WHAT IS COVERED IN TODAY’S INSIGHT?
Quick Read
National Blowback
Global Competitiveness
Production Redesign
Actionable Takeaways
INTRODUCTION
Towards the end of August, a major nationwide strike took place in Canada as the nation’s two largest rail companies, Canadian National and Canadian Pacific, faced off with unions. Over 9,300 workers were either locked out or went on strike over wages and working conditions. The strike was set to paralyze Canadian society, as rail companies also owned tracks that passenger trains used to ferry people between major cities (like Toronto) and surrounding areas. As fears grew of the economic cost of the strike, upwards of $341 million per day, the Canadian government stepped in and forced parties to return to work.
While this was purely a domestic affair, as is the case with many domestic events today, geopolitics was pulled into the picture.
A Canadian potash company, Canpotex, warned that without efficient rail and trucking transport, Canadian potash exports would be derailed, and buyers in other parts of the world, in particular Asia, could turn to other sellers like Russia. For Canpotex, rail was the only real solution, as one week of potash deliveries by train would equal around 10,000 trucks on the road.
If a Canadian rail strike could ring global alarm bells, then imagine what a major port strike in the US could do.
For several months, talks have been ongoing between the United States Maritime Alliance (USMX) and the International Longshoremen's Association (ILA). The USMX represents ports and container carriers, while the ILA represents 85,000 maritime workers at ports across the East Coast of the US and Canada.
The main catalyst for ILA to begin talks was automation, as certain USMX-backed ports began using “Auto Gate system,” which processes trucks autonomously without humans, taking workers out of the equation.
As talks have failed to yield results, the contract between USMX and ILA expired at midnight on September 30. This means that from October 1, 45,000 ILA workers across 36 ports, from New York to Texas, will stop offloading and processing cargo. These ports manage almost 50% of all US imports.
The port strike could cost the US economy $5 billion every day.
According to one analysis, a one-day strike could result in a four-to-six-day backlog, meaning it could take up to a week to clear cargo that builds up in the span of just 24 hours. But, what the US is looking at, is a potential strike lasting weeks, even months, unless a deal is met at the last minute or the government steps in.
This latter part, of government intervention is highly unlikely, as the Biden administration rejects forced-hand maneuvers and calls for collective bargaining (negotiations between unions and workers) to lead the way.
While some companies are acting fast by moving cargo to ports on the West Coast of the US, many shippers are facing paralysis in moving goods into the US. This means that America and the world are staring down the barrel of a massive new disruption that could be felt from politics to the economy.
1. QUICK READ (5 KEY POINTS)
A massive port strike in the US has begun, as 36 ports that handle almost 50% of US imports, come to a standstill, putting America in a precarious situation in the middle of a hot election.
The consequences of the port strike are massive, as just a two-week strike could cause backlogs that cannot be cleared until 2025, derailing global supply chains and trade with America for months.
For the US election, the port strike acts as an “October surprise,” a curveball that few saw coming, which could tilt the political scales in any direction, presenting advantages and disadvantages for each candidate.
All global supply chain projects have just received a new dose of reality and drive, as companies realize that they cannot move slowly as disruptions, from wars to labor strikes, derail operations.
The two big catalysts of the port strike in the US are quite shocking: a) the deployment of automation technologies, and b) pressures exerted by the Red Sea. Geopolitics and technology have separately sparked port unrest in America.
2. NATIONAL BLOWBACK
For now, much of the spotlight is on disruption to politics. The strikes are occurring with historic US elections next month.
The port strike could be the biggest “October surprise” in decades, as there is little certainty as to how this will sway voters. It is not just port workers who might vote differently.
According to some calculations, a two-week strike won’t be fully processed until 2025. This means that the current inventory companies have could disappear, and new inventory could either take a while to arrive or, when it comes, prices could be hiked, as demand far exceeds supply. For US consumers, already struggling with a cost of living crisis, another price hike is the last thing they want, and they are likely to respond at the ballot box.
