514505

research-article2013
IJH26110.1177/0843871413514505International Journal of Maritime HistoryKaukiainen

Article
IJMH
The International Journal of

The role of shipping in

Maritime History
2014, Vol. 26(1) 64­–81
© The Author(s) 2013
the ‘second stage of Reprints and permissions:
sagepub.co.uk/journalsPermissions.nav
globalisation’1 DOI: 10.1177/0843871413514505
ijh.sagepub.com

Yrjö Kaukiainen

Abstract
In popular literature, the rapid growth of international trade during the last 50 or
60 years has often been viewed as a direct consequence of shipping technology and
the decline of ocean transport costs, but a number of authoritative economists tend
to regard certain other variables, such as the general income growth or reductions
of customs tariffs, as more plausible explanations. However, typical macroeconomic
estimations have a couple of weaknesses that make them insensitive to historical
context. First, they pay no regard to the fact that ocean shipping is no homogenous
entity but—for example in terms of transport costs—has varied substantially both
across sectors and over time. Moreover, the typical macro-level proxy for transport
costs, freight factor (the ratio of freight to commodity value), varies so hugely between
cheap and expensive commodities that any single average ratio involves an unreasonably
high standard deviation. Relying on conventional freight indices and tonnage data, the
present article argues that, after the Second World War, the global role of ocean
shipping can be interpreted in terms of two different phases. During the first, the focus
was in bulk trades. Both in oil and dry-bulk fleets the average vessel sizes trebled and
the resulting efficiency gains were reflected in a corresponding decline of freight-rates.
This ‘bulk revolution’ came to an end during the so-called great shipping crisis, and
the next phase was characterised by the development of liner shipping, the ‘container
revolution’. Even in this case the technical development produced substantial efficiency
gains but, unlike before, freight-rates only declined modestly. Yet shippers gained
indirectly from better, more predictable and secure services—a better value for money.

1. This is a slightly amended and amplified version of the Ralph Davis Memorial Lecture given
at the sixth International Maritime Economic History Association International Congress of
Maritime History in Ghent, 6 July 2012.

Corresponding author:
Yrjö Kaukiainen, Department of Philosophy, History, Culture and Art Studies, P.O. Box 59, Unioninkatu 38
A, University of Helsinki, Helsinki FL-00014, Finland.
Email: kaukiain@mappi.helsinki.fi
Kaukiainen 65

Such quality aspects cannot be measured by freight factors, but common opinion seems
to be that, without the rapid growth of container shipping, the outsourcing of Western
manufacturing to low-wage countries—as well as the concomitant growth of world
trade in 1990–2007—would had been much slower.

Keywords
Ocean shipping, transport costs, freight, outsourcing

I
In 2012, the sixth International Maritime Economic History Association International
Congress of Maritime History had two specific reasons to pay tribute to the great mari-
time historian Ralph Davis. First, his magnum opus, The Rise of the English Shipping
Industry (1962), was published for the first time 50 years ago. We may also say that his
work is still highly relevant—particularly at a congress with globalisation as its special
focus. Davis concentrated on what we now often classify as ‘proto-globalisation’, the
period characterised by the rise of west European maritime powers and the development
of a world system dominated by them. He did not live long enough to see the breakdown
of this system during the so-called great shipping crisis and the demise of Western
national merchant navies, in the traditional sense. Yet, the ‘second stage of globalisa-
tion’, as we now understand it, had already started when Davis summed up his most
central conclusions in The Rise of the Atlantic Economies (1973).
The chronology of globalisation that is commonly applied today follows closely the
development of world trade. Thus, what we term ‘the first stage of globalisation’ coin-
cides with its rapid growth in the mid- to late-nineteenth century, while the ‘second stage’
has become almost synonymous with the last 50 or 60 years, during which the growth of
international trade seems to have been even faster than during the first. Of course, glo-
balisation has many non-economic dimensions, but it seems to me that the current vocab-
ulary strongly—albeit implicitly—suggests that the growth of trade has been one of the
most central agents, a motive power, in fact, in the social, economic and intellectual
integration of our globe.
It is a well-known fact that, since the 1950s, world trade grew substantially faster than
estimated world gross production (see Figure 1, which suggests that while world produc-
tion grew almost 10-fold, trade grew more than 30-fold). The driving forces of that
growth, however, are disputed—‘surprisingly disputed’, indeed, as Nobel laureate Paul
Krugman commented in 1995. In the same article, Krugman also took a stand against the
popular view that growth primarily depended on technological development in transport
and communication, a view which he associated with ‘journalistic discussion’. According
to Krugman, ‘international economists tended to view’ political issues, and, above all,
the liberalisation of international trade, as a more important factor.2 Subsequently, other
economists have followed the same path. In 2001, for example, Scott L. Baier and Jeffrey
R. Bergstrand estimated that general income growth would explain no less than about

2. Paul Krugman, ‘Growing World Trade: Causes and Consequences’, Brookings Papers on
Economic Activity, 1995, No. 1 (1995), 328.
66 The International Journal of Maritime History 26(1)

Figure 1. Growth of global merchandise trade and gross domestic product (GDP), 1950–2007
(ratio scale).
Source: World Trade Organization international trade statistics, selected long-term trends.

