Trade and Transportation Costs: The Implications of Higher Energy Prices

Abstract

As low cost oil reserves are depleted over the coming decades and replaced by higher-cost sources and other forms of energy that are less easily used for transportation, the cost of shipping goods internationally will increase, perhaps very substantially. This will have a pervasive impact on the pattern of trade. Export supply serving more distant markets will be deflected to closer regional markets. Multinational corporations will reorganize to service more distant markets through foreign affiliates or through licensing arrangements. Trade in intermediate goods and services will follow the shift in production base. Suitability of transport infrastructure to use of coal-fired electricity will further shape the geography of trade. The nature of traded goods (value-to-weight and carbon content) will affect their global market access. The question is how significant these effects will be- will there be a reversal of globalization or will the effects be felt more subtly? Consideration of the role of transportation costs in international trade and of the scope for improvements in trade logistics to offset higher fuel costs suggests that higher energy prices will not end globalization; but higher transportation costs will have important and pervasive impacts on the pattern of global trade and production.

Keywords: International trade, energy prices, transportation costs, globalization

JEL Classification: F15