High stakes for Tacoma, West Coast ports

About 600 miles north of Tacoma, amid the dark, deep waters of Hecate Strait, sits a small Canadian port whose ambitions in the container shipping business have become a cause for concern for West Coast ports, particularly those in the Pacific Northwest.

In just a few years, the Fairview Container Terminal at Prince Rupert, B.C., has grown from a fanciful idea to an able competitor in the contest for the container shipping business in North America.

Though Prince Rupert’s container volume now, some 500,000 container units a year, is less than 15 percent of the volume handled by Puget Sound ports, the port and its partners, a New Jersey-based container terminal operator and the CN railway, have immediate plans to expand the terminal to a 1.2 million-container unit capacity and long-range ambitions to up that capability to two million container units (about the volume the Port of Tacoma is handling now) and ultimately to five million container units.

A little more than half of the containers now imported through Prince Rupert are destined for American Midwest markets, the same markets that the ports of Tacoma and Seattle count on to provide the draw for container shipping lines to call on Puget Sound ports.

Indeed, while Prince Rupert is the port of most immediate concern for U.S. West Coast ports, other ports in Mexico and planned port developments in Eastern Canada could prove to be formidable competitors to the established import business order.

In Mexico, for instance, the port of Lazaro Cardenas, some 1,500 miles south of the mega-ports of Los Angeles and Long Beach, is rapidly developing.

This month, APM Terminals, the worldwide terminal operator that also operates a terminal on the Port of Tacoma’s Sitcum Waterway, is expected to begin construction on a $300 million first phase of a modern container terminal at Lazaro Cardenas. The 32-year APM contract calls for an eventual $900 million expansion of the terminal.

An existing 300-acre container terminal there is operated by Hutchison Wampoa.

Conceptual plans also have been unveiled for big container terminals at Punta Colonet in Baja California and in Eastern Canada.

The Punta Colonet terminal plans call for a capacity of six million container units.

WHAT MEXICO, CANADA HAVE

While the terminal operators in Mexico and Canada talk about serving their national markets, both Prince Rupert and Lazaro Cardenas have a common attribute that could make them strong competitors for U.S. business. Both ports are connected to U.S. population centers by relatively uncongested rail lines. The Canadian connection is via CN, which owns a U.S. rail network as well as one in Canada. The Mexican connection is owned by the Kansas City Southern Railroad.

The Canadian and Mexican ports say they have some natural advantages that in some cases give them an edge in the container business.

In the case of Prince Rupert, said Shaun Stevenson, the port’s vice president of trade development and public affairs, Prince Rupert’s proximity to Asia (it’s as much as 36 hours steaming time closer to Northern Asia ports than Puget Sound), its naturally deep, ice-free harbor (the water depth at the Fairview Container Terminal is 61 feet) and its uncongested surroundings make it more efficient than more urban ports.

Lazaro Cardenas can brag of lower construction and labor costs, and a shorter rail route to prime southern U.S. markets. The distance from Lazaro Cardenas to Houston, for instance, is 1,196 miles versus a Los Angeles-to-Houston distance of 1,549 miles.

American ports say they’re willing to compete with foreign ports based on natural attributes or other business factors, but they are trying to erase one cost advantage that they say Congress has unintentionally given those foreign ports.

HARBOR MAINTENANCE TAX ISSUE

That sore point is the harbor maintenance tax, a tax imposed on imports through U.S. ports. That tax was first enacted in 1986 to help fund Army Corps of Engineers maintenance dredging costs. On average, according to the Federal Maritime Commission, that tax amounts to about $109 per imported container.

Under the present rules, a container imported across the docks at the Port of Tacoma or any other U.S. port bears that cost. Containers landed in Canada or Mexico don’t pay the tax even though they’re destined for U.S. markets.

Over the past two decades, West Coast ports, supported by local congressional delegations, have made numerous unsuccessful attempts to get that tax changed to end the foreign port advantage.

Yet another attempt appears to be imminent in the wake of a new Federal Maritime Commission study done at the behest of a coalition of congressional representatives, most of them from the Pacific Northwest.

That lengthy report concluded that while shippers have many reasons to pick a foreign port to import their U.S.-bound goods, the harbor maintenance tax cost advantage was a significant factor.

“While the commission recognizes that funds are necessary to ensure adequate facilities to maintain international trade, the fact that each container requires, on average, a $109 fee to use a U.S. port places those ports at a competitive disadvantage before the container has even been offloaded,” the commission concluded in its report approved in a 3-2 vote.

