Marc Levinson

Category: Uncategorized

  • The Value of Value Chains

    Usually, the action at the American Economics Association’s annual meeting revolves around weighty pronouncements by prominent economists. What I found striking about this year’s meeting, which was held in New Orleans the first weekend in January, was the considerable attention devoted to value chains. These sessions didn’t attract the huge crowds of the ballroom speeches about inflation and innovation, but they did offer some interesting insights.

    One important development is the use of data about individual firms to understand how value chains actually work. Some of the most useful data comes from tax records, which may provide a detailed picture of business-to-business relationships. One such study, presented by Felix Tintelnot of the University of Chicago, uses Belgian tax and customs filings to show that imports account for a far greater share of domestic consumption than the government estimates. A study presented by Yuhei Miyauchi of Boston University, using tax data from Chile, shows how COVID-19 quickly disrupted relationships among domestic firms, forcing value chains to be forged anew. A paper offered by Nitya Pandalai-Nayar of the University of Texas, based on firm-level data, reports that 44% of U.S. factories export, more than twice the rate estimated from government surveys. One consistent finding: traditional trade statistics don’t offer an accurate picture of how value chains work.

    Other presentations discussed such matters as firms’ responses to input shortages, ports’ responses to shipping delays, the use of inventories to manage supply-chain risk, and the role of interest rates as a driving force behind globalization. The common thread is that time-worn two-country, two-commodity models of international trade have given way to the understanding that trade is undertaken by firms engaged in complex relationships, not by countries exchanging cloth for wine.

  • Carbon Border Adjustments and Trade

    The European Union is on the way to taxing many imports based on their greenhouse-gas emissions. The plan, which was agreed by the European Commission and the European Parliament on December 13 but is not yet final, is one more factor likely to constrain the growth of international trade.

    The plan would establish an import taxation system called the Carbon Border Adjustment Mechanism, designed to force importers of certain products to pay for the carbon emitted in making their products. The tax would equal the amount an EU manufacturer would have paid to purchase permits for those emissions under the EU Emissions Trading System. The point is to stop the “leakage” that occurs when companies import products that would be subject to carbon charges if produced in the EU. Initially, imports of iron, steel, cement, aluminum, fertilizers, hydrogen, electricity, and products made from iron or steel will be subject to the tax, and some chemicals and polymers may be taxed as well. Imports from countries that tax carbon emissions as the EU does would not be taxed.

    Implementing this well-intended policy is likely to prove more complicated than EU officials are letting on. While calculating the tax on a bag of imported cement may be straightforward, accurately figuring the charge on a product containing steel from multiple mills drawing on multiple power sources may not be so easy.

    It’s possible that the new taxes will be ineffectual; if, for example, an Asian manufacturer simply ships fertilizer from an older plant to Africa while selling output from newer plants with lower carbon emissions to the EU, the tax might have no net effect on emissions. On the other hand, if the EU succeeds in convincing its trading partners to impose their own taxes on carbon emissions or if proceeds to require significant carbon border adjustments instead, some goods could become more expensive in Europe, and might therefore be traded less.

    This isn’t necessarily a bad thing. As the economist Joseph S. Shapiro has shown, countries’ failure to adequately regulate greenhouse-gas emissions provides a massive subsidy to international trade. Taxes on emissions could be one more factor weighing on trade as companies reconsider their supply chains.

  • Digits Aren’t Always Free

    On a recent road trip, after yet another cup of tasteless hotel coffee, my wife and I ordered lattes at a trendy roastery. “That’s $10.36,” the cashier told me, turning the payment screen in my direction. When I laid a twenty-dollar bill on the counter, he changed his tune. “If you’re paying cash, it’s $9.96,” he said. Our coffee had suddenly become four percent cheaper.

    Credit card surcharges seem to be popping up all over the place, often without notice to customers. The reason is obvious: accepting cards costs merchants money. That coffee shop would probably have paid 2.6% of the transaction amount plus 10 cents — a total of 36 cents — to ring me up on its Square terminal, and the typical per-transaction cost to a small business using Stripe, 2.9% plus 30 cents, might have been even higher. The bank that issues the card takes a share of these fees, and some goes to network operators like Visa and Mastercard. With so many intermediaries, running a cashless business can be expensive.

    But accepting cash isn’t a costless alternative. Cash gets stolen. It must be counted and secured. Someone must cart it to the bank. And banks don’t want it, which is why they often charge business customers for depositing coins and currency.

    The bottom line: while a cashless sale would have been more efficient for me, the coffee shop, and the U.S. financial system, frictions in the market led me to pay with a twenty-dollar bill instead.

