Christoph Forstner: Transport Costs & Specialization

TRANSPORT COSTSAND SPECIALIZATIONSimon Kilian, Christopher Karlsson, Christoph Forstner

Negative externalities of transport

Transport costs and scale economies

Transport: an increasingly important sector 2

History and Development

STRUCTURE

I. History and Development

1. Development

2. Intraindustry trade

3. History, Eras, and Types

II. Transport costs and scale economies

1. Bumpy landscapes

2. Changes in trade

3. Concentration of economic activities

4. Transport Policies

III. Negative externalities of transport

IV. Transport: an increasingly important sector

TRANSPORT COSTSSHAPING THE ECONOMIC ENVIRONMENT





DEVELOPMENT OF TRANSPORT COSTS AND EXPORT

In 1910 British exports were spread quite evenly between Europe (35%), Asia (24%), and other regions (31%)

In the mid 1970s overseas transport costs had fallen significantly- Steampower- Telegraph

How do you think Britain‘s exports developed after the fall in overseas transport costs?





DEVELOPMENT OF TRANSPORT COSTS AND EXPORT

By 1996 60% of Britain‘s exports went to Europe and only 11% to Asia

This result is exactly the opposite of what standard economics would predict

Transport costs are a larger part of the cost of goods shipped from half a world away than for goods traded with neighbors

This means a fall in transport costs should have meant more trade with distant partners, than with neighbors not less.

How can this development be explained?





TWO WAVES OF GLOBALIZATIONThe first wave (1840 – WWI)

Transport costs fell low enough to make large scale trade possible between places based on their comparative advantadge

For example: Britain traded machinery for Indian tea

Trade increased between distant and dissimilar countries





TWO WAVES OF GLOBALIZATIONThe second wave (after 1950)

Transport costs fell low enough that small differences in products and tastes fueled trade between similar countries

Neighbors started trading different types of beer and different parts of cars such as wheels and tires

The trade in parts and components grew to take advantadge of specialization and economies of scale





TWO WAVES OF GLOBALIZATIONSummary

The first Wave was characterized by „conventional“ trade that exploited differences in natural endowments

Trade was mostly done between countries that where most efficientat producing a specific product

The second wave was characterized by „new international trade“ driven by economies of scale and product differentiation





NONLINEAR DEVELOPMENT

Research shows that relationship between production location,transport costs, and trade patterns are nonlinear

First they led to countries trading more with distant and dissimilar partners

Then they fueled trade with neighboring countries





INTRAINDUSTRY TRADE

The exchange of broadly similar goods and services

One of the most important economic developments since WWll

Share of intraindustry trade has gone up for all types of goods and services- Primary goods (oil, natural gas)- Intermediate inputs (auto parts)- Final goods (food, beverages)

Intraindustry trade is now more than half of global trade, up from a quarter in 1962





INTRAINDUSTRY TRADEDeveloped countries account for much of the world‘s intraindustry trade





THE BENEFITS OF INTRAINDUSTRY TRADE

Trade in intermediate inputs increases the potential for specialization and trade significantly

Specialization and scale economies generate efficiency- Both in production and transportation

Benefits have not been shared equally- Reason are the interactions between scale economies and transport costs- There is a gap between developed and developing countries





TRANSPORT COSTS AND TRADE VOLUMES

Transport and Trade costs heavily influence trade volumes

Trade in intermediate goods is especially sensitive to transport costs

As trade costs fall then trade in intermediates rapidly increase

Falling transport costs and increasing trade reinforce one another.





TRANSPORT COSTS AND TRADE VOLUMESAn Example:

On the trans-Pacific route, there are cost differences of 50% between - a Panamax Unit of 4000 TEU (a measure of shipping units) and - a Mega post-Panamax Unit of 10.000 TEU

Higher shipping volume decrease costs per unit

Exploiting these cost advantadges requires large trade volumes and high capacity.Both of which most developing countries lack





WORLDWIDE SHIPPING ROUTESClear difference between developed and undeveloped countries





TODAYS SITUATION

Northern Hemisphere is heavily trafficked, with ever strengthening trade links

Trade links between weaker regions are narrow roads

Global air and internet traffic show similar imbalance

Concerning development for developing countries

Scale economies in production and transport will make it more difficult to enter these highly competitive markets





