Economics of Maritime Business

Shuo Ma

• Publisher: Routledge
• Year: 2020
• ISBN:
  9781317330103
• Edition: 1
• Topic: Business
• Subtopic: Business General
• Index: Business

This book provides a comprehensive introduction to the economics of the business of maritime transport. It provides an economic explanation of four aspects of maritime transport, namely, the demand, the supply, the market and the strategy.

The book first explains why seaborne trade happens and what its development trends are; it then analyses the main features of shipping supply and how various shipping markets function; the book finally addresses the critical strategic issues of the shipping business. The full range of different types of shipping are covered throughout the chapters and cases. The book combines the basic principles of maritime transport with the modern shipping business and the latest technological developments, particularly in the area of digital disruption. The ideas and explanations are supported and evidenced by practical examples and more than 160 tables and figures. The questions posed by the book are similar to those that would be asked by the students in their learning process or the professionals in the business environment, with the answers concentrating on the reasons for what has happened and will happen in the future rather than merely fact-telling or any specific forecast.

The book is most suited for students of shipping-related disciplines, and is also a valuable reference for maritime professionals.

Part I

The demand

Chapter 1

International trade explained

Demand is the desire of a consumer to pay a specific price for having a product or service. Supply is, therefore, the response to the desire through the provision, at the price agreed, of the product or service. Without need, a maritime transport service will not be provided. So we will, first of all, discuss maritime transport demand, before trying to find answers to the fundamental questions on supply such as what, how and to whom the shipping services shall be provided. But the demand for maritime transport is a derived demand from trade. Shipping exists because of trade or, in other words, trade is the raison d’être for shipping. That is the reason why the first chapter is devoted to international trade. In this chapter, we will begin with an explanation of what a derived demand is. We will then look at the main characters of trade, the trade theories and their critiques. This will be followed by discussion of the changes in the environment for trade. We will also have a brief review of new economic theories and explanations of trade. We will finally analyse the differences between the trade of primary commodities and that of manufactured products.

1.1 Maritime demand derived from trade

Why does maritime transport have a derived demand from trade?

A ferry ship provides services to the passengers, a cruise ship offers packages to the tourists and a cargo ship provides transport to trade for the transportation of goods. In such cases, the demand for the service is a downward slope curve representing the relationship between the price charged by the shipping companies and the quantity of services desired by the users. The lower the price is, the more the demand will be. However, there is a difference between the demands for passenger ships or cruise ships and the demand for cargo ships. The services provided by the passenger or cruise ships are final consumption goods (services), but the service provided by the cargo ship is a part of the trade. What a final consumer wants are the goods, not the transport. But trade will not be completed without transport. The customer satisfaction from cargo transport is only indirectly obtained from the completion of the trade. The more successful the trade is, the bigger the demand for shipping. As people do not want maritime transport services per se, rather they want the products that have been transported by ships, the demand for shipping depends on the demand for the delivered goods.

Such a demand is called derived demand. Shipping is an intermediate service with a derived demand from trade. As a good illustration of such a demand, we can refer to one of the most commonly used terms; an ICC (International Chamber of Commerce) term for international trade, “CIF”, which means the cost of the cargo, the insurance cost and the transport freight. In this case, the transport service is purchased together with the cargo. If trade terms other than CIF are used, maritime transport is always considered as a part of the trade, though the payment may or may not be included in the cargo’s price.

What are the implications of a derived demand?

Because shipping has a derived demand, for a better understanding of shipping we need to have a detailed discussion about international trade. Among many characteristics of the trade-derived maritime demand, the following four aspects deserve more attention.