    This mundane story is worth pondering. Companies, industry groups, and standards organizations are pushing to standardize digital information concerning everything from home sales to import supply chains. This is touted as a way to cut costs. But if gatekeepers are able to tax the flow of information, as they do with credit cards, the benefits of doing away with paper may be less than expected. Digits aren’t necessarily free.

  • Locked In

    Standardizing the shipping container in the mid-1960s was a pivotal step in globalization. Up until that point, containers came in a multitude of designs, so one ship line’s containers might not fit aboard other carriers’ vessels. A crane equipped to lift one type of box from a wharf or a rail car might not be able to handle another. Only after years of arduous negotiations did the International Organization for Standardization (ISO) agree on standards for container size, structure, locking devices, and other features. Once the standards were set, container shipping boomed, helping transform the world economy.

    ISO designated the 40-foot box as the “standard” full-size shipping container in 1964. At the time, 40 feet was the maximum length allowed for truck trailers in most U.S. states. But over the years, state governments have gradually permitted longer loads, especially on Interstate Highways. A considerable share of U.S. domestic freight now moves in 53-foot containers. These boxes rarely cross the seas. Instead, in a little-known example of supply-chain inefficiency, warehouses near some U.S. ports specialize in unpacking 40-foot containers of imports and stuffing the cargo into 53-footers for land transport across the country. The freight in three 40-footers can fit into two 53-foot boxes, reducing trucking costs.

    The BNSF Railway has now gone a step farther, announcing that it will build a yard to transload freight between 40-foot containers and 53-foot containers. As planned, containers that now go by truck from Southern California docks to warehouses will move inland by rail instead, a shift that can only help air quality. Once a train of import containers arrives at the new yard, electric yard trucks will transport the containers to a warehouse, where the goods will be transferred into 53-foot containers, which will be moved back to the rail yard for shipment to points east. The process will be reversed for exports, with the contents of 53-foot containers being stuffed into 40-foot boxes to fit aboard container ships.

    I don’t doubt that BNSF, which says it will spend $1.5 billion on this project, has run the numbers carefully. But transferring freight between bigger and smaller containers seems to defeat the very purpose of containerization, to reduce the handling of goods.

    This is an example of what economists call “lock-in,” which occurs when a technology remains in use because the cost of change is high. In this case, 53-foot boxes generally aren’t allowed on roads outside North America, so the 40-foot container is still in demand. Most of the 5,500 or so container ships on the seas were designed for them, and carrying 53-footers as well hasn’t proven financially viable. While some 45-foot and 48-foot boxes are transported by sea, after nearly six decades of international container shipping, the 40-foot container remains the standard, and there is no practical way to make a change.

  • “Normal” Isn’t Coming Back

    “Supply chain ‘normal’ appears on the horizon,” Bloomberg’s Brendan Murray reports. Murray presents lots of evidence that fewer vessels are queuing at container ports, fewer sailings are being cancelled, and most measures of supply-chain stress are less alarming. But the discussion at the Global Maritime Forum’s annual summit, which convened last month in the Brooklyn Navy Yard, only reinforced my conviction that slow growth of international goods trade lies ahead. In that sense, “normal” isn’t coming back.

    The hot topic at the Brooklyn meeting was decarbonization. The International Maritime Organization, a United Nations agency that attempts to oversee the unruly business of international shipping, has decreed major reductions in greenhouse-gas emissions from ships by 2050. A revised strategy, likely with more ambitious goals, is due from the IMO next year. In addition, vessel owners, especially owners of container ships that carry consumer goods, are facing pressure from their customers to curb emissions more quickly.

    Reducing greenhouse-gas emissions means finding a substitute for the petroleum-based fuels that now power almost all ocean-going ships. At the moment, though, there is no consensus about the best alternative. Some shipowners are building ships that can burn ammonia. Others are embracing liquefied natural gas. A much-touted option is e-methanol, which combines hydrogen with carbon dioxide captured from industrial sources. A few hydrogen-powered ships are already at sea. Battery power may work for short sea crossings.

    These approaches have several problems in common. They are very expensive: by one estimate presented at the Global Maritime Forum, the cost of moving a ton of freight with low-emissions fuels will be five or six times as high as with petroleum-based fuels. Ships will sail very slowly to minimize consumption of precious fuel, increasing cargo owners’ inventory costs. Ports and terminals, facing the need to provide a variety of fuels at each berth, may face large investments in fueling infrastructure so long as ship owners can’t agree on which alternative fuel to use. Port users will have to foot the bill.

    All of this will affect choices about shipping goods across the oceans. Although the sky-high freight rates of the pandemic years are behind us, the long-run cost of decarbonizing shipping will reshape supply chains. The days when international shipping costs barely mattered in making sourcing decisions are over.

