Strategic Issues Facing Transportation, Volume 1: Scenario Planning for Freight Transportation Infrastructure Investment (2013)

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34 Future Freight Flow Scenarios Four scenarios were created based on the structural axes of level of global trade and resource availability. 3.1 Scenario Overviews Global Marketplace (high global trade and high resource availability) is a highly competitive and volatile world. Open, vigorous trade between virtually all nations has led to market-based approaches to most contemporary challenges. One World Order (high global trade and low or restricted resource availability) is a highly regulated and managed world. Facing global scarcity of key resources, nations establish inter- national rules to ensure their fair and sustainable use. Global trade thrives, but the very visible hand of regulation, at times an iron fist in a velvet glove, shapes its course. Millions of Markets (low global trade and high resource availability) is a world where advanced technological breakthroughs have enabled the United States (and other countries) to become highly self-reliant in terms of energy, agriculture, manufacturing, and other needs. There is increased migration toward smaller urban areas that are supported by nearby regional innovation hubs that can manufacture highly customized goods. Naftástique! (low global trade and low resource availability) is a world where trade has moved away from a single global market toward a number of emerging regional trading blocs. China, Europe, and South America form their own clusters. The United States leads an effort to make North America a self-sufficient economic community. In addition to the two structural axes, the scenarios incorporated a number of other forces. In order to keep the number of scenarios to four, we could not create separate scenarios for each combination of forces. Instead, these were feathered in to help make the scenarios more believable and to provide depth. (See Table 5.) A variety of collateral was developed for use in a Scenario Planning Toolkit to support each of the scenarios. These “immersion tools” included separate brochures with narratives and comparative charts as well as an assortment of introductory and “newscast” videos. The complete Scenario Planning Toolkit can be found on the companion DVD package or online at www.trb.org (search for “Scenario Planning for Freight Transportation Infrastructure Investment”). 3.2 Individual Scenario Narratives In order to provide some additional context while reading how the scenarios were applied, this section contains the narratives for each of the four scenarios. S e c t i o n 3

Future Freight Flow Scenarios 35 3.2.1 Global Marketplace Narrative U.S. firms have established and maintain intense collaboration with companies across the world. The private sector has taken the lead in addressing the pressing issues of the day. Any attempt by governments to get involved in regulating business is seen as unnecessary intrusion. Citizens trust markets and they are more than willing to allow them to “work the magic.” So far, their patience and confidence in the market forces has paid off. Case in point is the now routine hassle-free immigration across most nations and the dramatic increase in global food production. Traditional powerhouses such as Japan, Germany, and the United States no longer control the capabilities and resources needed to manufacture highly specialized, high-value products. Although developing countries are not on par with the advanced nations yet, they have found niches and are investing heavily in developing their industrial competencies. To exploit their comparative advantages, countries are specializing in producing what they do best and rely on other countries—halfway across the world in some cases—for everything else they need. The interconnectedness and speed of this global market has a very clear downside as well: increased volatility. For example, a labor strike in South Korea can have huge ripple effects in a Madison, Wisconsin manufacturing plant. As a result, firms are taking extensive precautions to keep the flow of goods both smooth and secure. Affordable and seamless supply chains are encouraging companies to invest in global manu- facturing capabilities with most large firms using a mix of offshore and near-shore plants to remain low-cost and flexible. The cost of moving goods anywhere in the world is very reasonable, primarily due to new and cheaper energy sources and technologies and non-obtrusive environ- mental regulations. Energy costs, although relatively low, remain extremely volatile because of the continual natural and man-made supply disruptions of oil-based fuels. Raw materials and commodities are brought to the market from all over the world, as there are minimal trade barriers limiting their availability. The free flow of goods is, however, driving extreme volatility in commodity prices, which is a persistent problem for most firms. Therefore, price—rather than access—is the key criterion for choosing a commodity item. Postponement of final product customization until the very end has led to higher value density in products being Driving Force Naftástique! One World Order Global Marketplace Millions of Markets Global Trade Low High High Low (physical) Resource Availability Low Low High High Energy Cost Level High High Low Low Energy Cost Variability Low High High Low Level of Environmental Awareness Same as Today High Low High Population Dispersion Growth in SW Growth in Biggest Growth in Biggest Cities Rise in Mid- Tiered Cities Energy Sources Majority NA Mix Foreign & Domestic Majority Foreign Majority Domestic Level of Migration High w/in Bloc, Low between High High Low Migration Policy High High Low Low Currency Fluctuations Low w/in Bloc High Moderate Low Table 5. Driving forces used for each scenario.

