Trade and Port Choices to the US

Wesley W. WilsonDepartment of Economics

University of Oregon

Introduction

• Since 1973, trade has increased more than 35 times.

• This has put serious pressure on the maritime system to which it has responded.

• Trade is growing faster in the last decade than in the previous three decades and show no sign of slowing.

• Maritime must continue to evolve to handle the increases.

Introduction

• Trade requires transportation and trade between countries is dominated by maritime transportation.– Understanding the determinants of trade may help

us understand maritime markets better.• Trade has increased by substantial amounts.

– Understanding the growth and changes in markets may help us identify the need for investments as well as the need for research to integrate maritime and international trade literatures.

Presentation

• The central goals are to:

Provide a synopsis of traditional trade models, new trade theory, and recent innovations with an eye towards the role of transportation.

Provide a description of international trade in terms:

• Growth in trade and world economies• Major importers and exporters• Major Products• Major Trading Partners

The economics of international trade

Basic tenet: Trade benefits each partner, and with trade each party is better off.

Adam Smith, Wealth of Nations, emphasized absolute advantages explains trade and how partners are better off.– Major work in that some felt i.e., mercantilists, that encouraging

exports and discouraging imports was ideal. Ricardo, Principles of Political Economy and Taxation, generalized

Smith to the notion of comparative advantage. – It remains a fundamental theory for why countries trade even if one

country has an absolute advantage over products produced.– Lots of papers that generalize to:

• Multiple products (Dornbusch, Fisher and Samuelson (1977)• Multiple products, countries (Eaton and Kortum 2002)

The economics of international trade

Alternative to Ricardo was developed by Heckscher-Ohlin model. In this model, relative autarky price differences (i.e. comparative advantages) stem from differing factor endowments in countries and differing intensities with which sectors use these production factors.Advantage of model is that it allows one to examine

distributional consequences of trade and trade policy.

The economics of international tradeEmpirical Work

Despite the famous theories, empirical work has struggled to find that relative factor endowments are a significant determinant of trade.

Yet, empirical researchers found a model that explains trade well – the “gravity” model (Tinbergen (1962)). Trade=f(gdp in each country, distance and other variables) Works well! But did not have a theoretical justification until the

1980s.

So , circa late 1970s, trade had beautiful and powerful theory with no empirical support and an empirical model that explained trade very well but had no theoretical basis.

The economics of international tradeNew Trade Theory

Some wake up calls on theory in the late 1970s and 1980s. Two facts that were hard to explain with theories of comparative advantage Lots of trade between developed and countries similar in factor

endowments Lots of trade within the same industry

Krugman’s (1979) new trade theory explains. Monopolistic firms that produce different varieties with economies

of scale Demand (CES Utility models) which allow consumers a “love of

variety” – more varieties means consumers are better off. Countries trade for variety and realize economies of scale with the

result that both countries are better off.

The economics of international tradeNew Trade Theory

In the late 1980s, Bergtrand (1989; 1990) was able to show that a gravity model can be derived from Krugman’s new trade theory. This pointed to NEW TRADE theory driving trade patterns not comparative advantage.

But, Deardorff (1998) demonstrated that the gravity model can be derived from comparative advantage models.

To Date Gravity Models are generally consistent with all trade models and seem to be robust across wide varieties of subsamples (Hummels and Levinsohn (1995))

The economics of international tradeRecent advances

Over the last decade, scholars have focused on decisions of agents – the micro foundations of trade. Perhaps, the most famous innovation is

Melitz (2003) extends new trade theory in a general equilibrium framework that models the export decisions of firms that are heterogeneous in their productive efficiency. This allows examinations of the effects of trade (and policy) on

industry dynamics (export decisions, aggregate productivity and wages)

This has allowed some to examine how trade determinants and frictions are different across different products.

The economics of international tradeSynopsis

• Lots of trade theory has evolved and is evolving.– Early theory models focused on comparative advantage, but did not

work well empirically.– Early empirical models were ad hoc, no theoretical basis, but worked

well in explaining trade.– New Trade Theory focuses on product differentiation and explains trade

between similar countries– Recent innovations have grounded both the models of comparative

advantage and new trade models in terms of gravity models.

Basic result: no theory will explain all patterns of trade. New trade theory does well in explaining intraindustry trade between similar countries, while comparative advantage models explain trade well between developed and developing countries.

Trade facts and trends

• Given the International Trade Synopsis as a backdrop, we now present some of the trends of trade and patterns of trade germane to shipping.

• This covers:Growth of Trade and EconomiesDeveloped and NonDeveloped TradeMajor Importers and ExportersMajor ProductsMajor Trading Partners

World Trade and Economies• United Nations Comtrade Data &

World Development Indicators Data (discounted $2005)

• Trade begins about 1.5 trillion in 1973 and increases to over 14 Trillion in 2011 – over 8 times.

