Category Archives: Trade

Megamess

The world economy, as you may have noticed, hasn’t been doing so well of late. Economic growth was slowing and international trade languishing even before COVID-19 swept across the globe. Now, we’re tumbling into a downturn that makes the global financial crisis of 2007-2009 look mild. So, of course, it’s the perfect time to introduce the largest containership ever built.

Meet the HMM Algeciras, which was just launched by Daewoo Shipbuilding in South Korea. HMM is the new name of Hyundai Merchant Marine, the last big Korean container line left standing after the collapse of Hanjin Shipping in 2016. Hanjin’s bankruptcy and eventual dismemberment was a direct result of a market flooded with excess capacity due to carriers’ blind enthusiasm for very large ships. South Korea’s government made sure Hyundai Merchant Marine survived, and induced it to build 20 ships with extremely generous subsidies. Eleven more the size of HMM Algeciras are to be delivered later this year.

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These megaships, each capable of carrying as much cargo as 12,000 full-sized trucks, are being built not to meet the demands of exporters and importers, but rather to preserve jobs at South Korea’s shipyards, steel mills, and marine equipment manufacturers. South Korean President Moon Jae-in expressed the “hope that HMM continues to secure a competitive advantage as a Korean national flagship carrier.” Elected officials have to say such things, but the reality is that HMM will be hard-pressed to fill its new vessels with Korean and Chinese goods bound for Northern Europe. They might be the most efficient ships at sea when fully loaded. But it’s more likely they’ll lumber half-empty across the oceans, spouting red ink as they go.

HMM Algeciras is just the latest example of megaship mania. Shipyards in China and Korea continue to turn out enormous vessels, even though the boom in container trade ended long ago. Once the COVID-19 pandemic has passed, globalization won’t go away, but it will have more to do with spreading ideas than with moving stuff in metal boxes. Many of the carriers unwise enough to own megaships are likely to need government help once more as they struggle to clean up a megamess.

No, the Coronavirus Won’t Kill Off Globalization

The spread of COVID-19 has brought much commentary about the impending end of globalization. While the virus has indisputably disrupted the world economy, I think that many of the claims about its impact on international trade are overblown. Globalization is far from dead. Rather, it is changing in ways that were already apparent well before COVID-19 appeared in Wuhan last December.

When people talk about globalization, they often have something specific in mind — the long value chains that have reshaped the manufacturing sector since the late 1980s. These chains emerged after the development of container shipping, falling communications costs, and more powerful computers made it practical to divide a complex production process among widely dispersed locations, performing each task wherever it is most cost-effective to do so.

Value chains underlay the torrid growth of international trade in the final years of the twentieth century and the early years of the twenty-first. During those years, trade grew two or even three times as fast as the world economy, mainly because of increased shipments of what economists call “intermediate goods,” items made in one place that are being sent elsewhere for further processing. I refer to this period as the Third Globalization, because it was distinctly different from other periods — the decades before World War One, the years between 1948 and the mid-1980s — when international trade and investment grew rapidly, but international value chains were uncommon.

Many companies decided where to locate various parts of their value chains based on production and transportation costs. But over time, complicated long-distance value chains often proved to be less profitable than they had imagined. As freight transportation became slower and less reliable, and as earthquakes and labor disputes resulted in goods not arriving on time, executives and their shareholders became more attuned to the vulnerabilities. Minimizing production costs ceased to be the sole priority. 

Companies have taken a variety of measures to reduce risks in their value chains. They are keeping larger inventories in their warehouses, producing critical components at multiple locations rather than in a single large plant, and dividing exports among several ship lines and sending them through different ports. All of these measures help limit losses when value chains malfunction. But all of them make international sourcing more expensive.

For most of the past decade, international trade has grown more slowly than the world economy, reversing the trend of the previous sixty years. Greater care when it comes to arranging value chains is one reason why. COVID-19 offers further reason to be careful. But it is not likely to cause manufacturers, wholesalers, and retailers to give up on globalization. The alternative, relying on a purely domestic value chain that can be interrupted by a flood or a fire, might create risks rather than contain them.

 

Too Damn Big

Not too long ago, I had a chat with a high-ranking executive at a major container shipping line. The subject was new ships. “Those guys on the operating side always talk about how the bigger ships have lower costs,” he said, shaking his head. “They don’t see the bigger picture.”

