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.15
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 1975.16
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.17
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.18
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.19
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.20
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.21
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.22
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.23
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 r
aise 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.24
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.25
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.26
Shipper organizations had no legal status in the United States, and shippers were reluctant to negotiate jointly lest they be accused of violating antitrust law. The biggest shippers, however, began to exert influence on their own, even as they changed the way they worked in order to take advantage of the container.27
In the early days of containerization, users dealt with shipping much as they had in breakbulk days. Traffic management was decentralized, with each plant or warehouse making its own arrangements. If the company as a whole could have saved money by sending fully loaded 40-foot containers to individual customers, well, that was not the concern of the freight managers at individual locations, whose job was mainly to get the products out the door. Most shippers favored 20-foot maritime containers, which cost more per ton to ship, because they could not coordinate production of various orders well enough to fill a 40-foot box. The biggest shipper of all, the U.S. military, divided responsibilities between one agency that handled land shipping and another that dealt with sea freight, often paying extra because it had selected the wrong size container for a given load.28
In industry, the traffic department, housed in the back of the plant near the loading dock, would be given whatever the manufacturing department produced, with instructions to ship it. A tariff clerk, his desk piled high with the freight classification guidelines of various liner conferences, trucking conferences, and railroads, would try to describe the cargo in whatever way brought the lowest rate. An export manager would then call ship lines to select a vessel, balancing the desire for fast delivery with the need to keep from becoming too dependent on a particular carrier. With decentralized organizations and fairly primitive computer systems, even large, relatively sophisticated multinational corporations could end up paying dramatically different prices for the same type of cargo, depending upon what the tariff clerk and the export manager could accomplish. “In some cases we’d pay $1,600 for a 40-foot container in the North Atlantic, and in other cases we’d be paying $8,000 for the same container,” recalled a former chemical-industry executive.29
Big shippers typically signed dozens of loyalty agreements covering different routes, obtaining discounts in return for commitments to ship all of their freight with conference members, and then dealt with hundreds of individual conference carriers. The result, often enough, was unsatisfactory. A loyalty agreement did not guarantee space on a ship; if the manufacturer had cargo to ship to India but no space was available on a conference member’s vessel, the cargo had to wait until a conference ship had room. Sending the freight on an independent liner or a tramp ship violated the contract and would expose the shipper to a heavy fine from the conference. If the only available conference vessel was making multiple port calls before heading overseas, the cargo would have to wait while the vessel loaded other freight in each port. Managing relationships with ship lines and doling out cargo were administrative nightmares for major manufacturers, requiring large numbers of staff.30
As ship lines combined their forces to gain market power, manufacturers responded aggressively. The first step was to look beyond the conferences.
Nonconference carriers had always played a role in the major trades, but a small one. The biggest shippers rarely used them. Independents, as the nonconference lines were known, offered discounts of 10 to 20 percent from conference rates, but most of them were too small to provide frequent service on the routes they plied. If a shipper used an independent carrier and then required service that the independent could not provide, it would end up paying a conference line more than if it had signed an agreement with the conference in the first place. Shippers that had a highly predictable flow of cargo could handle that risk. For manufacturers, who might have a sudden need to ship an unanticipated order, sticking with the large conference carriers, even at higher cost, was the safer strategy.31
When containers came on the scene, the economics of container shipping were thought to work against independent lines. The costs were so high that small operators could not enter the business on a whim. Establishing a viable container operation in the United States-Asia trade, one economist estimated in 1978, would require $374 million to buy five ships plus containers, chassis, and cranes. Common sense suggested that anyone putting up that much money would join conferences in hopes of keeping rates high enough to recover costs. But in the second half of the 1970s, it turned out that the barriers to entry were not as high as they seemed. Shipbuilding costs, which had risen 400 percent from the end of 1970 through the end of 1975, began to fall as the collapse of the oil tanker market left shipyards bereft of orders. Builders slashed prices and extended loans just to keep their yards at work. Bargains on new vessels allowed traditional ship lines such as Maersk of Denmark and Evergreen Marine of Taiwan to elbow their way into container shipping. Maersk and Evergreen operated as independents on most routes, with rates far below what the conferences charged. As they added ships, they became credible competitors, drawing shippers that had been wedded to the conferences. Neither company had owned a containership before 1973. By 1981, Maersk’s twenty-five ships made it the world’s third-largest containership operator, while Evergreen, with fifteen vessels, ranked eighth.32
Other independent lines proliferated, particularly in the Pacific. Taiwan’s Orient Overseas, owned by shipping magnate C. Y. Tung, became the first independent carrier to run containerships between Asia and New York in 1972, charging 10 to 15 percent less than the conference. Korea Shipping Corp., another nonconference operator, laid out $88 million for eight containerships in 1973. Far Eastern Shipping Company, a Russian independent, sent two containerships a month from Yokohama to Long Beach and Oakland. Conference tariff books turned into comic books as shippers deserted the conference carriers in droves. The shift to flat per-container 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. The conference rate for shipping a 20- foot container from Felixstowe to Hong Kong fell from $3,645 in 1980 to $2,136 just three years later, and was lower in 1988 than at the start of the decade. The cost of shipping a 40-foot box from Europe to New York, $2,000 in the middle of 1979, was below $1,000 by the summer of 1980. B
y January 1981, so many nonconference ships were competing to carry trade from Manila that the Philippines-North America conference collapsed.33
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.
Trucking was tightly regulated almost everywhere in the early 1970s, with the notable exception of Australia. Most railroads were state-owned, damping any competitive instincts. So long as political power rested with the transportation companies and their unions, rather than their customers, the regulatory structure stood strong. If its collapse can be dated to a single event, it was the bankruptcy of the Penn Central, the largest railroad in the United States, in June 1970. The Penn Central’s failure, followed in short order by half a dozen other rail bankruptcies, drew attention to the regulations that kept the railroads from adapting to truck competition. The costly and controversial government rescue program altered the political equation, and Republicans and Democrats alike began calling for reductions in regulation. In November 1975, President Gerald Ford proposed eliminating much of the Interstate Commerce Commission’s authority over interstate trucking. The following year, Congress took the first steps to ease regulation of railroads.34
The Box: How the Shipping Container Made the World Smaller and the World Economy Bigger Page 30