This creates a new level of noise as to whether the port disruption benefits Trump or Harris. From one perspective, the port strike is happening under the Biden-Harris tenure, an event that Trump is likely to begin campaigning on, as a way to poke holes in the Biden-Harris leadership. But, from another perspective, the port strike could be seized by Harris as a way to move the conversation away from immigration and to link the port unrest to certain Trump policies.
Both sides will play the port strike to their advantage. But ultimately, few know how such a strike and corresponding economic pain, will translate into different voting behavior (if any).
But, connected to this, are questions about the broader US economy.
Without a solution or fix, what begins as a strike at the ports could quickly snowball into a decline in US production. This would then cause a drop in logistics across America, from warehousing to rail transport to trucking hauls. And, this would begin to eat into investors and corporate activity.
This kind of “economic domino effect” should be on the radar of policymakers.
A shaky US economy could be pinned down by a port strike, that begins to disrupt the entire national economy. And, this could generate global shockwaves. When the US jobs report came out last month, resulting in US stocks dropping, on the other side of the world, the Nikkei’s 225 index posted its worst drop in more than 30 years. And this was from a jobs report.
There are also big questions of reliability.
Is production in America, or even North America, reliable in light of what is taking place from the US to Canada? The idea that the world can bet on North America as a stable pillar of the global economy, especially amidst chaos in Europe and the Middle East, could now be on the line.
A myriad of factors, from pandemic lockdowns (where the shipping industry saw historic activity) to technological deployment (where automation is being used to cut costs) to global wars (where shipping is being disrupted by attacks and threats), have suddenly converged into a supply chain and economic nightmare facing America.
And with no government intervention, along with the slowing economic performance, many could ask whether more strikes are on the horizon, and whether building in America is a sound approach.
3. GLOBAL COMPETITIVENESS
If US manufacturing slows down, one of the outcomes is a strengthened China.
At the core of America’s strategy to rebuild its manufacturing, is to take on China and end America’s trade reliance on other nations, in particular American adversaries.
While America grapples with a port strike, slowing production and business activity, China faces no such issues. In fact, in China, factories are pumping out huge numbers of goods, driven by a post-pandemic growth plan, which the West is taking aim at through the lens of “overcapacity.”
The idea of the US rivaling China in manufacturing could take a hit depending on how the port strike evolves.
It is not just about whether America can produce and export. This, of course, is a big concern. It is also about what American companies do in order to secure goods that are in the backlog at US eastern ports. Whether it is raw materials or electrical components, American businesses might increasingly turn to ports on the West Coast, and that could mean relying on Chinese imports.
Indirectly, could the port unrest cause a flood of Chinese goods into America?
And, it is not too out of leftfield to say, that the longer the port strike goes on for, and the bigger the backlog becomes, China might quietly capitalize by tinkering with prices on certain exports that are needed in the US.
While the US faces geoeconomic challenges at home, it also faces challenges on the world stage.
If certain goods that America exports, are slowed or halted by the port strike, it could force buyers across the world to begin looking for new suppliers, echoing concerns expressed in Canada regarding potash.
At a time when the US and its allies are attempting to reduce global reliance on certain nations, the port strike could result in the exact opposite. From Europe to Asia, companies might turn to the likes of Russia or China, in a bid to offset the paralysis in America.
And, quietly, in certain capitals, concerns might spread about whether US energy exports, like LNG, are susceptible to strikes, which would jeopardize energy security in other nations.
4. PRODUCTION REDESIGN
Whether it is Canada, the US, or other parts of the world, like South Korea, where the first semiconductor strike in history took place at a Samsung plant in July, strikes are becoming a frequent phenomenon in the global economy, far more than they were in the past.
While a certain amount of strikes are sustainable in the right economic climate, in the wrong climate, even the smallest number of strikes can disrupt the whole system. The latter is what is occurring today, as the world economy shakes, in part because of geopolitics, strikes are having an aggravating effect.
