How do transport markets interact with world merchandise trade markets? Shifts in product demand as countries unevenly recover and emerge from pandemic lockdowns have resulted in dramatic increases in shipping costs for both basic products and manufactured goods.
The billion-dollar trade delays caused both by the blockade of the Suez Canal by the Ever Given megaship, as well as transport supply shortages generated in the later phase of the COVID pandemic, recalled to the world the vital role of the transport sector. plays in world trade. While, in more ordinary circumstances, the role of transport remains somewhat invisible, new research investigates how the market for maritime transport services can influence trade flows, the products countries sell abroad, and how price shocks affect trade.
The market for maritime transport services can influence trade flows, the products countries sell, and how price shocks affect trade.
Ships carry more than 80% of the volume of world trade and about 70% of the value of trade. The global fleet that carries maritime trade includes dry bulk carriers, container ships and tankers. Each type of vessel specializes in different classes of products and can be divided into two categories: those that operate on fixed routes, much like buses, and those that operate on flexible routes, much like taxis.
Container ships belong to the first group, while oil / gas and bulk carriers belong to the second. Dry bulk carriers, which account for about half of maritime trade and 45% of the total world fleet, are the main mode of transporting goods such as grains, ore and coal. They operate on flexible routes and are therefore called “sea taxis”.
Transport companies influence transport costs and therefore global imports and exports. In nine research, Giulia Brancaccio, Theodore Papageorgiou and I focused on the dry bulk transport industry using data including vessel AIS data, showing the exact position and depth of submersion of each vessel, as well as contracts shipping. This allowed us to observe the intersection of transport markets and world trade.
Due to this significant trade imbalance, our research shows that at any given time, 42% of ships are traveling without cargo.
From the established patterns that we observed, we were also able to make projections of how particular changes in the economic situation, such as an increase in oil prices or a major economic slowdown in a key country like China , would affect maritime transport prices and trade flows. Although our research has focused on dry bulk, the knowledge applies to other modes of transport.
Global commodity trade is highly imbalanced: most countries are either large net importers or large net exporters. This is reflected in transportation costs and vessel movements. To a large extent, the imbalance is due to the different natural heritage of countries. For example, Australia, Brazil and Northwest America (the world’s largest net commodity exporters) are rich in goods such as minerals, grains, and coal. At the same time, growing developing countries need to import raw materials to achieve their industrial expansion and build their infrastructure. In recent years, Chinese growth has been based on massive imports of raw materials.
Due to this large trade imbalance, our research reveals that at any given time 42% of ships are traveling without cargo and that there are large asymmetries in trade costs in space. Shipping companies charge a premium for traveling to a destination with low exports, to compensate for the difficulty of finding new cargo from that destination. All other things being equal, the prospect of a freight-free round trip results in higher prices.
For example, China mainly imports raw materials, so ships specializing in this type of cargo arriving there have limited reloading possibilities. For example, a trip from Australia to China cost on average $ 10,000 per day during the study period, while a trip from China to Australia cost on average $ 7,500 per day. This reflects the general point that transport prices are largely asymmetric with differences reflecting a destination’s trade imbalance.
The higher transportation costs that exporters face in shipping goods to net importing countries tend to weaken some of the comparative advantages of exporters in these countries. Conversely, relatively cheaper transport offers exporters from net importing countries a certain cost advantage. This phenomenon is pervasive in most, if not all, modes of transport: trucks, trains, air and sea containers, all exhibit similar price asymmetries that correlate with trade imbalances (the direction of the imbalance, however, may be ‘reverse).
In fact, the trade deficit between the United States and China in the manufacturing sector has prompted the United States to export low-value goods, such as scrap metal or hay, to fill empty returns.
Gibraltar appears to be the most critical passage, as its removal would reduce world trade by almost 7% and up to 44% in the Mediterranean.
The role of the maritime services market allows us to provide new estimates of the factors that impact trade. For example, we find that the transportation sector is mitigating the impact of lower fuel costs on trade. This decrease has both a direct and an indirect effect. The direct effect is simple: as costs fall, transport prices also fall and therefore exports increase. The indirect effect is that lower fuel costs improve the negotiating position of the shipping company as it makes cargo-free travel less expensive. This mitigates the direct cost effect and mitigates the increase in exports.
Indeed, we find that the overall increase in world trade in response to a 10% drop in fuel costs would be 40% higher if shipping companies did not adjust their pricing behavior.
A slowdown in China that results in lower Chinese imports affects Chinese exports and also has network cascading effects. A drop in Chinese imports contributes to a drop in its exports, although they are not directly affected by the country’s slowdown, due to transport costs. Transport markets create complementarity between imports and exports; high Chinese imports led a large number of ships to end their journey in China and collect freight there, which reduced trade costs for Chinese exporters. Therefore, when imports decrease, fewer ships end up in China and Chinese exporters are affected.
It also has a ripple effect. China is a large importer who trades with several countries (Brazil, Australia, etc.), so a decrease in Chinese imports means a decrease in exports from the rest of the world. Besides this direct effect, the navigation pattern has different effects in neighboring countries compared to remote areas; fewer ships land in China, reducing the supply of maritime transport in the region. This negatively affects Chinese exports by raising prices but benefits faraway countries, such as Brazil, as ships are reassigned there.
To what extent do major changes in maritime conditions contribute to world trade? As evidenced by the recent blockage of the Suez Canal by Ever Given, the world’s largest crossings have a substantial impact on world trade. A permanent closure of three important passages (Suez, Panama, Gibraltar) would increase nautical distances and therefore the duration of specific trips.
We find that the existence of all crossings dramatically increases global trade in general, with particularly strong effects in particular regions. In our model, the removal of the Suez Canal reduces trade by 3.5% and up to 26% in the Middle East; The abolition of the Panama Canal results in a drop in world trade of 3%, but up to 28% in North-East America; Gibraltar appears to be the most critical passage, as its removal would reduce world trade by almost 7% and up to 44% in the Mediterranean.
What does that mean:
The transport sector is responsible for all international trade in goods. The trade costs paid by exporters, as well as the resulting trade flows, are largely influenced by the behavior of transport companies. Using big data from the dry bulk transportation industry, we gain insight into the behavior of these companies and their impact on trade. Ships travel empty almost half the time, in part because of large trade imbalances; this greatly affects the transportation costs that exporters pay. Transport markets mitigate differences in comparative advantage between countries, by reallocating production from net exporters to net importers; create network effects in commercial costs; and mitigate the impact of shocks on trade flows.
These three mechanisms reveal a new role for geography in international trade.
Editor’s Note: This article was originally published by Econofact.org – The role of maritime transport in world trade. It is based on Brancaccio, G., Kalouptsidi, M. and Papageorgiou, T. (2020), Geography, transport and endogenous trade costs. Econometrica, 88: 657-691. Also featured in Microeconomic insights.
Myrto Kalouptsidi is an Assistant Professor in the Department of Economics at Harvard University. She specializes in industrial organization and international trade, with a focus on transport markets.