4.5 Trade Volume Influences Trade Costs

larger shipping firms. On average, a 1 percent increase in trade volumes is associated with a 0.85 percent increase in average shipper size, a 0.16 percent increase in the number of shippers, and a 0.25 percent decline in transport costs from the United States to foreign ports.

A recent study of India develops a novel strategy to connect trade volumes and transport prices. Lall, Sinha Roy, and Shilpi (2021) use data obtained from a trucking and logistics company for more than 450,000 transactions. They find that transport prices (per ton per kilometer) vary depending on the direction of trade flow. The cost of shipping boxed consumer goods on a 32-foot truck with multiple axles is lower when the destination is a larger city and higher if the origin is a smaller city. The probability of ensuring a backhaul is important for the transport price (figure 4.5).

A global study of maritime shipping finds that at any point in time, a staggering 42 percent of ships are traveling without cargo (Brancaccio, Kalouptsidi, and Papageorgiou 2020). This natural trade imbalance is a key driver of trade costs, which discourages trade between regions. Transportation prices are largely asymmetric and depend on the trade imbalance with the destination: all else equal, the prospect of having to fill a ship with ballast after offloading cargo leads to higher prices. For instance, shipping from Australia to China is 30 percent more expensive than the reverse: because China mostly imports raw materials, ships arriving there have limited opportunities

FIGURE 4.5 Trade Volume Influences Trade Costs

Rupees per ton per kilometer

Delhi

Rs 3.28 Rs 2.14

Mumbai Rs 3.0 Rs 1.8

Rs 3.6

Rs 1.9

Source: Lall, Sinha Roy, and Shilpi 2021, for this volume. Note: Estimates are for India. Rs = rupees. Kolkata

to reload. This phenomenon is pervasive in most, if not all, modes of transportation: trucks, trains, container, air, and ocean shipping all exhibit similar price asymmetries that correlate with trade.

Stylized Fact 3. Improvements in Infrastructure “Hardware” May Be Necessary, but Are Not Sufficient to Reduce Domestic Trade Costs for Distant Regions

There is considerable evidence that declining transport costs enhance specialization. Using data from 1983 to 2003, Duranton, Morrow, and Turner (2014) show that the United States interstate highway system, spanning a length of more than 75,000 kilometers, enabled cities to become more specialized in the production of heavier products to take advantage of lower transport costs. In Canada and Mexico, a reduction in transport costs led to greater industry-level specialization from 1992 to 2008 (Behrens, Brown, and Bougna 2018; Blankespoor et al. 2017). In China, declines in trade costs are linked to regional specialization in export-oriented industries close to ports (Coşar and Fajgelbaum 2016). The advent of high-speed railway connections has increased employment, especially in industries with a higher reliance on non-routine cognitive skills (Lin 2017). In Argentina, the construction of the railroad network over the period 1869–1914 had a positive effect on productivity in a sector with comparative advantage (agriculture) and was strongly related to specialization in the new export crops (Fajgelbaum and Redding 2018).

In developing countries with high trade costs, economic activity, on average, tends to increase as transport costs decrease. Evidence on roads upgraded between 1960 and 2010 in 39 Sub-Saharan African countries suggests that a 10 percent increase in market access induces a 0.6 percent to 1.8 percent increase in city population (Jedwab and Storeygard 2019). This elasticity estimate is smaller than the 0.25–0.3 percent range observed in US counties during the 1870–90 period (Donaldson and Hornbeck 2016), perhaps because returns to infrastructure investments in the period after the 1960s were lower in Africa due to lack of complementary conditions (Jedwab and Moradi 2016). For example, the costs of trade and migration in Africa remained high (Atkin and Donaldson 2015). High oil prices and unpaved roads depress urban economic activity in Sub-Saharan Africa by making access to critical primate cities more expensive (Storeygard 2016). Nevertheless, the impact of roads on output in Africa is sizable and comparable to that of India’s GQ highways (Alder 2015), and significantly higher than that found in postconflict Mozambique (Chiovelli, Michalopoulos, and Papaioannou 2018).5 Compared with the United States, railroads in Africa created a change in the level of economic activity rather than a reorganization of it (Jedwab and Moradi 2016).6

Lowering transport costs may improve average firm productivity, although these effects are modest, at best. In China, average firm total factor productivity increased with improved market access, mainly due to the entry of new and productive firms