Working
Paper
SeriesCCAS No.043“Freight Charges, Time Cost, and Transport Mode Choice:
Evidence from Japanese Export”

Naohiko Ijiri
August 2015

College of Economics, Nihon University

Freight Charges, Time Costs, andTransport Mode Choice: Evidence
from Japanese Exports
Naohiko Ijiri⇤College of Economics, Nihon University,
1-3-2 Misaki-cho, Chiyoda-ku, Tokyo, 101-8360, Japanijiri.naohiko@nihon-u.ac.jp

Abstract
Airfreight is responsible for approximately 30% of the value of Japan’s exports in
2011, which is certainly not a small. According to the trade statistics in Japan, 20%of the total exported products are shipped exclusively by air. About 80% of exported
products are shipped to large developed countries, such as France, USA, Germany,and UK, by air. Beyond expensive-lightweight products, most of tradable products
are shipped by air in Japan.The frequencies of airfreight usage are different among
destination countries and products. However, the previous research results have notexplain enough such airfreight usage patterns so far. Based on the current situationof air shipping in Japanese export, this study examines how international traderschoose a transport mode, either air- or sea- shipping.

Keywords: International trade; Airfreight; Transport mode; Time costs
JEL classification: F14, L93, O18, R41

I.

Introduction: Airport Infrastructure Development

According to the Trade Statistic of Japan published by Japan’s Ministry of Finance(hereinafter denoted by MOF), 27% of the total amount of Japan’s exports in 2011
was exported by aircraft. Japan being an island nation, the rest of the total amount⇤ I am grateful to the comment from the participants at the annual conference of Korea Trade

Researcher Association (KTRA) in Seoul, 2010 and the GEP conference in The University of
Nottingham, Malaysia campus in 2010. Further, the author is responsible for any and all mistakes
in this paper.

1CCAS No.43 • Nihon University College of Economics• August 2015of exports was exported by ocean freighter. According to Hummels (2001) andIjiri (2008), approximately 30% of America’s exports are transported by air; almost
exactly the same proportion as Japan. It is believed that this result shows thehigh importance of airfreight in global trade today. However, until recently mostresearchers showed little interest in regards to the role of airfreight in global trade.
In other fields than international trade, researchers in transportation engineering and transportation economics are analysing the determinants of international
airfreight usage frequency. Previous examples of this sort of analysis can be seenin Matsumoto (2005) and Grosche, Rothlauf and Heinzl (2007), who empiricallyanalysed the determinants of air carriage flows, such as the number of international air passengers, and the amount of air cargo using gravity models. Bothstudies used gravity models (or other similar models) to analyse the determinantsof international trade between two trading partners. In transportation economics,
clarifying the deciding mechanisms of the amount of airfreight is vital to thedevelopment of appropriate air transportation infrastructure.
At the end of October 2010, the Japanese government reopened Tokyo International Airport1 (Haneda Airport) to international air routes . With the New
Tokyo International Airport (Hereinafter, Narita Airport) nearing the limits of its
capacity, an investment was made into transportation infrastructure in order toexpand the functionality of the two airports in the Tokyo metropolitan area. Since
its opening in 1978, Narita Airport has been the international hub, while Haneda
has been the domestic hub. The reopening of Haneda Airport to international
flights has greatly changed the division of roles of the two airports in the Tokyo
metropolitan area. Unlike Narita Airport which cannot operate around the clock
due to noise pollution, Haneda has become a 24-hour international airport since
its reopening. Because of this, international flights in the metropolitan area are
now available during a wider period of time each day. This is expected to leadto the creation of new air routes, encourage airlines to start servicing the region,and to lower the air transportation costs of international trade. The Chinese
government’s political reforms and open door policies beginning in the early
1990s have led to the continuous rapid development of China’s transportation
infrastructure. As shown in Table 1, the length of established air routes haveshown vastly more growth in recent years than the transportation routes of othertransportation modes. Between 1990 and 2007, the length of China’s express-ways
grew by a factor of 3.5.
By comparison, its international air routes grew by a factor of 6 over thesame period of time. Among the rapid continued economic growth in China,
1 As part of reopening Haneda to international routes, a new fourth runway was constructed,

and the capacity of take-offs and landings was increased from 296,000 to 407,000.

2CCAS No.43 • Nihon University College of Economics• August 2015
Table 1: Index of Transport Infrastructure Development in China
Table 1 Index of Transportation infrastructure development in China
expressed as the percetage of the value of Year 1990
(Year 1990 value=100)

Year
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007

Railways Highways Waterways
99.8
100.3
101.2
101.9
107.8
112.1
114.0
114.7
116.4
118.7
121.0
124.2
126.1
128.5
130.3
133.1
134.7

101.2
102.8
105.4
108.7
112.5
115.3
119.3
124.3
131.4
136.4
165.1
171.7
176.0
181.9
325.3
336.2
348.5

Domestic International
Aviation
Aviation

100.5
100.5
100.9
101.0
101.3
101.5
100.5
101.0
106.7
109.2
111.3
111.4
113.6
112.9
112.9
113.0
113.1

110.3
165.1
189.6
206.3
222.8
230.2
281.2
297.1
300.4
296.5
306.6
323.1
345.2
404.4
394.3
417.0
462.3

106.6
182.1
167.5
211.5
209.3
232.2
303.1
303.1
314.5
305.5
310.6
345.3
429.9
537.4
514.4
580.6
629.5

Source: Statistical Yearbook of China, Various issues

the continuing development of each transportation mode and the extension oftransportation routes, air routes are showing the largest growth. In this way,
both Japan and China are continuing the development of their domestic airtransportation infrastructure. It is surely the result of attempts to keep up withthe demand for air transportation.
Incidentally, what does this sort of expansion of air transportation infrastructure development mean for international trade? Until now, Japan has aimed to
improve its transportation efficiency with the objective of maintaining the international competitiveness of its industries. It has done by strategically expanding its
seaport facilities2 . However, Japan’s airport development policy does not seem tohave that same objective. It seems that in Japan the discussion of the link between
the expansion of air transportation infrastructure and the maintenance of theinternational competitiveness of its industries has failed to attract attention. It is
the objective of this paper to discuss international trade in Japan, especially the
2 The MLIT website states Japan’s specific policy toward the port facility improvement.

