Will Calamity Befall Kalama?
By Jock O’Connell
Developments have been exceptionally fast in coming in the trade imbroglio between the United States and China. So, too, have any number of conflicting, confusing, and sometimes shark-jumping reports warning of how much we all have to fear if things escalate into a full-on trade war.
What springs to mind is Herman Wouk’s couplet in The Caine Mutiny: “When in danger or in doubt, run in circles, scream and shout.”
Still, as next to impossible as it has become to provide timely commentary on the day’s all-important tariff tribulations in a newsletter that’s published just once a month, here’s what we know.
USWC ports are at risk. Any trade dispute involving China obviously creates problems for U.S. West Coast ports. Last year, USWC ports handled 63.5% ($247.59 billion) of the total U.S.-China maritime trade valued at $390.08 billion. Of that, 48.8% went through the Ports of Los Angeles and Long Beach alone. Including the 8.2% share that transited the NWSA Ports of Seattle and Tacoma and the 3.9% portion that the Port of Oakland handled, 60.9% of U.S.-China maritime trade went through the five major USWC ports last year. Smaller USWC ports like Longview and Kalama, Washington handled 2.6% of all U.S.-China maritime trade.
On the import side, 55.3% of the 68,094,005 metric tons of Chinese goods that entered U.S. ports last year came through USWC ports. As for exports, those same ports handled 25.9% of the 104,602,580 metric tons of exports that were shipped to China in 2017 from U.S. ports.
All of the major USWC ports do a sizable share of their business with China. Last year, the Ports of Los Angeles and Long Beach handled $386.04 billion worth of two-way trade, 46.9% of which involved China as either the destination or origin. Oakland was rather less dependent on its China trade, with the People’s Republic accounting for just 31.5% of its $48.34 billion in two-way trade last year. At the Northwest Seaport Alliance Ports of Seattle and Tacoma, 41.8% of last year’s $76.51 billion in maritime trade was conducted with China. Even a smaller, niche port like Longview does over 40% of its business with the PRC.
Where we are now. For the record, we are not in a trade war...yet. Apart from the initial volleys of higher tariffs aimed at curtailing imports of aluminum and steel into the U.S. and China’s retaliatory tariffs that targeted a cornucopia of U.S. fruits, nuts, and wines (along with pork, steel pipes, and aluminum scrap), subsequent exchanges between the two nations have been rhetorical exercises aimed at establishing bargaining agendas, while unnerving the people who actually trade goods internationally.
As for the impact of the new tariffs that have been imposed, there is currently only anecdotal information to go by, and that is seldom reliable. A local television station airing a story highlighting the woes of a local exporter too often goes viral, leading many viewers to conclude that entire American industries rather than individual firms are hurting. Reliable, statistics detailed enough to permit analysts to gauge just how much trade is being affected will not be available until June 6 when the Commerce Department releases trade data for April.
There is, though, ample cause for concern about what those numbers will reveal about the higher tariffs now in place.
The opening shot. On March 1, acting under Section 232 of the Trade Expansion Act of 1962, the President announced the imposition of a 25% tariff on steel and a 10% tariff on aluminum imports that “threaten to impair the national security.” Although the tariffs were originally intended to be applied universally, the administration soon moved to exempt several allied countries. However, China (along with Japan) was not among the countries shielded from the higher import levies. Those tariffs took effect on March 23.
Last year, USWC ports handled 27.6% of the 529.2 metric tons of iron and steel the U.S. imported from China and 51.6% of the 946.4 metric tons of imported Chinese aluminum.
China’s response. Almost predictably, Beijing fired back by announcing a new 15% tariff to be levied against U.S. fruits, nuts, wines, and some steel pipes, along with a 25% tariff on pork and aluminum waste and scrap. Those levies took effect on April 2.
The Port of Oakland last year handled 42.3% of the nation’s 140,598 metric tons of edible fruits and nuts exports to China. Another 31.8% went through San Pedro Bay, while the NWSA accounted for 17.3%. Not surprisingly, Oakland, with its proximity to Northern California’s wine-producing regions, shipped nearly 93% of U.S. wine exports to China last year.
It is worth noting, though, that for all the attention being devoted to the plight of wine, fruits, and nut exporters, it’s the 25% tariff on aluminum waste and scrap that will likely have a greater impact on USWC port operations. Why? Because, at 388,602 metric tons last year, aluminum waste and scrap shipments to China from USWC ports easily outweighed the 109,471 metric tons of exports of fruits and nuts to the PRC or the 21,267 metric tons of wine.
Caveats. So how are these new Chinese tariffs likely to affect business at USWC ports? The answer will be determined not by trade theory so much as by how individual Chinese importers respond. Imposing a higher tariff does not necessarily close a market to imported goods. Although a higher tariff on, say, California wines going into China will certainly increase the cost to the importer, a lot depends on what then happens on the ground. In the case of wine, it seems highly unlikely that a 15% increase in import duties will automatically cause a Chinese importer of high-quality California wines to walk away from years invested in building a presence for those wines in China, especially if the tariff is viewed as a temporary inconvenience that might soon be negotiated away.
In the case of the higher tariff Beijing has slapped on pork imports from the U.S., three-quarters of that trade is actually controlled by the Chinese multinational that owns Smithfield Foods and produces Nathan’s Famous hotdogs along with Armour and John Morrell bacon. We’ll see whether certain “accommodations” will be made to minimize harm to a Chinese firm and its customers. But it is still the case that U.S. pork shipments to China have been increasingly routed through USWC ports in recent years, with the share growing from 22.8% in 2015 to 39.0% in 2016 to 46.1% last year.
