Source: Adapted from Spulber, D.F. (2007) Global Competitive Strategy, Cambridge: Cambridge University Press.
There are four major cost components in international trade, known as the “Four Ts”:
- Transaction costs. The costs related to the economic exchange behind trade. It can include the gathering of information, negotiating, and enforcing contracts, letters of credit, and transactions, including monetary exchange rates, if a transaction takes place in another currency. Transactions taking place within a corporation are commonly lower than for transactions taking place between corporations. Still, with e-commerce and e-documentation, they have declined substantially.
- Tariff and non-tariff costs. Levies imposed by governments on a realized trade flow. They can involve a direct monetary cost according to the product being traded (e.g. agricultural goods, finished goods, petroleum, etc.) or standards to be abided to for a product to be allowed entry into a foreign market. A variety of multilateral and bilateral arrangements have reduced tariffs, and internationally recognized standards (e.g. ISO) have marginalized non-tariffs barriers.
- Transport costs. The full costs of shipping goods from the point of production to the point of consumption. Containerization, intermodal transportation, and economies of scale have reduced transport costs significantly.
- Time costs. The delays related to the lag between an order and the moment it is received by the purchaser, which is often referred to as inventory in transit. Long-distance international trade is often associated with time delays that can be compounded by custom inspection delays. Supply chain management strategies are able to mitigate effectively time constraints, namely through the concepts such as just-in-time distribution supported by a regular frequency of deliveries.
Each of the costs has an exogenous (between countries) and endogenous dimension (within countries):
- Separation factors, such as distance, transportation costs, and travel time, are imposing a friction to trade imposed by geography and the structure of international transportation networks. Transportation infrastructure, namely ports, can help mitigate these seperation factors. Countries that are part of the same trade agreement usually have lower separation factors than countries within a similar distance, but outside the trade agreement.
- Country-specific factors, such as customs procedures, are dominantly under the control of the concerned nation and can impact trade negatively if tariffs are high and restrictions are imposed on specific goods. The national transportation system, particularly its main gateways, and corridors, has an important influence on the performance of international trade flows as it involves the fundamental “first and last mile leg” in a supply chain.