Climate change is a global problem. Problems at that scale have no easy solutions. In 1992, the international community came together to recognize climate change formally. Five years later, they took the first step in tackling it in Kyoto, Japan.

The Kyoto Protocol established an international emissions trading system. Each country's emissions were limited (the cap), and they could buy or sell their emissions rights (the trade). This cap-and-trade system cemented the role of carbon pricing as a key mechanism to incentivize companies and governments to reduce their emissions at the lowest possible cost. However, the Kyoto Protocol was voluntary, the US and Canada withdrew without consequences, and no new countries signed on.

One of the limitations with the Kyoto Protocol — and subsequent Paris Agreement of 2015 — is the structure does not deter free-riding behavior. The atmosphere is a global public good, so cooperation on GHG emission reduction and removal presents a prisoner's dilemma.1 There are incentives for actors to pursue their interests without contributing to the cost of abatement. More specifically, since the Kyoto Protocol and Paris Agreement are voluntary, there's a strong incentive for countries not to participate and for those that do to understate their emissions and miss objectives. Even if governments are motivated to reduce their emissions — perhaps for international political reasons — there is still an incentive not to participate in the international agreements. Cooperating with other countries would place more accountability on those internal efforts, especially countries with large footprints. The result is a noncooperative free-riding equilibrium where a few countries undertake strong climate change policies, but we're worst off overall.2

We typically think about this problem from a geopolitical perspective, with each actor being a public entity. However, the same problem is encountered with voluntary emissions reduction efforts in supply chain networks, compounding the lack of progress on the international stage.

To illustrate the problem in supply chain networks, we need to look at how companies measure GHG emissions. The GHG Protocol, with three "scopes" of emissions, is one of the most common frameworks. Scope 1 emissions are from sources owned or controlled by a company. Scope 2 emissions are from electricity purchased by the company. Scope 3 emissions are everything else. Except for highly vertically integrated companies and the special carveout for electricity, supply chain emissions are in Scope 3.3

We could debate the merits of this framework; however, if we focus our lens on supply chain networks, the segmentation is straightforward: emissions from sources owned or controlled by the company versus its supply chain network.

Before moving on, it's worth considering Scope 2. Electricity is one of the largest sources of emissions for many companies, and there are many opportunities to increase energy (electricity) efficiency. Electricity is also typically supplied through a grid providing unique opportunities to incentivize lower-emissions generation. The same can't be said for Scope 3, which may be why the GHG Protocol, Science-Based Targets, and other accounting, goal-setting, net-zero, and climate-neutral frameworks consider Scope 3 optional or provide exceptions/exemptions.

With international climate negotiations, the structure of those agreements led to a prisoner's dilemma and free-riders. The same problem occurs in voluntary efforts within supply chain networks. Scope 3 emissions reduction can be a cooperative effort among network actors. However, the incentives for those actors are not to participate in emission reduction of any kind (scenario 1), or those who do to focus on Scope 1 and not cooperate on Scope 3 (scenario 2). Let's unpack this a bit further.

There are two scenarios in this incentive structure, resulting in a lack of cooperation on Scope 3 emissions ("Scope 3 paralysis"). The first scenario is a classic free-rider company enjoying the benefit of the efforts of other companies without any of the cost. The second scenario is a company that is motivated to reduce emissions, but the incentive structure encourages them to focus on Scope 1. And just like in international negotiations, they are incentivized to underestimate their Scope 1 emissions. One difference is there may be less incentive for them to miss their voluntary targets because accountability to those targets may be customers and investors outside of the Scope 3 network. However, both cases still trap actors in the prisoner's dilemma. The result is a noncooperative free-riding equilibrium where a few companies undertake strong climate change policies, but we're worst off overall. Sounds familiar.

Despite the impasse, there may be solutions we can draw on from international negotiations for voluntary efforts.4 And since the scale of voluntary emissions reduction efforts is smaller, and private sector actors can often act more nimbly, we may be able to test these solutions quickly. On the international stage, there is an opportunity in Glasgow this fall to build upon the Paris Agreement, but I won't speculate where international climate negotiations may go given the turbulence in the political area.

One of the challenges with climate change is it's a global problem, and it's natural to attack it with global solutions. However, we can narrow the scope of cooperation to a smaller number of powerful actors and change the incentive structure. William Nordhaus calls this a "Climate Club."5 Countries who join the club agree on a common objective and penalize those who are not in the club. This scope is similar to regional and bilateral trade agreements. The difference with trade agreements is that instead of lowering trade barriers, a climate agreement would use carbon pricing mechanisms to harmonize in-club objectives and impose penalties on countries outside the club.

Carbon pricing is a critical component of this strategy. The basic idea is to attach the costs associated with GHG — typically focused on CO2 — emissions to the source of those emissions. In addition to abatement costs, significant costs come with the accelerating frequency of destructive fires, floods, hurricanes, heatwaves, and other manifestations of climate change. The problem is homeowners, businesses, and taxpayers pay those costs irrespective of their contribution to the problem (GHG emissions).

Two basic parameters define a carbon pricing strategy: quantity and price. Regulatory and voluntary systems differ based on what parameter is variable (or market-based) versus policy-based. We hold one parameter constant — and change it based on a separate policy — while the other will be variable.

Governments use two carbon pricing strategies: carbon taxes (or fees) and emission trading systems (ETS). Many economists argue that a carbon tax is the most cost-effective lever to reduce carbon emissions at the scale and speed necessary to address climate change.6 With a carbon tax or fee, policy sets the price of carbon, and the payer's emissions determine the quantity. This strategy incentivizes payers to lower their emissions and lets market forces determine how best to do so.

In contrast, an ETS defines a limit or baseline for emissions quantity and leaves the market to determine the price. The Kyoto Protocol was a cap-and-trade system based on emissions limits. Some ETSs use a baseline rather than a limit (called "baseline-and-credit" systems). If a regulated emitter exceeds their baseline, they surrender credits. If they reduce their emissions below their baseline, they receive credits that can be sold to other emitters. 

So far, over 60 jurisdictions worldwide have implemented carbon taxes or ETSs, representing over 20% of global greenhouse gas (GHG) emissions.7 Europe has the largest and arguably most successful carbon market with the EU Emissions Trading System (EU ETS).8 This month, the European Commission laid out plans to expand the EU ETS to sectors that were previously exempt — notably maritime shipping and aviation — and introduced a new tariff called the Carbon Border Adjustment Mechanism (CBAM). The CBAM aims to protect European companies from foreign competitors that are not subject to EU climate policies. Essentially, the EU is pursuing the general approach outlined by Nordhaus. They have a robust ETS that harmonizes the price of carbon across a broad swath of the EU economy, and the CBAM penalizes imports from outside of the EU climate-strategy club. (The CBAM also has the potential to encourage other countries like the US to follow, but I'll save that discussion for another post.9)

Let's consider this solution for Scope 3 emissions reduction in a supply chain network. First, we narrow the scope of cooperation to a relevant segment of the supply chain network. In some cases, we can narrow the scope to parties connected to the physical supply chain. However, physical traceability is challenging. For agriculture-related industries, the Value Change consortium proposes a market connection in a "supply shed."10 For sustainable aviation fuel, the Smart Freight Centre and MIT's Center for Transportation & Logistics broaden the scope to any actors in the value chain, including fuel producers/distributors, air carriers, third-party logistics companies (3PLs), travel management companies, as well as shippers and business travelers who purchase air transportation services.11

For the air cargo value chain, a shipper may purchase air cargo services from a small list of 3PLs they have contracts with and trust to manage the movement of their cargo. If the shipper wants to reduce emissions associated with that air cargo — Scope 3.4 — they would do so by working with their 3PL partners. These 3PLs would then work with air carriers — the companies that directly manage the aircraft — and the air carriers would work with their fuel suppliers. This cascade builds a coalition of partners within the supply chain network, collaborating on emissions reduction related to air cargo.

Moreover, that emissions reduction coalition is the same supply chain network already working together to move air cargo. And that's precisely the point. Supply chain networks are primed for cooperation on emissions reduction.

These coalitions are not without precedent as well. In aviation, the World Economic Forum has convened a coalition of organizations, including Rocky Mountain Institute, the Energy Transitions Commission, Airbus, Boeing, Heathrow Airport, KLM, Shell, and others. Their objective is to "align on a transition to sustainable aviation fuels as part of a meaningful and proactive pathway for the industry to achieve carbon-neutral flying."12 Similar coalitions are forming around emissions transparency, raw material supply chains, and other complex topics.13

In addition to coalitions, we need a mechanism to harmonize carbon prices and protect companies inside the coalition. Carbon pricing is often considered a regulatory mechanism, but there are regulatory and voluntary mechanisms, and both are growing in importance.

The most common voluntary pricing mechanism is a carbon credit used for offsetting. A voluntary carbon credit is similar to regulatory credits generated in cap-and-trade or balance-and-credit systems, but parties in a voluntary market are not required to buy or sell credits. For voluntary buyers, carbon credits offer a way to "reduce" their emissions by paying another party to perform the reduction or removal. This strategy is typically more cost-effective than investing in the processes and technology needed to reduce emissions in their operation. Not surprisingly, offsets are controversial, and for this discussion, we can set that debate aside.

In our supply chain coalition, we can use the same carbon credit concept to standardize how we collaborate on emissions reduction. If we are the company that needs cargo flown by air, we are concerned with our Scope 3 emissions. However, since we do not own the aircraft or produce the fuel, we must work with those companies to deploy the emission reduction processes and technologies (e.g., sustainable aviation fuel). This process of directly intervening in our supply chain network with a carbon credit-like mechanism is called "insetting."14

Putting this all together, we can sketch out a potential solution to our Scope 3 paralysis. Rather than ignoring those emissions or buying offsets, we can work toward direct intervention in our supply chain by forming coalitions with our suppliers and customers ("Climate Clubs"). Within these clubs, we harmonize the price of carbon using an insetting mechanism, which builds on some of the infrastructure used for offsetting (e.g., accounting methodologies, verification protocols, registries, etc.).

To complete the analogy with Nordhaus, we still need a way to "penalize" companies outside of our club. However, there is a more natural solution for this in the private sector. We don't need a tax, which would run afoul of collusion and other regulations. Since we already have business relationships with the coalition members, we strengthen those relationships by collaborating on emissions reduction. In some cases, those relationships may be one or more linkages removed, which strengthens the network. That's good business practice and means more business will get done. I'll buy more from you, you'll sell more to me, and the "penalty" for those outside of our club is they're left out of this flywheel of decarbonizing growth.

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Have thoughts or feedback? Did I miss anything? Email me at kellen.betts@gmail.com. You also can reach me on LinkedIn.

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Let’s start with an observation from the 2021 State of Supply Chain Sustainability.1 According to the 2,400 people who responded to the survey — the vast majority of which work in a supply chain role — end-of-life management and supply chain circularity were less of a focus than the prior year for both goals and investments (see Figure 1). One notable exception to this is the healthcare industry. (I would encourage you to explore the data for yourself and see where your industry stacks up.)

This observation raises several interesting questions. First, I would love to better understand why companies are less focused on supply chain circularity. I suspect that the pandemic and other events of 2020 put their focus on other areas of sustainability such as employee welfare and safety or supplier diversity, equity and inclusion (DEI). However, I don't have data I can point to for that analysis today.

The question I want to address builds on the definition of end-of-life management and supply chain circularity. It could be argued that these terms do not capture the essence of circular supply chains or the broader concept of a circular economy. 

Staying within the context of the survey for the moment, it does make sense to narrow the concept of circular supply chains to end-of-life management and supply chain circularity. One challenge when constructing a survey like this is using terms that allow measurement specificity with complex concepts that overlap. A broader definition of circular supply chains would overlap many if not most of the topics in that figure, thus reducing the specificity of the analysis. This balance has to be weighed with most of those measures. Using more granular terms would reduce overlap and increase the survey's length and complexity, which reduces response.

Now, let's take a step back and consider the broader concept of a circular supply chain. When does it make sense to talk about a circular supply chain rather than more narrow strategies like end-of-life management? This question is about ontology and methodology. (To be clear, I don't mean the methodology of the survey referenced above but the methodology of supply chain theory and strategy.) Unpacking this question lies at the heart of my approach to this project, and it's why I wanted to restart post-hiatus with this topic.

A circular economy — and the circular supply chains in it — is defined in contrast to the linear economy and linear supply chains. My first introduction to these concepts came from Cradle to Cradle by William McDonough and Michael Braungart almost two decades ago.2 The field has advanced tremendously since then, with the Ellen MacArthur Foundation3 helping lead the charge.

The basic concept of a circular economy is simple. The way material things are brought to market (supply chains) flows in two ways — at least definitionally. The supply chains in a linear economy flow is a straight line — hence "linear" — from raw material extraction to a landfill when a product reaches the end of its life. This is often called "take-make-waste" (see Figure 24).

In contrast, supply chains in a circular economy use what a linear economy considers "waste" as inputs to upstream processes. If we freeze the frame of reference, the return of materials and/or products to the supply chain creates loops and a reverse flow — the geometric terms go a long way in illustrating the difference between the linear and circular models. Many processes can close these loops, including reusing, repairing, remanufacturing, recycling, etc. Figure 35 illustrates these loops.

This framework — linear-vs-circular supply chains — is a simple ontology for complex supply chains. Additionally, the assumptions this framework makes can be evaluated based on their network topology.6 A simple linear supply chain is equivalent to serial systems where each echelon (node) has a single predecessor and single successor. Visualizing a serial system (a in Figure 4) looks identical to the linear supply chain above.

Serial systems (a) are important from a theoretical perspective because there are robust techniques to solve problems using stochastic-service and guaranteed-service models. The limitation with serial systems — and the linear supply chain concept more generally — is that it often doesn't resemble supply chains. For example, in a serial system for distribution there is only a single facility at each step. Products flow from a supplier to a single distribution center, then to a single retail location, and finally to a customer. If we want to model multiple suppliers, facilities, and/or customers, we have to aggregate the characteristics for each into a single node (e.g., average customer demand) or use more complex network topologies.

Assembly systems (b) describe a typical bill-of-material structure for product supply chains allowing multiple sources for materials and assembly upstream. These are then consolidated as they move downstream toward the final product. From a theoretical perspective, assembly systems are useful because they can be transformed into an equivalent serial system and take advantage of serial solution methods. Distribution (c), tree (d), and general (e) systems are more complex but they resemble many supply chains. And there are techniques such as integer and dynamic programming to solve some guaranteed-device models. Often, especially for complex general systems, there are no solutions.

This is also where we can start to explore the models for circular supply chains. Circular supply chains are based around loops where products and materials flow back upstream to serve as inputs. There are no reverse flows or loops for assembly, distribution, and tree systems (hybrids of assembly and distribution). In graph theory, we call these cycles. Cycles can be directed — meaning the arrows in the graph flow one way — or undirected — where we remove arrows, and flows can go both ways. General systems allow cycles, so we use this form of network topology to model circular supply chains. One crucial assumption we make here is that products and/or materials flow back within the boundaries of the supply chain. For example, we recycle aluminum cans which feedback into the production of new aluminum cans.

It's also possible for those flows to occur outside of the boundaries that we define for our supply chain. For example, recycled aluminum can be used in the production of other aluminum products. In this case, we can use a more tractable tree system because the aluminum flows outside of the system. So if we want to include the loop in our system, we have to expand the boundaries — and complexity — of our system.

This is where our linear-vs-circular framework starts to break down. Both serial and general (with cycles) systems are powerful analytical tools. However, with general systems there are many cases where we will not be able to evaluate solutions and have to simplify the system to something resembling a linear supply chain. That may or may not be ok. It depends on what you're trying to do, and it doesn't address the question I am trying to answer: When does it make sense to talk about a circular supply chain?

The answer to this question sneaks in when we consider the boundaries of our supply chain. As discussed above, the loops that are introduced for a circular supply chain can be within the boundary — and we'll have our work cut out for us if we want to solve optimization problems — or not. If the loop is not within the boundary, then it's not really a loop. Instead, we treat that node or flow as a boundary. For example, we may be using recycled aluminum as the input for our aluminum can production, but if that recycling loop is outside of the boundary of our system, that material input is no different topologically than virgin material.

This result may seem obvious, and this whole discussion of network topologies unnecessary. However, what is not as obvious is when we define those boundaries. That is when our linear-vs-circular framework breaks down. And it has significant implications for our ability to develop solutions to circular supply chain problems. Those solutions will be inherently linear. We may be using better materials, but we're not actually talking about a circular supply chain — it's linear.

The alternative is to expand the scope of our model to include the loop. If we do so, developing solutions will be much harder, but at least we're capturing the circular flow and the network connections needed to create new loops. This is why many practitioners in the space advocate for thinking about small loops. It reduces topological complexity, and the problems are more tractable. 

So if we consider the original question — when does it make sense to talk about a circular supply chain — we approach an answer when we define the boundaries of the supply chain. If we are building a new supply chain, we have the opportunity to define those boundaries with the loops and stay grounded in supply chain theory. This will allow us to compare potential circular solutions to linear ones. And the network structure provides measures (centrality, flow betweenness, reciprocity, and others) to assess the viability of the supply chain we are building.

With an existing supply chain, there is an existing network to consider. If we want to explore circular solutions, we can either close loops within the system or redefine the boundaries. Again, this allows us to compare networks with loops to those without — circular vs. linear.

The consistent theme across all of this is that the linear-vs-circular characteristics of a supply chain are its network structure — whether it has loops or not. This allows us to generalize our original question. Rather than just asking when the linear-vs-circular framework makes sense, we can ask if it makes sense to talk about circular supply chains.

Both linear and circular supply chains are networks — "supply chain" is a misnomer in many cases. From an ontological perspective, however, there is a critical difference between linear and circular supply chains. Supply chain networks are genuinely linear, but circular supply chains are not exactly circular. Even if we take the circular strategy to the extreme — closing every loop imaginable in the network — the second law of thermodynamics ensures there will always be some linearity. This means there are not really linear or circular supply chains. There are just supply chains — or perhaps more precisely supply chain networks — with different degrees of circularity. 

This also means we are not transitioning from linear to circular supply chains — or maybe even from a linear to a circular economy. We are transitioning to more sustainable supply chains — and thus a more sustainable economy — by identifying opportunities to add circularity in our supply chains. 

If our goal is to be more sustainable — or perhaps regenerative if we're ambitious — then the right framework might not be linear versus circular. Maybe we should finally embrace the networked nature of supply chains and start measuring circularity. There's even a convenient formula7 for that:

Have thoughts or feedback? Did I miss anything? Email me at kellen.betts@gmail.com. You also can reach me on LinkedIn.

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The Jin Nui Zou is an oil tanker owned by the China Shipping Tanker Company Ltd. [1] On September 5th, 2019 the vessel entered the Port of Dalian oil terminal in Northeast China. Dalian is the headquarters of two subsidiaries of COSCO shipping which were sanctioned by the U.S. government for importing Iranian crude oil. [2] Like all large cargo and passenger vessels, the Jin Nui Zou is equipped with an automatic identification system (AIS). This system transmits the ship's identity, location, direction, speed and other characteristics to nearby vessels and a network of AIS stations and satellites. AIS tracking of the Jin Nui Zou shows it entered the Port of Dalian on a normal course. [3] As the ship approached the terminal from the southeast, however, the vessel's AIS positions suddenly scatter throughout the port with some showing the vessel traveling at a very high speed. Eventually the vessel's AIS positions settle into a circular pattern centered around a location inside of the oil terminal tank field—on land.

AIS is a cornerstone of modern marine navigation. It is used by vessel operators to avoid collisions with other vessels, and by shipping companies to track and manage their fleet. AIS also is used by a number of authorities to monitor the activities of cargo and fishing fleets, for search and rescue operations, for aids to navigation and for other applications. AIS does not work, however, without the precise location and time provided by GPS and other global navigation satellite systems (GNSS). Global positioning, navigation and timing (PNT) provided by GNSS forms the foundation of marine navigation, railroad operations, trucking operations, military operations, cellular communication, financial exchanges, power systems, driving with Google Maps, Uber, DoorDash, and countless other applications. GPS and the other GNSS constellations are the only true global utility—free, ubiquitous and essential. The economic value of GPS is estimated in the trillions of dollars. And in the U.S. we do not have a backup system.

GPS is one of four global systems—BeiDou (China), Galileo (E.U.), GLONASS (Russia) and GPS (U.S.)—and three regional systems (RNSS)—NavIC (India), BeiDou Compass (China) and QZSS (Japan). Over 75 percent of GNSS devices can use signals from multiple constellations. [4] Developed by the U.S. military in the 1970s, GPS consists of a core constellation of 27 satellites—31 are currently in service—which fly in medium Earth orbit approximately 20,200 km (12,550 miles) above sea level. [5] The satellites and other infrastructure are managed by the U.S. Space Force—a new branch of the military under the Secretary of the Air Force. Each satellite has a precise atomic clock and broadcasts a radio signal providing its location, status and time. Civilian users were given access to the full, non-degraded signal in 2000. GPS has a new, more secure M-Code signal nearing completion that will be restricted to military use. [6] Encryption with M-Code will combat the increasing threat of GPS interference.

The tracking phenomenon seen with the Jin Nui Zou is one of tens of thousands of GNSS "spoofing" incidents documented over the last decade. Similar circular patterns were seen near 15 other Chinese oil terminals in the summer and fall of 2019. [7] A 2019 report by C4ADS—an organization that researches global conflict and security issues—documented 9,883 instances across 10 locations that affected 1,311 civilian vessel navigation systems near Russian occupied territories and overseas military facilities. [8] It also found a correlation between GNSS interference events and movements of the Russian head of state, interference emanating from a Russian airbase in Syria and interference along the Russian coast and Crimea in the Black Sea emanating from a "palace" reported to be built for President Putin.

Interference with GNSS signals is not a new phenomenon. Devices that are able to overpower faint GPS signals ("jamming") were used in the 1991 Persian Gulf War several years before GPS was fully operational and almost a decade before the non-degraded signal was made available to civilian users. Jamming GNSS radio frequencies blocks reception to a receiver, preventing it from calculating a geographic location or accessing the timestamp. The incidents at Chinese oil terminals and Russian facilities used a more sophisticated device with the ability to mimic or "spoof" a legitimate GNSS signal in order to manipulate position and time data. Both jamming and spoofing are a threat to any service relying on PNT. Spoofing, however, poses a more serious threat and there are few countermeasures for the billions of devices in use today.

GPS was originally developed for military navigation and pinpoint weapons delivery—to "drop 5 bombs in the same hole." [9] Today, there is almost one device with a GNSS receiver for every person on the planet. [10] The vast majority of these devices are smartphones, followed in a distant second by wearable devices. [11] While smaller in number, GNSS is used for navigation and timing in transportation, energy, financial markets and other segments of the economy. GNSS satellites are equipped with extremely precise atomic clocks which serve as the reference time for power grids, cellular communications networks, financial markets and other applications. To determine its location, a GNSS device compares the time it receives a signal to the time the satellite sent it and calculates a geometric sphere. With signals from four separate satellites, a precise location can be determined by calculating the point where the spheres intersect.

The accuracy of positioning based on GNSS depends on satellite geometry, signal blockage, atmospheric conditions and the receiver's design/capabilities. To improve accuracy, ground-based and satellite-based augmentation systems have been developed. There are four primary satellite-based augmentation systems (SBAS) serving specific geographic areas including the U.S. Wide Area Augmentation System (WAAS) and European Geostationary Navigation Overlay System (EGNOS). SBAS satellites broadcast correction signals that are used for signal integrity, wide area corrections and as an extra navigation signal in some cases.

