Transportation and Commercial Geography

Authors: Dr. Jean-Paul Rodrigue and Dr. Claude Comtois

1. Trade and Commercial Geography

Historically, wealth was dominantly related to agricultural output implying that the largest economies were those with the largest populations. Trade patterns mostly followed demographics. The industrial revolution irremediably changed this relationship with mechanization and its multiplying effects on production and consumption. Yet, economic systems remain based on trade and transactions since specialization and efficiency require interdependency. People trade their labor for a wage, having to commute in the process, while corporations trade their output for capital. Trade is the transmission of a possession in return for a counterpart, generally money, which is often defined as a medium of exchange. This exchange involves a transaction and its associated flows of capital, information, commodities, parts, or finished products. All this necessitate the understanding of commercial geography.

Commercial geography investigates the spatial characteristics of trade and transactions in terms of their cause, nature, origin and destination. It leans on the analysis of contracts and transactions. From a simple commercial transaction involving an individual purchasing a product at a store, to the complex network of transactions maintained between a multinational corporation and its suppliers, the scale and scope of commercial geography varies significantly.

Trade, in terms of its origins and destinations, has a spatial logic. It reflects the economic, social and industrial structure of the concerned markets, but also implies other factors such as transport costs, distance, political ties, exchange rates and the reciprocal economic advantages proponents get from trade. For trade to occur several conditions must be met:

Availability. Commodities, from coal to computer chips, must be available for trade and there must be a demand for these commodities. In other terms, a surplus must exist at one location and a demand in another. A surplus can often be a simple matter of investment in production capabilities, such as building an assembly plant, or can be constrained by complex environmental factors like the availability of resources such as fossil fuels, minerals and agricultural products.
Transferability. Transport infrastructures in allowing commodities to be moved from their origins to their destinations favor the transferability of goods. There are three major impediments to transferability, namely policy barriers (tariffs, custom inspections, quotas), geographical barriers (time, distance) and transportation barriers (the simple capacity to move the outcome of a transaction). Distance often plays an important role in trade, as does the capacity of infrastructures to route and to transship goods.
Transactional capacity. It must be legally possible to make a transaction. This implies the recognition of a currency for trading and legislations that define the environment in which commercial transactions are taking place, such as taxation and litigation. In the context of a global economy, the transactional environment is very complex but is important in facilitating trade at the regional, national and international levels. The fundamental elements of a commercial transaction involving the transportation of a good are the letter of credit and the bill of lading. The transport terms have been regulated since 1936 by international commercial terms that are regularly updated and revised.

Once these conditions are met, trade is possible and the outcome of a transaction results in a flow. Three particular issues relate to the concept of flow:

Value. Flows have a negotiated value and are settled in a common currency. The American dollar, which has become the major global currency, is used to settle and/or measure many international transactions. Further, nations must maintain reserves of foreign currencies to settle their transactions and the relationship between the inbound and outbound flows of capital is known as the balance of payments. Although, nations try to maintain a stable balance of payments, this is rarely the case.
Volume. Flows have a physical characteristic, mainly involving a mass. The weight of flows is a significant variable when trade involves raw materials such as petroleum or minerals. However, in the case of consumption goods, weight has little significance relatively to the value of the commodities being traded. With containerization, a new unit of volume has been introduced; the TEU (Twenty-Foot Equivalent Unit), which can be used to assess trade flows.
Scale. Flows have a range which varies significantly based on the nature of a transaction. While retailing transactions tend to occur at a local scale, transactions related to the operations of a multinational corporation are global in scale.

2. Trends in Commercial Geography

Traditionally, commercial activities tended to develop where there was a physical break along transport chains as cargo needed to be transferred to one mode to the other and where a new actor took over its ownership, or its custody. The physical break imposed transactions, an important reason why most the world's most important financial centers tend to be port cities or major load break centers. The contemporary commercial setting is marked by increasing free trade and profound technological, industrial and geopolitical changes. The liberalization of trade, as confirmed by the implementation of the World Trade Organization, has given a strong impetus and a positive trend in the growth rate of world trade and industrial production. This has led the strong competitive pressures and shifting competitive advantages. However, in a true free trade environment, regulatory agencies would not be required. But in spite of attempts at deregulation, transactions and trade are prone to disputes, litigations and perceived imbalances concerning who benefits the most. Although these issues mainly apply to international trade, there are also situations where trade is constrained between the provinces/states of a nation.

In spite of globalization, much of the trade is still dominantly regional. An overview of world trade flows indicate that trade within regions is more significant than trade between regions, but long distance trade is steadily growing. Figures indicate the increasing share of East Asia, especially China, in world trade both in terms of exports and imports. Flows of merchandises have also been accompanied by a substantial growth in foreign direct investments. There is thus a remarkable reallocation of production capacities through outsourcing and offshoring following changes in comparative advantages around the world. This trend goes in tandem with mergers and acquisitions of enterprises that are increasingly global in scope. The analysis of international trade thus reveals the need to adopt different strategies to adapt to this new trading environment. As production is being relocated, there is a continuous shift in emphasis in the structure of exports and imports among nations.

