US ports may choke China's success

The United States faces a West Coast port crisis.

Imports from China and other Asian nations are rising so explosively that within a year or two, ports in Los Angeles, Long Beach, Oakland, Tacoma, Seattle, and San Francisco will be badly clogged with traffic, predicts George Stalk Jr., senior partner in Toronto of the Boston Consulting Group (BCG). Ships will be lined up in harbors waiting for space at a dock, he says. Railroads will be jammed; highways busier than ever.

As a result, retailers could face costly delays in the arrival of clothing, furniture, toys, electronic items, and other goods from the Far East. "This is a form of 'stealth protectionism,' " says Mr. Stalk. "I don't think the politicians have figured it out. It could be a powerful do-nothing way to limit trade with China."

Inadequate port capacity is already a "growing concern" for such major retailers as Wal-Mart, Lowe's, Target, The Home Depot, and so on, notes an official with the Retail Industry Leaders Association.

Greater attention to port security, perhaps involving more frequent inspections of ship-borne containers, could deepen the potential for port delays.

Stalk, in a report that BCG released last week, advises business clients to consider alternatives to having their products made in China because transportation bottlenecks will drive up costs and hurt profits. "Many companies are blindly walking into a strategic trap," warn Stalk and Kevin Waddell from BCG's Warsaw office. With no quick solution in sight, companies may be "better off" manufacturing in Mexico or at home.

A slowdown in the growth of Chinese imports would cause no tears in many labor circles and among some manufacturers.

The rise in the US trade deficit with China between 1997 and 2006 has displaced American production that could have supported 2.16 million jobs in the US, notes Robert Scott, an economist with the Economic Policy Institute, a think tank in Washington that is sympathetic to labor.

Though most Americans benefit from relatively inexpensive imported Chinese goods, the trade deficit with China has become a lively political issue. Last year, the US imported $232.7 billion more in goods from China than it exported to that country. The trade imbalance has allowed the Chinese government to pile up $1.2 trillion in foreign currency reserves, the bulk of that in US Treasury bonds. In effect, China has financed much of US budget deficits in recent years.

Many experts say that China's huge trade surplus with the US is the result of the Chinese government's fixing the price of its currency, the yuan, at an advantageously low rate on foreign exchange markets. This, in effect, subsidizes China's exports by 30 percent or thereabouts.

In July 2005, China abandoned a longstanding peg against the dollar and tied the yuan to a basket of foreign currencies. The result was a 2.1 percent revaluation of its currency. Since then, the yuan has appreciated about 5 percent more.

But inflation has been lower in China than in the US, canceling out some trade effect of that exchange-rate shift, notes Charles McMillion, an economist with MBG Information Services in Washington. He sees a risk that China could use some of its accumulated dollars to buy more American companies. Lenovo Group in China bought IBM's personal computer operations in 2004 for $1.75 billion.

Last Wednesday, members of the House Ways and Means Committee held a hearing on "currency manipulation" by both China and Japan. "Currency manipulation places American workers, farmers, and businesses at a competitive disadvantage," charged subcommittee chairman Sander Levin (D) of Michigan.

But that problem could solve itself to some degree if American West Coast port bottlenecks retard the growth in Chinese imports.

At the moment, "things are running smoothly" at the ports of Los Angeles and Long Beach, says port spokesman Arley Baker. "There are no problems at all," he says. Nonetheless, with various studies predicting a "staggering" increase in cargo volume, "there will come a time when there could be some hiccups," Mr. Baker says.

Some 43 percent of all seaborne imports enter the US through those two Southern California ports. Last year, they handled 15.8 million TEUs (twenty-foot equivalent units – a measure of the volume of containers moved), up 13.1 percent from 2005. Forecasters see container volume reaching 35 million TEUs at these ports by 2020.

Port expansion on the West Coast is not easy. At Los Angeles and Long Beach, environmental concerns are holding up various projects to lift capacity. Ships, which burn dirty bunker fuel, are a source of pollution, as are trains and trucks. And no new land for off-loaded containers is available.

One repercussion could be the rise of Port Rupert in northern British Columbia. It has extraordinarily deep water and is closer to China than Los Angeles is. The port is about 92 hours by train to Chicago – perhaps a shorter ride than from Los Angeles, if delays are considered.