Ground-based augmentation systems use a network of stations with precise known locations. These stations continuously compare their position based on GNSS signals with their known location, and broadcast a correction signal that can be used by differential GNSS receivers to improve the accuracy of their position. The U.S. Coast Guard operated a ground-based differential GPS (DGPS) with 85 broadcast stations that provided nationwide coverage for land navigation and 50 nautical miles offshore. Developed in the late 1980's and early 1990's, DGPS improved positioning accuracy from several meters to less than one meter. With the improved accuracy of un-augmented GNSS and the use of satellite-based augmentations systems, however, DGPS was no longer need. After more than 25 years of service, the Coast Guard switched off the final four stations located in the Great Lakes and the St. Lawrence Seaway in June of last year. [12]

Marine Applications

The origin of navigational techniques and technologies is the ocean. Around three thousand years ago, humans began exploring the Pacific crossing hundred of miles of open ocean in boats made from hollowed-out trees with leaves woven together for sails. [13] They accomplished these voyages long before the compass, sextant and other modern navigational tools would be developed. "In seafaring and navigational terms, while the Europeans were discovering fire, the Polynesians had already split the atom." [14]

Three thousand years later, ocean navigation would be one of the earliest applications of most modern navigation aids. The first commercial GPS devices made by Trimble and Magellan were targeted to the recreational sailing market. Today, GNSS-based technologies are used for many applications in the maritime industry including vessel monitoring, traffic management, port operations and search and rescue (SAR). Most vessels are equipped with augmented GNSS devices for more accurate positioning. New equipment leverages SBAS—including WAAS and EGNOS—and a number of countries in Europe and around the world continue to provide DGNSS coverage in coastal areas. The International Association of Marine Aids to Navigation and Lighthouse Authorities (IALA) established the standard used for DGNSS radar beacons. LORAN, another ground-based system, can be used for harbor entrance and approach maneuvers where these systems are available as well. [15]

Since December of 2004, the use of automatic identification systems (AIS) with GNSS receivers is required by the International Maritime Organization (IMO) for all ships 300 gross tonnes or larger on international voyages, cargo ships 500 gross tonnes or larger not engaged in international voyages and all passenger ships regardless of size. [16] The IMO also requires large passenger and cargo ships to be equipped with electronic chart display and information systems (ECDIS), which plot and monitor a ship's voyage with real-time information. [17]

AIS is a bidirectional system. The transponder automatically broadcasts a ship's position, identity, type, course, speed, navigational status and other safety-related information to other vessels, shore-based AIS stations and a growing network of AIS satellites. The transceiver simultaneously receives similar information from nearby vessels and shore-based stations. Since AIS is not required for all vessels, ship operators use a combination of AIS, radar and other tools for navigation and collision avoidance. Shipping companies use AIS to track vessels and mange fleet operations. AIS also is used by a number of authorities to track and monitor the activities of cargo and fishing fleets, for search and rescue operations, for aids to navigation and other applications. [18]

Rail Applications

Railways are a difficult environment for GNSS reception, and the industry has been slow to adopt the technology. Tunnels, cuttings and urban canyons all block or degrade signals. GNSS may not meet the level of reliability required for safety-critical rail systems as well. To compensate for these limitations, rail applications use hybrid systems that combine GNSS with track sensors, Doppler radar, Lidar and other technologies. Most railways use some form of mapping system based on GNSS and GIS technologies to track train locations and network infrastructure. GNSS-based technologies also are now being tested and deployed in automatic train control (ATC) systems, track control systems, passenger information systems and fleet management systems. [19]

One of the first applications of GNSS for ATC is enhanced odometry—measuring distance travelled. Traditionally trains are tracked using devices that detect the presence or absence of a train on the track (track circuits) or count the number of axles entering and leaving sections of track (axle counters). These devices are installed within the track network and provide a course determination of the position of trains within track segments. High-speed trains in Europe are monitored using more advanced on-board sensors—Doppler radar, tachometers and inertial sensors—and radio frequency transponders installed within the track network (balises). Train odometers calculate distance traveled based on signals from these transponders and the speed of the train—a technique known as dead reckoning—which is more precise than track circuits and axle counters. Radar-based sensors, however, do not perform well in winter conditions or with slab track. Slab track is a rail embedded within a solid—typically concrete—underlayment rather than loose gravel. It is increasingly common for high-speed railways, in tunnels and on bridges. Balises, axle counters and other sensors embedded in the track network are expensive to install and maintain as well. Mobile GNSS-based receivers, in contrast, are affordable and provide more accurate, real-time positioning—as long as the receiver has reception. [20]

Augmented GNSS has been tested within railway control systems for automatic level crossings (ALX). These systems detect when a train approaches a road crossing, and activate road traffic signals and barriers. Traditional ALX systems use fixed sensors within the track and activate traffic controls based on the maximum speed a train is allowed to travel in the segment of track. Trains equipped with augmented GNSS receivers, however, can track their real-time position and speed. The ECORAIL project in Europe demonstrated how a signal sent from an approaching train can be used by the ALX system to time road closure based on the speed of the train and improve traffic flow. [21]

In the U.S., positive train control (PTC) technology—most equipped with GPS receivers—is now required on 40% of the nation's Class I rails. PTC technology tracks a train's position and automatically deploys braking to prevent collisions, over speeding, and movement into closed work zones or past switches in the wrong position. The Rail Safety Improvement Act of 2008 mandates installation of interoperable PTC on main lines which move passengers, hazardous materials or a significant amount of freight. [22] The mandate came after a head-on collision between a freight train and a commuter train in Chatsworth, California in 2008. The accident killed 25 and injured 135. Railroads have struggled to meet the timetable set by the Act and received multiple extensions. According to the NTSB, 20 incidents could have been prevented by PTC since the 2008 legislation was passed. In December of 2017, a speeding Amtrak passenger train derailed at a curve along a recently completed section of track in DuPont, WA killing three passengers. [23] Two months later an Amtrak passenger train collided with a stationary CSX freight train in Cayce, SC killing two Amtrak crewmembers. [24] According to the NTSB, both incidents could have been prevented by PTC.

All railroads regulated by the Federal Railroad Commission (FRA) use the same PTC software and hardware standards for interoperability. There are three systems that comprise the technology including: an onboard locomotive system which monitors the train's position and speed—with GPS—and can activate braking; a wayside communications system which operates on a dedicated radio frequency and monitors track signals, switches and circuits; and a central back office server which oversees the rail network and authorizes trains to move into new segments of track. Most onboard systems are equipped with a GNSS receiver for signals from the GPS and Galileo satellite constellations. As with other GNSS applications, this forms the foundation of the PTC system providing the train's location, direction and speed. After railroads invested over $11 billion over the last decade, the FRA announced that PTC was successfully deployed for all 57,536 miles of required track on December 29, 2020. [25]

Trucking Applications

GNSS technologies are used extensively in road transportations systems as well. In the 1980s, Trimble and Qualcomm began developing systems for truck fleet management. Qualcomm launched Omnitracs in 1988 and within three years was tracking almost 15,000 trucks for 100 trucking companies. [26] Within a decade one in ten commercial trucks were tracked electronically. Today, the U.S. Federal Motor Carrier Safety Administration (FMCSA) requires most commercial trucks moving interstate freight to use electronic logging devices (ELD). The ELD requirement is part of the FMCSA's Hours of Service (HOS) regulations designed to promoting driver and public safety. It also simplifies requirements for commercial drivers with a single set of federal rules superseding a patchwork of state-level regulations. ELDs digitize and automate record keeping that was previously done with paper log books. While a vehicle is in service, ELDs automatically record date, time and location—with GPS—as well as engine hours, vehicle miles and identity of the driver. [27] Canada adopted a similar ELD requirement, which will be enforced in June of this year. [28]

Beyond tracking and navigation, GNSS and related technologies are integral to autonomous vehicles and intelligent transportation systems (ITS). Similar to automatic train control systems, autonomous vehicle systems pair GNSS-based positioning with inertial navigation and other sensor systems allowing the vehicle to operate in areas with poor GNSS reception. ITS extends these capabilities with wireless communication to surrounding infrastructure and other vehicles. Other applications that rely on GNSS-based PNT include: fleet management, traffic monitoring services, dangerous goods tracking, tolling and congestion management, insurance telematics, emergency services and other applications. [29]

Solutions

Despite the vulnerability to interference, there are few alternatives or backup systems to GNSS. Land-based long range navigation (LORAN) is still available in some countries. LORAN was developed by the U.S. government in World War II and the U.S. operated a nationwide system until 2010. E-LORAN (enhanced) is a low-frequency navigation system that uses terrestrial transmission stations. Each station emits precisely timed and shaped radio pulses centered at 100 kHz. The stations are grouped into chains with a single master station and two or more secondary stations. Since E-LORAN is transmitted by terrestrial stations, the signal is much stronger than satellite-based GNSS signals, and so receivers are less susceptible to interference. [30] In response to GPS vulnerabilities, the federal National Timing Resilience and Security Act of 2018 established a mandate—but no appropriations—for an alternative land-based timing system, which may resurrect LORAN in the U.S. [31]

There are new satellite-based technologies in development to mitigate spoofing interference as well. The European Global Navigation Satellite Systems Agency (GSA) is adding authentication capabilities to the Galileo constellation based on the timed efficient stream loss-tolerant authentication (TESLA) protocol, which only requires public keys for decryption. It also will be backward compatible with existing Galileo receivers. [32] Similarly, the U.S. has launched 23 of 24 satellites needed to deploy encrypted M-Code for military GPS users. The U.S. also is planning to launch Navigation Technology Satellite – 3 (NTS-3), the first experimental PNT satellite in more than 40 years. [33] NTS-3 will test a number of new technologies including a new digital signal generator that can be reprogrammed while it is in orbit. This capability will allow it to broadcast new signals to avoid and defeat interference, and add signatures to the signals to counter spoofing.

References

[1]: FleetMon (2021). Vessel JIN NIU ZUO (Oil tanker) IMO 9303699, MMSI 413136000. Retrieved January 23, 2021.

[2]: Gardner, T., & Mohammed, A. (2019, October 16). U.S. “deeply concerned” about untrackable China ships carrying Iran oil. Reuters. Retrieved January 24, 2021.

[3]: Bergman, B. (2019, December 12). Systematic GPS Manipulation Occurring at Chinese Oil Terminals and Government Installations. SkyTruth. Retrieved December 8, 2020.

[4]: European GSA (2020). GNSS User Technology Report: 2020. European Global Navigation Satellite Systems Agency.

[5]: NCO for Space-Based PNT (2021, January 24). Space Segment. Retrieved January 24, 2021.

[6]: Hitchens, T. (2020, December 7). GPS Anti-Jam M-Code Takes Two Steps Forward. Retrieved December 19, 2020.

[7]: Bergman, 2019

[8]: C4ADS (2019). Above Us Only Stars: Exposing GPS Spoofing in Russia and Syria.

[9]: Milner, G. (2017). Pinpoint: How GPS is Changing Technology, Culture, and Our Minds. New York: W. W. Norton & Company, p. 58.

[10]: European GSA (2019). GSA GNSS Market Report: 2019. European Global Navigation Satellite Systems Agency.

[11]: Fredrickson, C. K. (2020, June 29). Coast Guard Discontinues Differential GPS Broadcast. Retrieved January 20, 2021.

[12]: Fredrickson, 2020

[13]: Kiste, R. C., Suggs, R. C., Kahn, M., Augustyn, A., Kuiper, K., Lotha, G., et al. (2020, November 16). Polynesian culture. Retrieved January 20, 2021.

[14]: Milner, 2017, p. 5.

[15]: Kealy, A., & Moore, T. (2017). Land and Maritime Applications. In P. J. G. Teunissen & O. Montenbruck (Eds.), Springer Handbook of Global Navigation Satellite Systems (pp. 841–875). Cham: Springer International Publishing.

[16]: IMO (2021a). AIS transponders. Retrieved January 20, 2021.

[17]: IMO (2021b). Electronic Nautical Charts (ENC) and Electronic Chart Display and Information Systems (ECDIS). Retrieved January 20, 2021.

[18]: Kealy & Moore, 2017

[19]: Kealy & Moore, 2017

[20]: González, E., Prados, C., Antón, V., & Kennes, B. (2012). GRAIL-2: Enhanced Odometry based on GNSS. Procedia - Social and Behavioral Sciences, 48, 880–887.

[21]: ESA (2005, July 5). ECORAIL - successful demonstration of EGNOS for railway control applications. Retrieved January 20, 2021.

[22]: FRA (2009). Overview and Highlights of the Railway Safety Improvement Act of 2008. Federal Railroad Administration.

[23]: NTSB (2019a). Amtrak Passenger Train 501 Derailment in DuPont, Washington on December 18, 2017: Accident Report (No. NTSB/RAR-19/01). National Transportation Safety Board.

[24]: NTSB (2019b). Amtrak Passenger Train Head-on Collision With Stationary CSX Freight Train in Cayce, South Carolina on February 4, 2018: Accident Report (No. NTSB/RAR-19/02). National Transportation Safety Board.

