The Economic Role of The

Shipping Industry
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Introduction
Around 90% of world trade is carried by the international shipping industry. Without shipping the import and
export of goods on the scale necessary for the modern world would not be possible. Seaborne trade continues
to expand, bringing benefits for consumers across the world through competitive freight costs. Thanks to the
growing efficiency of shipping as a mode of transport and increased economic liberalization, the prospects for
the industry’s further growth continue to be strong.

There are over 50,000 merchant ships trading internationally, transporting every kind of cargo. The world fleet
is registered in over 150 nations, and manned by over a million seafarers of virtually every nationality.

Shipping is a growth industry

Shipping plays a vital role in world trade and is the backbone of the world economy. Without ships and the
transportation services these ships provide, the world would not be as prosperous as it is today and many
countries would not be able to participate in world trade.

In recent years, shipping has proven to be a growth industry witnessing the increase in gross tonnage of the
world fleet by millions of tonnage every year. Since the worldwide economic downturn set in late 2008, the
interdependence of global economies has become even more evident. International trade – by any mode of
transport – has been affected immediately and dramatically.

Shipping Development over Last 5,000 years

The history of trade can be divided into three phases. The first started in the Mediterranean, spreading west
through Greece, Rome and Venice, to Antwerp, Amsterdam and London. During this phase a global trading
network gradually developed between the three great population centres in China, India and Europe. At first
this trade was by land and was slow and expensive, but when the voyages of discovery opened up global sea
routes in the late fifteenth century, transport costs fell dramatically and trade volumes escalated.

The second phase was triggered by the industrial revolution in the late eighteenth century. Innovations in ship
design, shipbuilding and global communications made it possible for shipping to be conducted as a global
industry, initially through the Baltic Exchange, whilst reliable steamships and technical innovations such as the
Suez Canal made it possible for liner companies to operate regular services. For the next century trade grew
rapidly, focused around the colonial empires of the European states and the framework of sea trade was
radically changed.

Finally in the second half of the twentieth century another wave of economic and technical change was
triggered by the dismantling of the colonial empires which were replaced by the free trade economy initiated at
Bretton Woods. Manufacturers set out to track down better sources of raw materials and invested heavily in
integrated transport systems which would reduce the cost of transporting these goods. During this period we
saw the growth of the bulk carrier markets, the containerization of general cargo and specialist shipping
operations transporting chemicals, forest products, motor vehicles, gas, etc. An important part of this
revolution was the move of shipping away from the nation states which had dominated previous centuries
towards flags of convenience. This brought greater economies and changed the financial framework of the
industry, but it also raised regulatory problems.

Shipping’s ‘industrial revolution’

Trade expansion on this scale would not have been possible without a major reform of the transport system.
During the next 35 years many new ship types were developed, including bulk carriers, supertankers, liquefied
gas tankers, chemical tankers, vehicle carriers, lumber carriers and, of course, container-ships.

Congestion and the Economy

Many industries have adopted transportation-dependent strategies designed to reduce non-transportation costs,
or improve customer service. These include siting facilities in areas where large numbers of potential
employees live within commuting distance, implementing “just-in-time” manufacturing and delivery concepts,
and siting facilities where package express air services can pick up a parcel in the evening and still deliver it
the next day.

Transportation supports regional economies in three distinct ways. One is providing some form of access
to/from other economies. Another is through the provision of services and infrastructure that have the ability to
reduce transportation costs. Finally, transportation supports economies by ensuring the services and
infrastructure provided are managed and operated in a manner that allows industries to minimize production
costs as well as transportation costs. In particular, this means it is very important to find ways to reduce
congestion or at least keep it from getting worse.

The Global Economic Role of Maritime Shipping

Marine transportation is an integral, if sometimes less publicly visible, part of the global economy. The marine
transportation system is a network of specialized vessels, the ports they visit, and transportation infrastructure
from factories to terminals to distribution centers to markets. Maritime transportation is a necessary
complement to and occasional substitute for other modes of freight transportation. For many commodities and
trade routes, there is no direct substitute for waterborne commerce. (Air transportation has replaced most ocean
liner passenger transportation and transports significant cargo value, but carries only a small volume fraction
of the highest value and lightest cargoes; while a significant mode in trade value, aircraft moves much less
global freight by volume, and at significant energy per unit shipped.) On other routes, such as some coastwise
or shortsea shipping or within inland river systems, marine transportation may provide a substitute for roads
and rail, depending upon cost, time, and infrastructure constraints. Other important marine transportation
activities include passenger transportation (ferries and cruise ships), national defense (Naval vessels), fishing
and resource extraction, and navigational service (vessel-assist tugs, harbor maintenance vessels, etc.).

