International Trade Costs and Regulations
Chad Schroeder
Alex Naragon
Amanda Eddie
12/7/12
Dr. Ghosh
International Economics
Naragon, Eddie, Schroeder 2
Executive Summary:
No matter where on Earth your business takes you, we’ll make sure your freight gets
there, too.
It’s easy to commend an actor for a dazzling display on stage or screen, but we often
forget to recognize the work done behind the scenes. Similarly, we appreciate a beautiful,
foreign rug or a foreign-made beer, but how did it get here? Our group is going to focus on
the shipping industry for our International Economics Policy Brief. We will investigate
structure, regulations, and discrimination within the industry. Our research we lead us to
answer one specific question: What can be done to improve current transportation
practices? We will prove to you that promoting competition, categorizing goods, and
reducing tariffs can aid in the efforts to decrease transportation costs, and in return, raise
world income. And no matter where on Earth this paper takes you, we will make sure your
understanding gets there, too.
To develop our work, we plan to provide background of the shipping industry,
aiming to create a framework and strong base that will allow our research to develop
gently. “International trade in ocean shipping services: The United States and the world”
will gives us insight into that ‘behind the scenes’ information we are looking for. We will
receive an overview of the structure, barriers, ships, tonnages, employment, cargo carried,
subsidies, protection and more. We will use this source to help uncover the unknown.
Furthermore, we will delve into shipping regulation both in the United States and abroad.
Once we understand the processes and parameters in place, we can knowledgeably make
recommendations where needed, whether it be more ‘rules’ or less. We will analyze the
Naragon, Eddie, Schroeder 3
economic benefits and consequences of such moves to develop a strategy that benefits the
world for all it is.
Could this issue that’s so unknown to us be more relevant? Audiences at a
magician’s show are amazed by the trick, but they are confused too. After any card trick is
performed, everybody wants to know how it was done. We are sometimes distracted in the
same way with trade, but we have the resources and maturity now to learn the methods.
Furthermore, it’s extremely relevant to our class in particular. We will provide welfare
analysis of current practices, as well as for our suggested modifications.
The dominant form of moving goods in international trade is ocean shipping. “It has
been estimated that 95 percent of all goods shipped by all modes of transportation in
international trade move by water” (White 1). The industry has massive impacts on the
success of trade, which we have proved time and time again is mutually beneficial.
Therefore, countries have formed organizational patterns to create structure. The concept
of flagging allows a categorization of trade in ocean shipping services that has analogies
with trade in goods. Basically countries create incentives to encourage shipments coming
to and from its shores are carried in vessels flying its own flag. We did not understand this
concept before beginning research but it had developed to become a large factor in our
analysis. In other terms, ‘flagging’ is form of a tariff or quota protection for the domestic
production of goods. There are two extremes at work here. International conventions
require that ships have a home country of registry, but leaves guidelines up to countries. At
one extreme, countries require that ships are owned, crewed, and constructed exclusively
by its citizens, or maybe require a percentage. On the other hand, ‘flag-of-convenience’
Naragon, Eddie, Schroeder 4
countries place minimal restrictions on the nationalities of owners, crew, and constructors
(White 5).
The next step in our research is to investigate national as well as world
organizations related to our topic. We need to understand what impact they have, and how
effective they can be in managing the sophisticated network.
The American Maritime Congress, founded in 1977, is a non-profit educational and
research group representing U.S.-flag vessel operating companies in the international and
domestic trades that have collective bargaining agreements with the Marine Engineers’
Beneficial Association (AFL-CIO), which represents the licensed engineers and deck officers
of the U.S. Merchant Marine (About).
AMC’s Mission:
1. To study, examine, and research issues and problems affecting the American
maritime industry.
2. To foster suitable standards for the welfare of the American maritime industry;
3. To improve communication between representatives of labor and management in
the American maritime industry.
4. To expand and improve working relationships between workers and managers in
the American maritime industry and other related modes of transportation, and;
5. To enhance the economic development of the American maritime industry and to
study and explore ways of eliminating potential problems that reduce the
competitiveness of the American maritime industry and inhibit its economic
development.
