Seaborne trade has brought prosperity. How to ensure its sustainability

Seaborne trade: The demand for maritime transport services
The geography of trade has given a new role to developing countries. While in the past developing countries were mere providers of raw materials (large volumes at low unit values), today as a group, developing countries, including China, are emerging as important importers and exporters of goods by sea. Developing countries have reversed the historical situation with their seaborne imports in volume terms exceeding their exports (Figure 1). Emerging economies are increasingly participating in globalized production and expanding their industrial production and infrastructure development. As a result, they are more and more importing oil, iron ore and intermediate goods, to produce and export higher value manufactured capital and consumer goods. They are also increasing their imports of manufactured and consumer goods, with the rise of the middle class in many developing regions of Asia, the Middle East and Africa.

The type of goods traded has shifted from mostly liquid bulk commodities (e.g. oil) to more dry bulk goods (e.g. iron ore, coal and grain) and containerised goods (e.g. parts and components, intermediate and final consumer goods) which has been the fastest growing market segment since the 1990ss. Improved energy efficiency (e.g. Europe) and the discovery of new oil and gas resources (e.g. USA) in traditional oil importing markets have altered tanker trade flows and direction (crude oil, refined petroleum products and gas). China, in particular with its important production and consumption of steel associated with its growth model and its heavy investment in infrastructures, have fuelled growth of dry bulk commodities such as coal and iron ore. The changing geography of trade has resulted in an increase in trade measured in tonne-miles as distances travelled have also increased. For example, iron ore flows from Brazil to China. Meanwhile, globalisation of production processes supported by the container revolution resulted in exponential growth of containerized consumer goods from China and other Asian countries to the United States and Europe (Figure 2).

Globalized production of goods requires logistics, including transport. Within logistics expenditures, we observe a growing share of transport. This does not mean that transport has become more expensive – on the contrary, it has become more fuel efficient and less costly – but rather that shippers buy more transport to avoid having to pay for inventory holding. While we do not have global statistics on this distribution, data for the United States is quite illustrative. Still in 1980, the US economy spent more on inventory holding than on transport within total logistics costs, while in 2016 the share of transport expenditure was more than double that on inventory holding (Figure 3).

The supply of maritime transport
The demand for containerized trade is also reflected on the supply side of the world fleet, as multipurpose general cargo ships are replaced by container ships (Figure 4). The container has rightly been called the “humble hero” by The Economist: “Containers have been more important for globalisation than freer trade” as containerization has significantly increased transport efficiency by unitizing general cargo. Our research confirms that countries that are better connected to the global liner shipping network also report higher trade volumes and lower trade costs.

A typical maritime transport operation easily involves inputs from more than a dozen countries. The ship may be built in the Republic of Korea, financed by a German bank, flying the flag of Panama, manned by Philippine seafarers who are employed via a crewing agent from Cyprus. The beneficial owner could be a Greek national living in London, who charters his ship out to a Danish liner company. He may insure his ship in the United Kingdom and have it classed in Norway. The ship could be transporting containers that are built in Shanghai, with cargo exported from Japan to the Netherlands, arranged by a freight forwarder from Switzerland. On its journey, the ship may bunker fuel in Singapore, and the container could be transhipped in Djibouti, in a container terminal that is operated by Dubai Ports. At the end of its life, this ship will likely be scrapped and recycled in Bangladesh or India. Yes, the iPhone and the Barbie-Doll are also “made in the world”, but I don’t think that any industry is as truly globalized as shipping. Figure 5 depicts, by way of example, the ratio of the “foreign” to the “national” flagged fleet. This ratio more than quadrupled over the last 3 decades.

The future of maritime transport
In spite of the recent rise in trade protectionism trends arising from the “me first” policies, I am optimistic (or should I say hopeful?) that reason will prevail and that international trade supported by a strong rule-based multilateral trading system and efficient maritime transportation systems will continue to provide prosperity for almost all.

But there is a catch. How sustainable is maritime transportation in the current context of its globalised supply and demand dynamics?

While important initiatives already exist, shipping needs to play a larger role in addressing global warming and contribute to mitigating the carbon emissions that are causing climate change. Shipping emits far less carbon dioxide (CO2) per ton-mile than any other mode of transport, but then due to its sheer volume it also produces many ton-miles. Ideally – and I need to highlight again that this blog-post is a personal perspective – the industry should be charged by its main regulatory body not per ship tonnage (as is currently the case), but per tonne of CO2 emission. I like the way the IMO is financed; unlike most other UN agencies, it is not financed proportional to the GDP of its members, but proportional to the tonnage registered under the members’ flags. Like this, Panama, Liberia and the Marshall Islands pay for the largest share of the IMO budget – and in the end, this is passed on to the ship-owner, who in turn passes this on to the shipper, who will charge the consumer. This is a good established mechanism that could be expanded to also internalize the external costs of CO2 emissions.

Being the most globalized of all businesses, maritime transport should consider adopting a global regime that helps further internalize its environmental externalities – to ensure prosperity for all, including future generations.

Jan Hoffman’s viewpoint first published @ Global Maritime Forum website.