Commercial Policy Outcomes in the Presence of Integrated Transport Costs: The Importance of Trade Imbalances

Abstract

As artificial trade barriers continue to fall, the significance of alternative trade costs in the determination of trade rises. In this study, I investigate the heterogeneous implications of maritime trade policy on the patterns of international trade. I find theoretical and empirical evidence that the integration of bilateral transport costs leads to systematic variation in policy induced trade effects across different transport markets, trade imbalances and product groups. The theoretical predictions are based on a model of international trade and transportation that offers a static partial equilibrium framework from which the varying effectiveness of trade policy in the presence of joint production in the transport sector can be considered. Exploiting the negative externalities of an EU environmental policy on international transport costs, the empirical analysis provides evidence in support of the theoretically predicted heterogeneous treatment effects of maritime trade policy. Specifically, I find that US-EU containerized trade experiences significant reductions when facilitated in backhaul rather than fronthaul transport markets. Moreover, this variation in policy outcomes is shown to be increasing in the bilateral trade imbalance and the relative transport costs of differentiated product groups. The suggested heterogeneity concerning maritime trade policy outcomes has notable implications for the trade effects arising from current policies, such as the Trade Facilitation Agreement (TFA) by the World Trade Organization (WTO) or the International Convention for the Prevention of Pollution from Ships (MARPOL) by the International Maritime Organization (IMO), and underlines the significance of the international transport sector to the determination of international trade.