## **Box 2.  Shortcomings of Current Macro-Estimation of Transportation Costs**

_Cif/fob margin masks compositional effect due to their high level of aggregation (Hummels 1999)_ They are generally unreliable for most developing countries (For several former Soviet Union countries, the fob figure was higher than the cif figure). The issue of inclusion or not of insurance payments in these estimates is not clear depending on the countries. The informal transport charges can be inaccurately reported or estimated. Finally, internal transport costs are sometimes not included in cif estimates by customs even though these costs can be significant. Comparing cif/fob data with real shipping data, Hummels and Lugovskyy (2003) found negative transportation costs for almost 40% of the bilateral US imports.’ In the case of “ _freight payments as percent of total imports,_ ” there are two major methodological problems as well as data collection problems: The registry location of vehicles, and of firms alike, used in transport largely determines whether freight payments are considered as: service export, import or domestic service provision. Changes in registry or cross-border sale (or relocation of the HQ) of transport firms (especially "flagging out" of merchant ships and to a lesser extent, aircraft and trucks) can transform what was a domestic provision or export of transport services into an import of the same, even if the very same ships, aircraft, or trucks can continue to operate on the same routes under the same management. This can cause serious discrepancies between registered data and the real situation in many LLDCs. Even, in developed countries, the ownership restructuring in the transport and logistics industry makes the use of the Balance of Payments data almost impossible. Like cif/fob margin, it is masking disaggregated trends in transport costs. Shifts in the trade composition or trade partners or increase or decrease of transport costs for any product are not measured with this aggregate data.

Additionally, there are several _data collection_ problems (as raised in Stone, 2001):

- Customs cif  generally represents the burden of import costs up to the country's border. In practice, estimates in some cases include internal transport charges up to the destination city in the landlocked country. The true economic burden of freight costs on imports should indeed include these internal costs, but they are not necessarily included.

- The insurance issue is not clearly addressed: cargo insurance is, in some cases, probably included with Freight, in others it may be separately covered in the Insurance (debit) item.

- We do not know exactly if it includes the ‘full burden of informal transport charges at security checkpoints’ (Stone 2001). In theory it should be, but in practice it may be problematic.

Source: Hummels (1999) exchanges with Prof. Hummels and Prof. Ojala.

A recent innovative body of work combines shipping cost-time information with trade statistics and highlight the value of time as a trade cost (Hummels (2001) and Djankov (2006)). Although more insightful than pure macro-statistics, this approach does not disentangle the various sources of transit trade cost (see section 5.1).

# **3.1 Transit Systems and the Supply Chain Conceptual Framework**

Transit trade describes the inland movement of goods under customs control that is not cleared by customs. Transit can take place in the country of destination/origin of the 9