Naragon, Eddie, Schroeder 5
AMC provided the most updated information on the current U.S.-flagged oceangoing fleet:
U.S. Flag Oceangoing Privately-Owned Fleet - April 2011
Vessel Type
Ships
DWT
Jones Act Total
98
4,945,555
Dry Bulk
4
137,015
Containership
28
807,470
General Cargo
0
0
Roll-on/Roll-off
14
283,314
Tanker
52
3,717,756
Foreign Trade Total
93
3,978,392
Dry Bulk
6
322,376
Containership
53
2,833,877
General Cargo
4
84,368
Roll-on/Roll-off
26
562,699
Naragon, Eddie, Schroeder 6
Tanker
4
175,072
Total U.S. Flag
191
8,923,947
Dry Bulk
10
459,391
Containership
81
3,641,347
General Cargo
4
84,368
Roll-on/Roll-off
40
846,013
Tanker
56
3,892,828
The World Shipping Council was also consulted as a source in our attempts to find
an outline for the industry. The World Shipping Council's purpose is to provide a
coordinated voice for the liner shipping industry in its work with policymakers and other
industry groups with an interest in international transportation. The WSC and its member
companies partner with governments and other stakeholders to collaborate on actionable
solutions for some of the world's most challenging transportation problems. In particular,
the WSC plays an active role in the development of programs that improve maritime
security without impeding the free flow of commerce (Partners).
This source helped us uncover specific issues facing the industry:
Naragon, Eddie, Schroeder 7

Environment

Security

Safety

Infrastructure

Liability
The WSC contributes by managing vessel discharges and developing air emissions
regulations, collaborating with governments to increase security without impeding
timeliness, enhancing ports to value public health and infrastructure, and creating
insurance and policy plans to ensure the delivery of correct goods.
Regulation in the shipping industry is a complex network. First, it is important to
recognize that there are two main sectors of the bulk shipping industry and they operate
very differently; liner and bulk cargo services. Liner services typically operate for multiple
firms at a time on a schedule between listed ports. Bulk services typically operate for a
single firm at a time on non-scheduled routes carrying large amounts of a uniform liquid or
dry good.1 Shipping, by nature, is international so shipping firms are mostly bound by a
consensus between countries. Competition in the shipping industry is largely affected by
the number of regulations that exist. The industry, though, does not see any remarkable
restriction in ability to deliver goods even with the large number of regulations set in
place2. There are regulations related to rights and obligations of the country, regulations to
protect the environment, and regulations related to commercial operations and practices.
1
Parameswaran, Benjamin. The Liberalization of Maritime Transport Services: With Special Reference to the
WTO/GATS Framework.
2
Regulatory Issues in International Maritime Transport -OECD
Naragon, Eddie, Schroeder 8
Most regulations were born out of the United Nations Convention on the Law of the Sea of
1982 (UNCLOS). As of September 24, 2012, 164 countries have signed the treaty3.
The rights and obligations of the states are clearly going to be different for each
entity to reflect their views. UNCLOS says that each state has a right to decide the
conditions for a ship to be affixed with their flag. An issue with this right is determining the
undefined genuine link between a ship and its flag. Flag state, from where the ship sails,
inspections are in place to control annual surveys and pre-registration inspection of ships.
There is a danger to workers when these inspections do not take place. For some states,
ship registration is a primary source of income so interests of the shipping firms will often
override safety. Port states, where the ship docks, are not officially bound by a specific
body of regulations regarding ship inspections, although their control is endorsed by the
International Maritime Organization, an entity of the United Nations. Even so, port states
will still inspect ships to ensure their own standards are met. International labor also falls
under regulations dealing with rights and obligations of states. If there is no set regulation
on ship crew size or wage rate then ship owners can make huge savings. Although it seems
to be a reasonable idea to have specific crew requirements, labor regulations are typically
short-lived making this the most unregulated portion.
Regulations on the environment and safety are to protect the maritime environment
and the ship workers. The IMO defines the international and national regulations on
environment protection and safety. Regulations on the protection of the environment are
put into place because the marine environment is largely a public good by nature. Many
3
A Historical Perspective. United Nations Convention on the Law of the Sea.
Naragon, Eddie, Schroeder 9
national regulations have become de facto international regulations. One such case is the
United States requiring double hulled oil tankers. Just as a ship owner can cut costs with
labor reduction, they can also cut costs in safety. The cost of producing and maintaining a
safe vessel is very high. The cost of not maintaining s safe vessel can be even higher. These
costs can be incurred through loss of cargo or even loss of life. If an oil tanker springs a
leak, not only is it losing its cargo, but there is a huge cost to the environment as well as
huge clean-up costs. If the carrier is liable for its cargo and there are environmental
regulations in place, there will be astronomical costs incurred that could have been avoided
by having a more secure ship to start with.
