Containerized Shipping a Boon for World Trade by Janet Koech
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2 FEDERAL RESERVE BANK OF DALLAS • Globalization and Monetary Policy Institute 2013 Annual Report Cheaper by the Box Load: Containerized Shipping a Boon for World Trade By Janet Koech t’s hard to believe that a vessel 20 transport costs help make it economically sensible stories tall, a quarter-mile long and for a factory in China to produce Barbie dolls with made from eight Eiffel Towers’ worth Japanese hair, Taiwanese plastics and American i of steel can float, much less be the colorants, and ship them off to eager girls all over future of cargo transportation between continents. the world.”3 But the world’s newest and largest container- By sharply cutting costs and enhancing reli- ship, the Maersk Triple E, may become the most ability, container-based shipping has enormously common class of cargo carrier on the seas. Copen- increased the volume of international trade, made hagen-based Maersk chose the name to reflect the complex supply chains possible, facilitated the ship’s economies of scale, energy efficiency and development of just-in-time logistics and simpli- environmental improvement. With a capacity of fied the large-scale transport of consumer goods. 18,000 standard 20-foot containers, or TEUs, the The separate evolution of telecommunications Triple E can hold the equivalent of 36,000 cars.1 systems further increased the efficiency of cargo Ever-larger ships have made transportation handling and flows at major ports. costs a smaller part of the prices consumers pay— The economic integration of widely and helped create a world in which Americans separated regions has increased with expanded consume goods from around the globe. Ports international trade, financial flows and move- and canals are expanding to accommodate them. ment of people. Efficiently distributing freight and The Triple E, which sails the Suez Canal between transporting people have always been important Europe and Asia, is so massive it can’t yet navigate aspects of maintaining the cohesion of economic North American ports or even the expanded systems, from empires to modern nation states Panama Canal. and economic blocs. The opposite—poor trans- A vessel the size of the Triple E was unimagi- portation and communication infrastructure and nable a half-century ago when the first contain- remoteness—isolates countries from international ership, the Ideal X, sailed from Newark, N.J., to markets, inhibiting their participation in global Houston with 58 containers. The early container- production networks. Transport costs are espe- ships—modified bulk vessels or tankers—could cially pronounced for landlocked countries, which transport 1,000 TEUs or fewer. The increasing use are concerned not only about the quality of their of ships dedicated to container handling led to the transport networks, but also the ease of movement construction of larger containerships.2 Capacity of goods across boundaries. quickly expanded from about 4,000 TEUs in the 1980s to more than 6,000 in the 1990s and 10,000 Globalization Is Not New in the early 2000s. Containerization, along with other technologi- Falling transportation costs have contributed cal innovations in maritime, air and land-based to segmentation of production networks—compo- systems, has reduced transport costs, improved nents are now made wherever it is most cost-effec- efficiency and increased trade. This has accelerated tive. Marc Levinson, author of The Box: How the the pace of global economic integration in recent Shipping Container Made the World Smaller decades. However, integration of world economies and the World Economy Bigger, notes that “low is not new. Historians single out two episodes Globalization and Monetary Policy Institute 2013 Annual Report • FEDERAL RESERVE BANK OF DALLAS 3 of significant advancement in global economic Chart 1 integration. The first, from 1870 to 1913, was ended World Exports Substantially Increase in Most Recent by the two world wars and the Great Depres- Era of Globalization Index, 2005 = 100 Percent of world GDP sion, according to Kevin O’Rourke and Jeffrey G. 140 30 Williamson in their textbook on globalization and history.4 Postwar economic reintegration started in 120 1950 and continues today. During both episodes, 25 transportation costs fell, reflecting productivity 100 gains from innovations in transport technology. 20 80 Exports’ share Estimates of merchandise trade as a share of GDP of world output rose from the beginning of the 60 15 19th century until 1913, substantially dropped in the years leading to 1950, and recovered and 40 Volume of exports surpassed 1913 levels by 1973 before continuing 10 to still-higher levels (Table 1). 