• World Incomes increase from $16trillion to over $60trillion – about 4 times

• Correlation = .9720

3040

5060

GDP

(Tril

lions

)

05

1015

Trad

e (T

rillio

ns)

1970 1980 1990 2000 2010Period

Trade (Trillions) GDP (Trillions)

Trade and World Economies (2005$)Figure 1

World Trade and Economies0

24

68

1970 1980 1990 2000 2010Year

Trade GDP

Trade and GDP Relative to 1973Figure 2

World Trade and Developed economies

• World trade is dominated by trade between developed countries

• OECD membership is largely developed.

• Trade can occur:– OECD-OECD– OECD-NonOECD– NonOECD-OECD– NonOECD-NonOECD

02

46

1970 1980 1990 2000 2010Period

OECD-OECD OECD-NonOECDNonOECD-OECD NonOECD-NonOECD

Imports by OECD and Non-OECD by Source in $2005trilFigure 4

World trade and developed economies

• OECD-OECD since late 1990s have fallen as a percent of world trade

• OECD-NonOECD has grown

• NonOECD-NonOECD has grown

020

4060

1970 1980 1990 2000 2010Period

OECD-OECD OECD-NonOECDNonOECD-OECD NonOECD-NonOECD

Imports by OECD and NonOECD by Source (% of World Trade)Figure 5

Major Importers1973

CountryImport Values

(bil)Rank Share Cumulativ

e

USA 234.311

14.0414.04

Germany 208.832

12.5226.56

Japan 130.26 3 7.81 34.37

United Kingdom 123.304

7.3941.76

France 115.44 5 6.92 48.68

Italy 93.88 6 5.63 54.31

Canada 81.59 7 4.89 59.2

Netherlands 70.52 8 4.23 63.43

Norway 50.50 9 3.03 66.46

Switzerland 39.60 10 2.37 68.83

Rep. of Korea 14.71 57 0.88 69.71

China N.A. N.A. N.A. N.A.

Belgium N.A. N.A. N.A. N.A.

