Winter 2015

The Economics of Transport: From Trains and Boats and Planes - to the Cloud

David Blake

The routes which take people to places and things to people are what make the economy possible. Without them the economy cannot advance, since even the greatest invention has no worth if it cannot reach its markets.

In the postwar world, transport along the trade routes has been improved. In the process, it has changed its nature. Instead of being just the servant of industry it has become a crucial part of the industrial process. The supply chain is so reliable that production can be split around the world. It has morphed into a Global Value Chain.

This has led for the first time to the emergence of a truly global system of production. There is nothing new in the import of raw materials to be processed in another country. The first Industrial Revolution transported cotton across the ocean to meet coal in Lancashire for the textile industry. What is new now, and is a result of the globalisation of corporations, is that designs are made in one place, components in another and they are fitted together to a final product which is then marketed in a third place — often the country where the design originated — while the money earned ends up in yet another centre.

This complex system is quite new. It would have surprised Adam Smith, often seen as the prophet of trade. Smith used the phrase invisible hand” only once in The Wealth of Nations, and this was to say that the risks of spreading activity in this way were so great that it would never become a threat to home producers. Lack of trust would always keep businesses close to home, not daring to spread their activities round the world. And the dangers of travel would act as a further block. It has taken huge physical investment, inventiveness and changes in the laws of nations to make that warning outdated.

The inventiveness came first. From earliest times, man had learned to float on water and to turn it from a barrier into a route capable of carrying heavy loads with little effort. First on the great rivers of the Near East and then on the Mediterranean, a western system of water transport emerged. But it only took people where the water wanted them to go. The first great breakthrough came as man first tamed and then built his own rivers — the canal system which made possible the transport of goods across long distances on land. Both in Europe and North America the canals were crucial. In North America, the Erie canal turned New York into the entrepôt for people and goods, soon eclipsing all the other cities on the East coast. In Britain, the canal system was one of the most highly developed in Europe allowing goods made in the midlands or north to reach either sea or markets in the south. Firms such as Wedgwood became first national then international enterprises because the canals made them so.

But this was just an appetiser for the great revolution, the rise of the railways. As these spread across most of the world, huge changes occurred in the sourcing of materials. Not everyone welcomed this archetypal symbol of the modern world. The Duke of Wellington was against them because they would encourage the lower classes to move about”, something which lies behind much snobbish objection to package air holidays today. (His objections did not, however, prevent him making a lot of money later out of some smart speculations in rail shares.)

As with all moving goods, rail made possible the modern city. In the first place it allowed cities to reach out over a much greater distance for food to nourish their populations. And secondly it allowed people to live miles from their workplace. Even cities which we associate most intimately with the motor car, such as Los Angeles, owed their basic form to commuter rail systems.

Adam Smith gave as his best example of the bar that transport posed to imports the experience of the cattle trade. By the time the stock had been walked to market they had lost so much weight they could not compete with local produce. The Irish pig industry had the same difficulty, because as they walked to London the pigs got leaner and fitter. So they stopped on the way in around Chippenham, where there was ample fattening material available in the form of whey left over from cheesemaking. And rather than let them walk all that extra weight off, somebody had the brilliant idea of killing them and curing them there. Which is how Wiltshire bacon was born.

The rise of big cities has been one of the great trends of recent years, and one which few forecast. Without a renewed wave of mostly rail-based infrastructure this would not have been possible.

The mid 19th century saw the first great transformation of travel. Rail and steamships opened the grain fields of the American Midwest, in the process devastating much of European agriculture every bit as effectively as more recent developments have devastated manufacturing. With the opening of the Suez Canal came another great step forward in linking the world together. As often happened in the progress of transport, the canal brought technical change in its wake and shifted activity. The last gasp of the sailing ship was the development of the Tea Clipper, super-fast sailing ships bringing tea from Asia round the Cape of Good Hope to England. But sailing ships could not navigate the Canal, so these ships were suddenly obsolete.

The Suez Canal brought with it two great shifts in geography. The natal drift of sailing ships round the Cape from Europe took them on to Calcutta; now, the Canal ensured the rise of Bombay to its dominant position. And in Europe, Britain lost its role as the entrepôt for all trade from the East.

