Another day, another dollar
Peter Bradley, Editor in Chief -- Logistics Management, 2/1/2002
As every good logistics manager knows, logistics efficiency is one of the cornerstones of international trade.
Although that might sound like a bit of hubris, a recent study by a Purdue economist has provided some numbers to back that claim. As reported in our News & Analysis section on page 22, David Hummels has examined the effects of transportation speed on international trade and documented that time acts as a trade barrier. Each day in transit adds costs to a product, acting as a de facto tariff and reducing the chances that an importer will source from the provider nation again. Conversely, the faster a product moves, the less the added cost, or more accurately, lost value.
Reducing transit time, of course, has much to do with understanding the tradeoffs between ocean freight and air freight for a wide range of commodities and manufactured goods. Much of Hummels' research is devoted to quantifying the real-world decisions made every day by logistics managers overseeing the transportation of their companies' imports. More broadly, he demonstrates just how expensive time can be, and the numbers are frequently staggering.
But he also shows just how important improved transportation efficiency has been in spurring the enormous growth in world trade over the last half century. The combination of the development of the aircargo industry, declining aircargo rates (in real terms) and more efficient ocean transportation adds up to this: Since 1950, the average time in transit for imported goods has fallen to 10.5 days from 40 days. He equates that to reducing tariffs to 5.2 percent from 20 percent, on average.
That efficiency has much to do with the development of fast and efficient jet aircraft, the evolution of container shipping and vast improvements in transportation infrastructure. That is, it resulted from cooperation between the public and private sectors.
Hummels' study has important implications for developing countries that hope to sell goods to the United States and other developed economies: It's about more than cheap goods. And it has important implications for leaders of both industry and government in developed nations. As Matthew McGrath reports in his update on the World Trade Organization talks, trade facilitation will take a front seat in future negotiations. Customs barriers and other time-eating impediments add measurable costs to international trade, and those have gained top-level attention in the current round of talks. In addition, importers today face added costs as a result of the newly evolving security requirements that slow border crossings.
Many of the legal and security impediments are justifiable for both reasons of safety and sovereignty. Nations have many legitimate concerns about how and when to open their borders further. For instance, many Americans rightly fear that freer trade will undermine U.S. labor and environmental protections. But it's important that decision makers understand the often-hidden costs of delay.
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