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Overland vs seaborne trade

Czirják Ráhel 9489 Views 0 Comments , , , , ,

Since the diffusion of container shipping, considerably emerging from the latter half of the 20th century, most of global trade takes place by sea regarding both the volume and the value of goods. In the 21st century, however, more and more special needs arise increasingly encouraging also the promotion and development of modes of overland transport. The question is as to whether there will be a real economic rationality to the advance of modes of overland transport or the dominance of maritime transport will continue to prevail.

Introduction

Movement is as old as mankind, but we can talk about transport in its current sense since antiquity: transport activities evolved along the development of the division of labour, after the production of goods had appeared and ancient societies had been formed. We can talk about modes of land and water carriage from the dawn of the history of transport – the wheel was invented in the 4th millennium BC, around 2000 BC travelling by horse diffused, and rowing and later sailing boats appeared on water –, which were able to cover increasing distances with increasing efficiency as technology was developing.  Maritime shipping is a fine example; initially, it was coastal, then, thanks to an invention of the Chinese, the compass, crossing seas and oceans became possible.

The development of transport was given great impetus by the industrial revolution, initially with the utilization of steam power – both on land and water –, then, from the latter half of the 19th century, through the application of the combustion engine. Air transport is likely to have evolved a bit later, when, after failed attempts of  airships, the Wright brothers managed to fly a powered aircraft successfully in 1903.

During the 20th century, transport continued to develop rapidly, through infrastructure developments – such as the construction of motorways and the development of control systems – in addition to technological innovations related to vehicles. After World War II, “the development of high-speed vehicles started in rail transport, passenger cars became widespread in road transport, and tankers and container ships appeared in maritime shipping, while in air transport the first turboprop aircrafts then turbo jets appeared.”

This study paper focusses on a narrower segment of transport, i.e. goods transport, and its overland and maritime branches in particular. It aims at providing a starting point to decide whether land infrastructure developments are relevant while the dominance of maritime transport prevails.

Maritime transport

Modern container shipping evolved in the 1950s, and its capacities have been growing steadily ever since. 80 per cent of global trade is still conducted at sea, thus seaborne trade obviously constitutes the backbone of the exchange of goods and globalisation. In the latter half of the 20th century, the volume of goods transported by sea grew continuously, parallel with global GDP production and the value of trade in goods (this trend was shaken considerably only in 2009, with the outbreak of the world economic crisis).

The need for seaborne trade, however, is fundamentally influenced by economic growth, related to real production; its level has been permanently low since the economic crisis, which has an adverse effect on the sector. OECD’s Interim Economic Outlook issued in September, 2016 goes as far as saying that these figures, being well below past norms, imply that globalisation as measured by trade intensity may have stalled.

Another, simultaneously published OECD policy document claims that since the financial crisis the contribution to world trade from global value chains and trade liberalisation has plateaued and with creeping protectionism has gone into reverse (it is particularly relevant in the context of the trade war currently going on between the USA and China). The document concludes that substantial policy action is required to return to former growth rates.

The greatest advantage of maritime transport is that it is the ideal way to move big volumes of cargo relatively cheaply. In addition, it is a safe way of goods transportation as losses caused by incidents during transport have been very rare in recent decades. In comparison with road transport, the maritime industry is less dangerous for the environment, since this industry, moving 80 per cent of merchandise is responsible for only 12 per cent of the total of pollution generated by human economic activities.

The slowness of maritime transport, however, is a disadvantage; it is not suitable for carrying perishable goods and cannot always keep the pace required by global economic transactions. Besides, with the emergence of e-commerce, this way of transport is impractical for moving goods ordered with a short delivery time.

Basically, the greatest difficulty of containerised transport is to organise the loading of goods into containers, about which both the buyer and the seller may have different needs. In addition, empty containers owned or rented by a shipping company may mean various extra costs to freight customers. Due to the bankruptcy of South Korean Hanjin Shipping, a company also dubbed as shipping’s Lehman Brothers, several vessels of the company were stuck at sea for several months. This case highlights one of the potential problems of maritime transport: in a crisis situation, huge volumes of goods can be lost due to delays.

The profitability of maritime transport caused an enormous growth of capacities in the 2000s. The decline in demand after 2009, however, stopped growth for the first time in the history of the industry, which started a domino effect, extending beyond maritime transport. Insolvent companies were unable to service their bank loans, and this led many of the banks in the container industry to bankruptcy.

The crisis could show an example that excessive trust in the growth of a successful industry may do harm more widely. Another counterargument – or rather an issue to be resolved – on maritime shipping is the environmental aspect. “Green routes” drawn on the Baltic Sea, the Balearic Sea and the Ionian Sea and the reduction of allowed navigation speed may contribute to preserving the integrity of marine life, but would impose additional coasts on maritime shipping. This may make maritime transport disadvantageous on certain routes, but it is important to take into careful consideration whether it is the financial burden resulting from additional shipping costs or the environmental damage that poses a problem in the  long term.