http://www.mlit.go.jp/en/kowan/index.html

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CCAS No.43 • Nihon University College of Economics• August 2015
role of air transportation in exports, while also clarifying its current state. Further,
this paper will also analyse how international transport modes for Japan’s exports
are selected based on the destination and the type of exported product. There havebeen previous studies, primarily in the field of transportation economics that haveanalysed the determinants in air shipment flows of the manner mentioned above.
However, there are almost no examples of the analysis of the determinants ofairfreight usage frequency of exports by product - the air shipment ratio discussed
in this paper.
This paper is organised as follows. First, in II, we will confirm the current stateof the use of airfreight in Japanese exports using a number of indexes. Then, in
III we will consider the selection model for each trader (exporter and importer),in which they either select air or ocean transport. Here we will use an Anderson
and van Wincoop gravity model to suggest a theoretical model for analysing
the determinants of the air shipment ratio. Finally in IV we will, based on the
air shipment ratio determinant analysis model constructed in III, construct anempirical analysis model from Japan’s export data, and attempt a quantitative
analysis. In V, we will summarise the results of that estimation, and discuss theconclusion of this paper. There, we will see that the results largely support theanalysis model constructed in III.

II.

The Current State of Airfreight in JapaneseInternational Trade

As shown in Table 2, out of all of Japan’s air and ocean trading ports, Narita
Airport was the largest trading port, in terms of total transaction value as well
as both import and export value in 2011. This explicitly shows the importanceof international airport infrastructure to international trade in Japan. Further, as
in previous statement, the fact that about 30% of value of exports shipped out ofJapan and America are carried on aircraft shows that airfreight is a prominentmode of transportation.
This paper uses statistics from Japan’s MOF in its analysis of the importanceof airfreight to exports. This trade data3 in recorded in the HS 9-digit format4 ,3 The

MinistryofFinance’s
statistics
canbedownloaded
here:
http://www.customs.go.jp/toukei/info/tsdl.htm
4 HS is an abbreviation of the Harmonised Commodity Description and Coding System. It is aninternationally-unified statistical product code used in trade statistics that was created by the UN
HS treaty. While the first six digits of this statistical product code are unified world-wide between
exporters and exporters, the following digits are determined by each country.Japan has expanded
the HS product codes into nine-digit codes which, being proprietary to Japan, are not necessarily
shared with its trading partners. Further, the United States has an even more detailed 10-digit

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CCAS No.43 • Nihon University College of Economics• August 2015
Table 2: The Trading Port Ranking by Transaction Valuein 2008, Japan

Table2 Trading Port Ranking by Transaction Value in 2008
Rank Port
Export Value Share1
Narita Airport
11,208,563
13.8
11,083,130
13.7
2
Nagoya3
Yokohama
8,695,587
10.7
4
Kobe
6,107,770
7.5
5,369,281
6.6
5
Tokyo
6
Kansai Airport
4,634,026
5.7
7
Osaka
3,489,529
4.3
8
Mikawa2,937,482
3.6
9
Shimizu
1,952,719
2.4
10
Chiba
1,693,068
2.1（Unit：Million Yen，％）
Port
Import Value Share
Narita Airport
11,366,825
14.4
Tokyo
8,009,108
10.1
Nagoya5,277,042
6.7
Chiba
5,158,983
6.5
Yokohama
4,298,882
5.4
Osaka
4,131,405
5.2
Kawasaki
3,160,907
4.0
Kobe
3,072,621
3.9
Kansai Airport
2,819,930
3.6
Mizushima
2,298,340
2.9

of Finance,
Source:Trade
Statistics
of Japan,
Ministry
Source:Trade
Statistics
of Japan,
Ministryof Finance Japanand further has the characteristic of being recorded with an indicator of whether
airfreight or another mode of transportation was used. According to this data, a
total of approximately 150,000 products were exported from Japan in 2007 to all
destinations. Of those products, 86,265 products were exported to Japan’s trading
partners by aircraft. This means that more than half of the products exported
by Japan are transported by aircraft. Of course, it also implies that some of the
products are difficult or impossible to be transported by air. Generally, aircraft
cannot carry heavy or large cargo, so we can expect that products shipped by air
may share certain characteristics. For example, there is a report5 stating that the
products primarily carried by air include lightweight products and highly valueadded products such as fresh foods, flowers, precious metals, etc. Hummels (2001)
and Nordas et al. (2006) discussed the possibility of trade cost differences among
traded products, considering the difference in each product’s opportunity cost oftransit-time. They define products which require the exporter or importer to savetransit time as time-sensitive products. In order to apply their idea to international
airfreight we will calculate the frequency of airfreight usage for Japanese exports
for each HS 9-digit product. We describe it as the air shipping ratio6 . By analysing
this air shipping ratio for each product and for each destination, we can discover
the characteristics of each product and each destination.
code system. Japanese trade data for 2007 to 2011 was recorded using the HS2007 edition. The
current edition is HS2012, which was applied to trade data beginning in 2012.
5 For an example, refer to the MLIT Civil Aviation Bureau-published "Suuji de miru kuuko" foreach year.
6 The air shipping ratio (AR) of product k exported to country A is the value of the product kshipped to country A by aircraft divided by the total amount of product k exported to country A.

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CCAS No.43 • Nihon University College of Economics• August 2015
70,00063,70960,00050,00040,00030,75630,00020,14920,00010,000

7,231

5,027

3,919

3,505

2,926

2,823

2,768

2,977

0.3≦AR<0.4

0.4≦AR<0.5

0.5≦AR<0.6

0.6≦AR<0.7

0.7≦AR<0.8

0.8≦AR<0.9

4,211

‐
AR=0

0< AR<0.1

0.1≦AR<0.2

0.2≦AR<0.3

0.9≦AR<1

AR=1

Figure 1: The Histogram of Air Ratio in Japan
Source: Trade Statistics of Japan, Ministry of Finance JapanThe current state of this air shipping ratio is summarised as follows. In caseair shipping ratio is equal to 1, it indicates that the product is exported exclusively
by aircraft. The number of the products shipped from Japan exclusively by air(hereinafter AR17 product(s)) in 2007 was 30,756. This means that about 20% of
the total exported products and about 2.2% of total exported value were shipped
exclusively by air. In contrast, 63,709 products were shipped exclusively by ocean
freight. Figure 1 is a histogram of created with data on Japan’s exports thatshows the distribution of Air Shipping Ratios in increments of 10%. According
to this chart, the exports of both exclusively sea-shipped products (AR=0) andexclusively air-shipped products (AR=1) dominate Japanese exports. This result
implies that many export transactions are of products that must be shipped byeither aircraft or ship. Further, as shown by the incidences of the levels other thanthose with Aircraft Shipping Ratios of 0 or 1, many exporters prefer airfreightto ocean freight despite the fact that it is vastly more expensive. It is possiblethat this may because, as previous studies have indicated, many exporters chose
airfreight in order to reduce transit-time.
7 Hereinafter AR denotes for air shipping ratio.