The bigger picture is that the container shipping industry’s enthusiasm for size has brought it nothing but headaches. Changes in trade patterns, still in their early stages, are likely to make the problems worse. And yet most of the major ship lines can’t help themselves. In October, Mediterranean Shipping Company, the Switzerland-based company that is the world’s second-biggest container carrier, said it would acquire five megaships, each able to carry 23,000 20-foot containers — equal to 11,500 truckloads. Evergreen Marine, a Taiwanese line, just ordered six ships of the same size. Hyundai Merchant Marine has a dozen ships of that size on order, with deliveries to begin next year. CMA CGM of France, the fourth-largest container line, has several on the way. All of these vessels, it is worth noting, are larger than any containership now in commercial service.

The attraction of megaships is clear enough: if it is filled to capacity, a ship able to carry 23,000 twenty-foot-equivalent units — TEUs, as they’re called — has much lower operating costs per container than a tiddler carrying, say, 15,000 TEUs. But that is a very big “if.” With international trade growing slowly, there’s a lot of unused capacity on voyages from Asia to Europe, and on the reverse voyage from Europe to Asia empty containers, which travel at very low rates, are often the main cargo. The ships are too big to call at many ports and to fit through the recently enlarged Panama Canal, so they don’t serve North America. While a fully loaded megaship is highly efficient at sea, it can cause chaos in port by discharging or loading thousands of containers at a time, delaying customers’ deliveries and erasing many of the putative benefits of large vessels.

Recent economic trends pose an additional challenge. The world’s ten largest container ports all are located in Asia, seven of them in China. This is important for containership economics, because only a very large port is likely to amass enough outbound cargo to justify frequent calls by very large ships. But due to rising wages in China, trade sanctions in the United States, and businesses’ increased attention to risk, manufacturing of many widely traded goods — clothing, footwear, consumer electronics, toys — is shifting from China to such countries as Vietnam, Bangladesh, and even Ethiopia. This shift is visible in the fact that Chinese ports such as Hong Kong, Qingdao, Xiamen, and Dalian, all of them larger than any port in North America, have seen traffic flatten out or decline. Few of the new manufacturing hotbeds, though, export enough to Europe to justify a 23,000-TEU ship dropping by.

A few people in the shipping industry appear to recognize the insanity of the race for size. The chief financial officer of Maersk, the largest container line, said in November that “there are no intentions now to invest in any large vessels.” Cosco, the state-owned Chinese ship line, seems to have retreated from rumored plans to order 25,000-TEU vessels. No doubt, operating such vessels would bring prestige. But when it comes to making a profit, they’re too damn big.

Slow Trade Growth is the New Normal

The World Trade Organization forecast on April 2 that merchandise trade will grow a modest 2.6 percent in 2019, with risks to the downside. The outlook for next year is only slightly better, with trade projected to expand 3 percent. These are disappointing numbers: international commerce, the WTO anticipates, will expand no faster than the world economy this year and will be only slightly more robust than global GDP in 2020.

The WTO’s director-general, Robert Azevêdo, blamed the unhappy news on uncertainty caused by protectionist bluster. “Of course there are other elements in play, but rising trade tensions are the major factor,” he told the press. But Mr. Azevêdo may be overstating the case. There is reason to think that slow growth in goods trade is not an aberration caused by protectionist rhetoric, but is the new normal, due to factors that have nothing to do with trade wars.

For most of the past half-century, exports and imports grew far faster than the world economy. Merchandise trade, less than one-third of the world’s GDP in the 1980s, climbed to more than half in 2008 as China developed into the world’s workshop. China’s factories consumed vast quantities of imported fuel, ore, and chemicals; shipped a quarter or more of their output abroad; and then imported waste paper, used electronic equipment, and scrap metal for recycling into yet more manufactured goods.  Each part of this cycle involved long-distance trade, which is why demand for container shipping increased an average of roughly nine percent per year.

Exports and imports of goods plummeted in 2009, and they have grown since then on a much lower trajectory then before. It seems likely that in the years ahead, international trade will grow more slowly than the world economy as a whole, a distinct divergence from the pattern since World War Two.

Several forces are driving this trend. One is a change in consumer behavior. As personal incomes rise, households tend to shift their spending away from physical products toward services and experiences, from education and medical care to adventure vacations.  Call it the Marie Kondo effect, the belief that having things brings us less joy than doing things. This shift in spending patterns is positive for trade in services, but it is unambiguously negative for merchandise trade.

