Lots More on Potentially Massive East Coast Port Strikes

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1:33Bloomberg Audio Studios. Podcasts. Radio. News. The strike is bananas. B-A-N-A-N-A-S. Strike is bananas. Remember bananas, Joe? Are you talking about the fruit or something else here? No, well, I'm talking about the fruit. So I don't know. My kids eat bananas. I remember bananas. Okay. Are you worried about the banana supply chain? I can't believe we're dealing with this again. Oh, my God. Yeah. So another port issue. I did a deadlift. One, two, three. Hegemony. Okay, good. Hegemony. Barges. This is an after-school special, except. I've decided I'm going to base my entire personality going forward on campaigning for a strategic pork reserve in the US.

2:24Where's the best squid ink pasta? These are the important questions. Is it robots taking over the world? No, I think that like in a couple of years, the AI will do a really good job of making the Odd Lots podcast. And people will say, I don't really need to listen to Joe and Tracy anymore. We do have... Cha-ching. The perfect guest. You're listening to Lots More, where we catch up with friends about what's going on right now. Because even when Odd Lots is over, there's always lots more. And we really do have the perfect guest. So it looks like the International Longshoremen's Association, the ILA, there's going to be a lot of acronyms.

3:04They're kind of struggling to work out a deal with the United States Maritime Alliance, USMX. And so we might have disruption at the ports. It's 2020 all over again. The entire East Coast, from my understanding, every port on the East Coast, which I think has all kinds of influence from bananas to cherries to auto parts, could be on strike as soon as October 1st. Craig, what's going to happen? What's going on? A lot of people asked years ago, how could you set up a media business based on the supply chain? There's just that list up, isn't there? This always happens, but nobody cared before 2020.

3:43You know, everyone's aware that these supply chains are vulnerable and these issues happen. They've always, it's always been this way. It's just that up until recently, no one really paid attention to them because they didn't experience them personally. But this stuff is always taking place. We are up to a new union contract. The ILA is insisting that if their demands aren't met, that they're going to strike. And that would be potentially catastrophic to supply chains if it goes on for a long period of time. We are, of course, speaking, Tracy. We are speaking with Craig Fuller. He is the founder and CEO of FreightWaves.

4:16And to his point, Tracy, I don't think we ever once talked to him before 2020. And now we've probably talked to him like seven times or something like that. Yeah, I think that's very true. Okay. So, Craig, what are the main sticking points here? Because the coverage that I'm reading about the tensions between the ILA and USMX, I see issues on wages, issues on benefits, issues on port automation. When I read the list, it kind of feels like there's disagreement on everything. Pretty much. At the end of the day, I think it comes back to the fact that labor has more leverage today than they've had in decades.

4:55And it's really a couple of things. One is you have a very friendly administration to labor, probably arguably the most labor friendly administration in decades. This is in the White House currently. And you have a lot of leverage because of a supply and demand problem is that there just aren't enough workers that want these types of jobs. and that gives them enormous amount of leverage in these contract negotiations. But fundamentally, their arguments are that they don't want automation and they want significant pay increases is really what it comes back to. Those are the fundamental disagreements here is really economic and really technology and it's concerned that it's taking jobs or potential jobs away from their members.

5:37Setting aside the politics, and we know the politics are going to be very complicated for a democratic administration that's prided itself on being a friend of labor, but also doesn't want to have a massive economic disruption just a few weeks out from the election. But setting all that aside, maybe we can talk about that a little bit more. Does the government have tools to stop a strike in the same way it apparently can sometimes with potential rail strikes? They can ask for a cooling off period. So this is not subject to the same regulatory environment that you have with railroads. The railroads have a very specific group that govern a lot of the relations with the railroads because there's a lot of history to that.

6:19But effectively, what is in the arsenal of the White House is the Taft-Hartley Act. I mean, essentially what they're able to do with that is force them into a culling off period of 80 days. And so they can actually make them go back to work. The question is, if you make people who don't want to go back to work, how hard are they actually going to work? And I think that's the big concern is, yes, you can force them for at least 80 days to cool off and force them into effectively a mediation and arbitration environment, but you can't force them to work if they're called back in. So I kind of think the interesting thing about the potential strike is it's already or it seems to already be having an impact on shipping.

