Transportation Costs and International Trade over Time

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Transportation Costs and International Trade Over Time
David Hummels

David Hummels is Associate Professor of Economics, Purdue University, West Lafayette, Indiana. His e-mail address is .

While the precise causes of post-war trade growth are not well understood, declines in transport costs top the lists of usual suspects. However, there is remarkably little systematic evidence documenting the decline. This paper brings to bear an eclectic mix of data in order to provide a detailed accounting of the time-series pattern of shipping costs. The ad-valorem impact of ocean shipping costs is not much lower today than in the 1950s, with technological advances largely trumped by adverse cost shocks. In contrast, air shipping costs have dropped an order of magnitude, and airborne trade has grown rapidly as a result. As a result, international trade has also experienced a significant rise in speed.

Over the past five decades, world trade grew very rapidly. From 1950-2004, world trade grew at an average rate of 5.9 percent per annum (7.2 percent for manufactures) and trade relative to output more than tripled. (World Trade Organization, International Trade Statistics, 2005). Similarly, the sum of U.S. imports and exports rose from 6.5 percent in 1960 to about 20 percent of GDP in the early 2000s (based on data at ). One prominent possible explanation for the rise in international trade is the decline in international transportation costs. Economic historians have documented how technological change led to substantial reductions in shipping costs from 1850-1913 (Harley, 1980, 1988, 1989; North, 1958, 1968; Mohammed and Williamson, 2004). Econometric evidence has subsequently linked shipping cost declines to rapid growth in trade during that first era of globalization (Estevadeordal et al., 2003). The decades since World War II have also witnessed significant technological change in shipping, including the development of jet aircraft engines and the use of containerization in ocean shipping. However, documentation of the actual decline in shipping costs in recent decades has been lacking. This paper will draw on an eclectic mix of data to characterize the patterns of international ocean and air transportation costs in the last few decades.

Understanding modern changes in transportation costs can turn out to be unexpectedly complex. Technological improvements have been partially offset by significant changes in input costs and in the nature of what is traded. Shifts in the types of products traded, the intensity with which they use transportation services, and whether these goods are shipped by ocean or air freight all affect measured costs. Moreover, the economic effects of improved transportation are apparent not only in how much trade has grown, but also how trade has grown. Improvements in the quality of transportation services – like greater speed and reliability – allow corresponding reorganizations of global networks of production, and new ways of coping with uncertainty in foreign markets.

I begin with an overview of how goods are transported across international borders, with an emphasis on ocean and air transport. I discuss different ways of placing transportation costs in economic context, and then discuss patterns of technological changes and price indexes for international air and ocean shipping. I employ regression analysis to sort out the role of cost shocks and technological and compositional change in shaping the time series in transportation costs, and then draw out implications of these trends for the changing nature of trade and 3

integration. Finally, much of the data employed here can be difficult to find but of great use to researchers going forward. I close with a description of where to find data and links to a website that provides all of the data underlying this paper’s tables and figures. How Goods Move

Roughly 23 percent of world trade by value...
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