67% of average world trade growth, while tariff rate reductions would contribute about
25% and declining transport costs only about 8%. More recently, however, Alberto Behar
and Anthony J. Venables have claimed, on the one hand, that ‘transport improvements
have had much more significant impact on trade’, in particular as all their contributions
cannot be directly measured in pecuniary terms. On the other hand, a number of econo-
mists have also emphasised the role of outsourcing of production, or international verti-
cal specialisation, as a specific explanation for trade growth. The logic of this view is
simply the fact that outsourcing tends to increase trade with semi-finished products,
which means that materials and goods have crossed national boundaries already before
they are exported as final goods. In any case, the discussion still seems to be going on.3
International economists are quite right in criticising the mono-causal interpretation
of shipping revolutions as the engine of trade growth. Indeed, some works that were
published to commemorate the fiftieth anniversary of the first container voyage coined
adages which appear journalistic rather than analytical (e.g. how ‘the box made the world
smaller and the economy bigger’; or the ‘box [or box ships] that changed the world’).4

3. Scott L. Baier and Jeffrey H. Bergstrand, ‘The Growth of World Trade: Tariffs, Transport
Costs and Income Similarity’, Journal of International Economics, 53 (2001), 1; Alberto
Behar and Athony J. Venables, Transport Costs and International Trade, University of
Oxford, Department of Economics Discussion Paper Series, No. 488 (2010); David Hummels,
Jun Ishii and Kei-Mu Yi, ‘The Nature and Growth of Vertical Specialization in World Trade’,
Journal of International Economics, 54 (2001), 75.
Kaukiainen 67

However, for a maritime historian (or at least one like me) even the econometric exer-
cises seem to experience some specific shortcomings of their own. Above all, the high
abstraction level makes them insensitive to all historical contexts. Thus, the ‘second
phase of globalisation’ will typically be presented as a set period without any real per-
spective, allowing for no subdivisions or changes of trend over time. Even the main vari-
ables, like customs tariff rates and transport costs, stand out as large aggregates as if they
were monolithic phenomena, developments for which just one ‘flat rate’ impact percent-
age presents a sufficient delineation. In the real world, however, the various, more or
less, specialised sectors of shipping—not to speak of the other fields of transport—often
develop differently because they are connected with different sectors of the economy.
Thus, the aggregate known as ‘ocean transport’ is far from homogeneous; indeed, it may
contain substantial variations from one sector to another, as well as fluctuations across
time (thus even involving large standard deviation in terms of transport costs, for
instance). The same can be said of the long-term decline of customs tariffs, which has
been far from a uniform process in different parts of the world. Nor have its impacts on
different types of commodities, such as raw materials or finished goods, been similar.
The macroeconomic approach also generates inevitable problems with the empirical
data. As far as transport costs are concerned, only a few countries publish import and
export trade statistics that specify freight and insurance costs, and even in such cases the
data are only available from the 1970s. They are typically estimated from multilateral or
pooled data of free-on-board (FOB)-valued exports and cost, insurance and freight
(CIF)-valued imports (such as those published by the World Bank). As FOB data do not
include freight and insurance costs, but CIF-data do, the difference between them can be
interpreted as accumulated transport costs. This methodology has often been criticised
on the grounds that many national trade statistics may contain substantial errors and that
there are systematic differences between them. In principle, however, a more serious,
and overlooked, problem arises from the fact that CIF/FOB data are very sensitive to
variations in the actual baskets of traded goods, as well as transport distances. Commodity-
specific CIF/FOB ratios, actually the ratios of freight to the value of a commodity (ad
valorem freights or freight factor, as Douglass C. North called it),5 can fluctuate from a
fraction of a per cent to over 30% (for examples, see Table 1), and even average ratios
can vary both across different countries and over time. Thus, CIF/FOB ratios should be
controlled by applying fixed weights to counteract differences in the commodity-specific
composition of trade, as well as in the average length of shipments. As this cannot be
done with multilateral pooled data, conclusions drawn from them about the development
of transport costs cannot be regarded as accurate.

4. Examples refer to: Brian Cudhany, Box Boats: How Container Shipping Changed the World
(New York, 2006); Arthur Donovan and Joseph Bonney, The Box that Changed the World:
Fifty Years of Container Shipping Β an Illustrated History (2006); Marc Levinson, The
Box: How the Shipping Container Made the World Smaller and the World Economy Bigger
(Princeton, NJ, 2006).
5. See, e.g., Douglass North, ‘Ocean Freight Rates and Economic Development 1750–1913,
Journal of Economic History, vol. XVIII (1958), 544.
68 The International Journal of Maritime History 26(1)

Table 1. Examples of freight ratios (freight/CIF price) for different commodities.

A: S elected bulk and liner cargo in the 1990s. Approximate freights at about 5000
nautical miles (%)
Iron ore, Brazil–West Europe, 1995–1996 36
Dubai crude oil, 1995–1996 20
Steam coal, various origins, 1995 19
Wheat, various origins, 1995 9
Car parts (CKD), Japan–USA, c.1990 2
Electronics, Japan–USA, c.1990 0.4
Shoes, Japan–USA, c.1990 0.2

Sources: Commodity prices (usually FOB): Index Mundi (www.indexmundi.com/commodities). Freights:

iron ore—UNCTAD, Review of Maritime Trade 1997; Dubai crude oil—ISL, Shipping Statistics Yearbook (Spot
freights Arabian Gulf to Rotterdam, US Dollar per cargo tonne, adjusted to represent a distance of 5000
nautical miles); coal and grain—global projections of total freights at 5000 nautical miles, Kaukiainen, ‘Jour-
ney Costs, Terminal Costs and Ocean Tramp Freights’, Appendix Tables 1a and 1b; car parts, electronics
and shoes—‘Regulating Freights’, Containerisation International, September 1993, 47.
CKD: completely knocked down (fully disassembled).

