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The Black Swan of the Supply Chain, Part 1

Published Aug 3, 2011 2:51 PM by The Maritime Executive

By: Dr. Jim Giermanski, Chairman Powers Global Holdings, Inc.

Globalization creates interlocking fragility, while reducing volatility and giving the appearance of stability. In other words it creates devastating Black Swans. We have never lived before under the threat of a global collapse. Financial Institutions have been merging into a smaller number of very large banks. Almost all banks are interrelated. So the financial ecology is swelling into gigantic, incestuous, bureaucratic banks – when one fails, they all fall.  The increased concentration among banks seems to have the effect of making financial crises less likely, but when they happen they are more global in scale and hit us very hard. We have moved from a diversified ecology of small banks, with varied lending policies, to a more homogeneous framework of firms that all resemble one another.(1)

Professor Taleb was clearly talking about the potential of a catastrophic collapse of the global financial community which would affect the entire world.  But what about the possibility of the collapse of just the global supply system?  Could that also be a Black Swan?  Could the predicted disruption of the supply chain, in Professor Taleb's words, constitute the "...warnings imbeciles chose to ignore?"  I think so. 

THE IMPORTANCE OF U.S. SEAPORTS AND LAND PORTS

In 2004 the Rand Corporation did a study for the Department of Homeland Security (DHS) using a fictitious nuclear explosion at the Port of Long Beach and what the likely impact would be.  Rand concluded the following outcomes.

  • Sixty thousand people might die instantly from the blast itself or quickly thereafter from radiation poisoning.
  • On-hundred-fifty thousand more might be exposed to hazardous levels of radioactive water and sediment from the port, requiring emergency medical treatment.
  • The blast and subsequent fires might completely destroy the entire infrastructure and all ships in the Port of Long Beach and adjoining Port of Los Angeles.
  • Six million people might need relocation because fallout will have contaminated a 500-km area.
  • Gasoline supplies might run critically short across the entire region because of the loss of Long Beach's refineries--responsible for one-third of the gas west of the Rockies.(2)

In May, 2005, the Government Accountability Office published its Maritime Security report and referenced a Booz, Allen, and Hamilton report estimating that a discovered undetonated weapon of mass destruction (WMD) would result in the port's closing for 12 days at the cost of 58 billion dollars. (3)   Considering that, according to the GAO Maritime Security report, there are over 300 seaports, and 3700 cargo and passenger terminals, what would happen if they all closed simply to inspect the containers within in the port facility.  In March of 2006 the Congressional Budget office cited, while cautioning for potential overstatements in the original research done for the Pacific Maritime Association, that a 10-day shutdown of West Coast ports would cost the economy $1.9 billion per day. (4)  And the Brooking Institute estimated that the use of WMD in a shipping container to cost the United States 1 trillion dollars.(5)

Although reading what governments agencies, research entities, and consultants say about the role and importance of seaports and their value to the economy, perhaps, their value is best expressed by the 2005 testimony of Bethann Rooney, the manager of ports security for the Port Authority of New York and New Jersey.

Ninety-five percent of the international goods that come into the country come in through our nation’s 361 ports; twelve percent of that volume is handled in the Port of New York and New Jersey alone, the third largest port in the country. The Port generates 229,000 jobs and $10 billion in wages throughout the region. Additionally, the Port contributes $2.1 billion to state and local tax revenues and $24.4 billion to the US Gross Domestic Product.  Cargo that is handled in the Port serves 80 million people or thirty-five percent of the entire US population. In 2004 the port handled over 5,200 ship calls, 4.478 million twenty-foot equivalent units (TEUs), which is approximately 7,300 containers each day, 728,720 autos and 80.6 million tons of general cargo. Today international trade accounts for 30 percent of the US economy. Considering all this, it is easy to see how a terrorist incident in our nation’s ports and along the cargo supply chain would have a devastating effect on our country and its economy.(6)

Land ports-of-entry, too, are also critical infrastructure for this nation and indirectly the global economy.  With respect to land ports-of-entry, the U.S. has about 163 land ports.  Of those 120 (75%) are managed by the General Services Administration (GSA) with 43 ports directly under the control of DHS.  "On an average day, about $2 billion in trade cross the nation’s 163 border crossings, along with more than 350,000 vehicles, 135,000 pedestrians and 30,000 trucks."(7)  Merely looking at Laredo, Texas, the largest land port-of-entry on the Southern border, one can see the enormity and criticality of the amount of cargo and its conveyances crossing that border port.  Laredo was the second busiest land port by value of its imports and exports, and the sixth largest gateway compared with all U.S. land, air, and sea freight gateways.  The trade merchandise crossing through Laredo in 2008 was $116 billion, about 14 percent of the value of U.S. total land trade. It was the major gateway for both export and imports, with inbound shipments accounting for 53 percent of the value of freight handled by its land ports in 2008 and outbound shipments accounting for 47 percent.(8)  Its World Trade Bridge and its Colombia Bridge handled more than 1.5 million incoming commercial trucks and 329,000 rail containers from Mexico in that year alone.(9)

Finally, the cargo entering and exiting these ports are critical in themselves.  Take, for example the year 2008 exports and imports for which data are available.  U.S. exports amounted to $1.283 trillion (U.S. origin price) in the following categories:

  • industrial supplies, 29.8%;
  • production machinery, 29.5%;
  • non-auto consumer goods, 12.4%;
  • motor vehicles and parts, 9.3%;
  • food, feed and beverages, 8.3%;
  • aircraft and parts, 6.6%; and
  • other, 4.1%.

