The effects of transportation costs on international trade

This study investigates the effects of the transportation cost on the international trade. The first essay explores the effect of the transportation cost on the quality composition of trade. We derive a relationship between per unit and ad-valorem trade costs and the quality composition of trade showing that a per unit transactions cost raises the relative demand for high quality goods. Detailed international trade data for many importers and exporters are used to test these predictions. Within a narrowly defined commodity classification, exporters charge destination-varying prices that co-vary positively with shipping costs and negatively with tariffs. These results provide a clear rejection of the iceberg assumption on transportation costs and a strong confirmation of the classical Alchian-Allen hypothesis. We show that these results cannot be explained by monopoly pricing-to-market behavior. The second essay incorporates economies of scale in transportation into a trade model to show that even in a setting that is particularly favorable to free trade the welfare of consumers in free-trading countries can be improved by formation of trading blocks. When a group of countries forms a block by imposing a tariff on the rest of the world, trade flows concentrate within the block. With sufficiently strong regional scale effects in transport, concentration may induce cost savings in shipping strong enough to make certain level of regionalization preferred to the worldwide free trade.