According to press reports, as this column is written in mid-December, the U.S. and China are on the verge of signing a “Phase I” trade agreement which will represent a significant stand-down in the ongoing trade hostilities. Thank goodness. Assuming things continue to progress and we get to a full cease-fire and eventually a new comprehensive agreement, will things go back to “normal”? Not a chance.

Forces have been set in motion by the conflict that will continue to produce inexorable change in the coming years. BCO’s have once again learned the dangers to the supply chain that lack of diversification can produce. The changes will not be quick, but they will be large. History provides an example.

In 2002, the U.S. West Coast ports were convulsed by an extended lockout in connection with the negotiation of a new contract with the ILWU. This was followed by six years of peace on the docks. The off-shoring revolution took hold during these years, and import volumes grew.

In 2008, as the expiration of the contract approached, BCO’s grew concerned that there might be a repeat of the 2002 debacle. Things weren’t helped by a one-day walkout that shut down ports up and down on the West Coast on May Day of that year, ostensibly in protest of the war in Iraq. On July 1, 2008, the existing contract expired but, although the union did not agree to formally extend the contract day-by-day, the talks continued and the cargo kept flowing smoothly. However, things began to go downhill after a couple of weeks as operations slowed and delays accumulated. Fortunately, an agreement was reached at the end of July and ratified by mid-August, so things were “back to normal” on the West Coast. Except they weren’t.

Simply put, BCO’s had had enough. No longer willing to be held hostage to a volatile labor situation and feeling the need for options, they voted with their feet. Prudent importers would not continue with an undiversified port routing strategy. As shown on this chart, Import TEU market share dropped for both L.A./Long Beach and the U.S. West Coast in early 2008 and the ground lost was never regained. Further, the damage continued with share dropping steadily in ensuing years. BCO’s pivoted away from dependence on the West Coast and towards four and five-corner import strategies. It wasn’t easy and it wasn’t quick. But once the arrangements were in place and the facts were established on the ground (facilities, inland connections, etc.), further change became a matter of simply turning the dials.

Now, in 2019, BCO’s have once again experienced a graphic demonstration of the dangers of lack of diversification, this time with regard to over-dependence on China for sourcing product. In response, a limited volume has shifted to other locations, such as Southeast Asia, India and Mexico. All the alternatives have problems, whether it is instability, lack of infrastructure, lack of capacity and so forth. Solving these issues will take time, probably years. But, just as with the creation of five-corner import strategies, once the genie is out of the bottle there is no turning back. BCO’s are concluding that the status quo, with dependence on an autocratic one-party state with explicit policies favoring local entries, is not a long-term sustainable model.

The days of off-shoring products to China as a “no-brainer” decision are over. Off-shoring will still make sense for some, but it will be much more intricate and involved. There is little reason to expect import TEU’s to grow much faster than domestic GDP gains in the relevant economic sectors. The trade will be more fragmented and complex. Near-shoring and even on-shoring will begin to look more attractive.

It will take years for the situation to play out fully. Things will never get back to “normal”. The question is what the “new normal” will look like.