Transportation Costs and International Trade over Time

Transportation Costs and International Trade Over Time

David Hummels

David Hummels is Associate Professor of Economics, Purdue University, West Lafayette,

Indiana. His e-mail address is <hummelsd@purdue.edu>.

Abstract:

While the precise causes of post-war trade growth are not well understood, declines in

transport costs top the lists of usual suspects. However, there is remarkably little systematic

evidence documenting the decline. This paper brings to bear an eclectic mix of data in order to

provide a detailed accounting of the time-series pattern of shipping costs. The ad-valorem

impact of ocean shipping costs is not much lower today than in the 1950s, with technological

advances largely trumped by adverse cost shocks. In contrast, air shipping costs have dropped

an order of magnitude, and airborne trade has grown rapidly as a result. As a result, international

trade has also experienced a significant rise in speed.

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Over the past five decades, world trade grew very rapidly. From 1950-2004, world trade

grew at an average rate of 5.9 percent per annum (7.2 percent for manufactures) and trade

relative to output more than tripled. (World Trade Organization, International Trade Statistics,

2005). Similarly, the sum of U.S. imports and exports rose from 6.5 percent in 1960 to about 20

percent of GDP in the early 2000s (based on data at <http://www.bea.gov>).

One prominent possible explanation for the rise in international trade is the decline in

international transportation costs. Economic historians have documented how technological

change led to substantial reductions in shipping costs from 1850-1913 (Harley, 1980, 1988,

1989; North, 1958, 1968; Mohammed and Williamson, 2004). Econometric evidence has

subsequently linked shipping cost declines to rapid growth in trade during that first era of

globalization (Estevadeordal et al., 2003). The decades since World War II have also witnessed

significant technological change in shipping, including the development of jet aircraft engines

and the use of containerization in ocean shipping. However, documentation of the actual decline

in shipping costs in recent decades has been lacking. This paper will draw on an eclectic mix of

data to characterize the patterns of international ocean and air transportation costs in the last few

decades.

Understanding modern changes in transportation costs can turn out to be unexpectedly

complex. Technological improvements have been partially offset by significant changes in

input costs and in the nature of what is traded. Shifts in the types of products traded, the

intensity with which they use transportation services, and whether these goods are shipped by

ocean or air freight all affect measured costs. Moreover, the economic effects of improved

transportation are apparent not only in how much trade has grown, but also how trade has grown.

Improvements in the quality of transportation services – like greater speed and reliability – allow

corresponding reorganizations of global networks of production, and new ways of coping with

uncertainty in foreign markets.

I begin with an overview of how goods are transported across international borders, with

an emphasis on ocean and air transport. I discuss different ways of placing transportation costs in

economic context, and then discuss patterns of technological changes and price indexes for

international