Fractal risks in global freight systems

Part of a series on complexity and risk in freight transportation

Note: This post is part of a series on complexity and risk in freight transportation systems. Part 1 (Evolution) is divided into two posts: Global Freight and Land-Based Freight (coming soon). Part 2 (Risks) is divided into multiple posts including: this one, Satellite Navigation Systems, Ship Lifecycle (coming soon), Cybersecurity (coming soon), and others to come. Part 3 (Leverage Points) will follow.

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.

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