Team Article Presentation

'nternat/ona, Trade-

Don't Have More 0 f ft

E 0 ' r " A N D

ofthe most important is £ 6 m ° u s increase • h e e n o r -

t r a d e - Over the p a s t l n t e ™ « i o n a i

sports as a sharer 7 e a r s ' w ° r W

b J e d to aimos 25 n ° U t p U t W d O U -

P « . J However d2rerL 0fW0rJd

° « t - t h e ^-easing^tT t G o f b a J i 2 a t i ° n a n d

economic evidence J ^ T * ^ * « n t barriers to ,W„ t W S 1 g n i f i - - i s t - 2 ^ w i i si™

10™1 * a d e «UI W e w i i i sum • t r a d e sti" deveiopments \ n 7 ^

A e J « e s t , n t ernationai trade h m e a s u r e m e n t G f

m « i n i v f r o m a r b a ™ e r s , drawing

- 7 on the sub^cTl!7/ reil--e sur"

a n d & i c van J f m e L s Anderson

a u t h o r s " C ° ° P - n their survey,

Magnitudes of t l m a t C S o f Ae

^ernationai trade o ^ ^ f « M <* 0 n average h e y f l n d that

^ do^Lle henT°naJ f3de «»* d e v eJo P ed countries ^ °

f g ° ° d s *

^ • ^ t ^ ^ ^ ^ o a of Plenty 0 : ^ °

g ° ' S O ^ t there i s

S f f l i t n and his LTn g , b a c k to A ^

A r d i n g t : ^ r s a c t o T ^ a W e -

* * * * * * in doing onlT ^ ^ best suited to do a f

W t a s k s is ^ x i m u m e c o n o m i c e f f i ^ a d l i e V e s i t s

ater economists and frorn firms to c o u n t s t ^ . " B u m e n t ^ occurs when eachT E c ° n ° m i c ef&ien-

«aking and e x p o r f n " T Y * * * ^ *

Action. v S t S 6 8 S p e d a l - a t i o n in p ^

Pay without trade Z n J ^ W o u J d , a t f e c o n o m i s C l r t r a 1 ? * ^ 3 n d U n f e t t e r e d , a socieTv m

I S a n d

"Offlic weii-being 7 m a x i m ' ^ s i t s e c o .

occurring. F 0 r examnlT? d a b ° v e f r ° m

riers raise the c o s T f ' T ^ ^ ^ S°ods, U.S. c o n s l P C f a a S I n g p o r t e d f - i g n goods, a X S n W ° U i d ^

fewer U.S. goods T W o ^ f o ' Products S T ^ J ° S a t l t t h e d e m a ^ imported u n d c X f Z T ^ h a d

Foundations of Global Business

34 O S T A P I K A N D Y l

would now be making more g « £ * * relatively efficient at producing. I n the pres ence of international trade barriers, there would be less specialization, prices w o u d t higher, and, overall, consumers m all countries would be worse ott.

The Two Wlain Types of

Trade Costs I n 19th-century England, economist

David Ricardo used these core ideas of he benefits to international trade to argue S L t a pressing political barner to t r g :

the Corn Laws, which proteced Br sh agriculture and kept domestic food prices h ^ h . Since then, economists h a v e ^ d J L y other barriers to trade. We w 1 describe these barriers m terms of costs f o l l o w i n g the convention used by Anderson and van Wincoop.

Broadly, trade costs are all costs incurred f r o m the time a good leaves he actory or its place of production to the

time k is purchased by the end-user. Such c o i s can be incurred internationally (for

• example at the border) or domestically that is w i t h i n a country). I n the case of consumer goods such as automobiles, tele S n s , clothing, and food.trade costs are the difference between the p n e c ^ t the "factory gate" and the retail price.

