I have a very general question about something I want to understand better: what can you tell me about shipping? I started thinking about this when I was considering how much of our stuff is made overseas. I know that foreign labor is cheaper, but can it really be so much cheaper that it makes up for the cost of shipping everything? And how does the shipping business work -- is it owned by the companies, or the same people who run ground shipping, or what?
Shipping is a huge industry, and the category we’re talking about here covers a vast range of services. We’ll try to answer your questions and explain your observations while also taking care to remind you that there are plenty of exceptions to general rules, and plenty of competing companies, interests, and laws at play here.
Let’s start with the most central question you had: why doesn’t shipping make foreign products pricier? Obviously, shipping adds to the cost of a product. So is it, as you guessed, that foreign labor and work practices are just so much cheaper that it makes up for the high cost of shipping?
Not really, actually: the reality is that shipping is often very, very cheap. It matters, of course, that something might be cheaper to make in one country relative to another. But it doesn’t have to be that much cheaper for it to become worthwhile to start shipping materials and products around, especially when we’re talking about massive companies working at a huge scale. How cheap are we talking? In 2013, it was cheaper for Scottish cod to be sent to China to be filleted, then shipped back, than it was to simply fillet them in Scotland!
Why is shipping so cheap? For a variety of reasons, but a few are particularly important. For one thing, shipping containers have made transporting items much more efficient. Their standardized shape makes them stackable and allows them to be moved with standardized equipment, towed on standardized trailers, and more. Today, more than 90% of all products we buy have spend some time in a shipping container. The size of container ships matters, too, especially given the fact that each square foot can be used multiple times over simply by stacking those aforementioned containers. Other factors include competition among shipping companies and low fuel prices.
Not all shipping is cheap, of course. Shipping costs can go up for all sorts of reasons, including tariffs and taxes, various efficiencies (like not having enough stuff to fill a container, or moving things between less common ports).
And shipping on land is very different from shipping on sea. Much of land shipping is standardized: a semi truck’s trailer, for instance, can be swapped out easily. But not all of it is: enclosed auto transport, for instance, is relatively specialized. And then there are mail services, which handle all sorts of parcels, packages, and letters. These are not the same services that run shipping lines on the ocean -- domestic shipping is a whole different business, and it comes with its own challenges.
Domestic shipping will help us more closely examine a factor we mentioned briefly in our discussion of ocean shipping: scale. A service like UPS will charge you a certain amount to send a package, but if you are a huge corporation, perhaps you can entice them with the volume of mail you want to send, and work out a price that is a little cheaper per package. That’s the kind of deal Amazon has cut with the United States Postal Service, and while that deal has attracted some controversy recently, it’s a good example of how scale and an exclusive contract can limit costs for a big company. This kind of advantage is a called an economy of scale.
Let’s step back and put it all together. We know that a company can afford to ship materials from wherever they are most cheaply available to wherever they might most cheaply be turned into a product, and can then afford to ship those products to whatever place they are to be sold, because ocean shipping is cheap. We know that those products are easily moved from container ships to trucks that haul containers and standardized trailers. And if the company wants to subsequently ship those products from their store or warehouse directly to you, they can do so cheaply thanks to economies of scale. And there you have it: that’s how you end up holding a product that was made far, far away.