Transportation Costs and International Trade over Time

Topics: Cargo, Inflation, Cost Pages: 31 (10513 words) Published: April 1, 2008
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...

References: Aizenman, Joshua (2004), ‘Endogeneous pricing to market and financing cost’, Journal of Monetary Economics
51(4), 691–712.
Bajpai, Jitendra, Carruthers, Robin, and Hummels, David. (2003) “Trade and Logistics: An East Asian
Perspective”, in East Asia Integrates (eds: Krumm, Kathie, and Kharas, Homi) World Bank..
Berthelon, Matias and Freund, Caroline L., "On the Conservation of Distance in International Trade" (May 6, 2004).
World Bank Policy Research Working Paper No. 3293.
Blonigen, Bruce and Wilson, Wesley, (2006) “New Measures of Port Efficiency Using International Trade Data”
NBER Working Paper 12052.
Clemens, Michael and Williamson, Jeffrey (2002) “Why did the tariff-growth correlation reverse after 1950?”
NBER Working paper 9181.
Davies, J.E. (1986) “The Theory of Contestable Markets and its Application to the Liner Shipping Industry”
Canadian Transport Commission.
Disdier, Anne-Celia and Head, Keith (2004) “The Puzzling Persistence of the Distance Effect on Bilateral Trade”
Centro Studi Luca D’Agliano Development Studies Working Papers, N
Estevadeordal, A, Frantz, B and Taylor A, (2003) The rise and fall of world trade, 1870-1939, Quarterly Journal of
Economics, 118 (2): 359-407
Evans, Carolyn and Harrigan James (2005), “Distance, Time, and Specialization” American Economic Review.
Finger, J.M. and Yeats, Alexander (1976), “Effective Protection by Transportation Costs and Tariffs: A
Comparison of Magnitudes”, Quarterly Journal of Economics, 169-176.
Gilman, Sidney (1983), The Competitive Dynamics of Container Shipping, University of Liverpool Marine
Transport Center
Gordon, Robert, (1990) The Measurement of Durable Goods Prices, University of Chicago Press.
Harley, C. Knick, (1980) “Transportation, the World Wheat Trade, and the Kuznets Cycle, 1850-1913”,
Explorations in Economic History, 17, 218-250.
Harley, C. Knick, (1988) “Ocean Freight Rates and Productivity, 1740-1913: The Primacy of Mechanical Invention
Reaffirmed”, Journal of Economic History, 48, 851-876.
Harley, C. Knick, (1989) “Coal Exports and British Shipping, 1850-1913”, Explorations in Economic History, 26,
Harrigan, James (2005) “Airplanes and Comparative Advantage” NBER 11688
Harrigan, James and Venables, Anthony (2004) “Timeliness, Trade and Agglomeration” NBER 10404
Hummels, David (2007), “Time as a Trade Barrier” NBER ##.
Hummels, David, Ishii, Jun and Yi, Kei-Mu, "The Nature and Growth of Vertical Specialization in World Trade",
Journal of International Economics, 54 (2001).
Hummels, David and Lugovskyy Volodymyr, (2006) “Are Matched Partner Trade Statistics a Usable Measure of
Transportation Costs?” Review of International Economics 14 (1) 69-86.
Hummels, David, Lugovskyy Volodymyr, and Skiba, Alexandre, (2007) “The Trade Reducing Effects of Market
Power in International Shipping” NBER ##.
Hummels, David and Skiba, Alexandre, (2004) “Shipping the Good Apples Out: An Empirical Confirmation of the
Alchian-Allen Conjecture” Journal of Political Economy 112, 1384-1402.
Levinson, Mark (2006) The Box: How the Shipping Container Made the World Smaller and the World Economy
Mohammed, Saif I. and Jeffrey G. Williamson. "Freight Rates And Productivity Gains In British Tramp Shipping
1869-1950," Explorations in Economic History, 2004, v41(2,Apr), 172-203.
OECD, Maritime Transport, various years
Schaur, Georg (2006), “Hedging Price Volatility Using Fast Transport”, mimeo Purdue University.
Sletmo, Gunnar and Williams, Ernest (1981) Liner Conferences in the Container Age. MacMillan.
Sjostrom, William, 1992, “Price Discrimination by Shipping Conferences”, Logistics and Transportation Review;
UNCTAD (1970), Unitization of Cargo: Report. United Nations.
UNCTAD (1977) Port Problems: Causes of Increases in Port Costs and their Impact. United Nations.
Waters, W.G. (1970), “Transport Costs, Tariffs, and the Patterns of Industrial Protection, American Economic
Review, 1013-20.
ICAO Data on Route Groups
Shipping price per kg (2000$) Annualized growth rates 1973-80
Shipping price per kg (2000$) Annualized Growth Rates 1980-1993
All Routes -2.52; North Atlantic -3.59; Mid Atlantic -3.36; S Atlantic -3.92; North and Mid Pacific -1.48; South
Continue Reading

Please join StudyMode to read the full document

You May Also Find These Documents Helpful

  • Transportation Costs and International Trade in the Second Era of Globalization (David Hummels 2007) Essay
  • Tariffs: International Trade and Tariff Essay
  • international trade Essay
  • The Function of International Trade Essay
  • Incoterms: International Trade and Inland Waterway Transportation Essay
  • Globalization: Economic Inequality and International Trade Essay
  • Change in Transportation over Time Essay
  • Essay on International trade

Become a StudyMode Member

Sign Up - It's Free