How do transport markets interact with markets for world trade in goods? Changes in the demand for products as countries unevenly recover and emerge from pandemic lockdowns have resulted in dramatic increases in shipping costs for both raw materials and manufactured goods.
The billion dollar trade delays, both due to the blockade of the Suez Canal by the mega-ship Ever Given and the bottlenecks in the transport supply that emerged in the late phase of the COVID pandemic, have reminded the world of the crucial role the transport sector plays in world trade. While the role of transportation remains somewhat invisible in ordinary circumstances, new research has shown how the maritime services market can affect trade flows, the products countries overseas sell, and the ways in which trade price shocks linger .
The shipping services market can affect the flows of trade, the products countries sell, and the impact of price shocks on trade.
Ships transport more than 80% of the world trade volume and around 70% of the trade value. The world fleet for maritime trade includes bulk carriers, container ships and oil tankers. Each type of ship specializes in different product classes and can be divided into two categories: those that operate on fixed routes, similar to buses, and those that operate on flexible routes, similar to taxis.
Container ships belong to the first group, gas / oil tankers and bulk cargo ships to the second. Bulky carriers, which account for around half of sea trade and 45% of the world’s total fleet, are the main means of transport for raw materials 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 import and export. In new research, Giulia Brancaccio, Theodore Papageorgiou, and I focused on the bulk shipping industry, using data that included AIS data from ships reporting the exact position and depth of each ship’s immersion, and ship contracts. This enabled us to observe the intersection of transport markets and world trade.
As a result of this large trade imbalance, our research has shown that at any point in time an incredible 42% of ships are sailing without cargo.
From the established patterns we observed, we were also able to make predictions about how certain changes in economic conditions, such as an increase in oil prices or a severe economic slowdown in a major country like China, would affect ship prices and trade flows. While our research focused on bulk cargo, the findings also apply to other modes of transport.
World trade in raw materials is very unbalanced: most countries are either large net importers or large net exporters. This is reflected in transport costs and ship movements. Much of the imbalance is due to the different natural heritage of the countries. For example, Australia, Brazil, and Northwest America (the world’s largest net exporters of raw materials) are rich in goods such as minerals, grain, and coal. At the same time, growing developing countries need raw material imports in order to achieve industrial expansion and infrastructure development. Chinese growth has been dependent on massive imports of raw materials in recent years.
As a result of this large trade imbalance, our research has shown that at any point in time, an incredible 42% of ships are sailing without cargo and there are large asymmetries in the cost of trade in space. Shipping companies charge a premium to travel to a destination with low exports to compensate for the difficulty of finding new cargo originating from that destination. All other things being equal, the prospect of a return trip without freight leads to higher prices.
For example, China mainly imports raw materials, so ships arriving there that specialize in this type of cargo have limited reloading options. Accordingly, a trip from Australia to China cost an average of US $ 10,000 per day during the period under review, while a trip from China to Australia cost an average of US $ 7,500 per day. This reflects the general point that transport prices are largely asymmetrical, with differences reflecting the trade imbalance of a destination.
The higher transportation costs exporters face when shipping goods to net importing countries tends to weaken some of the comparative advantages of exporters in those countries. Conversely, relatively cheap transport gives exporters in net importing countries a certain cost advantage. This phenomenon is ubiquitous in most, if not all modes of transport: trucks, trains, container aviation, and maritime shipping, all of which have similar price asymmetries that correlate with trade imbalances (however, the direction of the imbalance may be reversed).
Indeed, the US-China manufacturing trade deficit has given US exports of low-value cargo such as scrap or hay an incentive to replenish the empty backhauls.
Gibraltar appears to be the most critical passage, as eliminating it would reduce world trade by almost 7% and in the Mediterranean by up to 44%.
The role of the shipping services market enables us to make new assessments of factors that affect trade. For example, we find that the transport sector is dampening the impact of falling fuel costs on trade. This decline has both direct and indirect effects. The direct effect is simple: as costs fall, so do shipping prices, and so exports increase. The indirect effect is that a decrease in fuel costs improves the shipping company‘s negotiating position as travel without freight becomes cheaper. This dampens the direct cost effect and mitigates the increase in exports.
In fact, we find that the overall increase in world trade in response to a 10% decrease in fuel costs would be 40% higher if shipping companies did not adjust their pricing behavior.
A slowdown in China leading to a decline in Chinese imports affects Chinese exports and also has network effects. A drop in Chinese imports is contributing to a drop in exports, although they are not directly affected by the country’s slowdown due to transportation costs. Transport markets create a complementarity between imports and exports; the high Chinese imports resulted in many ships ending their voyage in China looking for cargo, which in turn lowered trading costs for Chinese exporters. As a result, if imports decline, fewer ships land in China and Chinese exporters are affected.
This also has a ripple effect. China is a big importer trading with several countries (Brazil, Australia etc). A decline in Chinese imports therefore means that exports from the rest of the world are falling. Apart from this direct effect, the structure of shipping in neighboring countries has different effects than in distant regions; fewer ships unload in China, which reduces the number of ships in the region. This has a negative effect on China’s exports through price increases, but benefits distant countries like Brazil, as ships are being redistributed there.
How much do major changes in maritime conditions contribute to world trade? As the recent blockade of the Suez Canal by the Ever Given shows, the world’s largest passages have a significant impact on world trade. A permanent closure of three important passages (Suez, Panama, Gibraltar) would increase the nautical distances and thus the duration of certain journeys.
We find that the existence of all passages greatly increases world trade in general, with particularly large effects in certain regions. In our modeling, the removal of the Suez Canal reduces trade by 3.5% and in the Middle East by up to 26%; The dismantling of the Panama Canal leads to a decrease in world trade of 3%, in Northeast America, however, up to 28%; Gibraltar appears to be the most critical passage, as eliminating it would reduce world trade by almost 7% and in the Mediterranean by up to 44%.
What this means:
The transport sector is responsible for all international movement of goods. The trading costs borne by the exporters and the resulting trade flows are largely determined by the behavior of the transport companies. Using big data from bulk shipping, we gain insights into the behavior of these companies and their impact on trade. Ships run empty nearly half the time, in part as a result of large trade imbalances; this has a huge impact on the transportation costs that exporters pay. Transport markets dampen differences in comparative advantage between countries by redistributing production from net exporters to net importers; create network effects on trading 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 included 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.