Some Paradoxes of Transport Costs in International Trade

Abstract

The theoretical and empirical role of transportation in international trade has received renewed attention in recent years.' Among the major contributions in this field Ronald Falvey's [6] model represents an important advance over the wastage or evaporation model in which transport costs are incurred in the form of sacrifices of traded goods.2 Falvey explicitly incorporates a resource-using transport sector in the standard two-good, twofactor model. Since the transport sector competes in the factor markets with other industries producing traded goods, the introduction of transportation or changes in transport costs will necessarily affect the factor prices, the prices of traded goods and the welfare of trading countries. The significance of Falvey's analysis lies in its drawing attention to the fact that when the terms of trade are held constant the transport producing country's welfare is not only affected directly through the increase in the domestic relative price of the importable but also indirectly through the shift in resources to the transport sector. The objective of this paper is to extend the analysis of transport costs and delineate three possible paradoxes that may arise when the introduction or changes in transport costs affect the terms of trade. In section II, the model we use for our analysis which heavily borrows from Falvey's model is outlined. Section III demonstrates the possibility that the improvement in the terms of trade for the transport producing country may more than offset the adverse welfare implications of a rise in the real (resource) cost of international transportation. It is also shown that such a paradox occurs if and only if the increase in transport costs reduces the domestic relative price of the importable commodity in the transport producing country. In section IV we derive the conditions under which the latter counterintuitive result, a Metzler-like paradox, may arise. We also show that while

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