The Box: How the Shipping Container Made the World Smaller and the World Economy Bigger - Second Edition with a new chapter by the author

by Marc Levinson

The containership route between Japan and the U.S. Atlantic Coast, opened only in 1970, was served by thirty vessels in 1973.

The economics of container shipping were fundamentally different. The huge sums borrowed to buy ships, containers, and chassis required regular payments of interest and principal. State-of-the-art container terminals meant either debt service, if a ship line had borrowed to build its own terminal, or rent, if the terminal was leased from a port agency. Those fixed costs accounted for up to three-quarters of the total cost of running a container operation, and they had to be paid no matter how much cargo was available.

Overcapacity preoccupied everyone connected with containerization. “Now that standardized containers have been introduced, the rush to ‘get on the bandwagon’ will probably lead to substantial overexpansion,” a study for the British government warned in 1967. By one early estimate, 5 ships carrying 1,200 containers each, sailing at 25 knots, could move all of the U.S.–U.K. trade that could be containerized. By another, just 25 ships could handle the entire general-cargo trade between Europe and North America. A third estimate foresaw that the 5 ships ordered by the American carrier Farrell Line would be adequate for all of Australia’s exports to the United States. With hundreds of containerships on order, experts projected that half the available container slots across both the Atlantic and the Pacific would go unused by 1974. In the North Atlantic, “by the early 1970s there will be excess container capacity,” a study for the U.S. government predicted in 1968.

Quite so. For R. J. Reynolds, and for the other corporations that had chased fast growth by buying into container shipping in the late 1960s, their investments brought little but disappointment. Sea-Land and its competitors were not at all like Polaroid or Xerox, companies whose proprietary technology and constant stream of innovations provided inordinately high profits for decades. Ship lines’ end product was basically a commodity. Just like farmers and steelmakers, they would always be hostage to external forces, their prices and profit margins depending mainly on economic growth and on their competitors’ decisions to build new ships. The go-go years were over. By 1976, less than a decade after container shipping became an international business, the Financial Times could declare that “the revolutionary impact of containerization, the biggest advance in freight movement for generations, has largely worked itself out.”

Ocean carriers added 272 containerships to their fleets between 1976 and 1979. Four times during the 1970s, worldwide container shipping capacity increased by more than 20 percent in a single year. Total cargo capacity aboard containerships, 1.9 million tons in 1970, reached 10 million in 1980, not counting the tonnage of vessels designed for a mix of containers and other freight.

Shipowners decided to build slower vessels to save fuel: the average speed of newly delivered containerships dropped steadily from 25 knots in 1973 to 20 in 1984. Naval architects were no longer forced to design streamlined shapes to help achieve high speeds, and could concentrate instead on increasing pay-loads. Without getting much longer, vessels got much larger. The ships entering service by 1978 could hold up to 3,500 20-foot containers—more than had entered all U.S. ports combined during an average week in 1968.

By the 1980s, new ships holding the equivalent of 4,200 20-foot containers could move a ton of cargo at 40 percent less than could a ship built for 3,000 containers and at one-third the cost of a vessel designed for 1,800.

By the start of the twenty-first century, ship lines were ordering vessels able to carry 10,000 20-foot containers, or 5,000 standard 40-footers, and even bigger ships were on the drawing boards.

The other competitor in the race around the world was an equally self-confident shipping magnate, Malcom McLean. In 1982, his United States Lines placed orders for 14 gigantic containerships. By building at Korea’s Daewoo shipyard, the company forfeited any rights to U.S. government construction subsidies but won the freedom to deploy the vessels where it chose, without government involvement. Each new ship could carry the equivalent of 4,482 20-foot boxes, half again as much as Evergreen’s G-class vessels. The ships were wide, flat, and utilitarian, designed—in the words of their architect, Charles Cushing—to look “much like a big shoe box above the water.” McLean’s strategy was different from Chang’s. His ships would circle the globe only in an east-bound direction, and they would do so slowly. McLean had learned from his mistakes with the speedy SL-7s, whose fuel bills ate up all their profits. The new ships were built for an era of expensive oil. They would conserve fuel by sailing at only 18 knots, taking longer than Evergreen’s vessels to sail around the world.

The result was that the early rates for containers were based not on the cost of container shipping, but on the cost of breakbulk freight. If a container held mixed freight, each item was charged only slightly less than if it were moving in a breakbulk ship. Containers filled with a single product received discounts that were larger, but not generous. At the start of service from Europe to Australia in 1969, for example, a Welsh refrigerator plant could save only 11 percent from breakbulk rates by shipping full containers of its product, and almost nothing by sending small shipments that would travel in mixed containers along with other cargo. Full refrigerated containers of Australian meat went to Britain at a fairly meager 8.65 percent discount from the breakbulk rate.

Many nonfreight costs undoubtedly fell with the growth of container shipping. Packing full containers at the factory eliminated the need for custom-made wooden crates to protect merchandise from theft or damage. The container itself served as a mobile warehouse, so the traditional costs of storage in transit warehouses fell away. Cargo theft dropped sharply, and claims of damage to goods in transit fell by up to 95 percent; after insurers were persuaded that container shipping in fact had fewer property losses, premiums fell by up to 30 percent. Faster ships and reductions in the time needed to load and unload vessels at ports resulted in lower costs for inventory in shipment.

What we do know is that the overall cost of shipping goods internationally remained relatively high through the mid-1970s, even with containerization. One 1976 shipment studied in detail by the Maritime Administration, involving $25,000 worth of wheel rims shipped from Lansing, Michigan, to Paris, France, incurred $5,637 of freight costs—22.6 percent of the value of the cargo. The bill included $3,600 for ocean freight from Detroit to Le Havre, more than $600 in trucking costs, and over $1,300 in fees and insurance costs. With the 7 percent French import tariff added on, the wheel rims cost one-third more in France than in Michigan.

