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TRANSPORT COSTSAND SPECIALIZATIONSimon Kilian, Christopher Karlsson, Christoph Forstner
Negative externalities of transport
Transport costs and scale economies
Transport: an increasingly important sector 2
History and Development
STRUCTURE
I. History and Development
1. Development
2. Intraindustry trade
3. History, Eras, and Types
II. Transport costs and scale economies
1. Bumpy landscapes
2. Changes in trade
3. Concentration of economic activities
4. Transport Policies
III. Negative externalities of transport
IV. Transport: an increasingly important sector
TRANSPORT COSTSSHAPING THE ECONOMIC ENVIRONMENT
Negative externalities of transport
Transport costs and scale economies
Transport: an increasingly important sector 4
History and Development
DEVELOPMENT OF TRANSPORT COSTS AND EXPORT
In 1910 British exports were spread quite evenly between Europe (35%), Asia (24%), and other regions (31%)
In the mid 1970s overseas transport costs had fallen significantly- Steampower- Telegraph
How do you think Britain‘s exports developed after the fall in overseas transport costs?
Negative externalities of transport
Transport costs and scale economies
Transport: an increasingly important sector 5
History and Development
DEVELOPMENT OF TRANSPORT COSTS AND EXPORT
By 1996 60% of Britain‘s exports went to Europe and only 11% to Asia
This result is exactly the opposite of what standard economics would predict
Transport costs are a larger part of the cost of goods shipped from half a world away than for goods traded with neighbors
This means a fall in transport costs should have meant more trade with distant partners, than with neighbors not less.
How can this development be explained?
Negative externalities of transport
Transport costs and scale economies
Transport: an increasingly important sector 6
History and Development
TWO WAVES OF GLOBALIZATIONThe first wave (1840 – WWI)
Transport costs fell low enough to make large scale trade possible between places based on their comparative advantadge
For example: Britain traded machinery for Indian tea
Trade increased between distant and dissimilar countries
Negative externalities of transport
Transport costs and scale economies
Transport: an increasingly important sector 7
History and Development
TWO WAVES OF GLOBALIZATIONThe second wave (after 1950)
Transport costs fell low enough that small differences in products and tastes fueled trade between similar countries
Neighbors started trading different types of beer and different parts of cars such as wheels and tires
The trade in parts and components grew to take advantadge of specialization and economies of scale
Negative externalities of transport
Transport costs and scale economies
Transport: an increasingly important sector 8
History and Development
TWO WAVES OF GLOBALIZATIONSummary
The first Wave was characterized by „conventional“ trade that exploited differences in natural endowments
Trade was mostly done between countries that where most efficientat producing a specific product
The second wave was characterized by „new international trade“ driven by economies of scale and product differentiation
Negative externalities of transport
Transport costs and scale economies
Transport: an increasingly important sector 9
History and Development
NONLINEAR DEVELOPMENT
Research shows that relationship between production location,transport costs, and trade patterns are nonlinear
First they led to countries trading more with distant and dissimilar partners
Then they fueled trade with neighboring countries
Negative externalities of transport
Transport costs and scale economies
Transport: an increasingly important sector 10
History and Development
INTRAINDUSTRY TRADE
The exchange of broadly similar goods and services
One of the most important economic developments since WWll
Share of intraindustry trade has gone up for all types of goods and services- Primary goods (oil, natural gas)- Intermediate inputs (auto parts)- Final goods (food, beverages)
Intraindustry trade is now more than half of global trade, up from a quarter in 1962
Negative externalities of transport
Transport costs and scale economies
Transport: an increasingly important sector 11
History and Development
INTRAINDUSTRY TRADEDeveloped countries account for much of the world‘s intraindustry trade
Negative externalities of transport
Transport costs and scale economies
Transport: an increasingly important sector 12
History and Development
THE BENEFITS OF INTRAINDUSTRY TRADE
Trade in intermediate inputs increases the potential for specialization and trade significantly
Specialization and scale economies generate efficiency- Both in production and transportation
Benefits have not been shared equally- Reason are the interactions between scale economies and transport costs- There is a gap between developed and developing countries
Negative externalities of transport
Transport costs and scale economies
Transport: an increasingly important sector 13
History and Development
TRANSPORT COSTS AND TRADE VOLUMES
Transport and Trade costs heavily influence trade volumes
Trade in intermediate goods is especially sensitive to transport costs
As trade costs fall then trade in intermediates rapidly increase
Falling transport costs and increasing trade reinforce one another.