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CCAS No.43 • Nihon University College of Economics• August 2015
Table 3 shows the two indexes for the frequency of airfreight usage for each
Broad Economic Categories (BEC) classification8 . This table was also created using
data on Japan’s 2007 exports. These two indexes are the proportion of AR1 Products out of the total number of products in each BEC classification (Hereinafter,
AR1 Ratio), and the average air shipping ratio of each BEC classification. The BEC
types of traded products being used here are Parts and Components, Processed
goods, Material goods, and Consumer goods. As discussed in Harrigan and
Venables (2005), intermediate goods are shipped by faster transportation modes.
According to Table 3, Intermediate goods and Consumer goods have relatively
high average Air Shipping Ratios of 34.5% and 35.5% respectively. Further, Material goods and Consumer goods have relatively high AR1 Ratios. As discussed inprevious studies, there is a high probability that fast transportation modes will
be selected for Intermediate goods, which we can infer they are time-sensitive
products. We can also infer that they are products with properties similar to
those of Consumer goods. Additionally, this also indicates the possibility thata relatively large number of Material goods and Consumer goods can only betransported by aircraft. Further, according to Hummels (2009), for international
trade in the United States, the higher a product’s trade value per kilogram (Value
weight), the more likely it is to be shipped by airfreight.
Table 3: The Ratio of AR1 Products
P&C Capital goods Processed goods Material goods Consumption goods# of AR1Products: (1)

4

10

23

17

62

# of Proudcts in the category: (2)

420

601

847

402

1223

AR1 Ratio: (1)/(2)

0.95%

1.66%

2.72%

4.23%

5.07%

Average AR 34.50%

15.98%

16.72%

16.09%

35.51%

Source: Author’s calculation using Trade Statistics of Japan,
Ministry of Finance Japan
Next, Tables 4 and 5 show the top 30 export destination countries ranked byfrequency of air-shipped products shipped from Japan. The numbers of exported
products shown are the number of products shipped to these countries fromJapan in 2007. According to the AR1 Ratios on Table 4, Monaco had the highest
reliance on airfreight in regard to Japanese imports, with an extremely high 87.10%
of products being exclusively imported by airfreight. Additionally, the top 16
8 The product groups used here is RIETI-TID 2012, which is created by the combination of BEC

and System of National Account (SNA) in order to differentiate the traded products by productstages, such as final products, intermediates, materials so on.

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CCAS No.43 • Nihon University College of Economics• August 2015
countries all had AR1 Ratios higher than 50%. As you can see, airfreight plays
a vital role in bringing Japanese imports into more than a few countries. Manyof the countries that rank highly on Table 4 are those that both have relatively
small economies and are a great distance from Japan. While not all of thesecountries are landlocked, those that are not landlocked are countries that are noton regular ocean shipping routes. The reason why these countries have so many
AR1 Products may because ocean freight is relatively inconvenient.
Table 4: AR1 Ranking by Destination
Ranking Country
1 Monaco
2 Gibraltar (UK)3 The West Bank and Gaza Strip
4 Andorra
5 Belarus
6 Moldova
7 Bosnia and Herzegovina
8 Cayman islands (UK)9 Luxembourg
10 Croatia
11 Serbia
12 Austria
13 US Virgin Islands
14 Lithuania
15 Uzbekistan
16 Armenia
17 Slovenia
18 Zambia
19 Romania
20 Switzerland
21 Bermuda (UK)22 Azerbaijan
23 Malta
24 Netherlands Antilles
25 Bulgaria
26 Republic of Macedonia
27 Denmark
28 Ireland
29 Liberia
30 Niue Islands (NZ)
Average# of AR1 Product # of Export Products AR1 Ratio
31
27
87.10%
4231
73.81%
15
11
73.33%
21
15
71.43%
12588
70.40%
51
32
62.75%
26
16
61.54%
5935
59.32%
210
117
55.71%
235
129
54.89%
267
146
54.68%
998
533
53.41%
27
14
51.85%
279
143
51.25%
190
97
51.05%
3618
50.00%
325
162
49.85%
13667
49.26%
504
245
48.61%
1508
720
47.75%
8037
46.25%
221
101
45.70%
272
124
45.59%
185
84
45.41%
395
177
44.81%
56
25
44.64%
963
428
44.44%
786
347
44.15%
223
96
43.05%
73
42.86%
25.67%

Source: Trade Statistics of Japan, Ministry of Finance Japan
Table 5, by comparison, shows the top 30 countries when ranked by the
proportion of air-shipped products out of the total number of exported products
in 2007 (Air Shipping Ratio). In this case, "air-shipped products" refers to products
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CCAS No.43 • Nihon University College of Economics• August 2015
Table 5: Air Ratio Ranking by Destination
Ranking Destination
1 Monaco
2 France
3 USA
4 Austria
5 Germany
6 Luxemburg
7 UK
8 Switzerland
9 Andorra
10 Gibraltar(UK)11 Italy
12 Hungary
13 Palestine
14 Belarus
15 Czech
16 Denmark
17 Poland
18 Slovakia
19 Sweden
20 Israel
21 Spain
22 China
23 Norway
24 Belgium
25 South Korea
26 Ireland
27 Romania
28 Portugal
29 Finland
30 Netherland# of Exported Products# of Exported Products by Air

31
2,670
4,402
1,180
3,102
210
2,925
1,791
21
42
2,669
1,079
15
130
1,228
963
1,178
458
1,370
1,254
2,005
5,048
907
2,014
4,825
942
593
967
1,276
2,383