[25]: FRA (2020, December 29). Federal Railroad Administration Announces Landmark Achievement with Full Implementation of Positive Train Control. Federal Railroad Administration.; AAR (2020, December 29). America’s Railroads Meet PTC Mandate, Look to the Future. Association of American Railroads.

[26]: Milner, 2017

[27]: FMCSA (2015). 49 CFR Parts 385, 386, 390, and 395: Electronic Logging Devices and Hours of Service Supporting Documents, 80 Federal Register 78292–78416.

[28]: Transport Canada (2019). Canada Gazette, Part 2, Volume 153, Number 12: Regulations Amending the Commercial Vehicle Drivers Hours of Service Regulations (Electronic Logging Devices and Other Amendments), 153 Canada Gazette.

[29]: Kealy & Moore, 2017

[30]: Kealy & Moore, 2017

[31]: NCO for Space-Based PNT (2021). LORAN-C Infrastructure & E-LORAN. Retrieved January 24, 2021.

[32]: European GSA, 2020

[33]: AFRL (2021). Navigation Technology Satellite – 3 (NTS-3). Retrieved January 19, 2021.

Globalization is central to life in the 21st century. And whether we call it the “Digital Age,” the “Great Convergence,” or the “Fourth Wave,” it has transformed the way we live and work, unlocking the economic opportunities—and systemic risks—of global value chains. [1] In the first post of this series I survey the Evolution of Global Freight Systems from oars and sails to steam and internal combustion engines. I also discuss the systemic changes that came with the cargo container—the metal box changed the world—and the air cargo industry. These changes were transformational. No longer is transportation subject to the whims of climate—or so we thought—and the exhaustion of oarsmen. High value cargo can now be flown around the world in times best measured in hours rather than weeks or months.

Even with better machines and containerization, however, global trade was constrained by the cost—measured in information and time—of moving the knowledge and people needed to coordinate complex production networks. This concentrated industrialization in the small group of countries—largely the G7 countries of the United States, Germany, Japan, France, Britain, Canada, and Italy—where most of these people and ideas were located. Development in these countries led to the concentration of political, cultural, and military power—and a “Great Divergence” between the West and East. [2]

The nature of global trade began to change with the introduction of the internet and other information and communications technologies (ICT) in the second half of the 20th century. With these new technologies the cost of moving ideas—embedded in email, websites, and other digital mediums—fell dramatically. The telegraph in the late 19th century reduced intercontinental communication from weeks or months to minutes, but the volume of information that can be transmitted by telegraph is limited. The internet and related digital technologies, in contrast, accelerated the world’s information storage and telecommunications capacity, each growing over 20 percent a year since 1986. [3] It became possible to send vast quantities of information near-instantaneously anywhere in the world for almost no cost. It also became possible to coordinate complex production and logistics activities over longer distances.

Combined with the wage gap that had developed in the 20th century between developed and developing nations, companies moved production—and now services—to lower wage countries (“offshore”). Whereas 19th century industrialization led to sector level changes with divergent trajectories based on the location of people and ideas, this new phase of globalization took form at the level of production stages and occupations. Rather than an entire industry shifting from one location to another—largely driven by the geographic distribution of raw material costs—global businesses began moving the work of a single factory from one location to another based on the geographic distribution of wages. Offshoring production had a significant impact on labor in North American and Western Europe, eliminating many of the well-paid manufacturing jobs that created the middle class and simultaneously helping lift hundreds of millions out of poverty in Asia.

The shift of production stages also brought the ideas—marketing, managerial, and technical knowledge—needed to coordinate activities in the network. This knowledge is typically owned by the firms at the head of these global production networks—brands like Nike, Apple, and Procter & Gamble—and they work hard to keep that knowledge within their production network. Concentration of knowledge within production networks is aided by the high time-cost of moving people that remains today. Though people can travel using the same transportation as goods, travel takes time and impacts daily activities. These divergent costs built production networks around access to the people (talent) needed for each stage of production and distribution.

Global value chains are now comprised of thousands of businesses and hundreds-of-thousands of cumulative miles in transportation. They bring to market new products like smart phones and coronavirus vaccines that are transformational in their own right. They also have introduced unprecedented, systemic risks. Where industrial competitiveness was once defined by the boundaries of the state, global trade has redefined those boundaries around production networks, disrupting half-a-century of trade policy. [4] The growth and scale of this change also proved to be a one-way trip to giant ships and structural rigidity. Digital technologies offer a degree of flexibility, and simultaneously create a new dimension of security, exponentially expanding the “surface area” of vulnerability. Despite this digital transformation, humans are still essential for global trade, leaving some dangling from perilous heights dismantling giant ships or stranded at sea. And in a strange twist of fate, a gaseous byproduct of global transportation is the most transformational force of change, creating the greatest challenge—and opportunity—of our lifetime.

Policy Confusion

The current era of international trade policy was sparked by the U.S. Reciprocal Trade Agreements Act of 1934 and the resolution of the Second World War (WWII). This act established a framework for reciprocal tariff reductions—a change from unilateral tariffs—and “most favored nation” (MFN) status which meant any bilateral tariff would automatically extend to all MFN partners. The result was a decline in tariffs worldwide through the end of WWII, setting the stage for post-war trade liberalization. [5]

After the war, the U.S., U.K., and other Allies established a number of institutions to avoid the international governance vacuum that developed between the First and Second World Wars. One of these institutions was the General Agreement on Tariffs and Trade (GATT), which would later become the World Trade Organization (WTO). The GATT was a rules-based system that committed parties to negotiate reciprocal and mutually advantageous reductions in tariffs. These negotiations naturally lead to internal conflicts (within each nation) between domestic firms that compete with imports and exporting firms that benefit from lower foreign tariffs. However, the GATT framework and rounds of negotiation were successful in overcoming protectionist lobbies creating a self-reinforcing cycle of tariff reductions for the next 50 years, and serving as a stabilizing force for the global economy. [6]

With trade liberalization, low cost transportation and new information and communications technologies, trade grew three times as fast as the global economy between 1948 and 2008. By the end of the 20th century, manufactured goods accounted for more than 80 percent of developing countries exports and the share of people living in extreme poverty fell by more than half. [7] Trade continued to accelerate for the first few years of the new century with China’s entry into the WTO in 2001 and the search by multinational companies for lower-cost inputs and wages. The trajectory of global trade, however, would change course following the global financial crisis in 2008 and 2009. [8]

The financial crisis started in the U.S. housing market and soon spread throughout the world’s financial system. It led to a 20 percent or more drop in trade for WTO countries between 2008 and 2009. Trade fell faster and farther than industrial production. [9] The global value chains that accelerate trade also proved to spread financial—and biological—contagions with equal efficiency. And while trade would rebound slightly after the crisis, it grew slowly for the next decade. As China and other emerging economies continued developing, wages began to rise and their markets became a central engine for demand growth. Labor-intensive industries began looking to Southeast Asia and other countries. For industries that are not labor-intensive, companies started to base location decisions on access to talent, supplier ecosystems, infrastructure, business environment, and intellectual property protections. [10]

The decade following the financial crisis also saw a backlash against liberal trade policies. In Europe, British voters supported leaving the European Union. Many countries established new tariffs, subsidies and other policies to capture more domestic value. In China, foreign companies that wanted to sell in the massive and growing Chinese market had to establish more sophisticated operations or share technologies with partners in the country. The government also established tariffs on foreign automobiles and heavily subsidized new strategic industries like electric vehicles. Similar subsidies were used to boost domestic industries by state and local governments in the U.S., Europe, and elsewhere in Asia.

The backlash from the financial crisis also exposed the challenge governments faced with trade policy in a global economy. Historically, trade policy was used to balance domestic industry with economic growth from trade liberalization. The effectiveness of this strategy waned as global value chains became increasingly complex and as political attitudes toward globalization shifted. Changes in trade policy now had broad and unanticipated effects rendering post-war strategies ineffective or even counterproductive. Companies embedded in global value chains blurred the distinction between importer and exporter, and propagated the impacts of tariffs and other protectionist policies through complex networks. Services also contribute an increasing share of the value of manufactured goods, so trade policies meant to protect domestic manufacturing could harm domestic service industries. [11]

Trade policies implemented during the Trump administration proved to be an effective test of this new dynamic. The administration rejected the Trans-Pacific Partnership and other broad agreements, they renegotiating the North American Free Trade Agreement, and they instituted enormous increases in tariffs on goods from Canada, Europe, and especially China. Before the coronavirus pandemic upended the global economy, these policies did not achieve their objectives. Industries exposed to trade with China did see a modest boost in employment, but these gains were offset by greater losses in the agriculture sector after retaliatory tariffs were imposed by China. Overall, U.S. manufacturing continued to shed jobs in the months leading up to the pandemic, and the trade deficit widened, both of which were key targets of the administration’s trade policies. [12]

The effect the trade policies did have is the acceleration—supercharged by the coronavirus pandemic—of shifts that were already underway in years prior. Both production and service jobs continued moving offshore in search of lower wages, talent, supplier ecosystems, and other factors. [13] The share of regional trade also continued to increase with trade concentrated around hubs in Europe (Germany) and Asia-Pacific (U.S. and China). These trends highlight the challenge policymakers face in a global economy. Trade policy is no longer a balance between simple priorities—domestic industry or trade-fueled growth. In a dynamic network of complex interactions, the consequences of changes to trade policy are increasingly difficult to predict. This means governments are less equipped to serve as a stabilizing force for global trade challenges. It also means global freight systems are more vulnerable to the dynamics of the global economy.

Giant Ships

On April 27, 2020, as the coronavirus was spreading around the world, HMM Algeciras departed on her maiden voyage from Qingdao, China. At over 1,300 feet in length and with a capacity of over 24,000 twenty-foot containers (measured as TEUs or twenty-foot equivalent units), HMM Algeciras is the first in a new fleet of vessels ordered by the South Korean shipping line and billed as the (current) largest container ship in the world. Just 8 months prior the previous largest ship—MSC Gülsün with a capacity of 23,756 TEUs—sailed on her maiden voyage. Both vessels cap a string of ultra large containerships (ULCS) with a capacity over 20,000 TEU launched in the last three years. HMM Algeciras also marked what might be a turning point in the maritime industry. With the coronavirus pandemic upending global trade and sluggish growth of the container business over the last decade, the structural momentum generated by this capacity arms race may have been overcome by larger shifts in the global economy. [14]

The world’s shipping fleet has grown substantially over the last half-century driven by the growth of international trade. From that first voyage in 1956 of the Ideal X, the economics of scale with the container ship was evident. With a capacity of just 58 containers, the Ideal X showed that dedicated container service dramatically reduced shipping costs. It also quickly became clear those costs could be further reduced with larger vessels. The size of ships has grown rapidly ever since.

