Transport cost is one of the attribute which determines the line between the tradable and non-tradable goods. The GATT and WTO’s effort partly made an effect on the tariff cuts around the globe. The transportation cost is addressed as similar to the protectionist policy measures which acts as the anti-trade bias. The higher transportation cost reduces the volume of trade but do not change the composition of trade. If the transport cost are added and charged on the unit basis, the transport cost will have an effect on relative price and also in weight to value ratio of the good.
This kind of transportation cost will be having an impact on pattern of trade due to the disparity in prices between the high quality and low quality goods. The transportation cost are been closer to additive and the share of high quality good to low quality goods increased when per unit freight rate rose. The value to the weight ratio is disaggregated by the modes of transport. The composition of trade is affected by the increased trade cost and the industries located in countries with low cost captures the high share of world exports.
If the price wedge between country of origin and destination is reduced, then some of the non-tradable goods can be traded which increases the range of goods. The country’s economic size has a role in the type of increase in export due to decrease in the transportation cost. The inventory cost is tied up to the shipment time from the origin to the destination. The cost of time is linked to the rate of depreciation, technical obsolesce of traded good and terms of uncertainty.
The uncertainty is linked to the complexity of the global supply chain arrangement, guessing the consumer choice and demand. The price of the tradable good increase with the increase in shipment time from origin to destination. The trade flows that consist of parts and components were found to be more time sensitive. The shipment time is also linked with the global supply chain with the country/company participating in global supply chain process and in specific export sectors.
The possible determinants of the transportation costs are product characteristics, geography, infrastructure, market competition, technological change, trade facilitation and fuel costs. Ad valorem transportation costs differ depending on characteristics of the product being shipped. The ad valorem will be lower for the high quality goods and for the goods which have a higher value to weight ratio. The geographical characteristics of countries will have a significant effect on the transportation cost.
The landlocked countries will be dependent upon the transiting states. The location, size, quality of transportation, infrastructure, policies and regulations of the transiting states are not fully under the control of landlocked countries. The costs of transporting goods are significantly high in landlocked countries compared to the transiting countries and this in turn reduces the trade volume. The distance between trading country will play a major role in bi-lateral trade flow. The distance may not be fully taken into the account since there are other factors also affecting the distance and also the economic distance has been reduced significantly over the years.
The amount and the quality of the infrastructure play the important role in the transportation costs. The countries infrastructure investment will reduce the transportation cost and it benefits trading and also neighbouring land locked country. Many of the result show that the improvement in the infrastructure will reduce the transportation costs. Price fixing and alliances between the transportation industries will affect the transportation cost. A perfectly competitive market atmosphere will reduce the transportation cost.
In shipping the capital cost is high and it is difficult for the industry to adjust for the demand in the short run. The lack of competition in the liner shipping is due to natural monopoly existence. There is a trend of increase in the container ship size and declining in competition exists. The innovation in the transportation industry like jet engine and containerisation will drive the price down also pave the way for intermodal transportation adaptability. The trade facilitation like border issues, custom cost will have impact on the trade flows and also in transportation costs. The reforms made by WTO like single window system in customs have been cost efficient in trading.
The increase in fuel cost marginally increases the transportation costs and the higher fuel cost affects the various mode of transportation differently. Energy cost influences the composition of trade in different mode of transports. The UNCTAD (2010) study estimated the elasticity of freight rate for container (0.19 to 0.36) and for iron ore (up to 1.0). Oil price can act as tariff surcharges and the international trade can become more regionalised. Experiments should be conducted on projection of real price of energy with other transport determinants and impacts on transportation cost. The International trade also linked to the institution like politics, Form of government, political borders, and economic institution. The trade allows redefining the institutions in the country. When the country has better institutions, it will promote and negotiate the trade to the welfare of the people.