Negative externalities of transport
Transport costs and scale economies
Transport: an increasingly important sector 14
History and Development
TRANSPORT COSTS AND TRADE VOLUMESAn Example:
On the trans-Pacific route, there are cost differences of 50% between - a Panamax Unit of 4000 TEU (a measure of shipping units) and - a Mega post-Panamax Unit of 10.000 TEU
Higher shipping volume decrease costs per unit
Exploiting these cost advantadges requires large trade volumes and high capacity.Both of which most developing countries lack
Negative externalities of transport
Transport costs and scale economies
Transport: an increasingly important sector 15
History and Development
WORLDWIDE SHIPPING ROUTESClear difference between developed and undeveloped countries
Negative externalities of transport
Transport costs and scale economies
Transport: an increasingly important sector 16
History and Development
TODAYS SITUATION
Northern Hemisphere is heavily trafficked, with ever strengthening trade links
Trade links between weaker regions are narrow roads
Global air and internet traffic show similar imbalance
Concerning development for developing countries
Scale economies in production and transport will make it more difficult to enter these highly competitive markets
Negative externalities of transport
Transport costs and scale economies
Transport: an increasingly important sector 17
History and Development
HISTORY OF TRANSPORTATION COST
100 years before World War 2: Falling transport costs brought closer economic integration both within and between countries
19th century until World War 1: first era of globalization
20th century: large infrastructure investments and breakthroughs in transport technology caused further fall in transport cost
Negative externalities of transport
Transport costs and scale economies
Transport: an increasingly important sector 18
History and Development
FIRST ERA OF GLOBALIZATIONDomestic Transport:
Inland waterways and railways reduced transport costs
Steamships reduced travel times
Railroads surpassed inland waterways
New Urbanization pattern- Fueled by massive investments in both railways and canal construction
Negative externalities of transport
Transport costs and scale economies
Transport: an increasingly important sector 19
History and Development
FIRST ERA OF GLOBALIZATIONInternational transport:
Steamships reduced maritime transport costs, increased speed and reliability
Price differences between importing and exporting countries fell drastically
For example:- Wheat Prices in Liverpool exceeded Chicago prices by 58% in 1870- In 1913 Liverpool prices exceeded Chicagos by only 16%
Competition from abroad gave rise to protectionist trade policies
Steamships lead to increasing trade and competition in the global market
Negative externalities of transport
Transport costs and scale economies
Transport: an increasingly important sector 20
History and Development
TRADE IN THE MODERN ERA
Since mid-1970s the freight costs have halved by investments in transport infrastructure, better capacity use and technological progress
Surge in international trade has been within industries, not between them
Transport reforms and falling trade barriers have substantially contributed to the fall in transport cost
Falling communication and transport costs have been instrumental in the outsourcing process
Negative externalities of transport
Transport costs and scale economies
Transport: an increasingly important sector 21
History and Development
THE DIFFERENT TYPES OF TRANSPORT Road and Rail transport costs
Road Transport- 40% fall over the past three decades
Caused by deregulation of the trucking industry and lower vehicle costs
Rail freight- Cost fell much less than road costs- Technical progress was uneven- Monopoly power of large mostly state owned enterprises
slowed cost reductions
Negative externalities of transport
Transport costs and scale economies
Transport: an increasingly important sector 22
History and Development
THE DIFFERENT TYPES OF TRANSPORTAir and Maritime transport costs
Air transport- Jet Engine lowered costs quickly in 1950-1970- Faster, more reliable, and more fuel efficient
Maritime transport- Technical progress and institutional changes have reduced prices- Growth of open registry shipping- The Introduction of Containers
Negative externalities of transport
Transport costs and scale economies
Transport: an increasingly important sector 23
History and Development
THE DIFFERENT TYPES OF TRANSPORT Communication Costs
Drastic fall in Communication costs
Caused by the Internet and other telecommunication advances
Cost for a three minute phone call from New York to London- In 1931: 293 dollar- In 2001: 1 dollar
Lower communication costs facilitate the coordination of international production networks
Negative externalities of transport
Transport costs and scale economies
Transport: an increasingly important sector 24
History and Development
THE DIFFERENT TYPES OF TRANSPORT Communication Costs
Lead to a reduction in search cost- Knowledge about potential customers or suppliers is imperfect- Trade relations start with the search for trading partners
Reduction in variable costs- Costs that arise from the communication between consumer and producer- Interactions regarding: product specifications, quality control and timing
TRANSPORT COSTSAND SCALE ECONOMIES
Transport: an increasingly important sector
History and Development26
Negative externalities of transport
Transport costs and scale economies
TRANSPORT COSTS AND SCALE ECONOMIESIntroduction
Economies of scale (microeconomic def.): cost advantages that enterprises obtain due to size or high volume output, with cost per unit of output generally decreasing with increasing volume as fixed costs are spread out over more units of output
