Trends in International Trade and Logistics and Implications for the Future Role of Indiana

1. Trends in International Trade and Logistics and Implications for the Future Role of Indiana September 16, 2003 Indianapolis, IN Martin Associates 2938 Columbia Ave., Suite 602 Lancaster, PA 17603

2. International Trade Has Been a Growing Sector of the US Economy Value of Trade in Goods

3. Trade in Goods is an Increasing Share of US GDP 15.5% 18.1% 20.2% 18.4% 13.3%

4. Exports from Indiana Have Shown Strong Growth in the 1990’s -- 13th in Terms of Growth in State Exports and Nearly 8% of GSP

5. Ships and Barges Transported the Majority of the US Trade in Terms of Value 2001 Bureau of Transportation Statistics

6. Ships and Barges Transported More than Three-Quarters of the US Trade in Terms of Tonnage 2001 Bureau of Transportation Statistics

7. The Marine Transportation System is Critical to the Country’s Economic Growth • Deepwater Ports and Ocean Transportation, including the Saint Lawrence Seaway • Great Lakes Transportation System • Inland Waterways

8. The MTS Handled 2.3 billion Tons of Cargo in 1999

9. In Addition to Cargo Transportation, the MTS Also Consists of: • 168 Ferry Systems operating in the US • Commercial Fisheries -- 4.6 million tons of fish landed at US ports in 1999 • Travel and Leisure – 8.3 million passengers boarded cruise vessels at US port facilities

10. The Marine Transportation System is Vital to the US Economy • 2.5 million jobs directly or indirectly supported by the MTS • 4.9 million jobs in the US supported by the production of the products exported via the MTS • These 7.4 million jobs account for nearly 6% of US jobs

11. Impact of International Trade Transported by the MTS • 1.1 million total direct, induced and indirect jobs • $44 billion of direct, induced and indirect personal income • $56 billion of direct transportation services revenue • $11.1 billion of Federal taxes • $5.1 billion of state and local taxes

12. The MTS Moved $182 Billion of Export Product to Foreign Markets • 4.9 million Americans are employed in the production of the exports: • 840,000 jobs in the agricultural sector • 757,000 jobs in the electronics manufacturing sector • 620,000 jobs with automobile production sector

13. The Value of the Inland Waterway System • 12,000 mile network of navigable waterways in the US with a replacement value of $125 billion • 51% of nation’s oil refineries located along the inland waterways

14. The Value of the Inland Waterway System • States bordering the Mississippi, Illinois, Ohio, and Missouri River System are responsible for: • 82% of the nation’s corn • 77% of the soybeans • 32% of the wheat

15. The Inland Waterway System Provides a Cost Effective and Environmentally Friendly Alternative to Surface Transportation

16. Implication #1: The efficient performance of the MTS is critical for the future competitive position of the US and the State of Indiana in international trade. However, both structural and non-structural constraints could impact future performance.

17. Structural Constraints/Issues -- Deepwater Ports • Channel Depth • Post Panamax ships require depth of 45 ft. or greater • Only 7 of the nation’s deepwater ports have channel depths in excess of 45 feet • Capital investments are needed to provide deeper harbors • Maintenance dredging is a key expense

18. Existing Channel Depths Source: JWD

19. Terminal Infrastructure is Strained • Terminal capacity constraints appear with growing demand -- 8-10% annual growth in trade, particularly in the West Coast/Southern California port range: • Productivity gains less than in US manufacturing • Low density utilization of US container ports, inefficient use of scarce land • Capacity issues at container terminals exacerbate productivity • Technology adaptations will eventually lead to better capacity utilization

20. The US Lags in Terminal Densification Source: JWD

21. Structural Constraints/Issues -Inland Waterways • Small size of locks increases congestion, in turn impacting transit times and carrying costs • 15% of locks are 1,000-1,200 ft. long • 60% are 600-900 ft. long • 25% are less than 600 ft. long

22. Structural Constraints/Issues -Inland Waterways • 1,200 ft. lock can accommodate 17 barge tow compared to 8 barge tow for 600 ft. lock • Majority of tows on Mississippi are 12 barge tows -- tows must be split to navigate smaller locks • 50% of the locks are 50 years of age or older

23. Structural Constraints/Issues -Inland Waterways • National Corn Growers Association reports lock delays on the Upper Miss. cost farmers $94 million per year in the mid 1990’s • 2020 losses could amount to $384 million annually if locks are not replaced

24. Non-Structural Constraints/Issues - Security • Security costs competing for infrastructure funding: • Optimal level of inspections and security measures -- commercial vs. security trade-off’s

25. Non-Structural Constraints/Issues - Security • Impact on logistics strategies: • Increasing inventories -- costly • Impact on distribution strategies -- decentralization vs. centralization • Supply chain interruptions -- plant closures • Increased dependence on domestic sourcing -- infrastructure of waterways, highway and rail are key!

