Transportation Costs and Globalization

Changes in transportation technology have reduced transportation costs substantially helping to fuel the globalization process. Since digital technology is also a means of reducing transportation costs - email is cheaper and faster than air mail - globalization has been facilitated by the ability to move goods and services across borders at a reduced cost. Virginia Postrel discusses the sharp decline in international shipping costs in her last Economic Scene for the New York Times:

The Container That Changed the World By Virginia Postrel, Economic Scene, NY Times: The political showdown over a Dubai company's plan to operate terminals at six American ports briefly focused public attention on one of the most significant, yet least noticed, economic developments of the last few decades: the transformation of international shipping. Just as the computer revolutionized the flow of information, the shipping container revolutionized the flow of goods. ... By sharply cutting costs and enhancing reliability, container-based shipping enormously increased the volume of international trade and made complex supply chains possible.

"Low transport costs help make it economically sensible for a factory in China to produce Barbie dolls with Japanese hair, Taiwanese plastics and American colorants, and ship them off to eager girls all over the world," writes Marc Levinson in ... "The Box: How the Shipping Container Made the World Smaller and the World Economy Bigger"...

50 years ago, businesses and regulators treated distribution not as a single process but as a series of distinct modes: ships, trucks and trains. Every time the transportation mode changed, somebody had to transfer physically every box or barrel. "By far the biggest expense ... was shifting the cargo from land transport to ship at the port of departure and moving it back to truck or train at the other end of the ocean voyage," writes Mr. Levinson... This "breaking bulk" could easily consume half of the total cost of shipping.

Goods often had to wait in warehouses for the next stage. Those transfers and delays made shipping slow and schedules uncertain. They also created opportunities for damage, mistakes and more than a little theft. ... Today, by contrast, "you can call one of the big international ship lines, tell them to pick up your container in Bangkok, which is not a port, and tell them to deliver it in Dallas, which is not a port, and they will make the arrangements to get it ... where it needs to be," Mr. Levinson said. ...

The idea of containerization was simple: to move trailer-size loads of goods seamlessly among trucks, trains and ships, without breaking bulk. But turning that idea into real-life business practice required many additional innovations. New equipment, from dockside cranes to the containers themselves, had to be developed. Carriers and shippers had to settle on standard container sizes. Ports had to strengthen their wharves, create connections to rail lines and highways, build places to store containers and strike new deals with their unions. ...

In the container age, any city with good port facilities, including feeder rail and truck lines, can compete with any place in the same large region. Seattle can take business from Oakland ... That heightens competition among ports. At the same time, container lines keep building larger and larger ships to drive down their cost per unit...

This is Virginia Postrel's last Economic Scene column. She has written columns under that heading for the past six years...

Moving a load of goods as a single trailer-size unit to cut costs seems to be a relatively obvious innovation, so why wasn't this implemented sooner? Dynamist.com, Virginia Postrel's web site, adds more that helps to explain this:

My column barely mentions one important part of the story--the regulatory environment. At first, containerization grew through cracks in the rigid regulatory structure of the 1960s. But today's fully integrated systems became possible only after trucking and rail were deregulated in the 1970s and maritime rates were deregulated (to very little fanfare) in 1984...

As Levinson said in our interview, "Nobody even remembers what the Interstate Commerce Commission used to do. ... This was a key federal agency. And it spent its time hearing arguments about whether this truck line ought to be able to carry cigarettes in the same trucks as it carried textiles or whether the rates that were being charged to carry pretzels were adequate. People have trouble remembering that today." ...

I'm delighted that Tyler Cowen of Marginal Revolution fame will take over my Times slot, beginning in four weeks.

Sorry to see Virginia end her Economic Scene column, but looking forward to seeing what Tyler Cowen will offer in its place.

Comments

[Tom]

I'm very surprised. The idea that deregulation led to standardization is counter-intuitive to me. I always assumed that a public-goods kind of idea like "fixing one size across systems" would require a central authority to get co-ordination happening by identifying a focal point (container size in this case).

