The Economic Importance of USMCA

The world economy depends on the efficient movement of freight. There is a strong correlation, for example, between truck and rail ton-miles of travel and real gross domestic product (Figure 1). Analogous correlations exist between other freight measures—tonnage of freight or diesel fuel consumption—and GDP.

Figure 1: Ton-Miles and GDP. Source: FHWA Freight Analysis Framework, US Census Bureau

Transportation and logistics also consume a significant proportion of each of our budgets. The freight logistics system costs nearly $4,500 per person, which is spent moving and warehousing goods (Figure 2).

Figure 2: Logistics cost per person in 2008. Source: Murphy

This $4,500 factors into the cost of every product we buy. Anything that industry or government can do to make the logistics system more efficient will return benefits to us in terms of lower cost and greater global competiveness.

Transportation accounts for more than ten percent of our total economy (Figure 3). This percentage includes the costs of personal transportation as well as freight. It clearly highlights the significant role that transportation plays in our society and the heavy responsibility of those who manage transportation facilities.

Supply Chains

Supply chains are the mechanisms by which products and the raw materials from which products are made move from their source to the consumer. In recent decades, supply chains have become much more sophisticated. In part, this is because they are often longer: raw materials, components, and finished products now often move between continents before reaching the consumer. In part, it is also because businesses have become much more concerned about the efficient management of those chains. They have come to understand that the competition is not between individual businesses, but between supply chains that may include many businesses. The supply chain that is most efficient will be able to deliver a product to the consumer at the lowest cost.

At one time, the typical management structure was what was known as push-logistics. Under this management approach, manufacturing facilities and distribution centers simply shipped what had been produced to the retailer and hoped they would sell the product. The result was often large inventories and losses due to obsolescence, both of which increased the cost to businesses. Pull-logistics was introduced as a response to these costs. As the name implies, pull-logistics uses inventory management and communications systems to determine when additional product is needed and to signal back through the supply chain to trigger its delivery, and, in many cases, its production.

Considering a simple, frequently used product provides another way to understand supply chains and the importance of freight. A study funded by the American Association of State Highway and Transportation Officials (AASHTO) illustrated the long and winding road followed by a box of cereal. The trip begins in the wheat fields of the central part of the nation. The wheat is then stored, processed, distributed in its processed form, and then sent to retail centers where it is sold to the customer (Figure 4).

Figure 4: The journey of cereal. Source: AASHTO

Kansas is a major producer of beef, accounting for 17 percent of the nation’s total output. Each year 3.7 million cattle are finished on 369 feedlots in Kansas. Many of the animals and much of the feed are imported from other states. The finished products are sold across the nation and the world. A complex, multi-modal supply chain moves both the raw materials and the finished.

Drivers of Growth in Freight

We might also consider whether the forecasted growth in freight will actually happen. Based on recent trends and other forecasts, the answer again seems to be yes. AASHTO identified four major drivers of freight demand: consumption, production, trade, and supply chain management.

Consumption and production are closely related. As the population grows, consumption will increase. As our population grows, our economy grows to supply the product, services, and jobs that population requires. The US population was 308 million in 2010 and is expected to reach 420 million by 2050. Over the past twenty years, our economy has grown by more than 50 percent (Figure 14). During the same period, the population increased by 59 million people.

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