7:02And I saw that announcement from Hapik Lloyd that they were going to implement a work interruption destination surcharge. How common are those? Is that like a normal thing? Well, this is an interesting environment because not only has labor gained an enormous amount of leverage, but really since COVID, the ocean container lines have gained an enormous amount of leverage. I mean, what is untalked about or undiscussed in the public, and I think the Biden administration for all of the sort of, you know, as a supply chain professional, we're pretty critical of, you know, every administration when it comes to supply chain issues.

7:37But one thing that I think the Biden administration actually got correct was back in 2000, when we had the big launch in 2022, as sort of a peak or the sort of apex of the, or the climax of all the supply chain challenges with the ports is they had correctly identified that the big port containers had an enormous amount of pricing power that really made them a cartel. And I think they have a lot of validity and data to support that. I mean, if you think about this, the top 10 ocean container lines have 90 % of the market share of international container movements. I mean, they have an enormous amount of power.

8:1510 companies control 90 % of the flow of cargo. To put that in perspective, OPEC is approximately 40 % of global oil supplies. And so if you could argue that OPEC is a cartel, you should be able to argue, and I think rightfully so, that the ocean container lines are a cartel. And what's happened over the last really 30 to 40 years is there's been massive consolidation in the international ocean container market. They're not subject to US antitrust rules the way that almost every other company is. And so they sort of live outside this framework where it enables them to do things that in every other industry, you would have regulators pounded on the door.

8:54And so this is what the Biden administration identified back and came out talked about it. There was some laws passed in Congress that we haven't seen any real outcome in terms of change of how these guys operate. But what you're seeing now is the ocean container lines have realized that they can use their pricing power and their leverage over shippers to really increase and put these surcharges. We saw it during the attacks that happened to the Red Sea. We're now seeing it related to the port strike. And look, off the record, a lot of folks that we've taught to sort of through channels that are very close to some of the executive leadership at these lines will tell you that they, in some ways, kind of want a strike to happen.

9:34They would never admit that to their customers. But they actually gain an enormous amount of leverage. Think about the capacity that that pulls off the market. Like these are capacity-constrained businesses. If you have ships that are sitting fully loaded outside of US ports and can't be moved or offloaded, then you've pulled off an enormous amount of capacity out of the market. That demand is still going to be flowing. And so for them, it gives them enormous amount of pricing power. A surcharge is only one piece in that arsenal. What you'll also start seeing is aggressive spot pricing if that capacity gets pulled out.

10:11And what will happen is all of those container ships will sit off the coast. They will wait to be unloaded. And let's say this strike goes on for a couple of days. Probably not a big impact. You may see a week of slowdown. It may take a week or two to get back to where we're at. But if this goes on for a few weeks, it could be months before we see the system sort of adjust to those changes simply because all those container ships have to be unloaded. They all get loaded in a sort of a big bottleneck. And so there's a significant delay to unload those because there's a finite amount of capacity to actually do so.

10:46And then those ships then have to go back to pick up more cargo. And so that will pull a lot of capacity off the market. And so I think the ship lines, actually, it's in their interest to actually see labor disruptions. Yeah, Joe, this reminds me so much of Sam Brines' argument about price over volume and this idea that in an environment of disruptions and capacity constraints, as Craig just put it, you can raise prices to offset the loss of volume and still make a decent amount of margin.

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12:59Ready to bring your visions to life? Learn how at amazonbusiness.com. I'm just curious. This is actually a little bit separate from the strike. What are we seeing right now with trade flows that perhaps are anticipatory of trying to get ahead of possible increase in tariffs next year? Look, I think the facts are that we have record container volumes into the United States. We had talked about this, I think, in 23. And I had argued, and I was wrong, clearly wrong in this, that we've seen record volumes in the ocean container market. This is what I argued back in 22. And we were unlikely to see a repeat of that.

13:39Well, that's clearly not true because this year, we've actually seen records broke, or at least matched back where we were in 22. And so we are seeing record volume of imports. And there's been a lot of question about what's causing that. A lot of theory is that the port strikes that are causing shippers to move freight in advance. Certainly some of that's happening. No one, you know, these labor issues are not black swan events. They are expected. They're anticipated. Everybody knows when the contract comes up and everybody knows that there's going to be some level of pressure in terms of both parties sort of posturing.