International trade costs can be broadly divided into t w o main categories: border-related costs and internatton transportation costs Border-related cos* encompass the broad range of trade barn "encountered between nations, excludinS

international transportation. Thes barrier include costs that occur specifically at the border, such as tariffs, quotas, and paper- w o r k due to customs and other regula ions, as well as those differences between coun- t r i e l that could affect trade, such as d i f f c f r c L ^ , I a n g u a ^ , ^ ( c o n t t a «

enforcement).7 Together w i t h - t e r - u o n a

transport costs, these items make up the

costs incurred internationally. Border-related costs can be classified

based on whether they a " . a t t ^ t o ^ (national) government policies. This allows

economists to assess the importance of bor- der costs imposed by government^ohcy relative to other border costs. Border

a d costs imposed by government policy are further separated by economists into t t o categories- tariffs and nontariff barriers

G r i f f s arc additional charges added to the price of a good imported f r o m another country. The charge ts usually

to a sales tax. N o n t a r i f f barriers are loo l y defined as all other trade barrier imposed by national B o v e m m c n ^ most familiar of these are quotas, which are restrictions on the quantity o a good that can be imported f r o m a country They also ndude voluntary export restraints w h . h occur when the exporting country volun tarily" agrees to limit its exports to the l o r t i n f country; anti-dumping actions,

peered of selling their goods at a pnee below that in their home market; paper w o r k and regulatory procedures encoun L d specifically at the national borde and "softer" measures, such as product labeling and product quality standards.

Border barriers not due to govern- ment policy include information costs TZs incurred by potential importers m Kg out more about the goods they are buying); costs due to exchange rate uncer- S linguistic barriers, or other cultura S r ' e n c e s ; and contract enforcemen costs International transportation costs ar freight charges and transport time S o c i a t e d w i t h moving goods f r o m the exoorting to the importing country. Ihese : X include all freight and t i m e r s associated w i t h moving a good f r o m he factory i n the exporting country to the first no t of entry i n the importing country. Freight charges include trucking, shipping, and air charges.

Measuring Trade Costs We can measure trade costs two

wavs The first is to simply measure them X S l y from concrete d a t . The second involves an indirect approach whereby the

costs are inferred u s W a n

tte gravity model k ° o w n a s

' " ' e r m ' i m a l r r s * ^ " y We Do„; Have U „ r e o f / t

Border-Re/ated Costs

Tariffs are the eastVer- ,.

Jected on tariff r a t e S f o r ,7 , goods. There are 7 t h ° " s a n d s of

o n e a P ; ^ r ^ P t t h e c o u n ^

-ross ail tariff rates 7ki£ f - p l e to implement, 7t T 1 ^ • ' * because it weighs all P f , 0 b J e m a t i c less of wheth?^import o f T " 7 ' "T^

imports In the ,U 6 V o i u m e o f

are negatived „*/ S o n aPples . .ganveiy affecting imoor^ 1 0 n

precise y becan^ fU • • P o r t s - But tive th/t ? 6 I r J m Pact is so ne R a -Mve that imports fall tn i s

^ve a zero we ght i n T ' ™>uld JPProach tend t A " W ° R D S ' T H I S

C c t o ^ t S f f ^ C ° U n d e r e u S t i m a t e the true

most c l 7 S p I t e t h i s ^ortcoming l o s t calculations of overall " u " g , rates employ thi, f tar[ii mpjoy this second approach.

r r ^ e c ^ : U t T g ( | ° t h e r border-related

crs ;«, ' ejpecially nontariff trade barri

i s s r * s r a r i f f barriers info r r C ° n V e r t S m e n ° n -

f r » " ' c se s S - T d l r e C t N a t i o n t h e ;mtidum , n

S ° Aversion. For

t h c st-'udard worW d u m P i n S P"ce to

' " ' • ' • ' • r e s t o t a l , P ? C C ° C ° n V e r t the C 1 , ' ^ s u r e V a r e s

q U I V a I I n t S - T b e S e d i f f e r -

»* ^ - ^ I n t a n d T " ^ ? 1 1 ^ **"

rate to yield an estimate of

border-related trade costs imposed bv ™ ernment policy. P Y g o v "

r e l a t e d ^ trade costs not related to government policy P m n generally rely on a mJh• • e C O n o m i s t s and indirec m P

C ° m b m a t l o n °f direct indirect measurement based nn th*

gravity model. For examnle T not sharing o example, the costs of

snaring a common currencv nr a mon language as w P l f

7 C o m "

" > ™ s e , „ dtstance on trade f ) o w s . More sophisticated version, Z ,u

common current U uun\nes snare a

P r i d e s a statistical „ e S £ " S ^ " "

^ - U n i v a l e n t o / t S L ^ r r S

35

International Transport Costs TU* f„ •

Soods, balance ^ S T

tion reaper m terms of time. In addi-

36 O S T A P I K A N D Y l

I-

ft.

