By Joel Kotkin, November 5, 2013
SOCAL WAKEUP CALL-In this strange era of self-congratulation in California, it may be seen as poor manners to point out tectonic shifts that could leave the state and, particularly, Southern California, more economically constrained and ever more dependent on asset bubbles, such as in real estate. One of the most important changes on the horizon is the shift of economic power and influence away from the Pacific Coast to the Gulf Coast – the Third Coast – a process hastened by the imminent widening of the Panama Canal. Over time, this could represent a formidable challenge to our status as a critical global region.
Overall, the ports are the critical linchpin of the roughly 500,000 jobs tied to logistics, warehousing and trade services. These jobs, notes economist John Husing, provide a wide range of generally higher-paying blue-collar employment compared with, for example, hospitality or retail. This is critical in a region with a large undereducated, but motivated, workforce.
Southern California's emergence as the nation's largest trading center has been unlikely, tied more to ingenuity and ambition than natural geography. Unlike its West Coast rivals – San Diego, Seattle and, most particularly, San Francisco – the Los Angeles region does not boast a great natural harbor. Its construction, starting in the early decades of the previous century, was completely man-made and conceived.
By the 1980s, sparked by a shift of trade from Europe to Asia, the ports of Los Angeles and Long Beach started to overtake, in merchandise trade value, New York, which had dominated U.S. trade since the first decades of the 19th century. Along with trade came business connections, direct air travel and a surge of Asian immigration. Today, Los Angeles, with roughly 1.5 million Asians, ranks first among America's counties for Asian population, while Orange County, with more than 530,000 Asian residents, ranks third, just behind the Santa Clara-Silicon Valley region.
Wider canal coming
These advantages, human as well as geographic, are critical to the region's global status. But this could change, in part due to the expansion of the Panama Canal – set for completion in late 2014 or in 2015 – which will open to Asian businesses the opportunity to send megaships directly to the Gulf Coast or the Southeast.
“Trade will shift,” predicts Khalid Bachkar, a professor at the California Maritime Academy.
There are other challengers to our supremacy, including port expansions in both Western Canada and Mexico that could offer newer facilities and rail connections directly within their own countries and the vast U.S. market. But the greatest challenge seems likely to come from the Gulf, which offers excellent access to trains that carry goods directly to the vast majority of the United States.
Demographic trends will also play a role. In the 1970s and 1980s, the Pacific Coast seemed like the premier growth market, but high housing prices, taxes and regulatory restraints – and, most importantly, outmigration – have slowed regional business growth.
In the next four years, notes Pitney Bowes, Houston is expected to have the largest household growth in the country: some 140,000 people, an increase by 6.7 percent. Most of the other fast-growth regions in the nation – Dallas-Fort Worth, Austin, Texas, Raleigh-Cary, N.C., San Antonio, Jacksonville, Fla., and Charlotte, N.C. – are located either along the Gulf or are natural markets for their ports.
In contrast, Los Angeles is projected to grow by only 1.5 percent and Orange County by less than 2 percent the next four years.
Critically, the Gulf is, for the first time, attracting a critical mass of Asians. Over the past decade, Houston has enjoyed some of the nation's fastest growth in Asian population, up some 70 percent, and its Asian community is now the eighth-largest in the country. Houston's Asian population is now growing three times as rapidly as that of the San Francisco or Los Angeles areas.
At the same time, the expansion of oil and natural gas production in Louisiana, Texas and the Plains makes the Gulf ports major players in the emergence of the U.S. as an energy exporter. The Gulf Coast also is home to many of the nation's largest industrial investments, including from overseas.
The Port of Houston, for example, posted a 28.1 percent jump in foreign trade in 2012, and trade at reached records levels at the Port of New Orleans (I work as a consultant in that city).
Agriculture has also been on a roll in terms of exports, and 50 percent of the nation's grain shipments through Louisiana ports. Combined with rising energy and industrial growth, the Third Coast now claims a growing share of U.S. trade. Since 2003, the value of exports from the Gulf ports has more than tripled; the region's share of U.S. exports over that period grew from roughly 10 to nearly 16 percent.
Once an industrial backwater, the Gulf region has attracted new steel plants, petrochemical plants and facilities involved in everything from airplanes to food processing. All these locations export such items as cars and chemicals, and all import goods, such as car parts and iron ore. According to Site Selection magazine, the Gulf includes four of the top 12 states – led by No. 1 Texas, No. 7 Louisiana, No. 10 Florida and No. 12 Alabama – in attractiveness to investors. Texas and Louisiana ranked first and third among the states for new plants.
Ultimately, this is a challenge that our region cannot afford to ignore, particularly with completion of the Panama Canal expansion in as soon as roughly a year. In anticipation, ports along the Gulf, as well as in the Southeast, are almost all improving and expanding their ports. In contrast, Southern California ports – largely because of labor and environmental concerns – may be slow to make the “intense capital improvements,” such as dredging and new road connections.
This largely results from environmental pressures that, notes economist Husing, are not nearly as powerful along the Gulf or in the Southeast. A history of labor disputes by highly paid, politically powerful California port workers also has reinforced the notion that the LA area ports are becoming an increasingly unreliable place to do business.
The Third Coast is also positioned to benefit from commerce with Latin America, the Gulf's historic leading trade partner. Latin America, notes Bill Gilmer, has been home to many of the world's fastest-growing economies. Since 2002, about 56 million people in Latin America,according to the World Bank, have risen out of poverty.
Trade with these partners – including Mexico – are ramping up growth in Houston, as well as other Gulf ports. Brazil, notes Jimmy Lyons, has risen to become a trading partner of Mobile, Ala. Strong Latin immigration to virtually all the Gulf cities, particularly Houston and, increasingly, New Orleans, can only strengthen these economic ties.
Southern California, with its vast Hispanic population and proximity to Mexico, also should be able to serve as a hub for this trade, but this can only happen if the region attaches greater priority to port development. Historically, this region was built by people taking risks on big infrastructure – covering everything from the water delivery systems to the port and freeways – that literally paved the way to economic progress, and growth.
The key question now is: Do we still have the spirit and willingness to build, as our competitors are on the Third Coast, the Southeast, Mexico and Canada. If we fail to meet the challenge, Southern California could surrender desperately needed potential sources of new employment and a critical linchpin to our continuing status as one of the world's great global centers.