COVER STORY, APRIL 2010

IMPORT-DRIVEN PORTS WITH AN EXPORT-DRIVEN MANDATE
Whether to or fro, So. California's ports are good to go.
Tom Taylor

The ports of Los Angeles and Long Beach handle approximately 36 percent of all containers that enter or leave the United States — by far the nation’s largest port complex. They are strategically located to handle the importation of goods, but changing economic conditions and the recently announced National Export Initiative are favoring exports. Changing patterns of commerce will affect the national status of the ports of Los Angeles and Long Beach. These changes in global trade will, by extension, also alter the landscape of how industrial real estate is used and developed in Southern California.

At their peak in 2007, combined port volume at Los Angeles and Long Beach was almost 11.3 million loaded containers, according to data collected from the ports. This included 8.1 million imported containers; 72 percent of all the container activity at the ports was related to imports. In 2009, things changed dramatically: combined port activity totaled almost 9.1 million loaded containers, a 19.6 percent decrease from 2007 due to an ongoing worldwide recession. This drastic decrease in port activity was not shared equally across imported and exported containers. From 2007 to 2009, imports decreased by an astounding 25 percent, but exports decreased a mere 5 percent. During the downturn, exports have fared better and were negatively affected to a lesser degree than imports.

Container activity at the ports of Los Angeles and Long Beach is beginning to bottom out and is showing signs of a rebound. However, growth has not been uniform across imports and exports. In the first 2 months of 2010, loaded imports increased 13.3 percent from the first 2 months of 2009 while exports increased 32.3 percent for the same time period. While 2 months is too small of a sample period to make long-term projections, it seems that the growth in exports is outpacing the growth of imports at the largest port complex in the country.

Exports are also a major policy priority of the Obama Administration, which sees the promotion of exports as a critical component of both stimulating economic growth and as a way to create high-paying U.S. jobs. The National Export Initiative has the ambitious goal of doubling U.S. exports in the next 5 years. In the process, the administration expects that reaching this goal would support or create roughly 2 million American jobs. Many of these jobs would be in manufacturing, distributing and transporting these goods, leading to an increase in demand for industrial space nationwide. Time will tell. To achieve these goals, the administration seeks to boost exports by small and medium-sized businesses. In addition, the federal government looks to reduce barriers to trade, assist in export promotion of services, increase export credit with the Export-Import Bank and lead government trade missions and commercial advocacy abroad.

While a government mandate to double exports is encouraging, the fundamental drivers of U.S. exports continue to be market based. The two most important are the economic growth of countries that purchase U.S. produced exports, and perhaps the most important is the relative strength of the U.S. dollar. Let’s examine these issues one by one. 

The growth prospect for export markets is very promising. The International Monetary Fund (IMF) projects robust growth in Asia’s developing countries, with an average growth rate of 8.4 percent projected for 2010 and 2011. These countries are seeing an increase in consumer and government demand for U.S. goods and services. This trend is likely to continue as these developing countries will be among the first to emerge from the world-wide economic recession.

The second and most important factor in encouraging exports has to do with the purchasing power of the U.S. dollar. When compared with foreign currencies, a weaker dollar will boost exports as American produced goods are more attractive to foreign buyers. Market forces have been creating a weaker U.S. dollar, but recent world events have actually strengthened the value of the dollar relative to the Euro. These events are due to investors seeing continued weakness in Euro-denominated countries. A larger issue is the currency exchange rate with China. In April, both the U.S. Treasury department and the IMF will announce whether China is guilty of artificially lowering the value of its currency. Additionally, a current bill in Congress seeks to impose tariffs if China does not alter its exchange-rate policy.

If the economies of our largest trading partners continue to improve, and the exchange rate of the U.S. dollar is favorable towards exports, the daunting goal of doubling U.S. exports, while far-fetched, is plausible.

Combined, the ports of Los Angeles and Long Beach are also the largest export container ports in the United States. This is not surprising given that China, Japan, Korea and Singapore are major export markets of U.S. goods.

Southern California industrial real estate would benefit from increased exports to these foreign counties as many of these goods would be produced within the Los Angeles Basin, which boasts the largest manufacturing base in the country. In addition, goods produced elsewhere would need to be consolidated and warehoused before they could be shipped, further increasing industrial real estate demand across Southern California.

Few people expect the United States to switch from a net importer to a net exporter of goods. While global trade winds are changing, the ports of Los Angeles and Long Beach are still likely to be favored, with trade likely becoming more balanced in the future as a greater percentage of containers are devoted to exports.

Tom Taylor is executive vice president in Colliers International’s Ontario, California, office.

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