The second important result of shippers’ new power in the 1970s, along with their willingness to defy the shipping cartels, was their embrace of an idea that had been a heresy: the deregulation of transportation.

Deregulation changed everything. In two separate laws passed in 1980, Congress freed interstate truckers to carry almost anything almost anywhere at whatever rates they could negotiate. The ICC lost its role approving rail rates, except for a few commodities such as coal and chemicals. Trucks and railcars that had often been forced to return empty were able to get cargo for back-hauls. Another definitive break from the past proved critical to driving down the cost of international shipping. For the first time, railroads and their customers could negotiate long-term contracts setting rates and terms of service. The long-standing principle that all customers should pay the same price to transport the same product gave way to a system that yielded huge discounts for the biggest customers. Within five years, 41,021 contracts between railroads and shippers were filed with the ICC. Freight transportation within the United States was reshaped dramatically. Costs fell so steeply that by 1988, U.S. shippers—and, ultimately, U.S. consumers—saved nearly one-sixth of their total land freight bill.

On average, it cost four cents to ship one ton of containerized freight one mile by rail in 1982. Adjusted for inflation, that cost dropped 40 percent over the next six years. Rail rates fell so steeply that by 1987, more than one-third of the containers headed from Asia to the U.S. East Coast crossed the United States by rail rather than making the voyage entirely by sea. A major obstacle to international trade had given way.39

When American President Lines studied the matter a few years later, it concluded that freight rates from Asia to North America had fallen 40 to 60 percent because of the container. Between 1966 and 1990, economists Daniel M. Bernhofen, Zouheir El-Sahli, and Richard Kneller reported in 2013, the container was more than twice as important in increasing the flow of international trade among the wealthy countries as governments’ efforts to eliminate formal trade barriers. The box made the world economy much, much bigger.

Integrated production yielded to disintegrated production. Each supplier, specializing in a narrow range of products, could take advantage of the latest technological developments in its industry and gain economies of scale in its particular product lines. Low transport costs helped make it economically sensible for a factory in China to produce Barbie dolls with Japanese hair, Taiwanese plastics, and American colorants, and ship them off to eager girls all over the world.

Better, more reliable transport has permitted companies to obtain goods closer to the time they need them, instead of weeks or months in advance, tying up less money in goods sitting uselessly on warehouse shelves. In the United States, inventories began falling in the mid-1980s, as the concepts of justin-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 2014, inventories in the United States were perhaps $1.2 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 been borrowed at, say, 8 percent, and inventory reductions saved U.S. businesses roughly $100 billion per year.4

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.

The globalization of the late twentieth century took on quite a different character. International trade was no longer dominated by essential raw materials or finished products. 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 further 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.

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 different locations often are quite similar. Even small changes in transport costs can be decisive in determining where each stage of the process will occur.

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.

“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 arguably made it a more serious problem.

Being landlocked, one study calculated, raises a country’s average shipping costs by half. Another study found that it cost $2,500 to ship a container from Baltimore, on the U.S. Atlantic Coast, to Durban, in 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 central China to a port cost three times as much as shipping it from the port to America. China was slow to learn the lesson: in the early 21st century, it built the Yangshan Deep-Water Port, near Shanghai, to be the world’s largest container terminal—without providing a railway link to move the cargo cheaply to and from the dock.

Yet such an imbalance in trade can have a silver lining. After China joined the World Trade Organization in 2002, its trade surplus with the United States exploded, such that by 2009, two and a half times as many containers moved from East Asia to North America as from North America to East Asia. Entrepreneurs quickly figured out that low westbound freight rates made it sensible to fill those containers with low-value goods, such as wastepaper and grain. In 2014, U.S. farmers exported more than 50,000 40-foot boxes loaded with soybeans, a commodity long deemed unsuitable for shipping in containers. Greater use of containers for agricultural exports, in turn, opened doors to previously unimagined markets: when Canadian farmers discovered that Asian buyers would pay extra for barley and canola that could be traced to a specific farm, containers with single-use plastic liners offered an inexpensive way to move the product.

The prices of electronics, clothing, and other 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.

Manufacturers in poorer countries, where ports are less busy or less well managed, will find that their high logistics costs make competing in foreign markets a difficult proposition.

That disadvantage goes far beyond the occasional lost export sale. A country cursed with outmoded or badly run ports is a country that faces great obstacles to finding a larger role in the world economy. In 2004, the World Bank estimated that if Peru were as effective at port management as Australia, that alone would increase its foreign trade by one-quarter. The Peruvian government took that warning seriously, arranging $2 billion in port investments over the ensuing decade, which made possible a very large increase in foreign trade. Tanzania, on the other hand, staunchly resisted modernization. If only the port at Dar es Salaam had been as efficient as the nearby port at Mombasa, in Kenya, the average Tanzanian family in 2012 would have saved a stunning 8.5 percent of its annual expenses. Countries that fail to modernize their ports will receive the maritime equivalent of branchline service on a single-track railway. The big containerships that link national economies in the global supply chain, carrying nothing but stacks of metal boxes, will pass them by.

Its ascent was aided by a reputed lack of corruption as well as a reputation for efficiency. In part because it had no labor unions to deal with, Jebel Ali ranked near the very top among the world’s ports in the average number of container moves per ship per hour in 2013, and its computers allowed 9,000 over-the-road trucks to deliver and pick up containers each day with little delay.

The prospect that the container would permit a worldwide economic restructuring that would vastly increase the flow of trade was not taken seriously.