Corrections or additions?
This excerpt of a book by Marc Levinson was prepared for the April 26,
2006 issue of U.S. 1 Newspaper.
Thinking Out of the Box: 50 Years of Container Shipping
We see them every day, on Route 1, at the loading docks of big box
stores, and even in driveways, helping families about to move. They
are containers. We rarely give them a second look, and yet the handy
transporters, celebrating their 50th birthday this year, have had a
profound effect on the world economy and on the prices we pay for
everything from bananas to imported credenzas.
Mark Levinson has written “The Box: How the Shipping Container Made
the World Smaller and the World Economy Bigger,” a book that details
the history of the containers. He speaks at the University Store on
Wednesday, April 26, at 7 p.m. Call 609-921-8500. This is an excerpt
from his book:
Since the mid-1980s, when the concept of just-in-time manufacturing
took root, manufacturers such as Dell and retailers such as Wal-Mart
Stores have taken the concept to extremes, designing their entire
business strategies around moving goods from factory floor to customer
with minimal time in between.
In 2004 nonfarm inventories in the United States were about $1
trillion lower than they would have been had they stayed at the level
of the 1980s, relative to sales. Assume that the money needed to
finance those inventories would have to be borrowed at 8 or 9 percent,
and inventory reductions are saving U.S. businesses $80-$90 billion
per year. This precision performance would have been unattainable with
out containerization.
So long as cargo was handled one item at a time, with long delays at
the docks and complicated interchanges between trucks, trains, planes,
and ships, freight transportation was too unpredictable for
manufacturers to take the risk that supplies from faraway places would
arrive right on time. They needed to hold large stocks of components
to ensure that their production lines would keep moving.
The container, combined with the computer, sharply reduced that risk,
opening the way to globalization. Companies can make each component,
and each retail product, at the cheapest location, taking wage rates,
taxes, subsidies, energy costs, and import tariffs into account, along
with considerations such as transit times and security. The cost of
transportation is still a factor in the cost equation, but in many
cases it is no longer a large one.
Globalization, historians and economists have hastened to point out,
is not a new phenomenon. The world economy became highly integrated in
the 19th century. The decline of tariffs and other trade barriers in
the years following the Napoleonic Wars led international trade to
increase after decades of stagnation, and the introduction of the
oceangoing steamship in the 1840s sharply reduced transport costs.
Ocean freight rates fell 70 percent between 1840 and 1910, encouraging
increased shipment of commodities and manufactured goods around the
world, while the telegraph – the 19th-century counterpart of the
Internet – gave people in one location current information about
prices in another.
Prices of grain, meat, textiles, and other commodities converged
across borders, as traders found it easy to increase imports whenever
domestic prices rose or domestic wages got out of hand.
The globalization of the late 20th century took on quite a different
character. International trade is no longer dominated by essential raw
materials or finished produce. Fewer than one-third of the containers
imported through southern California in 1998 contained consumer goods.
Most of the rest were links in global supply chains, carrying what
economists call “intermediate goods,” factory inputs that have been
partially processed in one place and will be processed farther
someplace else. The majority of the metal boxes moving around the
world hold not televisions and dresses, but industrial products such
as synthetic resins, engine parts, wastepaper, screws, and, yes,
Barbie’s hair.
In international production-sharing arrangements of this sort, the
manufacturer or retailer at the top of the chain will find the most
economical place for each part of the process. This used to be
impossible: high transportation costs acted as a trade barrier, very
similar in effect to high tariffs on imports, sheltering the jobs of
production workers from foreign competition, but imposing higher
prices on consumers. As the container made intemational transportation
cheaper and more dependable, it lowered that barrier, decimating
manufacturing employment in North America, Western Europe, and Japan,
by making it much easier for manufacturers to go overseas in search of
low-cost inputs.
The labor-intensive assembly will be done in a low-wage country – but
there are many low-wage countries. The various components and raw
materials will come from whichever location can supply them most
cheaply – but costs in diferent locations often are quite similar.
Even small changes in transportation costs can be decisive in
determining where each stage of the process will occur.
The economics of containerization have shaped these global supply
chains in peculiar ways. Distance matters, but not hugely so. A
doubling of the distance cargo is shipped – from Hong Kong to Los
Angeles for example, rather than Tokyo to Los Angeles – raises the
shipping cost only 18 percent. Places far from the end market can
still be part of an international supply chain, so long as they have
well-run ports and a lot of volume.
