Source: 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, 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. 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 inventory in transit concept.