Tags: U.S. Economy

How a Port Strike Would Slam the U.S. Economy in 2013

By , Money Morning •

In the final hours to reach a deal, progress was made today (Friday) in averting a port strike that could cripple most major ports along the U.S. East Coast and Gulf Coast.

A federal mediator Friday announced a temporary solution: The strike, scheduled to take effect Dec. 30, will be delayed until Jan. 28 unless dock workers and management agree on payment issues.

"While some significant issues remain in contention, I am cautiously optimistic that they can be resolved in the upcoming 30-day extension period," George Cohen, director of the Federal Mediation and Conciliation Service, said in a statement.

But, if negotiators representing longshoremen on one side and shipping companies and port terminal operators on the other can't come to an agreement by Jan. 28, 2013, a port strike could cripple the U.S. economy, which may already be hobbled by falling off of the fiscal cliff.

In today's just-in-time, minimal inventory world, a dock strike would mean that stores would quickly run out of certain non-perishable imported products including clothing, shoes and electronics.

For example, Wal-Mart Stores Inc. (NYSE: WMT), which relies heavily on goods imported from China, could fail to receive merchandise on time, particularly on the East Coast. And auto manufacturers, especially those such as BMW that assemble cars in the U.S. from imported kits, could quickly find themselves running out of parts.

Given the uncertainty surrounding the fiscal cliff and how it has weighed on economic activity, "The last thing the nation needs right now is a strike that would shut down the East Coast and Gulf Coast ports," Jonathan Gold, vice president for supply chain policy at the National Retail Federation, told The New York Times. "This will have a huge ripple effect throughout the economy."

Why the U.S. Economy Faces a Port Strike

Talks between the United States Maritime Association (USMX), a group of shippers and port terminal operators, and the International Longshoremen's Association (ILA), the union representing about 14,500 dockworkers at East Coast and Gulf Coast ports, had been going on for months but broke down on Dec. 18.

The biggest unresolved issue is the United States Maritime Association's demand that "container royalty payments" to longshoremen be modified.

Container royalties were started in the 1960s as a way of compensating longshoremen for job losses resulting from the containerization of cargo, which was just beginning at that time. Royalty payments are calculated based on the number of tons of containerized freight handled.

Shippers and terminal operators argue that the royalties are an expensive, outdated and unnecessary payment to dockworkers. Longshoremen see the royalty payments, which added up to some $15,500 per eligible worker last year, as a core part of their compensation, reflecting increased productivity.

USMX wants to limit container royalties to the 2011 level of $211 million and wants to make new workers ineligible for royalty payments. The ILA has demanded that the container royalties "be left alone."

Costs of Port Strike on U.S. Economy

Analysts have been trying to assess the impact a dock strike would have on the U.S. economy in 2013.

The ILA, which has been far less radical than its West Coast cousin the International Longshore and Warehouse Union, has not been on strike since 1977. So much has changed over the past 35 years that no one is really sure what the impact of the strike will be.

The National Association of Manufacturers director of transportation and infrastructure policy Robyn Boerstling told CNBC, "Manufacturers are trying to protect jobs and minimize the damage of potential supply chain disruptions from a costly strike, which could cost an estimated billion dollars a day."

The strike has been well-telegraphed. Manufacturers, shippers and retailers have been preparing for the possibility of a prolonged strike for several months.

Although the Port of New York-New Jersey is the second-largest destination in the U.S. for imports from China, shippers have diverted shipments to the West Coast for forwarding by truck and rail to customers on the East Coast.

This is not cheap, according to National Retail Federation's Gold.

Gold was cited by the New York Post saying that a customer shipping goods from India to California instead of to the East Coast would have to pay an additional "congestion fee" of $1,000 per container in addition to the regular $2,000 per container shipping charge. Then the goods will have to be shipped across the country by truck, rail or air.

Goods being shipped from Europe do not have that option. Some ships have accelerated their schedule to arrive at U.S. East Coast ports before the strike deadline. Others had planned to either wait offshore until the strike ended or offload their cargo at ports in the Bahamas or Mexico that are unaffected by the strike.

East Coast ports have remained open late so that goods which have already been unloaded are not stuck behind the terminal gates in the event of a strike.

Peter J. Toscano, president of the Kearny, NJ trucking company PJT Transport & Logistics, told The Record, "Everybody wants everything at once. They need the freight, they want the freight, they have sales going on. They say 'Get it, or we will get somebody else.'"

The Port Strike and Politics

A group of businesses that ship goods through East Coast ports sent a letter to U.S. President Barack Obama last week asking him to use his emergency powers through the 1947 Taft-Hartley Act to avert a shutdown of East Coast ports.

"Just the threat of a shutdown impacting the East Coast and Gulf Coast ports creates a level of uncertainty in a fragile economic climate which has forced many businesses to once again enact contingency plans that come at a significant cost to jobs and our economic competitiveness," the letter stated.

The Taft-Hartley Act allows the president to order striking workers back to work for an 80-day cooling off period while contract negotiations continue if a strike has an adverse impact on a broad section of the economy. President George W. Bush invoked Taft-Hartley to end an 11-day strike by West Coast dockworkers in 2002. President Obama refused to do so earlier this year during an eight-day strike by clerical workers that shut down West Coast ports.

Democratic presidents have been more reluctant to exercise their Taft-Hartley powers. Unions were very strong supporters of President Obama in both of his election campaigns.

"For organized labor, that tends to be the nuclear option," Harley Shaiken, a labor expert at University of California at Berkeley told The Washington Post. "That would not be received well at all."

The port strike has the potential to exacerbate the impact of falling off of the fiscal cliff. Even if Washington manages to come to an agreement and can undo most of the fiscal cliff damage by making tax rates retroactive to Jan. 1, 2013 and moderating spending cuts, even a short port strike can take weeks to work out.

First quarter corporate earnings and share prices will reflect the increased expense of preparing for and dealing with a strike should it occur after the 30-day extension. That may cause investors to rethink some of their holdings, particularly in the retail sector, which is already reeling from sluggish holiday sales growth.

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