Weathering the Storm: Infrastructure and Trade in East Asia Kazutomo Abe John S. Wilson 1
Objectives & Scope Examine how investment in port facilities affects trade costs in East Asia. Benefits of investment in port infrastructure Reducing congestion Examine cost of port construction Costs vs. benefits in port infrastructure East Asia Role of infrastructure in intra-regional trade Economic recovery and growth Geographic importance of ports for trade in East Asia, Containerization 2
Trade in East Asia Background Rapid growth since early 1990s Trade liberalization, but bottleneck in infrastructure Intra-regional rising Within ASEAN5 China emerging as a large importer. 3
Ports are congested in ASEAN and China Unit in TEU per year. Line chart = loaded + unloaded Bar chart = estimated port capacity 4
Economic Crisis and Trade in East Asia Export Volume Import Volume 2007 2008 2009 prev. 2009 Revision 2009/ 2006 2007 2008 2009 prev. Developing Asia 14.4 8.9 11.0 1.12 11.0 11.1 13.2 ASAN5 6.6 4.2 5.3-10~-6 1.00 8.0 10.8 6.6 Asia NIEs 8.5 6.2 4.9 1.04 7.4 6.6 5.2 Advanced -3.7-5.9 3.1 1.3 (-5.0) 4.5 1.5 0.1 Emerging and Developing 9.6 5.6 5.0-0.8 (-5.8) 14. 5 10.4 4.8 2009 revision -10~-7-3.1 (-3.0) -2.2 (-7.0) United States 8.4 6.2 -- -10.7 2.2-3.4 -- -10.1 Japan - 9.3 0.2 -- -3.2 1.8-1.5 -- -1.5 Source: World Economic Outlook, and Updates, governments of US and Japan 2009/ 2006 1.11 1.08 1.03 5
Even in crisis - ports remain congested Trade Volume (2006=100) Port Congestion Ratio 2009 2006 2009* China (=Developing Asia) 1.12 1.79 1.22 ASEAN5 1.04 1.64 1.61 Assuming annual increase rates of port capacity from 2006 to 2009 in China and ASEAN5 are 18% and 2%, respectively. 6
Estimating Transport Costs Trade costs = cost with delivery process from producers to consumers As high as 74% for developed countries (Anderson, et.al (2004)) Transportation costs are parts of it. No stats except for US. Need to estimate transport costs. Matching method CIF / FOB > 1, because of the costs. Limao & Venebles (2001) used this method Not very useful, especially in sector base. Hummels et.al. (2006): noisy Need to rely on U.S. stats. 7
Determinants of international transport costs: survey Defined as (i) loading costs + (ii) unloading costs + (iii) freight costs + (iv) insurance Only (iii) and (iv) are covered by import charge or CIF FOB But, (i) and (ii) may reflect the data. Gravity models (transportation costs) = F(distance, weight, quality of infrastructure, sectoral efficiency, land-locked, etc.) 8
Explanatory powers of port Port efficiency indexes (i) (ii) (iii) efficiency indexes Total square number of largest seaports by country GDP per capita Length of road, paved road and rail, and telephone lines per capita ** Clark, Dollar and Micco (2004) Need a more direct measurement. 9
Our approach Assess the effects of port infrastructure on transport costs Gravity model with port congestion index, as a regressor Need to directly reflect port capacity Use container ports data to design congestion index Use U.S. import charge data on trade with East Asia Use Japanese data (publishing FOB & CIF) 10
Data on Ad valorem rates of import charges (Unit: percent) Japan United States 1996-2000 2001-2006 1996-2000 2001-2006 Indonesia 7.34 7.13 7.12 7.68 Malaysia 11.10 11.54 2.93 2.93 Phlippines 15.69 17.64 3.57 4.37 Singapore 7.34 6.81 1.68 1.80 Thailand 14.30 15.94 4.81 5.82 Viet Nam 12.83 11.23 7.33 8.28 China 7.65 9.29 6.46 6.72 Korea 10.91 14.27 3.36 3.79 Hong Kong 28.29 na 4.08 4.69 Taiwan 16.11 21.32 3.92 4.32 Canada 7.41 7.48 1.79 1.49 Australia 8.18 6.54 6.13 4.78 New Zealand 9.35 11.81 9.36 7.36 Japan -- -- 2.53 2.67 United States 13.43 13.89 -- -- Generally high, compared to nominal tariff rates. 11
TC ln Wgt Our transport cost gravity model: U.S. statistics ikt ikt Value ikt dist it 4 ln 5 Wgt ikt 6Cnt it 0 1 k 2t 3 ln ln k t Wgt ikt 7 PIndex it ikt PIndex: port congestion index: actual throughput in the container ports / container port capacity test this significance 12
Calculation of port congestion index (Appendix C) Actual throughput for container ports: from containerization yearbook Port capacity, calculated from depth and length of the berth; The factor of 50 is multiplied to estimate the normal annual capacity. 13
