Clayton Cramer sent me an email a week or more ago about a fascinating take on the Chinese price advantage by Tupper Saussy. My Saussy says that one of the main reasons the Chinese are dominating our import market for cheap goods is that their goverment is subsidizing shipping costs by essentially giving away those huge steel shipping containers.

It costs about $2000 to ship one from Shanghai to the west coast, Oakland or Seattle. I figure that it costs another $1000, minimum to get it from there to, say Kansas, by train and then truck.

Here's what inspired my thinking about those containers. I was talking to a guy who imports after-market auto parts for pick-up trucks, lots of fancy wheels and other gizmos. They all come from China. He told me that his shipper was having troubles making timely deliveries because their storage yard was packed with the containers. According to him, for every three that come here, only one ever carries anything away. So the shipping yard is packed and stacked full of "empties." ...

I build stuff for a living. Most of it's made of steel. I took a look at that big steel box and realized I'd want five figures to build one. In big time production mode, that would drop to $7500. There's that much welding involved. The steel costs alone, FOB a rolling mill in China, are over $2000. Even if I had laborers at 20 cents an hour and a factory 20 miles from the rolling mill, the overhead costs of the shop, 20 mile cartage, electricity, machine tool wear, welding rods, wastage on the steel plate, etc. would force me to a price of $6000. The box weighs 2.5 tons. $6000 ain't a bad number, given what's involved in building one. If I wanted to buy one for storage at my shop and got told, "It'll cost you $6000," I wouldn't even blink at the price.

Tumble the numbers with me. At $6000 each, three cost $18,000. The shipper made 3 x $2000, $6000, to send them to the US, full of Chinese made goods. Only one goes back for re-use. He's instantly down by $12,000, the logical result of a trade imbalance - and that doesn't even account for the fuel costs by the ship to get them here. Nobody is going to ship the empty containers by truck or rail back to a port. That would cost $1000, each. So, the shipper really ought to include the additional costs of $12,000, distributed into every three shipments. Instead of it costing $2000 to get a container full of goods from Shanghai to Seattle, it ought to cost $6000. $2000 + (1/3 x $12,000) = $6000. But even at that number he's just giving the container away at what it cost him - a very bad business practice - so the number has to be greater than $6000.

But if it cost +$6000 to ship it from China, then the Chinese labor discount vanishes from the goods in the box. The product would be the same price, or less (!) if manufactured here!

So, he concludes not only that the Chinese government must be subsidizing these shipping containers to keep costs down in America and Europe, but also that the shipping companies are making a killing by getting these containers at such a cheap price.

Now comes a nifty little Ponzi scheme. The shipper goes to a bank, a big international bank. He seeks a loan. The collateral is the shipping containers. He spent $7500 for three of them. But the fair market value is at least $18,000 (what they'd cost if built anywhere). He borrows $17,000. He buys six new containers for $15,000 and pockets $2000. But the fair market value of the new six is $36,000. He borrows another $34,000, using those six as collateral. With that $34,000, he buys 12 more containers and pockets $4000. I could keep doing the iterations, but you can see the game. It's a doubling up with each pass, with a cash profit of about 15% put into the shipping company each time. To keep it simple I started it at low figures. It's probably running at around 1,000,000 containers a year - given that 18 million of them have been built in only 30 years.

The shipping companies can offer very low rates from Shanghai to Seattle - all they want to do is break even, if that. They have a market incentive for that. They do NOT make money on the shipping. They make money by buying containers for shipping! They have to keep the shipping costs very low, as that's what's driving the whole "globalization" concept. If shipping costs were anywhere near their historical norms, then the low labor rates in China would be offset by the shipping costs, and importation would also go back to historical norms. We'd build far more stuff locally! Then the shipper would make very little money - as ocean shipping would drop substantially. But far worse from the shipper's perspective - he'd not need any more new containers. The scheme collapses.

There's a lot more, and I'd love to quote it all bit then you wouldn't have to go visit the site!

(HT: Clayton Cramer.)



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