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January 20 2020

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Januar y 20 2020 | The Journal of Commerce 33 Land Lines Lawrence Gross Getting back to 'normal' THE "PHASE ONE" trade agreement the US and China announced in mid-December represents a signifi- cant standing down in the ongoing trade hostilities between the world's two largest economies. Under the limited deal, the US canceled import tariffs due to take effect later in the month and reduced some of the tariffs already in place in exchange for commitments from Beijing to purchase $50 billion in US farm exports and tighten intellectual property protections. Shippers and transportation providers alike exhaled in relief at the news, but even if the US and China can come to terms on the more com- prehensive trade agreement that still needs to be negotiated, the question then becomes whether the trading environment will go back to "normal." The short answer: not a chance. Forces have been set in motion by the US–China conflict that will continue to produce inexorable change in the coming years. Benefi- cial cargo owners (BCOs) again have learned the dangers to the supply chain that can result from a lack of diversification. The changes won't be quick, but they will be large, and history provides us with an example. In 2002, US West Coast ports were convulsed by an extended lockout in connection with the negotiation of a new contract with the International Longshore and Warehouse Union. This was followed by six years of peace on the docks, during which the offshoring revolution took hold and import volumes grew. In 2008, as the expiration of the contract approached, BCOs grew concerned that there might be a repeat of the 2002 debacle. The situation wasn't helped by a one-day walkout that shut down ports up and down the West Coast on May Day of that year, ostensibly in protest of the US war in Iraq. The existing contract expired on July 1, 2008, and although the union didn't agree to formally extend the con- tract day by day, the talks continued and cargo kept flowing smoothly. Things began to go downhill after a couple of weeks, however, as operations slowed and delays accu- mulated. Fortunately, an agreement was reached at the end of July and ratified by mid-August, so things were "back to normal" on the West Coast — except that they weren't. Simply put, BCOs had had enough. No longer willing to be held hostage to a volatile labor situation and feeling the need for other options, they voted with their feet. Prudent importers wouldn't continue with an undiversified port routing strategy. As a result, import TEU market share dropped for the ports of Los Angeles and Long Beach and the US West Coast as a whole in early 2008, and the ground lost was never regained. Further, the damage con- tinued, with US West Coast ports' share of container imports dropping steadily in ensuing years. BCOs pivoted away from depen- dence on the West Coast and toward four- and five-corner import strat- egies. It wasn't easy and it wasn't quick. But once the arrangements were in place and the groundwork laid for inland facilities and con- nections, further change became a matter of simply turning the dials. Entering 2020, BCOs have again experienced a graphic demonstra- tion of the dangers of a lack of diversification, this time with regard to an overdependence on China for sourcing products. In response, a limited volume has shifted to other locations, such as Southeast Asia, India, and Mexico. All the alterna- tives have problems, be it political instability, a lack of infrastructure, lack of capacity, or a lack of skilled labor. Solving these issues will take time, probably years. But just as with the creation of five-corner import strategies, once the genie is out of the bottle, there is no turning back. BCOs are con- cluding that the status quo, which includes dependence on an auto- cratic, one-party state with explicit policies favoring local entries, isn't a sustainable long-term model. The days of offshoring products to China as a "no-brainer" decision are over. Offshoring still will make sense for some, but it will be much more intricate and involved. There is little reason to expect containerized imports to grow much faster than domestic GDP gains in the relevant economic sectors. The trade will be more fragmented and complex. Near-shoring and even on-shoring will begin to look more attractive. It will take years for the situation to play out fully, but things will never get back to "normal." The real question now is what the "new normal" will look like. JOC email: twitter: @intermodalist The days of offshoring products to China as a "no-brainer" decision are over Hien Phung Thu /

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