Thursday, June 15, 2017

Containers and globalisation: Estimating the cost structure of maritime shipping

From VoxEU, June 13:

Container shipping is considered to be one of the drivers of globalisation. This column uses micro-level data to show evidence that confirms the role of 'the box' in the global economy: it implies significant cost savings and explains a significant amount of the global trade increase since its inception. The results also suggest that most of its trade-increasing effect has already been realised.
The introduction and subsequent diffusion of container shipping in the second half of the 1950s marked a major innovation in transportation. By allowing increased mechanisation and inter-modality, ‘the box’ increased efficiency and became a major force behind the expansion of international trade in the post-war period (Levinson 2008, Bernhofen et al. 2016). Nonetheless, there exists no systematic evidence, except for a few engineering studies, on how much cheaper container shipping is compared to its alternative – traditional breakbulk shipping of goods in bags, bales, packed in cartons or pallets in a ship’s hold. Understanding the mechanisms through which containerisation reduces transportation costs is an important step towards evaluating the impact of reduced transport costs on trade and welfare. In recent research, we provide the first such analysis using micro-level data on Turkish maritime exports at the firm, product, and destination level in 2013 (Cosar and Demir 2017).

We start by documenting novel facts that guide our modelling and estimation. Despite a remarkably fast diffusion of the container technology across countries (Rua 2014), there is still an important margin of modal choice for firms between container and breakbulk. In our data, the average share of containerised exports at the firm-product-destination level is slightly above 50% (even after dropping fully breakbulk and fully containerised flows from the data). This is consistent with what we observe in the aggregate Turkish and US data: as of 2013, only 40% and 53% percent of Turkish and US maritime exports (in terms of value) were containerised, respectively. While container usage displays wide dispersion across all three dimensions of the data (firm, product, and destination country), a large part of the overall variation is due to the firm margin. In particular, within each product-destination category, container usage is increasing in shipment size, firm size, total exports volume and labour productivity. Within a firm and across destination countries, container usage is increasing in distance to the destination.

Motivated by these facts, we build a heterogeneous firms trade model following Melitz (2003) which we augment to feature the mode-of-shipping decision of exporters. Container shipping has a higher fixed cost but a lower marginal distance cost, making it cheaper for larger shipments beyond a breakeven distance.1 The model delivers a simple expression that relates firms’ export revenues to mode of transport and to destination distance, all of which are observed in the data. We estimate this expression by controlling for firm selection into container shipping, i.e. only the more productive firms find it profitable to use container technology.

Figure 1 summarises our baseline estimate for the variable cost of container shipping relative to breakbulk. The intercept above one captures the higher ‘first-mile’ cost of container shipping, which we estimate as 1.27 (i.e. the first mile of container shipping is 27% more expensive). The estimated distance elasticity for container shipping is smaller than for breakbulk shipping. Therefore, as the cost of an extra mile is lower in a container, the relative variable cost declines with distance. This rationalises the observed pattern in the data that container usage is increasing in distance. The breakeven distance of 103 km is quite short, which is consistent with the observation that we observe containerised shipments even between nearby countries. For the distance between China and the US – the pair with the largest trade flow in the world – cost savings from containerisation reach 22%. For the distance between Germany and the US, the cost savings are estimated to be 19.5%. We corroborate these results using direct measures on insurance and freight charges on US imports, disaggregated by mode of transport.
Next, we back out the fixed cost of container shipping relative to breakbulk by using additional information from our data. We find this to be 70% higher for containerised shipments on average....

If interested see also:
Shipping: "How The Vietnam War Gave Birth To Container Shipping — And Changed The World"
Coffee and Container Ships "The Real Reason Coffee Has Gotten So Fancy"

And the complete Fusion production of Containers:
Containers is an 8-part audio documentary about how global trade has transformed the economy and ourselves. Host and correspondent Alexis Madrigal leads you through the world of ships and sailors, technology and tugboats, warehouses and cranes. At a time when Donald Trump is threatening to toss out the global economic order, Containers provides an illuminating, deep, and weird look at how capitalism actually works now.
At Soundcloud, e.g. Containers Episode 8: Robots, Piers Full of Robots: