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In this episode, we discuss the ships that carry grains, metals and minerals from where they are found or produced, to where they are needed. Shipping prices rise and fall with changing demand for goods; and changing supplies. Blocked passages, recessions or melting ice all affect where these ships can go, and how fast and cheaply we can buy the commodities we use every day.
This podcast series is produced by Fernando Di Laudo and Jonathan Davidar.
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Transcript
Roumeen Islam: This is the World Bank's infrastructure podcast. In this episode, we learn about the ships that carry bulk goods, that is, commodities around the world.
And the ships that bring them to you, the efficiency of the services these ships provide and the prices they charge to carry these goods across the world, matter to each of us. And the more they matter, that is, the higher our demand for goods from far away, the bigger the impact on their prices and services.
and how will policy surrounding infrastructure investments interact with shipping markets? Let's find out how.
Roumeen Islam: Good morning and welcome. I am Roumeen Islam, host of Tell Me How. And today I have, as my guest, Myrto Kaloutpsidi, professor of economics at Harvard University, specializing in industrial organization and international trade. She has been researching the impact of transportation costs and shipping on commerce and welfare. Welcome, Myrto. It's nice to have you with us.
Myrto Kalouptsidi: It's great to be here.
Roumeen Islam: Perhaps we could start with having you tell us why economic research and transportation, and in particular, shipping markets and costs are important in any study of international trade and development.
Myrto Kalouptsidi: So, first of all, And we actually saw this recently, given the delays in trade that cost us billions caused by both the blockage of the Suez Canal by the mega ship Ever Given as well as the sort that is in transport supply generated in the later phase of the COVID pandemic.
And all of this reminded the world, I think, of the vital role of this sector, which is sometimes invisible. It's not a sector we interact with in our daily lives. Yet, shipping costs are, are important. At this point, they are actually larger than tariffs, which have generated a lot of interest across economists.
And in fact, according to our research, if we change shipping costs by 1 percent, we're going to get about a 1 percent decline in trade, which is very substantial. That's substantial. Yes. So, our whole research is about how transport markets interact with international trade. And we essentially find that there are two channels through which transport markets affect trade. They relocate production and they tend to dampen the impact of macro shocks on the ground.
Roumeen Islam: Okay, we're going to go through some of these effects later, but could you just briefly explain what you mean by these two effects?
Myrto Kalouptsidi: Sure, so roughly transport costs matter, and just by virtue of the fact that they matter, they will end up relocating production. Now, they do this in specific ways that we can discuss later on once I explain the mechanisms a little better. And then, second, we find that So, what happens is the shock hits, and it affects also the shipping costs that the exporters have to pay. And this turns out to mitigate the initial effect of the shock. And all of this happens through the network of interconnected countries and we can come back to that.
Roumeen Islam: Okay. That's very interesting. We will certainly come back to that. You've done research on ships that carry bulk goods, such as grain, mineral ore, coal. And you refer to them as taxis of the sea? I found that a very interesting expression. Why do you refer to them that way and how are they different from other ships? And I'm actually particularly interested in hearing about how the market for their services functions.
Myrto Kalouptsidi: There are roughly two types of transport markets. So, one of them is point to point. The other one operates on itineraries. So, in the point-to-point segment, we have the bulk ships, which is the segment that we've studied. We also have oil tankers LNGs that carry natural gas, but also trucking. All of these are point to point. You have a carrier and a customer: they meet. And the carrier takes the customer from their origin to their desired destination. And then at the destination, they will go on to meet somebody else. So, carriers are essentially constantly searching for a cargo. They carry one customer at a time and they restart. It's very much liked a taxicab. In contrast, in the other category, we have container shipping, airplanes, and trains: and all of these have specific itineraries.
They are much more like buses, they have a schedule. They keep the schedule regardless of demand in the short run. And essentially different customers can place a cargo. So, these carriers will accumulate cargo from many, many customers. Some very small, it can be somebody moving from the US back to Europe or, some of them very big.
So, Walmart will put hundreds of boxes on a given container ship. So, it may sound surprising at first, why they operate so differently. And the main answer is economies of scale. So, the idea is that for container shipping, in order to succeed, a particular firm needs to have many ships, so they can actually be able to sustain an entire network of different origins and destinations.
In contrast, when it comes to tracking or shipping or bulk shipping, you can have one operator who can still survive in the market by essentially doing individual trips, much like a taxi driver.
Roumeen Islam: That's really different, yeah.
