The issue
How do transport markets interact with markets for world trade in goods? Changes in demand for products as countries unevenly recover and emerge from pandemic lockdowns have led to dramatic increases in the cost of shipping for both commodities and manufactured goods.
The delays in trade costing billions caused by both the blockage of the Suez Canal by the megaship Ever Given, as well as the shortages in transport supply generated in the later phase of the COVID pandemic, have reminded the world of the vital role the transportation sector plays in world trade. While under more ordinary circumstances the role of transportation remains somewhat invisible, new research is finding how the market for shipping services can influence trade flows, the products that countries sell abroad, and the way in which price shocks reverberate through trade.
The market for shipping services can influence trade flows, the products that countries sell, and how price shocks reverberate through trade.
The Facts:
Ships transport more than 80% of world trade volume and about 70% of trade value. The world fleet that carries seaborne trade involves dry bulk ships, container ships and oil tankers. Each vessel type specializes in different classes of products and can be split into two categories: those that operate on fixed itineraries, much like buses, and those that operate on flexible routes, much like taxis.
Container ships belong to the first group, while gas/oil tankers and dry bulk ships belong to the second. Dry bulk ships, which account for about half of seaborne trade and 45% of the total world fleet, are the main mode of transportation for commodities, such as grain, ore, and coal. They operate on flexible routes and are therefore called “ocean taxis.”
Transport companies influence transport costs and thus global imports and exports. In new research, Giulia Brancaccio, Theodore Papageorgiou and I focused on the dry bulk shipping industry using data that included vessel AIS data, reporting each ship’s exact position and depth of sea submergence, as well as shipping contracts. This allowed us to observe the intersection of transport markets and world trade.
“ As a result of this large trade imbalance, our research finds that at any point in time a staggering 42% of ships are traveling without cargo. ”
From the established patterns we observed we were also able to make projections about how particular changes in economic circumstances, such as an increase in oil prices or a major economic slowdown in a key country such as China, would affect shipping prices and trade flows. While our research focused on dry bulk, the insights apply to other transport modes.
World trade in commodities is greatly unbalanced: most countries are either large net importers or large net exporters. This is reflected in transport costs and ship movements. To a large extent, the imbalance is due to the different natural inheritance of countries. For instance, Australia, Brazil and Northwest America (the world’s biggest net exporters of commodities) are rich in goods such as minerals, grain, and coal. At the same time, growing developing countries require imports of raw materials to achieve industrial expansion and infrastructure building. In recent years, Chinese growth has relied on massive imports of raw materials.
As a result of this large trade imbalance, our research finds that at any point in time a staggering 42% of ships are traveling without cargo and there are large asymmetries in trade costs across space. Shipping companies demand a premium to travel toward a destination with low exports, to compensate for the difficulty of finding a new cargo originating from that destination. All else equal, the prospect of having a return trip without cargo leads to higher prices.
For example, China mostly imports raw materials, so ships that specialize in this type of cargo arriving there have limited opportunities to reload. Accordingly, a trip from Australia to China cost an average of $10,000 per day during the period studied, while a trip from China to Australia cost on average $7,500 per day. This reflects the general point that transportation prices are largely asymmetric with differences reflecting a destination’s trade imbalance.
The higher transport costs that exporters face in shipping goods to net importing countries tends to attenuate some of the comparative advantages of exporters in those countries. Vice versa, relatively cheaper transport provides the exporters in net importing countries with some cost advantage. This phenomenon is pervasive in most, if not all modes of transportation: trucks, trains, container air and ocean shipping, all exhibit similar price asymmetries that correlate with trade imbalances (the direction of the imbalance, however, may be the opposite).
In fact, the U.S.-China trade deficit in manufacturing has incentivized U.S. exports of low value cargo, such as scrap or hay, to fill up the empty backhauls.
“ Gibraltar seems to be the most critical passage, as removing it would reduce world trade by close to 7% and up to 44% in the Mediterranean. ”
The role of the market for shipping services enables us to come up with new estimates of factors that impact trade. For instance, we find that the transport sector dampens the impact of a decline in fuel costs on trade. This decline has both a direct and an indirect effect. The direct effect is straightforward: as costs fall, shipping prices also fall and thus exports rise. The indirect effect is that a decline in fuel costs improves the bargaining position of the shipping company since it makes traveling without cargo less costly. This dampens the direct cost effect and mitigates the increase in exporting.
Indeed, we find that the overall increase in world trade in response to a 10% decline in fuel costs would be 40% higher if shipping companies did not adjust their pricing behavior.
A slowdown in China that leads to a decrease in Chinese imports affects Chinese exports and also has rippling network effects. A decrease in Chinese imports contributes to a decrease in its exports, even though they are not directly affected by the country’s slowdown, because of transportation costs. Transport markets create a complementarity between imports and exports; the high Chinese imports, led to a large number of ships ending their trip in China and looking for a freight there, which in turn reduced trade costs for Chinese exporters. Therefore, when imports decline, fewer ships end up in China and Chinese exporters are hurt.
This has a ripple effect as well. China is a large importer that trades with multiple countries (Brazil, Australia etc.), so a decrease in Chinese imports means exports from the rest of the world decline. Besides this direct effect, the pattern of shipping has different effects in neighboring countries as compared to distant regions; fewer ships unload in China, reducing the supply of shipping in the region. This negatively affects China’s exports by raising prices but benefits distant countries, such as Brazil, because ships reallocate there.
How much do large changes in maritime conditions contribute to world trade? As demonstrated by the recent blockage of the Suez Canal by the Ever Given, the world’s biggest passages have a substantial impact on world trade. A permanent closure of three important passages (Suez, Panama, Gibraltar) would increase the nautical distances and thus the duration of specific trips.
We find that the existence of all passages substantially increases world trade in general, with particularly large effects in particular regions. In our modeling, removing the Suez Canal reduces trade by 3.5% and up to 26% in the Middle East; Removing the Panama Canal leads to a decline in world trade of 3%, but up to 28% in Northeast America; Gibraltar seems to be the most critical passage, as removing it would reduce world trade by close to 7% and up to 44% in the Mediterranean.
What this means:
The transportation sector is responsible for all of international trade in goods. Trade costs paid by exporters, as well as the ensuing trade flows are largely shaped by the behavior of transportation companies. Using big data from the dry bulk shipping industry, we gain insight into the behavior of these companies and their impact on trade. Ships travel empty almost half the time, partly as a result of large trade imbalances; this greatly affects transport costs that exporters pay. Transport markets attenuate differences in the comparative advantage across countries, reallocating production from net exporters to net importers; create network effects in trade costs; and dampen the impact of shocks on trade flows.
These three mechanisms reveal a new role for geography in international trade.
Editor’s Note: This post was originally published by Econofact.org — The Role of Shipping in World Trade. It was based on Brancaccio, G., Kalouptsidi, M. and Papageorgiou, T. (2020), Geography, Transportation, and Endogenous Trade Costs. Econometrica, 88: 657-691. Also featured in Microeconomic Insights.
Myrto Kalouptsidi is an assistant professor in the economics department at Harvard University. She specializes in industrial organization and international trade, with a focus on transport markets.
