The Box: How the Shipping Container Made the World Smaller and the World Economy Bigger (39 page)

The new containerships were hit especially hard. Their high speeds meant that they consumed two or three times as much fuel for a given amount of freight as the breakbulk ships they replaced. This had not been a concern at the time the fuel-guzzling vessels had been designed; in the early 1970s, fuel accounted for only 10 to 15 percent of containerships’ operating costs. By 1974, though, fuel prices were a crushing burden, eventually to reach half the total cost of running a ship. The liner shipping conferences raised rates, slapped fuel surcharges and currency adjustment surcharges onto customers’ bills, and repeatedly raised the surcharges as fuel costs kept rising and the dollar kept falling. The cost of container shipping on long-distance routes, on which fuel mattered most as a share of total costs, rose disproportionately. Importers and exporters responded by curtailing long-distance trade in manufactured goods much more sharply than short-distance trade. To freight users around the world, container shipping no longer seemed quite such a bargain.
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Determining exactly what happened to the cost of shipping from 1972 through the late 1970s poses an insurmountable challenge for the historian. Only short sea routes, such as those across the North Sea, had flat rates per container for most of that period. Elsewhere, charges were based not on the container but on the commodity inside. There is no reliable way to calculate an average cost, much less to track its change over time.
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Three sources other than actual freight rates have been used to estimate the trends in shipping costs. One is the cost of leasing “tramp” ships, vessels that are chartered rather than providing regularly scheduled, or “liner,” service. The charter price per ton of tramp capacity rose sharply, as was widely reported in shipping publications during the 1960s and 1970s. Most tramps, however, carried grain or other bulk cargo rather than manufactured goods, so the rental cost sheds little light on the price of container shipping. As container shipping gained importance, tramps were increasingly relegated to carrying low-value freight that could not efficiently be containerized, making tramp prices of little relevance to the cost of containerized freight.
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A second main source of freight-cost data is the Liner Index compiled by the German Ministry of Transport. This shows that freight rates flattened out in 1966, as container shipping arrived, but then rose steeply, trebling between 1969 and 1981. The Liner Index, though, is highly problematic as a gauge of global transport costs. It tracked rates on cargoes passing through ports in northern Germany, the Netherlands, and northern Belgium, not worldwide, and its coverage included a large proportion of noncontainer shipping. Changes in the exchange rate of the German mark seem to have had a huge influence on the index’s movements. It took four German marks to buy one U.S. dollar in 1966, three in 1972, and only two by 1978. For shippers who did business in dollars, ocean freight rates as measured by the Liner Index rose well below the rate of inflation during the 1970s.
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The third alternative is the estimate of standardized charter rates for containerships published by Hamburg ship broker Wilhelm A. N. Hansen starting in 1977. Hansen’s measure, unlike the Liner Index, shows prices falling in 1978 and 1979. However, it is drawn from charters of very small containerships, the kind most likely to be available for charter. It is not clear whether it accurately reflects rates charged by operators with larger, more efficient vessels.
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The technical problems involved in measuring shipping rates during the 1960s and 1970s are so great that reliable measures of the container’s price impact are unlikely to be developed. International shipping rates were often set in U.S. dollars, and dramatic changes in exchange rates changed shipping costs for companies in many countries independent of changes in technology. Many conferences offered discounts of as much as 20 percent to shippers that signed “loyalty agreements” promising to use only conference members’ ships, so the published conference rates were not necessarily the rates that important shippers paid. Many large shippers demanded, and received, under-the-table rebates from ship lines in return for paying the published rate; although rebates on routes to the United States were illegal—Sea-Land was fined $4 million in 1977 for distributing $19 million in secret payments to customers between 1971 and 1975—the practice was common elsewhere. Rebates, of course, made the actual prices that shippers paid much lower than the prices ship lines claimed to charge.
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Complicating matters even further is the fact that traditional breakbulk ships remained in service long after container shipping arrived. Breakbulk ships transported more of the United States’ general-cargo trade than did containerships until 1973. They remained important on routes to developing countries in Africa and Latin America well into the 1980s, because in many trades the flow of cargo was too small to justify the capital outlay for dedicated containerships and ports. Any measure of overall ocean freight costs during the first decade of international container shipping thus is capturing a large amount of breakbulk shipping. It is also capturing inflation. Consumer prices in every industrial country more than doubled during the 1970s, and it would be an extraordinary achievement indeed if containerization actually brought the nominal cost of shipping down.
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Trying to compute the extent to which containerization changed “average” maritime rates for shippers keeping their accounts in different currencies and moving a wide variety of goods under hundreds of conference rate structures is an exercise in futility. On balance, the evidence suggests strongly that the cost of shipping a ton of international freight began to decline as containerization became important around 1968 or 1969, and that it fell through 1972 or 1973. As fuel prices rose steeply, freight costs reversed direction, rising until 1976 or 1977. Rates on American-flag vessels other than tankers, overwhelmingly general-cargo ships, show a similar trend, with ship lines’ revenues falling relative to the value of their cargo until the oil crisis brought the rate cutting to a temporary end in 1975.
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And what if container shipping had not taken the transportation world by storm? Dockers’ pay soared during the 1970s. Productivity improvements in breakbulk shipping were minimal. The labor-intensive task of loading a breakbulk ship would have been far costlier in 1976 than it was a decade earlier. Even at the peak of oil prices in 1976, when fuel surcharges were pushing ocean freight rates sky-high, very few shippers seem to have entertained the thought of going back to breakbulk shipping.
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Ocean freight, of course, is not the only cost involved in transporting imports and exports. The total freight bill includes not just ship rates, but land transportation to and from the ports; packaging; storage and other port charges; damage and insurance; and the cost of money tied up in goods that are in transit. In the days of breakbulk shipping, the relative importance of these various costs depended heavily upon the details of the particular shipment. Moving a load of packaging material from the United States to Western Europe in 1968, for example, yielded $381 per ton for the ship line and only $34 for truckers or railroads. Moving a load of auto parts with long land shipments at both ends, by contrast, cost $152 per ton for land freight and only $20 for ocean freight. For the packaging materials, a change in ocean freight rates would have made a dramatic change in the total freight bill, but for the auto parts it would barely have mattered.
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The containerization of ocean shipping initially did not reduce the costs on land. In many countries, rates for truck lines and railroads were based upon the commodity and the distance, just like ocean freight rates. Regulations in the United States barred ship lines even from quoting a single through rate to an inland destination, much less negotiating special discounts for land transportation on behalf of their customers. Moving a container of televisions from Hiroshima to Chicago thus required the exporter to pay the standard Japanese truck rate for televisions, plus the appropriate ocean freight rate, plus the domestic U.S. truck or rail rate for electronic products, plus a payment to a freight forwarder to make all the arrangements. Land freight rates moved sharply higher during the 1970s, driven by increased fuel prices and higher wages. Shippers exporting to the United States increasingly favored routes that involved longer ocean voyages and shorter land hauls, an indication that land transport costs were increasing relative to the cost of ocean freight.
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Businesses near ports ignored by container operators may have ended up with disproportionately higher shipping costs in the 1970s, because their goods now had to move much longer distances over land. Seventeen different ports had handled New Zealand’s international trade in breakbulk days, but containers were shipped through only four, leaving meat or wool processors to pay for getting their products to Auckland or Wellington. The same happened to industrial companies around Manchester; Britain’s fifth-largest port fell into disuse in the 1970s as containerships avoided the time-consuming trip up the thirty-six-mile canal from the sea, and local customers had to cover the land costs of trading through Liverpool or Felixstowe. Manufacturers in northern New England faced the added cost of trucking their exports to New York after their traditional port, Boston, ended up with only occasional visits from containerships.
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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.
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As Malcom McLean had understood back in 1955, it is the sum of these costs, not just the published rate of a ship line or railroad, that matters to shippers. Ideally, we would like to trace the door-to-door cost of the same shipment over time, so that we could measure the change as containerized transportation took hold. With similar information on a hundred different consumer products and industrial goods, we might be able to assemble a reasonable index of freight costs. This task, alas, is beyond even the most intrepid investigator. Data on door-to-door shipping costs were not compiled in 1965, and they do not exist today. Even a rough estimate of how the arrival of containerization in international trade affected the cost of trade is sheer guesswork.

