How Transportation Costs Affect Trade Essay

1046 words - 5 pages

1. Transportation costs

How transportation costs affect trade

The transportation costs affect the volume of trade in terms of the different quality or value to weight ratio of products. The transportation costs make up larger share in the price of low-quality products, so that an increase in the transportation cost will raise the price of low-quality goods proportionately than high-quality goods. And thus, consumers in the export markets tend to switch to high-quality goods, which has relatively constant price.

Similarly, when we fixed the weight of both high and low value to weight ratio goods, the transportation costs will make up large share in the price of low value goods, so that the increase of transportation cost will have more impact on the low value goods.

Also, the transportation costs affect the pattern of trades. The decrease of the cost will increase the range of goods available for International trade. In other words, it will extend the margin of trade. The potential diversification arises and more goods become tradable.

The cost of time in transportation will also affect the international trade. In this paper, the cost of time is considered as the interest cost of the shipment which is tied up in the hole, or the obsolescence of time-sensitive goods. However,some economists believe it difficult to value the cost due to the uncertainty of global manufacture and the volatility in product demand. Measures should be done to reduce the impact from the delay. Djankov et al, (2010) estimate that additional day in average export time will reduced the export by more than 1%. Each day in transportation is equal to an ad valovem tariff rate of 0.6% to 2.3%. Also, for time-sensitive goods, they are more likely to shift the transport mode.

Determinants of transportation costs

As mentioned above, the product characteristics such as the quality or the value to weight ratio of goods are one of the determinants of transportation costs. When we fixed other things, the transportation cost will be lower for high-quality or high value to weight ratio goods, and vice versa.

The geography characteristics of a country also affect transportation costs. The international trades of landlocked countries depend on their transit states. The quality and size of transport infrastructures are not totally under their control and they are more likely to get high cost from the transit countries. These cause much higher transportation costs in the landlocked countries. Another important geography features is the distance to other markets and transport routes. The longer the distance, the larger the cost of both transportation and time will be. However the disadvantage of long distance can be overcome by other features such as the fixed location of sources and the taste of the consumers.

The quantity and quality of infrastructures in the scenario of transportations are the most important features to affect the transportation costs. And the investment in...

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