Jan.Hoffmann@UNCTAD.org Geneva, May 2007.

The demand and supply of The demand and supply of international transport services: international transport services: The relationships between trade, The relationships between trade, transport costs and effective access to transport costs and effective access to global marketsglobal markets

TransportTransportcostscosts

TradeTradeVolumesVolumes

TransportTransportServicesServices

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

Costs

More income to finance trade facilitation

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

trade facilitation

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

The challenge: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

1) Transport Costs2) Connectivity

3) Trade

1) Transport Costs

TransportTransportcostscosts

TradeTradeVolumesVolumes

TransportTransportServicesServices?

Transaction costsTransaction costs

Source: World Bank, GEP 2002

International transport costs

are usually higher

than Customs Duties

in the destination country

Global tradeGlobal trademerchandise and servicesmerchandise and services

billion USD % growth 2005 2000-05

Source: WTO

What explains the differences?What explains the differences?

UNCTAD RMT 2006

Freight as % of goods value: Freight as % of goods value: Changes over time and by productChanges over time and by product

UNCTAD, Review of Maritime Transport

Higher transport costs in Higher transport costs in land-locked countriesland-locked countries

DistanceDistance• Doubling the distance

leads to a increase of maritime transport costs (incl. insurance)by

about 15-20%

… averages, empirical datae.g. ECLAC, FAL 191

y = 0.6206x + 1019.9

R2 = 0.2058

0

500

1,000

1,500

2,000

2,500

3,000

3,500

0 500 1,000 1,500 2,000 2,500

Distance

Frei

ght r

ate

Freight rates and Distance in the Caribbean, July 2006Freight rates and Distance in the Caribbean, July 2006

UNCTAD Transport Newsletter, 1st Quarter 2007

Dependency on Transit TradeDependency on Transit TradeStudy on US exports: • 1000 km by sea increase freight by 4%• 1000 km by land increase freight by 30%• Being landlocked increases freight by

50%

Limao and Venables

Economies of ScaleEconomies of Scale

• moving 10 000 tons instead of 100 (in one transaction)

reduces unit costs by around 40 to 50 %(maritime)

ImbalancesImbalances

CI-Online February 2007

ImbalancesImbalances

UNCTAD, RMT 2006

In West Africa, which freight rates would you expect to be higher: •Those for imports, or•Those for exports ?

ImbalancesImbalances

In China, which freight rates would you expect to be higher: •Those for imports, or•Those for exports ?

ImbalancesImbalances

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

Merchandize valueMerchandize value

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

Competition with land transportCompetition with land transport

• If countries are neighbours, with paved roads, maritime transport costs can be around 10% lower

Fotos: Jan Hoffmann

y = 1814.9e-0.0671x

R2 = 0.4348

0

500

1'000

1'500

2'000

2'500

3'000

3'500

0 2 4 6 8 10 12 14 16 18 20

Number of Carriers providing direct services

Frei

ght r

ate

Freight rate per containerFreight rate per containerin the Caribbean in the Caribbean (July 2006)(July 2006)

Dependent variable: maritime transport costs per tonne of containerizable cargo

Better Better port infrastructureport infrastructure reduces maritime transport costsreduces maritime transport costs

Port reformPort reform

Dependent variable: maritime transport costs per tonne of containerizable cargo

Port reformPort reform

Better (perceived)Better (perceived) port efficiencyport efficiency reduces maritime transport costsreduces maritime transport costs

Dependent variable: maritime transport costs per tonne of containerizable cargo

Port privatizationPort privatization in the EXPORTING country in the EXPORTING country reduces maritime transport costsreduces maritime transport costs

Port reformPort reform

Dependent variable: maritime transport costs per tonne of containerizable cargo

Trade facilitationTrade facilitation in the IMPORTING country in the IMPORTING country reduces maritime transport costsreduces maritime transport costs

Port reformPort reform

Dependent variable: maritime transport costs per tonne of containerizable cargo

Better Better connectivityconnectivity between ports/ between ports/ more competition among carriersmore competition among carriersreduces maritime transport costsreduces maritime transport costs

Port reformPort reform

To sum up: To sum up: Differences in maritime freights depend on…Differences in maritime freights depend on…• Distances• Type & value of

goods• Imbalances

• Competition• Economies of

scale• Port

characteristics

To sum up: To sum up: Differences in land freights depend on…Differences in land freights depend on…• Distances• Type & value of

goods• Imbalances

• Competition• Economies of

scale• Infrastructure• Border crossings

Changes over Changes over timetime

Clarkson Research Studies April 2007

2) Connectivity

0

50

100

150

200

250

300

350

400

450

1985 1995 2005

transhipment

empties

full

Port moves (Port moves (containerizedcontainerized trade) trade)

