The Clear Case Today for Globalization Preserving National Security: Part 1
The MOC
By
John D. McCown
May 1, 2024
Figure 1: John McCown, second from right, speaks at Sea Air Space 2024
Last week I was in D.C. to participate in two panel discussions. One was the Navy League’s Sea Air Space conference where I emphasized the critical need for more U.S. flag sealift capacity while the other was American University’s Trade in the Political Crosshairs conference where I highlighted illogical claims now being made regarding trade. Attendees at the first conference were primarily focused on national security, while economists and trade enthusiasts populated the second conference. It is fair to say that these disparate audiences well received my observations.
On the drive back to New York – the Baltimore Washington Parkway and the New Jersey Turnpike lend themselves to reflecting on takeaways from visits to our nation’s capital – I found myself seeing lots of overlap between the goals of folks at both conferences. My thoughts went beyond the “World Peace through World Trade” slogan IBM started using after World War II. I must admit admiring the straightforward logic of IBM’s slogan when I first became aware of it, seeing it covering a large part of a NYC building when I arrived in the mid-1970’s. On the drive back, my thoughts were more focused on how David Ricardo’s 207 year old Theory of Comparative Advantage still has specific real world applicability today, first for economic reasons but now also for national security reasons.
In full disclosure, I come to the trade issue with the admitted bias that one would expect from someone who has been linked with the shipping industry for four decades. But my view was formed before that and goes back to an undergraduate economics class where I found Ricardo’s concept of comparative advantage an eloquent observation that also applied to areas well beyond trade. Indeed, that very concept is the foundation for the specialization and expertise that has been a prime catalyst for human progress.
My association with shipping has primarily been in the container sector, the segment that has grown at a higher rate than the overall growth rate in trade volume. My bias is evident when I say most economists have it backwards. Container shipping has not grown because of trade growth; it is trade that has grown because of container shipping and the extraordinary cost efficiency it has delivered. Globalization could not exist without container shipping. Fareed Zakaria, as insightful and articulate an analyst on global events as there is, had an excellent recent article on the misconceptions about globalization and the world scale benefits it has produced that also accurately highlighted the less recognized inflationary impact of tariffs.
I had the honor of being mentored by Malcom McLean, the inventor of container shipping, over the last 20 years of his life. If there is any single day with the aid of hindsight that globalization began, that date was April 26, 1956. Last month 68 years ago, the IDEAL X sailed from New York to Houston with fifty-eight containers on board. Malcom would tell me that he chose that name because his analysis had him believing that was the ideal way – meaning lowest cost – of moving freight between New York and Houston, which he already overseen as one of the country’s largest truckers. But he added the X because it was still experimental. When the voyage was completed and he studied the actual cost figures, it was experimental no more.
The new shipping process would first grow domestically and then expand internationally, getting more efficient as it was refined, and ships got bigger. Shipping costs that were typically 50%, 100% or even more of the cargo value were geometrically reduced. In the early 1980’s, Malcom would lead what could be called the second container revolution by augmenting the process advantages of container shipping with the scale advantages of the larger ships used in other sectors. Entering into the largest shipbuilding contract in history, the 12 Econships he built could carry 30% more containers than any ship afloat. While criticized by the industry as being too large, they ushered in the era of giant container ships that has never stopped. Today, the largest ships carry almost six times as many containers as the pioneering Econships.
In 2023, worldwide container volume according to Container Trades Statistics, an affiliate of the industry’s lobby organization, was equivalent to 173,523,199 TEU’s based on the standard industry measure of twenty-foot equivalent units. At an average cargo value of $54,493 per TEU, that works out to $9.456 trillion in cargo value moving in container ships in 2023. The total revenue of the container shipping industry in 2023 was $254 billion. In other words, that revenue represented just 2.7% of the value of the cargo moved. As some cargoes engage in more than one movement, there is a bit of double counting in the volume figure. However, the overriding point is that container shipping costs moving something halfway around the world are typically a negligible percent of cargo value. The built in barrier to trade that previously existed has almost disappeared as a result of transportation cost efficiency of container shipping.
