International transport costs: new findings from modeling additive costs

Abstract

Abstract International transport costs do have an additive part. How large is it? Does it matter? This article provides new answers to these questions. Using information contained in the US imports flows from 1974 to 2019, we develop an empirical model that disentangles the ad-valorem and the additive components of international transport costs. The per-unit component of transport costs represents a sizeable share of total transport costs, between 30% and 45% depending on the year and the transport mode considered. We then investigate the important consequences of additive costs, under two different perspectives. First, modeling varying additive costs modifies the decomposition of transport costs time trend between the reduction in ‘pure’ transport costs and trade composition effects, the latter playing a minor role. Second, we revisit the welfare gains of the transport cost reduction in presence of additive costs. In this regard, we shed light on the welfare variations induced by the international trade acceleration and the ‘hyper-globalization’, as well as the key role of additive transport costs in determining those welfare variations. Neglecting the additive component substantially underestimates the welfare gains of the transport cost decrease.