Trade asymmetries: supplying an answer

December 10, 2017

 From a general perspective, many would assume that transportation cost of goods from one place to another are pretty much fixed and depend almost entirely on the distance between the origin and the destination. Rather, many economists and policymakers also make assumptions along similar lines for economic models that are used for calculating export and import costs and thus for analysing and determining trade policy.

But, before we move on and observe what these economic models fail to encompass, it is essential to understand how the prices in the actual shipping industry are determined; so, consider this example for the same:

 

Consider a goods ship going from Australia to China and another goods ship going from China to Australia, such that the routes taken by both ships are of equal distance. Note that, according to our general assumption, both trips should be costing the same amount; however, on average, the ship journey from Australia to China costs 33% more than the journey from China to Australia.

 

According to the National Bureau of Economic Research’s working paper, this price difference arises because of Demand and Supply. But, it is the Demand and Supply of ships and not that of goods.

 

This can be explained as follows: in terms of goods it receives from ocean trade, China is a net importer. As a consequence, the number of ships that dock on Chinese docks is much more than the number of ships that are actually required for shipping of Chinese cargo.

On the other hand, things Down Under are pretty much the opposite of what they are like in China: Australia, being a net exporter of goods in ocean trade, produces more goods and commodities than its people can consume and hence, the need for imports is on the lower side of things. This aspect of the economy results in there being fewer ships on Australian docks than the numbers required for shipping Australian produce.

 

Owing to these dynamics of the countries, the following scenario takes place: say a ship captain goes ahead with a deal to deliver China’s produce to Australia, he will be easily able to score a return shipment from an Australian exporter considering that there are fewer ships than required on Australian docks. On the other hand, if a captain agrees to deliver a shipment from Australia to China, he will face difficulty in terms of getting back a return shipment from China considering that the docks in China have more number of ships than required to carry out exports (from China); rather, there is a high probability that to get the return shipment, the captain will have to head to the docks of another nearby country, say Indonesia, that is a net exporter of goods, thus, costing the captain more in terms of fuel, time and labour.

 

In consideration of the above explanations, according to the National Bureau of Economic Research - the risk in terms of bearing additional costs related to fuel, time and labour, is the reason because of which, in the real trading and shipping industry, a shipment from Australia to China would cost somewhere around $10,000 a day (excluding fuel cost) while a shipment from China to Australia would cost somewhere around $7,500 a day (excluding fuel cost); thus, showcasing the price difference along the same route.

 

So, through the National Bureau of Economic Research’s study, it was observed that ship supply is affected by the ever-changing trade flows which are themselves determined by geographical factors and concentration of natural resources.

 

As highlighted earlier, the economic models used by economists and policymakers generally work on the single underlying assumption of shipping prices being solely determined by the factor of the distance between the origin and the destination. But, as we can see from the above real market condition, the very basis for this assumption fails to account for and encompass other determinants like trade flows that play prime roles in the determination of export and import costs, thereby affecting trade policy and  growth. Moreover, this also implies that the economic models are not equipped to take into account external shocks, domestic policies and changing trade patterns.Furthermore, owing to these very trade asymmetries, on average, it has been observed that at any point in time, on average, 45% of the dry bulk ships cruising the seas are empty, i.e. they have no cargo.

 

So, what can be done?

 

Well, I do not have an answer for how the trade asymmetries can be reduced because the amount of exports or imports that a country can carry out is driven very much by a country’s own resources, technological advancements and, of course, the demand and supply of goods on a global scale. But, looking into how the issue regarding 45% of the dry bulk ships cruising the seas being empty can be solved, it is clear that it is mostly due to an inefficient communications system.But, what would happen if the communication between the exporters and ships was such that no ships more than necessary would leave empty from net-exporting countries or arrive without loads at a net-importing one?

 

According to simulations, in such a world, trade at a global level would see an increase of 23%. But, in such a case, at the same time, ships would also tend to be attracted more towards regions from where they would surely get cargo, i.e. net-exporting countries; thus, leading to more benefit for exporters from net-exporting countries in comparison to exporters from net-importing countries.

 

Therefore, though there would be an increase in efficiency, we could see the competitiveness disparity between the net-exporters and net-importers of the world rise further.

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