V. Transportation Costs

The theory of international trade is usually expounded on the assumption that there are no transportation costs, and this has occasionally been made a basis of criticism. But abstraction from transportation costs is also a common feature of the exposition of the theory of trade in a single market—“closed economy” —and such abstraction does not apear to be logically less permissible in the one case than in the other. Notwithstanding, moreover, the common assumption that transportation costs are relatively much more important in foreign than in domestic trade, it is by no means clear that such is the general situation. Cases are common where internal freight costs from producer to consumer are higher than international freight costs from producer to consumer, as can be seen from a study of the transportation item in the reports on costs of production in different countries made by the United States Tariff Commission. The role of transportation costs, both of products and of factors of production, in contributing to regional differences of prices is an important field for study. It has not, however, been historically the particular responsibility of the theory of international trade, and judging what has so far been done in this field, under the name of Standortslehre, it is not yet apparent, in spite of the claims of its exponents,

that the indebtedness will be by the theory of international trade to Standortslehre rather than the other way round.

The relation of transportation costs to production costs and the terms of trade can be illustrated by chart X, a slight modification of Marshall's graphic method of dealing with foreign-trade problems. In country A a given amount of labor can produce either one unit of copper or one unit of wheat, and in country B a given amount of labor can produce either 3/2 units copper or ½ unit wheat. Country A will export wheat, and country B will export copper. In the absence of transportation costs, wheat will exchange for copper on terms within the limits of 1 wheat = 1 copper (= OA in chart) and 1 wheat = 3 copper (= OB = 3 × OA, in chart). AA′ represents the export supply curve of wheat in terms of copper of country A. BB′ represents the import demand curve of wheat in terms of copper of country B. The chart as drawn implies that in the absence of trade (or with trade on terms of 1 wheat = 1 copper) country A would consume (OA × AE) units of copper, and that in the absence of trade (or with trade on terms of 1 wheat = 3 copper) country B would consume BF wheat.

The actual transportation is assumed to be provided by the exporter. The charges for transportation are assumed to be 1 unit wheat payable in the export country for each 9 units of wheat transported and 1 unit copper payable in the export country for each 5 units of copper transported. With the transportation costs in the specified amounts, the possible limits of the terms of trade will be 1 wheat = 1.2 or Oa copper and 1 wheat = 2.7 or Ob copper. Country A's export supply curve for wheat in terms of copper will be aa′, and country B's import demand curve for wheat in terms of copper will be bb′. The equilibrium terms of trade, which would have been 1 wheat = OK copper in the absence of transportation costs, will be 1 wheat = mr copper, net after payment of transportation costs, for country A, and 1 wheat = ml copper, net after payment of transportation costs, for country B. It is to be noted that with the existence of transportation costs the terms of trade net after payment of transportation costs will be different for the two countries, the difference being absorbed in meeting the costs of transportation. Given elasticities greater than unity for both the foreign-trade curves, volume of trade will be smaller and the net terms of trade will be less favorable for both countries when there are transportation costs than when these are zero. In the present case the existence of transportation costs will reduce the amount of wheat imported by country B from OH to Om units, and will reduce the amount of copper imported by country A from (OH × OK) units to (Om × Or) units. The division of the costs of transportation as between the two countries will, as J. S. Mill contended, be determined by “the play of international demand.”