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Shipping Costs, Connectivity, and the Geography of Trade

This report explores the relationship between shipping costs and trade connectivity, highlighting the importance of lower transport costs, better services, and increased competition in driving trade volumes. It discusses the challenges of high transport costs and low service levels and emphasizes the need to initiate a virtuous circle of transport costs, connectivity, and trade. The report also examines the role of economies of scale, competition, and port characteristics in shaping maritime freights.

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Shipping Costs, Connectivity, and the Geography of Trade

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  1. Shipping Costs, Connectivity, and the Geography of Trade Jan.Hoffmann@UNCTAD.org Geneva, May 2008.

  2. TradeVolumes Transport Services Transportcosts

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

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

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

  6. 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

  7. Transport CostsConnectivityTrade Geneva, May 2008 Jan.Hoffmann@UNCTAD.org

  8. Transport CostsConnectivityTrade Geneva, May 2008 Jan.Hoffmann@UNCTAD.org

  9. Trade Volumes* Transport Services* Transport costs* * Containerized maritime

  10. TradeVolumes Transport Services ? Transportcosts

  11. Global trademerchandise and services, annual growth Source: WTO

  12. Freight as % of goods value UNCTAD, Review of Maritime Transport

  13. Doubling the distance leads to a increase of maritime transport costs (incl. insurance)by about 15-20%… averages, empirical dataECLAC, FAL 191, Wilmsmeier, HoffmannHandbook of Maritime Economics, Kumar, Hoffmann Distance

  14. Freight rates and Distance in the Caribbean, July 2006 Source: Hoffmann, Wilmsmeier, IAME 2007, partly with data from Lester Hernandez, MEL

  15. moving 10 000 tons instead of 100 (in one transaction) reduces unit costs by around 43% Economies of Scale

  16. Trading 10 million instead of 1 million tons per year reduction of transport costs by around 6% Total bilateral trade

  17. Economies of Scale

  18. Economies of Scale CRS, April 2008

  19. Ship sizes • 27.- US$ saving/ container/ tripusing “post panamax” versus “panamax” (Drewry)

  20. Mergers of shipping companies • Savings thanks to larger volumes(Roland & Berger)

  21. Port operations • 12 US$ per move savings with global operatorsDrewry

  22. Imbalances CI-Online February 2008

  23. Supply/demand Trans-Pacific trades Chart from Peter Faust, April 2008

  24. Imbalances CI-Online February 2008

  25. Supply/demand Asia-Europe trades Chart from Peter Faust, April 2008

  26. Imbalances CI-Online February 2008

  27. Imbalances • In the Caribbean, which freight rates would you expect to be higher: • Those for imports, or • Those for exports ?

  28. Increase the value by 1% implies an increase of transport and insurance costs by around 0.36% Merchandize value

  29. If countries are neighbours, with paved roads, maritimetransport costs are around 10% lower Competition with land transport Fotos: Jan Hoffmann

  30. Receiving 20 instead of 5 companies freights go down by around 12% Competition between carriers

  31. Competition between carriersCase study Caribbean • If the company itself has no direct service (i.e. it only has a service with transshipment): This company’s freight rate + $650 • If other, competing, companies do provide a direct service: This companies freight rate - $425

  32. Competition between carriersCase study Caribbean Source: Hoffmann, Wilmsmeier, IAME 2007

  33. Difference between “best” and “worst” case in Latin America: 25% of worst case Port reform

  34. Port reform

  35. Dependent variable: maritime transport costs per tonne of containerizable cargo Wilmsmeier, Hoffmann, Sanchez, in: Porteconomics, 2006

  36. Dependent variable: maritime transport costs per tonne of containerizable cargo Better port infrastructurereduces maritime transport costs

  37. Dependent variable: maritime transport costs per tonne of containerizable cargo Better (perceived)port efficiencyreduces maritime transport costs

  38. Dependent variable: maritime transport costs per tonne of containerizable cargo Better general transport infrastructure does NOT reduce maritime transport costs

  39. Dependent variable: maritime transport costs per tonne of containerizable cargo Port privatization in the EXPORTING country reduces maritime transport costs

  40. Dependent variable: maritime transport costs per tonne of containerizable cargo Trade facilitation in the IMPORTING country reduces maritime transport costs

  41. Dependent variable: maritime transport costs per tonne of containerizable cargo Better connectivity between ports/ more competition among carriersreduces maritime transport costs

  42. Distances Type & value of goods Imbalances To sum up: Differences in maritime freights depend on… • Competition • Economies of scale • Port characteristics

  43. Changes over time Hoffmann, IAME conference proceedings, Cyprus, 2005

  44. “Is there a pig cycle in container shipping?” Coase and Fowler (1935a)

  45. Pork meat is expensive: the farmer “orders” piglets Data from Clarksons Research

  46. Piglets take time to grow

  47. Pigs enter the market: Price of pork meat falls

  48. The model of a cycle ORDERSt =  CHARTERRATEt CHARTERRATEt =  (1/DELIVERIESt ) DELIVERIESt =  ORDERSt-24

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