A NEW ROLE OF DISTANCE IN INTERNATIONAL TRADE

 

In our new work, we enhance the New Keynesian Dynamic Stochastic General Equilibrium Model (DSGE) by incorporating a distance shock parameter into the transaction costs function. We show that distance does not impede trade, as conventionally assumed in gravity-based trade models. Rather, we show that a country’s economic benefit from trade depends on the length of time its main macroeconomic variables (gross domestic product, consumption, capital accumulation, investment, real money balances, and inflation) react to a distance shock, likely caused by today’s global economic uncertainty: i.e., what Jeffry Sachs of Columbia University has called ‘man-made supply shocks’.

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Globalization, trade liberalization, information technologies and low transport costs have all shrunk distances leading us into the global ‘village’. Geographical distance has become largely irrelevant in trade models, replaced by economic distance as this is represented by the low transport costs of large ships. This, for instance, allows China to import iron ore from Brazil, three times the distance of its neighboring Australia.

Recently, this reality has started to change, together with the emergence of the term de-globalization. Global economic uncertainty (GEA), deriving from trade frictions, inflation, embargoes, wars, strikes, etc. --what Jeffry Sachs of Columbia University has called man-made supply shocks--, is shortening global supply chains, giving rise to nearshoring, friendshoring, 3D printing, etc.. Interestingly, GEA creates regional distribution hub-countries, if one were to just look at Chinese investments in Mexico (for USA) and Turkey (for Europe)[1].

What we show in our work is that GEA changes distance from a geographical constant to an economic ‘shock’ variable, with asymmetric effects. With the use of Iran as an example, we show that the country’s economic benefit is far greater by joining the Shanghai Cooperation Organization (SCO), despite the much longer distances from SCO countries, rather than the International North-South Trade Corridor (INSTC) of Russia. Again, the distance of economic interaction plays a less significant role in advancing economic welfare, depending on the reaction time to distance of main macroeconomic variables such as gross domestic product, consumption, capital accumulation, investment, real money balances, and inflation.

HH

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[1] China was given one billion euro to Turkey, to develop a production facility for its BYD electric car, thus bypassing EU’s recently established import duties on Chinese electric cars.

OR: Operational Research or Operations Research?

A silly question really but, one worth asking nonetheless: Which of the two expressions is correct? Operational Research or Operations Research?

Most people will tell you “it’s the same”. Those a little bit  more savvy, however, will say (correctly I admit) that the first (operational) is UK/European (we even have journals and societies under this name, e.g., European Journal of Operational Research), while the second (operations) is American.

These, however, do not answer my question: which one is correct? Or, to be more precise, which one describes better the content and scope of the OR discipline which is the application of advanced analytical methods, such as mathematical modeling, statistics, and optimization, to help make better decisions and solve complex problems? 

The root of the problem may be in the translation of the English 'operations research' into, say, French (recherche opérationnelle), Dutch (operationeel onderzoek), etc., and then translating these back to English as (operational research). 

Operational Research, however, implies research that is operational; i.e., research dealing with day-to-day operational questions. Operations Research, instead, is 'research on operations', which is exactly what OR is about, as I have defined it above.

I hope my ‘silly’ distinction might be found useful or convincing among colleagues and students, so  that the correct expression is used going forward. And this is “Operations Research”.  

HH

 

Stowage planning and Yang Ming’s ‘Mobility’ explosion in Ningbo (9 Aug ’24)

Stowage planning of a large containership is an art and a science, claiming the brightest of our students and the use  of the most advanced algorithms of operations research.

This may sound surprising unless one things that the stowage exercise involves something like five loading ports in Asia and an equal number of unloading (and loading) ports in Europe; the need to minimize rehandles taking the full rotation into account; considering ship bay allocations by alliance members; proper positioning of dangerous, reefer and oversized containers; loading the ship evenly in view of the small clearance between a large ship’s keel and the seabed at berth; to the extent possible, reducing the metacenter of the ship by stowing heavy containers as low as possible.

All this is done not only by taking the full rotation into account, but also the plans of the yard planners. These have similar problems to solve, trying to minimize both rehandles (a nightmare in ports like Hong Kong where one must store containers 7-high), as well as the movement of terminal equipment (cranes; chassis; straddle carriers; reach stackers; AGVs, etc.). Recently, minimization of equipment movements has one more objective to fulfill: environmental emissions.