In the 1970’s the tanker market collapsed leading to a drop in shipbuilding costs. Container lines seized on the opportunity and ordered a new generation of large container ships. These ships had capacities up to 4,500 TEU and ran up against the limits of shipping infrastructure including the width of the Panama Canal creating the “Panamax” and “Post Panamax” vessel standards. By the turn of the century vessels in excess of 8,000 TEU were launched triggering infrastructure challenges at many ports and the eventual expansion of the Panama Canal in 2016. [15]

The current wave of megaship construction started with the launch of Emma Maersk in 2006. Riding off the Asian export boom of the 1990s, Maersk Line anticipated strong growth of the ocean freight market. The company also anticipated a critical capacity shortfall that would have allowed competing lines to capture that growth. Emma Maersk was their response. With a capacity over 15,000 TEU, the ship was almost twice as large as any container vessel in service at the time. Emma Maersk’s size and fuel efficiency gave the company a significant cost advantage on the longest and most profitable routes between Asia and Europe. Almost immediately, other shipping lines placed orders for larger ships of their own. Less than 2 years after Emma Maersk went into service, 118 container vessels with a capacity of over 10,000 TEU had been ordered. New records for ship size would be set almost every year since in a relentless march to HMM Algeciras. [16]

The large bet on growth Maersk and other shipping lines placed with these new ship orders was thrown into question not long after Emma Maersk was put into service when global trade plummeted in 2008 and 2009 following the financial crisis. Rather than calibrate capacity with trade flows, most shipping lines anticipated a strong rebound and continued growth coming out of the crisis. Maersk doubled down on this bet and ordered a new generation of vessels—the “Triple Es”—with 20 percent more capacity than Emma Maersk, surpassing 18,000 TEU. Recognizing the threat Maersk’s new ships posed—again—other shipping lines again placed new orders for larger ships of their own. This proved to be a disastrous mistake for the industry. Following a rebound in 2010 and 2011, global trade grew slowly over the next decade and with massive debt taken on by new ships, most shipping lines sank deeply into the red. [17]

The new megaships also led to structural shifts in intermodal service. Ports, railroads, and drayage (port trucking) were all impacted. New larger cranes had to be built and quays had to be reinforced. Container storage yards, roads, railways, and terminal gates had to be expanded to handle the massive waves of containers going on and off the ships. And with a price tag of $190 million each, even large ship lines staggered under the mortgage of new vessels like the Triple E. [18] This led to consolidation of the once competitive industry into four large alliances by 2018. “Sailing half full because of the dearth of cargo, the giant new vessels brought none of the efficiency gains or environmental benefits their creators had promised,” instead they made ocean transportation less reliable and undermined the global value chains they were meant to strengthen. [19]

Container ship companies provide “liner” service—sailing established routes on a set schedule—and enjoy a degree of certainty that bulk carriers and other segments of the industry lack—as long as trade patterns are consistent. Large ships like the Triple Es are designed for long routes with high demand and limited stops, typically between Asia and Europe. They also require ports and other infrastructure capable of handling their size. HMM Algeciras’ maiden voyage began in Busan, South Korea. It picked up more cargo in Ningbo, Shanghai, and Yantian in China before transiting the Suez Canal—the New Suez Canal capable of handling ULCSs like HMM Algeciras—on its way to Rotterdam, Hamburg, Antwerp, and London. [20]

Vessels like HMM Algeciras are specifically designed for trade lanes like Asia-Europe. Looking at broader patterns of global trade flows, however, indicate an increasing share of freight is shifting to regional networks with shorter routes and smaller ports. The share of intraregional goods trade fell in early 2000s with movement of production from the U.S. and Europe to lower-wage locations, especially China. This trend bottomed out in 2012 and has sharply rebounded with trade networks centered around hubs in Europe (Germany) and Asia-Pacific (China and the U.S.). [21] It also is expected to accelerate with the coronavirus pandemic as companies rebuild more flexible, resilient value chains. [22] And while megaships provide the operating-cost savings on major trade lanes in periods of high demand, they provide carriers less flexibility to adapt to these market shifts, especially shifts to shorter routes and smaller ports. [23]

Faced with disruption from the coronavirus pandemic, the large carriers are starting to take notice. According to Rodolphe Saadé, CEO of CMA CGM Group, the fourth largest carrier with over 10 percent global market share:

[The pandemic] will impact world economic flows and will necessitate that we all rethink our supply chain models. In view of our dependence on globalization, supply chains will need to be redesigned with more resilience. They will also need to be able to quickly adapt to sharp fluctuations in supply and demand… We are no doubt heading towards a reorganization of international exchanges with diversified sourcing for companies and the development of intra-regional exchanges. [24]

Like all major carriers, CMA CGM is on a trajectory toward ever-larger vessels receiving the first of nine new 23,000 TEU vessels within weeks of Mr. Saad’s statement. [25] How they reconcile capacity investments on major trade lanes with shifting trade flows to shorter routes and smaller ports will ripple across global freight systems from laborers in ship-breaking yards to the greenhouse gas emissions embedded in global trade.

Stranded at Sea

On July 31, 2020, as many parts of the world grappled with a second wave of infections in the coronavirus pandemic, the Unison Jasper was detained at the Port of Newcastle in Australia. A dry bulk carrier operated by a 22-person crew, the vessel is almost 600 feet long and has a capacity over 37,000 deadweight tonnage (DWT). [26] It arrived in Newcastle carrying a near-full load of alumina, the main feedstock for the production of aluminum. Alumina is extracted from bauxite ore, and together they comprise one of the five major dry bulk cargos. Australia is the world’s largest producer of bauxite and alumina. The Unison Jasper was transporting alumina from its main source near Perth in Western Australia to one of the largest aluminum smelters (Tomago) on the East Coast of the continent. It was detained at the Port of Newcastle by the Australian Maritime Safety Authority (AMSA) for charges of violating international maritime labor laws “including payment of wages, crew repatriation and provision of fresh food.” [27]

This is one of many such stories unfolding over the course of the global coronavirus pandemic in 2020. In a typical month roughly 150,000 seafarers change over at ports around the world. The pandemic, however, severely disrupted this process with port closures, disembarkation restrictions, a reduction of air travel, restrictions at border crossings, and consulate closures affecting visa processing. At the time of this writing there are over 300,000 seafarers—20 percent of the global workforce—stranded at sea waiting for relief from extended deployments. Meanwhile, shipping companies, labor unions, and maritime authorities are navigating a variable patchwork of pandemic-related restrictions for crew, and significant disruptions to global trade flows. [28]

Since the first ships plied Mesopotamian waters, merchant shipping has extracted a heavy toll from the humans working the cargo holds, decks, and docks. Roman trireme were powered by the suffering of 170 oarsmen pulling heavy oars in confined quarters below deck. [29] In the 16th and 17th centuries, only 60 percent of sailors for the Dutch East India Company would return home. [30] And the work of longshoreman at U.S. ports in the early 20th century could be brutally physical and highly irregular. Injury rates were three times that of construction and eight times that in manufacturing. [31] The modern maritime industry is far safer, “but seafarers are still at the mercy of an industry that is opaque, deeply fragmented and bound by a patchwork of national and maritime laws.” [32]

Similar to the Unison Jasper, modern containerships are operated by a small crew of 20 to 30 sailors—that’s 1 crew member for every 600 containers on a Maersk Triple E. Globally, there are approximately a million and a half seafarers—the vast majority (98 percent) of which are male—who work in the world of trade. The job market is truly global with less than 35 percent of vessels crewed by seamen sharing the same nationality. The largest share of workers come from the Philippines and China. Roughly 40 percent of the workforce hold senior leadership positions aboard vessels as licensed officers. For U.S. Merchant Marines, officers receive training at a maritime academy—or accumulate sufficient experience and training—and pass a license examination. Unlicensed seaman perform a variety of different roles on a ship including lookout, cleaning, working mooring lines, operating deck gear, standing anchor details, and working cargo. [33]

Ships are mobile machines, which cross seas that do not belong to any one state. With the 1958 Geneva Convention on the High Seas and the 1892 United Nations Convention on the Law of the Sea, ships are governed by the state they are registered in—their “flag state.” The majority of ships sail a flag from open flag states including Panama, Liberia, Marshall Islands, Bahamas, Malta, Cyprus, and several Caribbean island nations. Sixty percent of ships are registered in a state that is different from its owner. In coastal waters, ships must abide by the rules of their flag state and that of the coastal or port state—hence the Unison Jasper was bound by the rules of Hong Kong (flag state) and Australia (port). This system of open registration, combined with minimal international law, has created a patchwork of regulations and a flexible legal system. [34]

Maritime labor is governed by the Maritime Labour Convention (MLC) which entered into force on August 20, 2013. [35] The Convention is an international “bill of rights” for seafarers, unifying international labor regulations and simplifying compliance for ship operators sailing international waters. The core requirements of the Convention address: minimum age, work conditions, length of shifts, rest hours, accommodations, recreational facilities, food and catering, heath protection, medical attention, welfare and social security. To-date the MLC has been ratified by 97 countries representing most of the global ship capacity including the key open flag states, China, Russia, Canada, Australia, and most European countries. As of 2020, the U.S. is one of the last major holdouts from the MLC. The U.S. has historically refrained from ratifying international human rights instruments, and according to the Coast Guard, U.S. labor laws largely cover the tenants of the MLC. [36]

Since the MLC was adopted in 2006, abuse and exploitation in the maritime industry has come under increasing scrutiny. In a typical year 10-15 ships are abandoned by their operators, leaving the crew without pay or provisions. At the height of the financial crisis in 2009, over 50 vessels with over 600 seafarers were abandoned. In the two decades prior to the pandemic, more than 5,000 seafarers were abandoned onboard over 350 vessels worldwide. [37] Between 2,000 and 6,000 seamen die annually—typically because of avoidable accidents linked to lax safety practices—and tens of thousands of workers, many of them children, are enslaved on boats every year, with only occasional interventions. [38]

The Unison Jasper had sailed around the world for 7 months while the pandemic spread. After being detained by Australian authorities at the Port of Newcastle, some of the crew left the ship.

Seven of the 22-person crew had been on the ship for 14 months, beyond the end-date of their contracts and in breach of international maritime law, regulators and union officials said. They were owed $64,000 in back pay, and there wasn’t enough fresh food. There was also no valid plan to get them home to their families in Myanmar. They wanted off. [39]

Due to pandemic-related public health restrictions, the crew was transported by police escort to Sydney and quarantined for 14 days before being allowed to return to their home in Myanmar. The ship was held in Newcastle for a month until the operator could meet minimum safety standards set by the ship’s flag state (Hong Kong) and the AMSA. It also would be banned from calling on any Australian port for 6 months. After receiving a fresh crew and supplies, the Unison Jasper steamed out of port and continued its global journey moving the world’s cargo.

Phantoms in the Server Room

Vincent Clerc, Chief Operating Officer of the world’s biggest containership operator, A.P. Moeller-Maersk, was in a meeting in the company’s Copenhagen headquarters when the screens went blank. The company was under attack, and within minutes its worldwide computer network was shut down. To keep operations going, they resorted to phone calls and texts. Outages at ports in the U.S., Europe, India, and South America brought the flow of containers to a standstill. Containers continued to be offloaded from ships, but they couldn’t be loaded on trucks, trains or other ships without a way to determine where they were going—information that was hostage in their computer systems. Ultimately, it took more than a week to bring systems back online costing the company over $300 million. [40]

Twenty-first century global trade would not be possible without the internet and other digital technologies used to coordinate complex production and logistics activities over vast distances. Technologies like email, websites, and other platforms allow the near-instantaneous transmission of vast quantities of information anywhere in the world for almost no cost. This has accelerated the world’s information storage and telecommunications capacity, each growing over 20 percent a year since 1986. [41] It also created a new security dimension for companies, governments, and other institutions, exponentially expanding the “surface area” of vulnerability.

With over 90% of the world’s goods transported by sea, the maritime industry is a prime target for cybercriminals. The attack on A.P. Moeller-Maersk was not the first the shipping industry had experienced, and it would not be the last. In April of 2020, an attack on the world’s second-largest container line, Mediterranean Shipping Co., brought down its website and prevented customers from making bookings online for about 5 days. [42] Cybersecurity specialist Naval Dome has seen a 400 percent increase in attempted hacks over the course of 2020. [43] According to a simulation by the University of Cambridge Centre for Risk Studies, a single cyberattack on major ports across Asia-Pacific could cost the world’s economy $110 billion with 92% of the risk uninsured—almost 30 percent of that loss would occur in global transportation systems.

The June 2017 cyberattack on A.P. Moeller-Maersk is believed to be an unintended consequence of an attack originally targeting Ukraine. According to US intelligence agencies it was perpetuated by Russia’s military, which had been engaged in an undeclared war with Ukraine since 2013. In the non-digital realm, the conflict had killed more than 10,000 Ukrainians and displaced millions more. The cyberattack began after hackers broke into the computers of a little-known Ukrainian company (Intellekt Servis) that makes the country’s most popular tax software M.E. Docs. The hackers infected the software with a malicious virus (“NotPetya“) that looked like ransomware but had no means of means of decrypting files and so was meant to cause damage rather than extort money. [44] Other victims of the attack include FedEx’s TNT courier operations in Europe, the French construction giant Saint Gobain, pharmaceutical giant Merck & Co., and the law firm DLA Piper. In total, the monetary damages of the attack are estimated to be as much as $10 billion. The true lesson of NotPetya, however, is how the internet and digital technologies have shifted the security landscape. [45]

In ways that still defy human intuition, phantoms inside M.E. Doc’s server room in a gritty corner of Kiev spread chaos into the gilded conference rooms of the capital’s federal agencies, into ports dotting the globe, into the stately headquarters of Maersk on the Copenhagen harbor, and across the global economy. [45]

Exhausted

The movement of goods across vast distances is essential to life in the 21st century. It is estimated that as much as 90 percent of global demand cannot be met by local supply. Or to put that another way, roughly 90 percent of goods travel on a ship. The acceleration of transportation comes with a cost, however, not captured by the market value of goods and services. It accounts for over 20 percent of global greenhouse gas emissions. It also significantly lags progress being made in other sectors of the economy, and is projected to be the most carbon-intensive sector by mid-century.

