SCHOOLS BRIEF
Delivering the goods
The vast expansion in international trade owes much to a revolution in the business of moving freight. The fifth in our series of briefs on globalisation explains how it happened
IF SHOP windows everywhere seem to be filled with imports, there is a reason. International trade has been growing at a startling pace. While the global economy has been expanding at a bit over 3% a year, the volume of trade has been rising at a compound annual rate of about twice that. In 1996 some $5.2 trillion of goods was sent from one country to another, up from $2 trillion a decade earlier. Foreign products, from meat to machinery, play a more important role in almost every economy in the world, and foreign markets now tempt businesses that never much worried about sales beyond their nation’s borders.
What lies behind this explosion in international commerce? The general worldwide decline in trade barriers, such as tariffs and import quotas, is surely one explanation. The economic opening of countries that have traditionally been minor players in the world economy, such as China and Mexico, is another. But one force behind the import-export boom has passed all but unnoticed: the rapidly falling cost of getting goods to market.
In the world of trade theory, shipping costs do not matter. Goods, once they have been made, are assumed to move instantly and costlessly from place to place. The real world, however, is full of frictions. Exporting Italian steel to Britain may be good business if freight costs £20 ($34) a tonne and impractical if it costs £100 a tonne. Cheap labour may make Chinese clothing competitive in America, but if delays in shipment tie up working capital and cause winter coats to arrive in April, trade may lose its advantages. Freight costs, in short, can have a huge impact on both the overall volume of trade and on individual countries’ trade patterns.
They are a far less daunting obstacle than they used to be. This reflects two notable economic trends. First, the world economy has become far less transport-intensive than it once was. Second, the transportation industry has changed in remarkable ways, making it far cheaper and easier to ship goods around the world.
Brawn and brains
At the turn of the 20th century, agriculture and manufacturing were the two most important sectors almost everywhere. Together, they accounted for about 70% of total output in Germany, Italy and France, and 40-50% in America, Britain and Japan.
International commerce was therefore dominated by raw materials, such as wheat, wood and iron ore, or processed commodities, such as meat and steel. In 1900 “crude materials” and “crude food” made up 41% of America’s exports, by value, and 45% of its imports. The story in Britain was similar. Basic materials and foodstuffs, both processed and unprocessed, accounted for 75% of imports and 20% of exports. These sorts of products are heavy and bulky. The cost of transporting them is relatively high, compared with the value of the goods themselves, so transport costs had much to do with the volume of international trade.
Countries still trade disproportionately with their geographic neighbours (see chart 1). Over time, however, world output has shifted into goods whose value is unrelated to their size and weight. Finished manufactured products, not raw commodities, dominate the flow of trade (chart 2). And thanks to technological advances, such as light-weight composites to replace steel and microprocessors to do the job of huge control panels, manufactured goods themselves have tended to become lighter and less bulky. As a result, less transportation is required for every dollar’s worth of imports or exports.
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This is even more true of the fast-growing information industries. Films and compact discs cost little to transport, even by aeroplane. Computer software can be “exported” without ever loading it on to a ship or a cargo plane, simply by transmitting it over telephone lines from one country to another. In such cases, freight rates and cargo-handling schedules become insignificant factors in deciding where to make the product.
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At the same time, the cost of shipping itself has fallen sharply. In many countries, deregulation has helped to drive the process along. But behind the scenes, a series of technological innovations, known broadly as “containerisation” and “intermodal transportation”, has led to swift productivity improvements in cargo-handling—and, in the process, has lowered one of the biggest obstacles to trade.
Forty years ago, the very physical process of exporting or importing was arduous. Imagine a European textile manufacturer wanting to sell its wares in America. First, at the company’s loading dock, workers would have lifted bolts of fabric into the back of a lorry. The lorry would have headed to a port and unloaded its cargo, bolt by bolt, into a dockside warehouse.
As a ship prepared to set sail, longshoremen would have removed the bolts from the warehouse and hoisted them into the hold, where other longshoremen would have stowed them in place. At the American end, the process would have been reversed: dockers would have hoisted the cloth out of the hold, carried it to storage and then, eventually, placed it into a lorry that would take it to its destination.
Simply arranging this sort of shipment was a complex task. The repeated cargo-handling and storage would have been expensive, and the cloth would have spent days, or even weeks, sitting in warehouses. Likely as not, portions of the shipment would have been damaged or stolen along the way. Add in high customs duties and importing was a costly affair.
Smoother sailing
That first began to change in 1955, when an American road-hauling magnate named Malcom McLean hit upon a more efficient way to ship goods. Under his original scheme, a lorry body, wheels and all, was unhitched from the driver’s cab and lifted onto the deck of a ship, eliminating the need for dockworkers to handle the individual items inside the cargo compartment. This method soon gave way to the use of metal containers that could be separated from the lorry’s chassis and wheels. With the chassis left at dockside, the containers could be stacked several high aboard the ship.
Mr McLean’s first ship, an oil tanker called the Ideal-X, made its initial voyage from New York to Houston in 1956 with lorry bodies on its deck. In 1965 ships with containers on board began crossing the Atlantic. Ports were forced to adapt, as narrow piers in urban centres were replaced by large docks on the edge of town, alongside patios to hold thousands of containers.
The container crane, a new invention, made it possible to load and unload containers without capsizing the ship. The adoption of standard container sizes allowed almost any box to be transported on any ship. By 1967 dual-purpose ships, carrying loose cargo in the hold and containers on the deck, were giving way to all-container vessels that moved hundreds—and now thousands—of boxes at a time.
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Mixing modes
The shipping container transformed ocean shipping into a highly efficient, intensely competitive business. But getting the cargo to and from the dock was a different story. National governments, by and large, kept a much firmer hand on lorry and railroad tariffs than on charges for ocean freight. Almost everywhere, rates were either set by state bureaucrats or were subject to their approval. New companies could enter the freight business only with great difficulty, and were subject to tight restrictions.
This started changing in the mid-1970s, when America began to deregulate its transportation industry. First airlines, then road hauliers and railways, were freed from restrictions on what they could carry, where they could haul it and what price they could charge. Lorries were no longer forced to run empty because they were licensed to carry goods on only one leg of a round-trip journey. Railways were no longer obliged to maintain unprofitable branch lines, but could focus on moving freight in large volumes over long distances.
