A boat is a hole in the water into which you throw money ... but if it's a ship, money comes out?

August 17, 2009 10:46 AM

(Freighter experts) Does the world-wide shipping industry have hidden (or open) subsidies?

Boats are expensive. Big ships must be really expensive.

So, how is the shipping industry subsidized, or costs externalized, so that it becomes preferable to manufacture or grow something on the other side of the world, and ship it to the US?

How much does it cost to build, maintain, and operate a superfreighter?

[I think everyone's familiar with the labor cost side of the issue, so let's focus on ships.]

posted by coffeefilter to law & government (9 comments total)

Well, for a start, look at that universal externalized cost, pollution. I've seen estimates that put shipping at 3-5% of greenhouse gas emissions, even higher for sulfur dioxide, nitrogen oxides and particulates/soot.
posted by Good Brain at 10:57 AM on August 17

The United States Navy.

No joke. For several hundred years it's been an unspoken duty of the world's largest navy to try to keep the sea lanes safe. For a long time it was the Royal Navy that did it, but since the middle of the 20th Century it's been the USN. And the USN patrols large parts of the world's most dangerous waters, and helps keep piracy under control. For instance, there are always USN ships in the vicinity of the Malacca strait. And freighters going through there always make radio contact with the nearest USN ship and keep in touch the whole time they're going through.

If the USN stopped patrolling the Malacca strait, it would soon dwarf Somalia as a piracy problem.

That said, I think your basic assumption is wrong. What you're thinking is "Damn, this just CAN'T really be economical!" But in fact, it really is. There's a huge economy of scale involved. It's true that in absolute terms a superfreighter is expensive to build and operate. But a superfreighter also moves immense amounts of cargo, and does so a lot faster than you may realize.

Take a super tanker. Some of them can carry 500,000 tons of oil. Now that is a hell of a lot of oil. Even if the trip costs quite a lot in absolute terms, even including amortized cost of building the tanker, when you distribute that cost over all that oil the cost isn't really very great. Wikipedia says that it's on the order of 2 cents per gallon.

Big container ships are the same way. The economics make more sense than you think. And the reason it "makes more sense" to ship long distances is economy of scale. The cost of shipping is more than made up for by increased efficiency of manufacture (or growth). Distributed small local production is inherently inefficient and expensive compared to single large centralized sources even when you factor in shipping costs.

There isn't any conspiracy involved.
posted by Chocolate Pickle at 11:32 AM on August 17

I can't tell you in detail but in Germany it was highly tax beneficial to invest in container ships (please don't ask me for the exact scheme, I don't know it). In the end, after several years the investment was supposed to pump money back to you. So you would get a tax saving plus a good ROI. Since the ROI is now very doubtful the investment looks like a bad one.

http://www.businessweek.com/globalbiz/content/aug2009/gb20090811_320246_page_4.htm

I once read an advice and I always stuck to it: Never, NEVER, do any investment if it is only a good investment due to tax savings.
posted by yoyo_nyc at 11:32 AM on August 17

Good book on the subject: The Box: How the Shipping Container Made the World Smaller and the World Economy Bigger. Also this link is informative.

Big ships must be really expensive.

On the contrary, big ships are more efficient than small ships, per container. It doesn't cost 10% more fuel to carry 10% more containers, and you can use the exact same very small crew.

So, how is the shipping industry subsidized,

The main direct subsidy is that governments build huge modern ports so that the container ships will stop there, rather than at their neighboring country/city.

But at heart, container shipping is fundamentally cheap, which is why it took over the world. It doesn't need subsidies to make global trade worthwhile. If it costs $5000 to ship a full 40' container, that is still plenty of money to fund a voyage by a ship that holds 5,000 containers. But likewise, the number of units of your product that can fit in that container makes the per-item shipping cost minimal.
posted by smackfu at 11:32 AM on August 17 [1 favorite]

Absolutely fascinating answers so far - thanks.

But let's maintain focus. Shipping may be efficient, but that doesn't mean it's not getting subsidies, or externalizing costs. The industry is too big, too experienced, and too smart not to. (I figure it must be like aerospace - tons of support, both hidden and open. Whether it's good or bad is a separate question.)

GB - air pollution - wow that's a lot. But I guess on the ocean, there's no one to tell you not to pollute. I guess any waste would go straight into the ocean, also.

CP - USN - interesting. So, with no navies, they'd have to go armed. And oil ... good point - any support for oil supports shipping.

yy - yep, tax policy makes for some creative thinking. The BW article is fantastic background, thanks. It looks like the shipping industry is having its own version of the US bank debacle, which has helped finance it.

sf - port facilities - good thinking. That'd be analogous to expanding airports to accommodate the giant Airbus 380. Cool reference, from what I can see of the reviewers' summaries. Interesting that there's a military connection there, too. I'll probably track it down at some point.

