Many businesses are facing higher shipping prices to transport goods. As the cost of transporting goods is part of every step of the supply chain, these price increases have reverberated throughout the economy. Molson Coors Beverage Co., the maker of Coors beer and other beverages, said most of its cost inflation has come from transportation cost increases. Businesses and consumers are frustrated with the rising prices but before policymakers attempt to remedy the situation, they should look at why prices are rising in order to avoid policies likely to raise prices even further.
There is a perfectly reasonable economic explanation: Ocean carriers are raising prices in reaction to current increased demand and limited supply. Amid the pandemic, people were buying less, and in response, industries curbed production. As vaccines were rolled out and governments lifted pandemic restrictions, consumption increased and now, businesses are trying to catch up. These changes in demand are driven by changes in the market, but supply is partly circumscribed by policy problems that affect labor, immigration, and trade.
Carriers are raising prices to deal with elevated input costs such as higher fuel prices. Additionally, carriers face scarcity that affects their ability to quickly respond to increased demand for transportation; containers used to store and move goods are increasingly scarce and correspondingly expensive as a result of port bottlenecks. Figure 1 from a recent article in The Economist shows the large price increase of a 40‐foot shipper container in thousands of dollars over the last year. This dearth of containers is made worse by the scarcity of labor at ports that raise the cost of unloading cargo.
Global Container‐Freight Prices
Source: The Economist magazine and Drewry.
Note: In thousands of dollars per 40‐foot container.
While these costs have not yet been realized, carriers are preparing to increase wages in an effort to retain crew threatening to quit, creating further potential upward pressure on shipping prices.
Inputs such as fuel, containers, and labor, are all vital for efficiently transporting goods and changes in their availability and prices affect the prices that carriers charge shippers (the person/business that owns the products being transported). Charging higher prices tempers demand for transportation services and helps cover increased costs.
But shipping prices tend to be quite volatile because they are cyclical. Therefore, as the economy expands and demand exceeds supply (which we are seeing now), shipping prices increase to help manage demand for cargo space, and to cover costs from unprofitable periods when prices fall. Shipping prices are also particularly sensitive to changes in fuel prices. In fact, there is a lead‐lag relationship between oil prices and freight rates, meaning that if oil prices increase, shipping prices will follow.
However, the debate about how much shipping prices have changed over time is contested. Shipping became more efficient with the introduction of containers making it easier to load, unload, and stack cargo. The value of innovation may be understated in observable shipping price trends because fuel cost increases may have overshadowed the gains. Furthermore, the available data do not adequately differentiate between the use of containers and not, making it difficult to ascertain the true cost savings of containerization.
To add another wrinkle to this, it is uncertain whether available data can point to long‐term shipping price trends. Outside of some indicators such as the price of shipping containers that do not include the entire price of shipping, we simply do not have enough publicly available data to look at price changes over time.
Nonetheless, current shipping prices have increased because of changes happening in the economy. Those who have to pay higher prices may not like it, but these prices signal and incentivize important adjustments that firms and customers need to make so that the supply chain can rationally adapt to changing economic conditions. While allowing the market to adjust limits the potential policy responses, there are policies that could be changed to help the market flourish.
As my colleagues have written about, policies such as the Jones Act, tariffs on truck chassis, and immigration restrictions on foreign workers artificially restrict the supply of ships, containers, labor, and other inputs essential to transportation. Removing or reforming those policies would certainly help reduce prices. However, increased demand would still likely result in higher shipping prices. Although price changes in shipping are partly a response to policy failures, they also reflect the proper functioning of a market economy. In addition to signaling changes in supply and demand, prices also signal policy failures in this instance. Prices are the messenger and policymakers should not blame them for exposing underlying policy problems where they exist. Before overreacting with counterproductive policies that would raise prices even further, policymakers need to take a deep breath and understand the economic forces at play.
Gabriella Beaumont‐Smith is a policy analyst at the Cato Institute’s Herbert A. Stiefel Center for Trade Policy Studies. Her research focuses on the economics of U.S. trade policy.
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