Recipient Organization
PURDUE UNIVERSITY
(N/A)
WEST LAFAYETTE,IN 47907
Performing Department
Agricultural Economics
Non Technical Summary
The maritime shipping sector transports approximately 35% of U.S. export value and 46% of U.S. import value. U.S. trade in agricultural products is nearly twice as dependent on maritime shipping as is overall goods trade. This project seeks to provide new and novel empirical evidence on several questions about the economics of maritime shipping. The first empirical paper applies a recently developed estimation strategy to decompose freight charges into marginal costs and mark-ups. The estimates can be used to link the elimination of mark-ups to increased international trade flows and higher U.S. welfare. A second project applies the same estimating strategy to newly identified data on shipments between the U.S. and Puerto Rico. Cost and mark-up estimates on these shipments are useful because they shed new light on the economic consequences of a longstanding U.S. policy that prohibits foreign competition on domestic shipping routes. A third project develops new theory and brings novel data to bear in order to study the estimate the economic benefits linked to hub-and-spoke arrangements in international maritime shipping. We develop a method for separately valuing hubbing and transportation services in maritime shipping, and calculate the contribution of hubbing services to economic welfare in the destination market. Among other contributions, the joint analysis of hubbing and transportations services offers new insights into the economics of international supply chains.
Animal Health Component
100%
Research Effort Categories
Basic
(N/A)
Applied
100%
Developmental
(N/A)
Goals / Objectives
This project seeks to understand the market structure of the maritime shipping sector, and the sector's effects on international trade flows. Maritime shipping is a critical segment in global supply chains. Trade in agricultural commodities is especially dependent on the maritime shipping industry, because agricultural commodities are heavily traded, and because they typically have high weight-to-value ratios that make other modes of transport uneconomical. Important agricultural inputs like fuels and fertilizers also move via maritime shipping. All of these factors make an investigation of the sector's pricing behavior and its contributions to international trade and economic welfare relevant to the discipline of agricultural economics.It is widely understood that non-competitive pricing behavior raises the cost of freight for purchasers of maritime shipping services. The quantitative effects of this behavior - on total freight costs, on the volume of international trade, and on economic welfare - is not well understood. In the case of U.S. domestic shipping, the negative consequences of non-competitive pricing are magnified by the Jones Act of 1920, which prohibits competition by vessels that are foreign owned, foreign built or manned with foreign crews. While the political and policy discussion surrounding the possible removal of Jones Act restrictions have generated some analytical work on the topic, the literature still lacks a peer-reviewed study that estimates, econometrically, the effects of the Jones Act on marginal costs of shipping, on mark-ups, and on trade between the U.S. mainland and an outlying U.S. territory. While the market power and trade policy distortions are important, it is also important to recognize and quantify the sector's contribution to economic well-being. A better quantitative understanding of how the organization of the sector contributes to economic welfare would also be useful.We propose to address these issues with the following steps. First, we will obtain rich data on bilateral trade flows; data documenting the commodity shipped, the transport mode, the shipping route, origin and destination prices of the good, freight charges, and other relevant variables. We have secured two of the three necessary data sets already, but the third must be purchased. Second, we will adapt recently-developed economic theories to the study of maritime shipping markets. Where current theories are not fitted to the task, we will develop new theories that highlight the mechanisms we wish to study. Third, we will apply new approaches to estimation to identify key structural parameters in the data, and use these estimates to decompose observed freight charges into marginal costs and mark-ups. Fourth, we will undertake a comparative analysis between freight charges on US domestic and international routes, in order to estimate the effects of barriers to foreign competitors on domestic freight costs. Finally, we will combine novel theory highlighting the economic benefits of international shipping hubs with import data that distinguishes country-of-origin and country-of-loading to estimate the effects of shipping hubs on product variety, freight charges, shipping frequency and economic welfare. The long-term objective of this project is to provide rigorous quantitative assessments of a) non-competitive pricing behavior in the maritime shipping sector, b) the effects of the Jones Act on U.S. domestic shipping rates, and c) several distinct contributions of international shipping hubs to international trade and to economic welfare. Attainment of our long term goal rests on 5 key supporting objectives: (1) obtain suitable transaction-level data linking freight charges to appropriate shipment characteristics; (2) apply recently developed theories and econometric methods for measuring marginal cost pass-through to these data; (3) develop a framework for comparing freight costs and mark-ups estimates on U.S.-Puerto Rico routes to similar shipment routes in the Caribbean; (4) develop a theoretical framework linking international shipping hubs to increased product variety, increased shipment frequency, and potentially lower freight rates; and (5) estimate the structural parameters of a shipping hub model, and use it to calculate the welfare gains associated with the presence of shipment hubs.
