Author: Dr. Jean-Paul Rodrigue
Commercial geography looks at trade and transactions in terms of what they involve, how they are generated, and their outcomes.
1. Trade and Commercial Geography
Trade, the exchange of goods and services over long distances, and commercial activities, the exchange of products and services at specific markets, are core components of the economy. Trade and commerce have evolved in space and time, from low volume and limited extent before the industrial revolution, to the extensive flows and transactions that characterize the contemporary global economy. Historically, wealth was dominantly related to agricultural output implying that the largest economies were those with the largest populations, but these populations were mainly rural and with low income. As such, trade and commerce were marginal activities.
The industrial revolution irremediably changed trade and commerce with mechanization and its multiplying effects on production and consumption. Economic systems remain based on trade and transactions despite substantial growth in production capabilities since specialization and efficiency require interdependency. People trade their labor for a wage, often commuting in the process, while corporations trade their output for capital, having to access markets. Trade is the transmission of ownership in return for a counterpart, generally money, often defined as a medium of exchange. This exchange involves a transaction and its associated capital flows, information, commodities, parts, or finished products. All these activities define commercial geography.
Commercial geography investigates the spatial characteristics of trade and transactions in terms of their nature, causes, and consequences. It leans on the analysis of transactions, from a simple commercial transaction involving an individual purchasing a product at a store, to the complex network of transactions maintained between a multinational corporation and its suppliers. The scale and scope of commercial geography vary significantly.
Commercial geography can be considered a component of economic geography similar to transport geography. Still, it is relevant to see commercial geography as distinct, which allows the sphere of locations investigated by economic geography to interact with the sphere of circulation investigated by transport geography.
Trade, in terms of its origins and destinations, has a spatial logic. It not only reflects the economic, social, and industrial structure of the concerned markets but also implies other factors such as transport costs, distance, trade agreements, exchange rates, and the reciprocal economic advantages proponents get from trade. For trade to occur, several fundamental conditions must be met:
- Availability. Commodities, from coal to computer chips, must be available for trade, and there must be a demand for these commodities. In other terms, a surplus must exist at one location and a demand in another, which implies reciprocity. A surplus can often be a simple matter of investment in production capabilities, such as building an assembly plant, or can be constrained by complex geological and environmental factors like the availability of resources such as fossil fuels, minerals, and agricultural products.
- Transferability. Transport infrastructures, in allowing goods to be moved from their origins to their destinations, support the transferability of goods. There are three major impediments to transferability, namely regulatory barriers (tariffs, custom inspections, quotas), geographical barriers (time, distance), and transportation barriers (the simple capacity to move the outcome of a transaction). Distance often plays an important role in trade, as does the capacity of infrastructures to route and transship goods.
- Transactional capacity. It must be legally possible to make a transaction. This implies the recognition of currency for trading and legislation that defines the environment in which commercial transactions occur, such as taxation and litigation. In the context of a global economy, the transactional environment is very complex but is important in facilitating trade at the regional, national, and international levels. The fundamental elements of a commercial transaction involving the transportation of a good are the letter of credit and the bill of lading. The transport terms have been regulated since 1936 by international commercial terms (Incoterms), which define the respective responsibilities and risks of the actors involved. Such terms are regularly updated and revised to reflect commercial and regulatory changes in global markets.
Once these conditions are met, trade is possible, and the outcome of a transaction results in mobility (or interaction). Three issues are related to the concept of flow:
- Value. Flows have a negotiated value and are settled in a common currency. The American dollar, the main global currency, is used to settle and measure many international transactions. Further, nations must maintain reserves of foreign currencies to settle their transactions. The relationship between the inbound and outbound flows of capital is known as the balance of payments. Although nations try to maintain a stable balance of payments, this is rarely the case; flows are commonly imbalanced.
- Volume. Flows have a physical characteristic, mainly involving a mass. The weight of flows is a significant variable when the trade involves raw materials such as petroleum or minerals. However, in the case of consumption goods, the weight has little significance relative to the value of the commodities being traded. With containerization, a new unit of volume has been introduced; the TEU (Twenty-Foot Equivalent Unit), which can be used to assess trade flows.
- Scale. Flows have a range that varies significantly based on the nature of a transaction. While retailing transactions tend to occur at a local scale, transactions related to the operations of a multinational corporation are global in scale.
Cities are the world’s major commercial centers. Still, the commercial importance of a city is relative to a number of factors such as financial flows, ease of doing business, and transport infrastructure. Traditionally, commercial activities tended to develop where there was a physical break along transport chains. Cargo needed to be transferred from one mode to another, and a new actor took over its ownership or custody. Physical breaks have imposed transactions, an important reason why most of the world’s most important financial centers tend to be port cities or major load break centers in the hinterland.