A little before the Canal opened, the other link in the chain knitting the world together was the completion of the Transcontinental railway in the US. The uneven process of progressing along this chain is shown dramatically in Verne’s Around the World in Eighty Days, with constant breakdowns and troubles. But it could be done. To a 19th Century audience the achievement was as dramatic as flying was later to prove in the 20th Century. Where people moved, so did things. Trade meant transport of raw materials and finished products to a world suddenly freed.

The changes this brought about were famously celebrated by Keynes who wrote that, by 1913, The inhabitant of London could order by telephone, sipping his morning tea in bed, the various products of the whole earth, in such quantity as he might see fit, and reasonably expect their early delivery upon his doorstep.” But what Keynes wrote about for the consumer concealed a world where much less had changed for the producer. Goods which came stamped with their place of origin all still came from that place. A child’s toy stamped Made in Germany” had parts made in Germany, usually fitted together near the place where the parts were made. The owner of the factory probably employed a design department, situated in an office next to the factory. The labour cost of actually making the product accounted for a very high proportion of the final cost.

Contrast that with an iPhone today. The box says Made in China” and that is where it is put together. But the components come from a huge range of locations. Around 200,000 people work making iPhones and iPads. None of them work for Apple. Instead, huge companies have emerged acting as subcontractors for Apple and the other global giants. Offshoring production has devastated traditional manufacturing in the west, unable to compete with low labour costs. And that in turn has exerted continuing downward pressure on wages for many workers in the west.

High value products like phones can afford to use high cost means of transport such as aircraft. But a huge part of the latest revolution has involved low-tech items with low prices taking advantage of cheap labour in Asia and elsewhere. And here it has been huge progress in the growth of modern shipping which has led the way.

Even in the early 1960’s there were signs that cheap shipping could provide a crucial advantage for low-cost producers in Asia. Japanese car manufacturers beginning their first cautious assault on the US market discovered they had an unexpected advantage. Ships could deliver a car from Tokyo to California at much lower prices than US car manufacturers could move their vehicles from Detroit.

That advantage spread to other goods as container ships emerged in the 1960’s and then became ever bigger. As the ships get bigger, the demands they place on infrastructure grow too. Ports are spending enormous sums to allow the biggest vessels to enter and unload. The Suez Canal has been doubled in size and its Central American twin in Panama is also undergoing huge expansion.

One effect of this reliance on cheap sea transport has been to trap much of Asia’s economic development on the coast. The same high costs of land transport that initially aided Asian producers now make it expensive to move away from the congested coastal strip. For really high value products air transport is viable. Now, however, China is to use surface transport to Europe as a way of encouraging development far inland. The Silk Road rail system provides far quicker access to European markets than ship; more important, it rules out the need for a long journey to the coast.

Until the financial crisis, the most striking feature of the post war economy was that trade grew faster than the economy as a whole. And that in turn meant the need for transport increased faster than the economy as a whole. In the past few years that has reversed. Are we seeing the end of the Golden Age of transport growth?

That really depends on two things. First is whether the world is turning away from free trade to creeping protectionism. There are many warnings about this now, as there have been in the past, but little real sign that it is happening.

There is another, subtler threat which comes from the rise of the service economy. Traditional routes moves things or people. But much action now is done electronically without anyone moving. Working at home over the internet eats into the need to travel to a fixed workplace. Changing consumption patterns mean people spend less on things which need to be moved and more on services. It is why shops are facing an increasingly difficult future.

Ten years ago Netflix was a heavy user of courier services to deliver DVDs to clients; now they are downloaded over the internet.­­ And so we see the rise of the latest route which matters: the network of cables round the globe carrying an ever rising tide of information.

There is nothing new about electronic communication. The transatlantic telegraph cable is almost as old as regular transatlantic steamers. But what is new is the volume of data which can flood over the system. It is along these cables that the Cloud streams between the servers speed round the world. Futurists sometimes dream up extreme impacts as a result of these new developments. But the reality is that moving people and things is likely to remain crucial to the world’s progress. The new technologies will live in symbiosis with transport, not replace it.

David Blake is a financial analyst and commentator.