A Breakdown of Trade Costs* Table 1

Description

time costs

+ shipping costs

Total Transport Costs

tariffs and NTBs

language costs

currency costs

information costs

+ security costs

Total Border-Related Barriers

TOTAL

Percent Markup overthe Price of the Good

9

11

21

7

14

6

3

44%

74%

* T n e t a b l e p r e s e n t S —

Anderson and van Wincoop explore research on measuring freight costs, where shippers and handlers are interviewed industry trade journals are examined, and customs data are analyzed. Customs data provide b o t h t o t a l imports including freight charges and total imports exclud- ing freight charges. These customs data facilitate the calculation of total f r e i g h t charges associated w i t h importing.

Anderson and van Wincoop u l t i - mately draw f r o m an article by David Hummels f o r a measure of international transport costs because he incorporates time into transportation costs. I n his arti- cle Hummels develops methodologies to translate time costs into dollars, f r o m which the costs can then be expressed as a percentage of the value of the good trans- ported. Then, the freight costs and the time costs can be totaled to yield an overall mea- sure of international transport costs.

Estimates of Trade Costs Before beginning the discussion of

estimating trade costs, we advise the reader to review Table 1 and Figure 1. Table 1 con- tains a breakdown of the two main interna- tional trade costs and their components. Figure 1 illustrates the importance of taritts and other border-related costs, on the one hand, and international transport costs, on the other hand, via a hypothetical example of a pair of shoes produced i n a foreign country and shipped to the U.S.

Tariffs To arrive at a single overall t a r i t t

measure for a country, economists typical- ly calculate average tariffs according to the trade-weighted method discussed above. Average tariffs can differ across countries f o r a number of reasons, but the most

National Trade: Why We Don't Have s Figure 1

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START HERE

case st„dv. It is a hy^tC 'L '"7 " ^ °« »•> Tl,, path folded£™2*.»f« commoni,, t n d c d

•Mrent „„de costs discssed ™™£Z '"^ effc« ^K

C I

.2>i o I °: u . 1 I

«fa«on i n t r a d e a s t | l „ c u™^"EWouldEonerarc the s a m c

CD

•tan t«r,ft i ^ dteiZ rab'y 'OWer

»u»tifL arir?- d ^

between countriS „ J f 7 " " i «

^tdt;:Pr^^f a"d'

tariffs. A t the h.Vh j 7 p e r c e n t

4-5 percent. I n between were New Zealand

Bu84ŝ nf0 (Eurthirh'd and the

Griffs of about 2 to 3 peTcent ^

Nontariff Barriers

related sectors18 T V ' W O o d -

nontariff barriers, most notably

Foundations of GlobalBusln*s_

38 O S T A P I K A N D Y l

exert more of a tax than do tariffs.

Other Border-Related Bamers Using the gravity model described

K number of researchers have been

L indirect trade cos* at border, Anderson and van Wincoop

m a i n findings as follows: (1) The c ot- QnarinE the same language are ruu& ,

7 nerc nt of the value of the goods traded. m The os of employing different curren- ( 2 ) T ^ a b o u t 14 percent. (3) Information c i e s 1 S about 1 4 P c Q s t s a r e costs are 6 percent., v ,

total value of trade m

border costs, a ^ ^ ^ 0 3 ) - ! = . ^ d 07\*(1.14)"(1.06 {l.VJ)