36 Scenario Planning for Freight transportation infrastructure investment moved within the United States. Retail sales are predominantly conducted online, even for grocery vendors. With a significant proportion of the U.S. population living in large and dense cities, individual delivery to residences is the norm in most retail transactions. The collaboration between firms across national boundaries has further expanded the regional markets to the point that they have overlapped and blended into a single, global market, with a minimal set of regulations in place. It is said by cynics that, in this brave new world, “the only regulation is that there are no regulations.” Finally, a true global marketplace has emerged, where ideas, technology, labor, and goods are exchanged freely and quickly. 3.2.2 One World Order Narrative It has become clear that oil production has peaked. Renewable energy technologies have failed to live up to the heightened expectations of replacing coal and oil. The environmental crisis faced by the world’s population has taken on an urgent dimension, as looming scarcity increases social and political tensions within and across nations. Policy avenues are aggressively pursued at a global level to ensure equitable access to clean air, drinkable water, and healthy food for vast populations across the world, as well as the raw materials and energy required to sustain their communities. Fearing conflicts and war over the growing scarcity of vital resources, the governments of the most powerful countries come together to create a supranational entity, the World Sustainable Trade Organization (WSTO), to regulate the use of resources and resolve disputes among nations. While many see the WSTO as a replacement for the World Trade Organization, it is in fact much stronger than the WTO ever was. The WSTO reaches far beyond trade and has been given real teeth for strict enforcement. Also, through monitoring and reporting, it dictates efficiency and penalizes waste, prioritizing usage according to global needs. All world powers and most other countries have signed the Charter of the WSTO, and are working towards full compliance with its regulatory framework. Paradoxically, and despite the forecasts of detractors, global trade has not only remained strong, but it has actually continued to thrive in this heavily regulated world. The regulation-based system of balancing availability and needs did not replace the traditional market-based system of balancing supply and demand. Instead, it has redefined boundaries of the free market, therefore complementing it in unexpected ways. For example, grains are shipped from greener regions where they are produced in abundance to places where the land is not fertile. Metals are shipped in the opposite direction, from the arid yet mineral-rich countries toward the agricultural foci of the world. Technology and labor follow a similar pattern: less developed countries serve as providers of young labor for more technologically advanced countries, which in turn export their technology and knowledge back to the developing countries in the form of finished goods and services. Many analysts describe the new system as one of “global optima” for the long run, where the objective is sustainable use, not just short-term corporate profits. What gives shape to trade flows is not the invisible hand of the market, but a very visible body of regulations. Many people view these regulations as a “green bureaucracy” and a necessary nui- sance. At the end of the day, while individual firms still get to make—for the most part—their own decisions as to what to produce and where, it is in the “how” that the influence of the WSTO’s global bureaucracy and its ever growing tapestry of regulations play an influential role, sending the right signals to the market: how much water can be used, how much CO2 can be emitted, how discards should be recycled, and so forth. As a result, the speed of global trade—once mercu- rial and chaotic in the days of globalization—has slowed down into an optimized order, more entangled in regulations and quotas, yet less volatile and, in consequence, more predictable. Forged by the struggle for survival of globalized markets, firms have adapted relatively quickly to the new demands of a regulated world. Tracking and offsetting of greenhouse gases, even to

Future Freight Flow Scenarios 37 the level of zero emissions, is now a prerequisite for doing business. Manufacturers with similar needs have grouped together to create large-scale facilities, known as production clusters, where they find relief in numbers. They have found it is more cost effective to comply with tight regulations when the cost of required technology can be shared by many. Production clusters, coupled with ultra-efficient supply chains that make use of sensing and advanced computing, are emerging as the greenest solution. Regulations for urban areas have also forced local governments to adapt. Through a series of stick-and-carrot regulations, the WSTO has sent municipalities a clear message: cities must clean up their acts, too. Regulations promote a more efficient use of energy and water in urban areas, a reduction in transportation emissions, and a more effective treatment of waste and sewage. The largest cities in the world now compete for subsidies, and try to avoid penalties, on the basis of improving their performance against a series of sustainability indexes. As a result, large cities have continued to grow even bigger, even as they strive to make their environmental footprint smaller and easier to offset. Regulators have become aware that online purchasing has a much higher carbon footprint than shopping in person. In order to offset the higher per-pound emissions of home delivery, most states in the U.S. have mandated parcel carriers to charge customers a flat tax on all home deliveries. The effect of this tax is felt more on smaller, cheaper packages. Since for consumers it makes little sense to pay a $5 tax for the home delivery of a $10 book, most large cities have seen the appearance of consolidation centers, where goods from many retailers are consolidated and delivered to the final customer only when a certain amount of products have accumulated. This has radically changed “last mile” delivery of goods in metropolitan areas. 