The Expert Podcast

There's an interesting phenomenon going on in the supply chain market with shipping, and it has to do with some new laws and regulations enacted in the state of California. California has some of the largest ports in the country, including Long Beach, Los Angeles, and Oakland. A lot of the cargo that comes from Asia, mostly China and Taiwan, typically arrives on the West Coast of the U.S. due to its proximity across the Pacific Ocean. However, shippers are now abandoning the West Coast ports and heading east.

Businesses are reorganizing their supply chains to avoid the West Coast entirely, shipping goods from Asia to Gulf ports instead. Here's a visualization to understand this shift. Typically, cargo would travel directly from China to the West Coast, mostly to California. While there are ports in Seattle and Portland, they are not as large as California's. However, changes in California's regulations have made it difficult to get cargo out of the ports.

One significant change is the restriction on certain types of trucks. Trucks older than 2011 or 2012 that lack specific emissions equipment, like DEF (diesel exhaust fluid) or double catalytic converters, are no longer allowed to operate in California. Additionally, a rule called AB5 prohibits truck drivers from being independent contractors. This means truckers must be employees of a company, adding layers of bureaucracy and costs. Even owner-operators who own their trucks and businesses cannot operate as independent contractors.

These changes have made it challenging for truck operators to move cargo out of California ports. Once cargo arrives in California, it needs to be transported to the rest of the country. Instead of dealing with port congestion, regulations, and increased costs, shippers are rerouting their cargo. They now transport goods from China and Taiwan across the Pacific Ocean, through the Panama Canal, and into Gulf ports like Savannah, Norfolk, and even New York.

This longer route through the Panama Canal can cost tens or even hundreds of thousands of dollars. Once the cargo reaches the East Coast, it must be transported back to the West Coast or other inland locations by rail or truck. This circuitous route adds extra fuel costs, canal fees, and additional transportation expenses.

The underlying issue is an invisible blockade at California's ports. The financial, logistical, employment, and trucking obstacles make it impractical for shippers to use the West Coast. While these issues might resolve over time, for now, shipping companies and consigners are using the longer route to bypass the challenges in California.

This situation also impacts insurance. Longer shipping routes require extended cargo insurance and inland marine coverage for rail and truck transport. These are unintended consequences of California's new laws. While there are other factors contributing to the shift, the restrictions on trucks and independent contractors stand out.

Consider how challenging and expensive it must be for shippers to reroute through the Panama Canal, across the Atlantic, and into ports in states like Texas, Florida, Virginia, and Georgia. Even Port Newark in New Jersey is benefiting from this shift. Tell us in the comments what you think about these unintended consequences of the restrictions on the ports in Los Angeles.