Globalization: Not such an endangered species after all

Rising shipping costs might not kill off global trade. Wily humans will find a way

Published July 9, 2008 8:41PM (EDT)

How the World Works is not alone in having assumed that the rise of container shipping has been a key globalization-enabler. Technological innovation in maritime transport -- leading to falling freight costs -- is often cited as a prerequisite for significant trade growth between countries. Nor is this just true of the post-World War II era. The first great period of globalization, from roughly 1870 to the outbreak of World War I, also witnessed sharply reduced shipping costs along with the spread of maritime transport innovation -- steel hulls, screw propellers, steam propulsion...

The popularity of this analysis explains why so many people are so obsessively watching the current oil-price driven uptick in shipping costs. If lowered shipping costs catalyzed globalization, then what happens with higher shipping costs? "Reverse Globalization!"

Global Trade and the Marine Transport Revolution, a new National Bureau of Economic Research working paper by two economists at Canada's Simon Fraser University, David S. Jacks and Krishna Pendakur, suggests, however, that the conventional wisdom has got it all backwards. After analyzing data on "over 5000 maritime shipping transactions in the period from 1870 to 1913," Jacks and Pendakur conclude that "rising incomes and convergence" created so much demand for trade that shipping costs fell as a consequence of increased trade volume and high incentives for new transportation innovations. (Thanks to Ryan Hahn at the Private Sector and Development blog for the tip.)

In this view of the world, the key innovations in the shipping industry were induced technological responses to the heightened trading potential of the period.

Freight rates, then, become a function of the "'demand' for globalization," write the authors.

As usual, I'm going to skip over all the math that the economists use to "prove" their thesis and just assume it is not only true for the period for which they crunch their data, but for the modern era of containerized shipping and highly automated, efficient ports.

The implications are provocative. If Jacks and Pendakur's argument holds, then perhaps the currently popular hypothesis that rising energy costs will reverse globalization isn't as strong as one might have thought. If rising incomes and the convergence of economies such as those of China, India, Russia and Brazil with the developed world are the real drivers of increased trade, then maybe we should be expecting human ingenuity to devise new ways of lowering shipping costs and increasing the efficiency of maritime transport, rather than a reversion to pre-globalization autarchy.

By Andrew Leonard

Andrew Leonard is a staff writer at Salon. On Twitter, @koxinga21.

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