Myrto Kalouptsidi: Indeed.
Roumeen Islam: And I didn't actually know that one could think about these two types of shipping services so differently. And I assume that has lots of implications for how these goods markets work. And definitely, I hadn't thought about these similarities with the transport services. But to understand how this particular shipping market works, the one for bulk goods, you needed to collect a lot of data for your research. What were you looking for and where did you get it?
Myrto Kalouptsidi: Right. So that's an exciting feature of our research. So, we have, what is called AIS data. This means that essentially, we observe 5,000 ships, which is about half the world fleet every six minutes or so.
Roumeen Islam: This is from satellites?
Myrto Kalouptsidi: This is from terrestrial antennas and satellites that provide the exact location of these ships every few minutes. And what's also pretty interesting is that they also report essentially how deeply submerged each ship is at every point in time, which basically tells us whether a ship is loaded or not at any point in time. So, we can understand how these carriers search for cargoes.
Roumeen Islam: That's really interesting because without this advance in technology, you wouldn't have been able to do this research.
Myrto Kalouptsidi: That's right. That's right. We also collect information on shipping contracts that give us, shipping prices for specific trips. And we also collect other data such as weather along the oceans, fuel prices and other aggregate variables.
Roumeen Islam: Very good. What did the data reveal at first glance?
Myrto Kalouptsidi: The first interesting finding that the data reveals is that To give you some examples, China and India are the world's biggest net importers while Australia and North and South America are the world's biggest exporters. Now the backdrop story during our sample is that this is a time period when China is growing dramatically. It imports a lot, and it imports mostly these types of goods because it needs to build cities, factories, infrastructure. And the countries that are rich in these types of goods: Australia, Brazil, Northwest America, export these types of goods to China.
Now, these natural imbalances have important consequences. So, to give you one example, if we went out in the ocean and looked at all the ships that are sailing, we would see that 42 percent of them are actually sailing empty.
Roumeen Islam: Oh my God, 42 percent. That sounds very high!
Myrto Kalouptsidi: And to a good degree, this is just the consequence of these differences in natural inheritance across different countries. But it is surprisingly high. Now last, this is reflected in prices, which are largely asymmetric. So, let me give you an example. If you want to send the cargo from China to Australia, you have to pay around $7,000 a day. Well, the reverse trip from Australia to China costs around $10,000 a day. And the idea here is fairly simple.
When a ship owner has to take a cargo to Australia, he's happy because Australia is a good destination. He knows that when he reaches Australia, he's very likely to find another cargo there since Australia exports so much. In contrast, if he has to go to China, he knows that afterwards he will have to wait there or maybe travel empty back to Indonesia, or even back to Australia. And so, he commands a higher price to go to China in the first place he asked for a premium, essentially.
Roumeen Islam: Well, that's, you know, a little bit anti-intuitive because we think of China as being, a big exporter.
Myrto Kalouptsidi: Good points. So, remember, that's right, we are talking but we are focusing on raw materials. Now, if we were looking at container shipping rates, it would be exactly the opposite and it would be virtually free to ship from the US to China, but very expensive to ship from China to the US.
Roumeen Islam: Okay. So, you mentioned that shipping costs may lead to a reallocation of exports and imports. Could you expand on this and do you find evidence for this?
Myrto Kalouptsidi: Sure. Let me use an example. Let me focus on India. Again, India is one of the biggest net importers of the world, which means that essentially a bunch of ships are going to take cargo there. And then since India is a net importer, they will end up waiting or having to leave empty. What this means is that essentially at the shores of India, there is a chief supply of ships that, that end up there because of the imports. And this cheap supply of ships means it's cheaper for Indian exporters to export. So that essentially Indian imports subsidize Indian exports.
Roumeen Islam: Sorry, but these would be exports of what then? Same bulk goods?
Myrto Kalouptsidi: Correct. Still, it's always raw materials.
Roumeen Islam: Okay.
Myrto Kalouptsidi: So, there is a sort of complementarity between imports and exports, but in some sense, Indian exporters are going to over export because ships are cheap. And in that sense, the transport sector, reallocates production to India. You have Indian exporters that wouldn't export if shipping wasn't as cheap. And this may sound funny at first, but there is a well-known example from container shipping that has received a lot of press that has to do with China and the US.
