The effect of maritime transport costs on the extensive and intensive margins: Evidence from the Europe–Asia trade

Abstract

This article investigates the determinants of maritime trade. It focuses in particular on the extent to which variations in trade-related costs between Asia and Europe help to explain the surge in Euro–Asian trade in eight of the most emblematic categories of products related to Asian success: textiles, footwear, confection, machinery, electronic products, vehicles, furniture and pharmaceutical products. In marked contrast to other studies that focus only on the determinants of total maritime trade, we decompose trade into two margins: the number of different products exchanged (extensive margin) and the average value of each product (intensive margin). We estimate a trade-augmented gravity model with trade cost factors for specific trade flows and industries and for both margins of trade. Several types of trade costs are considered, namely maritime transport costs, time to export/import, behind-the-border trade costs and distances. The main findings indicate that lower freight costs increase aggregate trade values mainly by increasing the average value of imported varieties, but also by increasing the number of products traded. Our findings suggest that political actions aimed at spurring competition and innovation in the maritime transport industry do have an impact on the volume and composition of international trade.