California’s Seaports and the “Bigger Ditch” in Panama

By Jock O’Connell

This is the author's text of an article written for the January 29, 2012 Sacramento Bee Forum.

You’ll likely be hearing a lot of talk about the Panama Canal over the next couple years.

First opened on August 15, 1914, the canal linking the Pacific with the Atlantic will mark its centennial in two years. Yet, for some Californians, the anniversary won’t be an occasion for celebration.

That’s because the canal’s capacity is being doubled with the addition of a new set of locks designed to accommodate ships of a size never envisioned a century ago. And it’s that $5.25 billion project, due for completion by the end of 2014, which is being portrayed not as a laudable engineering feat but rather as a threat to “hundreds of thousands” of California jobs.

At least that’s the apocalyptic-sounding message of a “Beat the Canal” video recently produced by a Los Angeles-based coalition of maritime industry representatives, government officials, and business leaders calling themselves the Jobs 1st Alliance.

The group’s contention: that a bigger ditch in Panama will prompt a massive diversion of transpacific shipping from California’s maritime gateways to seaports along the Gulf of Mexico and the Atlantic Seaboard, thereby endangering the “entire goods movement industry in California.”

So how likely is it that an expanded canal will prompt shippers to divert a substantial volume of trade from California’s seaports, perhaps reducing traffic by as much as 25 percent as one frequently cited worst-case scenario suggests?

Or is all the hollering just an effort to stampede lawmakers into expediting a number of infrastructure improvement projects currently mired in red tape or litigation?

A little background information might help provide a better appreciation of what’s going on.

Until the mid-1980s, the majority of America’s maritime trade went through its East Coast ports. But with the emergence of Japan followed by South Korea, Taiwan, and ultimately China as major trading partners, the balance shifted decisively to the West Coast.

Between 1990 and 2007 (when U.S. maritime trade peaked as the recession took hold), there was a four-fold increase in containerized trade through the Ports of Los Angeles and Long Beach. In the process, the two San Pedro Bay ports became the nation’s busiest maritime gateway. Container traffic through the Port of Oakland meanwhile more than doubled.

Not surprisingly, the number of jobs directly and indirectly associated with port activities soared.

According to the Los Angeles Economic Development Corporation, trade-related employment in its five-county region exceeds 500,000, while the Port of Oakland estimates that its operations support some 73,000 jobs in northern California. (Notwithstanding its imposing presence alongside the Bay Bridge, the Port of Oakland handles about one-sixth as many containers as pass through the San Pedro Bay ports.)

These jobs also represent some the more egalitarian employment opportunities available in an economy afflicted with a shrinking middle-class. Indeed, for the 40 percent of Californians over the age of 25 whose resumes feature no more than a high school education, employment in the logistics sector remains one of the few avenues to a middle-class lifestyle.

Most of the merchandise imported through the West Coast ports falls into the category of “discretionary cargo,” shipments that are not destined for the region most directly served by a port.

Research conducted by UC Berkeley’s Robert Leachman for the Southern California Association of Governments found that fewer than 20 percent of the goods imported through the Ports of Los Angeles and Long Beach are actually destined for markets in Southern California. The rest are transported as expeditiously as possible by rail or truck to other areas of North America.

In theory, therefore, the vast majority of the cargo entering those two ports is up for grabs.

If conditions at these ports are not to shippers’ liking or if the charges for moving containers through the ports are deemed too high, shippers have the discretion of routing imported goods through other ports of entry, thereby imperiling jobs and reducing the revenue streams that finance port operations.

So what is the impact of the larger Panama Canal likely to be on California’s ports?

Frankly, it’s not entirely clear.

That a more capacious canal will have some impact is indisputable. Opening a new channel through which goods can flow will certainly draw some business away from California’s ports, especially when ports on the other side of the Canal are aggressively seeking to bolster their cargo-handling capacities and when an increasingly large share of America’s population and industry has been migrating into the states of the old Confederacy.

But ships move through canals in both directions, and so the impact a new set of locks in Panama cannot be measured solely in terms of lost cargo. Just as the expanded canal will enable more all-water trade between Shanghai and Savannah, California ports could expect to benefit from an increase in the volume of goods arriving by sea from Europe, Africa, and South America. (In one local example, the Port of West Sacramento’s new harbor crane, which arrived earlier this month, transited the Panama Canal en route from its European manufacturer.)

In any event, the diversion of some cargo to all-water routes through Panama does not necessarily mean that fewer goods will be moving through West Coast. Indeed, all long-term forecasts anticipate a steady increase in seaborne trade between North America and Asia. A rising tide of maritime business will generally lift all ports -- except, perhaps, those in places which chose to be indifferent to world trade.

Then there is the matter of Panama’s undisguised ambition to position itself as an intermodal hub for Latin American trade. Even an expanded canal will have capacity limits. Should the canal become a more intensively used route for trade between Venezuela and Chile or between Brazil and China, then the impact of the canal on California’s ports would be lessened.

Another mitigating factor might simply be cost. At the moment, no one knows exactly how much the canal authority will charge for a right of passage through its new locks. Higher than anticipated fees, coupled with the inventory costs of the additional days cargos are at sea (not to mention rising fuel prices), could make the generally faster intermodal routes through California’s ports a relative bargain for many cost-conscious importers.

Moreover, the major shipping lines appear determined to achieve greater and greater economies of scale by ordering larger and larger container ships which can be accommodated by fewer and fewer ports. The largest of these vessels are too big to pass through even the new locks at Panama. But they are well-suited to the Ports of Los Angeles, Long Beach and Oakland, whose ability to handle these huge ships will remain a major advantage so long as their rail and road links to major U.S. markets are able to cope with larger volumes of trade.

And there’s the rub and why, despite its penchant for hyperbole, the Jobs 1st Alliance has an exceedingly legitimate case.

As I noted in a Forum article in early December, California has not merely failed to invest adequate sums in maintaining its transportation infrastructure, it has allowed projects aimed at remedying deficiencies in its goods movement system to become bogged down in environmental review and NIMBY lawsuits.

Ultimately, the bottom-line question here is whether California’s political leadership is genuinely committed to preserving private sector jobs paying middle-class wages. Spending money on needed infrastructure enhancements and expediting their completion would help safeguard the future of California’s seaports, while clearly signaling that this once golden state is at last getting serious about vying for the world’s business.