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Thursday, March 23, 2006

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.

    Posted by on Thursday, March 23, 2006 at 01:34 AM in Economics, International Trade, Technology | Permalink  TrackBack (0)  Comments (8)


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