The evolution of global transportation by water and air was marked by the transition from animate and wind-powered ships to coal-powered steam engines, then to hydrocarbons and the internal combustion engine. Animate power sources—human rowers—have an indirect impact on the environment. The food, water, and other lifestyle characteristics of humans and animals result in waste emissions into the environment, but direct emissions from these “engines” are best allocated to other aspects of the economy. Similarly, there are no direct emissions from the wind powering sailing vessels. The combustion of coal and other fossil fuels, in contrast, generates sulfur oxides (SOx), nitrogen oxides (NOx) and volatile organic compounds that cause smog, acid deposition, and higher ground ozone levels. They also are the primary source of greenhouse gas (GHG) emissions—carbon dioxide (CO2), methane (CH4), and nitrous oxide (N2O)—which increase atmospheric temperatures.

Hydrocarbons—crude oils and natural gases—have been well known for millennia, but their use was primarily for building materials and protective coatings until the 19th century. Natural gas was burned in the Han dynasty (200 BCE) to evaporate brine. The first commercial refinery was built in 1837 by the Russians in Balakhani—an area on the coast of the Caspian Sea in modern-day Azerbaijan. By the 1860s, the U.S., Canada, and Russia had growing oil industries producing a more affordable source of energy for lighting, and eventually a new fuel for internal combustion engines (ICEs), a demand for which has yet to peak more than 130 years later. [46]

Cargo ships are powered by several different technologies. The majority have large diesel engines that burn heavy fuel oils (HFO) or blends of HFO with other crude distillates. Diesel engines are heavier and operate at slower speeds than other internal combustion engines—while delivering more force to the output shaft—making them ideal for ships, trucks, locomotives, and heavy machinery. The process of loading fuel on a large ship is called “bunkering” and the fuels are often called “bunker” oil. HFO is the residual substance from the process of refining crude oil, where lighter fractions are used for kerosene, gasoline and standard (highway) diesel. HFO is the viscous, dense residual with a high carbon and sulfur content. It is so thick it needs to be heated before it can pumped and used as a fuel.

Prior to new sulfur regulations by the International Maritime Organization (“IMO 2020”), the most common type of HFO was high-sulfur fuel oil (HSFO) with a maximum sulfur content of 3.5 percent. Lower sulfur fuel variants include low sulfur fuel oil (LSFO) and ultra-low sulfur fuel oil (ULSFO) with maximum sulfur contents of 1.0 percent and 0.1 percent respectively. Starting January 1st, 2020, the IMO restricted the sulfur content of fuel on board ships operating outside designated emission control areas to 0.50 percent. [47] This limited operators to the use of ULSFO unless the ship is equipped with exhaust scrubbing technology which can remove sulfur from the ship’s exhaust. Many ship operators chose to install scrubber systems allowing them to continue using HSFO on the premise that the cost of the scrubber system would be less than the cost of using ULSFO fuel. This appeared to be a smart move in the first weeks of the new year with ULSFO more than double the cost HSFO for a brief time. Following the crash of the oil markets with the onset of the coronavirus pandemic, the price for ULSFO has stabilized to an approximate 20 percent premium on higher-sulfur fuel. Recent research also shows that in many cases a ship’s life cycle CO2 emissions is lower using a scrubber than low-sulfur fuels due to emissions from refining processes used to make low-sulfur fuels. [48]

Greenhouse gases are an important type of emissions from the combustion of diesel and other fuels in ships and aircraft. Ships are one of the most efficient modes of transportation. Ocean-going and coastal vessels emit between 5 and 45 grams of CO2 per tonne-kilometer (gCO2/t-km). This is a small fraction of the 75 to 1,200 gCO2/t-km from trucks and vans that haul freight over the road. Aircraft are the least efficient form of transportation—save for orbital rockets—emitting between 400 and 2,900 gCO2/t-km. Aircraft move so little cargo by weight, however, that cargo aircraft contribute less than 10 percent of total freight emissions. The majority of cargo goes across the ocean accounting for over 30 percent of total freight CO2 emissions and over 3 percent of global emissions across all economic sectors. [49]

The recent shift to regional trade networks will have an impact on the environmental performance of the ocean freight market as well. There are complex network effects, but isolating emissions from ocean-going vessels, a shift to regional routes will decrease the distance shipments travel, and decrease the size of vessels they are transported on—20,000 TEU megaships are not suited for shorter routes and smaller ports with insufficient infrastructure. The primary drivers for GHG emissions from a ship are the efficiency of the vessel, distance travelled, and fuel and/or scrubber technology used. This means a decrease in vessel size for regional routes increases the net GHG load-distance for a given shipment. If shipments are moving a shorter distance, however, then the net GHG emission may actually balance out—with some emissions shifting to ground transportation.

Despite the efficiency of cargo ships, the vast majority of trade crosses oceans, and there may be no greater challenge for both the maritime and aviation industries than controlling greenhouse gas emissions. Electricity generation, residential, and other sectors of the economy made significant progress in curbing emissions over the last decade, but emissions from global freight transportation continues to grow. This is deeply troubling. Greenhouse gases attributable to human activities have warmed the atmosphere by more than 1.1 °C (1.98 °F) above estimated pre-industrial averages. [50] This is less than half a degree away from what parties to the UNFCCC Paris Agreement hope to achieve (1.5°C), and 2020 is on track to be the warmest year on record. The challenge upon us is to identify the levers—levers for resiliency, for human rights, and for environmental impacts—that will bring about change in this essential part of our economy.

Continue the deep-dive into the complexity and risks in global freight transportation with the next post in the series on Applications and Vulnerabilities of Satellite Navigation Systems in Global Freight Transportation!

References

[1] Sachs, J. D. (2020). The Ages of Globalization: Geography, Technology, and Institutions. New York: Columbia University Press.; Baldwin, R. (2016). The Great Convergence: Information Technology and the New Globalization. Cambridge, MA: Belknap Press.; Levinson, M. (2020). Outside the Box: How Globalization Changed from Moving Stuff to Spreading Ideas. Princeton, NJ: Princeton University Press.

[2] Huntington, S. P. (1996). The Clash of Civilizations and the Remaking of World Order. New York: Simon and Schuster.

[3] Baldwin, 2016

[4] Baldwin, 2016

[5] Baldwin, 2016

[6] Baldwin, 2016; Levinson, 2020

[7] IMF and WorldBank. (2001). Market Access for Developing Countries' Exports (No. 90290).

[8] Lund, S., Manyika, J., Woetzel, J., Barriball, E., Krishnan, M., Alicke, K., et al. (2020). Risk, resilience, and rebalancing in global value chains. McKinsey Global Institute.

[9] Baldwin, R. (2020, April 7). The Greater Trade Collapse of 2020: Learnings from the 2008-09 Great Trade Collapse. VoxEU.

[10] Lund et al., 2019

[11] Miroudot, S., & Cadestin, C. (2017). Services In Global Value Chains: From Inputs to Value-Creating Activities. OECD Trade Policy Papers (Vol. 197, pp. 1–59). Paris.

[12] Zumbrun, J., & Davis, B. (2020, October 25). China Trade War Didn’t Boost U.S. Manufacturing Might. The Wall Street Journal.; Hilsenrath, J. (2020, October 14). The Verdict on Trump’s Economic Stewardship, Before Covid and After. The Wall Street Journal.

[13] Donnan, S. (2020, October 22). The Offshoring of U.S. Jobs Increased on Trump’s Watch. Bloomberg.

[14] Link-Wills, K. (2020, April 23). HMM deploying world’s largest container ship. FreightWaves.

[15] Rodrigue, J.-P. (2020). The Geography of Transport Systems (5 ed.). New York: Routledge.

[16] Levinson, 2020

[17] Levinson, 2020

[18] Macguire, E. (2013, June 23). Maersk 'Triple E': Introducing the world's. CNN.

[19] Levinson, 2020, p. 193.

[20] The Maritime Executive (2020, May 26). World's Largest Container Ship Transits a Suez Canal in Transition.

[21] Li, X., Meng, B., & Wang, Z. (2019). Recent patterns of global production and GVC participation. In: Global Value Chain Development Report Technological Innovation, Supply Chain Trade, and Workers in a Globalized World (pp. 9–43). Washington, DC.

[22] Lund et al., 2020

[23] Paris, C. (2020b, April 17). Megaships Proving a Drag on Ocean Carriers in Trade Downturn. The Wall Street Journal.; Lund et al., 2020

[24] Saade, R. (2020). A message from our Chairman and CEO Rodolphe Saadé to our customers and partners. CMA CGM.

[25] CMA CGM (2019). World Premiere: Launching of the World's Largest LNG- Powered Containership and Future CMA CGM Group Flagship.

[26] MarineTraffic. (2020). Unison Jasper Vessel Information. MarineTraffic. Retrieved December 5, 2020.

[27] Kirkwood, I. (2020, August 15). “Modern slavery” allegations as Unison Jasper still in Newcastle a fortnight after federal authorities detained the Tomago Aluminium alumina ship. Newcastle Herald.

[28] UNCTAD (2020). Review of Maritime Transport 2020 (No. UNCTAD/RMT/2020). United Nations Conference on Trade and Development.; Ha, K. O., Wittels, J., Kyaw, K. L., & Chia, K. (2020, September 17). Worst Shipping Crisis in Decades Puts Lives and Trade at Risk. Bloomberg.

[29] Smil, V. (2017). Energy and Civilization: A History. Cambridge, MA: The MIT Press.

[30] Lucassen, J. (2004). A multinational and its labor force: the Dutch East India Company, 1595–1795. International Labor and Working-Class History, (66), 12–39.

[31] Levinson, M. (2016). The Box: How the Shipping Container Made the World Smaller and the World Economy Bigger (2nd ed.). Princeton, New Jersey: Princeton University Press.

[32] Ha et al., 2020

[33] Chaumette, P. (Ed.). (2016). Seafarers: an international labour market in perspective. Bilbao, Spain: Gomylex s.l.

[34] Chaumette, 2016

[35] ILO (2013, August 20). Maritime Labour Convention, 2006, as amended (MLC, 2006). Retrieved December 5, 2020.

[36] Gorrie, M. C. (2013, August 20). U.S. Prospects for Ratification as MLC, 2006 Enters into Force. Foreign Policy Blogs.

[37] ILO (2020). Database on reported incidents of abandonment of seafarers. Retrieved December 5, 2020.

[38] Urbina, I. (2015, July 17). Stowaways and Crimes Aboard a Scofflaw Ship. The New York Times.

[39] Ha et al., 2020

[40] Paris, C. (2017, June 30). Blinded by Cyberattack, Shipping Giant Maersk Slowly Restarts Operations. The Wall Street Journal.

[41] Baldwin, 2016

[42] Paris, C. (2020a, April 15). Shipping Line Confirms Cyberattack Brought Down Booking Platform. The Wall Street Journal.

[43] Ovcina, J. (2020, June 5). Naval Dome: 400% increase in attempted hacks since February 2020. Offshore Energy.

[44] McMillan, R. (2017, June 29). Cyberattack Launched for Pain, Not Profit, Experts Say. The Wall Street Journal.

[45] Greenberg, A. (2018). The Untold Story of NotPetya, the Most Devastating Cyberattack in History. Wired, September 2018.

[46] Smil, 2017

[47] IMO, 2020. Sulphur 2020 – cutting sulphur oxide emissions. International Maritime Organization. Retrieved December 5, 2020.

[48] Faber, J., Kleijn, A., & Jaspers, D. (2020). Comparison of CO2 emissions of MARPOL Annex VI compliance options in 2020 (No. 20.190191E.091). CE Delft.

