Recently I read The Box, a book about the history of container ships. This is book was recommended by Bill Gates — “you won’t look at a cargo ship in quite the same way again after reading this book.” It indeed changed my view of the shipping industry and here is a summary of my thoughts.
Influence of Containerization
An immediate result of containerization is a sharp decline in international transportation costs, which resulted in an unprecedented globalization process and business paradigm shift.
Globalization is not a new phenomenon — the world economy was already highly integrated in the nineteenth century. However, the globalization caused by containership is quite different because it fundamentally changed the production process itself.
Containerization significantly reduced the shipping cost among coastal cities between America and East Asia, which has abundant cheap and skilled laborers. As transportation costs decline, manufacturers could outsource their manufacturing overseas. Many American businesses only do research & design in the US and delegate the manufacturing to Original Equipment Manufacturers (OEMs) in East Asia. This new type of industrial paradigm would not be possible without container ships.
As a consequence, geographical disadvantage becomes a more serious problem. Because American consumers live in coastal cities, it no longer makes sense to manufacture in inland cities as the shipping costs by sea routes are so cheap. Doing business in those inland cities becomes much harder because of the overseas competitions.
In east Asia, coastal cities also absorb all the foreign investment and markets. Guangdong and Jiangxi are two Chinese provinces that are adjacent to each other. However, the GDP per capita of Guangdong is almost twice that of Jiangxi. The reason is only that Guangdong is coastal while Jiangxi is landlocked.
To reduce the gap, inland cities have to invest heavily in transportation infrastructure to reduce the shipping cost, which is very challenging.
Influence of Deregulations
The U.S. government played an interesting role in the history of containerization. The government regulations initially prohibited corporations to be involved in both land-based and sea-based transportations.
The initial goals of these regulations were to prevent monopoly and to ensure a fair price for consumers. However, the goodwills of lawmakers turned out to be a huge obstacle and made the cooperation among the shipping, railway, and trucking companies very challenging. Railroads and their customers could not negotiate long-term contracts setting rates. Trucks and railcars that had often been forced to return empty were able to be filled in on the return trip.
Deregulation changed everything. In 1980, Congress freed interstate truckers to carry almost anything almost anywhere at whatever rates they could negotiate. 41,021 contracts were signed within five years and by 1988 U.S. shippers saved nearly one-sixth of their total land freight bill.
The ability to sign long-term contracts gave railroads incentive to adapt containerships. On average, it costs four cents to ship one ton of containerized freight one mile by rail in 1982 and that cost dropped 40 percent over the next six years, adjusted for inflation.
Although containers were supposed to help cargo move seamlessly among trains, trucks, and ships, it took 20 years since Malcolm McLean invented the first container for the industry to achieve the goal. The process could be much faster without government regulation. This interesting case is another example that shows that the government should keep itself away from the market most of the time. Governments are too slow to adjust themselves to the market due to bureaucracy, so the best way is to let the market speak for itself.