Regression: U.S. import charge gravity model dependent variable: import charge / weight at 6-digits commodity level (log) (1) (2) (3) distance (log) 0.2470 0.0835 0.2105 (10.84)*** ( 3.61)*** ( 9.39)*** value/weight (log) 0.4873 0.4909 0.4908 (161.78)*** ( 163.62)*** ( 159.49)*** weight (log) -0.0294-0.0346-0.0320 (-32.32)*** (-37.56)*** (-33.66)*** containerization (share) -0.0281 0.0169 0.0212 (-15.25)*** (10.96)*** ( 12.71)*** port congestion (share) 0.0737 (18.45)*** Port Infrastructure Quality -0.0747 (GCR) (index = 1-7) (-33.95)*** Water Transportation -0.0517 (WCY) (Index = 1-10) (-28.00)*** constant -4.1469-2.1298-2.1298 (-20.26)*** (-9.94)*** (-9.94)*** Numbers of Observations 151249 151249 145600 R 2 0.4057 0.4102 0.4111 14
Results: Port congestion index, significant and positive Containerization ration, significant but negative Expansion of port capacity by 18 percent for China in 2006 reduce the index from 179% to 152%, cutting transport cost by 2.0%. Containerization cuts the trade cost. This estimate is modest, compared to other literature. 15
Correlation between the port indexes Port Congestion Port Infrastructure Sea Transportation Port Efficiency Port Congestion 1.00 -- -- -- Port Infrastructure (GCR) -0.16 1.00 -- -- Sea Transportation (WCY) 0.02 0.92 1.00 -- Port Efficiency (BW) 0.29-0.63-0.47 1.00 Port congestion index only covers hard infrastructure. Port efficiency index is the residual, capturing everything. 16
Japanese import charges: estimated from the macroeconomic FOB CIF data TC ln Wgt it it Value it Value 0 1 t 2 ln dist it 3 ln 4 ln dist it ln t Wgt it Wgt it it 5 AirValue Value it it Wgttnk ik 6 7PIndexit 8 Wgtit HKdummy ikt Including air transport need to control No sector breakdown need to control specific commodities fewer samples But, Japan is too important for East Asian export to be neglected. 17
Determinant of transport costs; Japanese imports dependent variable: (imports CIF - imports FOB ) / weight in total imports from the country (log) (1) (2) (3) (4) distance (log) 0.2850 0.8114 1.0075 0.4602 (1.25) (2.21 )** (3.05)*** ( 2.04)*** value/weight (log) 1.6799 2.6419 2.8732 1.9797 (4.32)*** (4.44 )*** (5.39)*** (5.21)*** distance (log) * (value / weight) (log) -0.0835-0.1900-0.2231-0.1278 (-1.73)* (-2.57)** (-3.37)*** (-2.66)*** air shipment share 1.3533 1.5265 1.5595 1.6731 ( 7.43)*** (6.25 )*** ( 6.62)*** (8.46)*** HS25-27 share -0.4155-0.2691-0.3932-0.6320 (-2.30)** (-1.23) (-1.88 )*** ( -3.29)*** port congestion (ratio) 0.0737 (1.90 )** Port Infrastructure Quality -0.0518 (GCR) (index = 1-7) (-1.61 )* Water Transportation -0.0760 (WCY) (Index = 1-10) (-2.82)*** Port Efficiency (BW) 0.9277 ( 3.38)*** constant -4.8407-9.3757-10.5073-6.0309 (-2.52)** ( -3.14 )*** (-3.93)*** (-3.23 )*** Numbers of Observations 153 83 103 153 Estimation period 1996-2006 2001-2006 1999-2006 1996-2006 R 2 0.9693 0.976 0.9722 0.971 18
Benefit and cost of port construction: simple partial equilibrium framework Transport Cost P 0 Demand E 0 Port Tariff + Congestion Cost P 1 E 1 PT 1 PT 0 Congestion cost Port services F 0 F 1 (Note) P: Transport cost. PT: Port tariff. F: Full capacity of the port 19
Benefits (net of full cost recovery) Increase in consumer surplus 0.0737 x (point change of port congestion index) = percentage changes in transport cost This corresponds to a rectangular, approximating the trapezium P 0 P 1 E 1 E 0 Regression result indicate the less congestion, the less transport cost. Benefit increases as port congestion is reduced. If construction cost is fully recovered, net benefit is blue part in the former chart. 20
Scenario (capacity expansion) Port Congestion Port Congestion Transport Cost of Imports (%) Index 2006 Index Target Total Unloading Loading Indonesia 1.13 1.07-2.13-0.50-1.63 Malaysia 1.22 1.11-2.14-0.83-1.31 Philippines 3.08 2.04-8.67-7.68-0.99 Singapore 2.07 1.53-4.71-3.94-0.77 Thailand 1.57 1.28-2.85-2.08-0.76 China 1.79 1.40-3.46-2.91-0.54 Japan 0.66 -- -0.95 -- -0.95 Korea 1.15 1.07-1.09-0.54-0.55 Hong Kong 2.85 1.93-8.63-6.83-1.80 Taiwan 1.45 1.23-2.42-1.68-0.74 Viet Nam 1.23 1.12-2.89-0.85-2.04 21
Anecdotal evidence of investment costs Increase in one TEU costs per year $43 in Korea $74 in Hong Kong $51 in Shanghai, China In our baseline, the expansion of ports in East Asia is 35 million TEU, costing $1.4 to 2.8 billion per year. Consumer surplus will be $21 billion per year. 22
Policy implications? Port infrastructure improvement could provide opportunity for facilitation to countries with low tariffs. E.g. Singapore, Hong Kong Port projects likely viable long-term investments Investment could bolster economic recovery over time in East Asia with less trade diversion. 23
Current Context Economic crisis and East Asia? Need to expand intra-regional trade Even with lower net exports to US in the near future, investment in the port likely viable Port construction would be a nice target in the short-run macroeconomic fiscal policy. 24