Globalization is motivated by the recognition that resources and goods are not always collocated with the
populations that desire them, and so global transportation services are needed (and economically justified if
consumer demand is great enough). For example, until the 1950s, most crude oil was refined at the source and
transported to markets in a number of small tankers [sized between 12,000 and 30,000 deadweight tonnage
(dwt)]. However, economies of scale soon dictated that oil companies would be better off if they shipped larger
amounts of crude from distant locations to refineries located closer to product markets. Product could then be
more efficiently distributed to points of consumption using a host of transportation modes. This realization
ultimately led to the emergence of large tanker vessels (e.g., greater than 200,000 deadweight tons) and drove
down the per-unit cost of intercontinental energy transportation.
Similarly, rather than palletize grains, minerals, and other commodities, dry bulk cargo ships were designed to
deliver cargoes in raw or semi-raw condition from where they were found or grown to processing facilities
(e.g., mills and bakeries) closer to final market. Along with containerization and advances in cargo handling
and shipboard technology, these measures reduced crew sizes and long-shore labor requirements which also
reduced the per-unit cost of ocean cargo transport.
Lastly, globalization identified labor markets overseas that encouraged transport of semi-raw materials and
intermediate products where manufacturing costs were lower. With low-cost petroleum energy for vessel
propulsion, facilitated by vessel economies of scale, the per-unit costs of semi-finished and retail products
were minimized by multi-continent supply chains. Today it is common for agri-products to be harvested on
one continent, shipped to another for intermediate processing, transported to a third continent for final
assembly, and then delivered to market. For example, cotton grown in North America may be sent to African
fabric mills, and then to Asian apparel factories before being returned to North America for sale in retail stores.
Orange juice, wine, and other products have also found markets on continents where seasonal or climatic
limitations require an offshore source.

Another trend associated with globalization is the pace at which trade occurs. Globalization has encouraged
transactions of goods and services in smaller packets delivered “just-in-time”. This has increased the “velocity
of freight” which justified in the 1970s faster, small containerized vessels, and over the last two decades
justified faster, large containerized vessels. In a globalized economy, containerization offers the advantage of
integrated freight transportation across all modes.

Global Transport Industry

Today it has become a tightly knit global business community, built on communications and free trade.
Perhaps that will change. The relationship between transportation and a region’s economy depends upon its
industry mix, the location of industry growth, and the location of population growth. Between 1990 and 2010,
significant changes took place in the makeup of Oregon’s base industries, but very little change occurred in the
relative size of industries supporting household activities. For example, employment in the forestry, lumber
and paper industries declined while employment in the instruments and electronic equipment industries
increased. At the same time, the proportion of the workforce employed in retail trade and in the finance,
insurance, and real estate industries remained about the same.

The modern international transport system consists of roads, railways, inland waterways, shipping lines and air
freight services, each using different vehicles. In practice the system falls into three zones: inter-regional
transport, which covers deep-sea shipping and air freight; short-sea shipping, which transports cargoes short
distances and often distributes cargoes brought in by deep-sea services; and inland transport, which includes
road, rail, river and canal transport.

Shipping, Transportation and Economic Development

There is universal agreement among interest groups that transportation facilities and services are necessary to
enable economic development to occur. However, there is little agreement among interest groups on a specific
definition of “economic development.”

Economists define economic development as activities that result in increased average per capita incomes.
However, most common viewpoints of economic development can be generalized as follows:

1- Capital investment in high wage industries resulting from investment (e.g., transportation
improvements) that improves the competitiveness of a region;
2- Development of new territory that is separate from similar, existing developed areas;

3- Development/investment in specific built-up areas (e.g., central business districts, along light rail
corridors); or Specific developments (e.g., a new paper mill, a new microchip plant) at specific sites.
Factors limiting private-sector capital investment in a region can often be identified. These factors may be a
limited water supply, an inadequate land supply, limited sewerage and wastewater treatment capacity, an
insufficiently skilled workforce, congested highway segments, or difficult and time consuming access to
distant markets. When these factors are constraining and the limits are removed, private-sector investment will
create jobs. For instance, the recently improved aviation connection between Portland and Frankfurt, Germany
is expected to generate significantly increased trade and tourism between these parts of the world. Highway
improvements in the right places will have the same effect. The key element is identification of those factors
that constrain private-sector capital investment.

Some areas are characterized by large amounts of vacant land, constrained access to that land, and local
citizens’ desire to see it developed. Development of such land may be “economic development” if it attracts
new high wage industries along with supporting commercial and housing development that would not
otherwise locate in the region, or if it provides housing for population growth that cannot be accommodated in
more developed areas of the region. However, land development that merely diverts capital investment or
housing from other nearby areas provides little, if any, actual economic development to a region. In any case,
areas having roads designed for low-volumes and low-speeds will require new high-speed, high-volume roads
to accommodate large-scale urban or suburban development.

