Malcolm McLean – The Man Standing Between President Trump and Trade Reset
- TerraCogent Staff
- 4 days ago
- 9 min read
The problems that the United States economy faces are well documented. There is also a general concurrence on the prevailing economic issues. Currently, the American economic malaise is obesity. But it is feared, often in a bipartisan manner that the obesity can soon morph into diabetes leading to pancreatic cancer.
The United States is now a quarter of the world economy as opposed to more than half that it was half a century ago. Yet, the US Dollar continues to be the global reserve asset of choice, the flight-to-safety destination and the global transaction currency. How long can the United States recede in its hegemony and yet provide the world’s global public goods, especially for the global economy?
Trump Prescription
The Trump second term has started with the global equity and debt markets rocked by his prescription to reconfigure the global trade architecture. During the press conference following a recent meeting with El Salvador President Nayib Bukele, President Trump emphasized that tariff was his fifth favourite word. It used to be the lexicon-topping choice for him during the campaign, but then he was reminded of words like God, family and love by the media. So now, President Trump has relegated tariff to the fifth place.
The fifth place choice, which he has now unleashed on the world has sent financial market participants scampering to find God, family and love, with red coloured heat maps of their investment portfolios in tow.
A combination of tariffs imposed under the International Emergency Economic Powers Act (IEEPA), 1977, the Section 232 of the Trade Expansion Act, 1962, the Section 301 of the Trade Act, 1974, Reciprocal Tariffs imposed also under the IEEPA and the retaliation to the trade partner retaliation on Reciprocal Tariffs have completely upended the liberal international trade order. The United States itself had worked hard to create this order, starting with the Bretton Woods system in 1945, the General Agreement on Tariff and Trade (GATT) in 1948 and the World Trade Organization (WTO) in 1995.
US Money Supply
The global trading system, which the United States created, led the US to excessively financialize, while hollowing out its manufacturing capacity. It made the country the top exporter of its currency, required by every country around the world to trade. Especially so after the pandemic, the US debt shot through the roof, with US Treasuries being issued at an alarming rate, purportedly to rebound the US economy. But the $35-trillion debt that the US carries today, worries any prudent financial observer.
The problem had in fact started soon after the Global Financial Crisis under President Obama. Through the Obama Presidency, the money supply was rising.
For most part, the M1 measure of money supply, which includes currency in circulation and bank deposits, stayed under control under President Trump’s first term. He ran a tight ship until the pandemic struck. The American solution to beat the pandemic was to slosh the country in excess liquidity, so that demand-led economic recovery could be pursued.
Under President Biden, the US debt continued to accumulate. The country saw the fastest roll up of state power during the Biden years, especially in the economic domain. Note that the floor of the M1 every month in Biden Presidency was usually more than the peak of the M1 during President Trump’s final year in office.
President Trump is absolutely justified in fretting over this situation. He still wants the US to be the dominant hegemon, but he now craves Techno Monetarism, not the conventional Bretton Woods system. However, the Bretton Woods system is a self-reinforcing feedback loop. More US dollars mean US imports goods from world over. This helps countries accumulate US dollars, which they can hold in the form of endless treasury issuance of the Fed.
Tariffs are one of the instrument – a blunt one, not the most elegant – to break this loop in President Trump’s view. If US imports reduce and if some manufacturing can be on-shored, the US will have to issue fewer dollars thus reducing its future debt burden and bring down the Debt to GDP ratio which is now touching 120%.
Bringing home manufacturing has its attendant benefits as well – it increases the comprehensive national power, it bodes scientific progress and a spirit of tinkering and building. These are qualities useful if and when the US goes to a war. A GDP of $27-trillion making PowerPoint presentations is not the same as a GDP of $27-trillion building sixth generation fighter aircrafts.
Reducing Trade
Unfortunately for President Trump, there is one man standing between him and his ambition of reducing trade, mainly imports. His name is Michael McLean and he died in 2001. McLean gave us an innovation which changed the world forever and in fact may rank not just the most significant but almost mostly an irreversible innovation of the modern human history. McLean invented and perfected the idea of containerized shipping.
Trade Before and After McLean
Until McLean demonstrated containerization in 1956, global trade was rather simplistic. The global trade had just started to pick up after the second world war, with the Marshall Plan, revitalization of the European purchasing power and the Bretton Woods system expressly meant to facilitate that outcome. But this trade was still concentrated in basic commodities and finished goods.
Bulk freight like grains and oil was relatively easier to transport on ships as the method of packing and storing these commodities were known for national transportation. The same methods were extrapolated internationally. But otherwise, the ships had to be fully packed, to make their cross-oceanic journeys profitable.
Sending rolled steel coils, readymade garments and tea powder together was not an easy task. They were packed differently and manually. The techniques of packaging varied across the countries. There was great reliance on manual work of the dock workers – one of the most unionized professions of that era. Unseemly packages of different commodities, none standardized for international interoperability, customs declarations and inspections or unloading and re-transporting at the destination, jostled for space in ship holds.
If a supplier could actually get his goods to the docks and managed to get them on a ship, there were always the financial risks of weather driven losses, pilferage or border customs measures at the destination to deal with. Goods took months to move with no guarantee of them arriving in the shape, form and quantity they were expected to. In general, there was no great incentive to trade, unless one really idolized Adam Smith and David Riccardo or had the necessary financial wherewithal.
