal container shipping has replaced breakbulk cargo on many routes. And, although the United States continues to conduct most of its foreign trade by ship, our rank among the world's maritime fleets has dropped. Figures 4-16 and 4-17 show the size of the world shipping fleet and U.S. share of the world fleet from 1975 to 1997. Even though productivity in the U.S. shipbuilding industry has improved, new shipbuilding activity has declined.

Waterborne trade has grown in the last quarter century with the expansion of the world's economy, and it is expected to double over the next 20 years. The primary commodities include semimanufactured products; dry cargoes, such as grains, coal, steel, and iron ore; and liquid-bulk products, such as petroleum and petroleum products.

In 1975, oceangoing shipping was growing, due in part to growth in the crude oil trade. As a result, the shipping capacity of the world merchant fleet (oceangoing steam and motor ships of 1,000 gross tons and over) more than quadrupled to 557 million deadweight tons (dwt) in 1975 [USDOC MARAD 1976] from 130 million dwt in 1955 [USDOC MARAD 1956]. Also in 1975, new construction additions to the world merchant fleet increased to 791 vessels [USDOC MARAD 1976], compared to 470 vessels in 1955 [USDOC MARAD 1956].

In 1975, Japan and West Germany led the world in shipbuilding (figure 4-18). The number of vessels on order or under construction reached an all-time high at the close of 1975, although the rate of growth for new shipbuilding orders had begun to decline. By the 1970s, the crude oil boom ended, and the capacity created during the previous decade stifled demand for new tonnage.

In 1975, oceangoing ships carried 625 million metric tons of foreign trade. By 1999, this trade had almost doubled to 1.13 billion metric tons. Figure 4-19 shows the U.S. oceanborne foreign trade by different types of cargo ships. However, the U.S.-flag fleet carried only 5.1 percent by volume and 17.5 percent by value [USDOC MARAD 1978]. Figure 4-20 shows the country shares of world maritime trade by cargo value in 1998.

The world's general cargo trades were being revolutionized, largely by U.S. shipbuilding innovations in advanced containerships and roll-on/roll-off vessels. At the end of 1975, the United States held 25 percent of the world's fleet of general cargo ships and 30 percent of the tonnage [USDOC MARAD 1976]. But there was growing worldwide competition between the expanding fleet of containerships and traditional general cargo vessels.

A quarter century ago, our foremost trading partner in oceanborne foreign trade, in both tonnage and value, was Japan (figure 4-21). U.S. purchases of consumer goods from Japan drove the Asia-Pacific trade in the late 1970s, and were largely responsible for the growth in liner trade vessels—those operating on fixed itineraries or regular schedules and with established rates. The continuing growth in the liner industry greatly contributed to the overall globalization of the maritime industry.

Even though Japan was our foremost trading partner a quarter century ago, in both tonnage and value, transatlantic trade was the primary traffic route. Today, major U.S. trade routes have shifted. Transpacific trade is now the primary traffic route for U.S. oceanborne commerce. Our top five trading partners account for approximately 42 percent of the tonnage and value [USDOT MARAD 1998]. Currently, Venezuela is our leading trading partner in terms of tonnage (primarily oil), but Japan is still our leading trading partner in terms of value. Mexico and Saudi Arabia joined the ranks of our top trading partners in terms of tonnage.

The world merchant fleet in 1975 consisted of 22,872 ships of 556,572 thousand deadweight tons. The United States ranked eighth in terms of deadweight tonnage. Liberia was ranked number one in vessel registries (by number of ships) and was considered a country flag of convenience. [USDOC MARAD 1975].

The number of containerships is expected to grow at a significantly higher rate (8 to 10 percent) than other vessels types (1 to 4 percent) in the near term [USDOT 1999]. Container ships are also becoming larger. Approximately 40 percent of the new capacity on order is for vessels with a capacity of 4,500 or more TEUs. These vessels have design drafts approaching 50 feet, which will require channel deepening at the ports where they call. In order to reduce the time vessels spend in port, liner operators are developing routes based on a hub-and-spoke system.

The Panama Canal is now less critical to global maritime trade because it cannot accommodate the newest generation of container vessels. Another factor that has reduced the importance of the Panama Canal is that transcontinental rail serves as a cost-effective land bridge. This could change if the Panama Canal were to be expanded.

By the end of 1997, Japan, South Korea, and China led the world in shipbuilding, the latter rising from its 1980 ranking of 17^th. Today, the United States ranks 12^th, with about 1.3 percent of the world's gross tonnage on order [USDOC 2000]. Reduced demand for new ship construction has led to a steady decline in world new shipbuilding prices since the early 1990s [Journal of Commerce 2000].

