Iceberg straight ahead

Is anyone in charge? The global shipping industry cannot afford to go off the US fiscal cliff

November 14, 2012
Obsession
Fiscal Cliff
November 14, 2012

The US Congress returns to Washington and faces the first item on President Barack Obama’s to-do list: reaching a compromise to avoid the so-called “fiscal cliff.” Obama stressed his desire to work across the aisle in his reelection acceptance speech, but given the track record of the House Republicans over the last four years, fears of a daredevil-style cliff dive this lame-duck session are very real. Business leaders who play a vital role in global trade are waiting to see if Congress will let the country go over the cliff in the name of partisan politics or if members will finally put their differences aside and come to some sort of compromise.

One of the industries anxiously watching this cliff—which refers to the debate over taxes and spending—is the shipping industry, which provides one of the biggest arteries in today’s global economy. They are following the outcome closely and they have good reason to be worried. Consider this: 95% of everything in your household moved on a ship.  By looking inside those containers and seeing the amount and quality of the products being transported by vessel, the shipping industry can be used as both a crucial forward-looking and backward-looking indicator on the health of economies around the world.  If there are upticks in product/commodity demand or a slowdown in orders, the shipping industry notices it first.

With fears of the United States going off the fiscal cliff (that means drastic, automatic spending cuts and tax increases), shipping magnates wait to see if confidence in the United States will suffer. Already some say political inaction has had an impact on global trade.

“There’s not so much wrong with the global economy. What is wrong is that there are no leaders,” said Jacob Stoltz-Nielsen, founder of shipping company Stolt-Nielsen. “No one seems to be able to take charge. In America today they are just bickering about peanuts instead of getting together and discussing other changes that they can make, and find a common ground. But right now, they’re not doing anything, and now things are getting worse and worse…until someone is a leader; until we have a Churchill or Eisenhower. We need people to take charge. If not, the impact of this lack of leadership will continue.”

Some fear that the consequences of such inaction will cause creditors of the US to question the size of its debt load. If they do, it would re-orient the cost of capital. Charles Fabrikant, chairman of SEACOR Holdings, said he is worried that he’ll wake up one day and America will be paying 6-7-8%  interest for borrowing:

I’m not going to sit here and try to make predictions and stick with them. Next year, or the year after, or even in 2016, interest rates could be close to today’s levels. However, if I woke up in 2014 and Uncle Sam is paying 8% for Treasury bills, it wouldn’t knock me over.

Across the pond, bank executives like Kristin Holth, executive vice president at DNB Bank ASA, Norway’s largest financial services group, said America’s ranking in the world is slipping because of political squabbling:

We are following the activity in the US very closely. The US is a crucial part of the capital markets so whatever happens in the US is important for all of us. I am very disappointed with what I see in the US. I’m very disappointed by the United States’ politicians. Because of this political polarization, they lack not the ability but actually the willingness to make decisions.

One of the biggest differences between the United States and countries like Greece is the former’s ability to print currency, but Loews Corp. chairman and CEO Jim Tisch said while it’s much easier for the United States to monetize its debt, the United States is actually in worse shape than Europe. “…Our debt-to-GDP, government deficit-to-GDP that has to be financed every year, is greater than the deficit-to-GDP in Europe.”

Frustrations over the fiscal cliff and the business climate are running high in the shipping industry. “Why would I come to the US where you will have high tariffs and environmental problems with the authorities because people want to create problems?” said Robert Yildirim, president of Yildirim Holding AS.

Thirty years ago when I came to the US it was a dream for everybody. That’s not the case anymore. Many Americans are looking for an easy way to make money. They are not willing to work the hard labor. America needs to build itself by enlightening the people who have the money. Instead, people are investing in China, or somewhere else. But the US, I think, has an opportunity today because of their energy resources. If I were them, I would give incentives to companies to set up shop, invest money and create jobs here in America.

The importance of free trade and its hand in strengthening the global economy has never been more evident in the past 20 years. The amount of people participating in the global economy has skyrocketed from 1 billion people to around 4 billion. Austan Goolsbee, former director of the President’s Council of Economic Advisers and an economics professor at the University of Chicago’s Booth School of Business, says this boom is because of free trade.

It is not only access to the US, but it is also arguably the single most important thing for the development of emerging economies. The ability to export on trade has been a central pillar for bringing a billion people out of poverty in the last 15 years. China and India have seen a huge boom in development, moving up from poor countries to middle-income. Historically, free trade is fundamental for innovation. Countries that trade are more open outside of their borders. They are open to new ideas, which spark innovation and economic growth.

With Congress’ not-so-stellar track record in reaching compromises, Seaspan CEO Gerry Wang said one of the biggest challenges facing the global economy is getting business leaders to understand the opposing realities of economics and politics and the impact of their decisions.

The common refrain across these industry leaders: the demand that sovereign nations start repaying what they have borrowed so that the global economy can recover. If not, they say, the recovery will not be quick and the pain will not be limited to ships and cargo, but to their destinations and recipients as well.

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