In 2008, the nation will elect a new president. The three remaining candidates-Senators Barack Obama (D-IL), Hillary Clinton (D-NY), and John McCain (R-AZ)-each represent dramatically different scenarios for the logistics sector. The outcome of the election has implications for the supply chain sector that companies and managers should prepare for and perhaps find opportunities that can be pursued.
While the countless debates, interviews and analyses in the national media have covered many of their differences, little has been brought out about their views and likely impacts on logistics and supply chain topics. Benjamin Gordon, managing director of Palm Beach, Fla.-based BG Strategic Advisors LLC, is a well-known industry voice who has led the most active investment bank for the supply chain and logistics sector for nearly a decade. He has reviewed the candidates' records and has reached a few conclusions about how each candidate might act on a variety of important issues.
Q: Which logistics issues are actually going to be impacted by any of these candidates?
Gordon: There is a long list, but the most important would include a new unionization drive, dramatically increased cargo screening, the growing cost of compliance, threats to NAFTA and free trade, and the likelihood of tax hikes.
Q: How do you see unionization in the logistics industry being influenced by the leading candidates?
Gordon: Congress has been considering a little-known bill that could have enormous implications for supply chain companies. This bill could actually be enacted after the presidential election. The Employee Free Choice Act could enable unions to mount drives via a new tool: the public vote.
Historically, employees voted for or against a union via secret ballots. However, under the recently-proposed Employee Free Choice Act, employees could be pressured to vote for unionization via public election, not private ballot. Hence, if a majority of employees were to vote for union representation through what is called Card Check, the National Labor Relations Board (NLRB) would be required to recognize the union. In the Card Check process, all the union needs to do is gather a list of employees declaring their support. If the list reaches a majority, the company can be forced to go union.
The implications are dramatic. Post-Card Check, employers could lose the right to request an election or respond by educating their workforce on the pros and cons of unionization. Many non-union companies fear that Card Check will put their companies at much greater risk of union drives.
On Card Check, the presidential candidates split on party lines. Democratic Senators Hillary Clinton and Barack Obama have both expressed their commitment to passing the Employee Free Choice Act legislation. Conversely, Republican Senator John McCain co-sponsored the opposing Secret Ballot Protection Act. With a Democratic Congress, a Democratic Senate, and polling showing a lead for the Democratic Presidential candidates, it appears very possible that we will see a Card Check bill pass.
Q: You mentioned cargo inspection. Ever since 9/11 there has been increasing pressure at the Federal level to do 100 percent cargo screening, and a law has been passed that could allow this action. Do you think this is likely to happen, and what would the cost of compliance be for the industry?
Gordon: The Department of Homeland Security has been pursuing initiatives to create 100 percent cargo screening, but sometimes with little regard for how to implement or pay for it. The burden is likely to fall on freight forwarding, customs brokerage, and international logistics providers.
As you allude, one recent development is the 100 percent inspection initiative. Ever since 9/11, Congress has debated legislation to screen all cargo. Some have objected that the commercial implications could be devastating. According to Jim May, president of the Air Transport Association, 100 percent physical inspection of cargo could shut down that part of the economy.
Nevertheless, the Democratic-controlled Congress passed this proposal, now Public Law 110-53, as part of the 9/11 Commission Report Implementation Act. As a result, the Transportation Security Administration (TSA) must achieve 100 percent of air cargo screening by August 2010. TSA may impose an unfunded mandate, requiring supply chain companies to take on the costs and responsibilities of screening and certifying all cargo prior to arrival at an airport. We are already beginning to witness these changes in cargo on passenger planes, where "known shipper" rules are deemed to be non-transferable.
The implications for the supply chain could be devastating. Potential consequences include increased costs of compliance, delayed shipments, increased prices, and reduction in air cargo. Small and medium-sized supply chain businesses that lack deep pockets may not survive the onerous requirements.
All three presidential candidates voted in favor of this inspection bill in the Senate. The trend toward heightened global security legislation and increased costs for supply chain businesses is bi-partisan and will likely continue. It is likely that small businesses that cannot invest aggressively in new technology, services, and compliance costs will find it difficult to compete. Many such companies will consider a sale or merger.
