Trade Diversion

Richard Florida says “While it’s commonly thought that globalization has put the world’s global cities on an increasingly level playing field, substantial differences in prices persist”:

What should leap to mind? Trade costs.

The biggest price gap (a ratio of 100) is for a good that is completely non-tradable and varies greatly in quality (bus fare is 7 cents in Mumbai and $7 in Oslo). A good of relatively uniform quality that is perishable varies quite a bit (Big Mac, from $2 in Shanhai to $6 in Oslo). A durable good with a high value-to-weight ratio, the iPad 2, exhibits less variation, a ratio of under two ($1058 in Buenos Aires and $548 in Bangkok). So it looks like trade costs are a pretty good explanation for nominal price differences.

That iPad gap may not be as large as it seems. You’ll want to adjust for taxes. The VAT is 21% in Argentina and 7% in Thailand.

How can there still be a ~$350 price difference when one can probably mail an iPad to most countries for less than a hundred bucks? Shouldn’t arbitrage drive price differences for identical products down to the shipping cost? Not so fast. It turns out it’s quite difficult to arbitrage iPads. Apple tracks its customers and doesn’t allow bulk purchases.

Why is gasoline, a very homogeneous and fungible commodity, $2 in Amsterdam but only 42 cents in Dubai? Taxes in the former and subsidies in the latter.

In short, these data are a lesson about trade costs. You’ll notice that Richard Florida didn’t title his post “why you should buy a bus ticket in Mumbai instead of Oslo”!

(Relatedly, price comparisons of personal services, as opposed to goods, suggest a lesson about global labor mobility. A one-hour Thai massage costs $6 in Bangkok and about $100 in New York City!)

An update on the Panama Canal expansion from the Economist that focuses on the west coast’s reaction:

But what can the California ports do? Floating cargo from Asia to the east coast by boat will always be cheaper, concedes Christopher Lytle, the executive director of the Port of Long Beach. But unloading in Long Beach and taking the train to New York can be faster by a week, he says. So California’s ports must compete on speed, which is increasingly important for time-sensitive goods such as fashion wear or consumer electronics. Let the lawn chairs go and keep the iPads, he reckons.

A lot must happen to keep that advantage in speed, however. One bottleneck is that short truck ride to the railway yard. Not only do the trucks account for much of the port’s air pollution (even though they are dramatically cleaner than just a decade ago), but they clog up stretches of the I-710 freeway, wasting precious time. One of the port’s plans is therefore to build a new, better and closer railway yard…

David Pettit, a lawyer at the National Resources Defence Council and one of those environmentalists who so frustrate Mr Baker, says that he fully understands the threat posed by the canal. But moving the railway yard to another community, and thus polluting it, is not the answer. Better, he says, to put the railway yard right on the docks. That would take up too much space, replies the port. The combatants have only until 2014 to work out their answer and build it.

[HT: Clayton]

A summary of a survey from the World Bank: “Trade Finance during the 2008–9 Trade Collapse: Key Takeaways“

The Panama Canal is being expanded; the $5b construction of larger locks is due to be completed in 2014. As the Financial Times describes, that’s expected to shake up the east coast shipping scene.

Scenes like the one at Baltimore are being played out all along the east and gulf coasts ahead of what promises to be the biggest shake-up in US distribution since the advent of shipping containers 50 years ago.

Ports, terminal operators, rail companies and state governments are jostling to win the new traffic they expect to be generated by the bigger ships. Billions of dollars are being spent to build new quays, deepen channels and expand rail tunnels. Consumers, manufacturers and retailers in the US mid-west and inland eastern cities could all benefit.

Containers heading to these areas will have the option of going via east-coast ports then heading west on trains. Their traditional route has been eastward from California, where larger ships free of Panama Canal restrictions already dock.

Here’s James Feyrer on the closing of the Suez Canal. Feyrer is also working on a paper titled “The Opening of the Panama Canal as a Natural Experiment in Trade”.

[HT for FT to Seb]

Ethan Zuckerman has some fun with Maersk’s online shipping rates calculator:

The main thing I’ve found playing with Maersk’s calendar: distance doesn’t matter as much as demand. Americans buy a lot of atoms from China. The Chinese don’t buy nearly as many from the US. A 40′ container filled with household goods, shipped from Shanghai to Houston, TX costs $6169.93. Reverse the trip and ship the same container from Houston to Shanghai and the cost is $3631.07. That’s because 60% of containers on ships coming from the US to China are empty, which means Maersk and other shippers are desperate to sell container space.