The idea here is that containers, container ships go full of China to the US but empty from the US to China. Recall we have the reverse imbalance when it comes to manufactured goods. And so, essentially, we saw that the US started exporting basically trash to China: scrap metal, hay, and other sorts of very low value goods. And they did so because it was virtually free to ship a container to China. So, the reallocation happens because these exports wouldn't be happening if the price was the same to ship from the US to China as the reverse.
Roumeen Islam: So, anything that changes those relative prices, will change who ships what to where.
Myrto Kalouptsidi: Exactly.
Roumeen Islam: So that's how important the shipping costs are. And. Is that right?
Myrto Kalouptsidi: That's right.
Roumeen Islam: They could just completely change the pattern of trade. Now, there are other costs to shipping, such as fuel. Could you speak about how fuel costs might affect shipping profits and prices? And I ask this because, you know, there's so much fuel price changes and maybe even volatility that we see recently. So, it does a decrease in fuel costs, lower shipping cost, proportionately, or other factors mitigating this decrease?
Myrto Kalouptsidi: Certainly, So, let's consider a decline in fuel costs. This instantly represents a decline in a ship's operating costs, and this means that instantly it will also translate to a decline in shipping prices, which will then lead to a rise in exports. So that's the sort of direct mechanism through which changing fuel cost is going to operate. However, there is a less straightforward effect that is mitigated through the transport sector. So, let's take an example. Let's consider India again as a net importer, and let's consider a ship that just unloaded in India, and it's sitting at the shore. And all of a sudden as fuel costs go down, what's going to happen is that essentially the ship is now facing a lower cost of ballasting away from India. It is less tied to its current destination, which in some sense, increases its bargaining position once it meets a customer in India. This will lead to higher prices and thus a reduction in Indian exports.
Roumeen Islam: Thanks. This is not something you would think of intuitively because when you think of fuel costs falling, you think, oh, costs fall, it's good for everybody. And now you see that, actually, it really depends on how the market works for transportation.
Myrto Kalouptsidi: That's exactly right. And that's the dampening effect.
Roumeen Islam: You have this idea that fuel costs go down. Shipping costs go down, trade goes up, but this is dampened by the reaction of the transportation sector where ships are made better off because of this decline in fuel costs. So, if they then leave that country wherever they were, because they now find it economically more profitable to do so, then exports from that country would presumably be lower.
Myrto Kalouptsidi: Well, they will ask for higher prices to stay there, which further reduces exports from such regions. And into an increase in exports from the regions where ships would ballast to anyway, so net exporters. So, the idea is in some sense when fuel costs go down, the world becomes flatter. Distance matters less. And so essentially in some sense, the shipping sector matters less. Transport costs matter less and comparative advantages are pronounced. Trade is driven to greater extent by comparative advantages.
Roumeen Islam: Myrto, could we go on to talk about global macro shocks? Could you explain how these shocks may affect the pattern and costs of shipping and therefore trade?
Myrto Kalouptsidi: Sure. So, let's consider an example of a slowdown in China. So, the example that we simulate is a 10 percent decline in Chinese imports. So, recall, we're talking about bulk commodities, where China is a big net importer and a slowdown would essentially reduce these imports. So, let me tell you how this shock would propagate through the world in three steps: I'm going to start by what happens to China itself directly affected by the shock. And then what happens to China's neighbors. And then what happens to the rest of the world?
So, let me start with China itself. Once Chinese imports fall, Chinese exports are also going to fall. Remember that there is this complementarity between imports and exports. As China was importing a lot, ships were arriving in China, and then lingering there, waiting to find new cargo. This made supply of ships cheap, which made exports cheaper, and increased them. So once Chinese imports shrink, so do Chinese exports. Let me move now to China's neighbors. This is a pocket of the world that includes countries like Australia, Indonesia, India, Japan, South Korea. Now, first of all, there is going to be a direct effect when China shrinks, the exports of these countries are also going to fall because to a good degree, they export directly to China. So, think about Australia. As we mentioned, a few times, Australia exports a lot to China. China shrinks, of course, Australian exports are going to fall the same.
Roumeen Islam: And of course, China is a good example because it's a large country and a large market. I just wanted to mention that.
Myrto Kalouptsidi: That's exactly right. China accounts for a large fraction of trade flows and studying China makes it easy for us to see some of these effects. Now, within this group of countries, even countries that are net importers like India, you know, whatever they export they export to China, so exports in all of these countries are going to go down and that's the direct effect of the Chinese slowdown. However, there is a second less straightforward effect that comes through the transport sector. Okay. So, this pocket of the world is not necessarily balanced: you have the big importers China and India, the other big exporters Australia, Indonesia, and ships are happy to stay in this pocket of the world because they can do short, ballast trips, empty legs, back hauls, and then go back and forth between big importers and exporters.
