Port of Long Beach Follows LA’s Lead, Will Launch Incentive Program as US-China Trade War, Other Issues Throw Industry in Tumult
Tuesday, September 24, 2019
The Port of Long Beach will soon launch an incentive program for oceanic carriers — about a year after its Los Angeles neighbor started its own — in an attempt to stabilize cargo traffic, which has declined each month this year amid the ongoing trade dispute.
The incentives will begin Oct. 1, the start of Long Beach’s fiscal year.
The two incentive programs, taken together, are a response to seismic tumult in the industry, officials for those ports said last week.
The China-U.S. trade war, which began last summer, has continually deepened: President Donald Trump has levied or announced tariffs on $550 billion worth of Chinese goods since then and the Asian powerhouse has retaliated with tariffs, both implemented and pending, on $185 billion of American goods. (Both countries have proposed tariffs that have not yet gone into effect, with the U.S. set to roll out another round in December.)
The ongoing dispute has forced some manufacturers to relocate to Southeast Asia, which — along with the rise in carrier alliances and other factors — has pushed increased traffic to the East Coast ports, exacerbating a years-long trend that’s eaten away at the twin ports’ dominance.
The incentive programs, in short, are an attempt to persuade current port customers to increase how much cargo they bring in and lure more business away from competing ports.
“It’s a tool we can utilize to stabilize our cargo volume,” said Noel Hacegaba, deputy executive director of Administration and Operations for the Long Beach port. “We felt this was the right time.”
Under the Long Beach program, which will last one year, the port will offer carriers $10 rebates for each 20-foot equivalent unit — or TEU — they bring in above market growth. TEU is a standard cargo measurement unit, based on the size of traditional shipping containers; most containers now, though, are 40 feet long, so the rebates are effectively $20 a container, said Gene Seroka, executive director of the Port of Los Angeles, which pays the same rate in incentives.
Here, according to Hacegaba, is how the incentives will work: Say, for example, an ocean carrier shipped 1,000 containers through Long Beach in the last fiscal year and then 1,500 in the new fiscal year, a 50% increase. If trans-Pacific cargo shipments as a whole, meanwhile, saw a 25% growth in traffic, the Port of Long Beach would then pay rebates on the remaining 25% the hypothetical carrier shipped above the industry’s growth rate.
The rebates are capped at $2 million per carrier per fiscal year, according to a staff report.
The goal, Hacegaba said, is to gain a competitive edge.
“In the end,” he said, “we’re going for that small portion that’s not committed to one port or the other.”
Long Beach, though, is late to the game.
The Port of Los Angeles began its incentive program in September 2018. It’s virtually the same as Long Beach’s, with two exceptions. First, according to port documents, Los Angeles’ program allows both loaded and unloaded containers to count toward the rebate, while Long Beach requires them to be filled. Second, L.A. requires carriers to provide data — manifests, the routes ships take — to its Port Optimizer, a digital tracker that helps keep the supply chain running smoothly.
From the program’s onset to the end of the fiscal year, on June 30, Los Angeles paid out $6.5 million in rebates, Seroka said. But, he added, the return to the port has been “three-to-four times that.”
“It’s been an amazing success,” Seroka added.
And during that time, the ports of Los Angeles and Long Beach have gone in different directions.
Long Beach’s total cargo traffic for the calendar year is down 6.6% through August, according to port data, compared to the first eight months of 2018. Each month this year has seen fewer total containers enter and exit the Long Beach port than each corresponding month from 2018. L.A., meanwhile, has seen its total traffic increase 5.74% compared to 2018, with February being the only month in which it saw a decrease, according to that port’s data.
Port of Long Beach officials have for months said there are multiple reasons for the slide. At the heart, is the trade war. In 2018, Long Beach continually set traffic records, largely driven, port officials have said, by manufacturers and retailers trying to beat each round of tariffs, which the U.S. first implemented in July. The port’s record-setting, Hacebaga said, was the reason Long Beach “did not see the need to employ an incentive program.”
But a slowdown, it seems, was inevitable.
“For 2019, it seems that the cargo is all here and warehouses are filled,” Mario Cordero, executive director of the Long Beach port, said in July. “That’s disrupting container movement and the growth we would normally see this time of year.”
