Archive for the ‘Trade costs’ Category
This paper uses a newly collected dataset on the prices of narrowly defined goods across many dispersed locations within multiple developing countries to address the question, How large are the costs that separate households in developing countries from the global economy? Guided by a flexible model of oligopolistic intermediation with variable mark-ups, our analysis proceeds in four steps. first, we measure total intranational trade costs (ie marginal costs of trading plus mark-ups on trading) using price gaps over space within countries—but we do so only among pairs of locations that are actually trading a good by drawing on unique data on the location of production of each good. Second, we estimate, separately by location and commodity, the passthrough rate between the price at the location of production and the prices paid by inland consumers of the good. Our estimates imply that incomplete pass-through—and therefore, intermediaries’ market power—is a commonplace, and that pass-through is especially low in remote locations. Third, we argue that our estimates of total trade costs (Step 1) and pass-through rates (Step 2) are sufficient to infer the primitive effect of distance on the marginal costs of trading; after correcting for the fact that mark-ups vary systematically across space we find that marginal costs are affected by distance more strongly than typically estimated. finally, we show that, in our model, the estimated pass-through rate (Step 2) is a sufficient statistic to identify the shares of social surplus (ie the gains from trade) accruing to inland consumers, oligopolistic intermediaries, and deadweight loss; applying this result we find that intermediaries in remote locations capture a considerable share of the surplus created by intranational trade.
You can listen to a podcast of Donaldson presenting a much earlier version of this work from the International Growth Centre. He does a really nice job of summarizing the issues involved in inferring trade costs from price data.
Richard Florida says “While it’s commonly thought that globalization has put the world’s global cities on an increasingly level playing field, substantial differences in prices persist”:
What should leap to mind? Trade costs.
The biggest price gap (a ratio of 100) is for a good that is completely non-tradable and varies greatly in quality (bus fare is 7 cents in Mumbai and $7 in Oslo). A good of relatively uniform quality that is perishable varies quite a bit (Big Mac, from $2 in Shanhai to $6 in Oslo). A durable good with a high value-to-weight ratio, the iPad 2, exhibits less variation, a ratio of under two ($1058 in Buenos Aires and $548 in Bangkok). So it looks like trade costs are a pretty good explanation for nominal price differences.
That iPad gap may not be as large as it seems. You’ll want to adjust for taxes. The VAT is 21% in Argentina and 7% in Thailand.
How can there still be a ~$350 price difference when one can probably mail an iPad to most countries for less than a hundred bucks? Shouldn’t arbitrage drive price differences for identical products down to the shipping cost? Not so fast. It turns out it’s quite difficult to arbitrage iPads. Apple tracks its customers and doesn’t allow bulk purchases.
In short, these data are a lesson about trade costs. You’ll notice that Richard Florida didn’t title his post “why you should buy a bus ticket in Mumbai instead of Oslo”!
(Relatedly, price comparisons of personal services, as opposed to goods, suggest a lesson about global labor mobility. A one-hour Thai massage costs $6 in Bangkok and about $100 in New York City!)
But what can the California ports do? Floating cargo from Asia to the east coast by boat will always be cheaper, concedes Christopher Lytle, the executive director of the Port of Long Beach. But unloading in Long Beach and taking the train to New York can be faster by a week, he says. So California’s ports must compete on speed, which is increasingly important for time-sensitive goods such as fashion wear or consumer electronics. Let the lawn chairs go and keep the iPads, he reckons.
A lot must happen to keep that advantage in speed, however. One bottleneck is that short truck ride to the railway yard. Not only do the trucks account for much of the port’s air pollution (even though they are dramatically cleaner than just a decade ago), but they clog up stretches of the I-710 freeway, wasting precious time. One of the port’s plans is therefore to build a new, better and closer railway yard…
David Pettit, a lawyer at the National Resources Defence Council and one of those environmentalists who so frustrate Mr Baker, says that he fully understands the threat posed by the canal. But moving the railway yard to another community, and thus polluting it, is not the answer. Better, he says, to put the railway yard right on the docks. That would take up too much space, replies the port. The combatants have only until 2014 to work out their answer and build it.
BOX 8.9 Exporting by mail in Peru—connecting small producers to markets
In many countries small enterprises are often excluded from export chains because they operate in villages or small towns or do not have the needed information to export. In Peru a trade-facilitation program called “Easy Export” connects small producers to markets. The key to this program is the most basic of transport networks—the national postal service.
How does it work? An individual or firm takes a package to the nearest post office, which provides free packaging. The sender fills out an export declaration form, and the post office weighs the package and scans the export declaration form. The sender pays the fee for the type of service desired. Goods with values of $2,000 or less can be exported. The main benefit is that the exporter does not need to use a customs agent, logistics agent, or freight forwarder or to consolidate the merchandise; even the packaging is provided. Firms or individuals need only to go to a post office with a scale and a paper scanner and to use the Internet to complete the export declaration for the tax agency.
Has it made a difference? Within six months of inception, more than 300 firms shipped goods totaling more than $300,000. Most users are new exporters—microentrepreneurs and small firms, producing jewelry, alpaca and cotton garments, food supplements (natural products), cosmetics, wood art and crafts, shoes and leather, and processed food. And many of them are in the poorest areas of the country.