Companies around the globe may be watching the port strike in the US as the “final sign” that new supply chain action needs to be taken. It is one thing for strikes to occur in South Korea or Sri Lanka as part of normal business practices. But a port strike in the US jeopardizing 50% of imports, where the federal government refuses to intervene, and where the shadow of politics looms large, is a scenario few executives have planned for and even fewer are comfortable with.
The task at hand now, in companies across the world, especially those in critical sectors like technology or chemicals, might be to localize supply chains. This could have a two-fold effect.
First, it could result in existing supply chain projects like nearshoring, friendshoring, or reshoring, being injected with nitrous oxide (NOS). Companies might fret about strikes and other potential disruptions, and slowly dedicate more resources that keep production as close to consumers as possible.
However, this comes with big geopolitical baggage.
An acceleration in supply chain redesign threatens to leave some economies out in the cold. Whether it is angering parts of Europe or threatening parts of Asia, companies who seek to shore up US production could pull resources from other geographies, making those capitals livid. And many companies that America may be uncomfortable with could ride on the back of the supply chain redesign, including Chinese companies, from fast-fashion to automotive, seeking to build new inroads close to America (or in America itself) and out of Washington’s crosshairs targeting mainland China.
Second, in the US and elsewhere in the world, governments might rethink trade in a bid to shore up economic security. This could result in a new set of agreements between governments, port operators, shippers, and businesses to keep certain goods flowing (i.e., chips, critical raw materials) even if disruptions occur like a strike.
Of course, this second part would be no easy task, as it would diminish the bargaining power of unions. But, it would introduce a new setup that maintains normalcy in the face of upheavals. Such a deal creates a new challenge for Western societies, which have to balance workers’ rights with global crises.
5. ACTIONABLE TAKEAWAYS
Nothing is off-limits from geopolitics. Even a port strike in the world’s largest economy is being “stoked” by a war in the Middle East, where an Iranian proxy (Houthis) has disrupted shipping (in the Red Sea). A vicious circle has formed, where geopolitics is sparking new crises, like a port strike, which itself is sparking new geopolitical challenges like America’s manufacturing objectives to take on China being hit.
America faces a new economic headache. Unless the port strike is resolved and the backlog is quickly processed, the US is staring at a major economic disruption. Whether this materializes into a full-blown economic crisis, the fact is that 36 ports that manage almost 50% of all US imports could be offline indefinitely. This is going under the radar of most, but it should not be. The port strike represents one of the most significant economic events of the entire year.
Supply chains vs. labor strikes. Companies that are already driving new supply chain projects, from inception to redesign, are likely to place new importance on procurement, production, transport, inventory, etc. It is becoming clear to some boardrooms that without action, companies will be held “hostage” by labor strikes that are fast becoming the norm.
CONCLUSION
As the port strike jolts many, two folks, in particular, are likely feeling their pulse spike: Donald Trump and Kamala Harris. While the two presidential candidates have campaigned and planned for all kinds of new curveballs, the port strike has seemingly come out of nowhere.
Both sides might be sensing an opportunity for themselves and their opponent. And while most of the focus is on the impact of the US election, this is only the tip of the iceberg.
Even if the port strike ends swiftly, what it represents will stay in the minds of businesses and governments for some time and influence new decision-making on a range of issues.
A “fog of strikes” is where America finds itself passing through. And, surrounding it all, is the world stage. From taking on China to isolating Russia to attracting global investment, the port strike in America threatens America’s bold geoeconomic projects.
While a port strike begins in the US, a separate strike has begun in Canada, where dockworkers at the Port of Montreal have walked off the job, derailing two terminals that manage 40% of traffic at the port, which is the second-largest in Canada.
Two major port strikes are occurring in North America simultaneously. And, many more are in the rearview.
Perhaps US politics or China are not the biggest issues. Instead, it might be whether a “strike virus” has infected the world and what this says about the economic and social designs much of the world employs.
-Abishur
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