2. Contemporary Commercial Trends
The contemporary commercial setting is marked by increasing free trade and profound technological, industrial, and geopolitical changes. This process is generically known as globalization and has been driven by economic integration, global supply chains, expanded forms of transportation, and transactions. As confirmed by the implementation of the World Trade Organization, trade liberalization has given a strong impetus to the growth rate of global trade and industrial production. This has led to competitive pressures and shifting competitive advantages between regions, which drives added value. Even if regulatory agencies would not be required in a true free trade environment, despite deregulation attempts, transactions, and trade are prone to disputes, litigation, and perceived imbalances concerning who benefits the most. Although these issues mainly apply to international trade, there are also situations where trade is constrained between jurisdictions (provinces, states) of a nation.
After decades of globalization and ongoing growth, much trade remains dominantly regional. An overview of world trade flows indicates that trade within regions is more significant than between regions, but long-distance trade has steadily grown. This has been associated with an increasing share of East Asia, especially China, in world trade, both in terms of exports and imports. Flows of goods have also been accompanied by substantial growth in foreign direct investments. A remarkable reallocation of production capacities has occurred through outsourcing and offshoring following changes in comparative advantages worldwide. This trend goes in tandem with mergers and acquisitions of enterprises that are increasingly global in scope. Thus, the analysis of international trade reveals the need to adopt different strategies to adapt to this new trading environment. As production is being relocated through outsourcing and offshoring, there is a continuous shift in the structure of exports and imports among nations. The decline of manufacturing in its share of the global GDP is illustrative of the growing complexities that added value brings to the function of production. It masks a manufacturing sector that is embedded with service activities, such as logistics, and which is increasingly dependent on the generation of added value.
Major changes have occurred in the organization of production. There is a noticeable increase in the division of labor concerning the design, planning, and assembly in the manufacturing process of the global economy. Interlocking partnerships in the manufacturing structure have increased the trade of parts and the supply of production equipment worldwide. One-third of all trade takes place among parent companies and their foreign affiliates. A part of this dynamism resides in adopting standards, a process that began in the late 19th century to promote mass production. It permitted the rapid development of many sectors of activity, including railways (gauge), electricity (wattage), the automobile (safety), and the telecommunication industry (communication protocols and electronic data formats). In the realm of globalization of economic activities, the International Standards Organization developed the ISO norms that serve as a comparison between various enterprises worldwide. These norms apply to the manufacturing and services industries and are a necessary tool for growth. There are also indications that the trends supporting globalization may be receding.
The growth of the service sector, particularly its share of the GDP, involves economic activities that are more difficult to trade. Due to rising living standards, countries consume a growing share of their manufacturing output, although this does not occur uniformly. As a result, the market size influences commercial geography, the consumption level of an economy (often measured in GDP per capita), and the growth potential of different regions of the world. However, national GDP figures do not reveal regional distributions well, particularly the prominence of a few large metropolitan areas in total economic output.
At the global level, the bulk of the consumption occurs in a limited number of countries, with the G7 countries alone accounting for two-thirds of the global Gross Domestic Product. Economic growth in East and Southeast Asia has been one of the most significant forces shaping changes in the contemporary commercial environment through the multiplying effects of increasing domestic consumption and expanded trade. The commodification of the economy has led to significant growth in retail and wholesale and the associated movements of freight. As wages increase across the world, wage differences and the derived comparative advantages are less significant, implying that cheap labor becomes less relevant for competitiveness. While technical advances have benefited transportation, they also support the automation of production. This implies that locational decisions for production increasingly tend to be more market servicing than related to factors of production.
3. Transportation and Competitiveness
It is commonly assumed that regions compete over factors such as resources, labor, and governance to provide the most suitable economic advantages. Transportation is a key factor for competitiveness since it provides access to markets, labor, and resources. In particular, the mobility costs of workers and freight are the two most important factors of spatial competitiveness. However, the true extent of how transportation can improve competitiveness is often unclear since transportation is embedded in many economic and social processes.
Trade liberalization was accompanied by a growth of transportation activities since transactions involved the mobility of freight, capital, people, and information. Developments in the transport sector are matched by global and regional interdependence and competition. Like commodities, goods, and services, transportation is traded, sometimes openly and subject to full market forces, but more often subject to public control (regulation) or ownership. The core component of a transport-related transaction involves costs that either have to be negotiated between the provider of the service and the user or are subject to some arbitrary decree (price-setting such as public transit). Since transportation can be perceived as a service, its commercialization (how it is brought to the market) is an important dimension of its dynamics. This commercialization takes place over a landscape composed of actors involved in modes, terminals, and related supply chains. Most transport firms compete over cost (ability to offer a similar service at a lower price), differentiation (offering different transport services in terms of nature or quality), or focus (highly involved in a specific region or type of service).