B: Container cargo in 2004, examples of minimum and maximum freight ratios (%)
Sports shoes 0.12–0.23
Medium-range clothing 0.08–0.86
Low-value clothing 0.56–1.91
Toys, low quality 0.40–7.17
Consumer electronics, small items 0.67–2.53
Consumer electronics, large items 2.07–6.14
Car spare parts (excl. electronics) 0.77–8.60
Small household appliances 2.90–9.56
Large household appliances 4.16–14.33
Furniture, flat pack 0.80–6.14
Furniture, assembled 1.93–21.50

Source: OECD, Maritime Transport Committee, ‘The Role of Changing Transport Costs and Technology in
Industrial Relocation’ (2005, research by French consultancy Copetrans) OECD, http://www.oecd.org/trade/
[June 2012].

Moreover, freight ratios have one more problematic feature: certain commodity prices
may even be affected by transport costs. Falling freights, by enabling new distant
resources to enter the global market, can increase supply and price competition—and this
may even lead to an increase in the relevant freight ratios.6 Still, economists like to
express transport costs in such ad valorem terms and seldom explore the possibilities
offered by ‘lower level’ freight data indices and other comparable source material. It

6. See, in particular, C. Knick Harley, ‘Late Nineteenth-Century Transportation, Trade and

Settlement’, in Wolfram Fischer, R. Marvin McInnis and Jürgen Schneider, eds., The
Emergence of a World Economy, Part II: 1850–1914 (Stuttgart, 1986), 595.
Kaukiainen 69

Figure 2. Average ship sizes, world total merchant fleet and selected shipping categories,
1930–2008.
Note: Until 1985, the low limit was 100 grt, and from 1986 it was 300 grt. Also, the definition of bulk car-
riers changed slightly in 1986. Ore-bulk-oil carriers were not included in the post-1985 averages of bulk
carriers, but these fleets have been rapidly diminishing.
Sources: Lloyd’s Register, Statistical Tables/World Fleet Statistics (–1985); ISL, Shipping Statistics Yearbook
(1986–).

even seems to be a common view that the ‘documentation of the actual decline in ship-
ping costs in recent decades has been lacking’, as David Hummels noted in 2007.7 Yet,
for the period after 1950 quite a lot of representative freight data are available, which
have the benefit of not being affected by commodity prices, but rather connect directly
with the various shipping markets.
In the following sections, I will not directly participate in the discussion of how to
explain the overall growth of world trade. However, as transport costs always tend to
seize a prominent role in the debate it seems worthwhile to sketch a more nuanced
picture of this variable, instead of presenting it as a monolithic unit. By disaggregating
it into various sectors, both in terms of technical ‘revolutions’ and freight develop-
ment, and by setting them in a proper historical context, a better understanding can be
provided of the interactions between ocean transport and other sectors of the economy.
Following a brief examination of technical developments in the most important ship-
ping sectors, the article will discuss estimates of freight development and then the
importance of transport costs and infrastructure for the trade of different raw materials
and finished goods.

7. David Hummels, ‘Transportation Costs and International Trade in the Second Era of
Globalization’, Journal of Economic Perspectives, 21, No. 3 (2007), 131.
70 The International Journal of Maritime History 26(1)

II
Let us first address the so-called shipping revolutions. For present purposes it is suffi-
cient to present an overview of their characteristics and chronology. Figure 2 summarises
the development of average ship size in a few important categories of shipping, and
clearly the rapid increase not only of maximum but also of average size was the essential
feature of these revolutions. Of course, it was not the only one, but the others correlate
almost perfectly with it.
As Figure 2 shows, between 1960 and 1980 there was a rapid growth in the size of
both tankers and dry-bulk ships. The boost started with oil shipping. In the wake of the
Korean War, the first tanker exceeding 50,000 deadweight tons (dwt) was launched. This
initiated an escalation during which several ‘magical’ limits were rapidly exceeded until,
in the late 1970s, a few ships of over 500,000 dwt were built. This was basically demand-
induced growth, mainly because mineral oil was replacing coal as the most important
source of energy in industrialised countries with rapid economic growth. Actual demand
for shipping was also affected by unexpected non-economic factors, such as the nation-
alisation of the British oil industry in Iran, which brought a fundamental structural
change in oil shipments. Whereas refineries previously had been built close to oil fields,
and oil cargoes therefore mainly consisted of refined products, oil companies gradually
moved their production closer to consumers in industrial countries, which necessitated
the carriage of crude oil from the Persian Gulf to these destinations. As both volumes and
distances were great, large tankers proved much more profitable than small ones. The
spectacular growth resulted in tanker tonnage (measured in gross register tons) more
than doubling in each decade between 1950 and 1980. The proportion of oil tankers in
the world fleet jumped from 21% to 42%.
Almost simultaneously, a revolution also began in the dry-bulk sector in the wake of
rapid economic growth. In particular, the transport of iron ore from South America, India
and Australia to Europe and Japan increased massively. The same applied, on a more
modest scale, to trade in other major bulk cargoes. With expansion came change, as
exemplified by the replacement of British coal on the world market by American and
Australian: the traditional trade of ‘tramp’ ships exporting coal from Europe and bring-
ing back other dry cargoes gave way to a more one-sided structure whereby, like tankers,
tramps steamed long distances in ballast. This gave an additional impetus to build more
economical bulk carriers. The most common solution was the same as with oil tankers:
increasing ship sizes beyond anything seen before. As early as the mid-1950s a few ore
carriers of about 60,000 dwt were constructed but, overall, the escalation of size was
slower than for tankers. Both the scale of the bulk trades and lack of deep-water ports
restricted development. In the late 1980s there was one bulk carrier of 360,000 dwt and
20 of over 200,000, but the most popular class was the handy 25,000–40,000 dwt
vessel.
Interestingly, both the tanker and bulk revolutions seem to have slowed down in the
1980s. The great shipping crisis hit the tanker sector particularly hard, while big bulk
carriers to some degree profited from oil being replaced by coal as a fuel; thus, while
total oil cargo shrunk by a quarter during the first half of the 1980s, seaborne coal
Kaukiainen 71

