Trade Adjustment Costs in Developing Countries: - World Bank ...

Transportation Costs and Adjustments to Trade 261But what exactly is driving the rapid growth in air cargo? A few factors closelyrelated to the changing nature of trade and trade shocks seem especially relevant.These are: a fall in the weight of trade, rising incomes, vertical specialization and(or) fragmentation, testing new markets, and trade between geographically remotelocations.Above I discussed how high-value goods enjoy a lower ad valorem transportcosts. The same logic can be employed to show that the premium charged forair-shipping, measured as a proportion of the final price, will be lower whengoods have higher prices. This means that a compositional shift in trade towardhigh-value manufactures makes air transport feasible for a larger set of goods.Rising incomes worldwide affect demand for air transport in three ways. First,high-income households buy higher-quality goods which have higher prices andtherefore a lower ad valorem transportation cost. Second, as consumers growricher, so does their willingness to pay for precise product characteristics. That inturn puts pressure on manufactures to produce to those specifications, and to berapidly adaptable to changing tastes. Third, as evidenced by the success of onlineretailers like Amazon, delivery speed is itself an important characteristic ofproduct quality and will be in greater demand as income grows.Much of recent trade growth has occurred through the fragmentation of internationalproduction processes, also known as vertical specialization. 10 Multistageproduction may be especially sensitive to lags and variability in timelydelivery, and both are reduced by using airplanes. Of course, airplanes move peoplein addition to cargo. Multinational firms with foreign production plants relyheavily on the ability to fly executives and engineers for consultations with theirforeign counterparts. 11Airplanes are especially useful for firms who are expanding trade by sellingnew goods for the first time. Consider a stylized description of export expansion.Firms begin producing for the local market, slowly expand sales within their owncountry, and some fraction of firms gradually expand sales abroad. When servingnew markets, firms face uncertainty about demand, quantities sold are likelyto be very low initially, and most trading relationships fail in a few years. All ofthese characteristics, initially small quantities of uncertain demand in distantmarkets, are precisely the characteristics that make air shipping particularly attractive.124. CONCLUSIONThere is a central idea that runs through all the preceding analysis. Transportationcosts are not an exogenous friction or drag on trade. Rather, they are en-10 Hummels, Ishii, and Yi (2001)11 Cristea (2009) and Poole (2010) provide evidence showing a linkage between business traveland the ability to export.12 Aizenman (2003) and Hummels and Schaur (2009) examine the use of airplanes in hedging demandvolatility. Evans and Harrigan (2005) and Harrigan and Venables (2006) discuss the importanceof demand volatility in determining comparative advantage and industrial agglomerations.