Friday, February 8, 2019

Shipping and economic development

 Shipping is a global service industry that, by general recognition, provides the lifeline of international trade. Suffice it to say that, due to the morphology of our planet, 90% of international trade takes place by sea. Technological developments in ship design and construction, and the ensuing economies of scale (EoS) of larger ships, have reduced trade- and transport costs, thus promoting trade (particularly that of developing countries) by making the transportation of goods over long distances affordable.[1] As a matter of fact, geographical distance plays a much lesser role today, as a determinant of trade between countries, and it is being replaced in trade models by the concept of economic distance, as this is proxied by ocean freight rates (cf. transport costs).

These developments have expanded the international markets for exported goods, thus allowing mass production and lower unit costs at home. This has improved the international competitiveness of exporting countries, and it has facilitated the industrialization of many of them around the world. One of the best examples of export-led industrialization is Japan: The Japanese are thrifty people. It was not therefore growth of domestic demand that enabled the country to develop, but low transport costs which allowed Japan to conquer Asian and world markets with high quality products. As a result, a huge global market for its products led to mass production, even lower costs and export prices, and greater dominance still in international markets.  

Often, international ocean transportation and Information and Communications Technologies (ICT) are referred to as the two basic ingredients of globalization [Joseph Stiglitz (2006) Making Globalization Work. W.W. Norton and Company, Inc. New York].

HE Haralambides

[1] In spite of distances, China buys more iron ore from Brazil, four times farther than Australia; it costs one dollar cent to transport one can of Heineken beer from Rotterdam to New York; and less than 10 dollars to bring an expensive TV set from Busan (Korea) to London. Actually, what matters most these days is not transport costs, but the time of the sea passage (as well as time in port) and the way these times impact the logistics and warehousing costs of traders.

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