Finally, the equation may need to include gate operations, regarding the arrival of export containers. Here, external tracks should interfere as little as possible with the movements of terminal equipment which, btw, should be available and ready to serve them: a synchronization issue. Thus, external tracks should wait as little as possible and be given priority if they must pick up an import container on their way out (known as ‘dual transaction’).

No matter how difficult, we often attempt the joint optimization of such problems, i.e. ship-terminal-gate. One can easily understand the complexity of the exercise, particularly if one considers that carrier and terminal operator do not always see eye to eye. HH   

REVOKING CONSORTIA BLOCK EXEMPTION REGULATION (CBER)

 In 2005, we had warned the European Commission (see Erasmus Report) that the prohibition of conferences from European trades was a big mistake. Its consequences, we claimed, would be stronger and fewer alliances, i.e., more concentration and opportunities for its abuse. They did not listen. Dressed to kill, hand-in-glove with shippers (the European Shippers' Council), they forbode liner conferences and we have all seen the results of this, which are exactly as we predicted in 2005. But the Commission, it seems, does not learn from its mistakes and is bound to make an even bigger mistake which will lead to mergers, acquisitions and hostile takeovers. In the end, the shipper will pay again through fewer services and heightened unreliability. 

The Commission claims that CBER does not promote competition anymore. It blatantly fails to understand, however, that more competition was never the intention of CBER. Instead, following the prohibition of conferences, the Regulation was affording carriers some 'self-regulatory' discretion because, in industries such as liner shipping, outright competition on marginal cost becomes destructive.

The right step, therefore would have been better regulatory surveillance, instead of expecting the carrier to prove himself that he is not an elephant. This is exactly what President Biden asked FMC to do (better regulatory work) a few months back. Following its review, the latter (FMC) decreed that there is nothing 'sinister' behind alliances and the astronomical profits of the covid-19 period were nothing more that the effects of a supply and demand imbalance. Indeed, if one observes today's precipitous drop in freight rates, one and only one conclusion can be drawn: even if carriers had some degree of monopoly power, they have never been able to make it work.-

HH

Lack of Slack? Risk mitigation in service industries: A research agenda on container shipping

LACK OF SLACK?

Our results show that it is the ‘unexpected’ and ‘unanticipated’ -e.g., a natural disaster; a war; a tsunami; or COVID19-that poses the greatest risk to carriers: Intense competition amongst them, geared to short-term profit maximization, coupled with the fine-tuning of capacity management within alliances, does not allow them the luxury of affording built-in buffers, or slacks, that could ‘absorb’ the unexpected. Not unexpectedly therefore, COVID19 has been the greatest risk factor of all times, mitigated –quite profitably one should add—by the joint capacity management of global shipping alliances. (Open Access: https://lnkd.in/dV9mkY7Y)

MEL SPECIAL ISSUE: PORT-CITY SYMBIOSIS

 

Before, ports used to be ‘city ports’, particularly in cities blessed with a river. Growth in trade and ship sizes eventually obliged them to move downstream, in river estuaries, where more space was available. Cities thus became ‘port cities’. Of recent, we observe port activity returning back to the hinterland in the form of inland terminals and dry-ports. However, the relationship between the port and its city, or vice versa, has never been easy. The port needs autonomy, the city requires ‘control’.

 Moreover, both port and city need to develop their port and urban plans, and this requires land which can be demanded and contested by both. Can a city and a port coexist in harmony? Carola and Maurice try to answer this through the compilation of eight excellent papers in this new MEL Special Issue. Congratulations and thanks to both guest editors and all the contributors to this new MEL milestone.

 HH

PUBLIC TENDERS IN PORTS: COMPETITION ‘IN’ OR ‘FOR’ THE MARKET?

I have written on this issue before but, again, here is an excerpt from my new work, to appear shortly.

The type of competition we choose to adopt among our concessionaires is important. In many submissions to the European Commission, I have favoured competition ‘in’ the market, vis à vis competition ‘for’ the market, the latter being the Commission’s preference, mostly based on arguments regarding market size. 

To explain. Ports are often referred to as the classic example of the so-called natural monopoly case, whereby possible market failure can justify government intervention. Under certain conditions (level of demand, cost structures and technology), a market with two or more firms can produce sub-optimal economic outcomes (for example a certain port may be too small to have two tug operators), whereas a single firm might produce the required output more efficiently. For this reason, governments often decide to move away from a multi-firm competitive environment (competition “in” the market), towards a monopolistic, albeit regulated, situation (competition “for” the market), whereby only one concessionaire is selected through competitive public tendering.

I have always argued that such public intervention in commercial decisions is wrong. And it is wrong for two reasons.

