Why high oil prices will dampen international trade

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Contra Paul Krugman, who says that “higher fuel prices are putting the brakes on globalization,” David Jacks, Christopher Meissner, and Dennis Novy argue in their Vox column on trade costs that oil prices won’t have much impact:

In their survey of trade costs, Anderson and van Wincoop (2004) find that the tariff equivalent of international trade costs is about 74%. Transport costs only make up a third of these trade costs. The rest consists of border-related costs such as informational barriers, tariffs and red tape. Even if oil prices directly feed through to transport costs, the impact on overall trade costs is limited.

Here are Anderson and van Wincoop:

We combine 9-percent time costs and 10.7 percent U.S. average direct transport costs for our representative full transport cost of 21 percent (1.107∗1.09-1).

Both costs are relevant, as higher oil prices have caused container ships to cut their top speed by 20% to save fuel. The 10.7% figure for direct transport costs comes from a paper by David Hummels, in which he estimates an all-commodities trade-weighted average transport cost for freight shipping. The US average is 10.7%.

But Hummels’ estimates are the product of a cross-sectional data set for 1994. Back in those days, oil was about $15 per barrel. There is no reason to believe that freight costs will remain confined to an approximately 10% share when the price of oil increases tenfold!

Jeff Rubin, author of a widely cited CIBC study, says that “the cost of shipping a standard, 40-foot container from Asia to the East Coast has already tripled since 2000 and will double again as oil prices head toward $200 a barrel.”

Jacks, Meissner, and Novy may be right that demand for shipping will induce productivity-enhancing technological innovations, but I thought that was the story of The Box. In the short run, at least, high oil prices mean that international trade will shrink – the world is bigger and spikier.

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