While Ricardo’s insight that trade results in benefits to both countries was accurate and his theory should be elevated to a law, it clearly leads to disruption adversely affecting some individuals. Capitalism in its very nature is a disruptive process. The collective benefits are such that it is incumbent on policy makers to put in place frameworks that assist in the transition related to such disruption. To not establish a way to continue to move down a path with immense collective benefits would be akin to a policy maker saying that too many people die in cars and advocating they should be banished rather than calling for seat belts, speed limits and other safety measures. Tariffs for the most part are a blunt irrational response that do not solve the problem and only make it worse.
The earliest trade was concentrated around items that were not otherwise available. As it grew, governments found it to be a convenient source of revenue that also ostensibly protected domestic sectors as economies grew. For more than one hundred years, tariffs were the largest source of revenue for the U.S. government. In 1890, the $230 million in tariff income was 57% of total federal government receipts of $403 million. The average U.S. tariff in 1890 was 30% or six times the 5% average U.K. tariff. More so than any country, tariffs in the U.K. had come down as it embraced Ricardo’s teachings.
U.S. trade policy would change in 1913 when President Woodrow Wilson followed up on a campaign promise to reduce tariffs. Wilson believed that tariffs were unfair to those forced to pay elevated prices and were a regressive tax that reinforced the market power of the trusts that controlled many businesses. He advocated for and signed the Revenue Act of 1913 that lowered tariffs and replaced the income by establishing a federal income tax. In a speech, Wilson’s strong views against tariffs were clear when he said, “We have come to recognize in the tariff as it is now constructed, not a system of protection, but a system of favoritism, of privilege, too often granted secretly and by subterfuge, instead of openly and frankly and legitimately, and we have determined to put an end to the whole bad business.” Wilson wanted to fully displace tariffs that he saw as regressive with an income tax that was progressive and he believed fairer. He was not able to eliminate U.S. tariffs, but they would come down substantially and by 1920 were similar to the U,K’s average 5% level. Tariffs would spike during the depression in an attempt to support the domestic economy. That action is now broadly recognized as misguided and only served to deepen and lengthen the depression. More in part 2.
John D. McCown is a Non-Resident Senior Fellow at the Center for Maritime Strategy. Mr. McCown has four decades of experience related to the shipping industry and his analysis focuses on the intersection of merchant shipping and maritime commerce with national security.
The views expressed in this piece are the sole opinions of the author and do not necessarily reflect those of the Center for Maritime Strategy or other institutions listed.
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Center for Maritime Strategy
By John D. McCown
Figure 1: John McCown, second from right, speaks at Sea Air Space 2024
Last week I was in D.C. to participate in two panel discussions. One was the Navy League’s Sea Air Space conference where I emphasized the critical need for more U.S. flag sealift capacity while the other was American University’s Trade in the Political Crosshairs conference where I highlighted illogical claims now being made regarding trade. Attendees at the first conference were primarily focused on national security, while economists and trade enthusiasts populated the second conference. It is fair to say that these disparate audiences well received my observations.
On the drive back to New York – the Baltimore Washington Parkway and the New Jersey Turnpike lend themselves to reflecting on takeaways from visits to our nation’s capital – I found myself seeing lots of overlap between the goals of folks at both conferences. My thoughts went beyond the “World Peace through World Trade” slogan IBM started using after World War II. I must admit admiring the straightforward logic of IBM’s slogan when I first became aware of it, seeing it covering a large part of a NYC building when I arrived in the mid-1970’s. On the drive back, my thoughts were more focused on how David Ricardo’s 207 year old Theory of Comparative Advantage still has specific real world applicability today, first for economic reasons but now also for national security reasons.
In full disclosure, I come to the trade issue with the admitted bias that one would expect from someone who has been linked with the shipping industry for four decades. But my view was formed before that and goes back to an undergraduate economics class where I found Ricardo’s concept of comparative advantage an eloquent observation that also applied to areas well beyond trade. Indeed, that very concept is the foundation for the specialization and expertise that has been a prime catalyst for human progress.
My association with shipping has primarily been in the container sector, the segment that has grown at a higher rate than the overall growth rate in trade volume. My bias is evident when I say most economists have it backwards. Container shipping has not grown because of trade growth; it is trade that has grown because of container shipping and the extraordinary cost efficiency it has delivered. Globalization could not exist without container shipping. Fareed Zakaria, as insightful and articulate an analyst on global events as there is, had an excellent recent article on the misconceptions about globalization and the world scale benefits it has produced that also accurately highlighted the less recognized inflationary impact of tariffs.