A fall in transport costs increases the concentration of people and firms because it allows more efficient sharing of facilities and services
Falling transport costs lead to higher economies of scale in production, higher production and trade facilitate economies of scale in transport
Transport: an increasingly important sector
History and Development27
Negative externalities of transport
Transport costs and scale economies
TRANSPORT COSTS AND SCALE ECONOMIESBumpy Landscapes
Earlier: natural geographic conditions (such as waterways) determined the location of settlements and economic activity
Shared investments (e.g. in local health, education facilities) then created increasing returns to scale that shaped economic geography and reduced transaction costs
The more the people who use a facility or communal service, the lowerthe costs per user. The larger the settlement, the more the people who share the fixed costs
Transport: an increasingly important sector
History and Development28
Negative externalities of transport
Transport costs and scale economies
TRANSPORT COSTS AND SCALE ECONOMIESExcursus: Transaction Costs
The costs associated with exchange of products to overcome market imperfections
Transaction costs are a critical factor in deciding whether to make a product or buy it
Examples: Legal fees, informal cost of finding the price, enforcing property rights, resolving contract disputes or identifying market opportunities
To minimimze transaction costs between business partners, trust is essential
Transport: an increasingly important sector
History and Development29
Negative externalities of transport
Transport costs and scale economies
TRANSPORT COSTS AND SCALE ECONOMIESBumpy Landscapes
So as transport costs fall, access increases, scale increases and unit costs of services drop. To use those services, people and goods have to travel
As more facilities and services are provided centrally in larger cities, smaller coummunities become less attractive and spatial disparities emerge
The size and economic distribution level of towns and cities changes
Transport: an increasingly important sector
History and Development30
Negative externalities of transport
Transport costs and scale economies
TRANSPORT COSTS AND SCALE ECONOMIESBumpy Landscapes
Natural geography (first-nature) and the lumpiness of urban infrastructure investments result in irreversible dynamics
The ecomomic landscapes first becomes rough, than bumpy
This is how transport costs define the geographic size of markets and thereach and scale of communal services and organizations
With urbanization, manufacturing and allied services become the drivers of growth and shape the economic world
Transport: an increasingly important sector
History and Development31
Negative externalities of transport
Transport costs and scale economies
TRANSPORT COSTS AND SCALE ECONOMIESBumpy Landscapes
In the past…- first nature geography and public goods had the strongest economic
impact on regions
Nowadays…- increasing returns to scale in the production of manufactured goods and
ideas influence the distribution of economic activities in geographic space
TRADING CHANGES
Transport: an increasingly important sector
History and Development33
Negative externalities of transport
Transport costs and scale economies
TRADING CHANGESFalling transport costs increase trade between neighbors
Paradox: with falling transport costs trade increases with nearby countries, not with those farther away
Explanaiton: the growing demand for varieties of similar goods
Distance has become a larger deterrent to trade while divisions (border effects)have become less of a deterrent
Transport: an increasingly important sector
History and Development34
Negative externalities of transport
Transport costs and scale economies
TRADING CHANGESFalling transport costs increase trade between neighbors
Transport: an increasingly important sector
History and Development35
Negative externalities of transport
Transport costs and scale economies
TRADITIONAL TRADE THEORY NEW TRADE THEORY
It predicted more intensive trade in goods that are different, favoring trade between countries with different endownments
Long distance trading
Countries traded because they could not produce the imported products themselves
Nowadays countries trade becausethey want slightly different versions of similar goods
High number of intermediate goods,trade with nearby countries
A love of variety, and low transportcosts, makes countries trade because they want to, not because they need to
Transport: an increasingly important sector
History and Development36
Negative externalities of transport
Transport costs and scale economies
TRADING CHANGESIntraindustry trade
With the surge in intraindustry trade a large increase in trade with intermediate goods (relative to final goods) came along
Intraindustry trade in intermediate goods requires an especially efficient transport sector
Lower transport costs, changes in goods traded, and lower communication costs reinforce each other
Transport: an increasingly important sector
History and Development37
Negative externalities of transport
Transport costs and scale economies
TRADING CHANGESIntraindustry trade
Product cycles for knowledge-intensive intraindustry goods and for customeritems such as electronic gagdgets and fashion articles have become shorter
Greater time sensitivity helps explain why the distance-dependence of trade goes up rather than down
CONCENTRATION OF ECONOMIC ACTIVITIES
Transport: an increasingly important sector
History and Development39
Negative externalities of transport
Transport costs and scale economies
CONCENTRATION OF ECONOMIC ACTIVITIESConcentration within countries
Increasing returns to scale in production, the love of variety for consumer and intermediate goods, and lower transport costs drive the concentration of economic activities in geographic space
But how?
