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.

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