International Transport Costs

, n As of 1998, about half the value of costs. As o i y;;. > Hummels U.S. exports are shaped by ai r. H

i m p u t e s a willingness to pay for v and translates that into a F « value of the goods shnpM His « n m U.S. time costs is 9 P e r c e n t - c o s t e s t i „ ^ ^ cost of

n T o y n l t l ) = 0.21, or 2 1 percent of ( i •' ; of the good at the factory gate, ^ t m m a r i z e , Anderson and van

w i n c T ? r r ^ n a n ~ t ; i costs: border b a m rs a ^ ^ transport costs. They & existing empirical research

mation ot tne ov n n n t a r i f f barriers,

barriers, h ^ * - ' * , 44 per¬

° , are an additional 2 1 percent.

^ o n T p e T e n t o f t h e factory gate Pt,e.

Conclusion

Anderson and van W i n c o o p r e p o

results on transport costs. f r o m another

article b7 David H o m n ^ . ^

0 1 1 T a C a g e - r o - all of the costs,

^ 2 ^ = ^

Barriers to international trade impede

t o c e a s e d ^ ^ ^ ^ c r a l l C 1 C n t erf societies, m i l e d « economic well being o r m e s has

seized the attenuu r r p q e a r c r i e r s have media, and - o — t s re earch recently collected a great deal ot t h a t indicates that barriers, tc>w£«£ ^

q u i t e high. The types an̂ d ^ ^ these barriers m develope highlighted i n an ^ ^ ^ ^ p . by James A n d e r s o n ^ d ^ m c u r r e n t

Combining the results

r e S e a r c h on trade costs, ^ ^ m t t t . Wincoop f i n d that border b a t n e o ^ ^ national transport costs are e ^ ^ e _ _ . 7 4 ; 74 percent tax on the factory g ^ P ^ a , p e r L t seems like a high n u n ^ ^ ^ ;

sales tax that high! H o w is t t h a t m l y globalizing wor d ^ of c £ o f ;

tional trade are still so high, r o r

were no costs to international d e t >

b a m „ s a „ 2 „ o w i l ) e v e r b e r e a | . ^ a „ d

costs and increases in J t r a d e

T " f ">d ="ltural barriers). 0 r i e

van Wincoop show that f r . r „ . •

=r^ a & r f*E "hole, would be better off.

Endnotes

- I d GDP), ^ c e ^ o d ? x S r - h a r e

io

reviews research on barriers rn C e g , o w * trade. Examining anorhZ 7 ""ernational - t i o n , S ^ ' S S ^ S A f^^'

countries. P ° f g o o d s « these

rage, One o f X t £ £ ^ £ .»*»- nomics, comparative advantaee shn T°~ countries can gain f m m 7 S

e ™ w s that even if o j ^ ^ , ^ 7* ̂ h ' ducing every singfe ^ p r o d u c t l v e at pro- Textbooics on t Z , ^ a n 0 t h e r COUnV. -ample, C o T ^ Z J T ^ l Frankel, and Ronald J o n S L " ' J f 6 7 Krugman and Maurice ObstfeM , b y P a u J

Retailed description of c ^ S ^

associated with iZl °! T °n t J l o s e c o s t s

S o S L ^ r s ? ; g o o d s s u c h « a « o . wheat, t t a S T S T ^ ^ a n d

the "factory gate" DrZ between

effect of these c o T ^ i ^ r * ^ For example f a m " I deferences on trade.

& d that SS/SStt^S" ^ tries with larger sharefnfrt W e e X 1 C o u n " They hypotheS tha I f l 5 6 P°Pulati^ ^ o A h S ^ ^ t ^ T 0 . a n d c u j t u r a l

tion and contract e n W 7 i n f o r m a -

^ d e and "

Dumping occurs when exports are ,„M • t eign markets at a price below U • j ^ fof" Price or product;™ h e i r domestic Policy). An a n t i d„m

( a C C ° r d i n g t 0 U-S- a d o l t tTdir^f" ̂ «* that a foreign fiV™ • 7 ' a n a c c "sation

Foundations of Global Business

, O S T A P I K A N D Y l

April 1984, the U.S. government increased the tariff rate On heavyweight motorcycles from 4.4 to 45 percent. From 1983 to 1984, the total customs value (the value at the "entry gate" of a country)'of heavyweight motorcycle imports (700-790 cubic centimeters of engine displace- ment) fell from $5.7 million to $55,000.