transports increased almost continuously, doubling during that decade.8 Towards the end
of the twentieth century, both sectors regained a modest growth, but maximum ship sizes
have not increased any further. This reflects the fact that importers of oil, as well as coal,
iron ore and other bulk products, have started to optimise storage costs: often it is more
economical to replenish the stores with several modestly sized cargoes than a few really
big ones.9
Figure 2 also suggests rapid growth in a third sector: container shipping. In the 1970s,
however, this was still a newcomer, and big, specialist full-container vessels were far from
common. Even in 1990 around half of all containers were carried on semi-container, roll-
on roll-off, general cargo and even bulk ships. Massive expansion in container shipping
really began in the 1990s, and recent growth has been even more impressive than the
conventional estimates of maritime trade (expressed in weight tons) suggest. Typically,
container cargo consists of fairly light commodities, which means that their cubic volume
is the main constraint for the ship’s cargo capacity. If we account commodities in cubic
meters, instead of tons, then at the beginning of the new millennium the volume of con-
tainer cargo exceeded that of all tanker cargo, as well as the sum of the major bulk car-
goes.10 Another special feature of the container revolution is that even in terms of ship
sizes it seems not to be slowing down; rather, larger and larger container ships are being
planned. This can be explained by the fact that container ships are common carriers, com-
bining in their holds (as well as on decks) a high number of consignments for different
shippers which means that the average parcel size is quite modest. Thus, the constraints of
shippers’ storage costs do not play a similar role as in bulk shipping.

III
In all three cases the dramatic growth of average ship size suggests substantial improve-
ments in economies of scale. This is also corroborated by relevant freight data. Figure 3
presents average freight development (in real terms) from the 1950s to 2005 in the three
‘revolutionary’ sectors of shipping. In both the tanker and dry-bulk sectors a substantial
decline since the late 1950s can be observed, as well as a dramatic decrease of fluctua-
tions, particularly for tankers. After 1980 they stabilised at a level that was less than a
third of typical freights in the 1950s. Since 2000, however, freights in both sectors have
moved around at a somewhat higher level.
The only long-term index of liner freight development is the German liner index, pub-
lished since the mid-1950s. It is slightly problematic in that it does not refer to freights paid
in the actual freight market currencies, British Pound and US Dollar (USD; since the 1960s),

8. See, e.g., OECD, Maritime transport, relevant years.

9. See, e.g., P.M.H. Kendall, ‘A Theory of Optimum Ship Size’, Journal of Transport Economics
and Policy, 6 (1972), 128; Jan Owen Jansson and Dan Shneerson, ‘The Optimal Ship Size’,
Journal of Transport Economics and Policy, 16 (1982), 217; Peter Garrod and Walter
Miklius, ‘The Optimal Ship Size: A Comment’, Journal of Transport Economics and Policy,
19 (1985), 83.
10. Yrjö Kaukiainen, ‘The Container Revolution and Liner Freights’, International Journal of
Maritime History, 21, No. 2 (2009), 54.
72 The International Journal of Maritime History 26(1)

Figure 3. Freight Indices, 1950–2005 (real freights, 1965 = 100).

Note: Series 1 and 2 have been deflated until 1966 by the British wholesale price index and thereafter (as
the British Pound was replaced by the US Dollar as the principal currency of freight quotations) by US
producer price index. Series 3 has been deflated by the German wholesale price index (the actual data were
computed in Deutsch Marks).
Sources: Series 1. To 1973, Norwegian Shipping News index, according to Intascale and Worldscale points (unde-
flated values); from 1973 according to spot-market quotations, dirty fixtures from the Arabian Gulf to Northern
Europe, expressed in USD per cargo ton (deflated values), published in ISL, Shipping Statistics Yearbook. Series
2. Norwegian Shipping News trip freight index as printed in Historisk statistikk 1978 Β Historical Statistics 1978
(Oslo, 1978), Table 201; and in ISL, Shipping Statistics Yearbook. Series 3. German liner index (Bundesminister für
Verkehr, Abteilung Seeverkehr), as published in ISL, Shipping Statistics and Shipping Statistics Yearbook.

but all the data have been converted to Deutsch Marks (DM). In a few cases, this means that
fluctuations in exchange rates interfere; in particular, this can be seen around 1985 when the
exchange rate of the DM suddenly dropped against the USD, while the actual domestic
purchase power of the DM hardly declined at all. This brought about a surprising peak in the
German liner index; yet it can be concluded that the real value of freights charged in USD
did not rise much (see Figure 4, in which curve 3 represents the lowest probable real value
development). Since the late 1980s, however, the index presents a steady, albeit moderate,
decline to a level of about 60% of the index datum in 1965. However, if we were to consider
only the high demand routes, such as the Far East to Europe or to North America, then the
decline would be even more modest than that. During the recent ‘China boom’ the freights
increased, of course, until the sudden collapse at the end of 2008.
In a global sense, the decline of transport costs means that the price of distance has
fallen—the world has grown smaller, if not in terms of miles or kilometres, but at least
measured in Dollars or Euros. However, that decline has not been equal across short and
long distances. As we know, all transport incurs two different types of costs: those caused
by the actual moving of goods from A to B, and others for loading and unloading (plus
the use of different structures and technical devices to do so). The latter, terminal costs,
are relatively high for shipping because loading and unloading ships requires both expen-
sive port infrastructure and labour, and the growth of ship size also has required bigger
Kaukiainen 73