However, once the biggest player of this group, China shrinks. Ships are going to relocate a way from this region of the world. There isn't as much demand for them anymore. So, these countries lose not just because of the direct effect, but also because of the reduction in ship supply in the region. Finally, let me come to the third step, which is China's distant countries, the rest of the world. And take Brazil as an example. Brazil exports a lot to China as we've said many times. So of course, again, there is a direct effect that when China shrinks, Brazilian exports are going to decline. However, these countries are going to now benefit from the ship reallocation. So, the ships that left from the pocket of Australia, Indonesia, China, and so on, will relocate, and where will they go? Most likely to places like Brazil or Northwest America. And so, this will mean when more ships flow to these countries, this will bring shipping prices down. And in fact, we find that these effects are substantial. So, if we look at Brazilian exports, we find that the decline in Brazilian exports is about 25 percent lower.
Roumeen Islam: When it's considered?
Myrto Kalouptsidi: When the transport market is considered. So, in response to a 10 percent decline in Chinese imports, the decline in Brazilian exports is 25 percent lower than you might expect.
Roumeen Islam: Now you also looked at how climate change may affect shipping because climate change may affect the routes that ships can take. And I know that you have an estimate of what the economic effects would be if Arctic ice melted so as to open certain passages, do you want to speak about that a bit?
Myrto Kalouptsidi: So, the Northwest passage is the sea route between the Atlantic and the Pacific oceans through the Arctic ocean. So, we ran an experiment where we study what would happen if the ice melts and the Northwest passage is opened up. So, this would mean in practice, a reduction in the travel distance between the Northeast America and the Far East, as well as Northern Europe and the Far East. So, let me start explaining what would happen by looking first at the countries that are actually directly affected by the opening of the passage, and then at the countries that are not directly affected by the opening of the passage.
So perhaps not surprisingly, Northeast America and Northern Europe would see their exports increase. And I say, not surprisingly because all of a sudden, these regions are brought closer to some of their biggest customers like Japan, South Korea, and China. Now what about Japan, South Korea and China who are also directly affected by the opening of the Northwest passage? We actually find that here, these countries are only marginally affected.
Roumeen Islam: What's the reason for that?
Myrto Kalouptsidi: So, take a ship off the shore of Japan, for example. Again, Japan is a big net importer. So as ship that just unloaded there is looking for options to travel somewhere else. And all of a sudden there is a new option in its portfolio, which is to travel quickly to a place like Northeast America or Northern Europe, which are attractive places. For example, Northeast America, to remind you, is one of the biggest net exporters of the world. So, all of a sudden, when the Northwest passage is open, a ship off the shore of Japan is better off. It has a stronger bargaining position and it can, at last command a higher price when it meets a Japanese exporter. This will tend to bring prices up in Japan, and decrease exporting marginally.
Roumeen Islam: So, it really affects who's exporting where and how much again?
Myrto Kalouptsidi: Exactly. Now, although the shock is local, it actually has global effects. So, take a ship anywhere in the world. Wherever the ship is, it now has more options, because Northeast America, a big exporter, has become a more attractive ballasting choice, a choice where ships can travel empty more quickly. This gives ships a stronger bargaining position. They can command higher prices. And this pushes exports down pretty much everywhere in the world. And so, I think this illustrates how network effects lead to the propagation of local shocks and they make them global.
Roumeen Islam: Yes. And of course, all these things happen assuming there are no other changes or policy changes. So, we're just looking at the impact of the shipping prices on trade. I just wanted to remind listeners. And of course, this applies to closure of passages as well. So, we looked at the opening of a passage and you've also looked at what would happen if there were blockages of these different passages that exist now, right?
Myrto Kalouptsidi: Yes. I'm inspired by where recent blockages of the Suez Canal by Ever Given, which was a mega ship of about 200,000-ton dead weight. We explore the impact of a permanent closure of three important passages: Suez, Panama and Gibraltar. Now, these passages essentially reduce nautical distances and thus the duration of specific trips. And we find that all of these passages have a substantial impact on world trade and welfare. So, for example, closing the Suez Canal permanently would reduce trade by about 3.5 percent and in some regions substantially more. So, in the Middle East, it would reduce trade by almost 25 percent.
