MARITIME SHIPPING IN INTERNATIONAL TRADE
Creators: name: Useche, Manuel Ignacio I Jimenez
Publisher: name: Purdue University Graduate School
Year: 2023
Subjects: International economics
Transport economics
Industry economics and industrial organisation

description: Maritime shipping is the most important mode of transportation for international trade. About 70 to 80 percent of the value traded worldwide moves by sea [1]. An inherent problem in global shipping markets is that non-competitive pricing behavior among carriers is widely believed to raise the cost of freight [2]–[5]. It is also likely that the effects of this problem on international trade flows and welfare are magnified by restricted cabotage reservation schemes. Historically, countries have implemented such policies to prohibit foreign competition in domestic shipping markets. The effects of protection on international goods trade are reasonably well understood. The effects of protection on service trade are less straight-forward. Issues of quality become more important, but they are challenging to measure. Moreover, most of these cabotage reservation schemes ban service imports. Therefore, this makes it complicated to compare domestic and foreign services in the same market, given that service activities are place-specific. <br> In order to better understand the effect of non-competitive pricing behavior in global shipping markets on international trade flows and the incidence of cabotage reservation schemes in shipping markets, I develop three essays. In the first Essay I focus on quantifying the economic effects of non-competitive pricing behavior in the maritime shipping industry on (1) freight costs, (2) international trade flows, and (3) economic welfare. The research question that I answer is: what share of observed shipping freight charges is attributable to non-competitive pricing behavior in maritime shipping markets? I estimate the maritime shipping mark-ups applying the method of Atkin and Donaldson [6] to U.S. Census import data of shipments moved by sea during the period 2002-2017. I find that freight mark-ups account for approximately one-third of total freight charges in U.S. imports. Carriers’ mark-ups thus represent an equivalent ad valorem tariff of 1.4-2.6 percent. U.S. imports of differentiated products would be 4.2 to 11.6 percent higher if these mark-ups were eliminated. The cost of these mark-ups in terms of economic welfare for U.S. consumers represents an annual reduction of 0.1-0.2 percent of their real income. Carriers also charge higher maritime shipping mark-ups (per kg.) to high-value products, products with a lower elasticity of substitution, and products with higher import tariffs. Imported products from developing countries or from distant countries to the U.S. are also charged with larger tariff equivalent mark-ups. <br> In the second Essay I estimate the economic burden placed on Puerto Rico by the Jones Act. Using Lloyd’s List Intelligence (LLI) data to document the supply of shipping services in the U.S. -Puerto Rico shipping market, I find that the Jones Act fleet serving Puerto Rico contains no ships designed for the purpose of moving general cargo or bulk commodities. I then evaluate how this lack of supply of shipping services is a burden on imports of goods that would normally travel by ships of those kinds, modelling Puerto Rico’s import demand in a gravity framework. This exercise indicates that Puerto Rico’s demand for final goods exhibits a greater substitution towards non-U.S. sources among products that tend a) to be shipped by sea, b) to be physically heavy, and c) not to be moved in containers. I then estimate a structural gravity model to quantify the tariff-equivalent trade costs the Jones Act imposes on U.S. shipments. This model yields that the Jones Act represents a tariff equivalent of 30.6 percent on average across products. Finally, I use these estimates to calculate the compensating variation of Jones Act removal. I find that the cost of final expenditure in Puerto Rico would be $1.4 billion (about 1.3 percent) lower per year without the Jones Act. <br> Finally, in the third Essay I investigate what specifically explains the estimated change in Puerto Rico’s import demand for U.S. products due to the Jones Act. I use detailed data of vessels’ ports-of-call in the Caribbean from LLI to document issues of service quality and availability in maritime shipping services between the U.S. and Puerto Rico during the period 2004-2020, calculating metrics for some quality dimensions (e.g., vessels age, shipping capacity, shipping frequency and more). I also evaluate market conditions such as the concentration level in the market of carriers and shipyard building companies in order to examine the presumed incidence in shipping freight costs. Additionally, I use Puerto Rico’s import data from the Instituto de Estadísticas de Puerto Rico (IEPR) to evaluate how much the Jones Act restrictions affect the mode choice decisions for shipping products between U.S. mainland and Puerto Rico. The research question that I try to answer is: what is the level and evolution of the quality of shipping services provided by Jones Act-compliant vessels in the U.S.-Puerto Rico shipping market?