Long Beach port officials have also said the decline, compared to Los Angeles’ increase, can partially be explained by the normal ebb-and-flow of customers between the Nos. 1 and 2 ports in the country — who happen to be neighbors.
But on Thursday, Sept. 19, Hacegaba said there’s another reason for the disparity.
“POLA’s (incentive program) has had an effect,” he said.
Long Beach’s program, which that city’s Board of Harbor Commissioners approved Sept. 9, could cost between $4 million and $6.5 million, according to a staff report, though officials said they believe the additional revenue from increased traffic would offset that — and help bridge the gap with L.A.
Both ports, though, have used various types of incentives — for carriers and terminal operators — in the past to combat challenges in the industry. Most recently, the Port of Los Angeles rolled out incentives in 2013 and the Port of Long Beach had incentives for the 2014-15 calendar years, a time marked by congestion and labor issues at the ports, a lethargic economy in China and weak economies elsewhere as the rest of the world sought to recover from the Great Recession.
And Seroka, for his part, said Long Beach’s new incentive program will be a good thing.
“We support it 1,000%,” he said.
“Anything that is implemented, it is helpful if it’s implemented across both ports,” said Tom O’Brien, executive director of the Center for International Trade and Transportation at Cal State Long Beach. “In many ways, it’s viewed as an integrated port complex.”
And as such, port officials and experts said, the two ports often have similar fates during turbulent times.
Despite L.A.’s increase in total traffic, a closer look shows the trade war has impacted that port as well: The L.A. port has seen declines in exports throughout the year and an increase in empty containers coming in and out — meaning fewer products are actually heading overseas.
One of the worries of a prolonged trade war was that manufacturers would start moving out of China and to Southeast Asian countries, such as Vietnam, Thailand, and Cambodia. Doing so, Seroka and Hacegaba both said, would give a competitive advantage to East Coast ports. The L.A.-Long Beach complex has worked to compete in Southeast Asia, Hacegaba said, but even if they cornered the market there, it wouldn’t make up for the harm the trade war has caused.
“For every container we gain from Southeast Asia,” Seroka added, “we lose 2.5 from China.”
And the ports have not cornered the market. In fact, they’ve already seen some manufacturers shift away from China because of the trade dispute, and carriers following suit by taking goods to the ports in New York and New Jersey, Hacegaba said. That shift, O’Brien added, has continued a trend that’s gone on for years as costs in China have risen.
And then there are the carrier alliances. In a 2014 white paper, Hacegaba wrote that carriers, which for decades had struck partnerships among each other, were consolidating and realigning those alliances. That trend has continued, both Hacegaba and O’Brien said.
Alliance members, Hacegaba added, can put their cargo on each other’s ships, giving them a competitive advantage over the ports. By being able to share space on each other’s ships, officials and experts said, carriers can ensure their vessels head out to sea completely full – which is more efficient for them, but also reduces the number of vessels the various ports can compete for.
Tom Boyd, a spokesman for Maersk, an ocean carrier that’s part of the 2M Alliance and operates APM Terminals in the Port of Los Angeles, declined comment. Ocean Alliance, which includes major carrier COSCO, did not return requests for comment. COSCO officials also did not respond to requests for comment.
But the alliances, the trade dispute and other factors, port officials and experts said, have led to the twin ports losing ground in the trade market for years. In the early 2000s, Hacegaba said, the L.A.-Long Beach complex represented 40% of the total U.S. trade market. It’s now 37%. Continuing to lose market share, port officials say, could have wide-ranging impacts of the regional economy, hurting jobs and, in turn, reducing consumer spending.
So, officials from both ports have said, they must work together if they are to remain the country’s premiere trade gateway. The two, in fact, are working on an agreement to expand their collaboration, in areas ranging from cyber security to rail transportation; the Long Beach harbor commissioners will receive the agreement for discussion on Monday, Sept. 23.
And, port officials said, the incentive programs are yet another tool to better compete.
“Hopefully, it accentuates what we started,” Seroka said about Long Beach’s program, during a Wednesday, Sept. 18, interview. “We want to make this the gateway of trade for the country.”
Category: Economic News, International Trade