GE 541 September 9 2008 Professor T R

GE 541 September 9, 2008 Professor T. R. Lakshmanan

Containers are steel or aluminum boxes that can be moved on trucks, rail road cars and ships and can carry different kinds of merchandise. Inaugurated on April 26, 1956, container made shipping cheap, thereby changing the shape of the world economy.

The container in the last three or four decades has become the core of a highly automated system that enables movement of goods from anywhere to anywhere at low costs and with minimum complications on the way. The container is at the core of a technical system which includes the modern container port with its forest of cranes, large container-stacking yards and intermodal freight yards permitting seamless transport from point to point.

Pre container era - cost of handling freight at the port was the major part of the total freight cost. Cost of Shipping One Truckload of Medicine from Chicago to Nancy, France (estimate ca. 1960) Source: American Assoc. of Port Authority data reported by J. L Eyre. The Box, Levinson, p. 9.

The container idea is not new with Mr. Malcolm Mc. Lean - the idea has been in use v British & French railroads used wooden containers to move furniture in late 19 th century v Cincinnati motor terminal company developed interchangeable truck bodies which could be lifted on and off wheels with a crane v NY Central & Pacific Rail Road used steel containers to be fork lifted and transferred between trains Yet all above were not successful.

Mc. Lean’s fundamental insight about the container was that shipping company’s mission was moving freight rather than moving ships. The container was not just a metal box, but an entire new way of handling freight - a new system with new types of ports, ships, cranes, storage facilities, trucks, trains and new organizational and operational improvements among the shippers.

Under this new system the benefits of containerization became quickly clear. Average Cost of Handling One Cubic Meter of Freight - 1970 Source: UNCTAD, Review of Maritime Transport, 1975.

In the light of such cost advantages of container ships over conventional ships. There was a boom in container shipping. Source: UNCTAD

Many Asian countries - Japan, Taiwan, Hong Kong, Singapore, Korea and later China, took a strategic view of containerization. They are invested in the system of container parts, containerships and associated trade-enhancing organizational improvements - resulting container systems gave these countries cheap access to the US and European Markets

Containers Handled (million 20 -foot equivalents) Country 1990 2003 Hong Kong China 5. 1 20. 8 Singapore 5. 21 18. 4 Shanghai China 0. 5 11. 4 Shenzhen China 0. 0 10. 7 Busan Korea 2. 3 10. 4 Kaoshung Taiwan 3. 5 8. 8 Rotterdam Netherlands 3. 7 7. 1 Los Angeles United States 2. 6 6. 6 Hamburg Germany 2. 0 6. 1 Antwerp Belgium 1. 6 5. 4 Dubai United Arab Emirates 1. 1 5. 1 Port Klang Malaysia 0. 5 4. 8 Long Beach United States 1. 6 4. 7 Qingdao China 0. 1 4. 2 New York United States 1. 9 4. 0 Tanjung Pelepas Malaysia 0. 0 3. 5 Tokyo Japan 1. 5 3. 3 Bremen/Bremerhaven Germany 1. 2 3. 2 Laem Chabang Thailand 0. 1 3. 2 Gaioia Tauro Italy 0. 0 3. 0 Source: Containerisation International Yearbook and UN Economic & Social Comm. for Asia & the Pacific World’s Largest Containerports Port

Import Containerized Cargo, 1998 -2004: Top 10 US Ports

Import and Export Containerized Cargo, 2004: Top 10 US Trading Partners

Containerization has reduced shipping costs more for some than for others. It costs $2500 to move a container from Baltimore (USA) to Durban (S. Africa) and $7500 more to haul it by road the 215 miles from Durban to Maseur in Lesotho. The cost of transporting a container from a city in Central City to a port is three times as much as shipping it from that port to the USA.

There are three perspectives available while examining the major economic impacts of containerization. The first perspective is: What are the economic consequences of the new technological system surrounding containers? A variety of economic historical studies of recent transport technologies - the steamboat, the canal era, the railroad, the automobile, the interstate system and the jet aircraft - exist. the sharp drop in transport costs. these technologies promoted led to higher mobility, rising regional and international trade and associated economic development.

The container as the core artifact of a new transport technology system has lowered very long by distance freight costs sharply promoting a revolutionary expansion of international trade.

The second perspective comes from the fact that the benefits of a physical technology and infrastructure associated with containerization are greatly enhanced and indeed multiplied when firms using containerization reshape their operations and indeed their organizational structures to take full advantage of the benefits of containerization.

This reshaping of transport operations and transport organizational structures has resulted from innovating a new transport system built around the container. This new system is rich in two broad types of innovations; namely physical and non-physical technologies.

By conceptualizing a seamless freight flow system, a constellation of physical innovations including containers, facet of gigantic cranes and transporters, stacking and storage yards and facilities for truck, rail and inland barge movement. The time and money costs of freight handling at the port are sharply lowered with cargo moving seamlessly from a Chinese city to a warehouse in the US Midwest.

The second type of innovations pertains to organizational innovations in the transport enterprise. Clearly some economic benefit derive from the container innovation. But major benefits come from the novel ways entrepreneurial users of containers put them to practical use - from organizational changes through which businesses reshape themselves to take advantage of the new physical technology.

Institutional and organizational evolution of the transport system. Such an evolution however, has greatly enhanced the economic effects of containerization as noted next.

The third perspective of considering effects of containerization pertains to the way containerization has changed the economic geography of production and containerization in the US and the world. To be elaborated below when we talk of globalization and international trade and Foreign Direct Investment (FDI etc. ).

Before discussing the economic effects of containers, a brief treatment of two other transport technologies - interstate high way system and jet aircraft. A brief discussion of these technologies and other economic effects follows.

Interstate System (IHS) Initiated in 1957 and expanded since. Approximately 45000 miles well banked roads allowing 60 -70 mph safe travel. Enhancement of inter urban and intra urban mobility steep drop of time and out-of pocket costs of person & freight movement. Keeler and Young (1988) study of benefits of IHS just for class 1 trucking industry. Would have paid 72% of costs of the entire IHS.

Interstate provided higher values of return (for highway capital) than the returns for private capital

Net Rates of Return of Highway Capital, Private Capital and Private Interest Rate, 1951 -1989