27
2,163
3,520
942
2,464
164
2,279
1,376
16
32
2,033
804
11
94
887
685
831
320
956
867
1,386
3,489
625
1,374
3,286
641
400
651
858
1,590

AR
87.10%
81.01%
79.96%
79.83%
79.43%
78.10%
77.91%
76.83%
76.19%
76.19%
76.17%
74.51%
73.33%
72.31%
72.23%
71.13%
70.54%
69.87%
69.78%
69.14%
69.13%
69.12%
68.91%
68.22%
68.10%
68.05%
67.45%
67.32%
67.24%
66.72%

Source: Trade Statistics of Japan, Ministry of Finance Japanthat both have a positive export value shipped by airfreight and are at least
partially shipped by airfreight. In other words, air-shipped products are productsthat can be shipped by air and are not exclusively shipped by ocean freight. As
in the case with AR1 Ratio, Monaco once again tops the list, having the highest
Air Shipping Ratio. However, unlike Table 4, the top-ranking countries on thischart are mostly European and North American countries with large economies.
For example, France is ranked #2, with 81.01% of air shipping ratio. The U.S. isranked #3 with 79.96% of air shipping ratio. These are certainly not countries
with small economies or poor access to ocean freight service. In this way, it can beseen that many products are shipped by airfreight despite the viability of ocean
freight, and that there is no particular product or country utilising airfreight.

9

CCAS No.43 • Nihon University College of Economics• August 2015

III. Transportation Mode Selection Model for International
Trade
1.

Transportation Mode Selection Model

Gravity models have frequently been used to determine the volume of aggregate
trade flows between trading partners, considering the scale of supply and demand
within each country, as well as trading costs (transport cost, trade barriers, etc.).
They are powerful analytical models with high explanatory power9 Here, wewill attempt to apply gravity models to the analysis of the determinants of Air
Shipping Ratios. As pointed out in II, the Air Shipping Ratios of Japanese exports
are distributed between 0 and 1, and these ratios differ for each product anddestination. Even when exporting the same product to the same destination
country, the trading costs can differ greatly within that country depending on
the trading partner, which indicates the possibility that a different transportation
mode may be selected accordingly. In order to analyse the determinants of theamount of airfreight from Japan to each destination country, we need a theoreticalmodel to analyse the amount of airfreight for each product. In this paper, we will
apply the microeconomically-refined gravity model developed by Anderson andvan Wincoop (2003) in order to suggest a model for analysing the determinants of
the Air Shipping Ratios of exports.
The Anderson and van Wincoop model10 , similar to so-called gravity models,
explains the size of the aggregate trade flow of two trading partners developed
from the consumer utility function discussed below. This new kind of gravity
model and gravity equation suggested by Anderson and van Wincoop has beenused to great effect in many empirical studies analysing the trade flows between
trading partners. Some empirical studies using Anderson and van Wincoop-type
analysis models have included non-transport cost trade costs such as tariff barriers,
non-tariff barriers, the border effect, etc. They have been used not only to analyse
trade volume, but to identify trade barriers and the strength of their influence.
In this paper, we will decompose trading costs into two elements, transport cost
and transit time cost, in order to analyse the determinants of Air Shipping Ratios.
Figure 2 below uses a graph to show the relationship of transport cost and transit
9 The gravity models have been applied to many empirical researches in international trade fordifferent countries, years, industries so far. One can refer to van Bergeijk and Brakman (2010) as awell-summarised survey for the previous researches on both theoretical and empirical analyses
regarding the gravity models.
10 Eaton and Kortum (2002) has developed an another kind of microeconomically-refined gravity
models, which is so-called Ricardian type of gravity model. In addition, Chaney (2008) has
introduced a new generation gravity model, which has a firm heterogeneity attribute, in line with
new-new international trade theory.

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CCAS No.43 • Nihon University College of Economics• August 2015
time cost with the transit time to the destination. Figure 2 shows the effect transit
time can have on transport cost and transit time cost by coupling four panels,
from panel (a) to panel (d). Even for the same given distance, various factors
effecting transportation mode and total transit time can influence transit time cost.
Below, we will attempt to analyse the selection of transportation modes in exports
using Table 2.
First, we assume that there are only two transportation modes for exports:
ocean freight and airfreight. The cargo transport costs for any export destination
country are given as FijS for ocean freight, and FijA for airfreight. These cargotransport costs are normally calculated by distance. Since airfreight transport
costs are generally higher given the same distance, we assume that FijA > FijS . Next,

we assume that each transport cost changes at a fixed rate, aS or a A , dependingon the distance. Further, when exporting to the same country the cargo transport
costs for each transportation mode shall be the same for every product so longas the product’s size allows the use of that transportation mode. However, weconsider that a product’s cargo transport cost increases with the weight of the
product. Therefore, cargo transport costs shall increase at a fixed rate. However,as we consider that airfreight transport costs increase at a higher rate than ocean
freight transport costs, for the purpose of simplification we shall assume that only
airfreight transport costs are affected by weight. This effect shall be given as wk 11 .
The relationship of cargo transport costs and distance for each transportation
mode shall be defined with the two following formulas. The transport cost to
ship product k from country j to country i for each transportation mode shall becalculated with (1) and (2).
SFij,k⌘ aS DistanceijAFij,k⌘ a A Distanceij ⇥ wk

(1)
(2)

Based on our assumptions, aS is smaller than a A . Next, we assume thefollowing relationship between transportation mode and transport time. First,
total transit time is defined as amount of time it takes for an exported productto arrive at its destination. Generally speaking, ocean freight takes longer thanairfreight for the same given destination. Further, when importing or exportinga product, transit time is not the only time required. The best example of otherkinds of time required is the time required for customs clearance. Although theamount of time required varies wildly by country, we consider customs clearance
11 We set w

AS
AS
k = wk /wk . wk and wk are an additional freight charge per kilogram to air-andsea-shipments,respectively.