  • The Queen Went Shopping

    The death of Britain’s Queen Elizabeth on September 8 triggered a slew of reminiscences about her many visits to the United States. On seven trips, first as princess and then as queen, she traveled to cities from Sacramento to San Antonio, sailed past Milwaukee in the royal yacht, and watched an American football game. Just after the latter event, on October 19, 1957, came one of her more unusual stops, at the Giant Food supermarket in Chillum, Maryland.

    Supermarkets weren’t a new invention in the 1950s. They’d been around since 1930, when the King Cullen Grocery Company opened the first supermarket-type store in New York City’s borough of Queens. But mom-and-pop outlets played a major role in food retailing until after World War Two: in 1948, the government counted 504,439 food stores in the United States. As I recount in The Great A&P and the Struggle for Small Business in America, the end of price controls related to the Korean War in 1953, followed by a change in tax law in 1954, triggered massive construction of large suburban supermarkets like the queen and Prince Phillip visited.

    Perhaps checking out the latest in frozen foods had some educational value for the queen, but I suspect that wasn’t really the purpose. At the time, self-service food stores were relatively new in Great Britain. Wartime food rationing, imposed in January 1940, had ended only in July 1954. High-street food shops had an important social role; as one interviewee told a historian, “You could always have a sit-down in the grocer’s shop.” But many grocers, especially those outside the largest cities, offered only a limited selection of canned goods, sweets, and other products with long shelf lives. In 1957, British households spent nearly a third of their incomes on food, yet did not eat particularly well.

    For her subjects, the queen’s visit to Giant Foods held out the promise of something better. And that promise came true. By 1961, Britain would have 572 supermarkets. By 1969, when the number reached 3,400, convenience foods were widely available and households spent, on average, only one-fourth of their incomes on food. While many local merchants had folded, Britons were eating better and, with more money to spend on things other than groceries, living better, too. Offering an optimistic vision of the future was one of the queen’s most important jobs, and that supermarket in Chillum helped her communicate that vision to her subjects.

    A footnote: her stop in Chillum was not the queen’s only foray into supermarkets. She visited a Waitrose supermarket near her home at Windsor in 2008, and another Waitrose in Poundbury, England, in 2016. In 2019, at the age of 93, she strolled through a pop-up Sainsbury store, where a manager introduced her to the Sainsbury app. She apparently was more impressed by the self-checkout; as she acknowledged, “Everybody wants to hurry.”

  • Rise and Fall

    What do Baltimore, Keelung, Jeddah, Belfast, and Melbourne have in common? Yes, of course, all are ocean ports. But only the most obsessive maritime historians are likely to note their other connection: at some time over the past half-century, each has ranked among the world’s 20 largest container ports, only to tumble down the rankings as international trade has mushroomed and trade patterns have changed.

    Lloyd’s List, the venerable Bible of ocean shipping, interviewed me recently for an interesting piece examining how container ports have evolved over the years. This sort of information used to be compiled in an annual volume called Containerisation International, which has long since been absorbed by Lloyd’s. Linton Nightingale, an editor at Lloyd’s, drew on the Containerisation International archives to assemble a picture of the port industry over time.

    The data for 1973, the year of Containerisation International ‘s first almanac, seem almost quaint. The biggest container port in the world, New York/New Jersey, handled 1.6 million twenty-foot equivalent units (TEUs) over the course of that year — roughly as many as passed through Shanghai, now the largest port, every 12 days in 2021. The twentieth-biggest container port in 1973, Belfast, saw 237,000 TEUs move through. In 2021, the one hundredth-largest port, Jinzhou, China, handled six times as many.

    The 1973 rankings, of course, were dominated by the United States, where the modern container shipping industry had begun 17 years earlier. Only four Asian ports, three of them in Japan, ranked in the top 20. As late as 1995, no port in mainland China was on that list. Today, in sharp contrast, six of the eight largest container ports are in China, and that doesn’t count ninth-ranked Hong Kong, whose container business has contracted since it ceded the title of largest port in 2005. “Volumes handled at Chinese container facilities represent more than 40% of total trade handled by the 100 ports in Lloyd’s List’s latest rankings,” Mr. Nightingale observes.

    But the current focus on supply-chain risk is likely to bring significant changes in trade patterns, especially for manufactured goods. I expect that the list of the busiest container ports will look quite different a decade from now.

  • Too Much Stuff

    The U.S. distribution system is stuffed with stuff. Business inventories in April were up nearly 18% from a year ago. Inventories at non-auto retailers were up 20%. One merchant after another — Target, WalMart, Costco, even mighty Amazon — has reported disappointing earnings and is marking down excess merchandise like crazy. Merchant wholesalers — a category that includes companies that import everything from washing machines to smartphones for sale in the United States — show much the same trend.

