Analysing measurements of international transportation costs

Abstract

Transport costs are commonly used in research when analysing international trade, specifically as one of the determinants of trade flows. Furthermore, transport costs are often used as one of the elements to identify markets with high export potentials. However, quotations for direct transport costs between countries are difficult to obtain for research purposes. Therefore, many researchers use indirect measures such as the CIF/FOB ratios to measure a country's cost of international transportation. This dissertation contributes to a better understanding of the CIF/FOB ratios as a measure of international transport costs, and aims at highlighting some of the limitations attached to using these ratios as a substitute for direct measures. A correlation analysis is used for investigating whether these ratios are adequate to replace quotations for actual transport costs by comparing their variation with direct freight rates for South Africa. The analysis compensates for some of the limitations of aggregate CIF/FOB ratios by taking into consideration transport mode, product type and partner country. The direct freight rates were obtained from a freight forwarder company located in Johannesburg, South Africa, and includes rates from South Africa to eleven Far East countries and fourteen European countries. The freight rates were collected for general cargo and automotive parts for containerised products. The CIF/FOB data used in this study are sourced from the World Integrated Trade Solution (WITS), United Nations Conference on Trade and Development (UNCTAD), International Monetary Fund`s International Financial Statistics (IFS), Direction of Trade Statistics (DOTS) and the Global Trade Analysis Project (GTAP). The findings of this study show that the CIF/FOB data is severely error-ridden and that researchers should be careful when using CIF/FOB ratios as a source of international maritime transport costs. Even after considering transport mode, product type and partner country, the CIF/FOB ratios calculated for purposes of this study display a very low and mostly insignificant correlation with direct freight rates. Overall, there was an increasing trend in the CIF/FOB ratios and a declining trend in the actual freight rates. Where possible, direct transport costs should rather be used.