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

McLean understood that transport companies’ true business was moving freight rather than operating ships or trains.

New insight into transferring ownership for cargo from entity to entity

Every day at every major port, thousands of containers arrive and depart by truck and train.

The 11,000-mile trip from the factory gate to the Ohio warehouse can take as little as 28 days, a rate of 400 miles per day, at a cost lower than that of a single business-class airline ticket. More than likely, no one has touched the contents, or even opened the container, along the way.

This high-efficiency transportation machine is a blessing for exporters and importers, but it has become a curse for customs inspectors and security officials.

Each container is accompanied by a manifest listing its contents, but neither ship lines nor ports can vouch that what is on the ma...

In the end, it took a major war, the United States’ painful campaign in Vietnam, to prove the merit of this revolutionary approach to moving freight.

Transportation has become so efficient that for many purposes, freight costs do not much affect economic decisions.

By late summer of 1959, it had agreed unanimously that “standard” containers would be 20 feet or 40 feet long, 8 feet wide, and 8 feet high.

but getting their cargo safely ashore was almost impossible: the harbors were so shallow that oceangoing ships could not reach the piers. Instead, a barge or a landing ship tank (LST), an amphibious vehicle longer than a football field but with a very shallow draft, would serve as a ferry.

Vietnam’s only deepwater port, located on the Saigon River forty-five miles from the South China Sea, was a major bottleneck.

William Westmoreland, the U.S. military commander, and James S. Killen, head of the U.S. foreign aid mission, had agreed that the best way to keep Vietnam supplied was to expand the port at Da Nang, a small city 430 miles north of Saigon.

As container shipping expanded, maritime traffic would be drawn to a small number of very large ports.

London and Liverpool were by far Britain’s biggest ports in the early 1960s, but their business was remarkably close to home. Exporters and importers tended to use the nearest port in order to minimize trucking costs.

About 40 percent of Britain’s exports in 1964 originated within twenty-five miles of their port of export, and two-thirds of all imports traveled fewer than twenty-five miles from the port of discharge.

Each time a container was to be moved, longshoremen would have to climb atop the box, attach hooks at the corners, and then remove the hooks once the container had been lifted. With none of the operating efficiencies of cellular containerships, most carriers were losing money on every container they carried.

The second generation of containerships was of a totally different order. Sixteen of these newly built ships were at sea by the end of 1969, and another 50 were under construction. These vessels were designed from the start to work smoothly with dockside container cranes. They were large, they were fast, and they came with very high price tags.

Demand, robust though it was, could not possibly keep up with this explosion of supply. The result was a new and painful experience for the shipping industry: a rate war.

Overcapacity was an old story in ocean shipping. The flow of cargo had always been volatile, based on economic growth, changes in tariffs and trade restrictions, and political factors such as wars and embargoes.

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.

Prices for international shipping, unlike domestic shipping, usually were not set by government regulators. Instead, rate setting was the realm of liner conferences, voluntary cartels of the operators on each route.

No fewer than 110 different conferences set rates on routes to or from the United States, and similar conferences governed routes elsewhere in the world.

The conferences structured their rates very much as railroads did. There was a separate rate for each commodity, or sometimes two rates, one measured by weight and one by volume.

This economically illogical system could not last. Ship lines had no reason to care what was inside the containers they carried, and with rampant excess capacity they were willing to accept any payment that exceeded their cost to carry the container.

By early 1967, Waterman Steamship, Malcom McLean’s former company, switched to a flat rate for shipments from the United States to southern Europe: $400 for a shipper-owned 20-foot container, $800 for a 40-foot container, regardless of the contents.

In desperation, the leading carriers on important routes tried an old-fashioned solution: reducing competition. Five competitors in the Europe–Far East trade, two British, two Japanese, and the German Hapag-Lloyd, combined their Pacific interests in an alliance called TRIO. Among them, the companies agreed to build nineteen large ships, with each company allocated a number of container slots on each ship.

Ship lines would be under constant pressure to build bigger ships and faster cranes to reduce the cost of handling each container, because at some point overcapacity would return, and when rates collapsed the carrier with the lowest cost would have the best chance of survival.29

High speed was important because of the closure of the Suez Canal in the 1967 Arab-Israeli war, which forced ship traffic between Europe and Asia and Australia to take a much longer route around the tip of Africa.

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.

