California ports on the front lines of the trade war with China

The Port of Los Angeles — the busiest port in the nation — is on the front lines of the trade war between the United States and China. The executive director is urging both countries to strike a deal before things get worse.

“You're having the world's two largest economies go head to head in a very combative way,” said Gene Seroka, executive director of the Port of Los Angeles.

Once President Trump’s promised tariffs go into effect, nearly all of the Chinese imports coming into the United States will face tariffs ranging from 15% to 30% — and many of those goods pass through the Port of Los Angeles.

Port officials say trade with China makes up 60% of the traffic at the Port of Los Angeles. The American Apparel & Footwear Association told Yahoo Finance about half of the apparel and footwear sold in the United States moves through the twin Ports of Los Angeles and Long Beach.

The trade war “increased imports to the United States and dramatically decreased exports -- and that, I think, is an unintended consequence of this ongoing trade debate between Washington and Beijing,” said Seroka.

‘More cargo than we could handle’

Last year, many importers rushed to get their goods into the United States before Trump announced another round of tariffs. (The first round of tariffs were announced in March 2018.) Seroka said in the fourth quarter of 2018 and beginning of 2019, the port was especially crowded.

“We had more cargo than we could handle simply because the cargo was sitting [for] longer times than normal,” said Seroka. “Folks were bringing in more inventory just to get away from the taxation of the tariffs and not necessarily bringing cargo in that would enter in the domestic supply chain.”

The Port of Los Angeles is the busiest port in the U.S. In 2018, it facilitated nearly $300 billion worth of trade. In recent years, the next two busiest ports – the Port of Long Beach and the New York and New Jersey – have each handled about $200 billion in trade annually.

Courtesy of the Port of Los Angeles

Over the past few years, the Port of Los Angeles has been digitizing its operations, through a partnership with General Electric. The new program allows port officials to see what cargo is coming into the port more than a month in advance, instead of a few days.

“I think that is one of the main reasons we were able to avoid a complete level of congestion near the port in the fourth and first quarters,” said Seroka.

Seroka told Yahoo Finance that importers are still trying to figure out how to respond to the newest tariffs scheduled to go into effect on Sept. 1 and Dec. 15.

“The singular definition of what this environment looks like is uncertainty — and we may have some folks that want to import real fast, we may have others that will delay,” said Seroka.

The National Retail Federation says it constantly works with ports around the country to map out how to deal with the constantly evolving trade environment.

The NRF’s supply chain expert, Jonathan Gold, told Yahoo Finance retailers didn’t have much time to adjust their shipments before the Sept. 1 tariff deadline, but they may decide to advance orders to beat the December tariffs.

“That will come with additional costs as well – moving up shipments and that extra storage, trying to find a space on vessels. So those are all additional costs that folks hadn't planned for in the beginning of the year,” said Gold.

‘Definitely a squeeze’

Finding extra storage capacity could be difficult. The Economist Intelligence Unit warned last week that warehouses and ports around the country are still “inundated with goods following last year’s import surge.”

“Low capacity levels may restrict their ability to absorb future shipments from China,” said Nick Marro, global trade lead at the EIU. “In addition to logistics concerns, it is likely that U.S. purchasers are also still offloading inventory from 2018. The unpredictability of U.S. trade policy that year prompted many purchasers to pull goods purchase orders forward, even for goods that had not yet been targeted by U.S. tariffs. These constraints will complicate plans by U.S. purchasers to store inventory for 2020 in advance of tariff escalation in December.”

To make the situation even more complicated, retailers are already in peak shipping season for the holidays.

“There wasn’t even a lot of excess capacity in the warehouse anyways,” said Gold of the NRF. “Retailers are stocking up on holiday merchandise. We haven't heard yet that there had been any [storage] issues, but again, folks haven't ramped up just yet. That could happen down the road, depends on how quickly and how much folks want to bring in in advance.”

