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Press Release · April 14, 2004

International Trade Through California Could Triple By 2020…But Can Our Infrastructure Handle It?

Airports, Seaports Not Keeping Pace With Demand; 2002 Port Closures, Homeland Security May Have Negative Repercussions

SAN FRANCISCO, California, April 14, 2004 — Busy and getting busier – that describes the airports, seaports, highways, and railways in California that move trade traffic through the state on its way to foreign destinations or other parts of the country, according to a study released today by the Public Policy Institute of California (PPIC). One-fifth of U.S. international trade currently passes through the Los Angeles and San Francisco International Airports and through the seaports of Los Angeles, Long Beach, Oakland, and Port Hueneme. Moreover, trade through the state is expected to increase significantly over the next 15 to 20 years – if California’s infrastructure can accommodate the growth.

The report, California’s Global Gateways: Trends and Issues, says trade flows through the state are expected to triple in weight by the year 2020. During the same period, the dollar value of exports shipped through California will increase by 148 percent, while the value of imports will increase by 81 percent. This anticipated growth is not a certainty, however. In fact, it is unlikely to happen unless more resources are devoted to expanding the state’s trade infrastructure and managing its existing infrastructure more efficiently. “These predictions are based on estimates of increased population, investment, gross domestic product, and other economic and demographic factors, not on what our ports and highways can effectively manage,” says PPIC research fellow Jon Haveman, who co-authored the study with David Hummels, associate professor of economics at Purdue University. “Without more and better capacity, the state’s infrastructure probably can’t handle the growing demand – in effect, curbing growth,” Haveman says.

In fact, the study finds that capacity, particularly at the state’s airports, has not kept pace with current demand and may already be deterring some shippers from using California’s gateways: Between 1995 and 2002, the overall share of U.S. trade handled by LAX and SFO International Airports dropped from 38 to 21 percent. According to the study, about half of this decline is due to shippers choosing other U.S. gateways to move their goods, and these preferences are partially due to congestion in and around California’s airports.

Because most of the state’s trade traffic neither originates in, nor is destined for California, the study asks the question: Is being an international distribution center for the nation worth the burden? “Moving trade through the state creates jobs, business profits, and considerable tax revenue, but it also carries costs such as increased congestion, pollution, and wear and tear on infrastructure,” says Haveman. “The challenge for policymakers is to weigh the pros and cons and decide whether California wants to make the investment to sustain itself as a major global gateway or to encourage international cargo to go elsewhere.” The analysis suggests a number of possible policy options to raise revenue for infrastructure investment, including increasing the state’s share of federal funds and imposing user fees at or around major airports and seaports.

The study also considers recent and current issues that are affecting trade in the state and the nation – including the lingering consequences of the 2002 West Coast seaport shutdown. Although it is too soon to tell if the port closures will have long-term effects, in the months following the shutdown, the share of trade through the West Coast was lower than it had been in any of the previous five years. Furthermore, imports from Asia – consistently between 77 and 78 percent of the nation’s share from 1998 to 2001 – dropped significantly to 74 percent in the first six months of 2003. “If problems like simple port congestion can idle an entire global production network, it’s possible that a major shutdown like 2002‘s could have lasting effects,” says Haveman.

Homeland security is also likely to affect California and the country’s trade. The primary federal measure, the Container Security Initiative, requires cargo to be inspected at its foreign port and is anticipated to cause shipping delays and greater uncertainty about arrival times at U.S. ports. In contrast, initiatives such as the Customs-Trade Partnership Against Terrorism, which encourages shippers and carriers to develop security plans for their cargo in transit, may have the opposite effect. The report’s analysis concludes that it is still unclear how these counteracting approaches will affect trade in California or the nation as a whole.

The Public Policy Institute of California is a private, nonprofit organization dedicated to improving public policy in California through independent, objective, nonpartisan research on major economic, social, and political issues. The institute was established in 1994 with an endowment from William R. Hewlett.