Regulations on commercial operations and practices are different for liner and bulk
services. Bulk shipping operates reasonably open and rates generally respond to
developments in the market. Shipping pools, when ship owners work together to improve
service to customers4, are created but are not covered by regulations on competition and
do not survive for long periods. Liner shipping is highly liberated but there are still many
regulations distorting entry into the market. General practices in regulation such as ship
registration, ship reservation, and cabotage are not entirely clear but still supported by
governments. Ship registration is a matter of legal consideration, national security, and
national interest. There is a minimum amount of stake in a ship that must be held by the
flag country and a maximum that can be held by foreign countries. Ship reservation
guidelines stem from the belief that certain imports and exports should be fulfilled by
certain national carriers. While countries may have preferences, only the United States and
Turkey have preferential laws in place. Cabotage is the reservation of a country’s domestic
4
"The Advantages of Commercial Shipping Pools." OSG Publications & Press.
Naragon, Eddie, Schroeder 10
shipping trades to ships flying the national flag of that state5. Ships bound by cabotage are
often required to be registered under the country’s national flag, built at domestic
shipyards, majority owned by domestic nationals, and manned by country’s own citizens.
Ship owners operating under cabotage do not have to compete with foreign vessels. There
is a cargo liability requirement set to determine legal responsibility in the event of cargo
loss or damage.
International trade costs make up a significant portion of the delivered price of an
item. Anderson and Wincoop (2004) estimate these costs to be equivalent to a 170 percent
ad valorem tax on products for shipping to rich countries while poor countries can be
burdened by even higher costs. This estimate can be broken down into local distribution,
which we will not be looking at, and international costs. The international portion of this is
equal to a 74 percent ad valorem tax, still a significant amount that must be swallowed by
producers and consumers (Anderson, 2004). The international trade costs can be further
broken down into government policy, port efficiency and shipping costs, among other
factors.
Government policies such as tariffs and quotas both cause inefficiency and increased
costs although their impact has been lessened over time, especially in rich countries. Cost
increases in rich countries have decreased over time with the worldwide decline in trade
barriers (Carbaugh, 2011). Decreased tariffs and quotas have brought the impact these
policies have on rich countries down to around an average of 5 percent (Anderson, 2004).
Poor countries generally have higher tariffs and quotas to protect their infant markets and
5
Regulatory Issues in International Maritime Transport -OECD
Naragon, Eddie, Schroeder 11
as a way to raise revenue if their economy is not so well-established. In these cases, the
average impact of tariffs and quotas rise into the 10 to 20 percent range.
When a shipment arrives at a port, it faces a number of obstacles it must pass before
it can get rid of its cargo and either takes on more or returns to sea, these obstacles deal
with port efficiency. Port efficiency can be evaluated through various factors including the
level of infrastructure, law enforcement, customs, and port regulations. A strong port
infrastructure is important to keeping a port operating at an efficient level. Infrastructure
includes pilotage, towing and tug assistance, and the cargo handling capabilities of a port.
Clark, Dollar and Micco (2004) find that “improving port efficiency from the 25th percentile
to the 75th percentile reduces shipping costs by 12 percent”, this reduction of inefficiency
can increase trade by 25 percent. Law enforcement present in a port can provide
improvements by keeping out organized crime that causes inefficiencies by stealing goods
and increasing insurance costs where they operate. Customs can indirectly increase costs
inside a port by holding up cargo and being the determining factor of when cargo will get to
be processed and unloaded, the longer cargo waits, the higher the loss in the time value of
the product. Many inefficient ports have inadequate port regulations, these that cause
confusion in procedures and responsibilities leading to long delays and an increased risk of
damage and pilferage of goods (Hummels, 2007).
Shipping costs also play a major role but can be affected by distance and market
power a company has over a trade route. Distance plays a major factor in determining the
cost of international transportation. Increasing distance by 100% can increase costs by
20% (Clark, 2004). However, since distance is fixed, it is not a focus of this paper on a
Naragon, Eddie, Schroeder 12
possible reform to current international trade. If a firm has some market power over its
trade route, such as on many smaller routes that are serviced by 1 ship and many more
routes serviced by just one firm, it has the ability to price discriminate on the products it
ships (Clark, 2004). This price discrimination can be based on the price of a product, the
tariffs placed on that product, the demand elasticity of a product, and the overall
competitiveness of a trade route and how much power a firm has over it.
