The Duck of Minerva

The Duck Quacks at Twilight

Sea of boxes

June 26, 2007

By now, you have probably heard about the recall of Thomas the Tank Engine toys, which are decorated with lead paint. While Lead-Foot Thomas is getting a lot of media attention right now, it’s only the latest in a string of serious safety problems associated with products imported from China. Over the last few years, there have been repeated recalls on children’s toys and jewelry due to lead contamination–all produced in China. Then there was the pet food debacle, in which wheat gluten tainted with melamine–a chemical that makes the protein content of the product appear higher and therefore more valuable– was associated with the deaths of hundreds–perhaps even thousands of pets. Less notice has been paid to another chemical contamination that is deadly to humans–the substitution of diethylene glycol, the primary ingredient in antifreeze, for pharmaceutical grade glycerin in toothpaste and cough syrups. Both are sweet, but poisonous diethylene glycol is cheaper than glycerin. The diethylene glycol-contaminated products were primarily destined for the Third World (Latin America and Bangladesh), though some tainted toothpaste has been found in dollar stores in the US. And today, there’s yet another recall, this time on imported tires, which are apparently missing an important safety feature that prevents tread separation.

All these products have something in common: made in China. Although the vast majority of products made in China seem to be perfectly safe, China’s lax regulatory environment means that the market can do what it wants. And the market wants cheap products, often with no questions asked. Scrupulous producers are at risk of being undercut by the unscrupulous, who have an incentive to shave off pennies by any means possible. Sure, they might get caught, but the chances are slim. You can thank Upton Sinclair, Ida Tarbell and the other muckrakers for the fact that it’s so much harder to get away with these tricks in the US.

Some people seem to have taken these incidents as evidence that one shouldn’t buy products made in China. On one parenting board, a poster admonished members to “know where the products they buy come from.” I nearly laughed out loud when I read that. Unless you are buying toys made by the Amish, it’s pretty much impossible to avoid “Made in China.” Low skill, labor-intensive jobs have almost entirely been exported to countries with abundant cheap labor–and China has become the largest world supplier of cheap labor.

Once upon a time, though, the relative cost of labor was not the primary determinant of the location of production. Sure you might be able to produce a product more cheaply overseas than in the US, but the cost of moving it to market was so high that it just wasn’t worth it. Instead, most products were produced locally–and imports were often luxuries rather than discount goods.

Over Memorial Day weekend, I actually managed to polish off a book I’ve been working on for a while: The Box: How the Shipping Container Made the World Smaller and the World Economy Bigger. Most people, when asked about what drives globalization, would probably talk about the internet and McDonald’s and Coca Cola and American movie blockbusters. But if you really want to contemplate globalization, start looking at the labels in your clothing. The shirt I’m wearing was made in Indonesia, my pants in India. My daughter’s shirt was made in Guatemala. I have clothing made all over the world: Vietnam, Sri Lanka, even Kazakhstan. My computer was “assembled” in China, though heaven knows where each of the component parts where made. The phone sitting next to me was made in Malaysia.

As I said, it wasn’t always like that. It used to be that the vast majority of things you bought were made close to home. New York City, for example, had a thriving garment industry because it was close to both the designers and the customers. Why? Because it cost a fortune to move things around. Remember “On the Waterfront?” In the “old days”, longshoremen loaded and unloaded ships’ cargo piecemeal. It often took over a week to unload and reload a ship during a port call, and it was easy for valuable cargo to “walk”. The bulk of the cost of transporting goods from one place to another was incurred as labor costs in port.

Containers, on the other hand, are efficiently loaded on and off ships and easily transferable to land-based transportation (rail or truck). The labor efficiencies are enormous. Container shipping has transformed the world economy by reducing the cost of shipping products to the point where shipping is a tiny fraction of the overall cost.

The transition to container shipping didn’t happen overnight, and it was punctuated with false starts and bad decisions. Arriving at a standard for containers–their size, their crane couplings, etc.–took years, and in the meantime, shipping companies invested in ships, containers, and port cranes that would become useless if and when standards were ever agreed upon. The longshoremen also suffered–though Levinson argues that the unions largely managed to negotiate deals that smoothed the transition (The Wire notwithstanding). It is telling, though, that the older, more established ports, where the unions fought hardest and most successfully to hold back the transition to container traffic, are also ports that died: New York, San Francisco, Boston. On the other hand, those older ports were also poorly situated for container traffic: old cities, with narrow streets that are difficult for tractor trailers to negotiate.

For the most part, The Box is a fascinating book (though my attention did wander during the lengthy and detailed discussion of the various labor negotiations and the extended wrangling over the standardization of container sizes). The explanation of the impact of the shift from traditional shipping to container shipping is, I think, extremely important to building an comprehension of the true drivers of globalization. I know it’s unoriginal to trash Tom Friedman, but having suffered through The World Is Flat last year, I was struck by the fact that nowhere in his pontification on the “global supply chain” did he mention container shipping. Large metal boxes, I guess, aren’t as sexy as open source software–nor is “Maersk Sealand” as compelling a brand name-drop. But the reason why it makes economic sense to make “Virgin of Guadelupe” statues in China and ship them to Mexico is that it’s so bloody cheap to ship them, and the reason it’s so bloody cheap to ship them is the container. If the shipping weren’t so cheap, it wouldn’t matter that labor is marginally cheaper in China than in Mexico.

By reducing shipping costs to a footnote, container shipping has made shipping itself into a footnote rather than a limiting factor. Instead, production decisions are made according to factor input costs–the relative costs of labor and capital. Container shipping has made classical trade theory (basically) true by reducing shipping costs to the point where they can be nearly assumed away, as typical in trade models. No wonder (orthodox) economists love the modern era of “free trade”–it makes them look right. But the dropping of trade barriers isn’t what drives globalization, it’s shipping, shipping, shipping.

So why is Thomas made in China? Because it’s cheaper to ship him here than to produce him here. The fundamental premise of the market, as my favorite econ professor liked to intone, is “buy low, sell high.” The logic of the market means that production of anything that is low-skill labor intensive will flow to a low-skill labor abundant market–China effectively exports its cheap labor to our expensive labor market. Buy low, sell high. And safety will continue to be a concern for these imported products until we can figure out how to effectively internalize the external cost of ensuring higher safety standards. Don’t think for a minute that the recall-associated costs to the owner of the Thomas franchise are higher than the profits associated with long-term production in China–this recall is merely a “cost of doing business”. Safety problems with products imported from China will not resolve themselves unless there is a genuine economic incentive placed on the producers (presumably by the American importers). The toothlessness of Chinese officialdom in face of the imperatives of market is on display in this account by a New York Times reporter who attempted to visit the factory producing the tainted Thomas toys. Don’t expect a robust regulatory regime to appear on its own, folks.

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