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CCAS No.43 • Nihon University College of Economics• August 2015
when exporting a product (leaving the country) to require the same amount oftime regardless of the transportation mode or the destination country. We label
this amount of time as C̄.
Another factor that can influence total transit time in the case of ocean freightis transshipment. An example of transshipment would be a ship going from Japan
to its destination via Hong Kong or Singapore. Without a direct shipment, theship would have to transfer its cargo at Hong Kong or Singapore to a regular routeheading to the destination. Transshipment normally takes 2 or 3 days12 .Therefore,
any time a non-direct ocean freight route is used (for example, a regular route) toship to a destination country via Hong Kong or Singapore, a significant amount oftime will be required for transshipment. In consideration of this the total transit
time for ocean freight is customs clearance time C̄ plus transship time. However,transship time is not added when the export destination is closer to Japan thanHong Kong or Singapore or when a direct route is used.
In other words, because transshipment becomes necessary over a certain
distance, transit time increases at a fixed rate for any destination closer than that
distance. This causes a decrease in the average speed to the destination country.
This indicates that the average speed of ocean freight can vary even between
destination countries of the same distance. Therefore, gS , if transshipment occurs(for example, as shown in Figure 2, Panels (a) and (b) after point A), a larger
Value g⇤ is incurred. Consequently, total transit time is given as TimeijS for ocean
freight and TimeijA for airfreight, and even when customs clearance time andtransshipment time is included, we consider that TimeijS > TimeijA .
Here we will include transit time cost into our analysis model. Transit time
cost is directly proportional to transit time, with lower transit time resulting in alower transit time cost. The reason is that, for example, in the case of products
such as fresh foods, without refrigeration or other special transportation methods,
longer transit times reduce the quality (and therefore the value) of the product.
Another example is apparel. Apparel retailers use lean inventory because they
dislike maintaining large inventories and prefer to restock frequently instead. Yetanother example is parts and materials used by manufacturers implementing
lean-production methods, who very frequently restock parts in order to minimise
their part and material inventories. In order to meet production schedules, parts
must be supplied on time. For that reason, transit time costs in this case are
relatively high.
As in the case of cargo transportation costs, transit time increases at a fixed ratedepending on the distance. The relationship between transit time and distance for
12 Forthe required days of transshipment, we have referred to the following website.
http://www.pref.hiroshima.lg.jp/soshiki_file/kouwan/con_hiro.html

12

CCAS No.43 • Nihon University College of Economics• August 2015
ocean freight and airfreight are defined by the following formulas. This is Panel(B) of Figure 2.
S
Timeij,k⌘ bS ⇥ Distanceij

A
Timeij,k⌘ b A ⇥ Distanceij

(3)
(4)

In this case, our previous assumptions mean that bS > b A . This b is clearly
the average speed from the point of origin to the destination13 . Expressing thetransport time costs mentioned above as distance will give you the following
formulas. This is expressed in Panel (a).
S
TCij,k⌘ gS ⇥ DistanceijATCij,k⌘ g A ⇥ Distanceij

(5)
(6)

As with these formulas, we assume that we can express transport time costs
for each transportation mode. We consider that while the distance to a certain
export destination country is the same regardless of transportation mode, thetime required differs, with airfreight requiring a shorter period of time. This is, ofcourse, because the average speed of airfreight is faster than that of ocean freight.
This, as expressed by the formula below, means that the higher average speedof airfreight means that shipment requires less time even for the same distance.
Thus, the difference of the transit time cost parameters g A and gS in Formulas (5)and (6) are caused by the difference in transit time required.
In other words, there is a possibility that each export product may have a
different transit time cost in every transaction. There is a possibility that, as in thecase of fresh foods, each product may have the same transit time cost. Conversely,
there is also a possibility that the transit time for each product may differ due tothe nature of the transaction (i.e., a transaction within a business group versus
outside of a business group). Recognising the different transit time cost for eachproduct and transaction, we label it as µk . This µk is the transit time cost for every
hour of transit time.
As mentioned above, the total transit time is the sum of transit time, customs
clearance time, and, in the case of ocean freight, transship time (when required).
13 This indicates the following relationship.

Distanceij = SpeedSea ⇥ TimeSea
Distanceij = Speed Air ⇥ Time Air
From the assumption, we have Speed Air > SpeedSea . Hence, Time Air < TimeSea is hold. Speed Air
and SpeedSea are the average speed of air shipping, b A , and sea shipping, bS , respectively.

13

CCAS No.43 • Nihon University College of Economics• August 2015
The transit time cost of a given product for each transportation mode is definedas the following.
For Ocean freight,S
TCij,k⌘ gS Distanceij = µk ( TimeSea + C̄ + Trans).

(7)

For Air freight,A
TCij,k⌘ g A Distanceij = µk ( Time Air + C̄ ).

(8)

Based on our previous assumptions, the transit time costs of airfreight aresmaller than ocean freight for the same destination because transit time is shorter.
Therefore, g A < gS . These two trade costs, cargo shipping cost and transit timecost, influence the selection of a transportation mode. As with the previous
statement, we consider that trade cost is the sum of cargo shipping cost andtransit time cost. In other words, Trade Costs = F + TC. We consider that a trader
will select the transportation mode with the lower trade cost as being the mostdesirable. This means that airfreight is selected when the trade cost is lower thanthe cost of ocean freight, meaning when DF < DTC. Written in another way,
DF/DTC < 1 is the selection condition for airfreight. As with the transshipment
mentioned previously, there are other cases in which transit time cost can increasedepending on the transaction. For example, first assume that total transit time t⇤
in Figure 2 is the upper limit for allowable transit time. If this upper limit was tobe exceeded, production could be delayed or inventories could run out, both ofwhich would cause additional costs to be incurred (gS grows closer to g⇤ ). If it isassumed ahead of time that transit time will exceed t⇤ , the logical choice would
be to use airfreight.

2.