These three factors usually involve different investment and development strategies for transport firms. Transport service providers tend to be private entities, particularly in the global freight transport sector. Local passenger transportation providers (transit) tend to be publicly owned. While transport companies have no specific location as modes are allocated to fulfill demand, transportation assets have a deep spatial and locational imprint. Transportation and logistics multinationals have emerged, improving global transportation systems and the competitiveness of regions. One important component of the competitiveness of transportation concerns investments in infrastructure, modes, and terminals, as well as their marketing and financing. Financial activities have seen a concentration among major global financial centers.
Investments are performed to expand the market area and the capacity of a transport system or to maintain and improve its operating conditions. The public and private sectors have contributed to the funding of transport investments depending on economic, social, and strategic interests. For obvious reasons, the private sector seeks transport investments that promise economic returns, while the public sector often invests for social and strategic purposes. In many cases, private transport providers have difficulties formulating and implementing their transport investments independently. Transport firms often lobby various levels of government for financial and regulatory assistance in projects that are presented as of public interest and benefit. The consolidation of regional markets and the resulting increase in transborder traffic has led transport firms to seek global alliances and greater market liberalization in the transport and communication sector to attract investments and improve their productivity.
Deregulation and divestiture policy has also substantially changed the competitive environment in the transport industry. It has led governments to withdraw from the management, operations, and ownership of national carriers, ports, and airports. This has led to a major reorganization of the international and national transport sectors with the emergence of transnational transport corporations governing the global flow of air, maritime, and land trade, and the management of airports, ports, and railyards.
Competitiveness is not always a rational endeavor, and behavioral issues could impact the choice of modes, routes, and terminals. There are several reasons behind this. First, decision-makers could have incomplete or even inaccurate information about routing options. The range of options is bounded, resulting in options that are not optimal. Second, existing relations between actors in a transport chain are commonly associated with informal commitments that may not be optimal. Third, there is inertia in commercial decisions where actors opt for the status quo since changing existing structures would require an effort and a level of risk.
4. Logistics and Supply Chains
The development of logistics and the setting of global supply chains substantially impact commercial geography. The key difference between transportation and logistics is that while transportation deals with the mobility of passengers and freight, logistics focuses on organizing the different components of this mobility, such as the booking of transportation services, and the packaging and storage of goods. A global economy with an acute division between production and consumption underlines the relevance of logistics as a commercial and spatial strategy to improve efficiency and reduce costs. Private interests have commonly managed freight, particularly in the maritime shipping segment. Similarly, the logistics industry is prone to private commercial interests that own modes, terminals, distribution facilities, and management services.
The ownership and operations of supply chains are intensive in transactions, flows, and information exchange. Logistics is the spatial and temporal management of freight flows, which are extensive and complex with globalization. As a commercial activity, logistics involves a range of tasks, from labor-intensive (loading, packaging, unloading) to information management-intensive (order processing, booking, routing). Still, the context in which logistics services are offered and managed has changed.
Freight transport services are increasingly being outsourced as many companies realized that transportation and warehousing were not part of their core business. They are reducing the number of transportation suppliers to cut costs and improve services. The development of the logistics industry has enabled many transport companies to take control of larger segments of the supply chain. With an increasing level of functional integration, many intermediate steps in the transport chain have been removed. Mergers and acquisitions have permitted the emergence of large logistics operators that control many segments of the supply chain. They are often labeled as third-party logistics providers since they almost exclusively take care of the management and operation of logistics on behalf of their customers. Technology has also played a role in this process, namely information technology (control of the process) and intermodal integration (control of the flows).
Freight distribution promotes regional competitiveness and integration into global supply chains and thus changes the commercial geography of a region. Logistical capabilities are often equated with competitiveness over segments of the supply chain, ranging from resource extraction to manufacturing and retailing. Public and private interests now consider various infrastructure, logistics, and supply chain management activities as high-priority national investment and economic development projects. This often involves logistics zones linked to intermodal terminal facilities, such as ports, rail yards, and barge terminals. Logistics is also linked with changes brought about by e-commerce. For instance, the growth of online purchases is linked with a decline in the retail commercial footprint, but with an increase in warehousing and distribution.
An important geographical, commercial, and logistical aspect of transportation is the issue of empty movements. Irrespective of the mode involved, the conveyance usually has to return to its location of origin. If part of the transport is done empty (without carrying goods or passengers), then the costs of these empty movements must be assumed one way or the other, directly by the carrier or indirectly by the customer. The main factors inducing empty movements are related to imbalanced flows (such as international trade), specialized transport equipment being able to carry only specific types of goods, short-range movements preventing a range of backhaul options, and regulatory restrictions such as cabotage laws or the jurisdiction of operators.
- 3.1 – Transportation and Economic Development
- 3.3 – Transport Costs
- 3.4 – Transport Supply and Demand
- 7.2 – Globalization and International Trade
- 1.3 – The Emergence of Mechanized Transportation Systems
- 1.4 – The Setting of Global Transportation Systems
- B.16 – The Financing of Transportation Infrastructure
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