As the size and prominence of the U.S. merchant fleet decreased, the U.S. transitioned from being a "flag state" becoming a "port state," as well. A "port state" is a nation whose interactions with merchant shipping come about primarily through port calls and coastal accidents involving ships whose safety is overseen by other governments. Today, fully 95 percent of U.S. foreign trade is carried in ships flying the flags of other nations. The United States is no longer able to carry out the same kind of risk reduction measures as was possible when the majority of ships in our ports flew the American flag. Further, not all nations are as conscientious in their flag state duties as the United States had been. Accordingly, the USCG has pursued a two-tiered approach to protecting public and environmental safety from the threats posed by inadequately supervised foreign shipping. The first tier is has been to promote increasingly rigorous international standards at the International Maritime Organization (IMO). The IMO is a specialized branch of the United Nations, responsible for a wide range of safety and environmental protection standards issued under several international conventions. In recent years, IMO standards have been made far more stringent, for both the protection of life and the marine environment. These improvements have been largely at the instigation of the United States, and the USCG is recognized at IMO and elsewhere as the world leader in maritime safety and environmental protection issues. Rigorous standards are meaningless, however, if they are not adequately enforced. Therefore, the United States, acting in concert with other nations, has embarked on an aggressive Port State Control program to ensure foreign flag vessels calling in our ports meet applicable IMO standards and any additional measures required for entry into U.S. ports. The United States, again in cooperation with other nations, is working to improve flag state enforcement capabilities through technical assistance and international training programs and by developing the Model Maritime Code to guide developing nations' efforts in building effective enforcement capabilities.

Keys to the Future

The U.S. maritime industry is challenged to remain competitive in the face of industry consolidation during an era of deregulation (discussed in Chapter 2). At the same time, the commercial fleet provides critical capacity for military sealift during national emergencies, which may have important implications for national security (see Chapter 7).

The U.S. trade deficit causes additional problems for shipping companies. Imbalance of cargo flows—more imports than exports and differences in the type of cargo and the kinds of ships needed in each direction—causes some routes to be largely one-directional, and leads to costly repositioning of empty containers.

The U.S. shipbuilding industry faces an even more serious challenge as commercial orders have declined to record lows (figure 4-22). A continuing lack of U.S.-built ships may threaten both the viability of the commercial U.S. fleet and our nation's security.

By 2025, U.S. ports must be prepared to accommodate larger, next-generation oceangoing vessels and to provide efficient intermodal connections to rail and truck. Secretary Slater's Marine Transportation System initiative is intended to address these issues in a comprehensive, multidisciplinary way with active involvement of all agencies and stakeholders. The U.S. Coast Guard interagency collaborative deepwater capability replacement project will also help in upgrading the infrastructure over the next decade.

North American Free Trade Agreement (NAFTA)

On December 8, 1993, the United States, Canada, and Mexico joined together in an historic agreement to form a North American Free Trade Agreement—NAFTA. Trade among the three North American nations was already on the rise in the early 1990s, but growth accelerated when the treaty went into effect on January 1, 1994. Between 1995 and 1999, U.S.- Mexico surface trade increased by 75 percent (by value), while U.S. - Canada surface trade grew by 20 percent. Figure 4-23 shows the increase in surface trade with Canada and Mexico between 1995 and 1999. Mexico has now become our third largest trading partner (by value), up from its fifth position in 1975 [USDOC Annual]. Figures 4-23, 4-24, 4-25, 4-26, and 4-27 show the trade flow between the United States, Mexico, and Canada in 1998.

In the six years since the three governments decided to loosen trade restrictions, foreign investment into Mexico has increased from companies hoping to take advantage of a low-cost labor market with duty-free access to the United States. One result of that investment—increased Mexican production and exports to the United States—has changed the trade patterns in North America and brought renewed attention to the need to upgrade trade corridors among these three countries.

Rapid trade growth, especially with Mexico, means a greater flow of goods in specific trade corridors, many of which were unprepared for increased traffic. For example, between 1994 and 1999, the value of Mexican imports by land modes passing through Laredo, Texas, increased 248 percent. Otay Mesa, California, experienced a 95 percent increase. In the gateway port of Detroit, Michigan, total surface trade with Canada increased 25 percent, and in Buffalo, New York, trade increased 53 percent [USDOT BTS 2000].

Even though the United States has delayed full implementation of the NAFTA trucking provision because of concern about truck compliance with U.S. safety standards, more than 70 percent, based on value, of the U.S.-Mexico trade is carried by trucks [USDOT BTS 1999]. Figures 4-28 and 4-29 show the U.S. surface trade with Mexico and Canada by different modes. Cross-border delays to and from Mexico have been blamed on inadequate infrastructure, lengthy inspection procedures, heavy traffic, and U.S. efforts to stop the influx of drugs and illegal aliens.