-

I'm also thinking along the lines of steel - freighters (and containers) - that's a huge amount of steel. Any support to mining and ore refining also supports shipping.
posted by coffeefilter at 12:37 PM on August 17

So, with no navies, they'd have to go armed.

Generally, no. Note that they haven't responded to the Somalian situation that way. The reasons are complicated, mostly a mix of strange insurance and law, but if piracy became a much more serious problem they'd just put up with paying lots of ransom and then raise their rates to compensate.

I think you're trying too hard. Steel, for instance; it's another kind of product which benefits from economy of scale. When steel is produced in huge quantities, its price declines. Does ship building benefit from that? Of course, but that doesn't make it a "subsidy" in the sense you're talking about. It's just an economic fact of life.
posted by Chocolate Pickle at 2:08 PM on August 17

It's important to remember that the ship-based segment of the modern container shipping industry is only a small part of the overall business. What this means is that every subsidy (direct or indirect) given to the trucking and railroad companies is just as applicable to the shipowners.

Look at Sealand, Maersk, HapagLloyd, etc.. Their product is not moving the container from Port A to Port B; it's moving it from Door A to Door B. This involves, almost always, trucking and/or railing the container from the port to the shipper's loading dock and then back to the port. That's why it's called "intermodal." Maersk/Hapag/SeaLand/COSCO would be out of business as unprofitable if they couldn't coordinate these various modes of freight transport and deliver door-to-door around the world.

None of this would be possible without road and fuel taxes, the grants of right-of-way given railroads, the generally lower property taxes paid by railroads, and everything else that's an indirect subsidy to road and rail usage and building that infrastructure.

P.S. I used to work in the ocean freight business (for a shipper, not a carrier). Fantastically interesting and varied business to work in. I remember when the old U.S. Lines salespeople would come calling. They spent money courting shippers like drunken sailors - pun intended. U.S.Lines was, IIRC, the only U.S.-flagged shipper at the time, and there were certain cargos that by U.S. law had to move only on U.S. flagged ships.
posted by webhund at 2:22 PM on August 17

The marketplace for shipping is highly competitive and right now with the economy in retreat (or just in recovery, if you believe the reports) there is a lot of it around and shipping rates are low.The Baltic Dry Index is a measure of this and will show how things have collapsed from the heyday of the market a couple of years back.

Ship owners are savvy people, but they're a little bit like hammers in a room full of nails, so their answer of late has been to shove their profits into more and more capacity that is suddenly about to become very surplus. Scrappage used to be an option for some, but the fleet is now so new and relatively high tech that it's unattractive, and scrap metal rates are low.

I don't think anyone is really subsidising shipping, though perhaps shipbuilding is able to attract subsidies (national financing or exim bank financing) to keep the shipbuilders in business.

As has been suggested before, sea freight is a very efficient way to move products around the world.
posted by sagwalla at 2:30 PM on August 17

So, to summarize:

(1) Contrary to popular belief, the industry has received tremendous assistance from many quarters.

(2) Governments have provided cheap facilities, cheap steel, cheap oil, and military protection.

(3) Banks have provided cheap money.

(4) The industry has relatively few direct responsibilities.


Externalized Costs:

- Pollution. Everything from the ships themselves, to shipyards, steel refining, steel mining. Typically externalized.


Subsidies (Direct or Indirect):

- Infrastructure - e.g., port construction

- National Industrial Policy Creates Low-Cost Freighters - Japan, and later South Korea created cheap steel, and manufactured low-cost freighters (and in a self-reinforcing cycle, the larger consumption of steel to make freighters lowered the unit cost of steel, resulting in even lower-cost freighters). In this sense, the international freighter fleet has been subsidized by entire nations. (And those nations moved up the economic ladder, and also received all the pollution, etc.) (See the Shin/Ciccantell paper).

- Financial - National financing in Japan, South Korea; see BW article for Germany

German banks finance freighters with cheap money

Bailouts / socialized losses - e.g., Hapag-Lloyd is getting a billion euros in bailout money. And it looks like the City of Hamburg got snookered.


Notes:

(1) Most of the industry is either European or Asian, not American. This is not an American story. The best experts, with in-depth knowledge, will most likely be found in Europe or Asia, or have roots or expertise there. (Note for other researchers who stumble across this.)

(2) China may be jumping in with both feet.

References:
BW article - thanks yoyo_nyc

And I found this paper by Shin/Ciccantell.

Thanks for responding and helping me navigate the waters.
posted by coffeefilter at 4:56 PM on August 17