Million TEUs

DVB/ Drewry

• TradeTrade grows faster than GDP

• South-South and regional trade of developing countriesdeveloping countries grows even faster than trade in general

• Containerized tradeContainerized trade of developing countries grows even faster than trade of developing countries in general

• Containerized port trafficContainerized port traffic grows even faster than containerized trade…

Containerization of trade, and access Containerization of trade, and access to containerized transport services to containerized transport services

are important determinants of are important determinants of countries’ trade competitivenesscountries’ trade competitiveness

How can we measure this?

““Maritime connectivity”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

Benefits of a high connectivityBenefits of a high connectivity

1. More choice for the user (importers and exporters)

2. Lower transport costs for the user(importers and exporters)

3. Direct income for the port (private operator, port authority)

4. Indirect income if value added services can be sold

““Connectivity”Connectivity”1) Per country – in a “point”2) Per route – between pairs of

countries

The UNCTAD “LSCI”The UNCTAD “LSCI”

Going upGoing up

• TEU deployment + 14%

• Maximum vessel size + 18%

• Average vessel size+ 11%(change of country

average 2004-2006)

Going downGoing down

• Number of companies - 6.2%

(change of country

average 2004-2006)

We have reached a peak 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

We have reached a peak 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.

Connectivity per routeConnectivity per route

Top 25 routes (out of 13041)June 2006

Route TEU Vessels Maximum vessel size

Average vessel size

Carriers

China – Hong Kong, China * 3839910 1028 9449 3735 68 Germany – United Kingdom * 2250164 586 9449 3840 66

Germany – Netherlands * 2130690 582 9449 3661 71 Netherlands - United Kingdom * 2090939 592 9449 3532 82

China – United States ** 2027659 458 8238 4427 30 China – Singapore * 1948345 514 9449 3791 50

China – Taiwan, prov of China * 1936339 496 8073 3904 45 Hong Kong, China – Taiwan, prov of China * 1914258 581 8073 3295 51

China – Korea, Rep. * 1914018 574 9200 3335 61 Hong Kong, China – Singapore * 1812848 517 9449 3506 50

China – Germany ** 1662922 296 9449 5618 27 China – United Kingdom ** 1571199 266 9449 5907 24

Belgium – Germany * 1563971 538 9449 2907 76 China – Malaysia * 1539303 385 8750 3998 37

Hong Kong, China – Korea, Rep. * 1535001 481 9200 3191 53 Belgium – United Kingdom * 1534819 510 9449 3009 72

China – Netherlands ** 1501368 259 9449 5797 26 Hong Kong, China – United States ** 1484955 326 8238 4555 28

China – Japan * 1467611 481 8204 3051 51 Germany – Hong Kong, China ** 1409978 244 9449 5779 26

Hong Kong, China – United Kingdom ** 1326064 219 9449 6055 24 Hong Kong, China – Malaysia * 1314977 349 8750 3768 36

Hong Kong, China – Netherlands ** 1300770 220 9449 5913 26 Belgium – Netherlands * 1223148 451 9449 2712 77

Hong Kong, China – Japan * 1194285 391 7929 3054 41

TransportTransportcostscosts

TradeTradeVolumesVolumes

TransportTransportServicesServices

?

Case study CaribbeanCase 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 servicesUNCTAD Transport Newsletter, Third Quarter, 2006

Case study CaribbeanCase study CaribbeanDeterminants of connectivityDeterminants of connectivity

• Trade volumes: (+)• Distance: (-)• GDP per capita in exporting

country (+)• Port infrastructure (+)

3) Trade

TransportTransportcostscosts

TradeTradeVolumesVolumes

TransportTransportServicesServices

?

• Example: You want to buy a car “made in Mexico”.

• Today: is its transport from Mexico to Cairo more or less expensive than 20 years ago?

Globalization and Globalization and international transportinternational transport

Globalization and Globalization and international transportinternational transport

• Less expensive • BUT: You pay MORE for “transport”

then 20 years ago. Why?

Case study CaribbeanCase 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?

Case study Caribbean:Case study Caribbean:Gravity model – what about distance?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.

Jan.Hoffmann@UNCTAD.org Geneva, May 2007.

Shipping Costs, Connectivity, Shipping Costs, Connectivity, and the Geography of Tradeand the Geography of Trade