Transportation Costs and Trade Term Paper

Introduction

The ongoing trade liberalization in the global economy, together with highly diminishing communication as well as transportation costs, there has resulted in a high increase of output in productivity over the past decade (David, 2000). All nations depend on the global economy for their survival and they do this by selling what they produce to obtain what they don’t or what they scarcely produce. The policy of trade involves both costs and benefits, and just like in the local market, costs and benefits are the impacts of the global economy. According to Taylor (1997), transportation is one of the major factors that affect international trade where the costs involved lower the availability of resources and the benefits increase their availability. Where transport economic impacts in trade are benefits, costs are normally reduced and where they are costs, the benefits go down and this therefore implies that costs or benefits are measured in terms of the other.

The aim of this study is to look at the transportation costs that have been used in the economic analysis and the way in which they impact the global economy through trade. The major costs include vehicle costs, travel time costs and environmental costs as well as the possible benefits that may come with it (David, 2000). The study entails looking at the possible impacts of transport costs and benefits on the society through trade and evaluating their estimates in terms of policy issues affecting trade.

Classification of transport costs

These are based on their impacts on trade and the society in general and they may be classified according to the following attributes (Bein, 1997):

1. Internal and external attributes: These arise as a result of the distribution of products during trade. Internal impacts are the costs and benefits that directly accrue to the final consumer of the goods and services. External impacts are the benefits and costs that accrue to other parties other than the consumer and they do not directly affect the consumer’s decision during trade. The internal and external attributes add up to social costs and benefits.Variable and fixed impacts: According to Bein (1997), variable costs are directly proportional to consumption while the fixed costs are not affected by what the consumer spends. This means that unlike the fixed costs that remain constant despite the consumer spending, variable costs increase with every increase in consumption. Fuel and travel time costs are variable costs while vehicle costs like depreciation and insurance are fixed.
2. Market and non-market impacts: Market impacts (costs) are those costs that can be quantified and are concerned with trading goods and services in a competitive market. They include the cost of vehicles and fuel. Non-market costs, on the other hand, involve those goods or services that are not traded in the normal competitive market. Environmental costs are an example of non-market costs and they involve goods like clean air or quiet environment. They are non-quantifiable and people involved in trade have to look for the most appropriate way of creating value for them because they are part of the impact attributes on transport costs.
3. Perceived (or estimated) and actual impacts: Transport costs in trade may be assumed or maybe the actual costs incurred. Sometimes the perceived costs do not equal the actual costs incurred because some unforeseen costs may be left out while estimating the costs to be incurred in a certain future time.
4. Price impact: Where all transport costs are added up together, a price for the good is set (Taylor, 1997). This is what consumers will pay for the commodity that they intend to have. Prices should reflect the cost per unit of the commodity.

Transport benefits

Besides transportation costs, trade also entails benefits and there are various ways in which these benefits, just like costs, can be evaluated. According to M.Asghlar (1997), to determine the benefits involved during transportation, it is important to use marginal benefits and not the total benefits. This will make it more effective when coming up with a proper plan for a particular policy issue. McCullough (2000) brings out the following classification of marginal benefits:

1. Mobility and accessibility benefits: Mobility benefits are those benefits that come as a result of a rise in the travel made. They increase the resources earned in trade due to increase in mileage or the number of trips made. Accessibility benefits are part of mobility benefits but they also include the benefits gained where access points are improved. Examples of these include the more effective use of land, which means less physical travel.
2. Efficiency benefits: Where traveling becomes more efficient and consumers are able to save on costs, they result in efficiency benefits. Resources are utilized better when there are efficient means of transport, like when telecommuting services are used instead of having to make actual trips.

The above classification helps policymakers to be able to effectively evaluate the benefits, where the mobility benefits are evaluated in terms of increased vehicle travel while the efficiency benefits are measured in respect to reduced travel (McCullough, 2000). It is therefore important that before any evaluation of benefits is carried out, the nature of the benefit is taken into consideration so that some of the factors that affect these benefits are not overlooked.

Estimating transportation costs

The major costs to take into consideration in this aspect are the vehicle (fuel) costs, travel time costs and environmental costs. They involve the fixed and the variable costs and these are distinguished so that the evaluation becomes more accurate for proper planning policy.