The implication of all of this is that transportation access and funds used to encourage or subsidize retail
development for the purposes of economic development usually will not be effective for the economy as a
whole. The use of transportation funds to subsidize retail development may be an effective way to address
other issues.
Finally, there is one universally agreed upon principle concerning transportation and economic
development. Modern transportation facilities are necessary, but not sufficient, to ensuring an area’s
development. Other necessary factors include available andcompetitively priced land, labor, capital, and
natural resources, as well as reasonable tax rates, an acceptable quality of life, and the presence of other types
of infrastructure.
The Global Economic Role of Maritime Shipping
Marine transportation is an integral, if sometimes less publicly visible, part of the global economy. The marine
transportation system is a network of specialized vessels, the ports they visit, and transportation infrastructure
from factories to terminals to distribution centers to markets. Maritime transportation is a necessary
complement to and occasional substitute for other modes of freight transportation. For many commodities and
trade routes, there is no direct substitute for waterborne commerce. (Air transportation has replaced most ocean
liner passenger transportation and transports significant cargo value, but carries only a small volume fraction
of the highest value and lightest cargoes; while a significant mode in trade value, aircraft moves much less
global freight by volume, and at significant energy per unit shipped.) On other routes, such as some coastwise
or shortsea shipping or within inland river systems, marine transportation may provide a substitute for roads
and rail, depending upon cost, time, and infrastructure constraints. Other important marine transportation
activities include passenger transportation (ferries and cruise ships), national defense (Naval vessels), fishing
and resource extraction, and navigational service (vessel-assist tugs, harbor maintenance vessels, etc.).

Globalization is motivated by the recognition that resources and goods are not always collocated with the
populations that desire them, and so global transportation services are needed (and economically justified if
consumer demand is great enough). For example, until the 1950s, most crude oil was refined at the source and
transported to markets in a number of small tankers [sized between 12,000 and 30,000 deadweight tonnage
(dwt)]. However, economies of scale soon dictated that oil companies would be better off if they shipped larger
amounts of crude from distant locations to refineries located closer to product markets. Product could then be
more efficiently distributed to points of consumption using a host of transportation modes. This realization
ultimately led to the emergence of large tanker vessels (e.g., greater than 200,000 deadweight tons) and drove
down the per-unit cost of intercontinental energy transportation.
Similarly, rather than palletize grains, minerals, and other commodities, dry bulk cargo ships were designed to
deliver cargoes in raw or semi-raw condition from where they were found or grown to processing facilities
(e.g., mills and bakeries) closer to final market. Along with containerization and advances in cargo handling
and shipboard technology, these measures reduced crew sizes and long-shore labor requirements which also
reduced the per-unit cost of ocean cargo transport.
Lastly, globalization identified labor markets overseas that encouraged transport of semi-raw materials and
intermediate products where manufacturing costs were lower. With low-cost petroleum energy for vessel
propulsion, facilitated by vessel economies of scale, the per-unit costs of semi-finished and retail products
were minimized by multi-continent supply chains. Today it is common for agri-products to be harvested on
one continent, shipped to another for intermediate processing, transported to a third continent for final
assembly, and then delivered to market. For example, cotton grown in North America may be sent to African
fabric mills, and then to Asian apparel factories before being returned to North America for sale in retail stores.
Orange juice, wine, and other products have also found markets on continents where seasonal or climatic
limitations require an offshore source, or entered into competition with domestic production at higher labour
costs.

Another trend associated with globalization is the pace at which trade occurs. Globalization has encouraged
transactions of goods and services in smaller packets delivered “just-in-time”. This has increased the “velocity
of freight” which justified in the 1970s faster, small containerized vessels, and over the last two decades
justified faster, large containerized vessels. In a globalized economy, containerization offers the advantage of
integrated freight transportation across all modes. Analogous to the more uniform transport of liquid crude oil
or unprocessed grains, containerization standardized the shipping package, reducing the per-unit cost of
transporting most finished goods.

The Role of Ports

The facilities provided in a port depend on the type and volume of cargo which is in transit. As trade changes,
so do the ports. There is no such thing as a typical port. Each has a mix of facilities designed to meet the trade
of the region it serves.

Ports and terminals earn income by charging ships for the use of their facilities. Leaving aside competitive
factors, port charges must cover unit costs, and these have a fixed and variable element. The shipowner may be
charged in two ways, an ‘all-in’ rate where, apart from some minor ancillary services, everything is included;
or an ‘add-on’ rate where the shipowner pays a basic charge to which extras are added for the various services
used by the ship during its visit to the port. The method of charging will depend upon the type of cargo
operation, but both will vary according to volume, with trigger points activating tariff changes.