Air Shipping Ratio Decision Model

Next, we will consider the following in regards to the frequency of airfreight inour model of international trade. First, the Anderson and van Wincoop model
considered in recent years to be the standard for analysis of international tradeflows between two trading partners is defined with the following formula.
Yi,t ⇥ Yj,tkEXij,t=Yw,ttijk
Pi,t Pj,t!1 sHere, Yi and Yj are the GDP (or another measure of the size of the economy)
for year t of the exporting and the importing nations respectively. Yw is the total
global GDP of year t. Pi and Pj are the multilateral resistance terms of country i
14

CCAS No.43 • Nihon University College of Economics• August 2015
and country j, respectively. Further, the elasticity of substitution s is assumed tobe larger than 1 (s > 1). By adding the previously mentioned trade costs of eachtransportation mode to this formula, it becomes equations (9) and (10) respectively.
The amount of exports for each transportation mode is determined based on theseformulas.
Amount of Productk exported by airfreight to country j from country i in Year
t=
k
tAij

Yi,t ⇥ Yj,tk
AirEXij,t=Yw,tPi,t Pj,t

!1 s

(9)

Amount of Productk exported by ocean freight to country j from country i inYear t =ktSijYi,t ⇥ Yj,tk
SeaEXij,t=Yw,tPi,t Pj,t

!1 s

(10)

Further, in order to analyse the selection of transportation mode, we require
the following decision model for the Air Shipping Ratio that utilises equations (9)and (10).
Air Shipping Ratio
k
k
k
k
k
= AirEXij,t/EXij,t= AirEXij,t/(SeaEXij,t+ AirEXij,t)Yi,t ⇥ Yj,t
=
Yw,t

k
tAij

Pi,t Pj,t

!1 s

0

k
tSij

Yi,t ⇥ Yj,t
/@
Yw,t

k
= tA,ij

1 s⇣

Pi,t Pj,t

k
tS,ij
0

1 s

= 1/ @1 +

!1 s

1 s

k
+ tA,ij
1
1 s

k
tS,ij

k
tA,ij

Yi,t ⇥ Yj,t
+
Yw,t

1 s

⌘

k
tAij

Pi,t Pj,t!1 s 1A

A

Here, we break down the transactions of product k into individual varieties,
wn .
In other words,mk = Â wnn =1

, and product k is the sum of wn varieties.
15

CCAS No.43 • Nihon University College of Economics• August 2015
Of all w varieties, airfreight will be selected for transactions in which DF <DTC. For example, the scenario in which airfreight is selected for varieties w1 to
wh can be expressed as k A = Ânh =1 wn , and the varieties for which ocean freight isselected in this scenario can be expressed as kS = Âmn= h+1 wn . Using this, the Air
Shipping Ratio can be rewritten as following.
Air Shipping Ratio
0
1
w
k 1 s
tS,ij
Ânh =1 EXij,kn
@
A
= m
(11)
w = 1/ 1 +1 skÂn=1 EXij,kntA,ijkThis equation (11) has the following meaning: as tA,ij
increases, Air Shippingk increases in number, the Air Shipping Ratio inRatio decreases. Conversely, if tS,ij
creases. Here, we introduce trade costs, including the transit time cost mentionedkk are broken down into
above. As previously mentioned, trade costs tA,ij
and tS,ij
cargo transportation cost and transit time cost as follows.
k
A
A
tA,ij
= Fij,k+ TCij,k
k
S
S
tS,ij
= Fij,k+ TCij,kk /t k increases, Air Shipping Ratio of an export ofIn this scenario, if tA,ij
S,ij
product k from i to j decreases.
Conversely, if it declines the Air Shipping Ratio increases. First, for the AirkShipping Ratio to be positive, tA,ij
must be a finite number. If it is infinite, thek is infinite, the Air
Air Shipping Ratio will converge with zero. Conversely, if tS,ij
Shipping Ratio will converge with 1. Therefore, in order for the Air Shippingkk must increase. In this case,
Ratio to increase, either tA,ij
must decrease, or tS,ij

k /t k < 1. If t kk
we consider that tA,ij
S,ij
A,ij is smaller than tS,ij , the probability thatairfreight will be chosen over ocean freight will be high. This can be rewritten as
the following formula.
k /t k < 1, we get
From tA,ij
S,ij
A
A
S
S
Fij,k
+ TCij,k< Fij,k+ TCij,kASSA= Fij,kFij,k< TCij,kTCij,k= DF < DTC= DF < Distanceij (gS g A )= DF/Distanceij (gSg A ) < 1.

(12)This equation (12) leads to the following. First, the lower the difference incargo transport costs for each transportation mode, the more often airfreight is16

CCAS No.43 • Nihon University College of Economics• August 2015selected. In other words, when a destination country or exported product has
relatively low airfreight costs or relatively high ocean freight costs for the same
distance, the Air Shipping Ratio will increase. One example of this would be anexport destination with frequent regular passenger flights, which have a highprobability of having low airfreight costs. Further, landlocked countries and thosewith insufficient port infrastructure have a high probability of relatively highocean freight costs. Similarly, when there is a large difference in the transit time
costs between each transportation mode, airfreight is more likely to be selected.
In other words, even for the same distance, products (and/or transactions) withhigh transit time costs are likely to have high Air Shipping Ratios. Finally, thelonger the distance, the more likely that airfreight will be selected. Based on theseresults, in the next section we will empirically analyse the determinants of Air
Shipping Ratios of exports using Japanese export data.

3.

Empirical Analysis ModelIn this section, we will empirically analyse whether the Air Shipping Ratio ofexports is influenced by the factors explained in the previous section. We havedesigned an estimation model like (13) below based on the discussion in theprevious sections. This model uses data from 2007, and adopts the OLS estimation
method.
ARijk = b 0 + b 1 Distanceij + b 2 D_TCk + b 3 D_Landlocked j + b 4 In f raFj

+ b 5 Port j + b 6 VWijk + #kij

(13)

Firstly, the dependent variable AR is the previously discussed air shipping
ratio of exports, and it is calculated for each of Japan’s HS 9-digit export products.
Because the Air Shipping Ratio takes a value between 0 and 1, we perform a logit
transformation on the dependent variable. Further, Air Shipping Ratios of 0 and
1 have been removed from the sample set. As an Air Shipping Ratio of 0 or 1
indicates that the product (transaction) in question cannot be shipped by either
ocean freight or airfreight, there is no choice on a transportation mode for theseproducts. Therefore, they are not subject to analysis in this paper.
Secondly, factors that influence transit time on the national level are selected
as explanatory variables for the first group. First of these is Distance, which is
the great circle distance14 from Japan to the export destination. As discussed in
the previous section 2, a longer distance decreases average speed, pointing out
14 This distance data is collected from the GeoDist, CEPII. One can download this file from thefollowing URL : http://www.cepii.fr/anglaisgraph/bdd/distance.htm

17CCAS No.43 • Nihon University College of Economics• August 2015
Transit time cost
Panel (d)Panel (a)Sea ShippingΔTC

