Priceonomics

This post is adapted from the blog of Flexport, a Priceonomics customer. Photo by å¢¨è‰²é²œè‰³.

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You may not know the name Tianjin, but when an explosion in its port destroyed warehouses, cars, and other cargo with the force of 21 tons of detonating TNT, it affected most major companies that sell products you know. 

If you had to choose one city to represent globalization, Tianjin would be a decent choice. The Chinese city of 11+ million is home to one the world’s one of the world’s largest ports, offices for nearly three hundred Fortune 500 companies, and factories that build cars, airplane parts, and mobile phones. 

But the impressive economic engine of Tianjin came to a halt on August 12, 2015, when a warehouse full of hazardous chemicals exploded. "First I saw some splashes of fire,” a university student told the press, “and then a big fire ball after a few seconds." A worker added, “It sounded like the start of a war. I thought maybe Japan was bombing our port.” The explosion killed over 100 people, and the Chinese government closed or restricted access to most of the port. 

In the world of shipping and trade, this was a really big deal. Initial estimates made by insurers of the amount they’d pay for damaged cargo were around $1.5 to $2 billion. Then insurers increased the estimate to above $3 billion. Then to as much as $6 billion, which would make Tianjin the largest disaster in maritime history in terms of monetary damages. 

Destroyed cars in the Tianjin port. Photo by Quapan 

The Tianjin disaster was an equally big deal for companies that rely on products and supplies coming from the city. The explosion destroyed more than 10,000 Toyota, Hyundai, and Range Rover cars and prevented the shipment of others from nearby factories. Additional impacted companies ranged from John Deere to the drug company GlaxoSmithKline. 

But for all the tragedy and concern, the impact on global trade of what may turn out to be the largest (commercial) disaster in maritime history has so far been limited. Here’s why. 

The Giant Hairball of World Trade

To understand how impactful the Tianjin disaster could be, it helps to appreciate the relative ease of world trade. 

For decades, shipping companies have built larger and larger ships to drive down the cost of transporting cargo. Terry Cummings, the Vice President of Roanoke Trade, points out that rates for cargo insurance are as low as they’ve ever been. That’s largely because significant damages are rare—affecting only 1% or so of cargo according to the International Union of Marine Insurance.

This is the reality that leads companies to source, build, and deliver products all over the world. It also helps explain the dynamic documented by academics Sameer Kumar and Gail Harrison: that “in one industry after another, supply chains have been stretched further than they have ever been in the past and lean, just-in-time production schedules have made the consequences of a disruption more severe.”

It is this faith in the stability of trade networks that makes disasters like Tianjin so damaging. When an earthquake in Taiwan delayed the delivery of semiconductors that Apple used in its laptops in 1999, it shipped customers slower computers that used older components. In response to complaints, the company eventually offered refunds, and many customers cancelled their orders. Similarly, shoe factories in Kobe, Japan, experienced a 90% hit in business after an earthquake hit the city, prevented them from shipping product, and alienated their clients. Large companies that experience disruptions from events like these can see their stock price decrease more than 30%.