What are the effects of transportation costs on international trade patterns?

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Globalization is highly dependent on transportation. When a company decides whether to send production offshore to country with lower costs of labor, the company must factor in the cost of transportation to decide whether offshoring would indeed save money.

Imagine a company making shirts that will be sold mainly in the United Stats. If it costs $5 to make a shirt in the United States and averages $1 to transport the shirt to retail outlets, the total cost of production and transportation is $6, If the same shirt can be made in China for $2 and the cost of transportation is $2, then the cost of production and transportation is $4 and the company saves money and increases profits. If the transportation cost from China rises to $5 per shirt, the cost of production and transportation would rise to $7, making offshore manufacturing more...

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