Imports were equally significant and amounted to $2.115 trillion (U.S. as destination price):

  • non-auto consumer goods 23.0%;
  • fuels, 22.1%;
  • production machinery and equipment, 19.9%;
  • non-fuel industrial supplies, 14.8%; motor vehicles and parts, 11.1%;
  • food, feed and beverages, 4.2%;
  • aircraft and parts, 1.7%; and
  • other 3.2%.(10)

It is crystal clear that the U.S. ports-of-entry are the sine qua non of economy growth and health.  The "taking out" with WMD of just one seaport or one land port-of-entry would, like 9/11 with airports, close all U.S. ports seaports and land ports for no other reason than to inspect containers in all other ports.  Because of consequential sympathy explosions(11),  the container blast would not only kill and injure port personnel, but also people and infrastructure for miles beyond the port.  Land ports and their surrounding populations are obviously clearly at risk.   

Imagine taking out one seaport, and one land port.  Since over 90% of our international trade moves by vessel and truck, essentially all trade would stop.  If, during the examination of existing containers within the port's area, WMD is discovered, it would be necessary to move, isolate, and disarm it away from any population and trade infrastructure creating further delays in resuming port operations.  Given the state of the U.S. economy, and health of the global economy, one simply cannot deny the consequence a foreseen but practically unaddressed Black Swan.  Beside no imports, there will be no exports, no manufacturing to make those exports, no foreign energy, and on and on.  Where will those vessels afloat discharge their cargo?  Even if discharged in Canada and Mexico, it could not enter the U.S. by land since U.S. land ports-of-entry would also be closed.  What would happen to the world's vessel container carriers?  What about the truck, and rail carriers?  What happens to their revenue and workforce?  And what happens to port related jobs?  If taking out a port included the use of nuclear waste, what would be the expected timeframe for use of that port area? I think even Professor Taleb's imbeciles would understand this.  The Black Swan would shut down this economy, impact all citizens without exception, and likely created chaos, lawlessness, and violence.

 

STAY TUNED FOR THE CONCLUSION WITH PART 2 ON TUESDAY AUGUST 8TH EDITION OF THE MAREX NEWSLETTER!

 

Citations:

(1) Nassim Nicholas Taleb, The Black Swan: The Impact of the Highly Improbable (April2007), The Black Swan: Quotes & Warnings that the Imbeciles Chose to Ignore, http://www.fooledbyrandomness.com/imbeciles.htm

(2) Charles Meade and Roger C. Molander, Considering the Effects of a Catastrophic Terrorist Attack, Center for Terrorism Risk Management Policy the Rand corporation, 2006, p. 9.

(3) Maritime Security, GAO-05-448T, Government Accountability Office, May 17, 2005, p. 5.

(4) As reported in The Economic Costs of Disruptions in Container Shipments, Congressional Budget Office, in attachment to letter to Representative Ron Coleman, Permanent Subcommittee  On Investigations, Committee on Homeland Security and Government Affairs, March 29, 2006, p.  15.

(5) Michael E. O'hanlon, Peter Orsgaz, Ivo H. Daalder, I.M. Destler, David L. Gunter, James L. Lindsay, Robert E. Litan, James B. Steinberg, Protecting the Homeland One Year On, Brookings Institution Press, Washington DC, 2002, Table 1-2, p. 7 http://www.brookings.edu/fp/projects/homeland/newhomeland.pdf

(6) Bethann Rooney, on Detecting Nuclear Weapons and Radiological Materials:How Effective is Available Technology? before the Subcommittee on Prevention of Nuclear and Biological Attacks and Subcommittee, and Subcommittee on Emergency Preparedness, Science and Technology, House Committee of Homeland Security, June 21, 2005. 

(7) Fast Facts, Land Ports of Entry Tool Kit, U.S. General Services Administration, http://www.gsa.gov/portal/content/103603

(8) Laredo, Texas Land Gateway, Research and Innovation Technology Administration, Bureau of Transportation Statistics (RITA), http://www.bts.gov/publications/americas_freight_transportation_gateways/2009/highlights_of_top_25_freight_gateways_by_shipment_value/port_of_laredo/index.html

(9) RITA Statistics, http://www.bts.gov/publications/americas_freight_transportation_gateways/2009/highlights_of_top_25_freight_gateways_by_shipment_value/port_of_laredo/index.html

(10) What are USA major exports and imports today? , Answers.com, http://wiki.answers.com/Q/What_are_USA_major_exports_and_imports_today

(11) "Sympathy explosions" is a term often used by law enforcement bomb squads that occurs when  flammable or explosive cargos are ignited by an explosive blast sufficient enough to set off a chain reaction of explosions in a commonly shared area, as in a seaport, or customs facilities at land ports-of-entry.

 

MarEx does not necessarily endorse any opinions herein.