What’s next? The U.S. Trade Representative is expected to announce any day now the details of the next tranche of higher tariffs on imports from China. Up to now, most consumer items like cell phones, apparel, footwear, and furniture have been excluded from higher levies. However, to meet the target of imposing an additional $100 billion in tariffs on Chinese goods, that will certainly have to change. Again, it will be some time before such proposed tariffs would be employed, if they ever are.
Those increased tariffs would be imposed on consumer goods that typically arrive in containers. Those new tariffs would have special significance for USWC ports which, in dollar terms, handled 68.2% of the $302.54 billion in containerized imports from China last year. Just by themselves, the Ports of Los Angeles and Long Beach accounted for 55.3% of those imports. By declared weight, 59.2% of the 61,253 million metric tons of containerized goods that arrived from China at U.S. ports last year went through USWC ports, with the San Pedro Bay ports alone holding a 47.3% share of the trade.
Actions that would erode trade volumes would have a wide range of immediate consequences from reduced port revenue to lay-off notices throughout the complex logistical systems that support the ports. These impacts would be particularly large in Southern California, given the disproportionate share of the China trade that moves through San Pedro Bay. But further rounds of tariffs could prove even more debilitating for smaller ports like Washington State’s Port of Kalama.
Speculation has it that Beijing could ultimately seek to impede exports of U.S. soybeans or Boeing aircraft in the next round of higher tariffs. Such a development could have a particularly damaging impact on Washington State, not so much because Boeing has major operations there but because the state’s ports play a key role in transporting soybeans to China. At Kalama, for example, soybean shipments to China accounted for one-third of its entire export volume in 2017.
Just what we don’t need right now. A brewing trade dispute between the world’s two largest economies comes at a particularly inopportune time for USWC ports planning on investing billions of dollars to upgrade facilities to meet the growing competitive challenge posed by rivals on the East and Gulf Coast ports and in British Columbia but also increasingly stringent air quality standards being set by state and local governments.
Ports derive their revenue largely from the volumes of containers or cargos crossing their docks. A major trade dispute that could easily curtail the volume of goods flowing through USWC ports isn’t going to be at all helpful.
Still, it bears stressing, threats of new tariffs are not tariffs. They are bargaining chips that negotiators will have to address in the coming months. At the same time, there is growing pressure within the U.S. to roll back or rescind the higher tariffs on steel imports and to think long and hard about the virtues of using tariffs on goods to resolve issues that are more and more coming to involve intellectual property.
For the time being, at least, Beijing’s warning that it might impose a 25% tariff on imports of U.S. soybeans is merely a red flag. So, for now at least, the Columbia River Port of Kalama probably won’t have to hold bake sales to supplement its maritime revenue.
Kudos for Candor
I know one economist who insists that, as a lad, he had predicted Bill Mazeroski would hit Ralph Terry’s second pitch over the left field wall in Pittsburgh’s Forbes Field for the walk-off homerun that gave the Pirates a seventh game victory in the 1960 World Series. I know this because he reminds me of his (alleged) precocious prognostication every year at World Series time.
His may be an extreme case, but it’s not unusual. Economic forecasters are notorious for shamelessly advertising the ones they got right. (And, if they were nearly alone among their peers in doing so, you’ll never hear the end of it...as Paul Krugman incessantly reminds us about his warnings prior to the 2008 financial crisis.)
As for the forecasts they blew, most authors of aberrant predictions pray to Lethe, the Greek goddess of forgetfulness, in hopes that no one will recall the times their educated guesswork went seriously awry.
Of course, one sure way of abetting the public’s amnesia is to avoid going around reminding everyone of how very far off your predictions have been. That’s why we should be impressed by the forthrightness shown by Drewry’s senior quantitative economist Mario Moreno at last month’s “Pulse of the Port” confab down at the Port of Long Beach. Before presenting his estimates of U.S.-Asia container trade volumes in 2018, Mr. Moreno took pains to remind his audience of just how poorly he did with the forecast he presented at the same conference a year earlier.
For example, he noted that U.S. container imports from Asia grew by 3.5% in 2017, or just about half of the 6.9% growth he had expected. Similarly, he conceded that the 0.8% decline in U.S. containerized export volumes to Asia in 2017 was much lower than the 1.3% increase he had foreseen in that trade.
The self-confessed margins of error that characterized Mr. Moreno’s 2017 trade forecasts were roughly consistent with his 2016 forecasts. Standing before last year’s “Pulse of the Port” audience, he noted that the actual 6.0% increase in U.S. container exports to Asia in 2016 differed substantially from the 0.8% decline he had anticipated. He likewise conceded that the 4.1% growth in container imports from Asia in 2016 was rather less than the 5.5% increase he had predicted.
As for 2018, Mr. Moreno thinks that, in the absence of a major trade war with China, U.S. containerized imports from Asia should increase by 6.8%, while U.S. exports to Asia should grow by 4.9%.
The commentary, views, and opinions expressed by Jock O’Connell are his own and do not reflect the views or positions of the Pacific Merchant Shipping Association. PMSA does not endorse, support, or make any representations regarding the content provided by any third party commentator.