Figure 4. German liner index, 1970–2005: nominal index and estimates of real development.
Sources: see Figure 3.

ports and more efficient, albeit costly, infrastructure. Interestingly, it seems that journey
or voyage costs have declined more quickly than terminal costs, at least as far as bulk
shipping is concerned. Figure 5 presents the example of grain freights from the 1870s to
the beginning of the third millennium. In the 1870s terminal costs for a ton of grain
amounted to about a third of the total shipping costs for a voyage of 5000 nautical miles;
in the 1950s, the ratio already was about a half, and in 2001 it was no less than two-
thirds. Similar estimates, though involving slightly different ratios, can be made for coal
shipping. The transformation has been continual—only in times of high fuel costs, like
the 1970s and nowadays, has the relative decline of voyage costs stopped. This is hugely
significant in the context of globalisation: it means simply that prices for long-distance
transport routes have fallen more quickly than shorter ones. We must note, however, that
this mainly applies to the carriage of dry bulk cargo—tankers and oil terminals with their
efficient pumping systems enable such quick turnaround times that the terminal costs for
oil cargoes must be lower than for grain or coal.
Terminal costs and other overheads also seem to have been fairly high in container
shipping. Unfortunately, the example presented in Figure 6 may not be very typical
because 2010 was a year of high fuel costs, but comparable data are scarce for earlier
periods. In this case, the proportion of terminal costs represents a good half of total freight
at a distance of 5000 nautical miles, but, quite obviously, this share must have been higher
before the recent ‘oil crisis’. This can be concluded from the fact that, until 2005–2006,
box-rates on the Asia to North America route tended to exceed those on the Asia to Europe
route, in spite of the latter being double the distance of the former. At the same time, the
freight rates for the main low-demand routes were roughly 50% lower than on the high-
demand routes, suggesting that distance was of rather secondary importance.
Logically, the impact of freight rate decline also depends on the actual freight ratio, that
is, the proportion of transport cost of commodity prices. As was already mentioned, different
commodities present wide variations in this respect. This is very clearly demonstrated by
74 The International Journal of Maritime History 26(1)

Figure 5. Grain freight, 1872–2001: projected averages at different distances.

Note: The curves have been estimated by regressing freights per ton with distances between respective
loading and unloading ports as the independent variable. Current values (British Pound until 1965 and US
Dollar thereafter) were deflated by respective wholesale (producer) price indices.
Source: Yrjö Kaukiainen, ‘Journey Costs, Terminal Costs and Ocean Tramp Freights: How the Price of Distance
Declined from the 1870s to 2000’, International Journal of Maritime History, 18, No. 2 (2006), Appendix Table 1a.

Figure 6. Blue-water container freight, January/March 2010: average rates at different

distances. High-demand legs.
Source: Drewry, Container Freight Rate Insight, March/April 2010.
Kaukiainen 75

Figure 7. Prices of selected commodities (actual FOB prices in US Dollars) compared with the
US Producer Price Index (PPI) (2005 = 100), 1982–2005.
Source: Index Mundi, ‘Commodity Prices’, http://www.indexmundi.com/commodities [July 2012].

Table 1. As might be expected, freight ratios for low-value bulk commodities are higher than
those for valuable finished goods; yet, it may be a surprise that the highest freight ratios were
almost 200 times higher than the lowest ones. While the data only relate to the 1990s, this
happened to be a rather stable period for both rates and commodity prices (see Figure 3 and
Figure 7). Over the long-term, of course, the ratios fluctuated considerably—and it seems
that this depended more on commodity prices than freights—but the general pattern (high
rates for cheap goods and low rates for valuable goods) must have remained similar. Only in
container shipping did a kind of structural change occur. Traditionally, different liner goods
were priced individually according to tariff books, which could contain thousands of differ-
ent items, and in which freights typically were related to the value of goods, but, gradually,
liner companies have moved to much simpler FAK (freight of all kind) or box rates, which
means that a full container load pays the same rate, irrespective of its composition. This has
lowered the transport costs for former higher-paying commodities and increased them for
low-paying goods thus, obviously, widening freight ratio variations.11
If the highest freight ratios are 200 times higher than the lowest ones, the effects of
falling freights are bound to be very different at each end of the scale: while a 20% reduc-
tion in the rate for shoes very probably will not cause a big sensation among exporters or
importers, a similar drop would make quite a difference for shippers selling Australian

