Endogenous Transport Prices and Trade Imbalances

This discussion paper led to a publication in the <A href="http://joeg.oxfordjournals.org/content/11/3/509"><I>Journal of Economic Geography</I></A>, 2011, 11(3), 509-527.<P> According to economic theory, imbalances in trade flows affect transport prices because (some) carriers have to return without cargo from the low demand region to the high demand region. Therefore, transport prices in the high demand direction have to exceed those in the low demand direction. This implies that transport costs, and therefore trade costs, are fundamentally endogenous with respect to trade imbalances. We study this effect using transport prices for the inland waterway transport market in north-west Europe. We find that imbalances in trade flows have substantial effects on transport prices. We estimate that a one standard deviation increase in the trade imbalance from region A to region B decreases transport prices from A to B by about 8 percent.