[49] Sims, R., R. Schaeffer, F. Creutzig, X. Cruz-Núñez, M. D’Agosto, D. Dimitriu, M.J. Figueroa Meza, L. Fulton, S. Kobayashi, O. Lah, A. McKinnon, P. Newman, M. Ouyang, J.J. Schauer, D. Sperling, and G. Tiwari, 2014: Transport. In: Climate Change 2014: Mitigation of Climate Change. Contribution of Working Group III to the Fifth Assessment Report of the Intergovernmental Panel on Climate Change [Edenhofer, O., R. Pichs-Madruga, Y. Sokona, E. Farahani, S. Kadner, K. Seyboth, A. Adler, I. Baum, S. Brunner, P. Eickemeier, B. Kriemann, J. Savolainen, S. Schlömer, C. von Stechow, T. Zwickel and J.C. Minx (eds.)]. Cambridge University Press, Cambridge, United Kingdom and New York, NY, USA.; ITF (2019). ITF Transport Outlook 2019. International Transport Forum.

[50] WMO (2020). WMO Statement on the State of the Global Climate in 2019 (No. 1248). World Meteorological Organization.

Oceans are the highways of economic development. Ships move more cargo around the world than any other form of transportation. Not every location is accessible by sea, but those that are have a distinct economic advantage, tapping global markets for goods and services more efficiently than landlocked regions.

Since the first cargoes were moved by sea more than 5,000 years ago, the evolution of sea transportation has followed a "Westline" starting in Mesopotamia in 3000 BCE and progressing westward to the Mediterranean with the Greek and then Roman empires. Venice and the city-states of northern Italy dominated international trade until the 17th century. Development progressed further west to the Dutch and then British empires in northern Europe, which dominated trade until the early 20th century when the U.S. became a dominant global power. The later half of the 20th century saw development progress further westward to Japan and South Korea by the 1970s and finally the emergence of China as a global power in the early 21st century. [1]

The first trade networks that moved cargo by sea date back to before 2000 BCE, when Babylon grew to be the first large city. The Mesopotamians traveled on the Tigris and Euphrates rivers to the Arabian Gulf and Indus River in western India to exchange oil and dates for copper and possibly ivory. They also had a well-developed maritime code which specified fixed tariffs based on vessel size, pro rata shipbuilding prices, terms for advanced payment, and agent responsibilities. [2] The earliest known port, Wadi al Jaraf, was built by the Egyptians in the 20th century BCE for voyages that exported copper and stones from the Sinai Peninsula to the Nile Valley. [3]

Boats from this time were mostly wooden, and powered by oars or (later) sails. Oared vessels eventually grew to be powered by hundreds of oarsmen. Roman trireme—some of the best performing warships of the era—were powered by 170 oarsmen and could reach speeds of up to 20 km/h (almost 11 knots). Large oared vessels remained important for warships and coastal and canal shipping in the Mediterranean until the 17th century. Long-distance ocean transportation was dominated by sail-powered vessels. [4]

Early sailing ships had square sails which are positioned perpendicular to the long axis of the boat. Square sails work most effectively when the wind is blowing at the vessel from the stern, limiting their speed and the routes they can travel. Roman ships, for example, could cross the Mediterranean from Messina (northeast Sicily) to Alexandria (Egypt) in 6-8 days with favorable northwesterly winds [5], but the return trip could take as long as 40-70 days. Sail designs improved with the development of fore-and-aft rigging in Southeast Asia. [6]

A sail is a piece of fabric that forms an aerofoil shape when inflated by the wind, and works using a mechanism similar to an airplane wing. When air flows across an aerofoil, a lift force is generated perpendicular to the flow of air. This lift force is what keeps an airplane airborne, and "pushes" a sail-powered vessel across the water. Airflow also creates a drag force along the sail, and so the angle with which the sail is positioned relative to the wind determines how effectively the vessel can advance. Development of fore-and-aft and pivoting rigging increased the speed and maneuverability of vessels traveling with less favorable winds.

By the early 15th century, Portuguese sailors began exploring the western coast of Africa and rounded the Cape of Good Hope into the Indian Ocean in ships equipped with a combination of adjustable square and triangular sails, stern-mounted rudders, and magnetic compasses. This design would dominate the European exploration and maritime trade through the 18th and early 19th century before being replaced by steam-powered ships.

The Engines

Development of the steam engine transformed global transportation, becoming the dominant source of power by the late 19th century. "The machine was the first practical, economic, and reliable converter of coal's chemical energy into mechanical energy, the first inanimate prime mover energized by fossil fuel rather by an almost instant transformation of solar radiation." [7]

The use of steam power can be traced to the aeolipile developed in first-century Roman Egypt. The aeolipile is a simple device that rotates when water is heated. The resultant steam is directing out of angled nozzles. The technology advanced more rapidly in the 18th century driven by the need to pump water out of mines in Britain.

In 1699, Thomas Slavery developed a new steam pump for coal mines. Slavery's design used positive steam pressure—working against atmospheric pressure—to push water up out of the pump. This meant it had to be located close to—usually within thirty feet—the water level deep inside the mine.

Thomas Newcomen improved on Slavery's design around 1712 with the first commercially successful steam engine. Newcomen's atmospheric engine combined Slavery's boiler design with Denis Papin's piston steam engine. The piston in Newcomen's design is attached to a beam that rocks back and forth with the motion of the steam power stroke. The beam is then attached to a chain connected to a pump at the base of the mine. This design meant Newcomen's engine—with its heat, exhaust and voracious fuel demand—could operate at the top of the mine. It also was much larger, more powerful, and more costly to build than Slavery's pump. [8]

Despite Newcomen's improvements, the steam engine was an inefficient machine. These early designs converted less than 1% of the energy in coal to usable power, and were dependent on an abundant fuel supply. [9] This meant they only operated profitably pumping water from pits in coal mines close to a fuel source. This would change later in the 18th century with new designs by James Watt.

Watt—a Scottish engineer working at the University of Glasgow—hypothesized that the repeated heating and cooling of the cylinder in Newcomen's engine was a significant waste of energy, and developed a separate steam condenser that allowed the power cylinder to stay at operating temperature. He also developed a double-acting engine with steam power driving the piston in both directions, a centrifugal governor to maintain constant speed with varying loads, a rotary engine with gears that converted reciprocating motion into rotary motion and a number of other improvements.

Watt's designs increased the efficiency of steam engines from 0.5% to 2.5% of the available energy in coal. To commercialize his engines, Watt patented the design in 1769 and partnered with the English manufacturer Matthew Boulton. Boulton & Watt grew to be a major producer of steam engines. By 1800 nearly 500 of their engines were installed in a variety of enterprises, ultimately leading to widespread commercial use for stationary steam engines. [10]

One of the challenges with Watt's engines, however, was there size. This limited their use in mobile applications. Due to the perceived risks with pressure vessel technology at the time, Watt refused to work with the higher pressures that would increase power output and decrease size. Watt's patents gave him a monopoly over the technology slowing the development of mobile applications until their expiration in 1800.

The first mobile applications of the steam engine were river steamboats in the 1810s and steam-powered rail service starting in 1825. The first transatlantic steam-powered voyage was completed by the Royal William in 1833. Early riverboats and seagoing ships—still fully rigged—were propelled by paddle wheels. The screw propeller was introduced in 1838. [11] Gradually, larger and faster steamships displaced sailing vessels crossing the North Atlantic and routes to Asia and Australia. These new steamships transported most of the 60 million migrants who left Europe between 1815 and 1930.

After more than a century of improvement on Watt's steam engine, the technology reached an apogee in the late 19th century. With a hundredfold increase in operating pressure from Watt's designs, large steam engines reached almost 100 kW of power and an efficiency of 25% by the 1890s. This translated into fuel savings and less air pollution. Typical steam engines, however, still wasted 92% of the coal fed into the boiler. They also were heavy, limiting their use in smaller mobile applications. These limitations would be surpassed with the introduction of the internal combustion engine and liquid fuels refined from crude oil.

The impact of steamships was momentous. In the late 1830s, a top-class sailing ship from Liverpool could make it to New York in forty-eight days or so. Favorable winds made the return faster, reducing it to about thirty-six days. By the 1840s, steamships brought the normal voyage to a reliable fourteen days in either direction. [21]

The transition from animate and sail powered vessels to the steam engine ushered in a new era of shipping. No longer were voyages subject to the whims of the climate or the exhaustion of oarsmen. Ships were now fueled by an abundant energy source (coal) driving increasingly powerful engines. The development of the internal combustion engine (ICE) powered by liquid fuels accelerated this transition and firmly cemented the use of fossil fuels in international shipping.

The first internal combustion engines suitable for mobile applications were developed by Gottlieb Daimler, Wilhelm Maybach, and Karl Friedrich Benz in the 1880s. These engines ran on liquid fossil fuels. Gasoline and the other liquid fuels made from crude oil are portable and have a higher energy density than coal making them a superior energy source for mobile applications. Gasoline engines have electric ignitions. In the 1890s, Rudolf Diesel developed a more efficient engine in which the fuel (diesel) is ignited spontaneously. Diesel engines are heavier and operate at a slower speeds—while delivering more force to the output shaft—making them ideal for ships, trucks, locomotives, and heavy machinery. Diesel—a fuel oil distilled from crude oil—has a higher energy density by volume than gasoline making it a more economical fuel as well.

The first diesel-powered vessel—a small oil tanker operating on the Caspian Sea—was put into service in 1903, and the first diesel-powered ocean-going vessel—a 6,800 dwt freight and passenger ship—was launched in 1912. Following World War II, diesel engines powered a new generation of large tankers, bulk carriers, and container ships. By the 21st century, the most powerful marine diesels in super tankers and large bulk carriers are rated at almost 100 MW, a thousandfold increase from the largest steam engines of 1900. With a superior fuel source and a lighter, more powerful machine, diesel engines have become the indispensable prime movers of globalization in the 21st century. [12]

The Container

Despite great advances in ship propulsion, shipping was a highly labor-intensive industry for the first half of the 20th century. Most of the time and cost of moving cargo was spent at port. The ships used to move cargo during this period were breakbulk vessels designed to handle almost any type of dry cargo—as opposed to the bulk carriers specially designed to transport unpackaged bulk cargo, such as coal or grain.

Breakbulk ships were loaded piece-by-piece by an army of longshoremen. One gang of workers would assembly cargo onto pallets on the dock. The pallets were then hoisted up onto the boat and through an open hatch into the cargo hold below. Another gang would unload the pallet and secure the cargo inside of the hold. Unloading breakbulk vessels followed the same basic process in reverse. Unloading an incoming shipload and reloading an outgoing load could keep a vessel tied up at port for a week or more, and account for 60 to 75 percent of the cost of the voyage. [13]

Shipping was labor intensive, and the work of a longshoreman could be brutally physical and highly irregular. Injury rates were three times that of construction and eight times that in manufacturing. [14] Wages were often higher than for other manual labor jobs, but work was contingent on the ships at the dock on a given day with frequent periods of part-time or no work. Getting a job on the docks usually required having a family member in the profession.

Harsh working conditions, economic uncertainty, and insularity of the profession strengthened longshore labor unions in 20th century. Labor disputes were frequent and difficult to resolve. Unions were often unable to impose settlements on their members, and their employers were often contractors rather than shipowners or terminal operators with assets to protect. This allowed shipowners and terminals to evade responsibility for working conditions, but it also meant there was a lack of central authority to negation with the unions. The history of antagonistic labor relations intensified cargo theft on the docks and led to strong resistance by dockworkers to anything that might eliminate jobs. [15]

One solution to the high cost of freight handling was to pack cargo in large boxes—wooden crates and eventually standardized metal containers—rather than moving loose cargo. The idea was first adopted by railroads in response to competition from trucks. Containers helped railroads improve cargo handling at interchange points. After WWII, the U.S. military began using standard metal boxes (the "Conex box") to move soldier’s personal belongings.

Early experiments with containerized cargo also revealed a number of challenges. Railroads were forced by the Interstate Commerce Commission (ICC) to set rates based on the most expensive commodity inside the container. On ships, containers had to be loaded by longshore gangs alongside other cargo, and could not be loaded as tightly as loose cargo leaving unused space. And one of the most significant challenges—one that remains to this day—was coordinating the return of a container where it came from, often resulting in global imbalances of empty containers.