11. See, in particular, OECD, Maritime Transport Committee, The Role of Changing Transport
Costs and Technology in Industrial Relocation, May 2005 (a report prepared by the French
consulting firm Copetrans). The table on page 25 presents freight ratios for a wide variety of
different ‘containerised’ products. It only refers to freights from the Far East to the USA and
Europe; as the box rates were quite similar in both cases, the big difference in the respective
voyage distances is irrelevant.
76 The International Journal of Maritime History 26(1)

coal to western Europe, or Brazilian iron ore to China. However, a sudden increase of
prices—as happened with iron ore during the recent ‘China boom’—may diminish the
impact of transport costs. Overall, the trade in low-value bulk goods is much more sensi-
tive to transport costs than valuable, finished goods.
Figures 3 and 4 illustrate that the overall development of freight costs during the last
50 or 60 years has been far from linear or uniform. In this respect, the second wave of
globalisation falls into two distinctive phases. During the first, bulk shipping was in the
key position, while liner shipping came to the fore during the second. In the former case,
the correlation between the rise of average ship sizes and the fall of freights is almost
perfect. Yet a few reservations, in particular concerning oil tankers, must be remem-
bered: first, non-economic factors, the two Suez crises and the OPEC pricing policy,
were responsible for a few spectacular fluctuations; and, second, conventional market
factors, the new balance between demand and supply of shipping services, ‘froze’ bulk
freights (in real terms) for a few decades after the early 1980s.
The tanker and bulk sectors were decisive for the overall development of ocean trans-
port costs from the 1950s to the 1980s. First, they were sectors with high freight ratios,
which means that the impact of freight decrease on trade was as high as it practically
could be. Second, this impact was increased by the great volume and rapid growth of
tonnage: between 1960 and 1980 their combined proportion of total world tonnage
increased from about 55 to almost 75%. Finally, in these sectors, transport costs almost
universally represented a greater impediment to trade growth than customs fees.
Traditionally—that is, before the General Agreement on Tarriffs and Trade (GATT)
Tokyo and Uruguay rounds, which greatly reduced tariffs on manufactured goods—most
countries allowed the import of fuels and raw materials at low customs duties, while they
protected their domestic manufactures with high ones. In this phase, then, the role of
tariffs must have been smaller than that of ocean transport costs.
It was demand that triggered the initial growth of tanker and dry-bulk shipping, but
the greater efficiency of ships and lower unit costs subsequently acted as accelerators,
which widened the influence of shipping services beyond the role of a passive exponent
of derived demand. Increasing oil consumption was an essential part of Western income
growth in the 1960s and 1970s (thus, the growth of trade also reflected the growth of
income), but an essential part of that development was the movement of refining closer
to areas of consumption—decreasing the risks of political instability in the Middle
East—which would have been much more expensive if oil freights had remained at
1950s levels. Even for dry bulk commodities, cheaper transport opened up new and dis-
tant resources for the developed industrial economies. Over two decades ago, I saw a
tangible example of this at the port of Antwerp: when imports of Australian iron ore on
big bulk carriers began, the transport costs became so modest that it could compete with
ore from Alsace-Lorraine. For a steel plant located on the coast, it was cheaper to import
ore from the other side of the globe than from its own hinterland, a few hundred kilome-
tres away.
Obviously, the dynamic impacts of bulk shipping diminished when the freights were
stabilised at the levels of the late 1980s. Gradually, the share of tanker and bulk tonnage
fell to 60% of the total, yet it is important to note that moderately priced shipments of
fuels and raw materials are still important for the global economy. As mineral deposits,
Kaukiainen 77

like iron ore and coal, are distributed very asymmetrically on Earth, the heavy industries
of many countries require a steady flow of imports from elsewhere.12 It even seems that
the relatively low and stable bulk freights actually encouraged the opening of new
resources or the expansion of old ones, thus increasing overall supply to the global mar-
ket. Figure 7 indicates that the nominal prices of important mineral products, as well of
grain, remained very stable at the same time as the purchase power of the USD shrank by
almost a half. This suggests that demand did not exceed supply, which only happened
during the ‘China boom’.
The second phase, the one that concerns the container revolution, shows many con-
trasts with the first. Above all, the impact of falling transport costs on trade volumes must
have been substantially smaller. Not only was the actual decline of freight rates more
moderate than before, but because of low freight ratios it affected overall trade costs
much less, down to small fractions of 1%. Set against this were sharp reductions in cus-
toms dues on finished goods. For example, in industrial countries the Tokyo GATT round
(1973–1979) is said to have brought tariff reductions of around 40% and, from the late
1950s to the late 1980s, the decline seems to have been around 80%.13 Therefore, it
seems reasonably clear that the container revolution, and its impact on international
trade, did not stem primarily from falling transport costs. Rather, in this phase, tariff
reductions must have influenced world trade much more.

IV
If the recent vast expansion of container shipping was boosted only marginally by falling
freights, two other explanations must be taken into account. First, it may be supposed
that the growth was simply a case of derived demand; international trade grew irrespec-
tive of the container revolution and shipping merely responded to the demand. Another,
equally possible, explanation is that container shipping—at least in the medium–long
run—was able to attract new customers by offering not cheaper but better services. Of
course, the latter explanation has already been presented a number of times before. Its
main problem is that quality is much more difficult to measure than price.
Modern container shipping still relies—at least in principle—on the innovation of
Malcom Maclean. Even in its original form, it offered much improved security of goods
against weather, accidental damage and pilfering, as well as great potential for faster
loading and unloading. Subsequently, a number of important refinements have vastly
improved the system: not only have container ships grown hugely in size, but their abil-
ity to carry volume cargo has increased even more, and terminal systems, including load-
ing, unloading and transhipment, are now vastly superior to anything seen in the era of
traditional liners. Perhaps the most important feature is the development of cargo man-
agement, a result of computer technology, which makes it possible to identify and track