First, the sometimes-widespread corruption in the public sector may result in ‘photographic’ tenders favouring a specific bidder (often the current incumbent), effectively shutting off international or even national competitors. Thus, it is not uncommon for public tenders to end up with only one interested bidder, while the correlation between single-bid contracts and corruption in the public domain is statistically significant[1]. Finally, the opening of the market for public contracts is one area where WTO is dragging its feet for years now, without much progress.

Second, governments, and the public administration by and large, are by far the least competent actors to decide on ‘market size’, or on the financial ramifications for private firms who would like to take calculated risks and enter a market. This is because governments lack both the information required for such decisions --a typical case of asymmetry of information[2] and the legitimization to decide themselves on the fortunes of private risk-takers. The same is true when it comes to the efficiency of the regulatory role of the public administration (port authority): often, the latter has neither the professional competence (accounting, finance, etc.) nor the information and statistics required to assess the highly complex accounts of the concessionaire; accounts that, often, are submitted in purposely complex and lengthy form, intended to confuse the assessor.  

Instead, the role of the public administration should be to set the rules of the game; to determine the conditions and quality of the services it requires (including any Public Service Obligations) and then leave it up to the private sector to decide for themselves if the market is big enough, if they see profit prospects, or if they would like to go bust. But this ought to be ‘their own’ decision, because it is ‘their own’ money, and, in the end, ‘their own’ neck on the block.

HH

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[1]The Economist (2016). Rigging the bids. Nov. 19, 2016.

[2]Akerlof, G.A. (1970). The Market for “Lemons”: Quality, Uncertainty and the Market Mechanism. The Quarterly Journal of Economics, Volume 84, Issue 3, August 1970, Pages 488–500. https://doi.org/10.2307/1879431.

 

Carbon Emissions Trading and Shipping: A game changer

 

The inclusion of shipping in the European Union’s Emissions Trading System (ETS) is a game changer for ocean transportation.

The World Bank foresees that the Carbon Emissions Trading (CET) market may develop into the world's largest commodity trading market, expected to exceed $3 trillion in the near future. The Bank also expects CET futures, as well as the carbon finance market as a whole, to replace oil as the world's largest market.

We show that the link between carbon emissions trading and shipping is strong, particularly between CET and dry bulk shipping. The link becomes stronger during periods of external shocks, such as Brexit, Covid-19 and China-US trade frictions.

But how can our results be intelligently used by shipowners for greater profit? How can they support the environmental sustainability decisions of shipping companies? And how can governments include shipping in emissions trading systems?

This pioneering research (published Open Access in Energy Economics) took three years to complete. Sincere thanks are due to the funding organizations that allowed us to carry out the work. These were:

1. National Natural Science Foundation of China

2. The 111 Project of China

3. The Postdoctoral Research Foundation of China

4. The Liaoning Revitalization Talents Program

5. The Liaoning Natural Science Foundation

6. The Dalian Academy of Social Sciences

7. The Dalian Federation of Social Sciences (Key Project)

HH

SHIPPING ALLIANCES AND THE MAERSK-MSC 'DIVORCE': WAS THE REGULATOR RIGHT AFTER ALL?

On the left, Drewry’s World Container Index (WCI) has tumbled by 80% year-on-year, down to $2000/FEW. On the right, one sees the industry’s unprecedented, all-time-high, orderbook with deliveries coming on stream this and the next two years (with many thanks to Drewry Shipping Consultants Ltd and Alphaliner). If you look at the two graphs together, ‘one plus one makes two’, and rates are expected to fall even further going forward.

MSC’s orderbook in particular is spectacular, five times that of the more conservative Maersk Line. This explains their ‘divorce’: Maersk has decided to invest along the supply chain while Mr. Aponte (MSC) will continue doing what he, and his father before him, did best: “shipping”. In other words, the two companies decided to invest their fathomless profits of the COVID-19 years in what each was best at: Door-to-door supply chain integration for Maersk; competitive ‘port-to-port shipping’ for MSC. The two strategies are not compatible, as they lead to two different cost structures: substantial investments in a global network of sales  effort around the world, for Maersk, targeting the individual shipper, and ocean transport cost competitiveness for MSC, renowned over the years for its acquisition of new and secondhand tonnage at competitive prices.

My point here is different, though: The two graphs tell us that shipping alliances may have not been very successful, after all, in managing capacity, and regulators may be proven right in considering the (COVID19) price hikes just a “matter of demand and supply”. This could be the second reason for the Maersk-MSC divorce. Or not? 

