What are the effects of transportation costs on international trade patterns?
Over the past few decades, the price of transport, especially transport by sea, has dropped dramatically. This has changed international trade patterns by allowing countries in Asia, for example, to become very strong exporters. They are able to export their products to the Americas and to Europe without having those products end up being too expensive because of transport costs.
If it were not for the low costs of transport, China, for example, would not be able to be such a major exporting country.
In addition, there have come to be more and more things that are produced in multiple countries. Big things like airplanes can have components produced in various countries and then shipped to the country where they will be assembled into finished products.
The cost of international transportation of goods also leads to some predictable patterns in trade. Canada is the largest trading partner the United States has. We share a common border, language, and since 90% of Canadians live within 100 miles of the border, from a trade perspective they act much like extensions of US states. We buy more from Canada and vice versa because of their proximity and the low transportation costs. Same goes for Mexico, our third largest trading partner.
The recession has caused a huge excess in shipping capacity, which has, at least in the short term, stimulated the export markets in Asia and the developing world.
In general transportation costs in international trade are higher as compared to those in domestic trade. This because the in domestic trade the transportation of goods traded takes place only within the national boundaries, while that in international trade takes place across countries, beyond the national boundaries. Thus transportation cost increase the effective purchase price of products. This means that the international trade becomes an attractive trade proposition where the economies of specialization at national level more than offsets the cost of transportation.
On one hand the international trade has received a boost because of drop in transportation cost with improved transport technology and practices. At the same time, increasing globalization has also given a boost to efforts at developing and implementing technologies and practices that economize on transportation cost.