The economic impact of a disruption to container trade

Congress acts — to cut funds for port security

While there was a tremendous hubbub over the Dubai Ports World deal (which I think was somewhat beside the point), Congress is doing something now that arguably will have a substantial impact upon whether the ports are more secure — and that is to cut additional funding. According to the Seattle Post-Intelligencer article:

“Opponents of the $648 million for port security said it was too expensive and needed to be cut to satisfy President Bush’s request that the supplemental budget for things such as the Iraq war and Hurricane Katrina reconstruction be brought under control.”

This action occurred despite remaining concerns about port security.

Is port security much ado about nothing? The CBO has recently produced a report assessing the economic costs of disruptions to container traffice. They conclude:

“As requested by the Subcommittee [on Investigations of the Senate Committee on Homeland Security and Governmental Affairs], the analysis focuses on two specific disruption scenarios:

  • An unexpected one-week halt to all container traffic through the ports of Los Angeles and Long Beach, California, the country’s two largest ports for such shipments; and
  • An unexpected three-year halt to all container traffic through those two ports as well as an initial precautionary one-week stoppage of container shipments at all U.S. ports.

CBO’s analysis of those scenarios provides rough estimates of the costs to the U.S. economy of disruptions in container traffic. Although in 2004 approximately $500 million worth of containerized imports flowed into the ports of Los Angeles and Long Beach each day, the loss in production (gross domestic product, or GDP) from a oneweek
shutdown of those ports would probably be less — between $65 million and $150 million per day.

Daily costs would be at least that large in the case of a three-year closure of those ports and an initial one-week stoppage of container movement at all U.S. ports. Simulations commissioned by CBO suggest that the three-year shutdown would reduce real (inflation-adjusted) GDP by between 0.35 percent and 0.55 percent, or $45 billion to
$70 billion, per year. That reduction translates into daily costs ranging from $125 million to $200 million.” (p.1-2)

The three year disruption scenario simulation has implications along other dimensions.

In the simulation, the three-year shutdown reduces real GDP by
between 0.35 percent and 0.55 percent, or $45 billion to $70 billion, per year. That translates into daily costs ranging from $125 million to $200 million. Outlays by consumers and businesses fall by substantially more than that, however, because they include less spending on both imported and domestically produced goods, whereas the decline in real GDP reflects only reductions in domestic production.

Inflation — as measured by consumer prices — is about 2 percentage points higher in the first year of the simulation than it would be otherwise, little changed in the second year, and lower thereafter, eventually bringing the level of consumer prices back to where it would have been without the disruption. (Thus, for example, if inflation would have been a steady 2 percent without the port closure, it would rise to 4 percent in the first year of the shutdown, fall back to 2 percent in the second year, and then decline further in the following two years.)…

An additional 2 percent jump in prices would call for a decision by the Federal Reserve Board about whether to tighten monetary policy to constrain inflation. The usual rules of thumb for monetary policy suggest that interest rates would rise. However, in the simulation, interest rates actually fall slightly in nominal terms, which implies a large reduction in real interest rates and an extremely accommodative monetary policy. Because the increase in inflation would be expected to be temporary, the Federal Reserve might well decide that an accommodative policy was appropriate to minimize losses to GDP and income. If, instead, the Federal Reserve acted more
aggressively to suppress the additional inflation, the first-year increase might not be affected much (because of inflation’s slow response to monetary policy), but the decline over the next two years would be greater. However, the reduction in real GDP during the three-year shutdown would probably also be larger.

The employment level would be about 1 million jobs lower, on average, over the three-year period than it would be otherwise, according to the simulation. That reduction is large given the reduction in GDP because the jobs that would be lost on account of the closure have, on average, lower pay and productivity and fewer weekly hours than the national averages….” (p.19-20).

Did it make sense for Congress to cut the spending on port security? It depends upon the probabilities you ascribe to the various scenarios, when you think these events might occur, and your coefficient of relative risk aversion.

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7 thoughts on “The economic impact of a disruption to container trade

  1. calmo

    Such an arbitrary choice of scenarios (Did they make similar simulations for hurricane damage before Katrina I wonder.), I nonetheless am surprised that these studies recommend less money be spent. (Does this mean the lobbyists for security firms are no longer the force they once were?) [Can this mean that congress is actually being, well, thrifty? Is this the new, improved responsible congress getting ready for the mid-terms?]
    I wish I could say I had some confidence in these scenarios, but after Katrina, how does anyone?

  2. dryfly

    Hows this for a concept – user fees to cover the cost of security? Charge each inbound container a fee to cover the cost of inspection. Set rates such that it is revenue neutral. If our trading partners want to do the samething for our exports to them – so be it – fair is fair.
    And don’t think of it as a tarrif – think of it like a stamp. We don’t expect to have mail delivered for free – if security is part of the cost, charge for it.

  3. bracken

    This article seems to totally miss the point.
    Port security expenditures isn’t to safeguard the supply lines into the US it is to safeguard US cities from from terrorist shipping in a container full of weapons that could take out a US city. The cost of losing a port is minor to the cost of losing a city. What is the economic cost of losing NYC, SF, Miami, Houston, etc.??

  4. menzie chinn

    calmo: Several clarifications. I believe the selected scenarios were meant to bracket the possible impacts.

    I don’t believe the report recommended any particular course of action. CBO merely laid out the possible implications of several scenarios. My point was that the Congress cut spending in their bill, contrary to what most people would think is the reasonable thing to do.

    bracken: Point well taken. But I think that is the topic for another report.

  5. Byomtov

    I’m with bracken. This analysis seems to deal with only a small part of the danger. It’s fine to say we need another report, but it looks like the funding decision is being made based on this one.
    That’s foolish.

  6. kyakman

    The type of funding that has been going to ports should be cut. We have had rounds of grants that have helped the ports and CBP establish perimeter and on-site security as well as aquiring better scanners. There isn’t much else that can be approved and at this point extra funding amounts to a lot of pork. But this is not the real problem. The main problem is that there has been a focus on “port security.” Unfortunately, it is the wrong way to look at the problem. No matter how much security we put in place at ports, it will not prevent a WMD from being detonated on a ship at port. If terrorist used a shipping container to send a WMD to US shores, the aim might not be to import the weapon. If terrorists were to detonate a weapon on a ship that is portside, lets say LA-LB or NY-NJ, there would be a devastating attack on a major population center and a port a great economic importance. The US response would be to immediately shut down ports nationwide and the economic impacts would be devastating.
    This is why there is a problem with looking at the problem as port security. It needs to be looked at as supply chain security or even container and ship security. There are technological advances (tracking devices, WMD sensors, and emergency alert systems) that can be utilized to help secure the supply chain, yet they are not used. Why? Because the industry wont act until DHS say this is what we are going to mandate, if we mandate. No one wants to buy a solution and have it become a sunk cost because DHS mandates something else. At this point DHS needs to have an approved list of solutions and Congress needs to through some funds to help the industry implement them.
    If we dont secure all those containers, and secure ships, especially those carrying volatile substances, and we only focus on securing ports, we may end up allowing the Trojan Horse to stroll in.

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