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cii-usa newsletter

October 2008 Newsletter

Nation's Meltdown Not Unique To U.S.

Having been born in New Zealand, lived and worked in Australia and now a proud citizen of the United States, I can say with some assurance that the nation's financial meltdown is not unique to the U.S.. Australia and New Zealand also have experienced in their histories the wrenching shocks of a financial collapse where stock prices headed south, credit dried up, housing prices and sales plummeted, unemployment rose as the nations' "misery indexes" climbed at a rapid rate.

While details of a financial collapse differ among the three nations, the basic reasons are strikingly similar. First and foremost, a lack of and disinterest in regulatory controls over the financial sectors of the economy, allowing greed and avarice to run rampant. Uninhibited speculation in financial paper assets like stocks and bonds, and "hard" assets like commodities. New and clever ways to slice and dice financial obligations like the increasingly popular derivatives that become more profitable to trade than the underlying securities. A casino-like atmosphere replacing the normally staid stock and bond markets.

"Perhaps the U.S. would do
well to have more people
thinking about engineering
actual structures rather than
the "structured products" of
Wall Street."


There is no doubt that the worst U.S. credit crunch and housing collapse since the Great Depression of the 1930s has resulted in no small measure from unprecedented negligence by government and quasi-governmental authorities. Under the Bush Administration, "free markets" have been allowed to inflate like balloons until they collapsed under their own weight. While Senator McCain insisted the economy is "sound," (shades of Herbert Hoover), a number of the nation's largest and oldest financial institutions like Merrill Lynch and AIG are bailed out by belated government action or are sold off like Washington Mutual. While supply siders shrug off the nation's financial calamity with a philosophical "stuff just happens," somebody makes that stuff happen. Full disclosure of just who allowed all this to occur and to apportion blame is the first step in attempting to assure an anxious nation that it will never happen again.

"Under the Bush Administration,
"free markets" have been
allowed to inflate like balloons
until they collapsed under
their own weight. While
Senator McCain insisted the
economy is "sound," (shades
of Herbert Hoover), a number
of the nation's largest and
oldest financial institutions like
Merrill Lynch and AIG are
bailed out by belated government
action or are sold off like
Washington Mutual."


Perhaps there is one sliver of hope amid the encircling clouds of doom. Perhaps the best and brightest of our young people no longer will be attracted to Wall Street and its basic function of shuffling paper. Perhaps many of the country's best and brightest students might now recognize that a new path to wealth isn't working for a brokerage firm or hedge fund but to look elsewhere among more traditional industries.

This is a potentially positive development. It encourages our nation to return to creating, building and doing instead of shuffling paper and trading it. Perhaps the U.S. would do well to have more people thinking about engineering actual structures rather than the "structured products" of Wall Street. If we can turn this potential into reality, our nation will be better off for it.

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  Where Does Air Freight Fit In Amongst All This Gloom & Doom

While the financial markets are reeling, what's happening in our little corner of the world--air freight? Domestic and international volume is down, but we haven't fallen off a cliff. Oil prices (at this writing) have dropped by a third but forwarders and their customers find airlines are only slowly and grudgingly lessening their fuel surcharges. International traffic is down about 3-4 per cent, a rather negligible drop considering the mayhem occurring in other sectors of the economy. Domestic traffic is weaker than international, but this is an old story. Shippers have been fleeing domestic air for lower cost truck for some time.

Surprisingly, ocean shipping is taking it on the chin to a far greater extent than air. West coast port volume is down substantially and east coast harbors are seeing fewer ships dropping anchor there. Importers of apparel, toys, furniture, furnishing and other consumer items that move overwhelmingly by sea have been more cautious about the upcoming Holiday season for some time. They have pared their shipments from Asia and the steamship lines are hurting. Almost every day, announcements are made of cutbacks in ocean service.

"Surprisingly, ocean shipping
is taking it on the chin to a
far greater extent than air.
West coast port volume is
down substantially and east
coast harbors are seeing
fewer ships dropping anchor
there. Importers of apparel,
toys, furniture, furnishing and
other consumer items that
move overwhelmingly by sea
have been more cautious
about the upcoming Holiday
season for some time."


Air, with its emphasis on high value, hi-tech products, is showing far greater resiliency during this downturn. The South Pacific, source of 75 per cent of CII's business, is particularly strong. Our problem is not so much finding business as finding lift. While the majority of our schedules remain direct flights from the U.S. to Australia and New Zealand, we also are using Singapore Airlines to move our freight through its Asian hub. The airline has so-called "fifth freedom" rights which allows the carrier to fly from the U.S. to Australia via Singapore.

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China Rebuilding Its Infrastructure While The U.S. Lags

Readers of our Newsletter are well aware that I am not shy in criticizing China when I believe that criticism is justified. But in one critical phase of development, the nation's infrastructure, China is miles ahead of the U.S. in building new highways, rail lines, sea and airports compared to the United States. Granted, the awarding to China of the 2008 Olympic Games was a huge stimulus to modernize the nation's antiquated infrastructure. Its political leaders saw a huge opening to build almost from scratch a modern transportation system, and took full advantage of this opportunity. During the past seven years, the Chinese have poured more than $500 billion into construction projects, mobilizing the resources of the entire nation. Its people have worked with almost a single purpose to transform its infrastructure from one of the oldest to one of the newest. Contrast these seven years of enormous financial, social and political investments to the U.S.' paltry attempts to modernize our transport system. Our attempt to update the U.S. air control system is a good example of government bumbling and delay. The FAA has been trying to bring the system into the modern, hi-tech era for the past ten years. Its efforts have been stymied by a do-nothing Congress and an indifferent Administration.