Q: The North American Free Trade Agreement (NAFTA) is one supply chain related topic that has been in the general news. How do the candidates differ on NAFTA and free trade?
Gordon: NAFTA really frames the differences between the candidates. Since 1994, NAFTA has removed trade barriers in the form of tariffs between the United States, Mexico and Canada. Both of the Democratic presidential candidates have attacked NAFTA. For instance, Senator Obama announced his opposition, arguing: "Trade deals like NAFTA ship jobs overseas and force parents to compete with their teenagers to work for minimum wage at Wal-Mart." Senator Clinton has echoed this criticism, joining Senator Obama in calling for a renegotiation of NAFTA.
Conversely, Senator McCain has spoken out in favor of NAFTA and other free trade accords, saying, "I believe that those agreements should be kept."
Q: If international tariffs are reinstated by the next party in power, what implications will that have on cross-border supply chain companies and their partners?
Gordon: The U.S. logistics sector depends on international trade. Over the past decade, global freight forwarders have enjoyed growth in excess of 10 percent. In turn, this trade has had a ripple effect on the entire supply chain, benefiting warehousing, trucking and logistics companies across the board.
If the new president presses for international tariffs, we could see a major slowdown in the supply chain sector. Particularly hard-hit will be freight forwarders. If, as President Kennedy once said, a rising tide lifts all boats, then tariffs will have the opposite effect.
However, there could be a few isolated winners. Those companies that are nimble enough to respond, large enough to invest in technology, and smart enough to anticipate changes could actually achieve increased growth. As trade barriers increase, shippers will be more dependent on supply chain partners that can use creativity and niche expertise to ensure successful freight flows.
Hence, increased tariffs will be harmful to most supply chain companies. But, as we move toward a "winner take all" marketplace, a handful of large, technology-savvy freight forwarding and logistics could actually benefit.
Q: Who gets taxes cuts or increases is another hot topic in the news, but how does that issue impact the logistics and supply chain industry?
Gordon: The Bush tax cuts are another example of an endangered policy that engenders opposite reactions. The Bush tax cuts were extensive. The Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA) lowered individual income taxes for all taxpayers. In addition, the Act lowered the top income tax rate from 39.6 percent to 35 percent. Thereafter, the Jobs and Growth Tax Relief Reconciliation Act of 2003 (JGTRRA) slashed the maximum capital gains and dividends rates from 20 percent and 35 percent, respectively, down to 15 percent.
These tax cuts were favorable for M&A. Logistics mergers boomed during the reduced capital gains era, in part fueled by the reduced capital gains that sellers stood to receive. Deals such as PWC Logistics-GeoLogistics, Jacobson-Wilpak, and CR England-Dynalink all took place during this favorable environment. In aggregate, 2007 represented the most active logistics M&A year ever recorded.
However, current levels are unlikely to continue. Of the three presidential candidates, two propose to raise taxes, and a third could end up doing the same. Both Senator Clinton and Senator Obama support higher rates. Senator Clinton has proposed increasing maximum capital gains to 20 percent, income taxes to 39.6 percent, and dividend rates to 39.6 percent. Senator Obama also supports a 39.6 percent maximum income tax rate. In addition, he would increase capital gains and dividends to 24 percent.
Senator McCain proposes maintaining the current tax levels. However, it is worth noting that Senator McCain is unable to ensure that taxes will not increase. Tax legislation must be passed by the Congress. If the 2009 Congress is solidly Democratic, as currently appears likely to be the case, then Senator McCain may be forced to reach an accommodation. In addition, the Bush tax cuts are currently scheduled to "sunset," or expire, by 2011, at which point they revert to the pre-Bush higher levels. So it seems reasonable to assume that taxes under a McCain presidency and a Democratic Congress would be unknown.
Q: What does this mean for to the logistics industry?
Gordon: The owners of the logistics firms would be hit the hardest. If you own a mid-sized logistics company, the gain on the sale of that business would vary widely among the candidates.
BG Strategic Advisors, www.bgsa.com
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