Another cause of slower growth in trade is a reconsideration of global supply chains. Starting in the late 1980s, lower transport and communications costs and better information technology made it practical for manufacturers and retailers to stretch their supply chains around the globe in search of lower production costs. Intermediate goods—things made in one country and shipped to another for further processing—account for a large share of all merchandise trade.  But in recent years supply chains have become more costly and less reliable. Importers have responded to increased risk by keeping more inventory on hand and by building redundancy into their supply chains, measures that make trading more expensive.

A third factor weighing on trade is automation. The great relocation of factory production to China, Mexico, and Eastern Europe since the early 1990s was, in good part, a search for lower labor costs. But production labor matters far less than it used to as robotics and artificial intelligence enable computers to take on more of the work. Additive manufacturing, more widely known as 3-D manufacturing, lets manufacturers make some goods with very few workers on the factory floor, and important experiments are underway to produce some types of apparel and footwear in highly automated factories.  These developments are making it feasible to locate factories near end markets rather than near cheap labor, and they are likely to suppress the growth of international trade.

All this means that cross-border movement of goods will probably be far less buoyant in the years ahead. Services and ideas, not things, account for a growing share of global commerce; since 2012, exports of commercial services have grown twice as fast as exports of goods. Ship lines, ports, and railroads that have invested in expectation of an every-increasing volume of containers may need to adjust their expectations.  Even if protectionist pressures recede, the next stage of globalization will be quite different from the last one.

Payless: A Brief Obituary

Back in 1956, there were a couple of events that helped shape the course of globalization. One, about which I wrote in my book The Box, was the first modern containership voyage. This would eventually lead to the behemoths, some carrying more cargo than 10,000 full-size trucks, that move much of the world’s trade today. The other was the most prosaic development one could imagine, the opening of a shoe store in Topeka, Kansas, by two entrepreneurial cousins, Louis and Shaol Pozez. Sixty-three years later, that company is about to go out of business, the victim of the globalization it played a small role in bringing about.

My family knew both Pozez families and we shopped in their store. Payless-National, as they ambitiously called it, aimed to offer quality shoes at discounted prices. It did so by keeping costs low. The floor was covered with linoleum, not carpet, and the wooden shelves weren’t even painted. Payless laid out its merchandise in shoeboxes. Sales clerks were few; customers were expected to find their size and try on the shoes themselves. In return for putting up with these rather austere conditions, shoppers could buy two pairs of shoes for five dollars.

The Pozez cousins were able to undercut their competitors thanks to a series of court decisions in the early 1950s that effectively prohibited manufacturers from fixing retail prices. Importing was not part of their strategy: the United States imported very little footwear in 1956. Although shoes cost far less to make in many other countries, the United States still had a vibrant shoemaking industry, with 1,900 factories employing more than a quarter-million people in places like Endicott, New York, and St. Louis, Missouri. Thousands more people were employed in tanneries and in factories that made synthetic shoe materials.

But while making footwear provided plenty of jobs, those jobs came at a cost. By today’s standards, shoes were expensive. Men’s dress shoes from Florsheim started at $18.95 a pair. That’s about $170 in today’s prices—which is far more than an equivalent shoe from Florsheim costs today. A pair of men’s loafers from Sears for went for $8.65, or about $77 in today’s money—nearly twice the price of the loafers available right now on Sears’ website. StepMaster children’s shoes cost $5.50 a pair. No wonder Payless’s offer of two pairs of shoes for five dollars seemed like a good deal to a bus driver or factory worker earning two bucks an hour. Payless became a huge success, operating thousands of stores. It was purchased by a big department store chain in the 1970s, then spun off as a publicly traded company, and  eventually ended up in the hands of private equity funds.

Footwear manufacturing has proven difficult to automate, making labor costs the single most important factor in choosing production locations. As factories in low-wage Asian countries filled millions of containers with cheap plastic and synthetic shoes and shipped them across the pacific at only a few cents per pair, the U.S. shoe industry couldn’t come close on price; today, about 98 percent of the shoes sold in the United States are imported, mainly from China. To keep its lead in the discount shoe business, Payless became one of the largest shoe importers. For it, as for many other companies, globalization was not a choice, but the only alternative.

