National Review
Blockade of the Suez Canal: Why are the ships so big?
Welcome to Capital Note, a newsletter on business, finance and economics. On today’s menu: big ships, the bank effect and the last Suez block. To subscribe to Nota Capital, follow this link. The ships are too big In case you didn’t know, there’s a container ship stuck in the Suez Canal. Tugboats and bulldozers have been working since Monday to dig up the 1,300-foot ship from the canal walls, with early reports suggesting it could take weeks to be dislodged. The stoppage is costing US $ 9.6 billion a day in maritime traffic, with container ships, oil tankers and cattle loaders patiently awaiting transit through the canal. While it is probably a one-time deal for transporters and their customers, it does raise a question: why are container ships so big? Couldn’t they be a little smaller? The container transport industry is a case study in economies of scale. High fixed costs to build, maintain and supply ships – in addition to the costs of port leasing and customer contracts – stimulate a tireless effort of dimensioning by the shipping companies. In The Box, a history of container shipping, Marc Levinson describes the industry’s drive to scale up in the mid-20th century: Larger ships reduced the cost of shipping each container. Larger ports with larger cranes have reduced the cost of handling each ship. Larger containers – the 20-foot box, a porter’s favorite in the early 1970s, was yielding to the 40-foot box – reduced crane movements and reduced the time needed to turn a ship in port, making more efficient use of capital. A virtuous circle developed: lower costs per container allowed lower tariffs, which attracted more freight, which supported even more investments to further reduce unit costs. If ever there was a business where economies of scale mattered, container shipping was that. The first container ships to cross the Atlantic were less than 150 meters long. In the early 1970s, fast boats reached 900 feet in length. In 1978, a single ship could carry 3,500 20-foot containers – more than the weekly cargo load that entered every port in the United States a decade earlier. When ships couldn’t get bigger, ports could. The amount of cargo moving through large American ports grew sevenfold in the 1970s, even as ports became more competitive. Because shippers enjoy little price-fixing power, they need to squeeze out every penny they can from each ship. Shipping companies are also highly sensitive to macroeconomic factors, profitable during booms, but cash cauldrons during downtime. Only the most capital-efficient senders can survive business cycles, and large boats are capital-efficient. The result: 1,300-foot-long vessels moving through 700-foot-wide channels. As with ships, transport routes have grown over time. Before the 1980s, ships operated point-to-point service, traveling through a fixed set of ports. While peer-to-peer service provided shippers with more flexibility, allowing them to use different ships for different routes, it also meant that ships often operated below capacity. “Sea-Land, for example, was a major carrier in the North Pacific, but Japan’s huge trade surplus with the United States meant that it transported far more cargo to the east than to the west,” says Levinson. Although longer routes could increase cargo loads, they generally resulted in longer waiting times for customers, because ships on shorter routes would deliver cargo more quickly. In the 1980s, however, ships became large and fast enough to circumnavigate the global economy. Some intrepid businessmen started the “around the world” (RTW) service. The first company to send its ships on routes that span the globe was (drumroll, please …) Evergreen Marine, the operator of the ill-fated ship Ever Given currently trapped in Suez. Its first ships around the world made 81-day voyages, leaving cargo in each of the 19 ports of call. Evergreen still offers services around the world today, and although it has become an industry giant, its routes concentrate risks on individual ships. A disturbance anywhere in the world – bad weather, mechanical failure or, say, a ship stuck in a canal – can have repercussions on the global supply chain. Evergreen and other RTW senders partially circumvent this challenge by using “feeder ships” that take cargo to ports instead of having their large ships moored, but, as we learned this week, not all risks can be mitigated. And as supply chains become more integrated, bottlenecks like Suez become more important. The Suez Canal facilitates about 10 percent of global trade today, up from 7.5 percent in 2009. While blocking large boats is a spectacle, it is unlikely to change international trade in the long run. They are called “economies of scale” because they are economical and large carriers have provided a significant reduction in freight costs. Levinson found that shipping rates fell by about 50% in the 1980s alone. If the price of cheap freight is an occasional blockage of the channel, so be it. On the Web, Financial Times’ Brendan Greeley explains the bank’s effect On Wednesday, the Golden-Class container ship Ever Given made an unplanned mooring in the sand on both sides of the Suez Canal, interrupting trade between Europe and Asia. Evergreen Marine, which operates Ever Given under a Panama flag, told the Financial Times by email that the ship “was” suspected of having received a sudden gust of wind, which caused the ship’s body to deviate from its course and accidentally ran aground. “In the beginning, the ship was still where it had stopped, being taken care of by several tugs. It may take a while; you can check it out for yourself on VesselFinder. “Container ship landings on the Suez Canal are not uncommon. The sand rises from the bottom of the channel in a 4: 1 ratio; if a ship drifts off the fairway, they are more likely to put a shoulder in the sand and wait for a tugboat. Last March, OOCL Japan, a container ship the size of Ever Given, had a mechanical failure in the Suez Canal, lost direction, took the ground, was refluxed in several hours and continued on its way. unemployment benefit applications reached its lowest level since the beginning of the pandemic. Applications for workers’ unemployment benefits, a representation of the layoffs, dropped to 684,000 last week from 781,000 the previous week. Claims are now at their lowest point since mid-March last year, before the blockades spawned millions of layoffs. They are also below the pre-pandemic high of 695,000, a threshold that has not been exceeded for 52 weeks. “Recovery is really hitting full steam again, and all conditions will be available for a real and explosive takeoff in the summer, when we expect to have reached a higher vaccination threshold,” said Julia Pollak, labor economist at jobs site ZipRecruiter. Random walk Although bad for the global economy, the Suez imbroglio will serve as a fruitful natural experiment for economists. James Feyrer of Dartmouth analyzed the closure of Suez after the Six Day War to assess the effect of distance on international trade. It is difficult to distinguish between physical distance and differences in culture, taste, etc., which is why natural experiments can be so informative: the negative effect of distance on bilateral trade is one of the most robust discoveries in international trade. However, the underlying causes of this negative relationship are less understood. This article explores a temporary distance shock, the closure of the Suez Canal in 1967 and its reopening in 1975, to examine the effect of distance on trade and the effect of trade on revenue. The variation of the time series in the distance from the sea allows the inclusion of effects of pairs that account for the static differences of tastes and culture between the countries. The effects of distance estimated in this article are, therefore, more clearly on transport costs in the trade of goods than the typical estimates of the gravity model. Distance has been found to have a significant impact on trade with an elasticity that is about half that of typical cross-section estimates. Since the trade shock is exogenous for most countries, the expected trade volume of the shock can be used to identify the effect of trade on revenue. Trade has a significant impact on revenue. The size of the time series allows for fixed country effects that control all long-term income differences. As the identification occurs through changes in the distance from the sea, the effect comes entirely through trade in goods and not through alternative channels, such as technology transfer, tourism or foreign direct investment. – DT To subscribe to Nota Capital, follow this link.