This new maritime geography brought decidedly non-traditional trade patterns. Exports from southern France might move most cheaply through Le Havre, on the English Channel. Imports for Scotland might ride the train from southeastern England. Japanese cargo headed for San Francisco Bay might well be imported through Seattle rather than Oakland, with the ship line’s saving of one day’s steaming time in each direction outweighing the cost of putting some of the cargo on a train from Seattle to California. Port cities along the Gulf of Mexico increasingly did their European and Asian trade through Charleston or Los Angeles, because ship lines deemed sailing to the Gulf uneconomic. The Hampton Roads of Virginia displaced Baltimore as a major load center through no fault of Baltimore’s, but because a ship line serving Europe could make four more trips per year from Hampton Roads—and when a $60 million ship was involved, those four trips could spell the difference between profit and loss.

Yet round-the-world service was a risky venture. Traffic flows between different pairs of ports were vastly different; a vessel that might be perfect for loads between New York and Rotterdam could easily be too large between Singapore and Hong Kong.

Unless stops were severely curtailed, voyages would become impractically long. As a result, most ports were connected to the round-the-world services with feeder ships that transferred their containers at major load centers, lengthening total transit time for cargo.

Evergreen’s globe-girdling ships eventually stopped visiting Britain altogether, using Le Havre, in France, as their regional load center and shuttling 200,000 containers per year to ports in England, Scotland, and Ireland.

Neither Evergreen nor United States Lines had faced the fact that their ships might not be the best way to move cargo; although shipping containers cross-country on double-stack trains cost more than sending them through the Panama Canal, American President Lines’ ship-rail service could get a container from Japan to New York in only 14 days, a transit time neither Evergreen nor United States Lines could come close to matching.

As ship lines combined their forces to gain market power, manufacturers responded aggressively. The first step was to look beyond the conferences.

Conference tariff books turned into comic books as shippers deserted the conference carriers in droves. The shift to flat percontainer rates in the late 1970s revealed the severe erosion of conference bargaining power in a way not possible when each commodity was charged a different rate.

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.41

Overwhelmingly, these companies found that just-in-time required them to deal with transportation in a very different way. No more would manufacturers offer a load or two to some truck line’s hungry salesman. Now, they wanted large-scale relationships with a much smaller number of carriers able to meet stringent requirements for on-time delivery.

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 the 1990s, they repeated the trick on a much larger scale in Asia. Major ports began to sprout in places like Chittagong, in Bangladesh, and Haiphong, in Vietnam, as those countries became important exporters of apparel.

Their creation was a deliberate response to the economics of container shipping, in which keeping the ship moving is what matters most.

Only the biggest ports are worth a time-consuming stop: in 2014, 46 percent of world container shipments moved through just 20 ports, the smallest of which handled more than four million 40-foot containers.

Almost 50% of container shipments are moved vy only 20 major ports

Factories whose goods use those ports will have the lowest rates and the lowest costs in lost time, saving money on imported inputs and gaining a cost advantage in export markets.

By some estimates, the giant vessels cut 30 percent or more off the cost of moving a container from Asia to Europe: a ship laden with 10,000 full-size containers burns perhaps half as much fuel per box as one carrying 3,000 containers, and the size of the crew need be no larger.

The economic importance of the logistics center concept, though, lay in the fact that many of those distribution centers performed work once considered to be in the manufacturing sector, processing goods before final delivery to customers rather than merely storing them.

Antwerp itself serves several logistics centers. Arriving containers filled with cucumbers from Israel and bananas from Ecuador go by barge or rail to Venlo, in the Netherlands, where dozens of businesses clean, sort, and package the produce for delivery to European supermarkets.

Its status as the trade hub of the Persian Gulf helped the emirate become the region’s financial hub, to the point that property, business services, and financial services accounted for a full quarter of economic output. Dubai’s trade-induced prosperity drew in hundreds of thousands of foreign residents and millions of tourists, whose demand for consumer goods and housing pulled yet more cargo through Jebel Ali.

Sixty years after the Ideal-X, the equivalent of more than 300 million 20-foot containers were making their way across the world’s oceans each year, with perhaps a fourth of them originating in China alone. Countless more were being shipped cross-border by truck or train.6

In 2005, a ship able to carry 4,000 40-foot containers—8,000 TEUs—was considered unusually large. Ten years later, ships of 20,000 TEUs had joined the world’s fleet, ships so large that a single one could carry 144 million bottles of wine. Even larger ones were on order.