How to Make More Noise Than Sense

By Jock O’Connell

“Exporters face ‘terrible’ situation” screamed the February 3 headline in the esteemed transportation industry publication, FreightWaves. “Exports are dropping like a rock,” one freight-forwarder is quoted as saying. “The ratio of U.S. imports to exports is increasing to a level we’ve never seen before - it’s now more than 3 to 1.”

Before going any further, let’s stipulate that the ratio of inbound container traffic to outbound traffic at U.S. ports has lately been much higher than normal. However, let’s also acknowledge that the chief reason for the heightened imbalance is that immensely destabilizing surge in containerized imports that has been congesting U.S. seaports and stressing the nation’s supply chains. During the last quarter of 2020, loaded import containers nationally were up 20.8% from a year earlier. Exports of loaded containers, meanwhile, were down 3.9%. A drop, certainly, but hardly at the rate of a falling rock.

What has lots of people fulminating, though, is the sharp rise in the number of empty outbound containers sailing from U.S. ports. Rather than being devoid of content, it’s widely argued, many of these empties should properly, if not patriotically be conveying hundreds of millions of dollars in American goods to overseas markets. Instead, reports abound of freshly emptied import containers being quickly corralled and returned to Asia, where they will again be stuffed with even more goods U.S. businesses and consumers have been willing to import at premium delivery prices.

To some observers, this rapid recycling is being done not merely to meet cooped-up Americans’ apparently insatiable thirst for imported merchandise but to fatten the earnings of shipping lines, which charge higher rates for containerized imports than exports. Not surprisingly, tales of export shipments being denied or delayed by ocean carriers have gone viral, a term a lot of media influencers seem fond of using even in the midst of a deadly pandemic.

But scuttlebutt is one thing; hard data are another. So, when CNBC, the New York-based cable news provider, weighed in on January 26 with an incendiary claim that ocean carriers at the Ports of New York/New Jersey, Los Angeles, and Long Beach had rejected (CNBC’s word) an estimated 177,938 TEUs last October and November, alarms rang in the corridors of power.

More specifically, as CNBC alleged, “carriers rejected U.S. agricultural export containers worth hundreds of millions of dollars during October and November, instead sending empty containers back to China to be filled with more profitable Chinese exports.”

Over the next few days, the CNBC numbers were cited—without equivocation—in most every publication faintly associated with maritime trade as well as by overly credulous editorialists eager to expound on any supposed manifestation of economic injustice. Understandably, the numbers also became invaluable grist for an already voluble agricultural export lobby.

The CNBC analysis, particularly its finding that the vast majority of those 177,838 spurned TEUs were rebuffed by ocean carriers serving the two big Southern California ports, caught the attention of folks at the state capital in Sacramento. Within short order, a letter co-signed by several prominent state economic development and agricultural officials was dispatched to the Federal Maritime Commission requesting the FMC’s intercession. More on this letter later.

But first, since no publication I’ve seen has bothered to ask about the provenance of the CNBC claims, let’s us take a closer look at their numbers. (Let’s also forget about the Port of New York/New Jersey. That’s in part because Savannah eclipsed PNYNJ as the nation’s third largest exporter of loaded TEUs a couple of years ago and in part because this newsletter is fundamentally more concerned with the two Southern California ports.)

According to CNBC’s investigation, the total export container “deficit” for the Ports of Long Beach and Los Angeles last October and November was 136,392 TEUs. How did CNBC come to this curiously exact estimate? Did CNBC’s analysts acquire affidavits from shippers willing to testify to precisely how many of their export containers had been thwarted by greedy shipping lines? Since cargo owners seldom share business details with even their mothers, that’s highly doubtful. Instead, they must have used some arcane methodology involving arithmetic.

And, indeed, that’s what CNBC cops to. In the words of the January 26 report, CNBC says they calculated the number of allegedly denied TEUs “by taking the difference between the actual empty exports in 2020 vs. the 2019 share of export empties.”

The first part of the formula is easy enough: The two San Pedro Bay ports tell us they collectively shipped 1,134,177 empty TEUs last October and November, up considerably from 828,772 TEUs during the same months of 2019. But the second part of the formula is, well, puzzling. To me, it looks like a numerator in search of a denominator. 2019 export empties share of what? Total TEUs, total exports? Disputed ballots? Methodological clarity evidently not apparently being the distinguishing hallmark of the CNBC analysis, we press on.

To the rescue comes a maritime industry celebrity. In that January 26 report, CNBC boasts: “These estimated TEUs are the empty exports that should have been filled in 2020,” said John Martin, manager of the economic and transportation consulting firm Martin Associates, who verified CNBC’s findings. “This formula shows you the increased ratio of empty export containers to total exports. This data suggests particularly the Los Angeles, Long Beach argument that empty export containers were being moved as quickly possible, leaving U.S. export cargo on the docks.”

So, the path to that 136,392 TEUs figure essentially involves finding the ratio of export empties to total exports (i.e. loads plus empties). Why, I don’t quite know. As it is, the formula is nothing more than a statistical head fake. Its flaw is its implicit assumption that, unless export loads move up and down in tandem with the number of export empties, there’s mischief afoot on the waterfront.

Humbug.

While it is certainly true that ocean carriers have had a powerful incentive for hustling as many empty containers as possible back to Asia, the TEU numbers cited by CNBC no more sustain their highly provocative conclusions than they prove that Col. Mustard used a candlestick to commit murder in the conservatory.

Contrary to what the CNBC analysts contend, the real world link between imports and exports is tenuous, at best. Indeed, for all the current obsession with how much the San Pedro Bay ports are being overwhelmed by imports, the two ports in recent years have been renowned for exporting considerably more empties than loaded TEUs.

