Pandemic-induced increases in container freight rates: assessing their domestic effects in a globalised world

This paper was produced as part of the BIS Consultative Council for the Americas (CCA) research conference on "Structural changes in inflation and output dynamics after Covid and other shocks", held in Mexico City on 17–18 November 2022.

Summary

Focus

One channel through which the Covid-19 pandemic affected welfare was the disruption in sea transport and its subsequent effects on international trade and global production networks. This study aims to quantify the effects of the pandemic-induced increase in freight rates worldwide on real wages, consumption and ultimately welfare in Colombia . To achieve this, we used a dynamic quantitative model of international trade, employing an instrumental variable approach to estimate athe trade elasticiyties with respect to freight.

Contribution

The research sheds light on the heterogeneous effects of transportation cost shocks on the variables under study, considering the globalised nature of these shocks. It emphasises that the effects on employment reallocations and welfare depend on the magnitude of freight rate increases on routes involving the country under study, relative to those on other routes. In essence, these effects depend on whether the shocks render the country more open or closed relative to the rest of the world. This information holds significance for policymakers aiming to quantify how far welfare impacts arise from domestic or external factors.

Findings

The global rise in container freight rates during the pandemic led to a 1.4% welfare loss for the Colombian economy, alongside moderate effects on labour reallocations. This decline in welfare can be attributed solely to the increased freight rates on goods imported and exported by Colombia. It is worth noting that, while higher freight rates on routes not involving Colombia do impact the country's productive structure through a cost-push shock, they also help to enhance Colombia's relative trade openness compared with that of the rest of the world. As a result, these factors generate trade gains that counterbalance the adverse effects of increased shipping costs worldwide. 

Abstract

The Covid-19 pandemic severely disrupted the sea transportation industry, leading container freight rates to reach record highs from late 2020 and into 2021. This study examines the welfare effects of this disruption on a specific country, Colombia. For this, I use a quantitative model of international trade with out-of-steady-state transitional dynamics and a rich structure for the organization of production, plus an instrumental variable approach to estimate a trade elasticity to freight. I quantify both the direct effects of freight increases on goods transported to and from Colombia, as well as the indirect impact of heightened rates on routes across the rest of the world. The resulting welfare loss of 1.4% is solely attributable to the direct effects, as the indirect impact simultaneously improves Colombia's relative trade openness, thereby compensating for the effects of the increased shipping costs worldwide.

JEL classification: F16, F62, F17

Keywords : container freight, transportation costs, international trade, Covid-19