    The reason for the excess inventory? Simply enough, consumers have stopped spending with abandon. As shopping habits revert to prepandemic norms, inflation decimates buying power, and home sales stall, the demand for consumer goods is stalling as well. This trend, visible in Europe as well as North America and parts of Asia, means that fewer consumer products and the inputs required to make them are moving through manufacturers’ and retailers’ supply chains. International trade in goods, which soared in 2021, is facing a decline. Construction of new distribution centers is grinding to a halt.

    The logistics industry has been slow to pick up on the implications. Some transportation companies and freight forwarders have issued glowing forecasts for the months ahead. Many ports are expanding in expectation that the trade boom will linger, and some that have rarely seen a container ship are investing to lure vessels that may never arrive. Shipbuilders’ order books are full, including many orders for vessels large enough to carry 24,000 20-foot containers. As globalization enters an era in which manufacturing value chains matter less and consumer spending is anemic, this enthusiasm for adding capacity is hard to understand.

  • Trade Secrets

    A couple of years ago, an exec at a major freight forwarder asked me to guess how many shipments each employee handled on an average day. Naively, I guessed 60 or 70. I was wrong by several orders of magnitude. With each shipment requiring numerous steps, from booking a truck pick-up at the factory to certifying that pallets had been treated to kill pests, dealing with three shipments was considered a good day’s work.

    Keeping track of goods moving through supply chains is a headache for every company involved in international trade. Lots of money and brainpower are going into improving information flows; the May 24 announcement that the Port of Long Beach is teaming with Amazon Web Services to provide “aggregate data for companies across industries and sectors to track cargo in real time from origin to destination” is only one of many examples. On May 27, the Biden Administration named a new “supply chain envoy,” Retired General Stephen R. Lyons, to help the logistics industry sort things out. Yet so far, these efforts have done little to make supply chains run more smoothly.

    There are many reasons for this hold-up. Not everyone is keen on big solutions; some manufacturers and retailers have their own supply-chain management systems and expect suppliers and logistics providers to furnish data their way, not vice versa. Many ports, ship lines, freight forwarders, and other parties are developing proprietary information systems that may not mesh with others’ systems. And behind the scenes, there’s a struggle for control of data about individual shippers that might prove valuable in the future.

    Improving supply-chain visibility will be an arduous process. Consider the most basic query a shipper might pose through an information system: when will our goods will arrive in port? Two ocean carriers that share space on the same vessel may have different answers to that question, because they have different definitions of “arrive.” That’s not a problem technology alone can solve.

  • Supply Chain Risks and Rewards

    Supply chains rarely received much attention in Washington until container ships started queuing outside the ports. Now, they’re a big deal. Even the White House is involved, first by appointing a supply chain “czar” and how by publishing a chapter on supply chains in the annual report of President Biden’s Council of Economic Advisers. The report reflects how much the conventional wisdom about supply chains has changed in just a few years — but it also reflects the bewilderment of government officials about what is basically a private-sector problem.

    Much as I argued in Outside the Box, the CEA report asserts that the evolution of supply chains has “been driven by shortsighted assumptions about cost reduction that have ignored important costs that are hard to turn into financial measures.” In other words, the companies that forged supply chains have often failed to account properly for risk. The CEA’s economic analysis, which draws heavily on a recent paper on supply-chain risk by Richard Baldwin and Rebecca Freeman, is well worth reading.

    The report goes astray, though, when it attempts to define an appropriate role for the government. This section underplays the complexity of modern supply chains; it highlights how the government resolved shortages by publishing data on hospitals’ stocks of personal protective equipment, but that doesn’t have much to do with industries in which the absence of some obscure component made far down the chain forces the final manufacturer’s production line to shut down. The report praises stiffer requirements for domestic content in federal purchases — a Biden Administration priority — but offers no evidence to support its claim that this will make U.S. supply chains more resilient.

    The challenge in developing more resilient supply chains is that it’s not always in firms’ interest to do so. Imagine two competitors. One serves the global market from a single location, taking advantage of economies of scale to lower costs. The other spreads production of a critical item across three continents to minimize risks. Much of the time, the low-cost company will outperform the low-risk one. The resilient strategy will win out if a fire or an earthquake intervenes, but in most years that doesn’t happen. The CEA report does not address this reality.

    Under pressure from customers and investors, many large firms have already taken measures to make their supply chains less fragile, from routing cargo through multiple ports to integrating vertically to control production of key inputs. The best way for the government to support such adjustments is by addressing distortions that lead to economically inefficient trade, such as by ending subsidies for freight transport and attaching a price to greenhouse-gas emissions in shipping (a subject briefly mentioned by the CEA). These sorts of actions are politically distasteful. But they might force companies to evaluate costs and risks more carefully when they decide what to make where.