HISTORY OF TRANSPORTATION COST

100 years before World War 2: Falling transport costs brought closer economic integration both within and between countries

19th century until World War 1: first era of globalization

20th century: large infrastructure investments and breakthroughs in transport technology caused further fall in transport cost





FIRST ERA OF GLOBALIZATIONDomestic Transport:

Inland waterways and railways reduced transport costs

Steamships reduced travel times

Railroads surpassed inland waterways

New Urbanization pattern- Fueled by massive investments in both railways and canal construction





FIRST ERA OF GLOBALIZATIONInternational transport:

Steamships reduced maritime transport costs, increased speed and reliability

Price differences between importing and exporting countries fell drastically

For example:- Wheat Prices in Liverpool exceeded Chicago prices by 58% in 1870- In 1913 Liverpool prices exceeded Chicagos by only 16%

Competition from abroad gave rise to protectionist trade policies

Steamships lead to increasing trade and competition in the global market





TRADE IN THE MODERN ERA

Since mid-1970s the freight costs have halved by investments in transport infrastructure, better capacity use and technological progress

Surge in international trade has been within industries, not between them

Transport reforms and falling trade barriers have substantially contributed to the fall in transport cost

Falling communication and transport costs have been instrumental in the outsourcing process





THE DIFFERENT TYPES OF TRANSPORT Road and Rail transport costs

Road Transport- 40% fall over the past three decades

Caused by deregulation of the trucking industry and lower vehicle costs

Rail freight- Cost fell much less than road costs- Technical progress was uneven- Monopoly power of large mostly state owned enterprises

slowed cost reductions





THE DIFFERENT TYPES OF TRANSPORTAir and Maritime transport costs

Air transport- Jet Engine lowered costs quickly in 1950-1970- Faster, more reliable, and more fuel efficient

Maritime transport- Technical progress and institutional changes have reduced prices- Growth of open registry shipping- The Introduction of Containers





THE DIFFERENT TYPES OF TRANSPORT Communication Costs

Drastic fall in Communication costs

Caused by the Internet and other telecommunication advances

Cost for a three minute phone call from New York to London- In 1931: 293 dollar- In 2001: 1 dollar

Lower communication costs facilitate the coordination of international production networks





THE DIFFERENT TYPES OF TRANSPORT Communication Costs

Lead to a reduction in search cost- Knowledge about potential customers or suppliers is imperfect- Trade relations start with the search for trading partners

Reduction in variable costs- Costs that arise from the communication between consumer and producer- Interactions regarding: product specifications, quality control and timing

TRANSPORT COSTSAND SCALE ECONOMIES

Transport: an increasingly important sector

History and Development26



TRANSPORT COSTS AND SCALE ECONOMIESIntroduction

Economies of scale (microeconomic def.): cost advantages that enterprises obtain due to size or high volume output, with cost per unit of output generally decreasing with increasing volume as fixed costs are spread out over more units of output

A fall in transport costs increases the concentration of people and firms because it allows more efficient sharing of facilities and services

Falling transport costs lead to higher economies of scale in production, higher production and trade facilitate economies of scale in transport





TRANSPORT COSTS AND SCALE ECONOMIESBumpy Landscapes

Earlier: natural geographic conditions (such as waterways) determined the location of settlements and economic activity

Shared investments (e.g. in local health, education facilities) then created increasing returns to scale that shaped economic geography and reduced transaction costs

The more the people who use a facility or communal service, the lowerthe costs per user. The larger the settlement, the more the people who share the fixed costs





TRANSPORT COSTS AND SCALE ECONOMIESExcursus: Transaction Costs

The costs associated with exchange of products to overcome market imperfections

Transaction costs are a critical factor in deciding whether to make a product or buy it

Examples: Legal fees, informal cost of finding the price, enforcing property rights, resolving contract disputes or identifying market opportunities

To minimimze transaction costs between business partners, trust is essential






So as transport costs fall, access increases, scale increases and unit costs of services drop. To use those services, people and goods have to travel

As more facilities and services are provided centrally in larger cities, smaller coummunities become less attractive and spatial disparities emerge

The size and economic distribution level of towns and cities changes






Natural geography (first-nature) and the lumpiness of urban infrastructure investments result in irreversible dynamics

The ecomomic landscapes first becomes rough, than bumpy

This is how transport costs define the geographic size of markets and thereach and scale of communal services and organizations

