Americas at the Crossroads: The Next Great Trading Bloc?

 

Mike Eskew, chairman and chief executive officer, delivered a keynote address to delegates attending the U.S. Commerce Department’s inaugural Americas Competitiveness Forum on June 12, 2007 in Atlanta, GA. In his remarks, Eskew noted that Latin America is at a crossroads, and can become the next hot spot for trade and economic growth if the region can address its customs and border issues.

 

Good afternoon.

It’s an honor to participate in the first ever Americas Competitiveness Forum.

Before everyone came in, I stopped by each table and dropped a copy of our UPS Centennial Book at your place, I hope you enjoy it.

I would like to thank Secretary Gutierrez for helping make this forum happen, and for all the work the Commerce Department does to help business and global trade flourish.

One thing I learned a long time ago about speaking during lunch: Keep it short and to the point. So let me get right to the point.

I believe that Latin America, home to half a billion people south of the U.S.-Mexico border, has the potential to be the next 'hotbed of trade' and economic growth.

Between 1997 and 2020, Latin America's real GDP is expected to grow 4.4 percent annually.

That’s faster economic growth than Asia at 3.6 percent. And much faster than the 2.8 percent global average.

But this future is not a given. In fact, there are a few factors that threaten to cloud the economic prospects for Latin America.

For starters, many barriers - tariff and non-tariff - continue to impede the flow of goods from the northern tip of North America to the southern tip of South America.

We have so many complicated customs and security requirements in place that it's often easier to import goods from Europe or Asia, than from our neighbors to the north and south.

Speaking of the North, Canada and the U.S. have enjoyed significant growth in trade since the signing of the NAFTA treaty, and continue to share an open and prosperous trade relationship.

One area of concern in the Americas is that our transportation infrastructures are not keeping up with the demands of global commerce.

Communications and IT infrastructures also need modernizing. It is clear that the Americas are at a crossroads.

The choices are to adapt or become irrelevant. I am optimistic that the Americas will do what is necessary to: adapt, thrive, and become the next great trading bloc.

I know that many of you are developing healthy trading partnerships with Asia and other regions of the world, but there are great opportunities here in our own back yards.

Trading with our neighbors in the Americas has a couple of built-in advantages that should make our region the first priority.

First is geographical proximity. In an era of ‘just-in-time’ supply chains, proximity is everything. When the distances are shorter, so are the supply chains.

Latin American markets can be accessed by all modes of transportation, depending on needs.

Ocean shipments tend to be larger, yet slower. Air shipments are smaller, faster and more frequent.

In between these two modes is trucking -- a critical element in the Americas supply chain and one that, frankly, is probably being under-utilized as a cross border mode in this hemisphere.

And obviously, at UPS we favor maximizing the use of trucks between our countries by minimizing the regulations that impede them.

Another key advantage of doing business with Latin America is the ability to take advantage of several free-trade agreements.

No, we don’t have a free-trade zone from one end of the Americas to the other. But we do have: NAFTA, CAFTA, Mercosur, and Multiple bi-lateral agreements between our various nations.

While we still face the challenge of how best to knit them together, these agreements really matter.

Just consider what NAFTA has done to encourage trade among the U.S., Canada and Mexico.

NAFTA is the second biggest trading bloc in the world behind the EU and accounts for far more trade than the U.S. conducts with China.

In fact, 30 percent of all U.S trade involves NAFTA countries. That compares to 11 percent of U.S. trade with China. And, 27 percent of U.S. imports are NAFTA imports, compared to 14 percent from China.

The truth is, despite these advantages, it will take all our efforts to keep intra-Americas trade flourishing.

After all, global commerce is like a river. It tends to flow down the paths of least resistance.

How, then, can we make sure that we don't lose out to Asia and other fast-growing trading regions?

What can we do as government entities, carriers and global businesses to remove the impediments to the free flow of intra-Americas trade?

Well, that’s what I’d like to talk about in the remaining minutes. The first and most important -- action governments in the Americas can take is to speed and simplify border crossings.

Although we’re neighbors, our border and customs policies make it sometimes seem like we’re enemies.

I am certain that each of you here today can think of an example, but let me use the issue of automobile production in North America to underscore the point.

Did you know that the average North American-produced vehicle crosses the border more than seven times during production?

During the journey, each vehicle faces a staggering 28,200 customs transactions. By comparison, cars imported from Europe or Asia to North America involve a single customs transaction.

28,200 to 1…Whose odds do you like?

