The widened Gatun Locks (foreground) on the Atlantic side of the Panama Canal (seen behind) are still under construction, with completion anticipated next spring.
The West Coast ports, including the Port of Oakland, have enjoyed decades of success serving as the point of entry for billions of dollars worth of goods, mostly from China and East Asia. Imports from Asia to the United States generated 9 million American jobs, 4 million in California, Oregon and Washington, in 2014, according to the Pacific Maritime Association. Cross currents in international trade, however, suggest a highly turbulent period lies ahead.
The short term looks good. The ports have bounced back smartly since May when, after prolonged worker slowdowns and federal mediation, yearlong negotiations with the longshore worker unions produced a ratified agreement. Indeed, the ports of Los Angeles and Long Beach had the largest cargo volumes in July and August since 2008.
But a projected slowdown of global trade, changing manufacturing technologies and increased competition will change the conditions that have proved so favorable to West Coast ports.
If there is a significant diversion of containers from West Coast ports, the reduced volume will place job development programs, such as those envisioned in Oakland and the tax dollars funding them, at risk. If Oakland and other West Coast ports cannot accommodate new large ships, they may have to limit their business to local markets.
Economists widely accept that China’s economy will slow from double-digit to single-digit growth. China’s economy is expected to shift toward more domestic consumption, which would result in substantial reductions in China’s exports to the United States.
Changing technologies, including 3-D printing, could further reduce East Asian exports. If goods can be produced at the point of use, rather than imported from Asia, flows of goods will slow. (Many firms, from United Parcel Service to Adidas, already are deploying 3-D printers in part to assess demand and their effect on transportation costs.)
Moreover, Chinese businesses are investing in manufacturing thread near U.S. cotton fields in Southern states (a trend referred to as “reshoring” of manufacturing to advanced economies). This may shorten supply chains to American customers but also could provide increased exports from the United States to East Asia.
An all-water route for larger ships from Asia to the East and Gulf coasts ports will intensify competition for business. The Panama Canal Authority is set to open the enlarged canal in April 2016 or soon thereafter. This will provide shippers from East Asia an all-water route for bigger ships to the Atlantic Ocean. From there, ships can travel north to serve East Coast ports and west to serve the Gulf Coast ports.
This would bypass the West Coast ports, where goods shipped from Asia are loaded on railcars and carried to U.S. destinations by rail. An all-water route would add three to five days of travel time but at significantly lower cost.
Not all trends, however, favor the modernized Panama Canal. Ocean carriers are on a buying binge for ships 50 percent larger than those that even the widened canal can accommodate. Cosco and China shipping, the two largest Chinese ocean carriers, just merged and ordered 11 of these ships (known as Triple Es) to compete more effectively for global container trade. Evergreen, a Taiwanese shipper, also ordered 11 of these ships.
Ports of Virginia, Baltimore, Charleston, S.C., and Miami now have 50-foot channels, and New York-New Jersey is close to completing its enlargement project. Within a few years, they will all be able to unload the biggest ships. The Triple E ships likely also will ply the East Asia-to-Los Angeles route across the Pacific when the ports of Los Angeles and Long Beach can accommodate them. Scale still rules in global trade.
These biggest ships will challenge both the West Coast ports and the Panama Canal Authority to be more adaptive. The canal authority could compete with a favorable toll — one that would enable a lower cost per container and encourage shippers to choose the all-water route rather than shipping the containers to West Coast ports and then moving them by rail to markets east of the Mississippi.
The Trans-Pacific Partnership that the Obama administration just signed with 11 other nations promises to stimulate U.S agricultural exports to East Asia. That could compensate for a decline in U.S imports and improve our overall trade balance.
But there are powerful elements in both political parties who publicly oppose the TPP. Early indications are Congress will not take up ratification until after the 2016 presidential elections, with a highly uncertain probability of ratification.
West Coast ports that are agile and innovative by anticipating and adapting to the future will succeed in this environment. Those that are slow to respond will fail. Millions of jobs hang in the balance.
Michael Nacht is a professor of public policy at the Goldman School at UC Berkeley and a former assistant secretary of defense for global strategic affairs. Larry Henry is the founder of ContainerTrac Inc., a Richmond company that inventories and tracks shipping containers for the seaport and rail industries.
This article was originally posted on the San Francisco Chronicle.