14:13There's a lot of stuff that is behind the scenes that we don't actually get to see or hear about. that's actually taking place. But the reality is these two sides are very far apart, as Tracy correctly identified. And that's one issue that supply chain professionals have had to account for. And that's causing some volume surges. The second is this threat of tariffs. Donald Trump has come out and talked about increasing tariffs on China by as much as 60 % or has been reported as much as 60 % and 10 % for everywhere else. That is part of the calculus. And even if Harris wins the election, as we've seen with Biden, he didn't reverse any of Donald Trump's original trade policies or an original tariffs.

14:51So we will, I think, can see a continuation and doubling down of tariffs as an instrument in policy that makes supply chain organizations prepare for these types of events. I mean, Donald Trump's changes would be pretty significant or not even pretty, would be very significant, whereas Harris is probably going to take a little bit more of a measured approach in terms of her. But the reality is we're dealing with this. And then the other thing that I think is really interesting is that if you look at the Chinese economy, and I know you guys have covered this a few times, is Chinese consumers are suffering one of the biggest recessions and downturns and activity that we've seen since it opened up trade.

15:35And so we're seeing a situation with China where they have all this excess capacity and production capacity that some of that was built for domestic consumption that, frankly, none of that stuff is being bought. So they're producing these manufactured goods and they're effectively dumping them on U.S. consumers because what's happened is the big box retailers have gone shopping. They're loading up the ships with a lot of discounted merch to sell to U.S. consumers. And because what happened during COVID is we saw these record inflationary impacts. For about two years, the retailers just took it.

16:09They didn't have a choice. is a fear of running out was a bigger issue than actually paying high prices. So that showed up in inflation. But over the last 18 months, because of what's happening in the domestic Chinese economy, we're seeing significant price concessions offered to US retailers, and US retailers are taking advantage. So that's why we're seeing a lot of additional volume. All of the geopolitical stuff is certainly real and it's happening. But I also think that there's a pure economic driver due to just significant price concessions offered by Chinese manufacturers. Wait, so just going back to the idea of record volumes meets a potential strike, but how much volume could be diverted away from the East Coast?

16:55Like, if I go back to shipping a teddy bear from Hong Kong to the US, can I just, I'll just ship it to LA instead of, I don't know, Baltimore? You would certainly think you could. Unfortunately, the West Coast union that is under a different contract has said that they will not unload any ships that were diverted to US Coast. So now we have a real - Solidarity, port solidarity. Solidarity. Absolutely. They are not going to cross the line. And so effectively what you have is this refusal to unload cargo at US ports on both sides of the coast. And you do have some non-union, Savannah is an interesting sort of city because it's sort of not a union.

17:37I mean, it's a southern city and it's not a part of the ILA. So we had this sort of couple of exceptions that are not, don't have to play ball, if you will, or won't play and participate in the labor issues. But for the most part, this is a situation where retailers and importers don't have a lot of optionality. And this is a relatively new development. There have been whispers about this for some time, the conversations, but now they've come out and said basically in solidarity, They're not going to unload ships. That is a huge development. I think if you'd asked me a month ago, I had believed that the Biden administration was going to force a cooling off period for 80 days.

18:16But we've seen recent reports where they've said they're not going to do that. How much of that is official posturing of, hey, we're not going to intervene. But as Joe correctly identified, this is an election season and a very contested election. And it's really a no-win situation for the Biden administration or the Democrats, I should say, because the Biden administration is all the way out. It's really a no-win situation. If they don't intervene, we have potential massive supply chain issues right before the holidays, which I think they would prefer not to have those headlines just generally.

18:45Nobody really wants me coming back on Odd Lots to talk about disasters. We do. We do. Because these things happen. So in the reality, you want things to be kind of boring. Yeah, of course. But then you have these union membership, which is incredibly contested this time around. You know, Trump actually is winning a lot of union support and rank and file. And so the question becomes, it's a no-win situation, in my opinion, for the Biden administration. They really don't have a winning answer on how they sort of resolve this. And so I would assume that there are a ton of back conversations that we're not privy to.

19:20You know those take place anyways. But I would assume there's a lot of stuff that's happening to try to get some resolution here. Craig. The official reports is they're not meeting, but the reality is they're certainly having conversations. Craig, if you woke up tomorrow and you're in a different life and it turned out your job is a spokesperson for the longshoremen needing to convince me that there's some reason not to aggressively automate our ports and that this risk of occasional strikes is worthwhile risk. I'm curious. I'd say we should have someone from the Longshoremen on to talk about this.