As Exhibit A should make abundantly clear, the Ports of Los Angeles and Long Beach have not been where you might expect to see spasms of export growth, much less the tight statistical connection CNBC thinks should exist between outbound loads and empties.

If anything, the imbalance between export loads and export empties in San Pedro Bay last year simply extended a trend that had begun in the middle of the past decade. What made last October and November different – indeed, what made 2020 different – was the unprecedented flood of containerized imports that began last spring as Chinese factories began to reopen after a Lunar New Year holiday extended by the outbreak of the COVID-19 virus.

The erroneous assumption underlying the CNBC analysis is that the surge in imported TEUs in the second half of last year, by enlarging the pool of presumably available empty containers floating around the country, should have fostered a commensurate surge in containerized exports. But why is that a valid expectation?

U.S. exports struggled all last year as exporters faced not only tariff barriers but pandemic shutdowns that staggered the economies of nearly all of our major trading partners. U.S. Commerce Department statistics show that the value of America’s merchandise export trade shrunk by 12.9% last year, despite a nearly ten percent slide in the value of the dollar that would normally have benefited U.S. exporters. Surely, the 8.7% decline in U.S. airborne exports last year had nothing to do with the scarcity of marine containers. At the San Pedro Bay ports, export loads peaked in 2014, while the trade in empty export containers continued to grow without any apparent regard for how many loaded TEUs were arriving each day.

The CNBC contention that 136,392 TEUs were rejected by carriers last October and November at the Ports of Los Angeles and Long Beach is based on a serious misapprehension, namely that some iron law exists that says the number of export loads shall always move in lockstep with the number of exported empties. CNBC’s formula only yields a conclusion where none is warranted.

The reason the dog did not bark, my dear Watson, is that the dog was somewhere else.

Worse, the hyped-up, headline-garnering allegation that these 136,392 TEUs were actually rejected by shipping lines—known to be almost entirely foreign-owned—is an especially egregious accusation of possible violations of federal law.

To compound their folly, the CNBC investigation also puts a price tag on the losses exporters purportedly suffered. For the 177,838 TEUs supposedly denied space on outgoing vessels at the Ports of New York/New Jersey, Los Angeles, and Long Beach last October and November, CNBC determined a loss of $632 million. ($485 million would have been incurred at the Southern California ports.)

Where did this number come from? It’s hard to say and frankly not worth pursuing, except to note it apparently has something to do with the declared value of containerized soybean exports from the Port of Los Angeles. Soybeans are a relatively minor export trade through the port, but then containerized soybeans do seem to obsess some journalists, even though only about one-tenth of U.S. soybean export tonnage moves in containers. In short, the $632 million number is a contrivance designed, I can only guess, to further dramatize a contention that rests on statistical evidence that can best be described as thin.

Now onto that January 28 letter.

The CNBC allegations about rebuffed shipments of agricultural exports clearly struck a nerve among California leaders. It was, however, characteristic of the peculiar myopia with which East Coast journalists view the West Coast that nowhere does CNBC acknowledge knowing that the Port of Oakland plays a much larger role in California’s agricultural export trade than do the two Southern California ports. Still, it was upon farm exports that the letter from California officials to the FMC dwelled.

“We are writing to seek your assistance to address the current delays and ongoing shipping challenges in California ports which are significantly impacting the operations of businesses throughout the state. In particular, the operations of our agricultural sector which relies heavily on export markets are being heavily affected. California is the largest agricultural exporter and producer in the nation with more than $21 billion in agricultural exports annually, requiring and supporting an estimated 157,800 full-time jobs. These exports directly benefit the national economy by generating $25 billion in additional economic activity. The current port situation falls within a crucial timeframe for California’s agriculture sector as it is occurring during a peak shipping period for several commodities.

Within the tree nut sector alone 75 percent of California’s walnuts are shipped during the last quarter and beginning of the year, as are 40 percent of our pistachios and 48 percent of our almonds. This represents approximately $3.8 billion in exports, 17 percent of total California agricultural exports.”

All very interesting; all highly inaccurate. While the co-signers certainly leave the impression that legions of California agricultural exporters were being stiffed by the ocean carriers, what do the exporters themselves tell us?

Let’s start with the state’s leading farm export, almonds. The California Almond Growers Association reports that December exports were down by NO, WAIT! It turns out that almond exports in December jumped by 32.1% over the same month a year earlier. In fact, almond exports during the entire fourth quarter of 2020 were up 19.2% year-over-year. That amounts to an increase of just over 100 million pounds. Given the charges being levied against shipping line, that increase is either a logistical sleight-of-hand or a genuine loaves and fishes miracle.

Okay, you demure, almonds are just one commodity, albeit a commodity that alone accounts for over 22% of the value of California’s agricultural export trade. What about the state’s second leading agricultural export? That would be pistachios, according to the folks at the Agricultural Issues Center at the University of California, Davis, who have had a contract since 1997 with the California Department and Food and Agriculture to compile the state’s official farm export numbers. So how did pistachios fare in last year’s final quarter? Not too shabbily, reports the Administrative Committee for Pistachios. Fourth quarter exports were up 19,292 tons or 28.8% over the same period a year earlier.

Fine, you say. But that’s just two commodities, although they’re two nuts that account for 30% of the state’s total farm exports. What was that other product the state officials’ letter said was being snubbed by shipping lines? Oh, yes, that would be walnuts. Well, walnuts (the state’s fifth biggest farm export) didn’t do as well as pistachios. In last year’s fourth quarter, walnut exporters contrived to ship 34,815 more tons than they had a year earlier, an increase of only 17.9%, according to reports from the California Walnut Board.

So this is what all the fuss has been about: bad arithmetic.

Disclaimer: The views expressed in Jock’s commentaries are his own and may not reflect the positions of the Pacific Merchant Shipping Association.