A summary of a survey from the World Bank: “Trade Finance during the 2008–9 Trade Collapse: Key Takeaways“
The Panama Canal is being expanded; the $5b construction of larger locks is due to be completed in 2014. As the Financial Times describes, that’s expected to shake up the east coast shipping scene.
Scenes like the one at Baltimore are being played out all along the east and gulf coasts ahead of what promises to be the biggest shake-up in US distribution since the advent of shipping containers 50 years ago.
Ports, terminal operators, rail companies and state governments are jostling to win the new traffic they expect to be generated by the bigger ships. Billions of dollars are being spent to build new quays, deepen channels and expand rail tunnels. Consumers, manufacturers and retailers in the US mid-west and inland eastern cities could all benefit.
Containers heading to these areas will have the option of going via east-coast ports then heading west on trains. Their traditional route has been eastward from California, where larger ships free of Panama Canal restrictions already dock.
[HT for FT to Seb]
This paper re-examines the GATT/WTO membership effect on bilateral trade flows, using nonparametric methods including pair-matching, permutation tests, and a Rosenbaum (2002) sensitivity analysis. Together, these methods provide an estimation framework that is robust to misspecification bias, allows general forms of heterogeneous membership effects, and addresses potential hidden selection bias. This is in contrast to most conventional parametric studies on this issue. Our results suggest large GATT/WTO trade-promoting effects that are robust to various restricted matching criteria, alternative GATT/WTO indicators, non-random incidence of positive trade flows, inclusion of multilateral resistance terms, and different matching methodologies.
The main thing I’ve found playing with Maersk’s calendar: distance doesn’t matter as much as demand. Americans buy a lot of atoms from China. The Chinese don’t buy nearly as many from the US. A 40′ container filled with household goods, shipped from Shanghai to Houston, TX costs $6169.93. Reverse the trip and ship the same container from Houston to Shanghai and the cost is $3631.07. That’s because 60% of containers on ships coming from the US to China are empty, which means Maersk and other shippers are desperate to sell container space.
(The 2006 New York Times article that offers that 60% empty container statistic suggests that lots of full containers are coming to China from raw-materials rich countries like Australia, Brazil and the Middle East. That suggests we should see the opposite pattern – expensive containers from Sao Paolo to Shanghai and cheap ones in the other direction. Nope. $5101.70 from Shanghai to Sao Paolo, $1930.59 in the other direction. Perhaps containers from China to Brazil are riding the same ships as those to the US and paying the same premiums?)
Maersk also offers a set of maps that help you get a sense for how these trade routes actually work. It’s a four day trip from Suva to Auckland on the Pacific Islands Express, and then the bottles of Fiji water are transfered to OC1, the Oceania Americas Service. The Pacific crossing is a long one – 18 days to the Panama Canal, a quick stop in Cartagena, and we’re in Philadephia 25 days out of Auckland. It’s a truck ride from Philly to Cambridge, and that short hop is responsible for $950 of the total transit cost.
As I poke through these maps, schedules and tariffs, I feel like I’m glimpsing a secret world. Part of it may come from the sheer poetry of the names. Shipping routes include “The Boomerang” and the “The South China/Australia Yo-yo” and connect ports like Tin Can Island (Apapa, Nigeria, the main port for Lagos). And part comes from the sense that these routes and rates, the infrastructure that supports an economy where transPacific bottled water is possible, are the ley lines of globalization, radiating a mysterious and sinister power.
Michael Baker in Foreign Affairs on African maritime problems:
Africa has the least efficient ports in the world. Dwell times — the amount of time a ship must stay in port — for the loading and unloading of cargo exceed global averages by several days and are nearly quadruple those of Asian ports, thus driving up shipping costs through delays. No African port can be found on the list of the top 70 most productive in the world. As a result, shipping companies send smaller, older, and cheaper ships to Africa in an effort to reduce their losses.
A number of factors are to blame: poor harbor maintenance, bureaucratic red tape, inadequate maritime law enforcement, and lax security. Additionally, Sam Bateman, a maritime security expert at the S. Rajaratnam School of International Studies, in Singapore, has demonstrated that pirates and other maritime criminals tend to prey on old, slow, decrepit ships — the types of ships that inefficient and unsecured African ports and waterways attract — because they are easy targets. Half of the ships successfully hijacked by Somali pirates in 2009 fell into the category of the smallest merchant ships.
Moreover, many African ports cannot handle ships of median size due to infrastructure limitations. Meanwhile, the global shipping industry has been modernizing its fleets, scrapping obsolete vessels for newer mega-carriers. This means that shipping companies will continue deploying their remaining smaller and slower ships for transport to and from Africa, increasing the number of easy targets for pirates and further impeding Africa’s ability to export products efficiently. In this environment, companies producing goods in Africa cannot reliably or efficiently get their wares to market. This plays a large role in explaining why Africa garners only 2.7 percent of global trade despite its cheap labor force, cheap commodities, and proximity to major markets.