3.2.3 Naftástique! Narrative A lack of significant technological advances, coupled with continued growth of the world’s population has pushed the ability of most nations to provide for their citizens. Basic commodities have become scarce. Relationships among world powers are strained by prolonged and intense competition for raw materials and energy sources. Military and political tensions follow. Inward facing policies designed to protect dwindling resources have served to reduce and fragment global trade through tariffs and trade barriers. Regional trading blocs have emerged across the globe. China, for example, has forged a particularly intense alliance with Africa. Many African nations, rich in natural resources and desperate for investments and new technology, found a natural partner in the resource-starved and over-populated China. Intense trade of materials, technol- ogy, and labor started taking place inside this Sino-African economic bloc, with the Yuan as the de facto currency. Other regional blocs have emerged over the past 30 years. The European bloc, trading almost exclusively with Russia and the Middle East, has adopted the Euro. Powerhouse Brazil led the Mercosur bloc; Japan, Korea, and Southeast Asian nations formed a Pacific bloc. Smaller countries were forced to ally themselves with existing blocs to keep their economies alive. However, a few larger nations like India, Venezuela, and Australia decided to remain “unaligned” to any particular bloc and trade with all clusters. The United States formed its own bloc along with Canada and Mexico, called the North American Economic Community (NAMEC). Complementing each other in natural resources, technological capabilities, and workforce availability, NAMEC has emerged as a strong economic cluster. Commerce among NAMEC nations has increased tremendously. U.S. borders with Canada and Mexico are essentially seamless for freight and passenger movements. Widespread use of domestic natural gas and coal, and heavy investment in renewable sources, made the North American nations less dependent on foreign oil. While energy prices inside NAMEC tend to be higher than the historical averages, they are also significantly less volatile than in the past.

38 Scenario Planning for Freight transportation infrastructure investment The United States undertook a re-domestication of manufacturing to NAMEC countries, with a clear emphasis on promoting processes that take advantage of local resources and talent. Migration among NAMEC nations has become fluid. U.S. work visas are issued for millions of young workers from both Canada and Mexico. Millions of aging Americans retire to Mexico and Canada. This influx of retirees has made some parts of the Mexican coastline the “New Florida,” creating new demand south of the border for higher-value goods. Environmental regulations are driven from the bottom-up by activism of the consumers inside the blocs. Previously disparate environmental regulations in Mexico, the United States, and Canada have been uniformed into a stricter corpus of rules. Rising temperatures have increased the agricultural output of countries located in higher latitudes. In North America, Canada’s production of cereals and other agricultural produce has increased dramatically. So far, however, the global increase in temperatures has had no major impact on coastal cities and in the operation of maritime ports. Fixed currency exchange rates are established within the blocs, which in turn has stabilized currency fluctuations across blocs. While the majority of global trade is conducted within regional trading blocs, there is still trade between the blocs. This inter-bloc trade is, however, mostly limited to supplementing technologies and materials that are not available in member nations. Many are surprised that despite the lack of a true global market the regional clusters manage to operate as self-contained trade systems. Inside each of these blocs, trade links have led to stronger political links and a sense of shared purpose. Member nations take pride in working together towards self-sufficiency. 