Product prices can play a major role in determining the optimal markup of shipping
rates that a firm sets. Higher priced goods are easier to price discriminate against than
lower priced items. This is because charging higher shipping rates on more valuable goods
will not have as large of an impact on the final delivered price of the good as the same
markup on a cheaper good. For example, one item costs 190 dollars, a second item costs 10
dollars, and the current shipping rate is 10 dollars per item. If the shipping company
wanted to increase the rate by 5 dollars per item, it would cause the final cost of the first
item to increase by 2.5 percent while the second item would experience an increase of 25
percent. Ceteris paribus, this firm would have an easier time passing this cost on to the first
item without losing such a large quantity in shipments as compared to the second item.
Tariffs affect the optimal markup of shipping rates in the same way product prices
do. Since a tariff effectively increase the price of an item being imported, larger tariffs allow
companies to charge higher rates without causing the final delivered price to increase as
much. Further reductions in tariffs around the world would help to reduce these sorts of
markups and promote trade in general.
Naragon, Eddie, Schroeder 13
When determining the optimal shipping rate markup, shipping firms must take into
account the products demand elasticity. If a product has a high elasticity of demand an
increase in shipping costs, and therefore price, will cause a large decrease in the quantity
demanded and, in turn, the quantity shipped. Firms can more easily raise shipping rates on
goods with inelastic demand as the increase in price will have a small effect on the quantity
demanded so they will not lose out on as much shipping business (Hummels, 2007).
The size and competitiveness of the trade route also determines how much a firm
can charge when shipping goods internationally. Large countries that import and export
large quantities of goods have highly competitive trade routes and this competition can
help keep prices low. But in many instances, countries with smaller gross domestic
products are serviced by only 1 ship and many more by only 1 firm (Hummels, 2007).
Firms in this situation can increase prices as no competitors are available to steal business
away by having lower costs. Firms can only increase prices so much though, as another
firm may notice the above average profits and step in to compete.
Naragon, Eddie, Schroeder 14
These graphs from Carbaugh (2011) show the efficiency loss from transportation
costs on markets. The first graph depicts a market with no transportation costs, where
prices between the United States and Canada equalize while the United States exports 4
cars and Canada imports 4. The second shows a market with transportation costs, in this
market the United States is still exporting car, but it is only exporting 2 instead of 4, while
Canada’s imports have also fallen to 2 cars. In the presence of transportation costs, the
exporting nation will have lower prices than the importing nation. The exporting nation
will produce less, consumer more and export less than it otherwise would without trade
costs. The importing country will do the opposite; they will produce more, consume less,
and import less (Carbaugh, 2011).
This paper has looked at the importance of the shipping to the world, the
importance of regulation on the shipping industry, and how, in various ways, the shipping
industry can affect the prices of products around the world. With the continuous increase
Naragon, Eddie, Schroeder 15
of international trade and shipping, regulation needs to keep up and the world should look
into making this huge part of our economy more efficient. Regulation that would promote
competition, categorize goods by their demand elasticity, the encouragement of decreasing
tariffs, and the modernization of all ports can help reduce inefficiency in the shipping
industry and allow the world to benefit as a whole.
Naragon, Eddie, Schroeder 16
References
“AboutUs”. American Maritime Congress. http://www.americanmaritime.org/.
A Historical Perspective. United Nations Convention on the Law of the Sea. United Nations,
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<http://www.un.org/Depts/los/convention_agreements/convention_historical_per
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Anderson, James, and Eric Wincoop. "Trade Costs." NBER Working Paper Series. (2004): n.
page. Web. 31 Oct. 2012.
Carbaugh, Robert. International Economics. 13th ed. Mason, Ohio: South-Western Cengage
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Clark, Ximena, David Dollar, and Alejandro Micco. "Port Effeciency, Maritime Transport
Costs and Bilateral Trade." NBER Working Paper Series. (2004): n. page. Web. 31
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Hummels, David, Volodymyr Lugovskyy, and Alexandre Skiba. "The Trade Reducing Effects
of Market Power in International Shipping." NBER Working Paper Series. (2007): n.
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<http://www.oecd.org/sti/transport/maritimetransport/2065436.pdf>.
"The Advantages of Commercial Shipping Pools." OSG Publications & Press. OSG, Winter
2009. Web. 02 Dec. 2012.
Naragon, Eddie, Schroeder 17
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