31 st IRU World Congress Road Transport, Driving Peace and Prosperity May 2008 Road Transport, Driving Peace and Prosperity An Economic and Social Imperative Jamal Saghir Director Energy, Transport and Water The World Bank

Climate Change Transforming Peoples Lives Transport & HIV/AIDS Oil & Gas Affordable Transport Urbanization & Transport Transport Emissions & Climate Change Macroeconomic & Fiscal issues Transport & Gender Gender Transport & Social Inclusion Transport & Energy Energy Security Road Safety Traffic Congestion Regional Integration Integration Competition between fuel and food Landmanagement Leveraging Private Sector Aid Architecture Biofuels MitigationandAdaptation MDGs Energy Global Issues Globalization Transforming Peoples Lives Lives Transport for Trade

Three Main Messages Trade and transport costs are now more important for globalization than trade policy Transport costs are misperceived: Distance is not dead, nor is the world flat Transport policy has to overcome its national bias and live up to new challenges 3

Message 1: Trade and transport costs are now more important for globalization than trade policy Tariffs have gone down, and non-tariff barriers have a limited range Transport and other trade costs are high by comparison Most negatively affected by high transport costs are landlocked countries Lower transport costs have strong positive trade and development effects 4

Importance of trade policy barriers for international trade Trade policy barriers are low by comparison – Hong Kong and Switzerland have removed all tariffs – US tariffs are 1.9% as a simple average – Industrialized countries have a simple average of 5% – Average tariff levels are above 10% for many developing countries – Highest levels are in India (30.1%) and Bangladesh (22.7%) 5

Importance of trade policy barriers for international trade Trade policy barriers are low by comparison – Non-tariff barriers are concentrated in a small number of sectors – NTBs are more restrictive than tariffs, in particular barriers to agricultural trade in rich countries 6

Importance of trade costs for international trade Trade costs amount to a tax-equivalent of 170% on production value for rich countries (US) – 55% wholesale and resale distribution costs – 44% border crossing costs – 21% transport costs 12% monetary transport costs 2% time costs 7

Importance of transport costs for international trade The burden of landlockedness – Lack of access to inputs: average import share of landlocked countries is 11% compared to an average 28% – Lack of access to export markets: none of the top 15 non-primary export performers is a landlocked country – Infrastructure deficits explain 60% of high transport costs of landlocked countries 8

Importance of transport costs for international trade High responsiveness of trade to transport costs: a 10% increase in transport costs leads to a 20% reduction in trade volumes on average High transport costs reduces competitiveness in two ways: – Net domestic export prices are reduced – Gross imported input prices are higher 9

Importance of transport costs for international trade Improved access to international markets by lowering transport costs by 10% raises national income by 2.5% Reduced international transport costs increases Foreign Direct Investment and knowledge transfer due to insourcing Lower international transport costs enhance agglomeration economies 10

Importance of trade costs for international trade Reducing congestion by increasing international infrastructure capacity from median values to the top 25 th percentile would – reduce cif/fob ratios from 1.28 to 1.12 – increase trade volumes by 68% 11

Importance of transport costs for international integration Trade relations increase the cost of conflict – Bilateral trade makes wars less likely – Low transport costs reduce probabilities of armed conflicts 12

Message 2: Transport costs are misperceived: Reducing transport costs is not a finished business Air transport costs have declined strongly but the mode remains relatively unimportant for trade Road transport costs have decrease more strongly Rail transport have weakly declined and differently in different submarkets Maritime transport costs have weakly decreased despite strong technical change Distance continues to reduce trade intensity 13

The reduction of transport costs Air 14 Most drastic fall but still unimportant for international trade: – Less than 1% in terms of volume but growing share – Higher share in terms of value but decreasing

The reduction of transport costs Air 15

The reduction of transport costs Road Road transport has become less costly – Overall decline of about 40% in 1980s and 1990s – Main contributor was the de-regulation of trucking (more than -20 percentage points) – Vehicle costs decreased – Fuel costs decreased despite the fuel price increases, indicating a reduced carbon intensity 16

The reduction of transport costs Rail Far smaller cost reduction compared to road sector Strong segmentation into submarkets, depending on competition from the road sector Increase of mark-ups in submarkets for bulk (coal, grain) Strongest decrease of freight rates in specialized markets (chemicals and automobiles) 17

The reduction of transport costs Maritime Still dominates international trade: 74% in volume terms Despite containerization and new vessel technologies no dramatic decrease of freight rates Strong differences in liner and tramp services Highly monopolized and monopolizing sector, including vertical integration with infrastructure 18

The reduction of transport costs Maritime 19

The reduction of transport costs Maritime 20

The reduction of transport costs Persistence of Distance 21

The reduction of transport costs Persistence of Distance Distance coefficient in trade equations does not go down but increases – Higher demand for speed, correlated with shorter product and fashion cycles – Higher demand for reliability – Result of higher transport and logistics costs 22

Message 3: What can transport policy do? Overcome the underinvestment bias in international infrastructure investment Reduce infrastructure rents by regulation Reduce rents in transport operations by competition policy Facilitate trade by more efficient border crossing Support new technologies to reduce external costs 23

International transport policy challenges: Infrastructure Investment Overcome the underinvestment bias in international infrastructure – Policy makers face limits in accounting for benefits to foreigners – Mutual benefits between countries need trust in reciprocity, coordination through formal good neighborhood 24

International transport policy challenges: Infrastructure Regulation Regulation of nodal facilities – Avoid natural monopoly rents of port and airport facilities – Avoid overuse of capacity by congestion charges – Implement logistics systems that minimize intermodal switching costs 25

International transport policy challenges: Competition Policy Organize the cooperation between transport and competition policy – Induce further reduction of transport costs by reducing cartelization – Remove protected sub-markets for public companies – Unbundle natural monopolies by vertical integration of operations and the provision of infrastructure services 26

International transport policy challenges: Trade Facilitation Part of the policy dialogue on trade issues since the WTO Ministerial in 1996 Focus on – Port efficiency – Customs regimes – Information technology infrastructure – Governance 27

International transport policy challenges: Trade Facilitation Lifting the border crossing capacity of the poorest performers of a sample of 75 countries to half the global average would result in $377 billion in trade gains The strongest impact is due to increasing port productivity and an expansion of the IT capacity The major part of the trade facilitation benefits result from the expansion of exports 28

International transport policy challenges: External Costs New challenges increasing transport costs – Climate change and the long-run perspective New fuels Fuel cell technologies – Rapid motorization processes and road safety – Limits to infrastructure expansion Intermodality Congestion charging 29

Conclusion Transport costs are a central determinant for trade and development Transport costs have less declined than perceived Transport policy has to better take up its international function – in infrastructure policies – in combining with trade and competition policies Demand management and new technologies are needed to sustain accessibility of markets 30

Thank you