Container shipping thrives on volume: the more containers moving
through a port or traveling on a ship or train, the lower the cost per
box. Places with lower demand or poorer infrastructure will face
higher transport costs and will be far less attractive manufacturing
sites for the global market.
In the 1970s and 1980s, when many U.S. industrial centers were dying,
Los Angeles thrived as a factory location because it was home to the
nation’s busiest containerport, and Los Angeles thrived as a port
because it was well located to handle import volume from Asia, not
just for California, but for the entire United States. The Pacific Rim
became the world’s workshop for consumer goods, in good part, because
large ports for containers gave it some of the world’s lowest shipping
costs. Antwerp spent a stunning $4 billion on port expansion between
1987 and 1997, including expropriation of 4,500 acres (2,000 hectares)
of land, just to keep itself in the game. Conversely, African
countries with inefficient ports and little containership service are
at such a transport-cost disadvantage that even rock-bottom labor
costs will not attract investment in manufacturing.
Shippers in places with busy ports and good land-transport
infrastructure not only enjoy lower freight rates, but they also
benefit from the shortest shipping times. Before the container, cargo
typically left the factory weeks before the ship departed, sailed at a
glacial 16 knots, and spent an unproductive week in the hold each time
the vessel called at an additional port.
In the container age, a machine manufactured on Monday can be dropped
at Port Newark on Tuesday and delivered in Stuttgart, Germany, in less
time than it once would have taken to be loaded aboard a ship. Yet
time still matters. By one estimate, each day seaborne goods spend
under way raises the exporter’s costs by 0.8 percent, which means that
a typical 13-day voyage from China to the United States has the same
effect as a 10 percent tariff.
The time savings represent a huge competitive advantage to shippers
located near a major port. Those served by smaller ports may have to
endure longer wait times between ships or shuttle links to a larger
port, adding time, and hence costs, to every shipment. Air freight all
but eliminates the costs of time, but it is too expensive for most
goods that are made in poor countries precisely because little value
is added in their production.
“Any change in technology,” the economist Joel Mokyr observed, “leads
almost inevitably to an improvement in the welfare of some and to a
deterioration in that of others.” That was as true of the container as
of other technologies, but on an international scale. Containerization
did not create geographical disadvantage, but it has made it a more
serious problem.
Before the container, shipping was expensive for everyone. The most
expensive part of international freight transportation, loading cargo
aboard ship, affected all shippers equally. Containerization has
reduced international transport costs for some much more than for
others. Landlocked countries, inland places in countries with poor
infrastructure, and countries without enough economic activity to
generate high demand for container shipping may have a tougher
competitive situation now than they did in breakbulk days. Being
landlocked, one study calculated, raises a country’s average shipping
costs by half.
Another study found it cost $2,500 to ship a container from Baltimore
to Durban, South Africa – and $7,500 more to haul it by road the 215
miles from Durban to Maseru, in Lesotho. Within China, the World Bank
reported in 2002, transporting a container from a central city to a
port cost three times as much as shipping it from the port to America.
And if high shipping costs, high port costs, and long waiting times do
not leave a country at an economic disadvantage, a cargo imbalance
might. Relatively few routes, it turns out, have an evenly balanced
flow of maritime exports and imports. When the flow is out of balance,
shippers in the more heavily trafficked direction have to pick up the
cost of sending empty containers back. In 1998 nearly three-quarters
of the containers sent northbound from Caribbean islands to the United
States were empty, resulting in much higher shipping costs for the
southbound imports of food and consumer goods on which these
island-states depend.
The revolutionary days of container shipping were over by the early
1980s. Yet the after-effects of the container revolution continued to
reverberate. Over the next two decades, as container shipping began to
drive international freight costs down, the volume of sea freight
shipped in containers rose four times over. Hamburg, Germany’s largest
port, handled 11 million tons of general cargo in 1960; in 1996, more
than 40 million tons of general cargo crossed the Hamburg docks, 88
percent of it in containers, and more than half of it from Asia.
The prices of consumer goods tumbled as imports displaced domestic
products from store shelves in Europe, Japan, and North America.
Low-cost products that would not be viable to trade without container
shipping diffused quickly around the world. Declining goods prices in
the late 1990s, thanks largely to imports, helped bring three decades
of inflation to an end.
Corrections or additions?
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