Vehicle costs

According to Bein (1997), vehicle costs are those costs that are directly incurred by the consumer in the use of vehicles during transportation. The fixed costs are the costs that are concerned with ownership while the variable costs are those that are involved with the normal operating expenses. The vehicle operating costs, which are the variable costs, include the minor day-to-day expenses like fuel, oil, wear and tear and other short-term expenses like parking fees. From the various analyses carried out, fuel expenses take up the highest proportion in vehicle operating costs and with the forecasted price increase in fuel globally, there is possibility that the long term analysis of fuel costs is likely to go up and this will affect the future prices in the international trade.

Fuel prices are used to determine the growth trend in trade through the price of commodities and this means that the analysis of fuel costs in the long run will help identify the appropriate growth trend and show whatever uncertainties in the prices that may arise (Bein, 1997). Estimating the vehicle operating expenses sometimes does not show the actual variable costs incurred and it is therefore important that before classifying costs into fixed or variable costs, proper analysis is made. According to Bein (1997), some expenditures that are taken to be fixed are in the actual sense variable and such expenses include depreciation, which increases when the number of trips taken increases hence reducing the vehicle’s net book value. Other costs include the cost of maintenance and in turn insurance costs. This may be as a result of additional number of trips that raise the rate of maintenance, replacement, vehicle damages, among others. This implies that, even if insurance expenses are considered fixed expenses, they are partly related to additional mileage.

Hence, reducing the mileage of vehicles results in increased savings by the consumers and hence raises their purchasing power in the long run (Taylor, 1997). The reduction in the number of trips made in trade therefore does not only imply reduced cost in fuel usage but also in some of the costs considered fixed.

Travel time costs

Another major cost incurred in transportation during trade is the travel time and it is important that consumers ensure they save as much time as they can in order to benefit from trade (Taylor, 1997). Some aspects of traveling like prestige, comfort and safe conditions are directly connected to time costs. For instance, the costs related to commercial vehicles include drivers’ expenses, costs connected with the freight of goods especially the perishable commodities and the costs incurred where there are delays in delivering commodities. According to Bein (1997), the cost that one takes while traveling is determined also by the time is taken, where it is estimated at half or a quarter of the existing wage rate. It is also estimated that where there are unexpected or unforeseen delays, the cost of travel time goes up and it is also high where traveling is under uncomfortable circumstances like in congested vehicles and it is low where traveling is under comfortable conditions.

Time costs during traveling increase as income increases and people who earn higher incomes therefore incur greater travel time costs than those who do not. People who have full-time and well-paying jobs therefore spend more time traveling while those who are not well-paid or are not in full-time employment incur fewer costs and tend to pay less for their travel time (Taylor, 1997). Sometimes individual preferences also determine the extent of the travel time costs incurred. On the other hand, there are circumstances where travel time has a low cost because consumers prefer such conditions of travel. For instance, traveling by train or cycling may be considered enjoyable in some situations and consumers may place high value on them, while in other circumstances, it may not and may be taken as very undesirable and cost-ineffective.

Environmental costs

Different scholars place monetary value on environmental costs of transportation, where such costs include pollution, disposal of waste and those environmental impacts that are connected with transportation. According to David (2000), there is needed to monetize environmental costs in determining policy issues affecting trade with respect to transportation. Studies show that an estimate of approximately $ 100 billion of vehicle environmental costs is incurred annually in the United States alone. Some of factors that cause these environmental costs include (McCullough, 2000):

1. Air pollution: This is one of the major environmental costs incurred in motor vehicle transportation. There have been efforts to control the extent of emissions by vehicles over the past few decades as policy efforts are enhanced to control this. On the other hand, improvement of the quality of engines and fuels has also helped reduce the rates of emissions into the environment especially under the well-designed conditions and this has in turn led to the reduction in environmental costs resulting from transportation. However, there are still situations where engines and fuels emit gases into the environment and motor vehicles traveling under non-design conditions have resulted in high environmental costs (David, 2000). Motor vehicles normally emit harmful gases into the air like carbon dioxide, nitrogen oxides, carbon monoxide, among others and these result in adverse impacts on both people’s health and the climate. According to David (2000), it is estimated that the more the vehicle uses in terms of gasoline or diesel, the greater the extent of emissions. Scientific study has shown that climate change caused by pollution poses a great risk and this may result in long-term effects on the environment which is likely to affect the productivity levels in the global economy in the long run.
2. Noise pollution: This is also caused by motor vehicles and the higher the traffic speed, the greater the noise. Traffic noise is also increased by traffic accelerations, increased use of heavy vehicles and the rise in their development. Costs increase in the urban areas especially because traffic is near places of residence. It has been noted that increased noise pollution, just like air pollution results in negative environmental impacts which in turn lead to high environmental costs that affect the extent of trade and the establishment of trade policies (McCullough, 2000).
3. Water pollution: There has been a need to protect water from pollution especially with the increased use of motor vehicles in transport. David (2000) argues that, water pollution increases the cost of development towards the society, which then results in greater costs of production.
4. Waste disposal: Another impact of the increased use of motor vehicles in transport is the number of harmful waste products that are emitted which can impose great impacts on the environment. For instance, the disposal of used tires, batteries or the cars themselves or disposal of other products like oil and the products that are produced as scrap or wastes from the production and maintenance of the motor vehicles. These waste products increase the environmental costs and policy measures have to be imposed to ensure that waste disposal into the environment is reduced. Other impacts of this kind of pollution are the risk to human health, residual impact and a rise in financial expenses as a result of poor disposal (Taylor, 1997).

