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Transport Costs in International Trade

  • Julia Spies

    ()

  • Joern Kleinert

This paper claims that distance alone is a poor proxy for international transport costs in gravity equations. We develop a theoretical framework with a manufacturing and a transport sector, where the level of manufacturing exports determines the demand for transport. Above a certain threshold, transport service suppliers find it profit-maximizing to invest into advanced transport technology, which lowers their marginal costs and as a consequence, transport prices. Transport costs therefore vary with the distance between the two locations, and with the endogenous decision to invest in a more efficient technology. We tackle the biases in traditional gravity estimates by using newly collected data on transport prices from UPS and by applying instrument variable estimation techniques. Our results reveal that distance affects trade beyond the transport cost channel. Transport prices, in turn, are influenced by the distance and by the exports between two countries. We find that trading partners with 10% more exports enjoy 0.7% lower transport prices.

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Paper provided by European Regional Science Association in its series ERSA conference papers with number ersa11p625.

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Date of creation: Sep 2011
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Handle: RePEc:wiw:wiwrsa:ersa11p625
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  1. Wilmsmeier, Gordon & Hoffmann, Jan & Sanchez, Ricardo J., 2006. "The Impact of Port Characteristics on International Maritime Transport Costs," Research in Transportation Economics, Elsevier, vol. 16(1), pages 117-140, January.
  2. Marc J. Melitz & Gianmarco I.P. Ottaviano, 2005. "Market Size, Trade, and Productivity," Development Working Papers 201, Centro Studi Luca d\'Agliano, University of Milano.
  3. Joao Santos Silva & Silvana Tenreyro, 2005. "The Log of Gravity," CEP Discussion Papers dp0701, Centre for Economic Performance, LSE.
  4. Hummels, David & Lugovskyy, Volodymyr & Skiba, Alexandre, 2009. "The trade reducing effects of market power in international shipping," Journal of Development Economics, Elsevier, vol. 89(1), pages 84-97, May.
  5. 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.
  6. David H. Romer & Jeffrey A. Frankel, 1999. "Does Trade Cause Growth?," American Economic Review, American Economic Association, vol. 89(3), pages 379-399, June.
  7. Richard Pomfret & Patricia Sourdin, 2008. "Why Do Trade Costs Vary?," School of Economics Working Papers 2008-08, University of Adelaide, School of Economics.
  8. Paula Bustos, 2009. "Trade Liberalization, Exports and Technology Upgrading: Evidence on the Impact of MERCOSUR on Argentinean Firms," 2009 Meeting Papers 1029, Society for Economic Dynamics.
  9. David Hummels, 2007. "Transportation Costs and International Trade in the Second Era of Globalization," Journal of Economic Perspectives, American Economic Association, vol. 21(3), pages 131-154, Summer.
  10. Baier, Scott L. & Bergstrand, Jeffrey H., 2004. "Economic determinants of free trade agreements," Journal of International Economics, Elsevier, vol. 64(1), pages 29-63, October.
  11. 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.
  12. Peter Egger & Mario Larch & Kevin E. Staub & Rainer Winkelmann, 2010. "The Trade Effects of Endogenous Preferential Trade Agreements," SOI - Working Papers 1013, Socioeconomic Institute - University of Zurich.
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