Global Trade Creation, Trade Diversion, and Economic Impacts from Changing Global Transport Costs

Abstract

Despite the complex political and economic trade environment, the generalized costs of transportation still play an important role in determining trade patterns. This paper analyzes how global trade patterns would simultaneously change as a result of new global transportation costs and for which countries the new patterns of global trade would be beneficial or detrimental. A random utility-based multiregion input–output model helps quantify the size of the impacts, identify the countries and sectors that would gain or lose the most, and explain the change in trade patterns that would create these impacts. Results suggest that Canada is most susceptible to negative economic impacts caused by decreases in global transportation costs, mainly because of its important trade relationship with the United States. Canada’s economy benefits from its proximity to the United States, but as transportation costs decrease, this proximity becomes less relevant as the United States increasingly trades with more distant countries. The United States suffers the same susceptibility to negative economic impacts with decreases in global transportation costs, but to a larger absolute (smaller relative) extent. However, global transportation cost reductions are especially beneficial to Japan, China, and South Korea, which absorb much of the trade diverted away from the United States and Canada.