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Eno Transportation Weekly

As Tariffs Take Effect, Port Activity Booms but Uncertainty on the Horizon

October 18, 2018

Ports across the country announced volume records this summer as shippers rushed to move goods ahead of the Trump Administration’s proposed tariffs—but what happens when the tariffs come into full effect remains to be seen.

The Trump Administration announced in September a proposed 10 percent duty, increasing to 25 percent in 2019, on $200 billion worth of goods imported from China, mostly consumer goods ranging from seafood and vegetables to paints and dyes. That came after the Administration announced last spring tariffs on $50 billion of Chinese goods, mostly on industrial and intermediate products. China has retaliated by raising tariffs against over $3 billion in U.S. exports.

According to American Association of Port Authorities (AAPA) President and CEO Kurt Nagle, the total tariffs on Chinese commodities and China’s retaliatory responses cover 8.4 percent of trade through America’s ports by value.

(Ed. Note: That significant a drop in the value of incoming trade would also have a significant effect on the receipts of the Harbor Maintenance Trust Fund, which is based on the value of cargo. Actual customs duties deposited in the HMTF totaled $1.513 billion in the just-closed FY 2018, close to an all-time high.)

Ahead of those tariffs coming into effect—as well as the wider tariffs on imported aluminum and steel from most other countries also announced this year—shippers front-loaded their orders for the year to ensure they could move their goods as cheaply as possible.

“For a number of shippers they can see what’s coming in terms of the trade situation and they’re trying to beat the tariff timing, to get the goods to move before the tariffs are in place,” Hackett Associates Economist Paul Bingham told Transport Topics in September. “On a risk-adjusted basis, it’s still much cheaper to pay a couple of months of inventory carrying costs than 10 percent or 25 percent tariffs on these commodities.”

As a result of that calculus, ports experienced a big boom in volume handling this year. The latest Port Tracker report found that U.S. retail container ports handled 1.89 million TEUs (twenty-foot equivalent units) in August 2018, which is up 3.4 percent year over year from August 2017. September is estimated (after-the-fact data isn’t yet available) at 1.84 million TEUs, a 2.7 percent annual gain, and October is estimated at 1.87 million TEUs, a 4.3 percent annual gain.

Port-specific examples abound. The Port of Los Angeles recorded its best September in history, moving 4.9 percent more TEUs year over year. Executive Director Gene Seroka said that “volumes remain strong with shippers importing holiday season inventories and manufacturers bringing supplies and materials in advance of additional cost impacts from tariffs.” The port also recorded its busiest July in its history.

The South Carolina Ports Authority said August was its busiest month ever, moving 16 percent more cargo by volume than the previous year.

And August was the Port of Virginia’s second most productive month ever, with the port processing 8 percent more TEUs than in August 2017. CEO John Reinhart said the port is “seeing some inbound cargo that is moving in anticipation of expanded tariffs on select imports.”

What comes next?

While ports are currently reveling in these high cargo volumes, experts say the party may soon be over. While the total impact of the tariffs are not yet known, the consensus seems to be that the question is not whether ports will see a decline in movement, but how much the decline will be.

“There’s a lot of concern that these very high growth rates and the volumes we have been seeing on a monthly frequency are driven by attempts to build inventory to get ahead of the tariff situation,” Mr. Bingham told Transport Topics. There is a payback coming and it’s going to be sharp once even more tariffs are in place, in terms of a falloff in volume, even if the economy remains strong.”

Some ports are already starting to see the effects of the tariffs. The Port of New Orleans reported that steel imports there have declined more than 25 percent from a year ago. One of the Administration’s first moves in the ongoing trade dispute with China and other countries was to add a 25 percent duty on imported steel.

Mr. Nagle of AAPA pointed out that the decline in steel imports could have ripple effects on agricultural exports: “About 80 percent of the steel and aluminum that is moved through New Orleans moves up the Mississippi River via barge, and those same barges are utilized by our farmers and agricultural products,” he explained. “So if less barges are going up, obviously that’s going to increase the cost of transportation and make our agricultural commodities less competitive in the world market.”

Steel imports have not slowed yet at the Port of Milwaukee because they are under long-term contracts, but Director Adam Schlicht reported an “almost immediate halt” in corn exports because of retaliatory duties imposed by the European Union on American products following the announcement of the steel and aluminum tariffs.

The Port of Baltimore, which saw a record 21.6 million tons of trade in the first half of 2018, is also bracing for tariff impacts.

“The next quarter will be really telling, because the tariffs will be in full effect at that point,” Daraius Irani, chief economist at Towson (Maryland) University’s Regional Economic Studies Institute, told the Baltimore Sun. “Because the port is just a facilitator of exports and imports, anything that impacts world trade is going to impact the port.”

It’s a similar story at the Port of South Carolina: CEO Jim Newsome said that “while we look forward to continued growth through 2018, we will continue to monitor the potential for tariff negotiations to adversely impact containerized trade if prolonged or not otherwise resolved successfully.”

It will likely take a few more months to get national data on port productivity post-tariff implementation. First, with the holiday season coming up, activity will likely remain high as American consumers make purchases even with the new tariffs on consumer goods (the cost of which will likely be passed onto them). Second, whatever impact there is will likely be greater after Dec. 31, 2018, when those tariffs rise from 10 percent to 25 percent.

Eno will continue monitoring how the tariffs affect U.S. ports and the freight transportation network more broadly.

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