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Love It or Hate It, Trade Is Driving Economic Recovery

Buyers and sellers appear generally optimistic about the prospects for trade and the economy this year. Let's hope they're not whistling in the dark.

Love It or Hate It, Trade Is Driving Economic Recovery

Regardless of whether you're for or against free trade, it looks to be driving near-term global economic recovery. That, at least, is the conclusion of a new survey by Panjiva, which tracks trade data.

Panjiva's latest report, The State of Trade in 2014, finds "somewhat" or "varied" degrees of optimism among 64 percent of respondents. "Those are pretty encouraging numbers," comments Panjiva chief executive officer Josh Green. "They line up with what we saw in our transaction data last year." In 2013, the total number of shipments at U.S. ports was up 6 percent over the prior year.

Green believes the latest trade-activity findings reveal a general trend of economic improvement on a global scale. Still, the report contains a few caveats.

For one, 10 percent of respondents said they were "somewhat" or "very" pessimistic about the state of trade. They were worried about two issues: rising wages in manufacturing "hotspots," and what Panjiva calls the "lingering" possibility of a slump in global demand. In fact, more than 20 percent admitted to being uneasy about the latter scenario.

So it's either sunny skies, or an approaching polar vortex.

Green doesn't discount the oddness of the variance of mood among traders. "It's almost contradictory," he says, while speculating that the nervousness signals "a bit of a hangover with respect to the last few years." Companies are still feeling the bruising effects - whether physical or psychological - of the most serious economic downturn in decades.

"Even as things start to improve," he says, "a lot of people still have that pit in their stomachs. They're wondering whether things are going to go bad again."

Fears of another global recession can only be stoked by recent disappointing results in Brazil, Russia and India - supposedly promising economies that make up three of the four letters of the BRIC acronym. The fourth, China, has its own problems, in the form of heavy overbuilding of infrastructure, a questionable banking system and the challenge of shifting to an economy driven by domestic demand. Then there are the sick patients of the European Union - Portugal, Italy, Greece and Spain - the so-called PIGS.

Green prefers to remain bullish on the economy in 2014 - after all, 64 percent is a fairly healthy show of optimism, when you're talking about companies trying to survive in unpredictable global markets. That said, the Panjiva report contains several key findings of interest.

The first should come as no surprise: "China remains a sourcing powerhouse, for now." Nearly three quarters of respondents said they were "actively looking" for suppliers outside the country, but few have yet to make the move.

There's been plenty of talk of companies reshoring their manufacturing to other parts of Asia, Mexico, or even the U.S. Green says early moves in that direction will mostly be for products that require low levels of skill among workers, with commensurately low wages. China, which has seen a sharp increase in factory wages over the past few years, continues to be a strong source of production for more sophisticated items. (And less as well: it's still responsible for 80 percent of the toys sold to western countries, according to SΓ©bastien Breteau, founder and chief executive officer of AsiaInspection.)

Interestingly, Mexico doesn't figure high on the list of sourcing options cited by survey respondents. Companies might be frightened off by a wave of drug-related violence in certain parts of the country. There's also the issue of a new Mexican tax law which will likely raise the cost of producing within the country's maquiladora plants, Green says.

In any case, manufacturers don't change sourcing strategies overnight. Despite a rash of deadly fires and a building collapse in Bangladesh within the past year, there's been no mass exodus of production from that country. Either Bangladesh offers too attractive a source of cheap manufacturing, or companies have decided to invest in making working conditions there better, Green says. In fact, following the Rana Plaza office building collapse, which killed 1,129, major apparel brands and retailers signed a binding agreement to improve fire and safety codes in the country.

Topping the report's list of sourcing alternatives to China was Vietnam, mentioned by 22 percent of buyers. More surprising, however, was the 9 percent who cited Africa. For years, the continent has waited its turn as the next big place for offshore manufacturing, but that promise has so far failed to materialize. "It was nowhere in our last survey," says Green. "At least it's starting to show up."

Then there's the U.S. General Electric, Apple and Whirlpool are a few of the American brands that have made fresh commitments to manufacturing domestically. But don't hold your breath waiting for a handful of announcements to trigger a lasting trend. Seventy percent of respondents to the Panjiva survey cited price as a major hurdle to sourcing in the U.S. Those choosing to make the leap will, for the most part, be sellers of goods that are produced in a highly automated environment, meaning few new jobs for American workers.

Meanwhile, cross-border trade thrives. December of 2013 recorded the highest level of U.S. imports for that month since 2007, Panjiva reports. And a recent report by Zepol Corporation found U.S. containerized imports in 2013 at a six-year high, when measured in 20-foot equivalent units (TEUs).

Even if trade figures for early 2014 show a seasonal decline, "I think the positive economic news coming out of [the fourth quarter of 2013] is going to put business in a buying mood," Green says. And we'll have trade to thank for it.

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