3.2.4 Millions of Markets Narrative The past three decades have been witness to tremendous technological advances and social changes that have led to a high level of regional self-reliance in matters of energy, health, food production, and manufacturing. Not only has the United States as a whole become highly self-sufficient, individual regions and cities have also become much more self-sustaining. The primary drivers of these changes were technical breakthroughs that are collectively referred to now as the “Three Pillars.” The first pillar is energy independence. Advances in drilling techniques and improved seismic testing enabled the economical location, capture, and production of tremendous quantities of natural gas from the massive shale formations along the Atlantic coastline. At the same time, improvements in the efficiency and safety of nuclear generators led to a “Nuclear Renaissance.” Renewable energy sources, such as solar and wind power, while still being pursued, have had only minor impact on the total United States energy production. Natural gas and nuclear power have led to almost complete energy independence for the United States and have facilitated the widespread decentralization of affordable and stable electricity production. This contributed to the growing adoption of initially hybrid but eventually completely electronic vehicles. The second pillar is the widespread use of intelligent manufacturing. These advances enabled the production of small to medium batches of a wide variety of products at reasonable costs. Essentially, the cost advantages of leveraging economies of scale that dominated manufacturing throughout the past several decades of the 20th century were replaced by the ability to cheaply produce a wide range of highly customized products. While manufacturing has not advanced to the stage of “home replicators” that enthusiasts once envisioned, it has led to the development of regional manufacturing hubs across the country. These manufacturing facilities are close to consumption centers and are fueling the expectations of consumers for rapid creation and delivery of highly personalized goods. A key innovation that transformed the manufacturing industry was the separation of the digital design from the physical production process. This has

Future Freight Flow Scenarios 39 in turn lead to the creation of a new industry sector of pure digital design firms that develop and sell small-run or custom designs. The third technological advancement was the widespread adoption and use of virtualization. Working and shopping from home—or from any other location—has become the standard rather than the exception for many people. Most households order products and services directly from the home and receive them there as well. Online shopping with prompt delivery to residences has largely replaced physical stores. People still go shopping in person—but the retail experience has evolved into an event rather than just a way to acquire physical products—similar to how movie theaters adapted when home entertainment systems were introduced. As goods and services have become more mobile than people, there is less physical commuting to work. Ironically, the level of travel for pleasure has increased since a large percentage of the workforce can work from any location. A social change that has emerged over the last several decades is the increase in social inter- action—both virtually and in person. It appears that while people can now work and live totally isolated from other humans, very few actually do. Instead, there has been a groundswell migration towards “livable cities” of a moderate size where people can enjoy the benefits of interacting with others in an urban setting without the drawbacks of an impersonal mega-city. In this widely fragmented, yet highly connected society, small and mid-sized cities are growing at a faster rate than the mega-cities. Local governments compete with each other to attract investments to create “innovation clusters” that feature a mix of technology, manufacturing, and distribution facilities. Technological advancements and cheaper energy have ushered in a new age of affluence: average household income has increased, personal consumption has soared, and standards of living have improved. It is not a technology-utopia, however. The income gap has widened between the traditional “blue collar,” “white collar,” and the newly established “no collar” creative class. Many traditional jobs have been displaced and those workers struggle to find new vocations. This is especially true for older workers who are not as able to adapt to the newer technology. Also, while new agricultural techniques, mainly genetically modified fruits, vegetables, fish, and livestock, have significantly increased the quantity and variety of food products available to consumers; there has been a significant amount of resistance from some sectors of the population. Food considered “100% Organic” is generally available, but at a much higher cost. In this fast-paced environment, the optimal production site is closer to consumption centers. The affluent and savvy buyers of this world demand products customized to their needs and tastes. While American consumers prefer locally produced goods, they are not inherently against foreign products, provided they meet their high expectations of personalization and delivery speed. Trade between countries is still active, but for the first time in history, the value of imported and exported services exceeds that of goods. The United States is a net exporting country when considering services, such as digital designs. Physical trade still occurs, but at a lower level and in different forms. For example, global trade of raw materials has increased while transportation of finished goods has decreased. Raw materials and components are transformed into goods when and where demanded by the final consumer. Also, intellectual property that is used within most local manufacturing is traded freely across the globe although there are some risks concerning theft of these “recipes” and instructions in certain areas of the world.