“It’s what I call an invisible blockade that’s preventing more cargo destined for the United States from coming across our docks,” said U.S. Rep. Rick Larsen.

If there’s anything that port officials on both sides of the border agree on is that shippers and shipping lines are extremely cost-conscious.

“I’ve been present in conversations with ocean carriers about costs where the differences of tens of dollars were a big item of discussion,” said Sean Eagan, the Port of Tacoma’s government affairs manager. “In some cases, the disagreement was over as little as $1 per container.”

Prince Rupert’s Stevenson said any item that adds cost is always a significant issue when it comes to shipping decision making.

So, why has the harbor maintenance tax issue never gained real traction in Congress?

Not everyone — not even everyone in the U.S. — favors changes, acknowledged the FMC.

On the side of standing pat with the present arrangement, of course, are shipping lines and terminal operators who use the foreign facilities. Joining them are retailers and importers who enjoy the pass-through cost advantage of shipments that avoid the tax. And Midwest communities where those imported containers are unloaded and their contents are sorted see at least some of those jobs going away if imported containers are diverted to U.S. ports or taxed when they enter the U.S. by rail or truck.

Certainly, the idea of imposing a new tax on goods brought through Canada or Mexico, runs contrary to the spirit of North American free trade.

Those foreign ports argue that since the harbor maintenance tax is designed to raise money to pay maintenance dredging costs in U.S. harbors, goods imported through their foreign harbors shouldn’t pay those costs because dredging expenses in their out-of-country harbors aren’t the responsibility of the Army Corps of Engineers.

Most, but not all U.S. West Coast ports, likewise argue that harbor maintenance tax treats them unfairly because while the lion’s share is raised at West Coast ports, little is spent there. The ports of Tacoma and Seattle say of every dollar raised by the tax here, about a penny is returned here to pay dredging expenses. The ports of Los Angeles and Long Beach, said the disconnection between money raised by the tax at their ports and money spent is even more out of kilter there.

A Congressional Research Service report shows that harbor maintenance tax funds are spent disproportionately in ports without the naturally deep harbors such as Tacoma and Seattle where little if any dredging is ever required. The government, for instance, spent $569 million dredging the Mississippi River from Baton Rouge to the Gulf in a 10-year period. Mobile Harbor in Alabama was second on the list after the Mississippi with $237 million spent from Harbor Maintenance Tax proceeds.

Harbors and canals with little freight business consumed a large percentage of the tax funds in places such as the Outer Banks of North Carolina, the Chesapeake and Delaware Canal and St. Mary’s River in the Great Lakes.

But the West Coast and Pacific Northwest weren’t without their disproportionately expensive venues. Washington’s Grays Harbor was the 15th most expensive harbor channel in the country to maintain, yet five years ago was 133rd among U.S. ports in cargoes handled. The port’s traffic has increased substantially since then. Based on those 2007 figures, the dredging costs for each ship call to Grays Harbor were about $250,000 compared with about $500 for Seattle and Tacoma, the Congressional Research Service said.

The Lake Washington Ship Canal is another case where harbor maintenance taxes raised are out of proportion to dredging costs. Because the canal is used primarily by recreational boaters, local barge traffic and fishing vessels, it generates little harbor maintenance tax revenue.

The Columbia River, too, requires frequent dredging to allow ships to reach Portland and Longview.

The Port of Tacoma’s Eagan says he sees a chance for an alliance between West Coast, Atlantic and Gulf Coast congressional representatives to address not only the West Coast issues of foreign competition but also over the issue of full expenditure of the funds raised by the tax.

The harbor maintenance tax fund typically is never completely spent each year. The fund has grown to some $5 billion that ports across the country want to spend for improvements to their facilities.

Broadening the permitted uses for the fund, for instance, might allow ports such as Tacoma to do such vital tasks as widening the Blair Waterway or improving shoreside facilities with the help of federal funds raised here. East and Gulf Coast ports, needing to accommodate bigger ships with the 2014 opening of a larger Panama Canal could use some of those funds to deepen their harbors or upgrade their piers.

Canadian and Mexican ports will always win a share of U.S.-bound cargo because some of the advantages they possess, the FMC report says.

But a comprehensive reform of the tax would at least level the playing field,” said Rep. Larsen.

Is there hope for change, or is the tax destined to continue unaltered?

“I’ll guarantee you one thing,” said Rep. Larsen. “It will stay the same unless we start trying to change it.