Structure of international seaborne trade, 2014. UNCTAD

The most important argument for maritime shipping may be the fact that even if infrastructure development plans include road and rail routes, high-speed railways are still awaiting construction in most places. Port and other infrastructure based on maritime routes is very well-developed, and the construction of newer ports contributes to increasing trade volumes more easily than the difficult construction of a cross-border, standard railway system. Because of ambitious railway development plans and the more developed land infrastructure being built also in developing countries, however, it is worth having an overview of the potential of rail and road transport.

Rail transportation

Overland transport was revolutionised by railways, emerging as a result of the industrial revolution.

Freight transport, and the growing need to make raw materials, processed goods and consumer products available for anyone from ever longer distances, was therefore the first “raison d’être” for railways.

In the 20th century, globalisation brought raw materials to ports at lower cost; furthermore, with the development of road infrastructure, road transport was expanding. Thus, in spite of market growth in industrialised countries, the volume of freight transported by train has declined overall. Of all modes of freight transport, rail market share currently stands at 18 per cent in Europe (that means approximately

2,400 billion tonne-kilometres annually). In the 21st century, however, the share of rail freight transport may see an increase again, largely due to the fact that the need for optimising transport provides an ever wider scope for using combined, multimodal ways of transport, in which rail transport, as a complementary way of transport, is given a significant role.

Rail is an ideal way of transport for products the life-cycle of which is too short for maritime transport, and for low-margin products, the transport of which would be too expensive by air.

In short, three major factors can be highlighted from the advantages:

– it is faster than maritime transport (as a result, it reduces the capital costs of customers significantly). It takes only 15-18 days, depending on the route, which is half of shipping time. Thanks to faster transport, certain industries can adapt faster to changing market needs, which may be an important viewpoint. Furthermore, faster transport allows for faster rotation, it is unnecessary to maintain large storage capacities (accumulate stocks), which reduces capital costs. Transport costs depend on a lot of things, but, as a rule of thumb, rail transport is twice as expensive as maritime transport, and it costs a quarter of air transport – which is partly contributable to the fact that the Chinese government keeps rail transport costs artificially low;

– it is cheaper than air transport;

– currently, it is the most environmentally friendly way of transport after maritime transport.

Furthermore, rail transport has several safety benefits:

– modern terminal facilities have qualified staff and are fenced in (the railway police are mostly located directly at terminals); furthermore, they are under video surveillance;

– entry to the terminal is allowed with an access card only, under strict control;

– the cargo on the terminal territory is guarded by the security personnel;

– armed guards are present at terminals and stations and also on some of the trains.

The mode of transport is determined by the value of goods:  the more expensive a product is, the more it is worth transporting it by air. No other mode of transport can be competitive with the maritime transport of low-value mass products, such as clothes. Rail transport can be competitive in the transport of mid-value but heavy products such as motor vehicles and automotive parts. More sensitive electronic components, which would be expensive to be transported by air due to their size – such as servers, special equipment – may be better transported by rail because salty air may damage them during maritime shipping, and these avoidable losses may make rail transport cost-effective.

Road transport

The role of road transport has come to the forefront since the 1990s, with the decline of rail transport. On the one hand, it was contributable to the fact that speed had become the primary consideration in the economy, in which road transport still overtakes railways; on the other hand, infrastructure aspects also played a role, as not all logistics centres, factories or shop networks have industrial tracks, which is essential for rail transport. Although transport policies seek to shift overland transport to railways due to the considerable environmental impact of road transport, it still has a significant share.

Road transport traditionally has a dense network, as one can get to practically anywhere by road, while railway lines usually pass through only major settlements. As road transport offers door-to-door transport, it will always have a key role in global freight transport, even as a complementary to maritime or rail transport, as in most cases goods get to consumers from large distribution centres by road. The opportunities of road transport cover a wide range of cargo types as well, and even the routes can be easily modified in certain cases (as opposed to rail vehicles), therefore this mode of transport is the most flexible.

Apart from its advantages, road freight transport also has disadvantages. Over a certain distance (over 750 km, according to literature), or in the case of bulk haulage, it is not cost-effective to choose this mode.

Long waiting times (e.g. at border crossing points, due to ban on lorries, or accidents, road congestions), the diversity of extra fees added to haulage (tolls, vehicle entry permits) may also pose a problem, and it is also an important factor that this mode of transport is the most labour-intensive.

Summary: A comparison of the modes of transportation

Different modes of transportation have different characteristics, and certain attributes may constitute both an advantage and a disadvantage. Thus, the appropriate mode is chosen depending on the given product or cargo.

