Market Share Loss or Regression to the Mean?

By Jock O’Connell

For some time now, this newsletter has taken heat for confirming statistically what everyone knew intuitively—that U.S. West Coast seaports have been losing a lot of business to other maritime gateways in North America. So, it is with grateful relief that we now see at least one prominent USWC port director not only publicly acknowledging the obvious but also offering a maritime outlook that departs sharply from the customary forecasts of growth never-ending.

At a June 10 press conference, Gene Seroka, executive director of the Port of Los Angeles, detailed the abrupt downturn in container traffic through his port and the neighboring Port of Long Beach this year. He then spoke of the twenty percent loss of market share the two San Pedro Bay ports had experienced over the past eighteen years. But then, in contrast to previous statements about fighting to regain lost market share, Seroka estimated his port “will have a permanent loss of 15% of our imports that won’t return due to the trade policies.” It was an ambiguous concession, to say the least.

Attributing the deficit in container traffic to trade policies sidestepped the fact that decline in market share had begun long before President Trump came to office. It was also unclear whether Seroka was considering any lasting effects the COVID-19 pandemic might have on shifting supply chains. As a lengthy Wall Street Journal analysis recently pointed out, many companies are reexamining their continued reliance on foreign and especially Chinese manufacturers. Post-COVID supply chains could emphasize resilience over efficiency, much like U.S. cargo owners once diversified their use of ports-of-entry to minimize over-reliance on a few.

How bad has it been? The total number of TEUs handled at the Ports of Los Angeles and Long Beach in May (1,209,870) was the lowest for a May since the bottom of the Great Recession in 2009, when the ports’ throughput was 994,383 TEUs. On a year-to-date basis the two ports have handled 5,901,269 TEUs, the worst January-May total since 2015, when the ports were emerging from a lengthy labor slowdown.

As Exhibit A shows, total TEU traffic through the San Pedro Bay ports during the first five months of each year since 2000 had been growing both before and after the Great Recession. While not an entirely uplifting picture, neither is it altogether discouraging. Until the pandemic arrived, total container volumes had been gradually rising since 2009, when the recession bottomed out.

The problem, though, was what wasn’t showing up in these numbers. What troubled and continues to trouble USWC maritime leaders has been the increasing number of TEUs that were being shipped through ports elsewhere in North America. As Exhibit B makes clear, those numbers—especially on the all-important transpacific import trade—were enormous. And the cost of those lost containers has been equally daunting. By Seroka’s estimates, the diversions deprived his port of $2 billion a year in lost revenue and the Southern California region of 200,000 jobs annually.

Why the decline in market share? Explanations for the erosion of market share usually point to several factors. Among those cited in a Pacific Merchant Shipping Association study released earlier this month are: (a) the generally higher costs of doing business in California; (b) the specific-to-California operational burdens inflicted by state and regional environmental regulators; (c) the migration of manufacturing operations from Northeast Asia and particularly from China to Southeast Asia and even into the Indian Ocean littoral that is resulting in more U.S. imports arriving at East and Gulf Coast ports via Suez; and (d) occasionally troubled labor-management issues.

Some editorial pundits, though, prefer to finger the International Longshore and Warehouse Union as the chief villain. To be sure, labor-management disputes along the West Coast have sometimes led to costly disruptions in trade and have sullied the reputation of USWC ports as reliable links in global supply chains. But, while heaping most of the blame on the ILWU may be understandably satisfying for members of the Fourth Estate who feel aggrieved that those they regard as mere manual laborers probably earn more and doubtless enjoy greater job security than they do, it is nonetheless hard to see how a less combative workforce would have prevented the downward drift in market share. Other things were going on.

Since treatment must follow from diagnosis, let’s consider what has happened to the transpacific trade in different light. In a long-term context, the USWC ports’ declining share of the transpacific import trade can be seen as essentially a regression to a historical mean. Up until the mid-1980s, the majority of America’s maritime trade was channeled through East and Gulf Coast ports. There were at least two particularly good reasons for that. First, most Americans—as well as the businesses that employed them—were located east of the Mississippi. Even though California had surpassed New York as America’s most populous state by 1970, only 17.1% of Americans resided in the Western states, which collectively accounted for barely one-fifth of the nation’s gross domestic product. Second, most of America’s maritime trade involved Europe, the Middle East, and the Atlantic and Gulf Coasts of South America. As Marc Levinson observed in “The Box”, his classic work on the history of containerization: “As late as 1966, nine of the ten largest maritime routes for U.S. international trade passed through ports on the East Coast or the Gulf, and only one touched the West Coast.”

Today, most Americans and the majority of the country’s goods-producing industries continue to dwell in the eastern half of the country. Over the past fifty years, the South has emerged as the country’s fastest growing region with nearly 40% of the nation’s population and over 35% of its economic output. But the flow of America’s maritime trade has changed dramatically in response to economic developments abroad. In 1960, Japan, South Korea, Taiwan, and the other nations comprising the Asia-Pacific region accounted for just 11.8% of world gross domestic product, according to World Bank data. Europe’s share that year was 25.6%. The USA accounted for a 27.9% share.

As Exhibit C shows, the rapid growth of Asia-Pacific economies based on export-driven economic development modes rapidly shifted America’s maritime trade from the Atlantic to the Pacific. To be sure, there had always been some volume of trade between the Far East and America that filtered through USWC ports. But once Japan’s postwar recovery, based on an export-driven model, took hold, things quickly changed. Emulating Japan’s export-driven development model, South Korea and Taiwan emerged by the mid-1980s as major exporting powers, while Hong Kong and Singapore established themselves as burgeoning entrepôts of maritime trade.

