Supply chains scramble to prepare as port union contract pressures mount

Just six months after a contentious, 13-month labor strike impacted 29 West Coast ports, the nation is bracing for a strike on the East Coast that could send supply chains into another tailspin during the peak holiday shopping season. This is one more reminder of the growing power of the labor movement at a time when consumers are increasingly focused on convenient retail experiences, including those that rely on workers to ship and deliver goods to their doorstep.

At stake is the movement of millions of containers of goods from around the globe into the North American port network that feeds into markets throughout the country. According to the U.S. Census Bureau, about 20% of all U.S. containerized imports are from Europe, with most of that cargo flowing through East and Gulf Coast ports. With the East Coast emerging as the top gateway for imports coming from Asia through the Panama and Suez canals -- and a preferred route for retailers tapping into growing population centers in the Sunbelt and the Southeast – even the threat of disruption has importers scrambling. Exporters will also feel the pain, including those in the growing offshore wind energy sector that is a key component of the Biden administration’s green energy push. Export delays could also stifle growth in the U.S. automobile industry given its reliance on importing and exporting many vehicle components.

And, the timing of a strike sets up retailers to move quickly to evaluate and likely shift trade routes to get ahead of any port disruption. East Coast ports handle a diverse range of goods, from automotive parts to pharmaceuticals to myriad home supply and retail goods. Ports from New York and New Jersey to Miami and Houston also provide connection to some of the largest metro areas in the country. The strike also could get underway in the final months of the presidential race and shine another spotlight on labor issues during what is already a contentious election cycle.

Logistics contingency planning shifts into full gear

What are shippers to do, given the potential for a strike that would bring massive disruption to 36 ports from New York to Houston as the holiday shopping season gets underway? Many are already reevaluating their trade routes, looking at contingency planning to divert some cargo to the West Coast or growing ports in Mexico, and/or move some through the rail system. Some retailers may accelerate their holiday buying and shipping plans to move ahead of the typical late summer delivery period. In these scenarios, are West Coast ports prepared with the additional labor, cargo containers, transportation equipment and logistics planning needed to move the added volumes inland?

"Current heated Gulf & East Coast Port Union contract negotiations could spur additional demand needs as supply chain specialists attempt to build inventory earlier than normal due to the current contract expiration date set for September 30th. Every day that passes ratchets up the pressure to avoid disruptions in supply chains that have been shifting more activity to the Gulf & East Coast port markets. The attractiveness to either build up inventory and utilize new space, or to shift activity to Western and Mexican Ports will become more pressing as we look at the end of the second quarter," said Peter Kroner, Director, Industrial / Supply Chain & Logistics Market Intelligence.

What’s on the bargaining table?

The International Longshoremen’s Association (ILA) contract, set to expire at the end of September, covers pay and other labor issues for 70,000 dockworkers on the East Coast. This is the first East Coast port strike since 1977 and it is expected to impact port activity along the East Coast and into the Gulf Coast, including at three of the five busiest ports in the U.S.: The Port of New York and New Jersey, the Port of Savannah, GA and the Port of Houston. Those three ports had a combined volume of 15 million TEUs in 2023, according to AVANT by Avison Young and port authority data.

Negotiations between the ILA and the United States Maritime Alliance (USMX), representing employers at 36 coastal ports, faltered earlier this year resulting in the ILA telling its members to prepare for a strike as it seeks “a landmark compensation package” that would include higher wages along with restrictions on automation at port terminals.

The union is riding the wave of labor uprising in recent years, including the 2023 Teamsters’ contract with 340,000 UPS workers that secured increases in wages and benefits, and improved working conditions, totaling $30 billion over five years. Not all strikes take effect, but even a serious threat of a strike can have significant repercussions on an industry. Talks of a UPS strike set off alarm bells for retailers, but the strike was averted ahead of the busy holiday shopping season. The 2023 United Auto Workers’ strike, which lasted 46 days and caused disruption to production across the Big Three automakers, resulted in large pay increases and other benefits for workers. And, the threat of a national U.S. railroad strike was averted in late 2022 with President Joe Biden signing legislation to block it due to its potential impact on the U.S. economy.