12. For example, about 80% of all exported iron ore comes from Australia, Brazil and India, while
about 80% of all imports in 2009 were unloaded in China and Japan. See, e.g., UNCTAD,
Review of Maritime Trade, 2010.
13. International Monetary Fund, Developments in International Trade Policy (Occasional Paper
No. 16) (1982); Baier and Bergstrand 2001, 15.
78 The International Journal of Maritime History 26(1)

each single container through all the stages from packing to final delivery, and even plan
the optimum routing for each consignment. Thus, container movements are now not only
secure, but also reliable and very predictable. Speed of transport has not improved at the
same rate. Modern ships are not much faster than the old ones, and even if transhipment
times in modern world ports are fairly short, ocean transport cannot compete with air
freight in this respect. However, the price difference between them still remains large: air
fares typically refer to kilos or pounds, while ocean freight rates concern tons or cubic
meters.
The improved quality of modern liner shipping—better value for money, in other
words—certainly brought savings in induced or indirect transport costs, both for carriers
and shippers. Some of them (such as reduced insurance costs)14 are possible to fathom
out but, more typically, they are deeply embedded in the profit-and-loss accounts of
individual companies and therefore cannot be measured directly, as Behar and Venables
pointed out.15 If such data were available they would very probably add a substantial
proportion to the ‘visible’ drop in transport costs. However, a probably even more impor-
tant contribution of modern liner shipping is that it makes it possible to earn profit which
otherwise would be harder to procure. This aspect was interestingly summarised in the
Organisation for Economic Co-operation and Development (OECD) report on transport
and industrial relocation, published in 2005. ‘The adaptability of regular cargo shipping
lines and advances in technology—mainly containerisation—have accompanied or even
encouraged the vigorous growth in the trade of manufactured goods and the transfer of
their production to regions and countries offering significant comparative advantages,
mainly in terms of labour costs’.16 Not only does it suggest that the availability of high-
quality cargo shipping has ‘encouraged’ trade growth, but it also connects the issue with
‘offshoring’ or ‘outsourcing’, which already has been presented as a potential explana-
tion for the rapid growth of international trade.
The relocation of Western industrial production to low-wage countries was already
underway in the 1970s, with textiles as the spearhead, and it has gained more momentum
with the liberation of international capital movements, in particular since the 1990s. At
the moment, a very high proportion of container cargo on the high-demand routes from
the Far East to Europe and North America consists of ‘offshored’ manufacturing prod-
ucts. Moreover, they are combined with shipments of semi-finished goods and compo-
nents. Thus, the commodity chains in typical outsourced industries involve a series of
ocean movements, even before the final goods are carried to centrally placed ‘supply
platforms’ in Europe or North America—and from these they will then be shipped to
nearby countries aboard smaller ‘feeder’ vessels. On the one hand, such huge commodity

14. Surprisingly, very little research exists on insurance costs. However, quite impressive decline
must have taken place: in the late-nineteenth century, premiums of about 5% were commonly
charged for cargo insurance, while, e.g., the insurance costs of Finnish imports have recently
fluctuated at around 0.5% (see the Finnish Custom’s report for 2007–2008: http://www.
tulli.fi/tiedotteet/ulkomaankauppatilastot/katsaukset/tiedotteet/tiedote07072009 [November
2011]).
15. Behar and Venables,’Transport Costs,’ (2010), 16.
16. OECD, Maritime Transport Committee, The Role of Changing Transport Costs (2005), 3.
Kaukiainen 79

flows place significant demands on intercontinental maritime transport, but, on the other
hand, they only represent a series of recurrent stages in long logistic chains. Accordingly,
modern container shipping has been tightly knitted into a global network, in which it
forms one necessary element. While airfreight can offer an alternative for really high-
value goods or mail, or as back-up in exceptional situations, present airfreight capacity
is trifling compared with container cargo. To give a simple example, the cargo-space
volume of a Boeing 747 freighter only equals eight or nine 40-foot ocean containers,
whereas even medium-sized container feeders carry 500 such ‘boxes’ and ocean-going
ones more than 5000.17 As the biggest profits are harvested from cheap labour—it has
been estimated, for instance, that in textile industries ‘offshoring’ may yield savings of
as much as 70–80%18— ocean freights currently represent fair value for money. In a
sense, container shipping, as a logistic system, enjoys a monopolistic position: without
it, the present ‘global village’ would collapse. This, however, does not mean that globali-
sation could not have advanced with traditional liner shipping, but it would have been
slower.19
Such a conclusion suggests that even the recent container boom represents something
more than just a simple expression of derived demand. Rather, it could be said that much
of this demand could not have been derived without modern liner shipping. At the same
time, it has also acted as a kind of filter, which has allowed the ‘offshoring’ of certain
kinds of production, but has denied it to some others. As can be seen in Table 1, before,
there were also substantial variations of freight ratios between different ‘liner goods’,
depending on their specific value and bulkiness. Not surprisingly, the OECD report on
transport and industrial relocation suggested that rates of ‘offshoring’ were highest with
products of low freight ratios and more modest with those of high freight ratios. Even in
another sense liner shipping can be regarded a filter: intercontinental traffic has increas-
ingly concentrated on certain ocean ‘highways’ (such as the Far East to Europe, the Far
East to North America, and Europe to North America), which favours regions situated
along them, or near the hubs, while more peripheral areas must be content with less fre-
quent connections. This means that the latter—for example Central and South Africa and
South America—are handicapped with an unfavourable time factor in their connections
to the most central markets.20
One more aspect remains to be mentioned. It was pointed out above that the present
value chains in outsourced production involve a series of ocean movements, of which the

