An increasing proportion of US trade with partners outside of North America was air-shipped, even though airfreight commands a premium over ocean freight equal to 25% of the good's value. Shippers are willing to pay this premium because of time savings; airfreight saves an average of 4 weeks in shipping time on US trade routes. Despite this willingness to pay a premium to save time, trade theory does not explicitly recognize the importance of time. This research will examine the importance of time as a trade barrier. It addresses three specific questions: (i) why are importers willingness to pay to save time in transport and how does this vary across goods, importers, and time periods? (ii) what is the source of the willingness to pay?, and (iii) how has the relative decline in air shipping cost affected the rise in world trade in general, and specifically the rapid increase in time-intensive forms of integration?
This examines how firms choose export location and transport mode in order to trade off fast but expensive air transport against slow but inexpensive ocean shipping. Variation across country pairs and commodities in the relative price/speed tradeoff identify a willingness-to-pay for timesavings in shipment. A pilot study using US data indicates that each additional day increase in shipping reduces the probability of sourcing from a given location by 1%. Conditional on sourcing, the price premium paid for air shipping is equivalent to a willingness-to-pay for timesavings of just under 1% per day. Identification of why firms are willing to pay to save time is obtained from looking at good/industry characteristics, information intensity, price, and inventory behavior. Cross-country evolution of air relative to ocean freight costs and its corresponding effect on trade growth and composition will identify trade effects of relative price declines of air shipping.
In addition to identifying the value of time as a trade barrier, the techniques developed in this research will be informative about many policies and sources of technological change that speed goods to market. For example, investing in streamlined customs procedures allows imported goods to reach their destinations more quickly, and estimates of the value of each day are necessary to calculate their economic benefit. These calculations can be especially helpful in international trade negotiations as well as the effects of disruptions to international trade. This research will have significant impacts on trade theory and policy.