I had the honor of being mentored by Malcom McLean, the inventor of container shipping, over the last 20 years of his life. If there is any single day with the aid of hindsight that globalization began, that date was April 26, 1956. Last month 68 years ago, the IDEAL X sailed from New York to Houston with fifty-eight containers on board. Malcom would tell me that he chose that name because his analysis had him believing that was the ideal way – meaning lowest cost – of moving freight between New York and Houston, which he already overseen as one of the country’s largest truckers. But he added the X because it was still experimental. When the voyage was completed and he studied the actual cost figures, it was experimental no more.
The new shipping process would first grow domestically and then expand internationally, getting more efficient as it was refined, and ships got bigger. Shipping costs that were typically 50%, 100% or even more of the cargo value were geometrically reduced. In the early 1980’s, Malcom would lead what could be called the second container revolution by augmenting the process advantages of container shipping with the scale advantages of the larger ships used in other sectors. Entering into the largest shipbuilding contract in history, the 12 Econships he built could carry 30% more containers than any ship afloat. While criticized by the industry as being too large, they ushered in the era of giant container ships that has never stopped. Today, the largest ships carry almost six times as many containers as the pioneering Econships.
In 2023, worldwide container volume according to Container Trades Statistics, an affiliate of the industry’s lobby organization, was equivalent to 173,523,199 TEU’s based on the standard industry measure of twenty-foot equivalent units. At an average cargo value of $54,493 per TEU, that works out to $9.456 trillion in cargo value moving in container ships in 2023. The total revenue of the container shipping industry in 2023 was $254 billion. In other words, that revenue represented just 2.7% of the value of the cargo moved. As some cargoes engage in more than one movement, there is a bit of double counting in the volume figure. However, the overriding point is that container shipping costs moving something halfway around the world are typically a negligible percent of cargo value. The built in barrier to trade that previously existed has almost disappeared as a result of transportation cost efficiency of container shipping.
While Ricardo’s insight that trade results in benefits to both countries was accurate and his theory should be elevated to a law, it clearly leads to disruption adversely affecting some individuals. Capitalism in its very nature is a disruptive process. The collective benefits are such that it is incumbent on policy makers to put in place frameworks that assist in the transition related to such disruption. To not establish a way to continue to move down a path with immense collective benefits would be akin to a policy maker saying that too many people die in cars and advocating they should be banished rather than calling for seat belts, speed limits and other safety measures. Tariffs for the most part are a blunt irrational response that do not solve the problem and only make it worse.
The earliest trade was concentrated around items that were not otherwise available. As it grew, governments found it to be a convenient source of revenue that also ostensibly protected domestic sectors as economies grew. For more than one hundred years, tariffs were the largest source of revenue for the U.S. government. In 1890, the $230 million in tariff income was 57% of total federal government receipts of $403 million. The average U.S. tariff in 1890 was 30% or six times the 5% average U.K. tariff. More so than any country, tariffs in the U.K. had come down as it embraced Ricardo’s teachings.
U.S. trade policy would change in 1913 when President Woodrow Wilson followed up on a campaign promise to reduce tariffs. Wilson believed that tariffs were unfair to those forced to pay elevated prices and were a regressive tax that reinforced the market power of the trusts that controlled many businesses. He advocated for and signed the Revenue Act of 1913 that lowered tariffs and replaced the income by establishing a federal income tax. In a speech, Wilson’s strong views against tariffs were clear when he said, “We have come to recognize in the tariff as it is now constructed, not a system of protection, but a system of favoritism, of privilege, too often granted secretly and by subterfuge, instead of openly and frankly and legitimately, and we have determined to put an end to the whole bad business.” Wilson wanted to fully displace tariffs that he saw as regressive with an income tax that was progressive and he believed fairer. He was not able to eliminate U.S. tariffs, but they would come down substantially and by 1920 were similar to the U,K’s average 5% level. Tariffs would spike during the depression in an attempt to support the domestic economy. That action is now broadly recognized as misguided and only served to deepen and lengthen the depression. More in part 2.
John D. McCown is a Non-Resident Senior Fellow at the Center for Maritime Strategy. Mr. McCown has four decades of experience related to the shipping industry and his analysis focuses on the intersection of merchant shipping and maritime commerce with national security.
The views expressed in this piece are the sole opinions of the author and do not necessarily reflect those of the Center for Maritime Strategy or other institutions listed.