20 Between 1950 and 2012, the volume of 0 5 exports increased an average of 6 percent annu- ’50 ’55 ’60 ’65 ’70 ’75 ’80 ’85 ’90 ’95 ’00 ’05 ’10 ally, paced by rapid industrialization in developing SOURCES: International Monetary Fund; World Bank’s World Development Indicators database; countries beginning in the 1990s. Exports’ share of World Trade Organization. gross domestic product (GDP) surged in the post- war period to 25 percent in 2012 from 14 percent in 1960 (Chart 1). Other factors contributing to increased economic interdependence include falling tariffs market areas and enhancing trade opportunities. and increased demand for goods and services Mechanized transport and industrial produc- amid rising income levels and living standards. tion facilitated mass production and global and This article focuses on the role of transportation regional trade. The development of high-capacity, technology, particularly containerization, in facili- low-cost mechanized transport networks and tating integration. terminals dates back to the late 18th century.5 Before that, the speed and efficiency of transport Technological Advances, were very low and the cost of traveling long dis- Falling Transport Costs tances was prohibitively high. Largely subsistence Transport innovations enable production economies created little demand for transport, specialization and the division of labor, widening and trade was minimal. Only the most prized Table 1 World Merchandise Exports as a Share of Gross Domestic Product Year 1820 1850 1913 1929 1950 1973 1998 2005 2012 Percent 1 4.6 7.9 9 5.5 11.4 17.6 22.4 24.6 SOURCES: Monitoring the World Economy, 1820–1992, by Angus Maddison, Paris: OECD Publishing, 1995, for 1820–1950 data; World Bank and International Monetary Fund for post-1950 data. 4 FEDERAL RESERVE BANK OF DALLAS • Globalization and Monetary Policy Institute 2013 Annual Report merchandise—gold and silver, silk, spices, jewels stifled economic expansion, slashed transport and medicines—moved between continents. Land costs and increased speed and reliability. For transportation was especially slow and costly instance, the Bridgewater Canal in 1764 cut by before the introduction of steam railways and iron one-third the average delivery cost per ton of steamships, major 19th century innovations that coal transported seven miles to Manchester. The helped create high-volume international trade. cost savings encouraged investment in a limited Merchandise exports as a proportion of network of canals that helped kick-start localized world output grew from just 1 percent in 1820 to industrialization in Britain’s coalfields.6 about 8 percent in 1913, enabled by numerous Steam-powered railways created a cheap transport innovations, low-cost mass-produced mode of transport that could move raw materi- goods in Europe and North America and low-tariff als, goods and passengers and surmount difficult trade. This growth in world trade created econom- topography. Steam railways, together with steam- ic convergence and initiated interdependence powered textile mills, helped Manchester become among increasingly specialized economies. the world’s first industrial city. By 1830, the first Modes of transportation and technology commercial rail line was built, linking Manchester evolved from small to large, slow to fast, simple to Liverpool, 40 miles away. Soon, rails were laid to complex and rigid to flexible in accordance throughout developed countries, and by 1850, with internationally accepted standards. In Great railroad towns were being established as trains Britain, canals were built in the 1760s to transport provided new access to resources and markets in via horse-drawn barges the growing volumes of vast territories. industrial raw materials, goods and foodstuffs. A thousand kilometers of railways operated The canals, which replaced inadequate roads that in England, and more lines were quickly con- structed in western Europe and North America. Railroads represented an inland transport system Chart 2 that was flexible in geographic coverage and Freight Rates Decline in 19th Century could carry heavy loads. They were a significant Index,1870 = 100 200 improvement from the stagecoaches widely used in the 18th and early 19th centuries.7 180 American Trains on the first railway networks traveled export routes 160 20 to 30 mph, three times faster than stagecoach- 140 es. The journey between New York and Chicago 120 (a 700-mile distance) was reduced to 72 hours in 1850 from three weeks by stagecoach in 1830. The 100 2,600-mile transcontinental line between New 80 York and San Francisco, completed in 1869, was a 60 American remarkable achievement that reduced the cross- East Coast 40 export routes country journey to just one week from six months, 20 aiding territorial integration and opening a vast pool of resources and new agricultural regions in 0 1869 1873 1877 1881 1885 1889 1893 1897 1901 1905 1909 1913 the western United States.8 NOTE: The freight rate indexes are aggregate rates on American export routes as reported Maritime routes linking harbors, espe- by Douglass C. North and are deflated by the U.S. Consumer Price Index. cially between Europe and North America, were SOURCE: “Late Nineteenth Century Anglo-American Factor-Price Convergence: Were Heck- scher and Ohlin Right?” by Kevin O’Rourke and Jeffrey G. Williamson, Journal of Economic established at the beginning of the 19th century History, vol.