Why ports are striking could be a no-win situation for the Biden administration

President Joe Biden and his administration are sticking by their position and will not invoke the Taft-Hartley Act to force International Longshoremen’s Association longshoremen back to work at ports on the East and Gulf Coasts, where a strike occurred on Wednesday takes place, a political decision reflects the power of unions a month before the election, but risks losing some progress on the issue most important to many voters: the economy.

The rhetoric from Cabinet secretaries, including Transportation Secretary Pete Buttigieg and acting Labor Secretary Julie Su, has become sharper in recent days, pointing the finger at port owners and shipping companies. But there is a big risk on the other side of policymaking: wage increases that are a win for workers but ultimately impact the economy in the form of higher prices, both domestically and globally.

The focus of attention to date on the economic impact of the port strike has been on the direct impact of the massive trade shutdown on the economy and the way congestion and delays in the supply chain can result in higher prices being passed on to consumers The longer a strike lasts, the greater it becomes. But shipping and economics experts also warn of the risk of continued wage inflation impacting supply chain prices, which the Federal Reserve has recently been successful in containing.

“The wage increase would actually be passed on and ultimately paid for by the importers,” said Lars Jenson, CEO of Vespucci Maritime, a shipping consultant. “The inflationary impact would vary dramatically depending on the value of the goods in the container,” he said, adding that the impact would be even greater for agricultural exporters.

ILA President Harold Daggett is seeking a pay increase of up to $5 an hour per year over six years in a new contract for union longshoremen in a labor dispute with the United States Maritime Alliance. The USMX, which represents port owners, most recently offered a nearly 50% wage increase over six years on Monday, an offer rejected by the union. The USMX reiterated that offer on Tuesday, saying in a statement that its “current offer of a nearly 50 percent wage increase exceeds all other recent union agreements, while combating inflation and recognizing the ILA’s hard work to keep the global economy running.”

But Daggett countered claims of a “significant increase,” saying in ILA’s own statement Tuesday that the USMX “conveniently conceals the fact that many of our members operate multimillion-dollar container handling equipment for as little as $20 an hour.” In some states, the minimum wage is already $15.” The ILA president added, “The USMX also overlooks the fact that two-thirds of our members are constantly on-call and have no guaranteed employment when no ships are in use. Our members are only eligible for benefits based on the hours they worked in the previous year, which leaves them vulnerable if there is a downturn in work.”

Daggett told CNBC Tuesday morning that the ILA is seeking a 61.5% wage increase.

While a significant wage increase would undoubtedly be a big win for workers and a resurgent labor movement, in light of the impasse between the union and port owners, shipping companies have begun to take measures to protect their own financial position in the short term and for a longer period as a strike continues. CMA CGM, one of the world’s largest shipping companies, declared on Tuesday force majeure, a legal maneuver to free itself from contractual requirements with shipping customers due to forces beyond its control, and said it could incur “any additional operating costs” related to it Vessel invoicing is delayed due to the strike for waterborne cargo beginning October 1, 2024 with a port of discharge on the U.S. East Coast or Gulf Coast.

President Biden said Tuesday that his administration will “pay attention to any price gouging activities” that benefit foreign shipping companies, including those on the USMX board. He also said: “Foreign shipping companies have made record profits since the pandemic as dock workers put themselves in harm’s way to keep ports open.”

Because of previous port strikes, shipping lines typically benefit from rising freight rates based on demand at other ports, as well as detention and demurrage fees for containers stranded during a port closure. Analysts have warned that spot prices at sea could rise by 20% to 50%. UBS predicted that 20% of Maersk’s total volume would touch a U.S. port affected by the strike. Maersk is on the board of USMX. UBS estimated that a 30% increase in freight rates over two quarters would generate a tailwind of more than $1 billion.

Buttigieg said Tuesday that the DOT is monitoring “any attempts by companies to opportunistically increase prices, including ocean carriers or others,” and called on ocean carriers to withdraw the surcharges. “No one should exploit a disruption for profit,” he said in a DOT statement. He added that the Federal Maritime Commission will use the expanded powers signed into law by Biden to “ensure that any fees assessed are legitimate and lawful.”