With urbanization, manufacturing and allied services become the drivers of growth and shape the economic world






In the past…- first nature geography and public goods had the strongest economic

impact on regions

Nowadays…- increasing returns to scale in the production of manufactured goods and

ideas influence the distribution of economic activities in geographic space

TRADING CHANGES





TRADING CHANGESFalling transport costs increase trade between neighbors

Paradox: with falling transport costs trade increases with nearby countries, not with those farther away

Explanaiton: the growing demand for varieties of similar goods

Distance has become a larger deterrent to trade while divisions (border effects)have become less of a deterrent





TRADING CHANGESFalling transport costs increase trade between neighbors





TRADITIONAL TRADE THEORY NEW TRADE THEORY

It predicted more intensive trade in goods that are different, favoring trade between countries with different endownments

Long distance trading

Countries traded because they could not produce the imported products themselves

Nowadays countries trade becausethey want slightly different versions of similar goods

High number of intermediate goods,trade with nearby countries

A love of variety, and low transportcosts, makes countries trade because they want to, not because they need to





TRADING CHANGESIntraindustry trade

With the surge in intraindustry trade a large increase in trade with intermediate goods (relative to final goods) came along

Intraindustry trade in intermediate goods requires an especially efficient transport sector

Lower transport costs, changes in goods traded, and lower communication costs reinforce each other





TRADING CHANGESIntraindustry trade

Product cycles for knowledge-intensive intraindustry goods and for customeritems such as electronic gagdgets and fashion articles have become shorter

Greater time sensitivity helps explain why the distance-dependence of trade goes up rather than down

CONCENTRATION OF ECONOMIC ACTIVITIES





CONCENTRATION OF ECONOMIC ACTIVITIESConcentration within countries

Increasing returns to scale in production, the love of variety for consumer and intermediate goods, and lower transport costs drive the concentration of economic activities in geographic space

But how?






Diffentiated products and increasing returns to scale will increaseproductivity more in larger areas than in smaller ones

The larger a region, the more varieties will be produced locally, fewer goods have to be imported which makes a saving on transport costs and leads to higherreal income in large areas

Higher real income will lead to in-migration, putting pressure on local wages






There is a strong belief that an equal distribution of infrastructure will lead to an equal geographic distribution of economic activities

So massive investments in transport infrastructure have been the central policy instrument to induce firms to move to lagging regions

But the outcomes were usually the opposite: the target regions lost production and workers to leading regions






Knowledge-sharing is another force shaping the economic geography of countries and areas

Technical know-how can be used by small extra cost, the accumulated stock of knowledge leads to innovation

Larger local labor markets increase knowledge spillovers between workers and increase productivity

TRANSPORT POLICIES





TRANSPORT POLICIESPriorities in the developing world

Not all countries have benefited equally. Transport costs have fallen faster where the demand for transport services is greater

In much of Africa, the cumulative causation has even hurt, because agglomeration

economies of Africa‘s divided neighborhoods remain small

Developing countries can get the circle started, if they increase local market interactions and reduce intercity and interarea distances and divisions





TRANSPORT POLICIESPriorities in the developing world

Reducing the negative effects of market structure in the transport sector

Improving trade facilitation and regional coordination

Minimize divisions





TRANSPORT POLICIES IN THE DEVELOPING WORLDCrossing borders or climbing walls?





TRANSPORT POLICIESGeneral Problems

Markets for transport services are not perfectly competitive

Trucking industry: tendency toward consolidated ownership

Railways & Airlines: markets are dominated by state-owned ownership

Transport providers consolidate power by owning infrastucture. Services are not provided in competitive markets because the indivisibility of infrastructure facilities naturally precludes competition





TRANSPORT POLICIESMaintenance

The absence of effective regulation limits competition and can reduce the construction of new infrastructure

It may cause underinvestment in maintenance of existing infrastructure

The direct costs of badly maintained roads are higher than the investments of maintenance would have been





TRANSPORT POLICIESEfforts to facilitate trade

Trade facilitation has become the most important policy instrument to achieve gains from international trade

Targets: improving the efficiency of ports, harmonizing standards, reducing bureaucratic burdens to cross borders, IT infrastructure





Increasing local market interactions and reducing intercity distances and divsions