In the case of railways, for example, we can say that they are one of the most effective modes of transporting goods in long distances and in large volumes. It is faster than maritime transport – also suitable for transporting large volumes of goods – and it consumes approximately ten times less energy than road transport, therefore rail freight transport is significantly cheaper than transporting goods from one place to the other by trucks. Fixed-track transport allows for a high degree of predictability – as there are no traffic congestions, for example – and it is also safer than road transport.  But a fixed track is also a disadvantage, as it does not allow flexible, door door-to-door transport. By contrast, road transport is rather flexible, thanks to, on the one hand, an extensive road network, and, on the other, the fact that vehicles van be used at any time, which allows for door-to-door transport, also flexible in terms of time. Its capacity, however is more limited than in the case of vessels or trains, and its specific fuel consumption is higher than that of the other two modes of transportation.

Shipping is considered to be the cheapest mode of transportation – it is not a co-incidence that shipping is still responsible for 90 per cent of world trade – but there are several other features that must be considered in transportation for an optimal delivery of cargo. Vessels have the largest carrying capacities, but they represent the slowest mode of transport. Thus, shipping is primarily suitable for transporting materials that are not time-sensitive, bulk commodities, fuels, raw materials, building supplies, finished products.

Table 1 summarises the advantages and disadvantages of specific modes of transportation.

 

Rail Road Water transport
Advantages – faster than maritime transport → adapts faster to changing needs

– cheaper than air transport

– the most environmentally friendly mode of transport currently

– creates a stable link between connected areas

– capable of significant speed over long distances

 – flexible: door-to-door transport

– extensive network

– a suitable mode for transporting almost any kind of cargo

 – the cheapest of all modes to transport goods in the largest volumes
Disadvantages – inflexible transport (due to fixed tracks)

– its specific transport cost is the double of seaborne trade

– slower than air transport

– construction of rail tracks is expensive

– spatially limited (door-to-door transport is not possible)

 

 – smaller carrying capacity than rail

– more specific energy consumption

(compared to rail) and more hazardous to the environment

– slower than rail transport

– barriers: traffic congestions, ban on lorries, tolls

 – slow → primarily suitable for transporting materials that are not time-sensitive, bulk commodities, fuels, raw materials, building supplies, finished products

 

– high shares of fixed costs

(port, maintenance of vessels)

Table 1: Characteristics of modes of transport

Overall, it can be concluded that the selected mode of transportation basically depends on the characteristics of goods – value, volume, best before date, fragility, etc. –, but also transport routes can be determinants. Nevertheless, the distribution of global trade is very uneven, in favour of maritime transport. Thus, it is exciting to examine whether overland infrastructure developments are relevant while the dominance of maritime transport prevails.

THE BRI PROJECT

In the period of four years that has elapsed since the announcement of the New Silk Road (the “Belt and Road Initiative”, hereinafter referred to as BRI), considerable financial investments and plans have been made to actually set up an economic belt extending over the new Eurasia.  The China Development Bank has set aside some $900 million for hundreds of projects. The project is planned to be implemented in several phases, resulting in economic corridors linking Europe with Asia.  During the implementation of the project, the Research Institute of PAIGEO will start to review these corridors consistently and in full detail, completed by field work, to achieve a detailed and scientifically grounded picture of the Belt and Road initiative, its current results and its future. In the first phase of our research, we are studying the Eurasian Economic Corridor, and our choice can be justified by two reasons. First, this is the corridor that links China to Europe via Kazakhstan, Russia, Belarus and Poland, which is a network based on an already functioning rail link.  Second, the Eurasian corridor has also symbolic significance, as the launch of the BRI project was announced by Xi Jinping in, Astana, Kazakhstan – one of the key states of the corridor –in 2013.

The project will be continued by the exploration of the other economic corridors, during which the economic corridors passing through Pakistan, Central Asia as well as Mongolia and Russia, along the Trans-Siberian Railway line will be examined.

The BRI builds on several deficiencies: any appropriate, detailed maps of BRI corridors and their functioning routes are still unavailable. The international media coverage of the BRI is just as vague and obscure as the lack of exact maps: plans and opportunities are mentioned, while the project was launched five years ago. There is little known about specifics. It cannot be seen what goods move – or can move – on corridors linking Europe with Asia, and the exact volume is not known, either. The official regulations and economic policies of countries where the infrastructure project traverses are unknown. The existence and operations of logistics hubs and industrial parks along the route are not completely clear, either.

The project would endeavour to present specifics, trade projects already implemented within the initiative, seeking answers primarily to questions that are important also from a Hungarian perspective.

 

Authors: László Gere, Ráhel Czirják, Eszter Pálvölgyi-Polyák

References:

 

 

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