Transportation, Globalization and International Trade

Author: Dr. Jean-Paul Rodrigue

1. Trade and the Global Economy

"Courtesy of ongoing trade liberalization, in conjunction with sharply declining communication and transportation costs, there has been a sharp increase in the tradable goods portion of world output over the past 15 years. At the same time, a veritable explosion in e-based connectivity since 1995, together with the emergence of an entirely new global IT outsourcing industry, has led to the networking of service providers around the world. As a result, rapidly expanding trade in both goods and services has become an increasingly powerful engine in driving the global growth dynamic." Stephen Roach, Morgan Stanley, July 18, 2005.

In a global economy, no nation is self-sufficient. Each is involved at different levels in trade to sell what it produces, to acquire what it lacks and also to produce more efficiently in some economic sectors than its trade partners. As supported by conventional economic theory, trade promotes economic efficiency by providing a wider variety of goods, often at lower costs. The globalization of production is concomitant to the globalization of trade as one cannot function without the other. Even if international trade has taken place centuries before the modern era, as ancient trade routes such as the Silk Road can testify, trade occurred at an ever increasing scale over the last 600 years to play an even more active part in the economic life of nations and regions. This process has been facilitated by significant technical changes in the transport sector. The scale, volume and efficiency of international trade all have continued to increase since the 1970s. As such, a point has been reached where larger distances can be traded for a decreased amount of time, and this at similar or lower costs. It has become increasingly possible to trade between parts of the world that previously had limited access to international transportation systems. Further, the division and the fragmentation of production that went along with these processes also expanded trade. Trade thus contributes to lower manufacturing costs.

Without international trade, few nations could maintain an adequate standard of living. With only domestic resources, each country could only produce a limited number of products and shortages would be prevalent. Global trade allows for an enormous variety of resources – from Persian Gulf oil, Brazilian coffee to Chinese labor – to be made more widely accessible. It also facilitates the distribution of many different manufactured goods that are produced in different parts of the world. Wealth becomes increasingly derived through regional specialization of economic activities. This way, production costs are lowered, productivity rises and surpluses are generated, which can be transferred or traded for commodities that would be too expensive to produce domestically or would simply not be available. As a result, international trade decreases the overall costs of production worldwide. Consumers can buy more goods from the wages they earn, and standards of living should, in theory, increase. International trade consequently demonstrates the extent of globalization with increased spatial interdependencies between elements of the global economy and their level of integration. These interdependencies imply numerous relationships where flows of capital, goods, raw materials and services are established between regions of the world. Another important attribute of international trade is that it increasingly concern exchanges within multinational corporations.

2. Trade Facilitation

The volume of exchanged goods and services between nations is taking a growing share of the generation of wealth, mainly by offering economic growth opportunities in new regions and by reducing the costs of a wide array of manufacturing goods. By 2007, international trade surpassed for the first time 50% of the global GDP, a twofold increase in its share since 1950. The facilitation of trade involves how the procedures regulating the international movements of goods can be improved, which concerns four main factors:

Integration processes, such as the emergence of economic blocks and the decrease of tariffs at a global scale through agreements, promoted trade as regulatory regimes were harmonized. One straightforward measure of integration relates to custom delays, which can be a significant trade impediment. The higher the level of economic integration, the more likely the concerned elements are to trade. International trade has consequently been facilitated by a set of factors linked with growing levels of economic integration, the outcome of processes such as the European Union or the North American Free Trade Agreement. The transactional capacity is consequently facilitated with the development of transportation networks and the adjustment of trade flows that follows increased integration. Integration processes have also taken place at the local scale with the creation of free trade zones where an area is given a different governance structure in order to promote trade, particularly export oriented activities. In this case, the integration process is not uniform as only a portion of a territory is involved.
Production systems are more flexible and embedded (see concept 3), which favors exchanges of commodities, parts and services. Information technologies have played a role by facilitating transactions and the management of complex business operations. Foreign direct investments are commonly linked with the globalization of production as corporations invest abroad in search of lower production costs and new markets. China is a leading example of such a process. There is consequently a growing availability of goods and services that can be traded on the global market.
Transport efficiency has increased significantly because of innovations and improvements in the modes and infrastructures. Ports are particularly important in such a context since they are gateways to international trade through maritime shipping networks. As a result, the transferability of commodities has improved. Decreasing transport costs does more than increasing trade, it also help change the location of economic activities. Yet, transborder transportation issues remain to be better addressed in terms of capacity and security.
Transactional efficiency. The financial sector also played a significant role in integrating global trade, namely by providing credit for international commercial transactions. For instance, a letter of credit may be issued based upon an export contract. An exporter can thus receive a payment guarantee from a bank until its customer finalizes the transaction upon delivery. This is particularly important since the delivery of international trade transactions can take several weeks due to the long distances involved. During the transfer, it is also common that the cargo is insured in the event of damages, theft or delays, a function supported by insurance companies. Also, global financial systems permit to convert currencies according to exchange rates that are commonly set by market forces, while some currencies, such as the Chinese Yuan, are set by policy. Monetary policy can thus be a tool, albeit contentious, used to influence trade.

