Trade deficit surging, Ports of Los Angeles and Long Beach backlogs ballooning
$100 per day fines for idle shipping containers piling up at Southern Californian ports
“If a foreign country can supply us with a commodity cheaper than we ourselves can make it, better buy it of them with some part of the produce of our own industry, employed in a way in which we have some advantage.”
- Adam Smith, The Wealth of Nations
You are probably familiar with the images of massive container ships parked offshore US ports in recent months. There are a number of reasons for this, but in general it is a symptom of a series of disjointed government policies over the past 20 months. The effects are being felt globally as companies scramble to keep goods readily available for consumers. Sporadic shortages of random products have become a daily occurrence for many. I will discuss the current state of US commerce in this article.
Economists measure the country’s balance of trade, or net exports, which is the monetary difference between exports and imports. This is done to monitor the flow of goods and services between countries. Net exports is a component of GDP, or gross domestic product, a measure of economic progress and growth. When exports are greater than imports, you have a positive trade balance adding to a country’s GDP; when imports exceed exports, a negative trade balance subtracting from GDP. Trade surpluses add to economic growth while trade deficits detract from it.
The US Census Bureau announced a record-setting $80.9 billion monthly trade deficit for September 2021. As a country, we are consuming more than we produce. This is nothing new and has been the norm for decades; however, it exposes our extreme dependency on other economies to manufacture goods for us. The staggering deterioration of the United States’ trade balance is certainly a concern going forward. When you annualize the September deficit, you arrive at nearly $1 trillion in imbalanced trade. Is it prudent to have such a lopsided dependency in commerce? I think not.
In The Wealth of Nations, Adam Smith wrote of the benefits of trade. The quote I chose above highlights the necessity of a balance to trade; paying for imports with exports. Unfortunately, with a chronic and aggravated trade deficit, the United States is not upholding that tenet of Smith’s. The concept of a balance of trade utilizes the term “balance,” yet our trade is as imbalanced as ever.
You’re seeing the detrimental outcomes at our ports. Shipping rates skyrocketed over the summer as fiscal and monetary stimuli pumped into the economy are driving demand to nosebleed levels. As an economy overly dependent on imported consumer goods, this is not sustainable. We are sending paper in exchange for real goods. Eventually, the rest of the world stops taking that deal.
Cargo ships backing up off the coast of California are becoming viral photos shared on social media. The Ports of Los Angeles and Long Beach are responsible for over 30% of all US imports. Collectively known as the San Pedro Bay Port Complex, it ranks as the 9th largest in world by shipping volume.1 These ports are critical for consumer goods imported from Asia to the rest of the country.
The ocean freight backlog has already become an environmental disaster. The U.S. Coast Guard determined the MSC DANIT’s anchor, operated by MSC Mediterranean Shipping Company S.A., dragged and punctured an undersea oil pipeline dumping 25,000 gallons of oil onto California beaches.2 This was due to the port congestion where massive container ships are unable to unload, sitting offshore in anchorage.
Due to the unending glut of imports, the Ports of LA and Long Beach decided to fine shipping companies $100 per day for every container left at the terminals for >9 days. This is resulting in an estimated nearly 60,000 shipping containers facing financial penalties as warehousing options are unavailable.3 These fines will only add to the inflationary pressures consumers are facing. The costs will work through supply chains and ultimately be integrated into the retail prices you see at the store.
Ultimately, there will be an economic reckoning. The costs of these vessels to park offshore for days or weeks is incredibly expensive. The fines by these ports for containers piling up will further strain logistics. Being as dependent on foreign imports as the United States is raises very serious economic concerns. Trade has to be balanced. This mammoth trade deficit illustrates our country consumes far beyond what it produces. The market is a humbling force, and unfortunately the market may determine, abruptly, that the days of hyper-consumption are over. If that’s the case, we are in for an economic shock we are not ready for.
The Port of Los Angeles. Retrieved November 8, 2021. Economic Impacts. https://www.portoflosangeles.org/business/statistics/facts-and-figures
Reuters. October 19, 2021. U.S. Coast Guard boards ship in connection with California oil spill. https://www.reuters.com/world/us/us-coast-guard-boards-ship-connection-with-california-oil-spill-2021-10-17/
Kay, Grace. November 4, 2021. Nearly 60,000 shipping containers are on a penalty clock for a $100-per-day fine at backlogged Southern California ports. Business Insider. https://www.businessinsider.com/nearly-60000-shipping-containers-face-fine-at-backlogged-ports-2021-11