Major changes have occurred in the organization of production. There is a noticeable increase in the division of labor concerning the design, planning and assembly in the manufacturing process of the global economy. Interlocking partnerships in the structure of manufacturing have increased the trade of parts and the supply of production equipment around the world. One third of all trade takes place among parent companies and their foreign affiliates. A part of this dynamism resides in the adoption of standards, a process which began in the late 19th century to promote mass production. It permitted the rapid development of many sectors of activity, including railways, electricity, the automobile and the telecommunication industry more recently (Internet, Electronic Data Interchange). The decline of manufacturing in its share of the global GDP is illustrative of the growing complexities that added value brings to the function of production. In the realm of globalization of economic activities, the International Standards Organization developed the ISO norms that serve as comparison between various enterprises around the world. These norms are applicable to the manufacturing and services industries and are a necessary tool for growth.

Another significant force of change in commercial geography implies the growth of consumption, although this is not taking place uniformly. As a result, the commercial geography is influenced by the market size, the consumption level of an economy (often measured in GDP per capita), but also by the growth potential of different regions of the world. The bulk of the consumption remains concentrated in a limited number of countries with the G7 countries alone accounting for two third of the global Gross Domestic Product. Economic growth taking place in East and Southeast Asia has been one of the most significant force shaping changes in the contemporary commercial environment. The commodification of the economy has led to significant growth in retail and wholesale and the associated movements of freight.

3. Commercialization of the Transport Industry

The liberalization of trade was accompanied by a growth of transportation since transactions involves movements of freight, capital, people and information. Developments in the transport sector are matched by global and regional interdependence and competition. Transportation, like commodities, goods and services, is traded, sometimes openly and subject to full market forces, but more often subject to a form of public control (regulation) or ownership. The core component of a transport-related transaction involves its costs that either have to be negotiated between the provider of the service and the user or are subject to some arbitrary decree (price setting such as public transit). Since transportation can be perceived as a service, its commercialization (how it is brought to the market) is an important dimension of its dynamics. Transport service providers tend to be private entities, particularly in the global freight sector. Local passenger transportation providers (transit) tend to be publicly owned.

One important component of the commercialization of transportation concerns investments in infrastructure, modes and terminals, as well as marketing and financing. Financial activities have seen a concentration among major global financial centers. Investments are performed either to expand the geographical extent and/or the capacity of a transport system or to maintain its operating conditions. The public and private sectors have contributed to the funding of transport investments depending on economic, social and strategic interests. For obvious reasons, the private sector seeks transport investments that promise economic returns while the public sector often invests for social and strategic reasons. In many cases private transport providers have difficulties to act independently in formulating and implementing their transport investments. Various levels of government are often lobbied by transport firms for financial and/or regulatory assistance in projects that are presented as of public interest and benefit. The consolidation of regional markets and the resulting increase in transborder traffic has led transport firms to seek global alliances and greater market liberalization in the transport and communication sector as a mean to attract investments and to improve their productivity.

Deregulation and divestiture policy in the transport industry has led governments to withdraw from the management, operations and ownership of national carriers, ports and airports. This has given rise to a major reorganization of the international and national transport sectors with the emergence of transnational transport corporations that are governing the global flow of air, maritime and land trade and the management of airports, ports and railyards.

4. Logistics and Supply Chains

Freight has commonly been managed by private interests, particularly the maritime shipping segment. The logistics industry as also prone to private commercial interests that owns modes, terminals, distribution facilities and provide management services. Freight distribution has become a fundamental element of the global commercial geography as it promotes the competitiveness of well serviced regions. Logistical capabilities are often equated with competitiveness over segments of the supply chain, ranging from resource extraction, manufacturing and retailing. Both public and private interests are now considering various infrastructure and activities related to logistics and supply chain management as high priority projects for capital allocation. This often takes the form of logistics zones linked to intermodal terminal facilities, such as ports, rail yards and barge terminals.

Freight transport services are increasingly being outsourced as many companies have acknowledged that transportation and warehousing are not part of their core business. Companies are reducing the number of transportation suppliers to reduce costs and improve services. The development of the logistics industry has enabled many transport companies to take control of larger segments of the supply chain. With an increasing level of functional integration many intermediate steps in the transport chain have been removed. Mergers and acquisitions have permitted the emergence of large logistics operators that control many segments of the supply chain: the megacarriers. Technology also has played a particular role in this process namely in terms of information technology (control of the process) and intermodal integration (control of the flows).

The ownership and operations of supply chains is intensive in transactions and information exchange. Logistics is after all the spatial and temporal management of freight flows and with globalization these flows are extensive and complex. As a commercial activity logistics involves a whole range of tasks, from the labor intensive (loading, packaging, unloading) to information management intensive (order processing, booking, routing).