Transport: an increasingly important sector
History and Development40
Negative externalities of transport
Transport costs and scale economies
CONCENTRATION OF ECONOMIC ACTIVITIESConcentration within countries
Diffentiated products and increasing returns to scale will increaseproductivity more in larger areas than in smaller ones
The larger a region, the more varieties will be produced locally, fewer goods have to be imported which makes a saving on transport costs and leads to higherreal income in large areas
Higher real income will lead to in-migration, putting pressure on local wages
Transport: an increasingly important sector
History and Development41
Negative externalities of transport
Transport costs and scale economies
CONCENTRATION OF ECONOMIC ACTIVITIESConcentration within countries
There is a strong belief that an equal distribution of infrastructure will lead to an equal geographic distribution of economic activities
So massive investments in transport infrastructure have been the central policy instrument to induce firms to move to lagging regions
But the outcomes were usually the opposite: the target regions lost production and workers to leading regions
Transport: an increasingly important sector
History and Development42
Negative externalities of transport
Transport costs and scale economies
CONCENTRATION OF ECONOMIC ACTIVITIESConcentration within countries
Knowledge-sharing is another force shaping the economic geography of countries and areas
Technical know-how can be used by small extra cost, the accumulated stock of knowledge leads to innovation
Larger local labor markets increase knowledge spillovers between workers and increase productivity
TRANSPORT POLICIES
Transport: an increasingly important sector
History and Development44
Negative externalities of transport
Transport costs and scale economies
TRANSPORT POLICIESPriorities in the developing world
Not all countries have benefited equally. Transport costs have fallen faster where the demand for transport services is greater
In much of Africa, the cumulative causation has even hurt, because agglomeration
economies of Africa‘s divided neighborhoods remain small
Developing countries can get the circle started, if they increase local market interactions and reduce intercity and interarea distances and divisions
Transport: an increasingly important sector
History and Development45
Negative externalities of transport
Transport costs and scale economies
TRANSPORT POLICIESPriorities in the developing world
Reducing the negative effects of market structure in the transport sector
Improving trade facilitation and regional coordination
Minimize divisions
Transport: an increasingly important sector
History and Development46
Negative externalities of transport
Transport costs and scale economies
TRANSPORT POLICIES IN THE DEVELOPING WORLDCrossing borders or climbing walls?
Transport: an increasingly important sector
History and Development47
Negative externalities of transport
Transport costs and scale economies
TRANSPORT POLICIESGeneral Problems
Markets for transport services are not perfectly competitive
Trucking industry: tendency toward consolidated ownership
Railways & Airlines: markets are dominated by state-owned ownership
Transport providers consolidate power by owning infrastucture. Services are not provided in competitive markets because the indivisibility of infrastructure facilities naturally precludes competition
Transport: an increasingly important sector
History and Development48
Negative externalities of transport
Transport costs and scale economies
TRANSPORT POLICIESMaintenance
The absence of effective regulation limits competition and can reduce the construction of new infrastructure
It may cause underinvestment in maintenance of existing infrastructure
The direct costs of badly maintained roads are higher than the investments of maintenance would have been
Transport: an increasingly important sector
History and Development49
Negative externalities of transport
Transport costs and scale economies
TRANSPORT POLICIESEfforts to facilitate trade
Trade facilitation has become the most important policy instrument to achieve gains from international trade
Targets: improving the efficiency of ports, harmonizing standards, reducing bureaucratic burdens to cross borders, IT infrastructure
Transport: an increasingly important sector
History and Development50
Negative externalities of transport
Transport costs and scale economies
Increasing local market interactions and reducing intercity distances and divsions
Improving physical infrastructure Improving trade facilitation and
regional coordination Adress the negative externalities of
transport
TRANSPORT POLICIESEfforts to facilitate trade
NEGATIVE EXTERNALITIES OF TRANSPORT
Transport costs and scale economies
Transport: an increasingly important sector
History and Development52
Negative externalities of transport
NEGATIVE EXTERNALITIES OF TRANSPORTCongestion
There is no smooth and immediate supply response when demand increases
Overcapacity: extra cost could be spread over a larger number of users
Insufficient capacity: congestion causes time and quality losses (in rapidly developing countries)
it´s not easy to handle, because it occurs mostly during certain times of the day, oftencaused by specific bottlenecks in the network
Transport costs and scale economies
Transport: an increasingly important sector
History and Development53
