Distance Isn't Dead

“Trade Costs” by James E. Anderson and Eric van Wincoop, in Journal of Economic Literature (Sept. 2004), 2014 Broadway, Ste. 305, Nashville, Tenn. 37203.

It’s easy to assume, in our age of instant communication, that goods travel around the world with nearly the speed and ease of e-mails. But they don’t. They need to be shipped, jump trade barriers, cross borders, and be distributed in a recipient country. According to Anderson and van Wincoop, economists at Boston College and the University of Virginia, respectively, the picture that emerges from recent research points to surprisingly high costs for international trade. In the industrialized countries, these costs amount to roughly the equivalent of a 170 percent tax. In developing countries, the costs may be more than twice that.

Imagine a doll that costs $1 to manufacture. The authors calculate that it costs an additional 21 percent to transport it to a customer country. That makes $1.21. Then tack onto that 44 percent for “border-related trade barriers”—partly tariffs, but mostly language, security, and currency exchange costs. That boosts the cost to $1.74. Finally, add 55 percent more for the wholesale and retail distribution costs involved in getting the doll into the hands of a child. That brings the final cost (excluding profits and nontrade costs, such as merchandising) to $2.70.

Anderson and van Wincoop are mostly concerned with the surprisingly difficult measurement problems involved in estimating the costs of world trade. They even calculate the “time value” of money lost while goods are in transit (one day by air or 20 days, on average, by sea). So, though American stores overflow these days with incredibly cheap leather jackets from China and CD players that cost less than dinner out, the price tags still reflect a hefty array of hidden costs. It may take a long time to figure out exactly how much “drag” the world economy suffers as a result, but it’s already clear that the enthusiastic talk of a “frictionless economy” and the “death of distance” is extremely premature.