Air Shipping
ΔF

FA
Transport cost

FS

𝐶𝐶̅

A

Distance

Air Shippingt*

Panel (c)Panel (b)Total transit time

Sea Shipping

Figure 2: Transport Mode Decision Modelthe possibility that transit time costs may become relatively higher. Therefore, we
predict that distance has a positive influence on the Air Shipping Ratio.
Thirdly, we consider that landlocked countries without ports require groundtransportation, which will cost relatively more than ocean freight costs for anequivalent distance. In other words, we predict that being landlocked will increase
the Air Shipping Ratio of a country, thus having a positive effect on the air shipping
ratio. For this reason, we add a dummy variable (D_Landlocked), with landlocked
countries having a value of 1, and all other countries having a value of 0.
Finally, we introduce the explanatory variable of the level of transportation
infrastructure development of each country. "Port" represents the quality of theeach country’s port facilities on a scale from 1 to 7 (with 7 being the best possible

18

CCAS No.43 • Nihon University College of Economics• August 2015
Table 6: Definition of Dependent and Explanatory Variables
Dependent Variable
Air Shipping Ratio

Definition of Variables
Air Shipping Ratio of HS 9-digit product:
Export value shipped by air freight ÷ Export valueof product k from Japan to country j in year t

Explanatory
Variables

Definition

Distancej

Great circle distance from Japan to country j in log

Expected
Sign Condition+

Dummy variables for transit-time cost of product k to country j :D_PCParts and components product = 1, Others = 0

+

D_PG

Processed goods products = 1, Others = 0

-

D_CG

Capital goods products = 1, Others = 0

-

D_Con

Consumer goods products = 1, Others = 0

+

VWkj

Export value ÷ Weight(kg)of product k exported from Japan to country j+

D_Landlockedj

Dummy variable for landlocked country j :Landlocked = 1, Coastal = 0

+

Portj

Level of Port Infrastructure development of country j-

InfraFj

Relative level of domestic airfreight infrastructure development :Air Transport Freight ÷ Road, goods Transported+

rating)15 . Landlocked countries do not have port facilities, so this is no data. In
order to prevent the loss of sample data on landlocked countries, they are given
a 1 for this variable (1 being the worst possible rating). Because the presence ofhigh-quality port facilities is certain to contribute decreasing the transit time ofocean freight, it is expected to be a factor that decreases the Air Shipping Ratio. In
the same way, an export destination country having a high level of road and rail
infrastructure development is also considered to be a factor that decreases the Air
Shipping Ratio. However, the level of land route infrastructure development has ahigh correlation coefficient with the level of airport infrastructure development,
and is therefore not included as an explanatory variable. Therefore, we include
the relative level of airport infrastructure development as an explanatory variable,
15 The data of the quality of port infrastructure used here is taken from the World Development

Indicators, The World Bank.

19

CCAS No.43 • Nihon University College of Economics• August 2015
and we consider that the Air Shipping Ratio will increase when the level of airport
infrastructure has a relative advantage to those of land routes.
The explanatory variables of the second group are those that take into accountthe characteristics of each product that we consider to have an effect on the
Air Shipping Ratio. These are all dummy variables for transit time cost. Here,based on the UN Broad Economic Categories (BECs) previously mentioned, we
try to find the differences in transit time cost that likely exist between eachproduct. For example, intermediate goods within an internationally fragmented
production network, global value chains (GVCs), are products that absolutely
must be supplied in a reliable manner.
In the case of Japanese companies that use lean production methods in particular, intermediate goods such as parts and components must be delivered ontime. Because of this, we consider intermediate products to have relatively higher
transit time cost than other products. Therefore, we introduce a transit time cost
dummy variable, such as 1 for intermediate products and 0 for other products. In
the same way, we introduce a dummy variable for each BECs, namely, consumer
goods, materials, processed goods, and capital goods.
Here, the export data of the dependent variable is on the HS 9-digit level, yet
BEC classifications are on the HS 6-digit level. Therefore, each 9-digit productis categorised in the HS 6-digit level so as to make to be compatible with BEC
classifications. According previous studies, intermediate products and consumer
products have high frequency of being shipped by airfreight. In addition to this,we have also included the export value per 1 kg of each product (a proxy variable
for lightweight products, VW) as an indication of the effect the characteristics ofeach product has on its Air Shipping Ratio. Because lightweight products haveproportionately lower airfreight transportation costs, we assume that higher Value
Weight (VW) is a factor that increases the Air Shipping Ratio. A summary of thedefinitions and expected sign conditions of these variables can be found in Table
6 below.
In addition, in this paper we are using trade data from before the so-called"Lehman shock". As the world suffered a rapid decline and increase in the amountof trade after the Lehman shock, we found that the extreme fluctuations were notconducive to the purpose of our analysis. Therefore, we have analysed a periodof time prior to the Lehman shock in 2008.

4.

Results of Estimations

The results of estimations using the estimation model explained in IV are shownon Table 7. Here, we separate the estimation models into two large groups.
Namely, the estimation models of the first group include data on exports to20

CCAS No.43 • Nihon University College of Economics• August 2015
landlocked countries (Models (1) through (6), while the estimation models of thesecond group (Models (7) through (11)) exclude this data. This is in considerationof the fact that the characteristics of landlocked countries have a large effect on
Air Shipping Ratios, with the possibility of a large variance from coastal countries.
As shown in Table 7, based on all of the estimation results we can come to theconclusion, that the estimation models are highly significant overall. Virtually allof the explanatory variables are statistically significant, with most of them being
significant to the level of 1%. To begin, of the explanatory variables considered toaffect the Air Shipping Ratio at the country level, Distance was found to be both
positive, and significant in all of the models to the 1% level. As predicted by theprevious models, this signifies that the further the shipping distance is, the higher
the Air Shipping Ratio will be. Previous studies including shipment weight as an
explanatory value have also shown that distance has a positive correlation with
the Air Shipping Ratio.
Next, the landlocked dummy is both positive and significant to the 1% level.
As we expected, countries without seaport facilities tend to have longer transit
times than countries of the same distance with them. Therefore, it is likely that
there are merits to cutting down total transit time by air shipping. Further, therelative level of airport infrastructure development was positive as expected,
albeit with a slightly low level of significance. On the other hand, Port was
statistically significant, but gave us an unexpected result of positive. This may
mean that countries with high-quality ports also have sufficiently developed
airport infrastructure. It may also be that the quality of port facilities may nothave a significant effect on ocean freight shipping costs. Therefore, the quality ofport facilities does not have a significant effect on the selection of transportation
modes, and there may be a more important factor at work.
The second group of explanatory variables, which consider the characteristics
of each product, the dummy variables for intermediate and consumer goods areboth significant and positive. As pointed out by previous research, intermediate
goods have are frequently shipped by airfreight. In the same way, consumer
products, as demonstrated by lean inventory methods, are considered to be
products with have relatively high transit time costs. Finally, the Value-Weightvariable was also shown to be significant and positive. As expected, we can say
for sure that the lighter a product is, the higher its Air Shipping Ratio.