1 1 In their survey, Anderson and van Wincoop cite Messerlin's article.

1 2 Ad valorem duties, which are taxes levied as a percentage of the value of the imported goods, are cpnverted directly.

1 3 The tariff-equivalent of the effect of not having a common currency could be calculated if the gravity regression includes both tariff rates and a variable for whether or not the two countries share a common currency. Then, the regression would indicate how much a one-percentage- point change in tariffs reduces trade, and it would also indicate how much not sharing a common currency would reduce trade. From these two pieces of information, the tariff equivalent of not sharing a common currency can be calculated.

1 4 From these two measures it is possible to cal- culate the average free on board (f.o.b.) price (the price on the mode of transport before any trade costs) as well as the average cost, insur- ance, and freight (c.i.f.) price. The difference between these two numbers is one way of mea- suring transport costs.

1 5 See the 2001a article by Hummels. 1 6 Another reason would be if a country happens

to heavily import those goods that face high tariff rates. This would be unusual, however, because high tariff rates presumably discour- age imports.

"United Nations Conference on Trade and Development's Trade Analysis & Information System: TRAINS, and general insight from the work of Jon Haveman available at: www. macalester.edu/researcn/economics/PAGE/HAV EMAN/Trade.Resources/TradeConcordances.

<> html. 1 8 In 2005 the World Trade Organization's textile

quota system known as the Multi-Fiber Agreement (MFA) was phased out. However, subsequent dramatic changes in trade flows have caused countries to invoke other methods to control the amount of textiles traded.

1 9 All percentages reported are simple averages of the nontariff barrier coverage ratios over the appropriate categories of goods (that is, the share of total goods in a category that are sub- jected to nontariff barriers).

2 0 When border costs are small, the multiplicative formula yields numbers very similar to what would be obtained by adding up the costs. Hnwrner. when border costs are large, the

formula yields numbers quite different from those obtained by simple addition.

2 1 See Hummels' 2001b article. 2 2 See Hummels' 2001a article. 2 3 This is a sharp decrease from 32 percent in

1950. 2 4 Between 2000 and 2005, euro-area trade

increased by 10.3 percent, which was larger than the increase between 1993 and 1998 (8.3 percent). This is consistent with (but not proof of) the notion that the adoption of the euro reduced trade costs, thus increasing trade.

References Anderson, James E., and Eric van Wincoop. "Trade

Costs," Journal of Economic Literature, 42 (September 2004), pp. 692-751.

Caves, Richard E., Jeffrey A. Frankel, and Ronald W. Jones. World Trade and Payments: An Introduction, 10th edition. Addison Wesley: New York, 2006.

Ceglowski, Janet. "Has Globalization Created a Borderless World?" Federal Reserve Bank of Philadelphia Business Review (March/April 1998), pp. 17-27.

Harrigan, James. "OECD Imports and Trade Barriers in 1983," journal of Intemational Economics, 34:1-2 (1993), pp. 91-111.

Hummels, David. "Time as a Trade Barrier," manuscript, Purdue University (2001a).

Hummels, David. "Toward a Geography of Trade Costs," manuscript, Purdue University (2001b).

Krugman, Paul, and Maurice Obstfeld. International Economics: Theory and Policy, 6th edition. Addison Wesley: New York, 2002.

Leduc, Sylvain. "International Risk Sharing: Globalization Is Weaker Than You Think," Federal Reserve Bank of Philadelphia Business Review (Second Quarter 2005), pp. 18-25.

Messerlin, Patrick. Measuring the Cost of Protection in Europe. Institute of Inter- national Economics: Washington, D.C. (2001) .

Rauch, James E., and Vitor Trindade. "Ethnic Chinese Networks in International Trade," Review of Economics and Statistics, 84:1

(2002) , pp. 116-29.