Global shipping is – in a way – a unique success story. Maritime transport costs declined spectacularly over the last decades. This has facilitated an economic model of specialisation on a truly global scale. So much so that even David Ricardo, one of the intellectual fathers of economic globalisation, would have been surprised. Maritime transport represents only a tiny little share of the price of an average consumer good. It will cost you less than 300 US dollars to transport a container from Asia to Europe, but the goods in the container can easily represent a trade value of 300,000 dollars. Shipping is very cheap!
Too cheap to be good. The shipping sector is obsessed with costs. The survival of the cheapest – that is the idea. But that no longer works. Only a few companies make profits despite the very low oil prices, usually good news for shipping. Freight rates are at a record low, but that does not bring more cargo. So we are stuck. Shipping could get unstuck by creating more value for customers, increasing reliability and offering more bespoke service. Focus on revenue rather than costs. Be more expensive!
There is another reason why shipping is too cheap: the hidden costs that do not show up in the maritime freight rate. Hidden costs at many corners. Ships are too cheap because shipbuilding is subsidised. Buying ships is too cheap because shipping lines are often state-owned and benefit from sovereign risk ratings. Scrapping ships is too cheap because of scrapping subsidies. Shipping itself is too cheap because of state aid, favourable tax regimes, exemptions of social security contributions, government bail-outs and health care costs related to shipping emissions. Ports are too cheap because public authorities subsidise them via investments, tax exemptions and other cunning tricks.
Users should pay, but in most cases that does not happen. The reason is competition: between ports, between shipping nations, between shipbuilding nations. These ports and nations do not want to create their own competitive disadvantage by making users pay for all costs, risking that the competitor will not so the same. Competition is generally a great idea, but more so when there are common global rules for competition, when there is a level playing field.
So instead of the user, it is the taxpayer who pays. Is that good? No, because it leads to wasteful use of public money. No, because why subsidise one economic development model, the globalised economy, over another?
All this is amplified by the dominant paradigm in shipping: economies of scale. Bigger ships to save costs for shipping companies, and bigger costs for other transport actors to accommodate these ships. Shipping lines ask ports to dredge to 18 metres deep – to be paid with taxpayers’ money because the carrier might not come if the port makes him pay for these costs.
Is there a solution? Yes: less subsidies, more “user pays” and “polluter pays”. Time to apply this medicine to the shipping sector. How? Let’s save that for the next blogpost.