1. Alternative transport modes. While an increase in the demand for shipping in terms of cargo transported must come from the corresponding rise in trade in volume, the opposite may not be true. This means that more trade does not always lead to more demand for shipping, even in volume terms. Shipping is not an exclusive mode of transport for trade. This is particularly true between the countries sharing common borders, where rail or road transport may be more suitable options. Pipelines and aeroplanes are other modes of transport carrying importation portions of international trade. The exact mode of transport to use depends on many elements of the characteristics of each transport mode. But one can also not estimate future maritime transport demand by merely relying on future trade development and without considering other modes of transport.
2. Variable impact on the demand. Unlike passenger or cruise shipping, for which price changes directly affect the demand level, in cargo transport, price changes may or may not have a noticeable impact on the demand. This is about price elasticity of demand, a topic which will be discussed in more detail later in the book. What is important to note now is that, for maritime transport of cargo, the same degree of change in price will have very different effects on the final prices of the goods delivered, thus leading to very different degrees of changes in the demand of trade. For example, the freight cost could be at the same level as or even higher than the price of some cargoes, such as raw materials to be transported over a long distance. In this case, a small change of the freight cost, say by 10%, would have a significant effect on the price of the cargo and subsequently on the level of demand. However, the maritime transport cost could be less than 1% of the price of some high-value cargo, such as electronics or clothes. In this case, even a 50% rise or fall in the freight level would only have a limited effect on the price of the final product and thus the level of demand.
3. Indirect competition. With a derived demand, maritime transport contributes to the final value of trade and it is, therefore, an element of the trade’s competitiveness. So even in a case where there is no direct competition in shipping services, maritime transport may still be a decisive factor in the trade competition between nations. In other words, the success of the shipping depends on the success of the trade it serves. It is also true that maritime transport strengthens or weakens the competitiveness of trade. For example, from 2011 the Brazilian mining company Vale S.A. took delivery of a series of very large ore carriers (VLOC) capable of carrying about 400,000 tons (deadweight) of iron ore from Brazil to China and other destinations. As China has become the world’s top producer of iron and steel, Australia enjoyed a competitive edge over Brazil in exporting iron ore to the Chinese market due to its proximity. So maritime transport was a determining factor in the competition. By using such large ships, the intention was to cut transport cost through scale economies to improve the competitiveness of iron ore.
4. Weak public awareness. Operating in support of international trade shipping is invisible to the public. For instance, ordinary people generally do not appreciate the importance of shipping because they cannot see it when they pick up at the supermarket a product imported from a country on the other side of the globe or fill up their cars with gasoline that has been transported all the way by a tanker ship. Most people normally only care about what they see and feel and have little interest in knowing how the product has been brought to them. It is difficult for people to appreciate the role of international shipping and the tremendous contributions made by truck drivers, warehouse keepers and crane drivers at the port. So knowing that maritime transport has a demand derived from trade allows us to better understand why improving public awareness of the maritime sector is so hard a task.

1.2 The need for trade

Why is trade at the centre of a modern economy?

Trade can simply be described as the transfer of the ownership of goods or services from one individual or firm to another in exchange for monetary payment or other products or services. This definition applies to demand and supply, though usually the topic of demand/supply and that of trade are discussed under separate headings. Trade is an exchange or a transaction of goods or services between a buyer or the demand and a seller or the supply, that may or may not take place in a market.

Gross domestic product (GDP) is commonly used to measure a country’s economy or its output for a period of time, normally a year. Gross domestic product is measured by the calculation of the total prices or market value of the final goods and services produced within a year. Such prices or market value are equivalent to the final transactions, or trade. For example, the food in a restaurant is traded between the restaurant owner and the customer, it thus has a price and enters into the country’s GDP. But a self-prepared dinner at home is not traded with an attached price and is not included in the GDP. So the GDP can be calculated either based on the total consumer prices, which is on the demand side, or based on the total value-added or all producers, which is on the supply side. For a firm, the value-added is the difference between its sales and its purchases of input from other firms. Once again, trade is at the centre of both sales and purchases. So we may say that a country’s GDP is realised in the form of the outcomes of trade.

Why are national trade and international trade often discussed separately?

A trade is a trade. There are no fundamental differences whether it is within a country or between countries. In an extreme case, if the entire world were just one country, all trade would be national or, at the other extreme, if countries were divided into small enough pieces to separate every producer and consumer, then all trade would be international. So, if trade is almost a synonym of demand and supply and it also has a central position in the creation of GDP and the development of national economy, why are national and international trade usually treated as separate topics? There are some reasons and we would like to discuss the following three of them.

• Sovereign nations. Although trade is the same no matter where trade partners are from, in most textbooks on economics trade is usually discussed in the international context. The role of domestic trade for a national economy is only elaborated on briefly if at all. Concerning the reasons for this, Samuelsson¹ explained that international trade differs from domestic trade in three aspects: it has a larger scope of trade, it involves natio...

Table of contents

• Cover
• Half Title
• Series Page
• Title Page
• Copyright Page
• Table of Contents
• List of figures
• List of tables
• List of abbreviations
• Preface
• Part I: The demand
• Part II: The supply
• Part III: The market
• Part IV: The strategy
• Index