17. See, e.g., Boeing, ‘Technical Characteristics: Boeing 747 Freighter’, Boeing, http://www.boe-
ing.com/boeing/commercial/747family/ [29 July 2013].
18. OECD, The Role of Changing Transport Costs, 15.
19. This seems to be a parallel case with Robert Fogel’s counterfactual thesis on the role of rail-
roads in American economic growth [Railroads and American Economic Growth: Essays in
Econometric History (Baltimore, MD), 1964]. Fogel did not regard railroads as a necessary
condition, but concluded that without them the growth of gross domestic product would have
been almost 3% slower.
20. For example, it has been estimated that the South African textile trade suffers from twice
higher time factor surcharges than China’s; OECD, The Role of Changing Transport Costs,
16, 25.
80 The International Journal of Maritime History 26(1)

freight ratios of ‘liner goods’ (as in Table 1) only represent the tip of the iceberg. Were
we able to account all freight costs in such a chain—from raw materials to components
and semi-finished goods—the accumulated transport bill would certainly seem more
substantial than that for final goods only. This also means that quite small cuts in indi-
vidual freight rates may cascade to amounts that are able to affect the trade of the final
goods. Unfortunately, present freight and trade data do not allow such estimates.21

V
Summing up, it seems that the role of shipping in the second stage of globalisation was
a two-phase story. The development of bulk shipping can still be understood (at least
until the 1980s) in the classical context of a technological innovation that affects a sub-
stantial part of the economy by reducing costs in a strategic sector, ocean transport. Thus,
it is possible that the impact of transport costs was equally large as in the late nineteenth
century (when, according to some estimates, they accounted for as much as 50% of the
growth of international trade).22 The role of container shipping, however, particularly
since the 1990s, can hardly be measured by the same criteria. Rather, it can be compared
with the construction of new motorways, the benefits of which can be measured in terms
of so-called social savings—although, in this case, they should be accounted in a trans-
national scale.23
In a broader perspective, it cannot be a surprise that the phases of shipping develop-
ment at least loosely confirm with those of the international economy. Until the 1970s
or 1980s the world economic system was still dominated by Western industrial coun-
tries and connected with their manufacturing industries. Accordingly, international
trade consisted of their imports of energy and mining products, and of manufacturing

21. The ‘cascading’ can also take place in the other direction: during the ‘China-boom’ (2005–
2008) freight rates increased universally to such a degree that they may have retarded the
growth of trade. Recently, increasing trade costs (of which transport costs must have made a
substantial proportion) have been presented as the principal cause in the great trade collapse
of 2008–2009 (see, in particular, David S. Jacks, Cristopher M. Meissner and Dennis Novy,
‘The Role of Trade Costs in the Great Trade Collapse’, Vox, http://voxeu.org/article/role-
trade-costs-great-trade-collapse [29 July 2013]).
22. See, e.g., Behar and Venables 2010, 8. They are referring to David S. Jacks, Cristopher M.
Meissner and Dennis Novy, ‘Trade Costs: 1870–2000’, American Economic Review, Papers
and Proceedings 98, No. 2 (2008), 529, according to which the combined trade costs (i.e.
tariffs and freights, contributed 55% to trade growth before the First World War. According
to Kevin H. O’Rourke and Jeffrey G. Williamson [Globalization and History: The Evolution
of a Nineteenth-Century Atlantic Economy (London, 2000), 35], the decline in trade costs
(which they estimated at 45% in 1870–1913) depended overwhelmingly on rapidly sinking
ocean freights.
23. However, I must admit that I am not very eager to speak of social savings in this context
because of all the social problems of outsourced production and of low-wage labour—not
to speak of environmental hazards—which actually should be compensated for in a ‘perfect’
savings account.
Kaukiainen 81

exports from industrial to less developed countries. Indeed, the bulk revolutions still
favoured the prosperous Western world: by improving access to cheap energy and raw
materials they sufficed to maintain the competitiveness of their manufacturing indus-
tries—in spite of steadily rising labour and social costs. However, in the aftermath of
the oil crisis, this system began to break down. Not surprisingly, the real revolution
started in Western shipping, which experienced a massive outflagging, or ‘offshoring’,
of tonnage in the 1980s. Quite logically, other industries in high-cost countries followed
the example, albeit typically with a time lag of one or two decades. As suggested above,
this outsourcing of European and North American manufacturing was obviously made
easier, and probably even accelerated, by the development of modern container trans-
port. Reciprocally, the transformation of shipping relied on the growth of trade, particu-
larly on demand created by increasing transports of semi-finished products and
components from one ‘offshored’ production plant to another. As the available statisti-
cal data do not yet allow a more penetrating overall assessment of transport costs by
value chains, it is extremely difficult to estimate which side of this ‘good’ circle was
more primary than the other. Still, it seems possible to draw the conclusion that the role
of shipping has experienced a substantial transformation during the second stage of
globalization. From a tool that greatly helped the redistribution of global energy and
raw material resources, it has increasingly developed to an agent for the efficient exploi-
tation of global labour costs differentials. Such change has hardly decreased the eco-
nomic importance of ocean transport—rather, the contrary.

Received 1 August 2013; accepted 15 November 2013

Author biography
Yrjö Kaukiainen is Emeritus Professor of European History (previously of Economic
History) in the University of Helsinki and a former President of the International
Maritime Economic History Association. He has specialized in the history of shipping
in the eighteenth, nineteenth and twentieth centuries, as well as the history of informa-
tion transmission in the nineteenth century. His recent research has focused on the
development of ocean freights after the Second World War.