What killed it, at the end, was the same thing that made it a success—the constant quest for lower prices. According to the Bureau of Labor Statistics, the average consumer price of footwear has gone up all of 8 percent over the past 25 years. Rent and workers’ wages, meager though those may be, have been rising much faster, squeezing shoe retailers’ margins. In that environment, even globalizers can end up as road kill.

Burdened by Bigness

Suppose your company invested billions of dollars in new equipment. And suppose now, very shortly after taking delivery, you’ve discovered that your investment was misguided. The machines you’ve bought are threatening to destroy your business. What would you do?

That, in essence, was the subject of a conference I spoke at in October at the Copenhagen Business School. Shipping is a very, very big business in Denmark, and of course Maersk Line, the world’s largest container shipping company, is headquartered on the Copenhagen waterfront. Maersk itself built the first of the megaships — ships that carry as much cargo as 8,000 or 10,000 trucks — back in 2006, when it launched what it called its E class (hence such clever ship names as Emma Maersk and Evelyn Maersk). There are now roughly 150 vessels this big or larger on the seas. More are on the way: the South Korean government just agreed to finance ships the size of 12,000 trucks. This is not something the world needs.

I’ve been spending some time of late studying how the megaships came to be, and I’m convinced that they are a colossal error. The ship lines that commissioned them, by and large, were transfixed by the idea of economies of scale: if you can actually fill one of these giant vessels, they can carry a single container for about 30 percent less than a ship half the size. But filling them has been a persistent challenge. Moreover, the people obsessed with achieving economies of scale at sea largely ignored the fact that these behemoths would create diseconomies of scale on land. With fewer ships calling but each ship discharging and loading many more boxes, ships spend more time in port, the ports are half-buried beneath mountains of containers, and service for the manufacturers and retailers who ship goods in containers has become much less reliable. These days, when a containership arrives in port, it’s behind schedule nearly half the time, and when the goods will reach their final destinations is anyone’s guess.

The ship lines have been praying that international trade will grow faster, as it did before 2009, and fill up all those half-empty ships. Some thoughtful people, including the experts who monitor shipping for the United Nations Conference on Trade and Development (UNCTAD), think this will happen. My own view is that it’s highly unlikely. The world economy itself is likely to grow more slowly than it has in recent decades; China’s years of 10% annual growth are over. Adding to that, the gradual shift of manufacturing closer to end markets and the desire of manufacturers and retailers to minimize risks from malfunctioning supply chains will suppress demand for container shipping. Managers of ship lines, in my view, need to think very hard about where they’re going to make money, because they are probably not going to make much from operating ships.

Many of the people I met in Copenhagen, including the authors of a new McKinsey study envisioning the shipping industry of 2043, seemed to agree with my analysis. There was much discussion about the digital future. What that seems to mean is that ship lines might figure out how to use information technology to provide higher-value services to their customers. In other words, they might become logistics managers, coordinating the efficient flow of goods around the world for individual customers, rather than simply selling cheap transportation. It’s an alluring vision. Many start-up companies are now pursuing similar strategies, without the burden of owning all those money-losing ships. Ocean carriers have to figure out how to turn their underutilized floating assets into a competitive advantage even as they transform themselves into technology companies — and given the fairly bleak profit outlook for the shipping industry, some of them may not have much time to get it right.

Setting the Standard

The Australian National Maritime Museum, in Sydney, has mounted an unusual exhibition about the history and consequences of the shipping container, a subject near and dear to my heart. Appropriately enough, the exhibition is housed in containers spread around the museum’s grounds.

When the organizers asked me to write a post for the museum’s blog, I took the opportunity to explain why standardization has been so important to the growth of container shipping — and asked readers to imagine how tangled world trade might be if the same basic 40-foot container was not in use everywhere. The first containers used aboard a ship in Australia were 16 feet 8 inches long. No ship in any other country has ever carried boxes of that size, and you can imagine how difficult it would be for Australia to engage in international trade if its containers couldn’t easily be used abroad. The post is here. Many thanks to the museum’s staff for coming up with some great pictures and drawings to illustrate it.

Globalization in a Pickle

This morning, a crisp and lovely morning in Washington, I hopped on my bicycle and pedaled over to a farmers’ market a mile from my home. My modest goal was to buy a quart of half-dills from Number One Brothers, who turn cucumbers into terrific pickles.