It is important that policy measures are put into place to ensure there is proper waste disposal in the society. There have been new laws and policies that have been put into place to help lower the amount of waste disposal and in turn lower the environmental costs. According to Bein (1997), recycling products like oil, batteries and scrap is one of the efforts put into place to help reduce these costs.

Summary

In summary, it has been noted that transportation has a significant impact on the global economy, which means that trade is determined greatly by transportation. There are both benefits and costs of transportation, which are the transportation impacts on the economy. The costs normally depend on the location in which the vehicles are being used, the condition of the means of transport, the time taken during transportation, the type of the vehicle, among other factors. Transport costs may be grouped into internal and external costs, where the internal costs are both the fixed and the variable costs and they directly affect the consumer. The external costs do not directly affect the consumer and may not be used effectively to determine their impact on the economy.

It is also important to note that a reduction in costs increases the benefits and increasing costs means that benefits reduce. It is therefore necessary that proper policy measures are put into effect to help lower the internal and external costs and therefore increase the economic benefits that are as a result of transportation. Policymakers need to identify the extent of impact in which both the internal and external costs have had on the economy and from this, they will be in a position to come up with the most appropriate strategies.

Policy proposals

In order to be able to effectively evaluate the transportation economic impacts, it is important to come up with models that show the relationship between the number of travels and the costs involved. It is important that various transport cost reduction strategies are developed so as to increase the benefits that come with transportation and trade. Policymakers need to develop the most appropriate policy proposals with the aim of taking in all the costs involved and hence identifying the ways in which they may be overcome or reduced to make trade a valuable activity for the consumers. Evaluating benefits and costs help in identifying the most appropriate way to come up with a strategy that will balance them most effectively. Cost analysis should be used to identify those costs that can be avoided and those that can be incurred the least to increase the benefits.

Some of the factors that need to be taken into consideration include the number of vehicle mileage that is to be covered during trade. According to the classifications of costs, some are said to be variable while others are fixed (Bein, 1997). The variable costs depend on the number of mileage covered and they can easily be varied to help increase the benefits as an impact of transport. On the other hand, where costs are fixed, changing the number of mileage may not change them and they therefore have to be incurred. It has however been noted that fixed costs may, to some extent, be variable. For instance, depreciation and insurance of motor vehicles are considered fixed costs but they sometimes also vary with the number of times a vehicle is used for transportation. Taking this factor into consideration, evaluation of fixed costs may help reduce the costs depending on the mileage.

On the other hand, it is necessary that benefits are also taken into consideration while coming up with effective proposal measures. As Taylor (1997) puts it, a reduction in costs results in increased benefits since the two co-relate with one another. Therefore, changing the mileage in vehicles while keeping other factors, constant will cause a proportionate change in most benefits to be gained, both the efficiency benefits as well as the mobility and access benefits.

With this analysis, cost reduction strategies will be effective and this will help increase the benefits and in turn improve trade through positive transportation economic impacts.

Bibliography

1. Bein, P (1997). Monetization of Environmental Impacts of Roads, Highway Planning and Policy Branch: Ministry of Transportation and Highways.
2. David, A and McCullough, G (2000). The Full Cost of Transportation in the Twin Cities Region: Center for Transportation Studies, University of Minnesota.
3. M. Asghar, B and Taylor, P (1997). PAVESIM: Simulation of Pavement Damage Due to Heavy Vehicles: University of Iowa Public Policy Center, USA.
4. Silvia, B, et al (2000). External Costs of Transport: Accident, Environmental and Congestion Costs in Western Europe: INFRAS.