19:55My experience practically is that actually they're hard to get a hold of and aren't that easy from a media perspective, but that's no excuse to stop trying. Is there a steel man argument you could come up with for the system that we have in place, which is relatively light on automation and relatively heavy on a handful of powerful, solidly well-paid blue-collar jobs at the port? Joe, it's hard for me to make that transition because I find some of these arguments completely absurd. And so if we're talking about full automation and getting rid of absolutely all of the jobs, then I think you have a valid argument.

20:34I think as a log-torman having human labor, I could understand, you know, talk about eliminating these jobs. These are obviously high quality jobs or high paid. I can understand and empathize where it's coming from. But a lot of the automation that's actually being talked about is stuff that is really not humans don't add a ton of value in these types of structures anyways or these types of events anyway so one example of this is rfid technology when the trucks come in and out of the ports these dredge trucks come in you have toll passes that we all experience you know when i walked in the building this morning i used a key i used an rfid badge to get in the building what's great about that is you get all this data.

21:15Well, there are humans today that actually do the check-in process. And frankly, humans are, we all know this, is that humans are prone to a lot of, you know, we're not the most optimal solution. Computers can do a much better job in these types of situations where you're dealing with consistency. So it's hard for me to make the case that some levels of automation should not be promoted. And that's really what I think the longshoremen have said, we're absolutely not going to allow automation. And that's sort of the public official stance. Over time, they do soften some of those positions. If you look at historically, they will allow for some levels of automation.

21:54But this is an ongoing issue. I mean, we saw it during the Hollywood strikes is that actors and actresses were really concerned about AI replacing them entirely and creating these animated movies that looked very real with the likeness of a real human actor. So I think this is going to be an ongoing problem, an ongoing dispute between labor is always going to be fearful of automation of any level because to them, it's a slippery slope, right? They're concerned that if they allow RFID technology to check you in and check you out at the port, that that means that we're just one step closer to full automation.

22:37And that just isn't the case. I mean, Rotterdam, I got the chance to visit it a while ago, and there's ports in Asia as well that are, you know, Yeah. Rotterdam is stunning. But if you look at the place where there's still humans running the machines, they just happen to be doing it remotely. And there's an argument that the port runs far more efficient in terms of time in and out. There's a lot less delays. These machines aren't getting sick. But also safety is a really big factor in this. I mean, think about moving big boxes of 20 ,000 pounds across cranes. There's a lot of potential for safety issues.

23:19And so I have a hard time sort of empathizing with this argument. I understand the labor cost situation. And I was empathetic to the railroad, some of the rules around health days and sick days. I was kind of empathetic to their cause. I have a problem or a real sort of issue, Joe, making the case that some levels of automation shouldn't happen. So this episode is coming out on September 27th, and the deadline for negotiation is the end of the month, so just a few days left. What should we be watching in terms of gauging not just the outcome of this whole situation, but also the immediate impacts?

23:59Like, are there one or two things that you're looking at on a daily or even hourly basis at this point? You know, it's so hard, Tracy, having studied enough. I mean, one thing about my industry is we're always sort of in the front lines of labor issues because they do disrupt. So, you know, the freight industry is an interesting industry because when things work, nobody thinks about it. Supply chains often are like the utility companies. Like, when the power is working, you don't think about your local utility company. But when things are out, you all of a sudden think about it. And I think a lot about labor issues is a lot like I think about a big weather system.

24:36I'm this hurricane that's coming. Oh, yeah. I forgot about that. Yeah. The line of sight is right to Chattanooga, Tennessee. And we're all preparing locally for what happens if we don't have power? Should we get groceries? And all the things that you deal with the family, have a family of five. So we're thinking about this stuff. My wife and I are. But there's nothing to do until that happens. And I think this is the same thing with the labor issue is we know it's coming. We know the storm is upon us. We can see the path of it. It doesn't appear that either side is budging. It doesn't appear that the White House is going to intervene.

25:08So we know this has happened. There isn't a lot to do until it actually happens. And so I would say much like you see a hurricane is you know it's coming. You can prepare. But frankly, if you're running a supply chain and you haven't been making preparations for the potential of a disruption for months, you're really kind of left out. I mean, there isn't a whole lot you could do at this point. If your cargo is in a box headed to Newark, New Jersey, sorry, it's in the box and it's going to be up to labor to decide whether they want to play ball or not. Wait, I have one more very important question.