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.
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At some point in the late 1970s, the trend line seems to have begun to change. Although fuel costs continued to rise, the real cost of shipping goods internationally started to fall rapidly.
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What happened to make shipping cheaper? And why did it start to happen around 1977 rather than with the onset of international container shipping a decade earlier? The answers have to do with a group that has received little attention in these pages: shippers. Containerization required the buyers of transportation to learn a whole new way of thinking about managing their freight costs. As they became more knowledgeable, more sophisticated, and more organized, they began to drive down the cost of shipping.

Shippers were not a major force in the days of breakbulk freight. Many governments frowned upon rate competition, supporting rate fixing by the liner conferences and, on some routes, prohibiting low-rate independent carriers altogether. Even where governments allowed nonconference lines to compete, relatively few did, because there often was not enough freight: shippers typically agreed to pledge all of their freight on a route to conference members in return for “loyalty” discounts—a pledge that strengthened the conference by making it harder for nonconference intruders to get business. Shippers, ship lines, and governments all thought of ocean ship lines in much the same way they thought of trucking companies and railroads, as providers of a public service entitled to raise their rates whenever their costs went up. “Our future depends on having strong conferences supported by strong commercial shipper bodies,” an executive of a British ship line said in 1974—as if the interests of ship lines and their customers were one and the same.
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The huge capital requirements of container shipping left fewer ship lines on each route, strengthening the conferences and tilting the playing field against shippers. The 1971 pooling agreement on the North Atlantic, to take the most extreme example, essentially combined the efforts of fifteen lines that had once been competitors. On the Europe-Australia route, the thirteen companies that sailed between Europe and Australia in 1967 had combined into seven by 1972. As these new groupings began to curb competition, shippers reacted by working together more closely. By 1976, private-sector shippers’ councils were active in thirty-five countries.
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It was in Australia, where farmers were almost totally dependent upon exports, that shippers began to flex their muscles. In 1971, four groups representing sheep farmers and wool buyers formed a joint organization to oppose rises in freight rates. A year later, rubber traders in Singapore responded to conference surcharges by finding a nonconference carrier to move their product to Europe for 40 percent less. Australian dairy producers signed with a nonconference carrier to save 10 percent on freight rates to Japan. By 1973, shippers’ power on the East Asia-Europe route was substantial enough that the conference was forced to bargain, and the Malaysian Palm Oil Producers Association won an unprecedented two-year rate freeze. “Increases in the liner freight rates met considerable opposition from shippers in certain trades,” UNCTAD reported in 1974. In 1975, the Australian Meat Board bargained for unusually deep rate reductions in return for giving four ship lines all its meat shipments to the U.S. East Coast.
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