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Endogenous Transport Costs in International Trade

  • Joern Kleinert

    ()

  • Julia Spies

In this paper we claim that distance alone is a poor proxy for international transport costs in empirical studies. We model a manufacturing and a transport sector and let the level of manufacturing exports determine the demand for transport services. Above a particular trade level, transport service suppliers find it profit-maximizing to invest in an advanced transport technology, which lowers their marginal costs and as a consequence, equilibrium transport prices. Transport costs thus vary with two characteristics: with the distance between two locations and with the endogenous decision to invest in a more efficient technology which is driven, in turn, by the bilateral export level. A simulation exercise reveals that ignoring the effect of the investment decision on transport costs biases empirical results. The empirical estimations rely on newly collected transport price data from United Parcel Service (UPS). We apply an instrumental variable (IV) estimator to account for the endogeneity of the investment decision. Our results confirm that transport prices are influenced by both the distance and the level of exports between two countries. We find that trade partners with 10% more exports enjoy 0.8% lower transport prices.

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File URL: http://www.iaw.edu/RePEc/iaw/pdf/iaw_dp_74.pdf
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Paper provided by Institut für Angewandte Wirtschaftsforschung (IAW) in its series IAW Discussion Papers with number 74.

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Length: 36 pages
Date of creation: Jul 2011
Date of revision:
Handle: RePEc:iaw:iawdip:74
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  1. Olaf Jonkeren & Erhan Demirel & Jos van Ommeren & Piet Rietveld, 2011. "Endogenous transport prices and trade imbalances," Journal of Economic Geography, Oxford University Press, vol. 11(3), pages 509-527, May.
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  12. Peter Egger & Mario Larch & Kevin E. Staub & Rainer Winkelmann, 2011. "The Trade Effects of Endogenous Preferential Trade Agreements," American Economic Journal: Economic Policy, American Economic Association, vol. 3(3), pages 113-43, August.
  13. BEHRENS, Kristian & PICARD, Pierre M., 2008. "Transportation, freight rates, and economic geography," CORE Discussion Papers 2008040, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
  14. Yeaple, Stephen Ross, 2005. "A simple model of firm heterogeneity, international trade, and wages," Journal of International Economics, Elsevier, vol. 65(1), pages 1-20, January.
  15. Paula Bustos, 2011. "Trade Liberalization, Exports, and Technology Upgrading: Evidence on the Impact of MERCOSUR on Argentinian Firms," American Economic Review, American Economic Association, vol. 101(1), pages 304-40, February.
  16. Inmaculada Martínez-Zarzoso & Gordon Wilmsmeier, 2010. "Freight Rates and the Margins of Intra-Latin American Maritime Trade," Ibero America Institute for Econ. Research (IAI) Discussion Papers 201, Ibero-America Institute for Economic Research.
  17. David H. Romer & Jeffrey A. Frankel, 1999. "Does Trade Cause Growth?," American Economic Review, American Economic Association, vol. 89(3), pages 379-399, June.
  18. Alexandre Skiba, 2007. "Regional Economies of Scale in Transportation and Regional Welfare," WORKING PAPERS SERIES IN THEORETICAL AND APPLIED ECONOMICS 200705, University of Kansas, Department of Economics, revised Sep 2007.
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