I've often used the example of Emperor Qin mandating a fixed axle-width to speed traffic along early China's mud-based roads (carts could run in the grooves made by other carts) as the kind of place that some central authority needs to pick an arbitrary value and identify it as a focal point for people to adopt.

Live and learn...

[me]

I quit reading when she said six terminals instead of the actual 22.

[save_the_rustbelt]

Early in my career I did a little bit of work with regulated trucking.

It was idiocy to the nth power.

[Movie Guy]

"Thinking Inside The Box"

The history of container shipments extends back more than 50 fifty years to Malcom McClean's original containerization ideas during the 1930s and the military use of container boxes in World War II.

Malcom McClean launched his global shipping initiative on "April 26, 1956, [when a] converted T-2 tanker sailed with its 58 containers on a spar deck constructed over the piping and manifolds for the 15,000 tons of bulk petroleum below. In June 1956 the Maxton with 62 container slots, joined the Ideal X in the Sea-Land Service to Houston. Built in 1945 at a California shipyard, the Ideal X went to a Japanese scrap yard in 1965. The first fully containerized vessel made its maiden voyage on Oct. 4, 1957, amid hoopla from a crowd of 400, including New Jersey Governor Robert B. Meyner, who helicoptered to the pier to deliver his address. In Miami, cargo was delivered to the consignee only 90 minutes after the Gateway City docked."

The History of Containerization (HOC) Foundation, "in conjunction with the Containerization & Intermodal Institute (CII), will host the official gala honoring the 50th anniversary of containerization on April 27, 2006, in Washington, D.C.

"The black tie dinner will be held in the Rotunda of the Smithsonian National Museum of Natural History, exactly 50 years after Malcom McLean's historic inaugural ocean voyage of IDEAL X, the first vessel carrying containerized cargo, between the ports of New York/New Jersey and Houston, Texas."

"The HOC Foundation was established this year by those involved with CII and other industry leaders as a non-profit charitable organization to capture and preserve the history of the development and evolution of the sea-going shipping container and the industry it created, including the many individuals around the world who played a key role in containerization. The HOC Foundation intends to create a permanent exhibit for viewing by future generations."

"Containerization needs to be recognized as one of the most significant commercial events in world history, " said Michael Berzon, HOC Foundation Chairman. "Today's global economy and our modern retail society would not exist without the incredible advancements made by the container industry over the past 50 years."

More information on containerization can be reviewed here, here, and in the German GDV Container Handbook. A timeline history of Malcom McClean's Sea-Land operations is also available for review.

One of the more notable aspects of container ships operations involved the "free freight" movement of above deck containers through the Panama Canal that I first learned about during the 1970s when my parents lived in the Panama Canal Zone. But that shipping loophole in U.S. law is now being closed. "Following a recommendation from the Board of Directors of the Panama Canal Authority (ACP), the Cabinet Council of the Republic of Panama" on 16 February 2005 "approved a new measurement and pricing system for full container vessels and other vessel types with on-deck container carrying capacity."

"The bottom line is that we simply closed a loophole that prevented us from charging for containers carried on-deck," said Administrator/CEO Alberto Alemán Zubieta. "Today, with some ships carrying more containers on-deck than in the ship’s belly, this new system is more equitable, more transparent and will provide the Canal with a fair price. Considering other shipping options, the Canal is still the best deal in the industry." Details of the revised measurement and pricing system are available here. The phased in new system will be in full force by May 1, 2007.

Interestingly, the Panama Canal Authority may be faced with loss of future container and general cargo ship traffic due to the opening of the "Northwest Passage" across the Arctic ocean due to global warming. This shipping route, if free of major ice blockage, could save 9,300 kilometers (5,800 mi) or 5,000 nautical miles transiting between Europe and Asia as compared to passage through the Panama Canal. Other estimates put the transit savings at 23,000 kilometers (14,300 miles) over the Panama Canal for a London to Tokyo transit.

This post is submitted in honor of Malcom McClean, who passed away in 2001.

[Damian]

Excelent! We get things cheaper! Glad we got that strait!