California’s port dominance is waning as US freight shifts east

California has suffered a series of economic setbacks this year, from torrential rains that flooded farmlands to the collapse of three regional banks. Now the state’s $2.8 trillion freight industry is in jeopardy.

Southern California’s ports have grown in tandem with China’s rise as a global trading power, transporting almost 40% of Asia’s containerized imports to the US over the past two decades. But the pendulum is swinging east as pandemic backlogs pushed the Los Angeles and Long Beach complex to the breaking point and allowed ports from New York-New Jersey to Houston to increase their market share.

A gradual shift was already underway. But it’s being charged by simmering negotiations over West Coast dockers, the near relocation of factory production amid rising tensions with China and the shift of US population growth to the Sunbelt states.

Some observers fear that LA’s Long Beach docks will struggle to remain America’s No. 1 sea gateway in the long run.

“Now that pandemic freight volumes have leveled off, the decline in market share has accelerated,” said John McLaurin, president of the Pacific Merchant Shipping Association, in its April trade report.

With negotiations between nearly 22,000 West Coast dockers and employers approaching the one-year mark this week, timid logistics managers are taking action to avoid potential strikes and lockouts by shifting supply routes away from LA’s San Pedro Bay. Due to shortages in the pandemic period, companies place more emphasis on reliability.

Many remember contract negotiations in 2014, which dragged on for nine months and led to ship jams and shortages of some consumer goods. Those talks eventually ended when the US government intervened, but it took most of 2015 for the shipping industry to return to normal.

This time around, operations in the 29 West Coast ports have been largely smooth since the International Longshore and Warehouse Union-Pacific Maritime Association contract expired on July 1, although recent disruptions in LA-Long Beach have brought renewed calls for White House involvement.

The standoff “could pose an entirely avoidable, self-inflicted obstacle to the U.S. economy,” said Jessica Dankert, vice president of supply chain at the Retail Industry Leaders Association. “Retailers will continue to work to protect consumers from the impact.”

According to RILA, which includes Home Depot Inc., Target Corp. and Best Buy, several importers have taken the more costly step of diverting some or all freight away from the West Coast and will stay away pending an agreement being ratified by Co.

Changing demographics in the US are also a factor — California’s population has shrunk by about 500,000 since 2020, while places like Texas and Florida are growing faster than ever.

The big winner? ports on the Gulf Coast. An April Descartes report showed that container volume on the west coast fell by 10% in the first quarter of 2023 compared to the same period in 2019. However, Gulf ports have seen a 43% increase in goods over the same period, and much of the incoming cargo includes electronics, furniture and machinery – products normally imported from Asia.

LA and Long Beach sit at the nexus of a logistics system largely geared toward delivering freight by trains and trucks to the two major local population centers and to cities across the country — often through warehouses, distribution centers, and store shelves that span over 2,000 miles (3,219 kilometers) extend to Chicago.

Ports like those in Texas, Alabama, Georgia and New York that are capable of accommodating larger ships navigating the Panama and Suez canals have invested years and billions of dollars to expand their capacity — deepening canals, Add warehouses, upgrade railroad connections, and even build a large bridge – so cargo can flow more efficiently to the Midwest and across the South.

Consider what the Georgia Ports Authority just announced: the opening of the Mason Mega Rail Terminal, a five-year, $220 million investment project billed as the continent’s largest intermodal port facility. It promises delivery to places as far away as Dallas or Chicago within three days – the average time containers currently spend at the docks in LA’s Long Beach.

To win

Southern California’s ports still have major advantages: they offer the most direct route from the Asia-Pacific region and they have twice the capacity of their closest competitor New York-New Jersey.

They also offer intermodal rail transport and a vast network of truckers hauling cargo to the country’s largest distribution center in the Inland Empire. At US$1.1 trillion, Los Angeles-Long Beach-Anaheim had the second-highest GDP of any US city in 2021.

But a third of the containers in San Pedro Bay are increasingly “available” and the twin ports are at risk of becoming more of a regional hub, according to marine economist John Martin. This so-called discretionary freight generated $19.3 billion in 2021, according to a report by Martin Associates commissioned by the PMA.

The supply chain industry powers nearly a third of the state’s economy and supports one in five jobs in California. Even a small drop in cargo volume over the longer term could result in a cascading loss of jobs, starting at the docks and spreading through technology, consulting, transportation, warehousing and retail.

“Every time we see such a significant slowdown in volumes, every segment of the supply chain feels it,” said Noel Hacegaba, chief operating officer for the Port of Long Beach.

Terminal operators in the ports of LA and Long Beach paid out about 400,000 shifts to longshoremen in the first quarter of 2023, down about 25% from the same quarter of 2019, according to data from the PMA.

According to data from FreightWaves, Southern California truckload bidding volume, a measure of market demand, was 23% lower than in April 2019. The decline contrasts with national truckload levels, which are still up from pre-pandemic levels climb.

LA port leaders are using the volume slump to ask for infrastructure funds to improve their prospects.

In a recent trip to Washington, Port of LA Executive Director Gene Seroka campaigned for a share of the $17 billion in federal dollars earmarked for ports and waterways. He’s looking for funding for digitization efforts “to make freight flow smoother,” cleaner equipment to reach the zero-emissions goal and support for a new staff training facility.

Some port customers will ship their goods back to Southern California once contract talks are complete, which will be critical for the region to remain a vibrant supply chain hub.

“Haulers aren’t thinking about going backwards just yet, but neither are they saying never,” said Anne Reinke, executive director of the Transportation Intermediaries Association.

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