The first breakthrough in container shipping came from an outsider. Malcom McLean started a trucking company in 1935 at the age of 22, and by 1954 had built one of the largest trucking companies in the U.S. In the early 1950s, McLean proposed using ships to ferry his trucks along the coast to avoid highway congestion and compete with domestic shipping lines operating cheap war-surplus ships. In 1955 McLean walked away from his trucking business and purchased one of the country's largest shipping companies (Waterman Steamship Corporation) in one for the first leveraged buyouts.

In the spring of 1956, McLean's company started the first container service at the Port of Newark with a converted WWII tanker called the Ideal-X. Loading similar sized breakbulk ships of the time typically took days, and cost roughly $5.83 per ton. The Ideal-X was loaded in less than 8 hours with costs estimated at 15.8 cents per ton, proving the potential of containerized shipping. [16]

Malcolm McLean's fundamental insight... was that the shipping industry's business was moving cargo, not sailing ships... [and] reducing the cost of shipping goods required not just a metal box but and entire new way of handling freight. Every part of the system—ports, ships, cranes, storage facilities, trucks, trains, and the operations of the shippers themselves—would have to change. [17]

Following McLean's early success, the shipping industry evolved gradually toward containers over the next decade. By 1965 most of the prerequisites for containerized shipping had fallen into place: new labor agreements were reducing the cost of dock labor; international standards for container sizes and lifting methods were in place; manufacturers began to adjust their operations; regulators were encouraging competition; railroads, truckers, and freight forwarders had grown familiar with this new "intermodal" freight; and finally shipping lines began investing in new, dedicated container ships. In the spring of 1966 only three companies were offering international container service from the U.S. That number surged to 60 companies in the span of 12 months. [18]

Growth in container shipping would accelerate over the next decade, and the economies of scale gained with containerships led to an arms race in capacity. This put a premium on size leading to orders for larger and larger ships. It also consolidated traffic at large ports with sufficient trade flow and the infrastructure to handle large containerships. By 1974, ship capacity on the largest international trade routes had increased fourteen-fold. [19]

Despite the increases in container capacity, the overall cost of shipping internationally remained relatively high for shippers through the 1970s. This changed when shippers began to think differently about how they managed their freight costs. Initially, shippers managed container shipments the same way they had managed loose cargo using a decentralized organization and existing relationships with large carrier conferences. With containers, however, shippers started to embrace independent shipping lines, which proliferated with falling shipbuilding costs after the collapse of the oil tanker market. Deregulation of the shipping industry in the early 1980s had a significant impact on prices as well. The Shipping Act of 1984 allowed shippers to sign long-term contracts with shipping lines, negotiating better rates and terms of service.

Increased competition and deregulation of the shipping industry, unleashed the economics of scale with container shipping, expanding international trade flow and transforming global supply chains. For most of the 20th century, large manufacturers controlled as much of their value chain as possible—vertical integration. With faster, more reliable, and lower cost transportation, however, manufacturers and retailers discovered they could contract with other companies for raw materials and components. This meant these companies could look for the most economical location for each part of their supply chain, ultimately outsourcing many labor-intensive processes to lower-wage countries. This decimated manufacturing employment in North American and Western Europe while helping lift millions out of poverty in Asia. By the turn of the century, most containers flowing through U.S. ports contained components and partially-produced goods rather than raw materials or finished goods reflecting the fundamental restructuring of global supply chains.

Air Cargo

While cargo has moved across canals and oceans for over 5,000 years, it has moved through the air for little more 100 years. The Wright brothers' first flight of a self-propelled machine was in 1903, and the first demonstration flight delivering a package—pitting an airplane against an express train—took place seven years later. These airplanes were not capable of carrying much weight, and from that first contest with an express train, air freight has been focused on speed. The cargo they did carry was limited to mail and small packages. From these humble beginnings, the aviation sector grew steadily in the post-war era. By the 1960s passenger airlines began offering air freight services carried in the cargo holds of passenger planes.

Early airplanes like the Wright Model B were powered by reciprocating engines—which typically run on an aviation-grade gasoline—cementing the connection to fossil fuels from birth. By the 1930s these engines were 130 times more powerful than their predecessors. Gas turbines—a type of jet engine—were introduced in the late 1930s, and the first jet-powered military planes went into service by the end of WWII. These engines typically run on a kerosene-based fuel, also distilled from crude oils. Most large aircraft in service today are powered by jet engines.

Due to the inherent weight and capacity limitations of aircraft compared to other modes of transportation, many early air cargo carriers struggled. The introduction of the Boeing 747 in 1968, however, transformed the nascent industry. It was the first wide-body aircraft capable of transporting full pallets in its cargo hold, increasing capacity threefold. Federal Express (FedEx)—the largest air cargo carrier today—was founded soon after in 1971. United Postal Service (UPS) offered air cargo services as early as the 1950s, and began operating a dedicated aircraft fleet in 1988. Deregulation in late 1970s also helped the airline industry establish a foothold in cargo services allowing carriers to offer next-day services on almost any route.

Buoyed by expanding international trade and the emergence of e-commerce, the air cargo market has grown steadily since the 1990s. Growth softened following the economic recession in 2008 and 2009 owing to increasing competition from ocean freight and increasing trade tensions. In 2017, air cargo represented only 1 percent of global freight by weight, but on average the industry carries higher value goods, representing over 35 percent of global freight by value. The majority of air cargo is moved by dedicated freight aircraft. A new generation of wide-body planes—such as the Boeing 787 and Airbus A350—has allowed passenger airlines to further expand cargo services moved with their passenger operations. This segment of the market—where cargo is carried in the "belly" of passenger aircraft—has shown the strongest growth in recent years. [20]

References

[1] Stopford, M. (2009). Maritime Economics (3rd ed.). New York: Routledge.

[2] Stopford, 2009

[3] Lorenzi, R. (2014). World’s Oldest Port: Wadi el-Jarf, Egypt. Archaeology, January/February 2014.

[4] Smil, V. (2017). Energy and Civilization: A History. Cambridge, MA: The MIT Press.

[5] Wind direction refers to the direction from which the wind is blowing. This is in contrast to bearing, which indicates the direction toward which an object is moving.

[6] Smil, 2017

[7] Smil, 2017, p. 235.

[8] Wrigley, E. A. (2010). Energy and the English Industrial Revolution. Cambridge, UK: Cambridge University Press.

[9] Smil, 2017

[10] Smil, 2017

[11] Smil, 2017

[12] Smil, 2017

[13] Levinson, M. (2016). The Box: How the Shipping Container Made the World Smaller and the World Economy Bigger (2nd ed.). Princeton, New Jersey: Princeton University Press.

[14] Levinson, 2016, p.24.

[15] Levinson, 2016

[16] Levinson, 2016

[17] Levinson, 2016, p. 70.

[18] Levinson, 2016

[19] Levinson, 2016

[20] Crabtree, T., Hoang, T., Tom, R., & Gildemann, G. (2018). World Air Cargo Forecast: 2018-2037. Boeing.

[21] Baldwin, R. (2016). The Great Convergence: Information Technology and the New Globalization. Cambridge, MA: Belknap Press. Page 52.

This summer, one of the country’s largest egg producers was charged with price gouging, inflating the price of their eggs to “unconscionably excessive” levels during the peak months of the pandemic. According to the New York Attorney General, the Ohio- and Pennsylvania-based producer Hillandale Farms (allegedly) charged up to four times more per carton in March and April, netting the company $4 million. [1] 

Price gouging laws are designed to prevent abuse during periods of significant disruption. The New York statute cited in the case against Hillandale Farms states: “During any abnormal disruption of the market for consumer goods . . . vital and necessary for the health, safety and welfare of consumers, no party within the chain of distribution of such consumer goods . . . shall sell or offer to sell any such goods . . . for an amount which represents an unconscionably excessive price….” [2]

Critics argue these price controls extend shortages, and an unfettered market would more efficiently allocate scarce resources. If demand increases for bottled water following an earthquake that disrupts municipal water systems, for example, then some sellers might increase the price of bottled water to profit from their supply. These higher prices could then encourage some sellers to rush new supplies to the market. This argument, however, rests on the classic supply-and-demand model which is most effective for perfectly competitive markets where there is no price manipulation, the costs of trading are low, and everyone has full information about the price (and quality) of goods offered for sale.

In a market disrupted by an earthquake, even the most enterprising seller can’t bring supplies to market if roads and other infrastructure is not operational. More importantly, an unfettered market where sellers can raise prices to profit from increased demand allocates resources to those who can pay—which might mean physical cash on-hand in an earthquake—rather than those in the greatest need during an emergency. 

In the case against Hillandale Farms, the New York Attorney General (NYAG) argues the company raised prices to profit from an increase in demand driven by the coronavirus pandemic rather than recouping increased costs. In defense, Hillandale argues that they charge market-based prices. Like many producers in the egg industry, they base their prices on an index published by a price reporting agency (PRA). [1]

PRAs are private companies who report news and analysis of company activities and price trends in commodity markets. Their price assessments serve as an independent reference for strategy, procurement, and a wide range of financial products that play a crucial role in commodity markets and the broader economy. An oil refinery, for example, may use prices from a PRA for specific grades of crude to determine what feedstock they will buy, and prices for its refined products to determine which markets to sell in. “Without their work,” argues Owain Johnson in The Price Reporters, “many important markets would experience a reduction in transparency that would have knock-on effects on confidence, activity levels and, ultimately, on the cost of everyday goods and services.” [3]

PRA price assessments are used as the basis of trade deals, simplifying negotiations to benchmark premiums rather than volatile commodity prices. Many commodities like grains, metals, and crude oil are traded on exchanges with transparent, near real-time pricing information. PRAs report on market prices and trading levels for these exchange-traded commodities. The assessments by different PRAs often deviate significantly on specific trading days but are remarkably consistent over longer periods of time for some commodities. The major price indexes for crude oil, for example, can differ by less than $0.01 per barrel. [4] PRAs also provide assessments and information on commodities that are not traded in sufficient quantity or frequency to be listed on exchanges. 

Given the central role price benchmarks serve in commodity markets, there is increasing scrutiny by regulators worried about the manipulation of commodity markets affecting wholesale—and ultimately consumer—prices. There are few cases of a PRA deliberately publishing a false or misleading price, but their assessments have been subject to manipulation by market participations. [3] 

In some markets, PRA price assessments have become entrenched in the contractual fabric of the industry. In the oil industry, long-term contracts and short- and long-term derivative instruments are based on Platts’ price benchmarks. This has created the condition where adopting a different price benchmark would have both contractual risk and risk when hedging physical contract prices in the derivative markets.

The methodology PRAs use can influence the way an industry trades as well. Platts uses transaction data from a specific window of time to compile its price quotations, and traders will time their trades based on this window if they want their transaction included—or not included—in Platts’ assessment. [4]

In an active market, there are conflicting price signals. Sellers will try to assess higher prices, buyers lower prices, and speculative traders will flip between the two based on where their position lies. PRAs use a variety of methodologies to provide a fair and independent assessment of where the market values a given product. Some use information collected from market participants and trading screens. Others use a more mechanical approach based on data submitted by a panel of traders. Most use a combination of analysis and judgement.

In the egg industry, Hillandale Farms and other producers use an index published by Urner Barry, a PRA specializing in agricultural commodities. Urner Barry uses a hierarchy of market information to form their price assessments including bona fide trades, offers and bids, trading activity of feedstock and related items, and assessments by market participants like Hillandale Farms. [5]

In effect, Hillandale Farms bases their prices on an index that uses their own assessment of the market. According to the New York Attorney General (NYAG), Hillandale claims its customers have agreed to this pricing practice but “to the extent that any such agreements with its customers purport to allow Hillandale to charge unconscionably excessive prices for eggs during an abnormal market disruption, such provisions are illegal, in violation of public policy, and unenforceable under New York law.” [1]

References

[1] New York Attorney General. (2020, September 5). Attorney General James Sues One of the Nation’s Largest Egg Producers for Price Gouging During the Coronavirus Pandemic.

[2] New York versus Hillandale Farms. New York versus Hillandale Farms, Supreme Court of the State of New York(August 10, 2020).

[3] Johnson, O. (2018). The Price Reporters. New York: Routledge.

[4] International Organization of Securities Commissions IOSCO. (2011). Oil Price Reporting Agencies Report by IEA, IEF, OPEC and IOSCO to G20 Finance Ministers, October 2011.

[5] Urner Barry. (2020). Price Reporting Methodology.