Shipping Chaos, Not Ukraine, Is How Globalization Ends

Small importers are having trouble getting space from ocean carriers, and when they can get space, it's incredibly expensive. This is how it all ends.

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The invasion of Ukraine has prompted an endless number of think pieces on the end of globalization. “The Russian invasion of Ukraine has put an end to the globalization we have experienced over the last three decades,” wrote powerful financier Larry Fink in his latest letter to shareholders. In Foreign Affairs magazine, the influential head of the Peterson Institute, Adam Posen laid out the destructive consequences of the end of free trade. And in Bloomberg, uber-establishment journalists John Micklethwait and Adrian Wooldridge titled their view “Putin and Xi Exposed the Great Illusion of Capitalism”, and pressed for Biden to toss aside union votes and sign more NAFTA-style trade agreements.

It’s clear that the economic elites are not going to let go of their fantasies about the virtues of the thinned out supply chains they fostered, even if they are now couching their rhetoric in the language of supporting Ukraine. Regardless, none of this really matters on the ground, because the supply chain situation underpinned by global shipping is just not getting better. That is, the boats that move all the stuff that these economic elites love to see move around aren’t circulating fast enough. Yes, partly this is a result of the Ukraine situation, but it preceded it, as we remember from the big ship stuck in the Suez Canal. (There’s another big ship stuck near Baltimore!)

The backbone of globalization was lowly metal box, a standardized shipping container. Such a container can move from a ship to a truck to a railroad, and all the equipment and infrastructure is the same to load and unload them. Shippers thus transport the container on whatever type of vehicle makes the most sense, as opposed to being constrained to a specific ‘mode’ of transportation. It was this transformation of shipping, starting in the late 1950s, that made it possible to make things all the way on the other side of the world and bring them to the U.S. at a lower cost than it was to produce things next door.

That era, however, is over, and was over before Russia invaded Ukraine. Shipping container rates are creating profits for ocean carriers that in just one year are three times as high as the total amount of all duties collected on China tariffs since they were imposed years ago. It’s particularly bad for small and medium size importers, who get the leftovers from shipping lines after Walmart and Amazon have bargained for what they need. (Price discrimination like this would have been illegal prior to deregulation in 1998.)

It gets worse. At this point, the profit from bringing stuff from China to the U.S. is so crazy high that it doesn’t even make sense to export food from America anymore, even in the midst of what looks like a global famine. The basic problem, described in the Journal of Commerce today, is that the ocean carriers do not want to carry exports because it’s not profitable enough.

Through-rates from Asia to the US interior via the West Coast, known as inland point intermodal (IPI) rates, are also rising rapidly as carriers prefer that importers stop the containers on the West Coast and transload the contents to domestic containers or trailers. That way, carriers can quickly return the empty marine container to Asia for another high-paying shipment to the US… They [are] considering the “opportunity cost” of a container sitting idle for weeks in the interior US versus sending it back empty to Asia for another $10,000 US-bound import load, the carrier source said.

In other words, the basic idea behind container shipping - standardization no matter what kind of mode of transportation - is breaking down. Ocean carriers don’t want their boxes moving onto trains and trucks in the U.S. to go fetch grain, they want the boxes moved back as quickly as possible to ferry more TVs to the U.S. from China. This doesn’t mean imports and exports are over; indeed, imports to the U.S. from China are at a record high. But the certainty that one could order products and have them delivered within 90 days is what undergirded globalization and just-in-time supply chains. And that era is over.

What is interesting is that the people who actually understand this situation best are not the economic elites. Larry Summers, for instance, responded to arguments about shipping by saying we need to get rid of a law that mandates domestic ships for shipping stuff within the U.S.

Lawrence H. Summers @LHSummers

If the Administration were serious about competition in shipping it would suspend the Jones Act.