Who wins with port shifts?

U.S. West Coast ports have historically been the top gateway for containerized imports from Asia, despite the larger population concentrations on the East Coast. In recent years, however, the East Coast has taken the lead on cargo volume from Asia, as businesses adjusted their logistics strategies to avoid congestion and labor unrest on the West Coast. In the short-term, an East Coast labor strike is likely to shift volume back to the West Coast ports, which have not regained their activity following their recent strike.

The East Coast average annual growth rate from 2011 to 2021 was 7.4% compared with the West Coast at 3.5%, according to data from the U.S. Commerce Department and the U.S. Census Bureau. This shift was also notable during the pandemic, as East Coast ports recorded a 21.4% growth versus the West Coast at 16.2%.

Last year’s West Coast port strike was resolved in August, with a six-year contract covering the 22,000 U.S. dockworkers at the nation’s busiest gateway of Los Angeles and Long Beach, among others along the coast and into Washington State. The new contract included a 32% pay raise and a one-time bonus for working through the early days of the pandemic. That contentious strike included 13 months of negotiations and was resolved ahead of the all-important retail holiday shopping season.

Avison Young research through November 2023 showed overall port activity continuing to accelerate as economic concerns retreated. Continued diversification of supply chain networks is a driving force behind reshoring and near-shoring demand and is fueling activity on the East Coast, with its ties to growing population centers, and in key Mexican ports. Part of that growth on the East Coast is the result of shifts away from West Coast ports, which have experienced a stagnant or shrinking level of imports in recent years.

As these contentious labor issues surface, other ports are positioning themselves for future growth and accessibility. The Duluth Seaway Port Authority, for example, is experiencing an uptick in cargo traffic after the merger of Kansas City Southern railroad and Canadian Pacific railroad created the first single-line railway connecting the U.S., Mexico and Canada. It is at the center of efforts to facilitate moving product through the center of the country to key North American destinations.

Impact on industrial space usage

An East Coast strike may also provide a short-term boost to some industrial markets aligned with ports, as 3PLs and importers look for short term overflow spaces to build a safety stock of inventory. Retailers may pull demand forward to ensure they have the proper inventory of products that they plan to sell into the holiday season and into 2025. This type of port disruption highlights the negative aspects of just-in-time supply chains and the need for occupiers to balance their approach to inventory management. In the event that a rush of imports flow through the West Coast ports, railroads and drayage providers may need to proactively position transportation equipment in that region to move product off the docks. In support of those efforts, an adequate supply of trailers, empty shipping containers and chassis may need to locate parking in industrial outdoor storage space in places to be summoned on short notice.

What’s ahead?

The East Coast port system has emerged as a critical network for importers trying to move goods efficiently throughout U.S. markets and support growing population centers. East Coast ports have continued to build market share in recent years and pull cargo volume from the historically dominant West Coast. The New York/New Jersey ports expanded from a 14.4% market share in 2010 to 19.2% in November of 2023. Savannah expanded from 9.9% in 2010 to 12.0% in November of 2023, according to AVANT by Avison Young and individual port authorities.

The East Coast ports have room for additional growth and several port authorities are undertaking massive capital investments to expand their infrastructure. From channel dredging, rail line extensions and acquisitions of larger and more efficient gantry cranes, port authorities are planning ahead for more growth despite any short-term impact from a strike.

Given the growing prominence of East Coast ports and their reputation for moving goods efficiently and without the disruption that periodically impacts West Coast ports, this is a critical time of reckoning. A strike this fall could deliver a crippling blow to the port system just ahead of the holidays and the general election. In the months ahead, Avison Young will continue to monitor conditions across the port system – and within the expansive system of industrial markets that support those ports.