And finally, here's what Tracy's interested in today
One of the many things we're learning this year is that much of the modern global economy is still built on archaic rules of sea travel and that economics doesn't do a particularly good job of forecasting or incorporating the vagaries of transport costs. In other words there's a mismatch between the the old-fashioned structures that dictate how the world actually works and our modern impression of it. Take for instance the Ever Given, the container ship that got stuck in the Suez Canal back in March.
On the most recent episode of Odd Lots, we spoke to Ryan Peterson, the CEO of logistics company Flexport, which has customers who still have a total of more than 40 containers stuck on the Ever Given. He describes how even though the ship is now unstuck, it's probably going to take months to sort out the situation, and there are clients who potentially could end up paying billions of dollars to settle the matter — all because of a historical quirk in the way shipping works:
"One of the little known facts about global shipping is under ancient maritime law the company shipping the cargo, not the owner of the ship, but the company that [owns the cargo], the products on there, is liable when something like this happens ... That's a law called general average, it's a fascinating Wikipedia article. And the reason that that's true, it goes back I think hundreds of years, the reason that that was true is that in a storm or an accident at sea, you don't want people to stop and argue about whose cargo they're going to throw overboard ... You don't want these arguments. You don't want the mariners worrying about that. Just throw the cargo over and save the ship is the principle. And you'll sort it out later. And the way you sort it out later is everybody agrees that we will share equally in whoever's cargo got thrown over — the rest of the people will make them whole, and that's a principle called general average. And the ocean carrier under the law has the right to invoke general average and declare it and say, okay. And so that's what Evergreen has done. They have declared general average, which means all of the customers who have cargo on that ship are going to be liable for the damages that come through. And it could be billions of dollars in aggregate and it gets divided, pro-rata based on the commercial invoice value of your goods."
He also points to the sometimes arbitrary way in which ships are loaded — with space being awarded on the basis of personal relationships — as another example of potential inefficiencies (or as Peterson put it: "Traditionally it works by who has the best relationship with this person, probably named Lars sitting in Copenhagen or something, who is making these decisions.”) Anyway, the whole thing is worth a listen to get a sense of how much supply shortages are currently compounding supply changes, but also to understand that a big part of the modern “globalized” economy is still connected to practices that can be traced back hundreds of years.
You can follow Tracy Alloway on Twitter at @tracyalloway.
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