In the United States, traditional trade routes have been east-west, serving the coastal ports. However, with NAFTA, new north-south trade corridors are emerging. Texas is concerned about the truck traffic on its segment of Interstate 35, which is expected to increase 85 percent by 2005. Concerns also have been raised about air quality at congested border crossings. Simply adding capacity to existing systems is no longer seen as a salve for these problems. Intelligent Transportation Systems (see chapter 6), which incorporate the use of advanced communication and information technologies in managing day-to-day traffic operations, can enhance safety, ease congestion, and reduce pollution by monitoring and coordinating traffic flow.

Under TEA-21, a National Corridor Planning and Development Program and Coordinated Border Infrastructure Program was established to fund improvements in national highway corridors and border facilities. The program aims to improve border infrastructure and transportation telecommunications to facilitate the safe and efficient movement of people and goods at or across the U.S.-Canada and the U.S.-Mexico borders. The National Corridor Planning and Development Program provides USDOT authority to allocate dollars to states and metropolitan planning organizations (MPOs) for coordinated planning, design, and construction of highway corridors.

Ports also are seeking NAFTA business. The Port of Mobile is starting high-speed intermodal ferry service with the Canadian National Railroad and two Mexican partners, while the Port of Galveston is initiating rail-barge service to Mexico's east coast.

To the north, Canadian railroads have geared up to move more goods. Canadian National, an east-west route, purchased Illinois Central, giving it access to the Port of New Orleans and the Gulf of Mexico. Canadian Pacific purchased the Susquehanna Railroad for access to the Port of New York and New Jersey.

In trucking, U.S. companies are restricted to a 49 percent ownership share in Mexican companies. Because of this restriction, American companies have formed alliances, joint ventures, and partnerships with Mexican companies. Under NAFTA, full ownership would be permitted in 2004, but that provision may not be implemented as long as the United States delays entry of Mexican trucks. NAFTA also will permit U.S. bus companies to own 100 percent of Mexican companies, beginning in 2004.

To promote safety, the three countries have reached an agreement on comparable standards for commercial driver 's licenses. To ensure that Mexico-domiciled motor carriers comply with U.S. statutes, USDOT and states are establishing controls and enhancing safeguards, including verifying registration information, using automated data and state safety inspectors to monitor compliance, implementing consistent enforcement policies, and allocating additional resources for the border program. California has hired additional inspectors and is working to provide adequate mechanisms to control access of Mexico-domiciled motor carriers into the United States. Texas, which receives two-thirds of the truck traffic from Mexico, has also hired more than 100 additional inspectors, while Arizona has opened new inspection facilities. In addition, the new Federal Motor Carrier Safety Administration has hired additional border personnel.

The NAFTA agreement did not cover aviation, but the United States has signed liberalizing agreements with both Canada and Mexico. The 1995 agreement with Canada replaced a restrictive treaty and, after an initial period of slow growth, resulted in a 37 percent increase in passenger traffic in the first 3 years, with 42 percent more nonstop destinations. Today, the U.S.-Canadian market is the world's largest bilateral aviation market. A 1999 agreement with Mexico expanded code-sharing rights for U.S. and Mexican airlines. Six U.S. airlines were approved for partnerships that would, together, serve 50 markets in both countries, creating the largest code-share market in the world.

Keys to the Future

The North American Free Trade Agreement (NAFTA) should continue to provide the basis for an improving continental trade and transportation environment well into the new century. To realize this promise will require continuing progress in a number of key areas including:

1. intergration of national transportation policies amd practices for air, lan and sea
2. sharing and transferring of transportation knowledge and technology;
3. improvement of transportation safety and security through the achievement of greater compatibility among regulatory standards;
4. improved cooperation among the parties in the deployment and use of interoperable advanced technologies; and
5. increased exploitation of multimodalism to achieve greater transportation efficiency, reduced congestion, and lower costs.

NAFTA provides the framework and the resulting improvements in social welfare will provide continuing motivation to practice open trading policies. An efficient and responsive North American transportation system is a derived demand from this trading environment.

NAFTA however, represents only one liberalized trade arrangement in the Western Hemisphere among a number of others that include various countries in Central and South America, as well as the Caribbean region. Each of these trade relationships places inevitable requirements on transport systems to be more safe and efficient. The first quarter of the 21^st century is likely to see these efforts expand and merge within a broader Western Hemispheric trade initiative that brings the same transportation benefits and challenges to the hemisphere as are anticipated for North America.

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