26. Non-Structural Constraints/Issues -- Labor Issues and West Coast Work Stoppage • Labor work stoppages/slowdowns have increased in frequency in last 2-3 years: • Most pronounced -- West Coast Dock Shutdown and work slowdowns --Taft-Hartley outcome

27. The West Coast Port Shutdown, September 29, 2002 -- 11 days • Vessels delayed about 25 days on average • Lost one full rotation • Daily cost $15,000-$40,000 per ship • 3 key carriers reported $30 million loss • Marine terminals • Lost wages for hourly workers --11 days • Fixed operating costs of terminals continued • Productivity reduced for 5-7 weeks • Railroads did not accept bulk cargoes

28. The West Coast Port Shutdown • Trucking • Turn times more than tripled for 5-7 week period • Truck turns per driver reduced to 1 per day -- lost income and withdrawal from industry • Freight consolidators • Closed during shutdown • Need for additional space -- remote storage, increased drayage, inventory carrying costs increase

29. The West Coast Port Shutdown Railroads • Intermodal and bulk trains serving West Coast halted during shutdown: • equipment demurrage charges • shortages of equipment • domestic repositioning issues • Need to find siding for 150 miles of trains during 11 day period • Locomotives not allocated properly • Quota system established by railroads after re- opening to allocate rail cars to ports • One railroad reported a $4-$5 million loss during shutdown

30. The West Coast Port Shutdown Importers/Exporters • 11 days shutdown resulted in 3-4 weeks of delay in products: • Lost sales -- 10%-15% of imports lost during shutdown • Inventory carrying costs • Use of air cargo (10% of shoes, apparel, toys and electronics) -- 10-15 times ocean freight rate levels • Diversion to East Coast for 2% of daily imports at 50% increase in costs

31. The West Coast Port Shutdown Importers/Exporters • Retail sectors hardest hit: • Apparel • Toys • Electronics • Auto industry suffered key impacts in terms of plant closings: • NUMMI in Fremont, CA • Honda in Lincoln, AL • Mitsubishi in Illinois

32. The West Coast Port Shutdown Importers/Exporters • Shutdown resulted in 5% market share loss for US grain exports ($135 million loss) • Banana importers lost more than $1 million in banana sales due to spoilage • Meat exporters incurred increased refrigeration and storage costs

33. The West Coast Port Shutdown, September 29, 2002 -- 11 daysIn summary • 5-7 weeks of follow-on impacts • $15.6 billion cost to the economy • 20,147 full-time jobs lost

34. Implications • Specific investments in infrastructure and technology are required to just maintain the MTS. • Improvements in efficiency of the system are necessary to position the MTS for its growing role in international and domestic trade. • Exporters and importers must develop contingency plans to deal with security issues and labor uncertainties.

35. The Ports of Indiana are Well Positioned to Participate and be a Leader in the Marine Transportation System • The Port of Burns Harbor provides a gateway for: • International cargo • Trans-lake cargo • Domestic cargo

36. The Ports of Indiana are Well Positioned to Participate and be a Leader in the Marine Transportation System • The river ports at Southwind and Clark Maritime Center provide low cost transportation for steel (domestic and international), coal, grains, other raw materials

37. The Ports of Indiana are Well Positioned • The Indiana Ports System can provide valuable transportation logistics services to improve the competitive position of Indiana in international trade

38. The Ports of Indiana are Well Positioned • Potential to move trucks off congested highways: • Ferry services on the Lakes • Synergy between the river system ports and Burns Harbor could provide alternatives to truck and rail transportation

39. Immediate Constraints/Issues Facing the Indiana Ports System • Limited draft on the Seaway • 9 month shipping season • Competition with coastal ranges and rail infrastructure -- capitalize on intermodal opportunities to compliment marine system • Dependence on the steel industry at Burns Harbor to drive international trade -- Diversify maritime markets • Conflict between international transportation and logistics interests and the domestic steel industry – Section 201 Steel Tariffs.