Trade facilitation depends on the reduction of the general costs of trade, which considers transaction, tariff, transport and time costs. Thus, the ability to compete in a global economy is dependent on the transport system as well as a vast array of supporting service activities. These activities include:

Distribution-based. A multimodal and intermodal freight transport system composed of modes, infrastructures and terminals that spans across the globe. It insures a physical capacity to support trade.
Regulation-based. Customs procedures, tariffs, regulations and handling of documentation. They insure that trade flows abide to the rules and regulations of the jurisdictions they cross.
Transaction-based. Banking, finance, legal and insurance activities where accounts can be settled. They insure that the sellers of goods and services are receiving an agreed upon compensation and that the purchasers are protected and have a legal recourse if the outcome of the transaction is judged unsatisfactory or is insured if a partial or full loss incurs.

The quality, cost, and efficiency of these services influence the trading environment as well as the overall costs linked with the international trade of goods.

3. Global Trade Patterns

International trade, both in terms of value and tonnage, has been a growing trend in the global economy. The emergence of global trade patterns can mainly be articulated within three major phases:

First phase. Concerns a conventional perspective on international trade that prevailed until the 1970s where factors of production were much less mobile. Particularly, there was a limited level of mobility of raw materials, parts and finished products in a setting which is fairly regulated with impediments such tariffs, quotas and limitations to foreign ownership. Trade mainly concerned a range of specific products, namely commodities, (and very few services) that were not readily available in regional economies. Due to regulations, protectionism and fairly high transportation costs, trade remained limited and delayed by inefficient freight distribution. In this context, trade was more an exercise to cope with scarcity than to promote economic efficiency.
Second phase. From the 1980s, the mobility of factors of production, particularly capital, became possible. The legal and physical environment in which international trade was taking place lead to a better realization of the comparative advantages of specific locations. Concomitantly, regional trade agreements emerged and the global trade framework was strengthened from a legal and transactional standpoint (GATT/WTO). In addition, containerization provided the capabilities to support more complex and long distance trade flows, as did the growing air traffic. Due to high production (legacy) costs in old industrial regions, activities that were labor intensive were gradually relocated to lower costs locations. The process began as a national one, then went to nearby countries when possible and afterwards became a truly global phenomenon. Thus, foreign direct investments surged, particularly towards new manufacturing regions as multinational corporations became increasingly flexible in the global positioning of their assets.
Third phase. There is a growth in international trade, now including a wide variety of services that were previously fixed to regional markets and a surge in the mobility of the factors of production. Since these trends are well established, the priority is now shifting to the geographical and functional integration of production, distribution and consumption with the emergence of global production networks. Complex networks involving flows of information, commodities, parts and finished goods have been set, which in turn demands a high level of command of logistics and freight distribution (see concept 3). In such an environment, powerful actors have emerged which are not directly involved in the function of production and retailing, but mainly taking the responsibility of managing the web of flows.

The global economic system is thus one characterized by a growing level of integrated services, finance, retail, manufacturing and nonetheless distribution, which in turn is mainly the outcome of improved transport and logistics, a more efficient exploitation of regional comparative advantages and a transactional environment supportive of the legal and financial complexities of global trade. The outcome has been a shift in global trade flows with many developing countries having a growing participation to international trade. The nature of what can be considered international trade has also changed, particularly with the emergence of global commodity chains. This trend obviously reflects the strategies of multinational corporations positioning their manufacturing assets in order to lower costs, maximize new market opportunities while maintaining the cohesion of their freight distribution systems. In addition, another important trade has been growing imports of resources from developing countries, namely energy, commodities and agricultural products.

The dominant factor behind the growth in international trade has been an increasing share of manufacturing activities taking place in developing countries with manufacturers seeking low cost locations for many stages of the supply chain. The evolution of international trade thus has a concordance with the evolution of production. There are however significant fluctuations in international trade that are linked with economic cycles of growth and recession, fluctuations in the price of raw materials, as well as disruptive geopolitical and financial events. The international division of production has been accompanied by growing flows of manufactured goods, which take a growing share of international trade. There is relatively less bulk liquids (such as oil) and more dry bulk and general cargo being traded.