Perhaps too many billions of dollars have been funneled into homeland security, combined with the Bush Administration's war of choice in Iraq. Most if not all of expenditures for homeland security are necessary, but how many billions have been wasted in attempting to force down the throat of the air freight industry regulations that would inhibit and perhaps even destroy the ability of forwarders and airlines to move our customers' shipments in a timely and efficient manner.

Of course, the Chinese government doesn't have to worry about public opinion. If they want to build a new highway or new airport, they just clear out the hundreds of thousands of people living in the affected areas without worrying about their opinions. In the U.S., we go to the opposite extreme.

As soon as a project is announced involving construction of new or expanded transport facilities, hordes of lawyers representing environmental and other "good government" groups descend on the courts to gain injunctions to stop the projects. I am convinced that if the two famous bridges in the San Francisco-Bay area, the Golden Gate and Bay Bridge had not been built in the 1930s, they never would have been constructed today because of a slew of environmental and financial objections.

Perhaps we need more of the Chinese attitude. Make the necessary investments in our infrastructure without allowing lengthy and often spurious objections to hamstring the projects. Rebuilding our infrastructure is vital if the U.S. is to prosper and remain competitive.

"Perhaps we need more of the
Chinese attitude. Make the
necessary investments in our
infrastructure without allowing
lengthy and often spurious
objections to hamstring
the projects. Rebuilding our
infrastructure is vital if the U.S.
is to prosper and remain
competitive."

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Politicians Decry NAFTA But It Will Be Tough To Change

NAFTA is generating a great deal of unwelcome publicity during the current Presidential campaign. The trade agreement between the U.S., Canada and Mexico will be generating even more attention as our economic woes deepen. The Republican nominee, John McCain, voted for NAFTA. As a senator from Arizona, a state bordering on Mexico, he believes it should be strengthened.

Democrats, led by Barack Obama, are decrying the trade agreement and plan to amend it drastically if they win the White House. Ironically, NAFTA became law under the Clinton Administration.

Despite all the high profile promises made by the Democratic candidate to change NAFTA, the road to reforming the most famous trade agreement in U.S. history will take a much longer time and will be pitted with more potholes than even the most determined amenders suspect. What is clearly written into the current NAFTA agreement is that all three nations must agree to any changes. NAFTA cannot be renegotiated unilaterlly. Canada and Mexico must agree to any and all changes, before any change goes into effect. Unfortunately, neither nation shows the slightest inclination to open NAFTA to renegotiation.

What kind of balance sheet does NAFTA present after fourteen years on the books?

On the plus side, trade between the U.S., Canada and Mexico has increased. Whether the NAFTA agreement has contributed to this upsurge in trade is debatable. A question honestly can be raised, "would trade have continued to increase without NAFTA?" I believe the answer is "yes." Commerce between nations without any formal trade agreements has increased substantially during the past fourteen years of NAFTA's existence. On the negative side, American jobs definitely have been lost.

"Maquiladora" plants along the U.S.- Mexican border either have been opened or existing factories expanded during the past decade and a half. U.S. manufacturers are taking increased advantage of Mexico's nearness to the United States, cheap Mexican labor and the removal of import duties to build a greater presence in Mexico. Canadian exports to the U.S. have increased enormously during this time, but the rise in volume can be credited primarily to the demands of the U.S. economy for commodities supplied by our Northern neighbor. These commodities, consisting of paper and wood products, oil and raw materials, move almost wholly by rail, truck or pipeline. U.S. exports to Canada, consisting primarily of manufactured products, have remained essentially flat.

Our particular interest, air freight, has benefited hardly at all during the NAFTA years. There has been slight growth by air but that increase has been dwarfed by the enormous rise in surface traffic. Shippers are looking for cheap trucking service, not expensive air.

If trucking firms are willing to move freight between New York and Toronto at 10 cents per pound, who can blame shippers for using them? Surface volume between the U.S. and Mexico also will continue to grow as Mexican truckers for the first time can transit interstate highways.

Will trade agreements along the lines of NAFTA be struck in the future? My prediction, in no way. Protectionism is rising in both parties despite McCain's embrace of free trade. Too many American jobs have been lost and too many regions have been stripped of their manufacturing facilities due to outsourcing, for politicians to dare write, let alone pass NAFTA-like legislation.

"Despite all the high profile
promises made by the
Democratic candidate to
change NAFTA, the road to
reforming the most famous
trade agreement in U.S.
history will take a much
longer time and will be pitted
with more potholes than
even the most determined
amenders suspect."

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Airports Joining The Surcharge Brigade

It's bad enough paying those fuel surcharge tacked on by the airlines. Now, airports are getting into the act. At New Delhi, India, its international airport is charging a " congestion fee" of $15 to each passenger in addition to the airlines' fuel surcharges.

Exactly what is a congestion fee? Because the private developers charged with upgrading and expanding the airport are five years behind schedule, they are charging innocent passengers for the delays, inconveniences and cost over-runs caused by their own incompetence. How's that for sheer arrogance?

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Julian Keeling

Consolidators International, Inc.
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