Determinants of international transport costs and connectivity and the mutual relationship between trade and transport facilitation and development Jan Hoffmann, Chief, Trade Facilitation Section, Trade Logistics Branch, Division on Technology and Logistics

Transport costs Trade TransportServices

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

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

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

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

Transport Costs Connectivity Trade Geneva, May 2010

Transport Costs Connectivity Trade Geneva, May 2010

Freight rates in May ’ container from Dalian to DUBAI 1200 COLOMBO 1300 B.ABBAS1300 CALCUTTA 1700 BAHRAIN1800 UM QUASER3000 PORT SUDAN3300 ROTTERDAM3500 TEMA4600 SANTOS4800 VALPARAISO5200

Source: UNCTAD Freight costs for countries

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

Transport costs Trade Volumes TransportServices ?

Differences in freight costs depend on… 1)Distances 2)Economies of scale 3)Imbalances 4)Type & value of goods 5)Competition 6)Port characteristics

1)Distances 2)Economies of scale 3)Imbalances 4)Type & value of goods 5)Competition 6)Port characteristics

Freight rates and Distance in the Caribbean UNCTAD Transport Newsletter, 1st Quarter 2007

Distance Distance matters much more over land than at sea Distance matters more with higher oil prices

1)Distances 2)Economies of scale 3)Imbalances 4)Type & value of goods 5)Competition 6)Port characteristics

Economies of Scale moving tons instead of 100 (in one transaction) reduces unit costs by 40 to 50%

March 2010 costs 500TEU6500TEU TEU Construction costs million USD Construction costs USD per TEU Crew12 to 1715 to 17 Source: UNCTAD, Review of Maritime Transport 2010, forthcoming and data from Drewry Shipping Consultants

CRS, 25 April 2010

1)Distances 2)Economies of scale 3)Imbalances 4)Type & value of goods 5)Competition 6)Port characteristics

Imbalances CI-Online 10 May 2010

1)Distances 2)Economies of scale 3)Imbalances 4)Type & value of goods 5)Competition 6)Port characteristics

Merchandize type and value Increase the value by 1% implies an increase of transport and insurance costs by around 0.3 – 0.4%

1)Distances 2)Economies of scale 3)Imbalances 4)Type & value of goods 5)Competition 6)Port characteristics

Source: Hoffmann, Wilmsmeier, MEL 2008 Competition between carriers Case study Caribbean

1)Distances 2)Economies of scale 3)Imbalances 4)Type & value of goods 5)Competition 6)Port and infrastructure characteristics

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

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

Dependent variable: maritime transport costs per tonne of containerizable cargo Better port infrastructure reduces maritime transport costs

Dependent variable: maritime transport costs per tonne of containerizable cargo Better (perceived)port efficiency reduces maritime transport costs Better (perceived) port efficiency reduces maritime transport costs

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

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

Dependent variable: maritime transport costs per tonne of containerizable cargo Better connectivity between ports/ more competition among carriers reduces maritime transport costs

Differences in freight costs depend on… Distances Type & value of goods Imbalances Competition Economies of scale Port and infrastructure characteristics

Transport costs Trade Volumes TransportServices ?

Transport Costs Connectivity Trade Geneva, May 2010

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

“Maritime connectivity” UNCTAD ’ s “ Liner Shipping Connectivity Index ” (LSCI): An indicator for the supply of liner shipping services Components: Ships Container carrying capacity Shipping companies Services Maximum ship sizes

The UNCTAD LSCI components Index of country averages Source: UNCTAD, based on data from Containerization International

New ships no longer have their own cranes

The UNCTAD LSCI components Index of country averages Source: UNCTAD, based on data from Containerization International

Bad news for smaller economies In 2009, there were fifteen LDCs with only one to four service providers – almost a doubling compared to 2004, when there had been just eight LDCs with such low levels of competition.

Bad news for smaller economies (cont.) The global average of direct connections per country has remained stable, while the number of direct connections per LDC has declined by 20 per cent during the last three years.

Transport costs Trade Volumes TransportServices ?

LSCI African countries UNCTAD LSCI (Liner Shipping Connectivity Index) 2009 values

Determinants of connectivity Trade volumes (+) Distance (-) Development (+) Infrastructure (+)

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

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

Transport Costs Connectivity Trade Geneva, May 2010

Transport costs Trade TransportServices ?

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.

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.  The freight rate

Summary 55 DIVISION ON TECHNOLOGY AND LOGISTICS, TRADE LOGISTICS BRANCH, TRADE FACILITATION SECTION

56 DIVISION ON TECHNOLOGY AND LOGISTICS, TRADE LOGISTICS BRANCH, TRADE FACILITATION SECTION Questions

57 DIVISION ON TECHNOLOGY AND LOGISTICS, TRADE LOGISTICS BRANCH, TRADE FACILITATION SECTION Thank you! Jan Hoffmann UNCTAD/ DTL Trade Logistics Branch Trade Facilitation Section Palais des Nations