February 23, 2015

Now comes the hard part

With a labor deal in place, the U.S. supply chain has dodged a bullet. But the biggest challenge, strengthening the nation's ocean export competitiveness, lies ahead.

By Mark B. Solomon

Labor peace has finally arrived at the West Coast waterfront. But a five-year contract tentatively agreed to late Friday between the International Longshore & Warehouse Union (ILWU) and the Pacific Maritime Association (PMA) will, by itself, do little to resolve the problems that faced the seagoing infrastructure long before nine months of talks burst into open warfare and threatened to close the country's most vital international commerce lane.

The tentative contract keeps open the 29 ports that fall under the ILWU's jurisdiction, and begins the slow process of returning operations to normal and trying to restore the trust—and business—of the many constituents whose livelihood depends on the port network. Contract details were not disclosed because the agreement hasn't been ratified. Labor and management faced a Friday deadline set by U.S. Labor Secretary Thomas E. Perez to either reach a deal or shift the venue from California to Washington, D.C., and perhaps have face-to-face chats with President Obama—a scenario neither side wanted.

No one disputes the significance of Friday's events. The last contract expired July 1, and with no contract extension in place a strike or lockout could have happened at any time. An alleged work slowdown by the ILWU—which management said took the form of failing to make skilled crane drivers available to load and unload cargoes at dockside—slowed productivity at key ports to a crawl, leaving stocked vessels stranded in the water or stuck at berths. U.S. exporters, who must use West Coast ports to get their goods to Asian markets, watched as their goods sat—and in some cases rotted—in warehouses because import traffic couldn't even be unloaded for their shipments to be laden. The impasse was on track to cost the U.S. economy about $2.5 billion a day if it morphed into a strike or lockout, according to the National Retail Federation.

At the same time, those with a clear-eyed view of the situation recognize that the compact did not—nor was it designed to—address long-standing and widening fissures in the U.S. goods-moving system that were exacerbated, not created, by the standoff.

Port congestion at dock and landside was already a critical concern, and the problems haven't gone away. Ever-larger ships are expected to hit the water in the next two to three years; about 60 percent of the global ship order book is comprised of vessels of 10,000 twenty-foot equivalent (TEU) container units, according to research firm Alphaliner. Because operators of the large vessels must minimize berth times in order to justify the huge investment in them, the ships are likely to call at fewer ports, analysts said. This means more tonnage to be handled by a smaller cluster of ports already straining under the load.

In an ideal world, technology will be optimized at port facilities to ramp up productivity, and to expedite the import loading and unloading process. But the world is not ideal. "West Coast U.S. ports have become over the past decade the least productive, most prone to labor disruption, most expensive, least automated ports in the developed world," Peter Friedmann, executive director of the Agriculture Transportation Coalition, a group representing agricultural and forest products exporters, said in early January.

News of Friday's agreement did nothing to change the group's view. The coalition said in a statement that if "U.S. agriculture is to recover, we will need to see West Coast ports become more efficient, more productive than they were before the contract expired and the disruption initiated."

In the last two contracts, 2002 and 2008, automation was introduced to boost productivity, even if dockworker interests didn't like the idea. As the 2015 contract remains in tentative status, it is unknown what, if any, work-rule changes are embedded in the text. However, in an earlier communiqué, PMA said that it was seeking "no takeaways" from an agreement, implying that management's main objective was to keep the ports running normally.

For importers, the situation could have been far more damaging than it turned out to be. The worst of the impasse occurred long after the pre-holiday shipping season ended. Many importers moved their goods into U.S. commerce over the summer to ensure their availability in the event of a job action. Most import commodities are dry goods that, by definition, are not prone to physical obsolescence. And it's not as if U.S. importers are going to shift their buying away from Asia.

Importers will likely face no bigger headache than delivery delays of six to 10 weeks while the current backlogs are cleared. Those who suffer may be the ports themselves, which saw business diverted to other shipping lanes and gateways. Some of that traffic will never return, though it is believed most of it will. It is still less costly and more expeditious to route Asian imports through the West Coast—and, if needed, move them inland via surface transportation—than it is to route through the Panama or Suez canals.

For U.S. exporters, though, the situation couldn't be more different. Agriculture accounts for a large share of U.S. exports to Asia. Much of that volume is comprised of perishable foodstuffs. Foreign buyers have supply sources outside the U.S. and would not hesitate to use them if U.S. delivery schedules are compromised. There are no other viable ports outside the U.S. that have capacity adequate to accommodate a massive diversion of exports. Vancouver's Port of Prince Rupert—geographically the closest North American gateway to Asia—today handles about 400,000 total TEUs a year, according to consultancy Hackett Associates. By contrast, the ports of Los Angeles and Long Beach, the busiest U.S. port complex, handles about 8 million total TEUs, Hackett said. "U.S. exporters are pretty much stuck with the ports they have," said Ben Hackett, founder of the firm.

Adding to the problem is the chronic lack of access to empty containers to ship Midwest agricultural exports from sparsely populated origin points to the ports via rail or truck. Containers entering U.S. commerce are typically bound for densely populated regions, and vessel operators that have a billion dollars or so invested in the equipment want them to remain there. This makes life tough for growers whose products are in parts of the country where land is abundant but consumers may not be. For example, Minneapolis, the closest large metro area to many upper Midwest grain suppliers, has the most acute shortage of 20- and 40-foot equivalent containers of 19 markets analyzed by infrastructure design consultancy Moffatt & Nichol from data provided by the Agriculture Department.

Walter Kemmsies, who as an economist with Moffatt & Nichol has raised concerns for several years about the equipment imbalance, is not encouraged about the trend's direction. When asked at the SMC3 annual conference in January if anything has changed, he said, "export containers are even tougher to find, and it's more expensive to procure and ship them if you can."

Kemmsies said the contract battle should serve as a wake-up call to "reset" a flawed infrastructure that has undermined export flows and, by extension, American competitiveness in world markets. The key, he said, is to fully embrace the idea of a seamless, multimodal network, and to execute along that mantra.

"Intermodalism is the essence of freight movement. ... It's time to resurrect the (U.S. Department of Transportation's) Office of Intermodalism, and tie infrastructure investment to economic objectives again," Kemmsies said.

About the Author

Mark B. Solomon
Executive Editor - News
Mark Solomon joined DC VELOCITY as senior editor in August 2008, and was promoted to his current position on January 1, 2015. He has spent more than 30 years in the transportation, logistics and supply chain management fields as a journalist and public relations professional. From 1989 to 1994, he worked in Washington as a reporter for the Journal of Commerce, covering the aviation and trucking industries, the Department of Transportation, Congress and the U.S. Supreme Court. Prior to that, he worked for Traffic World for seven years in a similar role. From 1994 to 2008, Mr. Solomon ran Media-Based Solutions, a public relations firm based in Atlanta. He graduated in 1978 with a B.A. in journalism from The American University in Washington, D.C.

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