The geography of international trade still reveals a dominance of a small number of countries, mainly in North America and Europe. Alone, the United States, Germany and Japan account for about a third of all global trade, but this supremacy is being seriously challenged. Further, G7 countries account for half of the global trade, a dominance which has endured for over than 100 years. A growing share is being accounted by the developing countries of Asia, with China accounting for the most significant growth both in absolute and relative terms. Those geographical and economic changes are also reflected over trans-oceanic trade with Trans-Pacific trade growing faster than Trans-Atlantic trade.

Regionalization has been one of the dominant features of global trade. The bulk of international trade has a regional connotation, promoted by proximity and the establishment of economic blocs such as NAFTA and the European Union. The closer economic entities are, the more likely they are to trade, which explains that the most intense trade relations are within Western Europe and North America. A similar, but more recent trend, has also emerged in Asia, particularly between Japan, China, Korea and Taiwan.

4. International Transportation

The growth of the amount of freight being traded as ell as a great variety of origins and destinations promotes the importance of international transportation as a fundamental element supporting the global economy. International transportation systems have been under increasing pressures to support additional demands in volume and distance carried. This could not have occurred without considerable technical improvements permitting to transport larger quantities of passengers and freight, and this more quickly and more efficiently. Few other technical improvements than containerization have contributed to this environment of growing mobility of freight. Since containers and their intermodal transport systems improve the efficiency of global distribution, a growing share of general cargo moving globally is containerized. Consequently, transportation is often referred as an enabling factor that is not necessarily the cause of international trade, but a mean over which globalization could not have occurred without. A common development problem is the inability of international transportation infrastructures to support flows, undermining access to the global market and the benefits that can be derived from international trade.

International trade requires distribution infrastructures that can support trade between several partners. Three components of international transportation facilitate trade:

Transportation infrastructure. Concerns physical infrastructures such as terminals, vehicles and networks. Efficiencies or deficiencies in transport infrastructures will either promote or inhibit international trade.
Transportation services. Concerns the complex set of services involved in the international circulation of passengers and freight. It includes activities such as distribution, logistics, finance, insurance and marketing.
Transactional environment. Concerns the complex legal, political, financial and cultural setting in which international transport systems operate. It includes aspects such as exchange rates, regulations, quotas and tariffs, but also consumer preferences.

About half of the global trade takes place between locations of more than 3,000 km apart. Because of the involved geographical scale, most international freight movements involve several modes, especially when origins and destinations are far apart. Transport chains must thus be established to service these flows which reinforce the importance of intermodal transportation modes and terminals at strategic locations. Among the numerous transport modes, two are specifically concerned with international trade:

Ports and maritime shipping. The importance of maritime transportation in global freight trade in unmistakable, particularly in terms of tonnage as it handles about 90% of the global. Thus, globalization is the realm of maritime shipping, with containerized shipping at the forefront of the process. The global maritime transport system is composed of a series of major gateways granting access to major production and consumption regions. Between those gateways are major hubs acting as points of interconnection and transshipment between systems of maritime circulation.
Airports and air transport. Although in terms tonnage air transportation carries an insignificant amount of freight (0.2% of total tonnage) compared with maritime transportation, its importance in terms of the total value is much more significant; about 15%. International air freight is about 70 times more valuable than its maritime counterpart and about 30 times more valuable than freight carried overland, which is linked with the types of goods it transports (e.g. electronics). The location of freight airports correspond to high technology manufacturing clusters as well as intermediary locations where freight planes are refueled and/or cargo is transshipped.

Road and railway modes tend to occupy a more marginal portion of international transportation since they are above all modes for national or regional transport services. Their importance is focused on their role in the "first and last miles" of global distribution. Freight is mainly brought to port and airport terminals by trucking or rail. There are however notable exceptions in the role of overland transportation in international trade. A substantial share of the NAFTA trade between Canada, United States and Mexico is supported by trucking, as well as large share of the Western European trade. In spite of this, these exchanges are at priori regional by definition, although intermodal transportation confers a more complex setting in the interpretation of these flows.

Economic development in Pacific Asia and in China in particular, has been the dominant factor behind the growth of international transportation in recent years. Since the trading distances involved are often considerable, this has resulted in increasing demands on the maritime shipping industry and on port activities. As its industrial and manufacturing activities develop, China is importing growing quantities of raw materials and energy and exporting growing quantities of manufactured goods. The outcome has been a surge in demands for long distance international transportation. The ports in the Pearl River delta in Guangdong province now handle almost as many containers as all the ports in the United States combined.