Negative externalities of transport
NEGATIVE EXTERNALITIES OF TRANSPORTEmissions
Largest share of these emissions is generated in industrialized countries
Rising in many developing countries
Emissions from transport are at 13%
expected global costs of a 2.5° C warming in 2100
Transport costs and scale economies
Transport: an increasingly important sector
History and Development54
Negative externalities of transport
NEGATIVE EXTERNALITIES OF TRANSPORTEmissions
Transport costs and scale economies
Transport: an increasingly important sector
History and Development55
Negative externalities of transport
NEGATIVE EXTERNALITIES OF TRANSPORTPollution
Vehicle emissions of all local pollutants have fallen in developed countries,but they remain high elsewhere
Diseases related to air pollution contribute to the premature death of more than half a million people each year
Transport may be responsible for about a quarter of this impact, mainly from private and commercial vehicles
Transport costs and scale economies
Transport: an increasingly important sector
History and Development56
Negative externalities of transport
NEGATIVE EXTERNALITIES OF TRANSPORTAccidents
stable motorization have reduced road fatalities and injuries but in developing and transition countries these rates are increasing
1.2 million people die in road accidents each year, and 90 percent occur in low- and middle income countries
World Bank projections suggest an increase by more than 80 percent between 2000 and 2020 but a decrease of 30 percent in high-income countries
- Middle East and North Africa 5% to 8%- Latin America and the Caribbean and East Asia and the Pacific 3%- Africa, Eastern Europe and Central Asia, and South Asia 2%
TRANSPORT: AN INCREASINGLY IMPORTANT SECTOR
Negative externalities of transport
Transport costs and scale economies
Transport: an increasingly important sector
History and Development58
TRANSPORT: AN INCREASINGLY IMPORTANT SECTOR
Introduction
Costs have declined in many markets but those costs are becoming a larger share of overall trade costs because of regions like Latin America and the Caribbean Area
with fuel costs rising, transport’s share will rise even more
Negative externalities of transport
Transport costs and scale economies
Transport: an increasingly important sector
History and Development59
TRANSPORT: AN INCREASINGLY IMPORTANT SECTORTransport costs now matter more for trade
Tariffs have come down and trade agreements continue Reduction of transport costs would bring more benefits 10% decrease in trade costs would increase the region’s imports by 50% and
intraregional exports by more than 60%
Negative externalities of transport
Transport costs and scale economies
Transport: an increasingly important sector
History and Development60
TRANSPORT: AN INCREASINGLY IMPORTANT SECTORWhat is needed for transport to continue to contribute to development?
Poor countries become big producers before they become big consumers
Income generation- importing intermediate goods and raw materials, exporting processed goods
Relocation of intermediate production processes to middle- and low-income countries indicates the enormous potential benefits from integration into world markets
How to achieve this provision- some of the benefits of transport policies will accrue to foreign countries- a growing confidence in reciprocal support for international transport
Negative externalities of transport
Transport costs and scale economies
Transport: an increasingly important sector
History and Development61
TRANSPORT: AN INCREASINGLY IMPORTANT SECTORtwo more coordination problems (neighboring countries share facilities)
The scale of least-cost port
Airport investments calls for hub-and-spoke transport systems it requires credible agreements
The mutual dependence of transport policy and competition policy implies a global effort, such as that started by some multilateral organizations
Negative externalities of transport
Transport costs and scale economies
Transport: an increasingly important sector
History and Development62
TRANSPORT: AN INCREASINGLY IMPORTANT SECTOREast Asia
Closer to the world markets as Japan and the Republic of Korea
Transport costs to North America and Western Europe have fallen
They have joined the growing trade in intermediate and final manufactured goods
Countries such as Tunisia can do the same
Negative externalities of transport
Transport costs and scale economies
Transport: an increasingly important sector
History and Development63
TRANSPORT: AN INCREASINGLY IMPORTANT SECTORSouth Asia
Falling trade and communication costs have helped India enter western markets for intermediate services, eliminating some of the disadvantages of being distant
Countries such as South Africa can do the same, exploiting their home market potential
Negative externalities of transport
Transport costs and scale economies
Transport: an increasingly important sector
History and Development64
TRANSPORT: AN INCREASINGLY IMPORTANT SECTORCentral Asia
With economies that are small, landlocked, and dependent on exports of primary products such as oil and gas reducing transport costs will be more difficult
It will also be difficult for smaller countries in divided neighborhoods, such as Burkina Faso, Malawi, Niger, and Rwanda
These countries will need aggressive measures to lessen the trade friction and selected investments to encourage agglomeration and reduce the transportcosts for primary goods exports