(The 2006 New York Times article that offers that 60% empty container statistic suggests that lots of full containers are coming to China from raw-materials rich countries like Australia, Brazil and the Middle East. That suggests we should see the opposite pattern – expensive containers from Sao Paolo to Shanghai and cheap ones in the other direction. Nope. $5101.70 from Shanghai to Sao Paolo, $1930.59 in the other direction. Perhaps containers from China to Brazil are riding the same ships as those to the US and paying the same premiums?)

Maersk also offers a set of maps that help you get a sense for how these trade routes actually work. It’s a four day trip from Suva to Auckland on the Pacific Islands Express, and then the bottles of Fiji water are transfered to OC1, the Oceania Americas Service. The Pacific crossing is a long one – 18 days to the Panama Canal, a quick stop in Cartagena, and we’re in Philadephia 25 days out of Auckland. It’s a truck ride from Philly to Cambridge, and that short hop is responsible for $950 of the total transit cost.

As I poke through these maps, schedules and tariffs, I feel like I’m glimpsing a secret world. Part of it may come from the sheer poetry of the names. Shipping routes include “The Boomerang” and the “The South China/Australia Yo-yo” and connect ports like Tin Can Island (Apapa, Nigeria, the main port for Lagos). And part comes from the sense that these routes and rates, the infrastructure that supports an economy where transPacific bottled water is possible, are the ley lines of globalization, radiating a mysterious and sinister power.

Michael Baker in Foreign Affairs on African maritime problems:

Africa has the least efficient ports in the world. Dwell times — the amount of time a ship must stay in port — for the loading and unloading of cargo exceed global averages by several days and are nearly quadruple those of Asian ports, thus driving up shipping costs through delays. No African port can be found on the list of the top 70 most productive in the world. As a result, shipping companies send smaller, older, and cheaper ships to Africa in an effort to reduce their losses.

A number of factors are to blame: poor harbor maintenance, bureaucratic red tape, inadequate maritime law enforcement, and lax security. Additionally, Sam Bateman, a maritime security expert at the S. Rajaratnam School of International Studies, in Singapore, has demonstrated that pirates and other maritime criminals tend to prey on old, slow, decrepit ships — the types of ships that inefficient and unsecured African ports and waterways attract — because they are easy targets. Half of the ships successfully hijacked by Somali pirates in 2009 fell into the category of the smallest merchant ships.

Moreover, many African ports cannot handle ships of median size due to infrastructure limitations. Meanwhile, the global shipping industry has been modernizing its fleets, scrapping obsolete vessels for newer mega-carriers. This means that shipping companies will continue deploying their remaining smaller and slower ships for transport to and from Africa, increasing the number of easy targets for pirates and further impeding Africa’s ability to export products efficiently. In this environment, companies producing goods in Africa cannot reliably or efficiently get their wares to market. This plays a large role in explaining why Africa garners only 2.7 percent of global trade despite its cheap labor force, cheap commodities, and proximity to major markets.

The Economist has a story on container derivatives:

Some 140m containers now carry around half of the world’s exports by value. And according to the brokers that are starting to offer container-freight derivatives, contracts based on the future price of renting containers, the way these boxes are financed is about to undergo another revolution.

[HT: Seb]

The NY Times has a story on shipping costs:

Fighting for freight, retailers are outbidding each other to score scarce cargo space on ships, paying two to three times last year’s freight rates — in some cases, the highest rates in five years. And still, many are getting merchandise weeks late.

The problems stem from 2009, when stores slashed inventory. With little demand for shipping, ocean carriers took ships out of service: more than 11 percent of the global shipping fleet was idle in spring 2009, according to AXS-Alphaliner, an industry consultant.

Carriers also moved to “slow steaming,” traveling at slower and more fuel-efficient speeds, while the companies producing containers, the typically 20- or 40-foot boxes in which most consumer companies ship goods, essentially stopped making them.

With freight rates that high, why isn’t the idle portion of the fleet coming back into service?

The shipping companies slowly added ships back into the system early this year, but they did so haltingly, not wanting to add too much supply and risk having their rates fall. (Major carriers largely hew to the rates set by carrier groups, which are allowed to discuss and set voluntary rates, under antitrust immunity.)…

Because of slow steaming, which takes containers out of the system for a longer period of time, and because places like Russia and India began to demand container space, finding something to ship goods in, much less space on a ship, has been problematic.

“There aren’t enough actual containers, so therefore, even if the vessel capacity situation is easing up a little bit,” said Peter Tirschwell, senior vice president for strategy at The Journal of Commerce, “you now have equipment that people can’t get.”

[HT: Seb]