If we delay cross-border shipments by just a few days, the Americas lose their proximity advantage over Asia.

To speed and simplify border crossings, there are a number of steps governments can take.

For starters, they can work together to harmonize their tariff codes, so global shippers don’t have to look up different codes every time they ship to a different North or South American country.

The North American Competitiveness Council (NACC) a joint initiative between the private sector and North American governments proposes that North America develop a single, streamlined customs clearance system.

We need to expand this kind of approach throughout the Americas.

If we don’t simplify and streamline border crossings, the Americas could suffer while our distant neighbors in other parts of the world take advantage.

I can assure you that other regions of the world aren’t resting. In 2002, 21 Asian-Pacific economies launched a Trade Facilitation Action Plan.

They pledged to reduce business transaction costs by five percent within six years largely by streamlining customs and upgrading ports.

Well, these APEC countries reached their goals three years ahead of schedule.

Governments in the Americas must respond or get passed by. It's our choice.

Another way to speed and simplify border crossings without compromising security is to identify trusted, certified shippers and let them get in the "fast lane" for customs processing.

CT-PAT and FAST are two public-private initiatives that let frequent shippers qualify for expedited processing, in exchange for following stringent security procedures.

Other common-sense steps include raising the minimum dollar value at which imported goods must receive customs clearance, so low-risk, low-value goods can cross borders without delay.

Separating the release of shipments from the collections of duties and fees is another such step.

The devil, of course, is in the details, but organizations like the NACC know what is needed to simplify and speed border crossings.

At UPS, we support and are involved with the NACC and other public-private partnerships like the Security and Prosperity Partnership to streamline trade.

Now is the time for governments throughout the Americas to follow through, to act or be passed by. It's our choice.

In addition to speeding border crossings, another major step governments in the Americas can take is to improve transportation and IT infrastructures.

The growth in global trade has stressed transportation infrastructures around the world, even in the U.S. and the more developed countries.

The Americas region is in danger of falling even farther behind.

A recent World Bank report says (quote): “Infrastructure is hampering [Latin America’s] ability to grow, compete and reduce poverty.”

The report says that while there have been major improvements in the past decade to electricity, telecommunications, ports and airports ... on the flip side, roads remain poor.

The World Bank report also says that Latin America has lost ground when it comes to infrastructure coverage compared to countries in Asia.

On average, the region spends less than 2 percent of GDP on infrastructure, not the 3 to 6 percent more common in countries that once trailed Latin America, like China and South Korea.

Infrastructure is not only about meeting basic needs. It’s also about making Latin America a better conduit for trade. More must be invested. More must be done.

It is time to act - or be passed by. It’s our choice.

A great start can be seen in a number of ocean port expansions going on right now. In El Salvador, they're doubling the capacity of the La Union Port, which will become the largest and most modern in Central America.

In Panama, in addition to the Canal, they’re upgrading the ports of Balboa, Mazanillo and Colon.

Brazil, Argentina, Uruguay and Chile are all upgrading or building new ports.

Canada is upgrading a major ocean port in Vancouver.

All this is critical to growing North-South trade.

It’s not just ports, roads and railways that support a trading infrastructure. IT and communications infrastructure, both wired and wireless, support the seamless exchange of supply-chain information.

I’ve talked a little about what government can do to remove the impediments of intra-Americas trade.

But we in the private sector can take action to improve the flow of North-South trade, as well.

We can start by putting supply chains at the heart of our business strategy.

Supply chains are no longer merely tactical considerations no longer best left to the transportation department at the back of the building.

Global competition has intensified. Technology quickly renders product innovations obsolete. It’s no longer enough to compete on product features or price alone.

Success now can hinge on a different set of criteria: Getting the right products to the right place at the right time, with the right information and at the right price.

The orchestrated movement of goods, funds and information is what we at UPS call “synchronizing global commerce.”

Still, too few C-level executives have yet to recognize the strategic importance of synchronized supply chains.

A survey of CFOs found that only one-third say their supply chains are well integrated with corporate strategy. We have to do better.

Getting goods delivered quickly and smoothly across the Americas depends on it.

Besides the benefits to global trade, making supply chains part of your core business strategy also yields some key business benefits.

About 10 percent of the cost of goods is wrapped up in logistics costs. Streamlining your logistics networks can help you cut these costs.

Strategic supply-chain management can also help you improve your financial performance. In fact, supply-chain enhancements overall in the last decade have led to a 10 percent improvement in order-to-cash cycles.