HH

Optimizing global maritime supply chains: What is a ‘Dual Transaction’ in a container terminal?

In the thrust of nations towards ever higher competitive advantage[1], container terminals play a pivotal and indispensable role. Technological advances and competition amongst them, have forced terminals to raise their efficiency to remarkable levels. This was not always the case: there were times, during the protectionist years following WWII, when inefficient ports were tacitly encouraged by local exporting interests, seen as protection from foreign imports. These were the days of the general cargo freighter, often known to spend half of her time in port, waiting to berth, unload and load[2]. Seafaring was fun during those days. Today, the ship is turned around in two days and the terminal may be 50 kms or more from the city. Even if public transport did exist, the youngster would rather relax in his airco berth, or by the pool, or playing a game of snooker with his mates. At any rate, he would again be back home in a couple of weeks[3].

Simply put, efficiency means two things: Either we strive to achieve a certain output (i.e., number of containers handled per annum, or ships hosted in our berths) with as low a cost as possible; or, given a certain endowment of port resources (i.e., cost), we struggle to maximize the port’s output. The methodology commonly employed in this type of efficiency assessments is known as Data Envelopment Analysis (DEA): a mathematical programming approach, producing ‘frontiers’ of best practice (i.e., top efficiency), against which all other firms (in our case port terminals) can benchmark themselves; a procrustean bed, so to speak[4].

Whatever the case, cost control is the paramount consideration of port management. One of the ways to achieve this is to minimize the movement of containers and their handling-equipment in and around the terminal. A few examples might suffice: Minimize the turnaround time of ships (how many ship-to-shore cranes can I deploy on a large ship before I start realizing diseconomies?); Minimize container rehandles in the stacking yard (if a container departs in two hours, you may not stack other containers on top of it); minimize the distance between the berth and the stacking yard; minimize the distance an external truck must travel between the gate and the place where it must drop its export container; minimize the time a truck must wait in the parking lot before it can enter the terminal to pick up its container; and so on.

If one wants, and one must want, problems could become even more challenging: Stack containers in the yard according to the stowage-plan of calling ships; i.e., optimize ship stowage-planning and yard-planning simultaneously and well in advance, adjusting terminal-planning according to ship operations in previous ports. Yard-planning is an operations research (OR) challenge but, even in the largest of terminals, like Shanghai, Rotterdam, Singapore or Los Angeles, the problem has been efficiently solved through the development of advanced IT software. But if yard-planning is a challenge, stowage-planning may be an even bigger one: A stowage plan needs to take into account not only the ship’s port-rotation, but also a) stability considerations during loading (the clearance between the ship’s keel and the seabed, these days, may be less than half a meter, and if loading along rows is not even, touching the seabed could be disastrous); b) alliance-members’ dedicated bays on the ship; c) crane density; d) different sizes of containers; e) dangerous goods, and more. If stowage-planning and yard-planning are ‘challenges’ in themselves, trying to optimize them simultaneously is an OR nightmare. It is not by accident that my brightest students (in math and OR) work at PSA, DP World, Hutchinson and other global terminal operators.

But still we haven’t explained what are ‘dual transactions’ in container terminals.

There are two types of external trucks visiting a container terminal: those who bring export containers from the hinterland, to be loaded on arriving ships; and those who come to pick up import containers, already unloaded and waiting in the container yard. Usually, in both cases, one of the two legs of the trip is unproductive: the ballast leg, as we would say in shipping. A truck drops the container at the terminal and returns empty; another goes empty to the terminal to pick up an import container. This type of inefficiency -if we could call it that- not only leads to higher transport costs but, these days, it causes things even more important:  these are the negative externalities of land infrastructure use, i.e., pollution, congestion, and road accidents. It would be interesting at this point to make a small diversion.

The drive to efficiency, as we said above, has to do with maximizing output (e.g., number of containers handled) given a certain endowment of resources (cranes, land, people).  Today, however, there is a new factor entering the efficiency calculation: This concerns the minimization of negative externalities from port operations, such as sea and air pollution, noise, disturbances of sea ecosystems, accidents, impacts on local communities and on commercial activities (e.g., fishing, aquacultures, etc.), conflict with urban development plans, road congestion around the port and so on; the list goes on[5]. All these are called ‘negative output’ of port operations and reducing them is equivalent (or it should be seen as equivalent) to increasing ‘output’.[6] [7] The question of course here, as in all cases involving negative externalities, is how to price them, who should pay for them and how, and what would be the impact of higher prices on trade and welfare. But let us finish our diversion here and return to our dual transactions.