However, according to some economists, the even more significant price increases would come after a successful ILA agreement, even if the total number of workers involved in the strike, at around 50,000, represents a small outlier in a US labor market that employs well over 100 million People. It comes amid other union struggles across the U.S. economy targeting aerospace and automakers. “The level of wage demands at the ports, at Boeing and among auto workers makes one laugh at claims that the labor market is weak and wage inflation is dead,” said Larry Lindsey, CEO of The Lindsey Group.

Acting Secretary of State Julie Su criticized the idea that wage increases would be passed on to U.S. exporters and importers.

“At the same time that we were urging them to put a fair offer on the table to avoid any disruption, they were also calculating what the surcharge they could charge for shipping in the face of a strike,” Minister Su said an opinion interview. “I mean, it really is an outrageous position.”

For months, logistics and trade groups representing major industries from retail to manufacturing to agriculture have sent numerous letters to Biden and his administration urging action. With the president now sticking to his position that collective bargaining is the only way to get a “fair deal” for the ILA, executives across the economy are beginning to weigh the potential impact on prices for their business models.

“This will quickly make our U.S. agricultural exports significantly less competitive on the global market,” Peter Friedmann, executive director of the Agriculture Transportation Coalition, said of any logistics rate increases in his sector. “Our foreign customers can get their food, agricultural and fiber needs from other countries, and that’s where they will go as the cost of shipping containers through U.S. ports continues to rise.”

Acting Labor Minister Julie Su said she has great understanding of the needs of the business community but stands by the government’s position. “I also had a lot of conversations with them,” she said. “I understand how important the impact of a good solution is. I know that, just like consumers and American workers, they understand that foreign companies that benefit from our economy, employ American workers and have an impact on American consumers should do this. It is the right thing to do and will be in this fight “We will always stand with American workers, American businesses and American consumers.”

The Federal Reserve is more worried about the job market than inflation lately and has begun cutting interest rates to “rebalance” its monetary policy to prevent a surge in layoffs, and bet inflation is on the way back to the most recent 2% data supported. In the latest nonfarm payrolls report for August, average hourly wages rose 0.4% from the previous month and 3.8% from a year ago, both above estimates. The September non-farm payrolls report comes out this Friday and in the short term the union fight could impact the wages and layoffs data.

The big payroll report just ahead of the government data, the ADP private payrolls report, showed on Wednesday that despite rising hiring, wage growth continues to decline. The annual gain for those keeping their jobs fell to 4.7%, while for job changers it fell even more sharply, to 6.6%, down 0.7 percentage points from August. The upcoming nonfarm payrolls report is the last the Fed will receive before its next rate policy decision in November, and it could also include downward pressure in the labor market from both strike-related layoffs and hurricane-related measures Helene is influenced.

“That would totally complicate everything the Fed is trying to do because they don’t get any insight into what the economy is actually doing,” Jim Bianco, head of Bianco Research, told CNBC’s “Fast Money” on Tuesday.

In the longer-term analysis, the wage increase sought by the union will confirm that wage growth is not returning to its pre-Covid trend of around 2.5%, according to Peter Boockvar, chief investment officer at Bleakley Financial Group. Instead, he expects it to settle at around 4%, which will represent a lower bound for inflation.

“I continue to believe that the normalized inflation rate will be 3-4% after the end of disinflation, which is mainly taking place in goods,” Boockvar said. “And if this collective agreement comes about, it will cause the prices of goods to rise.”

“For those who rely on functioning ports for their livelihoods, the collateral damage is often underestimated by those watching from a distance,” said Alan Baer, ​​CEO of logistics company OL USA.

Steve Lamar, CEO of the American Apparel and Footwear Association, said it is imperative that the Biden administration use all the tools at its disposal, including its authorities under Taft-Hartley, to persuade the parties at the negotiating table to open the ports and keep the goods moving efficiently. “Continuing the status quo increases the likelihood that this port crisis will harm our industry and the entire U.S. economy through job losses, higher prices and shortages of goods,” Lamar said.

—Reporting by CNBC’s Jeff Cox contributed to this article.