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Transportation Costs and International Trade in the Second Era of Globalization (David Hummels 2007)

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Introduction: During the past decades, the international trade experienced a rapid growth with the annual rate of 5. 9 percent. This growth in manufacturing trade has been even faster with the annual rate of 7. 2 percent. In the era of globalization, one justification of this greedy rise in the world trade could be noted as a considerable decline in the international transportation cost. Improvements in transportation industry not only resulted in the economic effects, but also it brought improvements in the quality of services like higher speed and reliability.

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In this work, the role of transportation costs in international trade has been studied. Towards this end, a perspective of transporting goods across the borders with the emphasis on air and ocean transportation modes is given, and the associated costs and expenditures are explained. The effects of technology advancement on the transportation modes have been analysed, trends and data have been interpreted, and finally, a regression analysis has been performed in order to make a better justification of data and incorporating compositional changes and technological effects.

Discussion: International trade with neighbours mostly performs by the surface modes, but for nonadjacent partners, most trades transfer via ocean or air. Bulk commodities like oil, petroleum products and grains are mostly transhipped through ocean cargo, while manufacturing and non-bulk-traded goods are transferred in both air and ocean modes. The trends and data on the worldwide trade on ocean and air for non-bulk goods reveal that the quantities of non-bulk cargoes increased over the time, and also this rate of the rise for the air transport is more than the ocean transport.

That would be justified as a sharp decline in the relative cost of air transhipment, and its high quality of services in terms of time and reliability. Transportation cost is relative to the value of the good, according to ad-valorem terms, which can be stated as a percentage changing in the delivered price as a result of transportation fees. For a particular product it also depends on transhipment distance, the quality of the service offered, and the weight/value ratio of the good.

Moreover, with the notable reduction in worldwide tariffs over time, the contribution of the transportation cost to the total trade cost has been raised. Thus, the transportation cost has a key role in altering relative prices across the borders and make notable variations in international trades. By appearance of jet engines, dramatic declines in aircraft expenditures and subsequently in air transportations have been reported. According to the “survey of air fares and rate” by ICAO , the air transportation prices dropped rapidly after the introduction of jet engine, and it reduced with a slow steady rate during the past decades.

The fluctuations reported in the trends are mostly related to the oil price changes over specific period of the time. Ocean transport of dry cargo performs in two ways; tramp and liner shipping. The liner is a service that operates within a fixed schedule and route which has a fixed port rotation. The liner is organized into cartels or conference to set the price and market shares. On the other hand, tramp referred to dry bulk cargoes which have not a routine and predetermined path and schedule, a charter-based, which the shipping prices are set in spot market.

The introduction of containerized shipping had a key role in transportation industries which could be named as one of the most important revolutions in twentieth century. This provides cost savings by allowing goods to be packed once and moved easily over the long distances. Furthermore, it reduces direct port costs like storage and labors, as well as indirect costs incurred during lengthy port stops. Besides, containerships require larger and faster ships which reduce the price per ton-mile of the goods, hence the investment in larger and faster ships becomes justifiable.

This system also needs ocean liners and adopted ports with cranes, storages, and rail-head which have not been easily furnished in developing countries due to price factors, and took some times to be implemented in these countries. Comparing the effect of technological and institutional changes on the ocean shipping, tramps and liner, a different trend and story have been reported. The price of bulk shipping, relative to tramp trip charter, measured in real dollars per ton has declined steadily over time, while surprisingly the liner prices increased over time after the introduction of containerization to European liner trades.

One possible justification of this unexpected finding could be stated as the unmeasured quality changes in transportation services which are not reflected in the liner prices. In order to offset this problem and also taking into account changes in the mix trade partners or product traded, a new value for ad-valorem costs has been defined through a regression analysis. The results for the air shipping cost with this method reveal the greater absolute decline in the air transportation costs. For the ocean shipping cost, the costs have been declined initially, and then increase through mid-80s and finally decline over time subsequently.

According to the results, ocean shipping appears to be more expensive than air shipping which is due to the fact that the average ocean-shipped good is 25 times heavier than the air-shipped good. Hence, when the relative price of air/ocean shipping falls, goods at the margin shift from ocean to the air shipping. In air and ocean transhipment, the costs are increasing based on weight/value ratio of the good, fuel expenses, and the distance shipped while for air shipping interestingly, the effect of distance is eroding over time. Hence, air transport tends to be preferred to ocean transport on specially long-distance shipments.

Conclusions: Rising in international trades in the second era of the twentieth century is not only as a result of transportation cost reduction, but also it could be affected by advances in technology. This improvement brought so many opportunities and motivations to boost international trade rate. In the air shipment, introducing jet engines resulted in sharp declining in costs, while in ocean shipping, appearance of container shipping as a revolution in transportation industry played an important role in enhancing world trade, although its primary effects is not a cost reduction.

Cite this Transportation Costs and International Trade in the Second Era of Globalization (David Hummels 2007)

Transportation Costs and International Trade in the Second Era of Globalization (David Hummels 2007). (2017, Jan 19). Retrieved from https://graduateway.com/transportation-costs-and-international-trade-in-the-second-era-of-globalization-david-hummels-2007/

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