The stand was open for business, stocked with pickled beets, pickled kale, and cauliflower and carrots pickled with ginger. There was not a half-dill in sight. The woman in charge told me that the last cucumber pickles of the season were sold in mid-October. Number One Brothers won’t have any more until June.

As I pondered this annoyance on the way home, I realized that it’s yet more evidence of what the shipping container has wrought. I, like most people, have come to expect the food I want when I want it. I don’t see why the end of cucumber season in the mid-Atlantic states should give rise to a pickle shortage. Aren’t farmers somewhere in the world now harvesting fresh cucumbers that can be piled in a container, shipped my way, and dumped into brine?

The answer, of course, is yes. Pickles from some far-off place may not be quite as good as the Number One Brothers half-dills, but I don’t need to wait until June to get my pickle fix. Some pickle factory somewhere is making cucumber pickles right this minute, and the container brings those pickles to me at an extremely modest cost. While buying them at Costco may not be as virtuous as buying directly from the maker at a neighborhood market, Costco never runs out of pickles.

What Happens After the Container Shipping Crisis?

Until 1978, dozens of airlines flew the U.S. skies. Then, with the passage of the Airline Deregulation Act, competition increased and profits became scarce. Decades of consolidation followed, as Allegheny, Eastern, Frontier, Ozark, Pan Am, and many other venerable names were merged out of existence or went bust. When the turbulence finally subsided, four giant carriers—American, Delta, Southwest, and United—controlled 70 percent of U.S. domestic passenger traffic and, through agreements with foreign carriers to share services, dominated international routes as well. Such measures have enabled the airline industry to rake in profits as never before.

Something similar is now going on in the world of container shipping. Excess capacity and slow-growing demand are forcing down the price of shipping, driving companies deeply into the red and bringing a wave of bankruptcies, mergers, and joint ventures. The August bankruptcy of South Korea’s Hanjin Shipping, the world’s seventh-largest container carrier, and the announcement, in September, of the restructuring of A.P. Moeller-Maersk, by far the world’s largest, are signs of a consolidation process that still has far to go. And although the industry is likely to remain troubled in the short term, in the long term, today’s troubles will lead to less competition among those carriers adept enough to survive. That in turn will mean higher rates for shippers, increasing the cost of moving goods around the world.

I’ve recently written an article laying out why I think this will occur. You can find the full text over at ForeignAffairs.com.

Strawberries in Winter

In our globalized world, many people hold firmly to the belief that local is better. That conviction is particularly strong when it comes to food. In Washington, where I live, farmers markets are crowded with shoppers (including myself) who are prepared to pay outrageous prices for a basket of apples or a pound of cheese if it originated at a nearby farm. We convince ourselves that what we eat is fresher, purer, or more environmentally virtuous because it was grown or manufactured on a family farm close by.

I recently had the chance to participate in an unusual radio program, produced by the BBC, that takes a look at the booming international trade in food. Called The Food Chain, the program asks why long-distance shipments of food are growing so quickly. Part of the answer, it will not surprise you to hear, is that low transport costs and high reliability make it feasible to import goods that would not be traded if freight rates were higher, a story I tell in my book The Box. But an even more important cause of increased trade in food, I suspect, is changed consumer preferences. We expect to eat the foods of our choice when we want to eat them, and if that means importing strawberries from Mexico or Chile when local berries are out of season, so be it.
Those of a certain age can remember when life was otherwise. In the town where I grew up, in the U.S. Midwest, having fish for dinner meant popping a box of frozen fish sticks in the oven. Fresh fish was something our supermarket simply did not carry, because it had no means of bringing it in. Now, the town boasts several sushi bars. Thank modern logistics, including refrigerated containers and air freight, for providing diners with an option that previously did not exist.

One current line of attack on such variety in our food supply is that long-distance shipments of food are “unsustainable.” By this, the critics usually are taking aim at the large amounts of greenhouse gases supposedly produced while transporting food internationally. Part of my contribution to the BBC program was to point out that “local” is not at all the same as “sustainable.” International trade in food often involves huge economies of scale, which means food produced on another continent may be transported far more efficiently than food produced nearby. Moving 40-foot containers of fruit great distances in a large containership can result in much lower emissions per ton than carrying smaller quantities a hundred miles in a diesel truck.
The BBC has taken an unusually sophisticated look at the food trade. I hope you’ll have a chance to listen.