Air or Sea? Quality-Driven Sorting in International Trade

We study how product quality shapes the choice between air and sea freight. In a model with non-homothetic demand and income uncertainty, exporters face a timing wedge: sea shipments must commit quantities before uncertainty resolves, whereas air shipments can be better timed but at higher cost. The model implies a sharp modal sorting for vertically differentiated products: high-quality varieties fly while lower-quality varieties sail. It also predicts that the average air–sea quality gap shrinks as sea routes lengthen relative to air routes. Using U.S. customs data at the exporter–district–product level, and proxying quality with unit values, we confirm both patterns. In addition, leveraging within origin–destination time variation in relative freight costs in a 2SLS design, we show that higher sea costs (relative to air) raise the average unit value of air shipments, consistent with quality sorting. Calibrated counterfactuals show that higher demand volatility reshapes selection in a distance-dependent way, tightening it on short routes while expanding air-based participation on long routes, whereas COVID-type air-freight disruptions and tariff-type marginal-cost shocks disproportionately hit profits for highquality, long-distance exporters, and push marginal exporters to switch from air to sea.