How the West Coast port shutdown could ruin Christmas.

How the West Coast port shutdown could ruin Christmas.

How the West Coast port shutdown could ruin Christmas.

Moneybox
Commentary about business and finance.
Oct. 2 2002 6:43 PM

Short Port Report

How the West Coast port shutdown could ruin Christmas.

On Sept. 29, angered by an apparent work slowdown, the Pacific Maritime Association, which represents shipping companies and terminal operators at 29 West Coast ports, locked out 10,500 members of the International Longshore and Warehouse Union. Talks broke down two days later as union officials protested the fact that management had brought armed guards to the negotiations.

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The labor strife feels archaic. Tough-guy longshoremen stand off against the bosses' hired muscle. Concerned business groups plead with a laissez-faire president to intervene. The law on everyone's lips is Taft-Hartley, not Moore's.

Nonetheless, the debate is very much about the new economy. The root of the impasse is the bar-code scanner. And the shutdown is so threatening to the economy because of the new economy revolution in how companies organize their supply chains.

President Bush has sent word that he's concerned about the situation. But since his preferred method of dealing with every economic problem—cutting taxes—wouldn't have any effect here, he has chosen to observe from the sidelines. Thus far, he has resisted calls from industry and trade groups to invoke the Taft-Hartley Act, a 1947 law that grants the president the authority to intervene and ask for an injunction when a labor action might "imperil the national health." Essentially, the president could try to impose an 80-day cooling off period in which the striking workers must go back on the job. The last chief executive to use this bit of executive puissance was Jimmy Carter, who interceded in a 1978 coal strike. Bush may want to avoid antagonizing labor a few weeks before a crucial election.

But there's reason for Bush to act. Ever since the followers of Ned Ludd busted up British textile factories in the early 1800s, organized workers have resisted new technology. And that's exactly what the longshoremen are doing now. The port operators want to start using bar-code scanners to speed cargo through terminals. More likely than not, those operators will want to engage outside contractors to run the new scanners, and those contractors will employ non-union labor.

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It's easy to sympathize with workers whose jobs are displaced by technology—E-ZPass has meant the elimination of many decent-paying jobs for toll-booth clerks. But the union members in question here get paid more like accountants than day laborers. According to the Pacific Maritime Association, the average annual salaries at the ports are $82,895 for Class "A" longshore workers; $118,444 for clerks; and $157,352 for foremen. The six-figure clerks who chart the inflow and outflow of the trucks and containers—frequently by hand—say they'll be happy to use these new gizmos, but only if the bar-code jobs are unionized.

The union and the port operators are fighting over millions of dollars. The stakes for the rest of the country are much greater. According to the New York Times, a five-day shutdown will cost about $5 billion—peanuts in a $10 trillion economy. But the costs will mount more rapidly than Andrew Fastow's legal bills. A 10-day shutdown will cost $20 billion, and if it goes on for a month things will really get hairy.

What accounts for the exponential growth in economic damage? First, low-value perishable products will lose their value. All those Washington apples and California table grapes waiting to leave, and all those bananas from Guatemala waiting to enter, might rot.

If the strike continues further into the fall, the effects will ripple from the agriculture and transportation sectors into other parts of the economy: cars and computers, retailing, construction.

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Our trade with Pacific Rim countries is highly imbalanced but massive. Last year, we exported $181 billion to and imported $376.1 billion from the region. A good chunk of that trade—about $320 billion in 2001—flows in and out of the 29 big ports on the West Coast.

Another import from Asia—this one a management technique—is compounding the problem. In the '80s and '90s, U.S. industry began to adopt the just-in-time manufacturing techniques pioneered in Japan. The theory is that holding and storing inventory—books, cans of corn, auto parts—wastes resources. Inventory occupies space, which means you have to house and pay rent for it. It also ties up capital. Buy your supplies closer to the exact moment when you need them to make pizzas or notebook computers, and you get more use of your cash. The frequency of inventory turnover is a measure of efficiency and success for many companies. Dell, which gets many components from Asia, turns its inventory up to 60 times a year.

American supply chains are among the most efficient in the world. A finished product—a car, or a computer—may include parts produced in a dozen countries. Inventory efficiency has contributed to higher productivity, low inflation, and lower consumer prices. But put a stick in one gear, and the whole machine stops.

Retailers have also adapted just-in-time inventory management techniques to great effect. One of the original premises of Amazon.com was that it wouldn't have any inventory at all. And that's why this slowdown is such a huge potential problem. The Christmas shopping season, which provides about one-third of profits for many retailing sectors, is upon us. Not being able to stock shelves with such staples of the Pacific maritime trade as clothes and toys—especially  toys—could be disastrous for retailers who are already fearful of a poor season. It's no surprise that the National Retail Federation is among the leading advocates of government intervention.

This is also why President Bush may have to intervene if the shutdown continues. Americans will endure long lines at airports for the war on terror. But no toys at Christmas—that would be intolerable.