The Relationship between Trade, Transport Costs, and Global Market Access

1. The demand and supply of international transport services: The relationships between trade, transport costs and effective access to global markets Jan.Hoffmann@UNCTAD.org Geneva, May 2009

2. TradeVolumes Transport Services Transportcosts

3. More income to finance trade facilitation -> Better trade facilitation -> More Trade -> More income to finance trade facilitation

4. Lower Transport Costs -> More trade -> Economies of scale -> Lower Transport Costs

5. Better services -> More trade -> More income to finance infrastructure -> Better services

6. More trade -> More shipping supply -> More competition -> lower freights -> More trade

7. The challenge: • Avoid a vicious circle, where high transport costs and low service levels discourage trade, which will further endear transport and reduce connectivity… • Instead: Initiate a virtuous circle

8. Transport CostsConnectivityTrade

9. Transport Costs Connectivity Trade

10. ? TradeVolumes Transport Services Transportcosts

12. Case study Caribbean • Most Central American and Caribbean countries trade very little with each other. • Examples: • less than 0.001 per cent of Guatemala’s exports in manufactured goods are destined for Surinam, • 0.24 per cent for Jamaica, • 1 per cent for the Dominican Republic, and • around 8 per cent for Costa Rica. • What are the main explanations for such differences?

13. Case study Caribbean:Gravity model • Participation of country B in global imports is the basic determinant of the share of country A’s exports that are destined for country B. • Neighbouring countries can be expected to trade more with each other than those that are not neighbours.

14. Case study Caribbean:Gravity model – what about distance? • Distance / trade: negative correlation (as expected) • But: the parameter for distance is not statistically significant if other variables are incorporated that capture the supply of shipping services and transport costs. • Instead of distance: • number of liner shipping companies that provide direct services between a pair of countries. • Existence of direct liner shipping services. • Increase of the freight rate per TEU (twenty foot equivalent unit) by 1000 USD: Reduction of the share of country A’s exports to country B of almost half a percentage point.

15. TradeVolumes Transport Services Transportcosts

16. Transport Costs ConnectivityTrade

17. Tradegrows faster than GDP • Containerized tradegrows even faster than trade in general • Containerized port trafficgrows even faster than containerized trade…

18. Containerization of trade, and access to containerized transport services are important determinants of countries’ trade competitiveness How can we measure this?

19. “Maritime connectivity” An indicator for the supply of liner shipping services (containerized trade) • Ships • Capacity to transport containers (TEU) • Shipping companies • Services • Maximum ship sizes

20. Benefits of a high connectivity • For the user (importers and exporters): lower transport costs, more choice, higher speed and frequencies • Direct income for the port (private operator, port authority) • Indirect income if value added services can be sold

21. Freight rate per containerin the Caribbean (July 2006)

22. “Connectivity” • Per country – in a “point” • Per route – between pairs of countries

23. “Connectivity” • Per country – in a “point” (162) • Per route – between pairs of countries

24. “Connectivity” • Per country – in a “point” (162) • Per route – between countries (13041)

25. 1) Connectivity per country based on www.ci-online.co.uk

26. Container ship deployment 1448

27. Number of companies 118

28. The UNCTAD “LSCI”

29. Barbados www.ci-online.co.uk

30. Components of LSCI (country averages)

31. We have reached a peak Until very recently: • In spite of the (global) process of concentration, the number of companies providing (local) services increased due to the expansion of global players into (so far) new markets

32. We have reached a peak Today: • As global players are (now) covering all regions of the world, mergers among them (start to) lead to a reduction of competition on individual routes.

33. 2) Connectivity per route Top 25 routes (out of 13041) June 2006

35. TradeVolumes ? Transport Services Transportcosts

36. Case study Caribbean • 189 routes • About half served by direct liner shipping services • Examples: • Costa Rica – Colombia: 14 companies, 50 container ships, total capacity 61000 TEU; largest vessel 2500 TEU • Costa Rica – Jamaica: 5 companies/ 16 ships/ 17,400 TEU/ 2105 TEU maximum size • Costa Rica – Guyana: no direct services UNCTAD Transport Newsletter, Third Quarter, 2006

37. Case of Barbados

38. Case study CaribbeanDeterminants of connectivity • Distance: (-) • Trade volumes: (+) • GDP per capita in exporting country (+) • Port infrastructure (+)

39. TradeVolumes Transport Services   Transportcosts

40. Transport CostsConnectivityTrade

41. TradeVolumes “connectivity” Transport Services Transportcosts

42. Transaction costs International transport costs are usually higher than Customs Dutiesin the destination country Source: World Bank, GEP 2002

43. The Baltic Dry Index (BDI) Source: via Capital Link Shipping

44. Freight as % of commodities value UNCTAD, Review of Maritime Transport

45. Freight costs for countries Source: UNCTAD

46. Transport within logistics expenditures (USA) “Status of Logistics Report”, Cass Information Systems, various issues, and “Logistics Management”.

47. Source: UNCTAD

48. Lower Transport Costs -> More trade -> Economies of scale -> Lower Transport Costs

49. Better services -> More trade -> More income to finance infrastructure -> Better services

50. More trade -> More shipping supply -> More competition -> lower freights -> More trade