Roumeen Islam: That's a very large percentage. So, what you've described shows, how important are the physical passages that are open to shipping as well as the structure and functioning of the bulk shipping services market, right? Both affect trade costs and patterns. And you've also shown the transport service providers respond to market conditions and incentives. And we have to take this into account when investments in port infrastructure are done, right? And you also compare bulk shipping market to trucking. So, let me now ask you could an Uber for shipping happen.
Myrto Kalouptsidi: So, this is an open question. And a question at which even industry participants disagree on what the answer is. As we discussed earlier, bulk shipping, and trucking, and taxis operate very similarly. They're point to point transportation, one cargo, one ship. So, essentially, they are what we call decentralized markets. You have many small agents, so you have a fragmented industry structure and there is no central marketplace or exchange when customers and carriers can meet and transact. This means that there is the potential for what is called search friction. Think about taxis and passengers and imagine a taxi driver driving in the streets. And there is a passenger who is one block away, but the driver doesn't know, and so the two do not get to meet. Even though this would have been a valuable transaction. Or think about real estate where your perfect house is for sale, but you actually don't know it because your broker doesn't have this house in their listings. So, this can lead to important inefficiencies.
Roumeen Islam: Yeah. They could increase inefficiency. That's what I was thinking, or not?
Myrto Kalouptsidi: Exactly!
Roumeen Islam: I was going to ask, but is this the most efficient solution: digitalization of this market?
Myrto Kalouptsidi: So, it's tricky. On one hand platforms can resolve these inefficiencies. And this is partly why they've been so successful in many different types of industries. On the other hand, platforms can also exercise market power. Now they can choose their prices, and it's not clear that these are going to be socially optimal.
Yes. So, it's tricky on one hand platforms would alleviate these frictions. And this is partly why they've been so successful in a range of different industries. So, think about the case of taxis with Uber and Lyft. A big advantage of Uber and Lyft is that we are no longer worried about finding an available driver or passenger on the other side. And this has been a great contribution of these platforms. On the other hand, platforms will choose their prices and as such may exercise market power.
So, this means that it's a concern for society.
Roumeen Islam: Yes. But I was just wondering, would you have any estimate of how much trade might be affected if this market were to go digital in an Uber-like way?
Myrto Kalouptsidi: Yeah. We are studying this question right now for now. What I do know for sure is that such frictions do exist in bulk shipping and they are actually substantial. So, if we could entirely wipe them out, social welfare would go up by about 14 percent. We're still working on figuring out the impact of a platform. And in this trade-off of reduction of frictions, trading frictions, versus market power, we still don't know who the winner is.
Roumeen Islam: Okay, very good. And I'm glad that you just spoke about these trade-offs because it makes me think that as technology and market structure evolve, so will regulation. As in every other sector that we study, other areas of the economy, wonderful.
Myrto, that was a fantastic discussion. Thank you very much. Certainly, learned a lot. Is there anything you'd like to add?
Myrto Kalouptsidi: Just that this research is available online on my website, and whoever's interested in taking a look at this in more detail, can find all the relevant papers there.
Roumeen Islam: Thank you so much, Myrto. It was lovely having you here.
Myrto Kalouptsidi: It was really great to be here, Roumeen, and I really enjoyed this discussion.
Roumeen Islam: Bye for now,
Myrto Kalouptsidi: Bye-bye.
Roumeen Islam: Thank you.
Roumeen Islam: So, what did we learn today, listeners? Well, quite a bit. Firstly, how the shipping market functions affects the benefits from trade, but it's not enough to assess the impact of hard infrastructure, such as ports on trade costs. It's equally important to understand how and why shipping costs and efficiency vary.
Secondly, a shock in one part of the market, whether it be a demand shock, a climate or a policy one, reverberates into different parts of the market by changing prices in the shipping routes, which connect continents. Shipping prices and routes adjust to dampen the immediate impact of shocks emanating from any one part of the world.
Thirdly, digitalization and other technological advances can change market structure and prices and how they benefit consumers and producers of shipping services will be partly determined by the quality of regulation. Thank you, and bye for now.
You can find more information about the podcast on www.worldbank.org/tell-me-how. If you've got questions or comments, we'd love to hear from you. You can also find us on all popular podcasting platforms. This episode was recorded in September 2021. Don’t forget to subscribe and thanks for listening. See you in two weeks!
Resources:
See publications by Myrto Kalouptsidi on the topic of bulk shipping