Geography, which had formerly worked to isolate USWC ports from the main channels of U.S. foreign trade, rapidly became an asset. Physical proximity to Asia’s emergent economies was not the only advantage USWC ports enjoyed. Over the course of the 20th century, ports along the Western states had acquired a maritime infrastructure that was more extensive than the needs of private commerce alone would have justified. That was because of the unusual requirements imposed on the ports by a single major customer—the United States military.

Ever since America defeated Spain in 1898 and acquired the Philippines, supporting American military operations throughout the Pacific has been a primary mission for dozens of West Coast ports. Post World War II commercial shipping may have remained largely a transatlantic activity well into the 1980s. But supplying American military operations throughout the Pacific could hardly depend on a logistical system that relied chiefly on East Coast ports to ship munitions and supplies from American factories to forces in the Pacific.

Instead, the imperatives of supporting military operations during the Korean and Vietnam Wars ensured that West Coast port infrastructure would not only be maintained but would also be equipped with novel technologies. As Marc Levinson relates the story in “The Box”: “The explosion of port construction on the Pacific Coast, starting in the 1950s, had no counterpart on the other side of the country.” One of the key developments occurred in 1967, when the U.S. Army hired Malcom McLean to build and operate a new port at Cam Ranh Bay. McLean, of course, was famous as the father of containerization, and not surprisingly helped establish a containerized service linking West Coast ports with Vietnam. Perhaps fittingly, the first container ship to arrive at Cam Ranh Bay was the Oakland with 609 25-foot containers carrying as much cargo as could be carried on ten average breakbulk ships hauling military freight to Vietnam.

The rise of Japan and the so-called Four Asian Tigers in the 1970s and 1980s generated growing volumes of transpacific container traffic, but even those volumes would be eclipsed by China’s entry into the global trading system. When Chinese leader Deng Xiaoping abandoned Maoist doctrines in 1978 and embraced new, often experimental approaches to economic development, China’s share of global GDP was a trifling 1.1%, equivalent to the Netherlands’ current share of global GDP.

In the last two decades of the 20th century, Japan remained the focus of U.S. trade policy in the Pacific. Remarkably, it was not until 2005 that the annual Economic Report of the President first provided a separate line item for trade with China. But by then, China was the source of 14.5% of all U.S. imports. And with double-digit rates of economic expansion, its outsized role in the global economy and as a source of manufactured goods would soon become abundantly obvious.

By 2000, 35.0% of all U.S. imports arrived from the Asia-Pacific region, while 24.8% came from Europe. By 2017, the last normal (pre-tariff war) year, 39.9% of U.S. imports originated in the Asia-Pacific region, while 25.5% came from Europe.

So what does an East or Gulf Coast port do to contend with a new world in which transatlantic trade offered modest growth prospects? Sure, business was good, but the action was definitely somewhere else. And, although the population of the states comprising the western United States has increased by approximately 125% over the past fifty years, it is still the case that the majority of Americans live east of the Rockies as does the bulk of the nation’s manufacturing base. Regionally, the South has emerged as the most dominant region of the country, followed then by the West as the roles of the Northeast and Midwest declined.

Given the rising volumes of trade on the lucrative transpacific routes, it is little wonder that ports on the East and Gulf Coasts as well as in British Columbia coveted a piece of the action, especially after the lockdown of USWC ports in 2002 prompted doubts about the reliability of those ports. But there were imposing physical barriers to siphoning off cargos from West Coast ports. A nearly century-old set of locks at Panama was a chokehold, severely limiting the size of ships that could transit the isthmus at a time when ocean carriers were building larger and larger vessels. Unless they were going to sail the long way around through Suez, there was no way 10,000-15,000 TEU vessels were going to get from Ningbo to New York.

What started to flip the balance of trade, what truly enabled implementation of the so-called Four Corners Strategy was the 2005 vote by the Panamanian electorate to construct a more capacious set of locks able to accommodate vessels significantly larger than the 5,000-TEU Panamax freighters that had long constrained the growth of all-water shipping between the East and Gulf Coast ports and the markets of East Asia.

As construction of the new locks got underway, port officials on the respective coasts reacted in different ways. To USWC leaders, the transpacific trade was regarded as an entitlement, a line of business they owned but were cavalier in defending. After all, what was there really to worry about? A 2005 report by Drewry Shipping Consultants on the likely impact of the canal expansion on shipping had found that, even ten years after the new locks opened, most East ports would still lack the facilities to accommodate Post-Panamax vessels.

So, while public officials along the West Coast at least initially remained smugly confident, port directors along the East and Gulf Coast ports enterprisingly turned to their political allies in state capitals and in Congress to finance tens of billions of dollars in port expansion projects.

While East and Gulf Coast ports, aided by the Army Corps of Engineers, assiduously embarked on scores of major projects to widen and deepen channels, shore up wharfage, establish new road and rail connections to the docks, and even elevate a major bridge, West Coast ports mounted an astoundingly impotent “Beat the Canal” public relations campaign which never featured a coherent strategy. Worse, while East and Gulf Coast ports enjoyed the support of state and local authorities, West Coast port directors were swamped by a seemingly unending blizzard of restrictive regulations imposed by lawmakers largely indifferent to how goods get from here to there.

It wasn’t a fair fight. Stir in an occasionally obstreperous longshore union, and you have a sure-fire recipe for market share loss.

Disclaimer: The views expressed in Jock’s commentaries are his own and may not reflect the positions of the Pacific Merchant Shipping Association.