2011

CountryImport Values

(bil)Rank Share Cumulativ

e

USA 1,944.63 1 13.4713.47

China 1,422.47 2 9.8523.32

Germany 1,055.95 3 7.3130.63

Japan 733.35 4 5.08 35.71

France 612.19 5 4.24 39.95

United Kingdom 551.34 6 3.8243.77

Italy 481.81 7 3.34 47.11

Rep. of Korea 448.08 8 3.1 50.21

Netherlands 429.61 9 2.98 53.19

Belgium 408.16 10 2.83 56.02

Canada 382.51 12 2.65 58.67

Switzerland 181.26 22 1.26 59.93

Norway 79.31 34 0.55 60.48

Major Exporters

1973 2011

Country Export Values (bil) Rank Share Cumulativ

e

USA 239.01 1 14.3114.31

Germany 199.18 2 11.9226.23

France 107.19 3 6.42 32.65

Japan 104.56 4 6.26 38.91

United Kingdom 96.48 5 5.77 44.68

Canada 90.63 6 5.42 50.1

Netherlands 79.81 7 4.78 54.88

Italy 76.25 8 4.56 59.44

Sweden 45.59 9 2.73 62.17

Saudi Arabia 33.36 10 2 64.17

China 15.02 21 0.9 65.07

Rep. of Korea 10.35 32 0.62 65.69

Russian Federation N.A. N.A. N.AN.A

CountryExport Values

(bil)Rank Share Cumulative

China 1,876.12 1 13 13

USA 1,194.99 2 8.28 21.28

Germany 1,189.15 3 8.24 29.52

Japan 719.96 4 4.99 34.51

France 506.31 5 3.51 38.02

Rep. of Korea 453.74 6 3.14 41.16

Russian Federation 444.27 7 3.08 44.24

Netherlands 434.66 8 3.01 47.25

Italy 421.85 9 2.92 50.17

Canada 387.30 10 2.68 52.85

United Kingdom 382.19 11 2.65 55.5

Saudi Arabia 284.78 14 1.97 57.47

Sweden 157.21 25 1.09 58.56

Stability of import rank.9

.92

.94

.96

.98

1C

orre

latio

n

0 10 20 30 40Number of Observations

1973 irank 1981 irank1988 irank 1996 irank2004 irank 2010 irank

Rank Correlations for ImportersFigure 8

Stability of Export rank

.92

.94

.96

.98

1C

orre

latio

n

0 10 20 30 40Number of Observations

1973 irank 1981 irank1988 irank 1996 irank2004 irank 2010 irank

Rank Correlations for ExportersFigure 9

Concentration of imports and exportsTrade is More Diffused

400

500

600

700

800

1970 1980 1990 2000 2010Year

Imports Exports

HHI-Imports&ExportsFigure 10

3436

3840

4244

1970 1980 1990 2000 2010Period

Imports Exports

Concentration Ratios-Imports&ExportsFigure 11

Major Products in tradeTable 4: Major Commodity Groups, 1973 and 2011

1973 2011

Product SITC Value(bil 2005$) % Value

(bil 2005$) %

Growth

Food and live animals 0 212.22 12.67 858.7358 5.91 4.04

Beverages and tobacco 1 23.07 1.38 113.7877 0.78 4.93

Crude materials, inedible, except fuels 2 180.03 10.75 723.1183 4.98 4.01

Mineral fuels, lubricants and related mtl. 3 212.51 12.69 2605.463 17.93 12.26

Animal and vegetable oils and fats 4 11.76 0.70 88.70488 0.61 7.54

Chemicals 5 126.45 7.55 1691.982 11.65 13.38

Manufact goods classified chiefly by mtl. 6 304.55 18.19 1850.909 12.74 6.18

Machinery and transport equipment 7 445.01 26.57 4729.541 32.56 10.62

Miscellaneous manufactured articles 8 145.01 8.66 1562.255 10.75 10.77

Commod. & transacts. (No Class) 9 14.07 0.84 302.8949 2.08 27.32

Total 1,674.67 100.00 14,527.39 100

Major Products over time

SITC 7 = Machinery and Transport EquipmentSITC 6 =Manufactured GoodsSITC 3 =Mineral Fuels, lubricantsSITC 0 =Food and Live Animals

010

0020

0030

0040

0050

00Bi

llions

1970 1980 1990 2000 2010Year

SITC_7 SITC_6SITC_3 SITC_0

Major Products Over TimeFigure 12

Product changes over time

• HHIs calculated at the 1, 2, 3, and 4 digit level.

• More general is the product classification more concentrated is the measure.

• Chart points to tremendous stability in products over time.

0.0

5.1

.15

.2.2

5

1970 1980 1990 2000 2010Year

HHI1 HHI2HHI3 HHI4

Product Level HHIs over TimeFigure 13

Major trade flows

• 1973

Importer Exporter Imports ShareCumulative Share

USA Canada 62.97 3.76 3.76Canada USA 58.69 3.50 7.26

GermanyNetherlands 35.89 2.14 9.41

USA Japan 34.39 2.05 11.46Japan USA 32.99 1.97 13.43France Germany 30.20 1.80 15.23Germany France 28.74 1.72 16.95Netherlands Germany 23.43 1.40 18.35Germany Italy 21.77 1.30 19.65Italy Germany 20.02 1.20 20.85Total 349.09 20.85

Total World 1,674.67 100.00

2012Importer Exporter Imports Share Cumulative ShareUSA Canada 277.99 1.91 1.91USA Mexico 229.12 1.58 3.49Canada USA 195.11 1.34 4.83China, Hong Kong China 192.40 1.32 6.16China Japan 171.64 1.18 7.34Japan China 162.20 1.12 8.46Mexico USA 154.18 1.06 9.52China Korea 143.55 0.99 10.51USA Japan 116.84 0.80 11.31China USA 108.62 0.75 12.06Total 1,751.64 12.06

Total World 14,527.39

Major trade flows

Summary and major points

• Trade and transportation are growing at phenomenal rates.• Trade theory has a long history that may be useful to

planning for transportation investments and may be useful to researchers tempting to model transport markets.

• Existing trade models go far in explaining trade between nations, but different models apply to different trading partners– New trade – intraindustry trade among developed and similar

countries– Comparative advantage – trade among developed and non-

developed countries.

Summary and major points• Major points of data:

Substantial growth in world economy, but trade is growing substanitally faster.

Most trade is among developed countries, but this seems to be waning due to increased “outsourcing” of developed countries and trade among developing countries.

There is a remarkable stability in the ranks of importers and exporters with correlations in excess of .9 for both importers and exporters regardless of the time lags.

While stability in the ranks, it appears that market shares of major importers and exporters have been falling as the markets become less concentrated.

All product groups are growing at different but still substantial rates. A major difference between 1973 and 2011 is that the Asian to US and US to

Asian markets has increased.

On-going Work• Port Efficiencies: An update to a recent paper that covered

through 2003, which provides efficiency levels of US and Non-US ports.

• Port Choice: Foreign countries ship to a number of US ports. This study models the choices made by exporters to the US in terms of hinterland costs, maritime costs, and port attributes.– Preliminary results suggest that the costs of shipping both internally

and externally have significant effects on port choice. Attempting to integrate port attributes, and develop an estimator that can accommodate special features of the data.

On-going Work• Spatial lag model to explain the nature of competition amongst

ports. – Preliminary results suggest that spatial lag models work and

that distance to the nearest port as well as the average trade of competing ports negatively impact trade at a port.

• Trade Models and Transportation: – Integrates Anderson-Van Wincoop model of trade with

transportation markets in the context of trade imbalances. – Preliminary results suggest that we can estimate fh-bh

demands successfully, and that the traffic imbalance has a sizable impact on fh prices when they should and no impact when they should not.