IV.

Conclusion

Currently, airfreight is responsible for approximately 30% of the value of Japan’s
exports, which is certainly not a small amount. As shown in this paper, the
Air Shipping Ratio for Japanese exports differs vastly depending on the product
21

AR

(5)

49662

t statistics in parentheses*p<0.05, **p<0.01, ***p<0.001

N

_cons

-1.865***(-71.52)44868-1.862***(-71.32)

44868

25804

-2.483***(-36.97)44868-2.228***(-48.15)

0.0559(1.79)

InfraF-1.758***(-67.02)

0.0732***(9.49)

0.0974***(7.71)

Port

0.616***(10.88)0.629***(11.13)

D_Landlocked

0.659***(10.70)0.387***(9.86)-0.0975**(-2.93)-0.716***(-16.48)0.369***(12.83)0.00539***(30.07)0.349***(6.93)-0.175***(-3.92)-0.707***(-12.74)

0.394***(10.10)0.00367***(19.62)VW
0.00539***(30.02)0.443***(12.08)D_Con-0.100**(-3.01)0.00540***(30.03)-0.0922**(-2.76)0.0703*(2.16)

D_CG-0.698***(-16.06)

0.417***(10.64)-0.698***(-16.03)-0.695***(-15.45)0.352***(12.24)

0.416***(10.60)0.363***(12.61)

D_PG

AR

(4)
AR

(6)
AR

AR

Excluding landlocked countries
(8)
(7)
(9)
AR

AR

(10)
AR

(11)

25804

-2.053***(-54.95)

0.0719*(2.31)

0.629***(10.23)0.00367***(19.58)0.377***(7.50)-0.181***(-4.05)-0.680***(-12.25)

0.377***(9.66)

47613-1.770***(-67.10)0.457***(12.26)

0.0637(1.92)-0.715***(-15.65)

0.603***(20.35)43035-1.872***(-71.29)0.00523***(29.03)0.428***(10.75)-0.106**(-3.09)-0.719***(-16.26)0.365***(12.40)24148-2.599***(-37.61)1.440***(10.62)0.0753***(5.81)

0.00351***(18.68)0.362***(7.02)-0.198***(-4.28)-0.749***(-13.16)0.395***(9.73)

43035-2.228***(-47.64)0.0715***(9.19)

0.00523***(29.07)0.399***(10.01)-0.103**(-3.02)-0.737***(-16.65)

0.382***(12.97)24148-2.283***(-53.63)

1.571***(11.73)0.00350***(18.66)

0.382***(7.42)-0.202***(-4.38)-0.731***(-12.84)

0.380***(9.37)

0.0000386*** 0.0000491*** 0.0000466*** 0.0000715*** 0.0000488*** 0.0000764*** 0.0000368*** 0.0000475*** 0.0000904*** 0.0000497*** 0.0000955***(13.87)(17.49)(16.59)(17.60)(17.31)(19.01)(13.12)(16.78)(20.34)(17.51)(21.89)0.595***(20.57)

D_PC

Distance

AR

AR

AR

(3)

Table 7 Estimation Results.
Including landlocked countries(1)(2)

CCAS No.43 • Nihon University College of Economics• August 2015
Table 7: The Estimation Results

22

CCAS No.43 • Nihon University College of Economics• August 2015
and the destination. Out of all Japanese exports, the majority of transactions(products or destinations) have an Air Shipping Ratio of either 0 or 1, indicatingthat they can only be shipped by either ocean freight or airfreight. However, allother transactions had Air Shipping Ratios distributed between 0 and 1, and agiven product being shipped to a given destination will not necessarily always
be shipped either by ship or aircraft. In other words, a trader exporting a certain
product to a specific country will not always exclusively select either airfreightor ocean freight. While it seems that ocean freight is the clear choice when
considering shipping costs, in reality the selection of transportation modes is more
complex. Therefore in this paper we attempted to analyse the mechanisms which
can cause airfreight to become the logical choice by introducing the concept oftransit time cost.
First, we applied the Anderson and van Wincoop-type gravity model in order
to express the degree to which traders select airfreight in terms of the Air Shipping
Ratio. This indicated that the Air Shipping Ratio relied on the relative differenceof the trade costs between airfreight and ocean freight. Then, we divided trade
costs into shipping costs and transit time costs, and considered the conditions inwhich airfreight was advantageous based on their correlation to distance and totaltransit time. There, we saw that products having relatively high transit time costs,
factors that decrease the cost of airfreight shipping, factors that increase ocean
freight shipping costs, and distant trading partners all increased the frequency of
the use of airfreight. Based on the results of this consideration, we constructed
the estimation model using the data of Japanese exports in 2007 and performed
the quantitative analysis. Based on the results of our estimations, we can statethat the factors predicted by the analysis model influenced on the Air Shipping
Ratio of Japanese exports. Namely, we saw that intermediate and consumer goods
have higher Air Shipping Ratios due to their high transit time costs. This isbest represented by transactions involving traders utilising lean production andinventory methods.
Finally, we saw that the greater the distance to the destination, the greater
additional transit time due to various factors (landlocked, etc.) for destinationsof the same distance, and/or the higher the quality of airport infrastructuredevelopment of a destination, the higher the Air Shipping Ratio will be forJapanese exports.
Based on the assumption that time costs would differ for products based on
their purpose of use, we introduced a dummy variable for each BEC classification
as a proxy variable for time cost. In the future, we wish to consider introducing
time cost for each product as a non-dummy quantitative variable.

23

CCAS No.43 • Nihon University College of Economics• August 2015

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