Time as a Trade Barrier
Each day in transit is worth between 0.6 and 2.2 percent of the value of the good.
In Time as a Trade Barrier (NBER Working Paper No. 17758), co-authors David Hummels and Georg Schaur study the choice that firms make between delivering their products by air or sea. Delivery times are much shorter for air freight than for ocean freight, but shipping by air is also much more expensive than shipping by sea. Still, a large and growing share of international trade is carried on airplanes. That leads these researchers to ask whether lengthy shipping times impose costs that impede trade and, if so, whether firms engaged in trade exhibit significant willingness-to-pay to avoid these costs.
The authors find that the choice between air and ocean cargo depends on the price elasticity of demand for the product and on the value that consumers attach to fast delivery. That choice is revealed in the relative market shares of firms who air and ocean ship. Because air shipping is expensive, consumers will shift purchases away from the firm that air ships in proportion to the price elasticity of demand. And, conditional on prices, consumers will shift purchases toward the firm that air ships in proportion to the valuation of their time. By combining estimates of these two effects, the authors extract the price-equivalent of the consumers' valuation of each day of delay.
Using data on U.S. imports, which provide rich variation in the premium paid for air shipping and in time lags for ocean transit, they find two effects. First, long transit delays significantly lower the probability that a country will successfully export a good. Second, conditional on trade taking place, they estimate that each day in transit is worth between 0.6 and 2.2 percent of the value of the good. However, these estimates vary across goods, with especially high time sensitivity exhibited in the end-use categories motor vehicles and parts, capital goods, and parts--and-components. Indeed, parts-and-components have a time sensitivity that is 60 percent higher than that of other goods. These results suggest a link between sharp declines in the price of air shipping and rapid growth in trade.
--Claire BrunelThe Digest is not copyrighted and may be reproduced freely with appropriate attribution of source.