This kind of commentary is remarkably ignorant; the problem is the east-west line from China to the U.S., not moving stuff within the U.S. But Summers, like all the authors I mentioned above, does not actually think about the flow of stuff, the real guts of globalization. For instance, the “Indo-Pacific Economic Framework (IPEF),” which is the name Biden has given to a suite of diplomatic and economic efforts to get other countries in the Pacific to be mean to China, doesn’t even mention shipping. It’s remarkable that the people who designed our economic and security architectures are so divorced from the reality of production, but if you want to know why we’re in such trouble, that’s the reason.

Fortunately, there are people that do understand this situation. And oddly enough, this group includes, gasp, politicians, because while they are heavily influenced by the elite commentariat, they also have to deal with voters, unions, and businesses. As such, a few days ago, the Senate Commerce Committee unanimously and quietly passed their version of the Ocean Shipping Reform Act, a bill to impose new rules on how ocean carriers - a highly concentrated and dysfunctional industry - can treat the firms that import and export goods. The passage of this bill is excellent news, as the House of Representatives passed their version a few months ago. That means the bill is almost certain to become law, which would be the first major re-regulation of a sector in the American economy since the Cable Act of 1992.

That said, there are significant differences, and the Senate version of the bill is weaker than the House version. The key point of dispute is what I noted earlier, which is how to handle the problem of carriers refusing to carry exports because it’s just not profitable enough versus bringing back empty boxes to China. The Senate removed rules that would force ocean carriers to carry U.S. exports of food, and even struck out one of the proposed purposes of the law, which in the House version is to “promote reciprocal trade in the common carriage of goods by water in the foreign commerce of the United States.” To be clear, the Senate didn’t disallow the Federal Maritime Commission from fixing the export problem, it just didn’t mandate it. There is some good stuff in the Senate version, with Ted Cruz putting in an amendment on price discrimination. The problem is that Senators deferred more to the regulators, instead of telling them to do specific stuff to fix our export problem.

Regardless, these rule changes, even if they went into effect tomorrow, wouldn’t fix the situation, though they will in the medium-term help a lot. We’re going to need a lot more action. And in case it’s not clear why, here’s a point of view from a reader who does a fair amount of importing on the shipping market. The context here is that the carriers are so powerful that shipping contracts aren’t worth the paper they are printed on.

Hey Matt,

Want to give you update on shipping situation. We usually sign annual contract sometimes around March and April before it kicks in on May 1st. This year, all the shipping lines are coming back with nearly identical rates, $10,000 for China/Hong Kong/Taiwan to West Coast. Furthermore, they are adding a performance failure penalty for the first time. They will add an extra $1,000 fees if you don't book 80% of the contract volume. This is unprecedented. In the years past, if you don't book the contracted volume, nothing happened. In 2021/2022, they couldn't even provide the contract volume and there was no refund of any kind.

The strange thing was that I’ve never seen contract rates being offered by the shipping lines that close to each other. But this time, the bids were identical, $10,000 across the board. Last year we got rates between $3,400-$4,200. We signed contracts with five shipping lines Spring 2021. Of the five, we never got a single booking with one of them. So that was an unusable contract. Three of them ended up raising prices throughout the year by withholding container availability and forcing us to sign a "Premium Service" add-on. The end result was that by the end of the year, we were paying close to $9,000 per container instead of the $3,400-4,200 range. Even then, we only finished the contract quantities for one of them due it being only 100 containers. One of them did honor the contract and kept the price the same for the entire year.

This is why I was so upset when I heard about performance penalty for failure to book the container based on the quantity in the contract.  It strikes as blatant attempt to impose a price floor on the rates knowing that it's very likely to collapse, especially when we go into recession this year, an almost certainty in my opinion.

Anyways, hopefully some of your readers are in DOJ who can do something about it.  It's a messy situation. In any case, just more chaos by this industry to stick it to the American general public. Thanks!

So that’s the deal. At this point, the underpinnings of globalization, the boats that move things to terminals and trucks, won’t move boxes from the U.S. anymore because it’s not profitable enough, even when we can send the food necessary to feed starving people. That’s how globalization ends, with a ship traffic jam and not just a war.