Enter Malcolm McLean of North Carolina.
He used World War 2 era tankers to move freight from New Jersey to Texas, shipping trailer vans as a demonstration. Between 1956 and 1967, when the US Army invited him to fix its supply lines and logistics issues in North Vietnam, McLean kept improving the containerization system and more importantly kept working towards standardization.
Today, massive ships traverse the world oceans carrying up to 24,000 twenty feet equivalent (TEUs) containers. Deep draft ports allow these ships to berth. Massive cranes on the ports can unload and store these containers for customs procedures and onward transportation on standardized trailers. Loading and unloading can happen simultaneously. The whole operation is now akin to playing with lego pieces stacked with some defined loading and unloading rules. Ports can turn around ships in 2-3 days, what used to take weeks before McLean.
Note that while the GATT was signed in 1948, for a long time the global trade rules only applied to relatively simple trade patterns with modest volumes. In fact, it wasn’t until the 1980s that containerization fully became commercialized. Any technology takes time to make its way up the S-curve of adoption. In this case, the shipping technology was fighting a pitched battle against longshoremen unions around the world. They had a political voice and their strikes and agitations reverberated from New York to London to Mumbai in an era when communism was at its peak. The steel containers won the battle with great difficulty.
Intermediate Goods
Once the battle of standardized transportation was won, trade got new wings. There were four contributing factors.
Firstly, the issue of goods packaging got resolved. Filling standard TEUs was significantly easier than filling massive ship holds.
Secondly, the cost of international shipping continued to collapse as the containerization adoption continued to increase.
Thirdly, the cost of communication and the ability to supervise any business operation remotely increased significantly with the advent of the Internet.
Fourthly, a result of all of the above, multinational firms grew around the world and they started to break down their operations into global value chains. Not everything had to be done at the same place, in the same timeframe by the same workforce. This gave rise to manufacturing outsourcing. China was ready to lap up the opportunity, being at the right place (WTO) at the right time (2001).
This is how intermediate goods were born.
Outsourcing and Offshoring of Manufacturing
A 2009 study by the OECD[1] found that intermediate inputs represented 56% of all global goods trade. The study found that the trade in intermediate inputs had been steadily growing between 1995 and 2006 at an average annual growth rate of 6.2% for goods. However, trade in final goods had increased at the same pace and hence the share of the intermediate goods trade had remained constant in the first decade of trade under the WTO rules.
This same study showed that the firms now had a choice to operate their manufacturing inside the firm or outside the firm, as well as inside the country as well as outside the country. This gave rise to the concepts of manufacturing outsourcing as well as offshoring. Much of this offshoring opportunity was lapped up by China.
Containerized transportation made it possible to improve shipping to the extend, that neither cost nor predictability of delivery remained a concern. International businesses started to optimize for efficiency. Manufacturing became just in time.
This led to manufacturing job losses in the United States. The job losses after 2001 when China began its unending march as the human history’s most potent manufacturing superpower are particularly noticeable.
Implications for President Trump
Malcolm McLean has left President Donald Trump in a very difficult situation. The United States imports are mainly intermediate (17%) and capital goods (33%). This is not an easy equation to solve via import substitution. It is not easy to create these production competencies at the right price either.
While in the economic sense, capital goods are “final consumption”, but for manufacturing process, they are usually being used to produce something else of value. So about 50% of US import is required to produce what President Trump wants to produce domestically. This leaves the US very vulnerable, because the intention of President Trump to ramp up manufacturing is not sufficient. The capabilities required to turn the intent into results are missing and will take time to create, if at all.
If the world were still trading raw materials and finished goods, tariffs would have done a wonderful job of import substitution. But with 50% of US imports being used inside another manufacturing or services production process, tariffication of these imports makes US further uncompetitive in the production of final goods or services.
This situation also leads to critical bottlenecks. Today’s complex final goods require several intermediate inputs. Even if the US become proficient in making some, it may not be making everything required for the next stage of production process. This situation makes US vulnerable to manipulation, especially so by China.
Additionally, intermediate goods tend to be multi-use. Fasteners are used in every conceivable item used by the human race today. Small batteries can power toys or computer keyboards. Copper wires are required to power steel mills as well as semiconductor manufacturing plants. The world where a given industry would make everything it needed under one roof ended when manufacturing started to get dispersed. This process was in fact led by American manufacturing giants like GE. But in the initial years, the site dispersion was domestic. Post McLean, the design to deal with is international.
The trade implication of this situation is that if US restricts its import, it may invariably also end up restricting its exports. So the imports may fall, but not the trade deficit. And if that end goal is not achieved – that’s the goal which will reduce US debt burden eventually by restricting US Dollar outflow – it will be a very big price to pay for the market and economic disruption.
Can He?
Only time and President Xi Jinping will tell. After his death, Forbes magazine remarked that McLean’s work had changed the world. For President Trump, this change may yet prove to be a hurdle too high, a business feature too globally integrated, a situation too intractable.
[1] Miroudot, S., R. Lanz and A. Ragoussis (2009), “Trade in Intermediate Goods and Services”, OECD Trade Policy Working Papers, No. 93, OECD Publishing. doi: 10.1787/5kmlcxtdlk8r-en
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