The Shipping Companies

A striking feature of the shipping business to outsiders is the different character of the companies in different
parts of the industry. For example, liner companies and bulk shipping companies belong to the same industry,
but they seem to have little else in common. In fact there are several different groups of companies involved in
the transport chain, some directly and others indirectly. The direct players are the cargo owners, often the
primary producers such as oil companies or iron ore mines and the shipowners (shipping companies).
However, in the last 20 years they have been joined by two other increasingly important groups: the traders
who buy and sell physical commodities such as oil, for which they need transport, making them major
charterers; and the ‘operators’ who charter ships against cargo contracts for an arbitrage. Ship managers and
brokers are also involved in the day-to-day commercial operation of the business. Each has a slightly different
perspective on the business.

Each of The suppliers, including managers, ship repairers, shipbuilders, equipment manufacturers and
shipbreakers are a distinctive business with its own special culture and objectives. Ship finance forms another
category, again with distinctive subdivisions, as do lawyers and other associated services such as ship
surveying, insurance and information providers.

The Role of Finance in Shipping and Ports

The growth prospects and capital requirement to finance projects, namely shipbuilding, ports development,
mergers and acquisitions, have attracted the attention of large financial firms and changed the relationships
finance was traditionally having with the industry. Financialization, as a proxy for the growing influence of
capital markets, their intermediaries, and processes in contemporary economic and political life—has attracted
growing academic, political, and popular attention (Pike and Polllard, 2010). Supported by financial
institutions, maritime shipping companies and global terminal operators have built an impressive portfolio of
assets. Finance has made a complex industry even more complex with an array of new players such as
sovereign funds and various stakes.

While financialization shifted the relations between the port industry and the trade patterns it is servicing, this
relation is likely to shift again towards a new paradigm better placed to assess risk. before the economic crisis
ports and terminals had experienced the arrival and normalization of what Froud and Williams (2007) termed
as a ‘culture of value extraction’: financial principles interpreted port businesses as abstracted bundles of
financial assets and liabilities to be traded for higher economic returns than the existing configurations are able
to deliver. In the aftermath of the economic crisis, the broken link between, (a) financial institutions whose
decisions have assumed a central role in port development and directed towards particular corporate strategies,
and, (b) the territorial and relational specialties of economic environments and markets within which ports and
terminals develop, might be reestablished in a way that previously ignored concerns, like the organization of
production factors, trade developments, regulatory regimes, localized corporate and social cultures, will once
more condition decisions to invest. Given this reconnection, uneven geographies of future financialization
processes, in terms of assets investments, profitability opportunities, and exclusion potentials, that is observed
in other sectors might also apply in the port sector, reversing the observed in the pre-crisis period ‘globalised’
reckless nature of in financial actors involvement.

Conclusion
Because shipping is a service business, ship demand depends on several factors, including price, speed,
reliability and security. It starts from the volume of trade, how the commodity trades can be analysed by
dividing them into groups which share economic characteristics, such as energy, agricultural trades, metal
industry trades, forest products trades and other industrial manufactures. The shape of the PSD function varies
from one commodity to another. The key distinction is between ‘bulk cargo’, which enters the market in ship-
size consignments, and ‘general cargo’, which consists of many small quantities of cargo grouped for
shipment.

Bulk cargo is transported on a ‘one ship, one cargo’ basis, generally using bulk vessels. Some shipping
companies also run bulk shipping services geared to the transport of special cargoes such as forest products
and cars. To meet marginal fluctuations in demand or for trades such as grain where the quantities and routes
over which cargo will be transported are unpredictable, tonnage is drawn from the charter market.

General cargo, either loose or unitized, is transported by liner services which offer regular transport, accepting
any cargo at a fixed tariff. Containerization transformed loose general cargo into a homogeneous commodity
which could be handled in bulk.

This changed the ships used in the liner trades, with cellular container-ships replacing the diverse fleet of cargo
liners. However, the complexity of handling many small consignments remained and the liner business is still
distinct from the bulk shipping business. They do, however, go to the charter market to obtain ships to meet
marginal trading requirements.

Specialized shipping falls midway between general cargo and bulk, focusing on high-volume but difficult
cargoes such as motor vehicles, forest products, chemicals and gas. Their business strategy is generally to use
their specialist investment and expertise to give the company a competitive advantage in these trades.
However, few specialist markets are totally segregated and competition from conventional operators is often
severe.

Sea transport is carried out by a fleet of 74,000 ships. Since technology is constantly changing and ships
gradually wear out, the fleet is never optimum. It is a resource which the shipping market uses in the most
profitable way it can. Once they are built, ships ‘trickle down’ the economic ladder until no ship-owner is
prepared to buy them for trading, when they are scrapped.

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