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Transport Costs in International Trade Theory*

Published online by Cambridge University Press:  07 November 2014

Robert A. Mundell
Robert A. Mundell*
Affiliation:
University of Chicago
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Transport costs have been somewhat neglected in international trade theory, most of which is expounded on the assumption that transport costs are absent. In this paper I shall present a simple geometric method for describing transport costs in offer-curve diagrams, and apply this method to consider the effects of transport costs on the terms of trade, the transfer problem, the optimum tariff, and real factor returns.

To avoid introducing a third industry—the transport industry—it will be necessary to employ a drastic, but very useful assumption regarding the nature of transport costs. I shall assume that transport costs are met by the wastage of a proportion of the goods traded. This assumption will mean that: if each country provides the resources for transporting its own exports, then only a proportion of the goods exported will be received as imports by the other country, the remainder being used up as costs of transport; if each country provides the resources for transporting its imports, then a proportion of its exports will be used up for every unit of the other country's good imported; and if each country shares in the transport of each good, some of each country's resources will be used up in transporting each good. The meaning of this assumption will become clearer later in the paper.

Type
Articles
Information
Canadian Journal of Economics and Political Science/Revue canadienne de economiques et science politique , Volume 23 , Issue 3 , August 1957 , pp. 331 - 348
Copyright
Copyright © Canadian Political Science Association 1957

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Footnotes

*

I am grateful to Professor H. G. Johnson, Professor J. E. Meade, and Dr. S. A. Ozga for helpful comment on and criticism of an earlier draft of this article. I am especially indebted to Professor Johnson for his method of representing the transfer problem with transport costs, a method I have used in section III of this paper.

References

1 This assumption has been used by Professors Samuelson and Johnson in their analyses of the transfer problem (see section III).

2 I have assumed throughout that no transport costs are required to ship transport costs. Thus, in Figure 2, the proportion ax measures the amount of Y used up in transporting X after transport costs incurred in X have been deducted. To make the alternative assumption it is necessary only to change the proportions Kx and ax .

3 See Lerner, Abba P., “The Symmetry of Import and Export Taxes,” Economica, 08, 1936.Google Scholar

4 In his Survey of International Trade Theory (Princeton, N. J., 1955), 28, 29 Google Scholar, Professor Haberler discusses this problem but says that the correct procedure in empirical studies is to include the price of transport services in the computation of the terms of trade. It is not clear whether he means that export and import prices should be calculated c.i.f., or whether transport costs should be counted as an export or import. If the latter, should the indexes be calculated with c.i.f. or f.o.b. prices?

5 For recent discussions of the transfer problem, see Samuelson, Paul A., “The Transfer Problem and Transport Costs: I, The Terms of Trade When Impediments Are Absent; II, Analysis of Effects of Trade Impediments,” Economic Journal, LXII, 06, 1952, 278–304 CrossRefGoogle Scholar, and LXIV, June, 1954, 264–90 (hereafter cited as Part I and Part II); Johnson, H. G., “The Transfer Problem: A Note on Criteria for Changes in the Terms of Trade,” Economica, 05, 1955, 113–21Google Scholar, and “The Transfer Problem and Exchange Stability,” Journal of Political Economy, LXIV, no. 3, 06, 1956, 212–25Google Scholar; Meade, James E., A Geometry of International Trade (London, 1952), chap. vii.Google Scholar

6 For a thorough discussion of this problem, see Samuelson, Part I, 295–9.

7 Professor Samuelson writes (Part II, 282): “Our graphical analysis … fails to handle the real transport case, because then the final consumption points for the two countries do not coincide, instead differing by a vector representing the amount of goods actually used up in transport.” This section of my paper shows that the problem is nevertheless amenable to purely graphical analysis; the methods employed here were suggested by Professor Johnson.

8 These lines relate to behaviour between points; the “Engel's curves” are not necessarily straight lines.

9 See, for example, Meade, , A Geometry of International Trade, 76.Google Scholar

10 In “Protection and Real Wages,” Review of Economic Studies, IX, 1941, 58–73 Google Scholar, Stolper and Samuelson showed that, under the Heckscher-Ohlin assumptions, with constant terms of trade, tariffs increase the scarcity, and thus the real income, of the scarce factor. In “Tariffs, the Terms of Trade, and the Distribution of National Income,” Journal of Political Economy, 02, 1949 Google Scholar, Metzler qualified the argument taking into account changes in the terms of trade, making use of a criterion derived by Lerner (“The Symmetry of Import and Export Taxes”). Lemer's criterion showed that a tariff would increase the price of importables relative to exportables in the tariff-imposing country if the foreign elasticity of demand plus the domestic marginal propensity to import were greater than unity. In the case of transport costs, the criterion does not involve the marginal propensity to import since the transport costs are used up, rather than (as in the case of tariff proceeds) redistributed to consumers.