Cargo containers at the Port of Los Angeles. (Courtesy of the Port of Los Angeles)

Right now, Seroka doesn’t see a rush of orders on the horizon, but that could change if Trump does, indeed, hold off on some tariffs until December.

I could see folks advancing inventory again. Maybe not to the level that they did in the fourth and first quarter,” said Seroka. “Our warehousing space is still pretty full.”

Southern California is home to one of the world’s largest warehousing complexes, serving both the Port of Los Angeles and Long Beach. Seroka said the 1.8-billion-square-foot warehouse and distribution center is already packed – with just 1%-2% vacancy left.

“It’s definitely a squeeze,” said Seroka.

Typically, the complex sees a 4%-6% vacancy level during peak season (August through October) and 7%-8% during the off-season. If importers do decide to rush shipments, he said its new digital approach will help manage the congestion.

“We’ll have to stretch the supply chain as best we can. This is a lot of the work that we can do digitally to understand, to have a good cadence of the ships coming in, to recognize how much cargo we have and where it's going to,” said Seroka. “Making sure that we can push that cargo out with the right cadence is also important, so we don't get our gates jammed up during a traditional business day.”

‘We’re bleeding exports’

Despite the trade war – or perhaps because of it – last month was the port’s third-busiest month in history. July imports at the Port of Los Angeles were up nearly 9% year-over-year, but exports were down 4%.

“We're bleeding exports, it's impacting jobs. The three biggest export segments that have been impacted are agriculture, recyclables and industrial equipment. And with those, I can categorically state the jobs are being impacted,” said Seroka.

Because of the trade uncertainty, Seroka said U.S. importers are holding off on capital investment.

“With very few exceptions in our industry, we’re seeing capital remain on the sidelines,” said Seorka. “They're not buying the additional five trucks they need to carry the cargo. They're not building that next warehouse to store the goods and they're not hiring new folks to handle the supply chain mechanisms of cargo. So that is really bad – a direct impact.”

Last week via tweet, Trump “ordered” American companies to look for alternatives to China.

The NRF stressed it’s difficult, if not impossible, for businesses to move supply chains out of China. Not only does it take time to develop a new sourcing base that can make a product and meet quality assurance and safety standards — but importers must make sure their new partners have the necessary infrastructure and shipping capabilities.

“Are there the sailings coming from the port on a regular basis for the increased capacity? Can they run the larger vessel? Things like that. So all these different considerations that go into your decision on who are you going to make a partner with — and the thing is, you can't just pick up and move your entire supply chain out of China,” said Gold.

Container terminal activity at Yusen Terminals. (Courtesy of the Port of Los Angeles)

Seroka said if the president were to declare a national emergency and try to force American companies out of China, it would lead to American job losses.

“Less cargo means less jobs — that would be a composite of the folks that work on the ground to administrators like myself, warehousing people, truck drivers, all the folks that are responsible for moving cargo. That is fact,” said Seroka.

That’s not just a West Coast problem.

“The cargo that moves through this port reaches each and every one of our nation’s 435 congressional districts. This is absolutely a conversation of national significance,” said Seroka.

Seroka said it’s been “difficult” to get the attention of the Trump administration — but if he could get the administration’s ear, he would tell them to end this quickly.

“We've spent, now, the past 17 months going back and forth in social and mainstream media. It is time to work out the details. We know that the intellectual property and forced technology transfer are two big, big issues — but there's got to be a different remedy,” he said. “Go into a room with the highest level of authority — not just people that are taking notes — and get a deal done.”

The Port of Long Beach echoed Seroka’s concerns in a statement to Yahoo Finance.

“The hope continues to be that there's an agreement reached that benefits everyone and we can lift the uncertainty that's permeated the supply chain for more than a year. No one wins a trade war. The Port will continue to work with our supply chain partners to provide fast, dependable service as cargo comes through our port,” said Don Snyder, Port of Long Beach Acting Managing Director of Commercial Operations.

Jessica Smith is a reporter for Yahoo Finance based in Washington, D.C. Follow her on Twitter at @JessicaASmith8.

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