Can a hinterland consignee know which trucks take export containers to the port so that he can ‘book’ one to pick up his waiting import container and bring it to him? And can the truck going to the port to pick up an import container know who, in the hinterland, needs a truck to carry his export container to the terminal? Technically, this exchange of information shouldn’t be too difficult to organize, and a simple APP could take care of it. The impact of dual transactions on terminal management requirements, however, is considerable, and this is the problem we have tried to solve in this research, the development of which took us more than three years.  This is why[8]:

The terminal management system we have described above, i.e., stacking-berthing-gate (etc.) operations, now needs to be modified to accommodate the following dual transaction considerations: a) An incoming dual transaction (DT) truck cannot wait at the gate and needs to jump the queue; b) the truck cannot wait either at the queue of the export block to drop its container; priority should be given to it over the operations of internal terminal trucks and other handling-equipment; c) when the truck is ready to move to the import stack to pick up a container, the handling-equipment (e.g., bridge cranes, straddle carriers; reach-stackers, forklifts, etc.) should be ready and waiting and, ideally, the availability of the equipment should have been planned in advance. So, in short, if optimizing shore and yard operations jointly (we have carried out research where even gate operations are included in this optimization) in a nightmare, the inclusion in the problem of dual transactions makes the problem apocalyptic. This, because now one needs to develop a heuristic algorithm that jointly optimizes: gate; berth; stowage; yard; export/import blocks and handling-equipment deployment.

In an effort to address these issues, we have developed a bi-objective mixed integer programming model that optimizes the allocation of appointment quotas simultaneously with the deployment of (yard) cargohandling equipment. The model addresses the challenges posed by the different types of truck movement in the terminal, i.e., delivery, pickup, and dual transaction. These require different handling-equipment, involving various deadlines, and multiple priorities. To estimate the queuing length of external trucks in single or dual transactions (as well as that of internal trucks), we have set up a novel three-level vocation queuing model. For the bi-objective optimization, we propose a revised non-dominated genetic algorithm, to obtain the approximate optimal solution. Experimental results have proven the efficiency and effectiveness of our method, which outperforms all similar algorithms. We show that our vocation queuing model can estimate the prioritized queuing process more effectively in three respects: a) the 3-level queuing; b) discrete truck arrivals in the queuing system; c) non-interruption of servers. Our quota optimization design improves the model’s applicability to real cases, especially in the case of dual transactions. We finally demonstrate that the method proposed here, if adopted, could help terminal operators allocate quotas and simultaneously match the capacity of yard-handling, thus improving truck services, cost reductions and environmental impacts. The benefits to be enjoyed by port users, because of higher terminal efficiency, are only too obvious to be discussed.-

HH, May 2022.

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[1] Michael E. Porter (1990) The Competitive Advantage of Nations. Macmillan Press Ltd., Basingstoke, UK.

[2] H.E. Haralambides (2021). Containerization and the port industry. The Elsevier Transport Encyclopedia, Roger Vickerman, Editor.

[3] Haralambides, H.E. (2019). Gigantism in container shipping, ports and global logistics: a time-lapse into the future. Maritime Economics & Logistics, 21(1), pp. 1-60.

[4] H.E. Haralambides, M. Hussain, C. Pestana-Barros and N. Peypoch (2010) A New Approach in Benchmarking Seaport Efficiency and Technological Change. International Journal of Transport Economics, 38.1: pp. 77-96.

[5] Haralambides, H.E. (2018) ‘Port Management and Institutional Reform: 30 Years of Theory and Practice’. In: H. Geerlings, B. Kuipers and R. Zuidwijk (eds.) Ports and Networks: Strategies, Operations and Perspectives. Routledge, Oxford and New York, 2018.

[6] Haralambides, H.E. and Gujar, G. (2012). ‘On Balancing Supply Chain Efficiency and Environmental Impacts: an eco-DEA Model Applied to the Dry Port Sector of India’. Maritime Economics and Logistics, 14(1).

[7] The efforts of the European Sea Ports Organization (ESPO) during the last decade to promote the Corporate Social Responsibility of European ports is truly commendable.

[8] Li, N., Haralambides, H., Sheng, H., Jin, Z. (2022). A New Vocation Queuing Model to Optimize Truck Appointments and Yard Handling Equipment Use in Dual Transactions Systems of Container Terminals. Computers & Industrial Engineering (2022), DOI: https://doi.org/10.1016/j.cie.2022.108216.