Then there’s the enhanced ability to enter new geographic markets, by 'piggybacking' on the global networks of integrated logistics providers.

The way you manage your supply chains can also help you differentiate your product offerings and enhance customer service.

In short, putting supply chains at the ‘heart’ of business strategy is a key way we in the private sector can enhance the flow of trade.

Like governments, we in the private sector must act or find ourselves irrelevant. It's our choice.

Another way companies can improve intra-Americas trade is to shorten our supply chains. Shortening your supply chain involves reducing the number of middlemen whenever you can.

It means keeping inventory moving rather than constantly gathering dust in warehouses.

And basically simplifying the path between buyer and seller.

There are ways to do this: Bypass warehouses where possible, and Consolidate multiple shipments into one for streamlined customs clearances.

For example, California-based Precision Dynamics is one global company that decided to shorten and simplify its supply chain.

Precision Dynamics makes electronic identification wristbands for use in concert events, hospitals and law enforcement.

The company can’t afford to miss customer events by having shipments held up in customs.

A new manufacturing plant across the border in Tijuana meant that Precision Dynamics had to coordinate separate trucking companies, customs brokers and freight forwarding companies. All this complexity threatened to delay shipments.

Today, Precision Dynamics relies on UPS to provide direct-to-customer delivery from Mexico, with no shipments stopping at warehouses along the way.

UPS provides consolidated management of freight forwarding, customs and trucking, so there’s a single point of management.

Transit times have been reduced by two days and the importer has lowered transportation and administrative costs.

They have acted and they will not be passed by.

A third private-sector strategy for improving the flow of trade is to leverage information technology to improve supply chain visibility.

Knowing exactly where a shipment is where it’s heading and what makes up its contents, not only accelerates fulfillment, it also can supply information that customs and other regulatory agencies demand.

I’ll give you an example of the power of sharing supply-chain visibility.

UPS worked with Guatemala customs, the National Express Association, and World Bank consultants to help automate customs clearance into Guatemala.

UPS transmits electronic shipping and manifest information to Guatemala customs for pre-clearance before the shipments arrive in the country.

Our company has also given Guatemala customs special risk assessment software that lets them search through data about incoming shipments.

Using customized search criteria, customs can identify the riskiest goods that need to be inspected.

As a result, Guatemala is able to pre-clear 95 percent of incoming shipments before they arrive.

Of the five percent inspected for inspection, over 80 percent clears on the day of arrival. And even though shipments clear faster, the automated system has also increased collection of duties by five percent a year in Guatemala.

It is an example of action through government-private industry cooperation action that will ensure we will not be passed by.

What’s good for customs agencies can also be great for managing supply chains. Third-party visibility platforms can help you track the movement of shipments across parties and across borders, down to the SKU level.

That way, if there’s an unexpected delay because of weather or other factor, you can reroute the shipments or put other contingency plans into action.

Your supply chain becomes adaptive, not just reactive. Good thing, because with cross-border transactions, there are always new contingencies that require adaptation.

If you want a symbol of both the challenges and opportunities we face doing business in the Americas, look no farther than the Panama Canal.

Completed in 1914, this waterway connecting two great oceans has been called the hardest 50 miles "ever won by human ingenuity."

Some 25,000 people lost their lives to landslides and malaria helping build the Panama Canal.

But the vision was ultimately realized. And the Panama Canal secured the importance of Latin America in the flow of global commerce.

Today, much of world trade goes through the Panama Canal.

But the Panama Canal was in danger of losing its position. Shipping traffic is growing, and the cargo ships themselves are getting bigger.

A growing number of ships are too big for the Canal to handle. They simply can’t fit through the Canal.

Without modernization, the Panama Canal would become a relic of another age.

The Panamanian government knew it had to adapt and modernize or fall forever behind.

That’s why, last year, Panama approved an ambitious enlargement and modernization of the Panama Canal.

Two extra flights of locks will be built to accommodate the larger shipping vessels. When the massive project is completed in 2015, capacity will nearly double.

Adapt or become irrelevant: we stand at the same crossroads in Latin America.

While Asia and other regions work to make their countries friendly to trade, we cannot be comfortable with the status quo.

There is great incentive for us to act, both on a government level and in the private sector.

Increased intra-Americas trade can mean: better standards of living for our people, higher GDP growth, increased tax revenue, more profitable companies with adaptive supply chains, and a stronger competitive role in the global economy. We all want that.

So, the questions are: will we make the right choice? Will we do what’s necessary to reach our potential?