Improving physical infrastructure Improving trade facilitation and

regional coordination Adress the negative externalities of

transport

TRANSPORT POLICIESEfforts to facilitate trade

NEGATIVE EXTERNALITIES OF TRANSPORT





NEGATIVE EXTERNALITIES OF TRANSPORTCongestion

There is no smooth and immediate supply response when demand increases

Overcapacity: extra cost could be spread over a larger number of users

Insufficient capacity: congestion causes time and quality losses (in rapidly developing countries)

it´s not easy to handle, because it occurs mostly during certain times of the day, oftencaused by specific bottlenecks in the network





NEGATIVE EXTERNALITIES OF TRANSPORTEmissions

Largest share of these emissions is generated in industrialized countries

Rising in many developing countries

Emissions from transport are at 13%

expected global costs of a 2.5° C warming in 2100





NEGATIVE EXTERNALITIES OF TRANSPORTEmissions





NEGATIVE EXTERNALITIES OF TRANSPORTPollution

Vehicle emissions of all local pollutants have fallen in developed countries,but they remain high elsewhere

Diseases related to air pollution contribute to the premature death of more than half a million people each year

Transport may be responsible for about a quarter of this impact, mainly from private and commercial vehicles





NEGATIVE EXTERNALITIES OF TRANSPORTAccidents

stable motorization have reduced road fatalities and injuries but in developing and transition countries these rates are increasing

1.2 million people die in road accidents each year, and 90 percent occur in low- and middle income countries

World Bank projections suggest an increase by more than 80 percent between 2000 and 2020 but a decrease of 30 percent in high-income countries

- Middle East and North Africa 5% to 8%- Latin America and the Caribbean and East Asia and the Pacific 3%- Africa, Eastern Europe and Central Asia, and South Asia 2%

TRANSPORT: AN INCREASINGLY IMPORTANT SECTOR





TRANSPORT: AN INCREASINGLY IMPORTANT SECTOR

Introduction

Costs have declined in many markets but those costs are becoming a larger share of overall trade costs because of regions like Latin America and the Caribbean Area

with fuel costs rising, transport’s share will rise even more





TRANSPORT: AN INCREASINGLY IMPORTANT SECTORTransport costs now matter more for trade

Tariffs have come down and trade agreements continue Reduction of transport costs would bring more benefits 10% decrease in trade costs would increase the region’s imports by 50% and

intraregional exports by more than 60%





TRANSPORT: AN INCREASINGLY IMPORTANT SECTORWhat is needed for transport to continue to contribute to development?

Poor countries become big producers before they become big consumers

Income generation- importing intermediate goods and raw materials, exporting processed goods

Relocation of intermediate production processes to middle- and low-income countries indicates the enormous potential benefits from integration into world markets

How to achieve this provision- some of the benefits of transport policies will accrue to foreign countries- a growing confidence in reciprocal support for international transport





TRANSPORT: AN INCREASINGLY IMPORTANT SECTORtwo more coordination problems (neighboring countries share facilities)

The scale of least-cost port

Airport investments calls for hub-and-spoke transport systems it requires credible agreements

The mutual dependence of transport policy and competition policy implies a global effort, such as that started by some multilateral organizations





TRANSPORT: AN INCREASINGLY IMPORTANT SECTOREast Asia

Closer to the world markets as Japan and the Republic of Korea

Transport costs to North America and Western Europe have fallen

They have joined the growing trade in intermediate and final manufactured goods

Countries such as Tunisia can do the same





TRANSPORT: AN INCREASINGLY IMPORTANT SECTORSouth Asia

Falling trade and communication costs have helped India enter western markets for intermediate services, eliminating some of the disadvantages of being distant

Countries such as South Africa can do the same, exploiting their home market potential





TRANSPORT: AN INCREASINGLY IMPORTANT SECTORCentral Asia

With economies that are small, landlocked, and dependent on exports of primary products such as oil and gas reducing transport costs will be more difficult

It will also be difficult for smaller countries in divided neighborhoods, such as Burkina Faso, Malawi, Niger, and Rwanda

These countries will need aggressive measures to lessen the trade friction and selected investments to encourage agglomeration and reduce the transportcosts for primary goods exports

Christoph Forstner: Transport Costs & Specialization

Economy & Finance

Transcript of Christoph Forstner: Transport Costs & Specialization