Project Methods
Our long-term objective is to provide rigorous quantitative assessments of a) non-competitive pricing behavior in the maritime shipping sector, b) the effects of the Jones Act on U.S. domestic shipping costs, mark-ups and freight rates, and c) several distinct contributions of international shipping hubs to international trade and to economic welfare. Our methodological approach combines the use of innovative methods and the development of theory to questions of academic and policy relevance to the sector. We have identified novel data sources that will allow us to answer important questions. We also develop new theory to estimate the welfare gains from hubs, and to improve understanding of their role in international supply chains. We will use detailed international trade data from the U.S. and Colombia, which we have already obtained. We will also use data documenting freight movements to Puerto Rico. These data have been collected by Puerto Rican authorities, and can be accessed via an official request. These three data sources meet the specific needs of this project.To make inferences about market-power from freight data,we will apply the method of Atkin and Donaldson (2015). The process involves a two-step estimation procedure, with the "pass-through" parameter estimated in a first stage regression of destination prices on origin prices. The second stage uses the pass-through parameter to adjust freight rates for pass through, which allows identification of the marginal cost function. These results allow the decomposition of freight charges into marginal costs and mark-ups.Once we estimatepass-through rates, the question is how to operationalize them to decompose the shipping freight rates into maritime shipping costs and maritime shipping mark-ups. Following Atkin and Donaldson, we will estimate a rearranged version of the optimal pricing-rule of maritime shipping carriers, exploiting variation over time, across products and across maritime shipping routes.Finally, to calculate the size of the maritime shipping mark-ups, we will apply the standard Lerner (1934) index definition. That is, we will calculate these mark-ups as the difference between the maritime shipping freight rates and the maritime shipping costsas a fraction of maritime shipping freight rates.Our nerxt paperdevelops a framework for comparing freight costs and mark-up estimates on U.S.-Puerto Rico routes to similar estimates from shipment routes in the Caribbean. We seek to analyze the economic costs the Jones Act imposes for shipping products within the US, using the data on shipments from U.S. mainland to Puerto Rico as a case study.To do so, we willconduct an Atkin and Donaldson (2015)-style analysis of marginal costs and mark-ups for U.S.-Puerto Rico routes. As in the earlier exercise, we will decompose the freight charges charged on these routes into marginal costs and mark-ups. For this purpose, we will use data from maritime shipping manifests that Puerto Rican authorities collect.Our next step will be to create suitable counterfactuals to compare with these results. We plan to consider three different sources for designing these counterfactuals. The first will be to use trade Puerto Rican data from non-US sources (e.g. Canada, Mexico, etc.), estimating the maritime shipping costs and mark-ups for trade flows from these countries to Puerto Rico. The second source of counterfactual data will be to evaluate U.S.-Puerto Rico costs and mark-ups against those estimated for U.S. imports on Caribbean routes in the first paper of this project. The third source of counterfactual data will be imports from the U.S. as reported by other countries in the Caribbean. We have in hand Colombian imports data to do so, and we know that suitable data is also available for Costa Rica. Our choice of a suitable counterfactual will be data-driven. We plan to choose the data that provide information for shipments of similar products, at similar scale, over similar distances.As noted, a fuller understanding of the sector involves more than an analysis of freight charges as trade costs.In a third paper we will seek to quantify the contribution of services provided at shipping hubs to the overall contribution of the sector to international trade. In particular, we seek to better understand how the involvement of international shipping hubs contributes to several dimensions of economic welfare, including increased shipment scale, possibly lower freight costs, increased shipment frequency, increased product variety, and an increase in the number of import sources for a given product.The theoretical model we will develop for quantifying the benefits from shipping products via maritime shipping hubs relies on the model of Kropf and Sauré (2014). That paper develops this model to analyze firms' endogenous decisions of frequency and size of shipments, given administrative fixed costs for exporting. Weadapt that model to a multi-country framework with three type of agents (i.e. consumers, firms and shipping carriers), in order to develop a theoretical framework linking international shipping hubs to increased product variety , increased shipment frequency and potentially lower freight rates.Our model will yield equilibrium conditions for hubbed and non-hubbed shipments that we will econometrically estimate. Specifically, each condition will be a function of exogenous variables determining agents optimization decisions such as: (1) the maritime shipping distance between the country of origin and the country of destination; (2) the ocean shipping distance; (3) the price of each product inthe country of destination; (4) the shipping frequency of each product; (4) the shipping amount; and (5) a set of estimatedparameters. The econometric section of the paper will employ Colombian import data for the period 1989-2017. These data report the last port of loading (i.e. the port from which a product is certainly dispatched). This is key, because this dataset will allow us (1) to have in-hand the maritime shipping freight rates charged for shipping a product through the entire vessel-voyage, and (2) to observe those shipments that arrive to Colombia indirectly via a maritime shipping hub. Likewise, each observation is reported on a monthly basis and includes the HS10-digit product, customs office code, origin country, last loading country, mode of transportation, CIF and FOB values, and the cost of insuranceand freight.We focus on estimating structural parameters that will allow calculation of the welfare gains associated with the presence of shipment hubs. To do so, we will use a Heckman correction model in two stages. In the first stage, we will intend to estimate the probability that a carrier ships a productdirectly along routeusing a standard probit model. This will allow solving the potential problem of endogeneity we will probably have in the estimation, because (1) we will only observe in the data the decision ex-post regarding whether the trade flows was shipped directly or indirectly, and (2) many variables could lead shipping carriers to make their decision of how to ship the cargo. Then, in the second stage, we will estimate a log-linear version of each expression, using a standard linear regression model with fixed effects.?Finally, our last step will be to use these parameters to calibrate the model, and conduct a counterfactual experiment that forces all shipments to occur point-to-point. In doing so, we will specifically quantify the benefits from the trade-off between the scale and frequency benefits of hub-oriented shipping and the shorter shipping distances and lack of reloading charges that occur in point to point shipments. To achieve this, we will calculate simple differences between the welfare levels perceive under each scenario (i.e. technically, calculating a Compensation Variation).