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.