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The Unflattening

Let me quote a couple of abstracts for you. First up: Glaeser and Kohlhase:

The theoretical framework of urban and regional economics is built on transportation costs for manufactured goods. But over the twentieth century, the costs of moving these goods have declined by over 90% in real terms, and there is little reason to doubt that this decline will continue. Moreover, technological change has eliminated the importance of fixed infrastructure transport (rail and water) that played a critical role in
creating natural urban centres. In this article, we document this decline and explore several simple implications of a world where it is essentially free to move goods, but expensive to move people.

And now here’s Glaeser and Ponzetto:

Urban proximity can reduce the costs of shipping goods and speed the flow of ideas. Improvements in communication technology might erode these advantages and allow people and firms to decentralize. However, improvements in transportation and communication technology can also increase the returns to new ideas, by allowing those ideas to be used throughout the world. This paper presents a model that illustrates these two rival effects that technological progress can have on cities. We then present some evidence suggesting that the model can help us to understand why the past thirty-five years have been kind to idea-producing places, like New York and Boston, and devastating to goods-producing cities, like Cleveland and Detroit.

And now have a look at this:

The impact of rising transportation costs, driven significantly by high oil prices, is already being seen in capital-intensive manufacturing that carry a high ratio of freight costs to the final sale price. But a new report has determined that higher energy prices are affecting transport costs at such an unprecedented rate that “the cost of moving goods, not the cost of tariffs, is the largest barrier to global trade today.”

What does this all mean? Well, it depends on a lot of things, some financial, some technological, some institutional.  But I think we can make a few general statements. In recent decades, global trade patterns–that is the structure of supply chains and mix of products shipped–have developed in a world of more or less persistent declines in transportation costs (and, one presumes, the expectation that those declines would continue). In the same way, our domestic urban geography has evolved with certain expectations about transportation cost trends in mind.

Some non-trivial portion of those transportation cost declines, actual and expected, are likely not sustainable over the long-term. Depending on just how off expectations were, we could see some interesting changes in economic patterns. For one, I’d expect a global squishing of supply chains and cities. For another, I’d expect the mix of shipped goods to move toward high value items, which have a lower ratio of shipping costs to sale price. That may mean a return of some production jobs to service-oriented economies.

And as Econbrowser’s Menzie Chinn notes, we may see an increase in the importance of regional economies. Increased shipping costs could advantage rail and shipping hubs, could advantage nearby trading partners (his example is Mexico) over distant ones (China), and could generally reduce the resonance of global trade as a hot-button issue. Could.

And of course, depending on how all of that unfolds, there could be knock on effects on income and income distribution. It’s hard to say; the rise in transportation costs could be short-lived, or technologies could rapidly evolve to reduce the impact of those cost increases. But alternatively, we could be at an inflection point for the dispersion of productive activity around the world.

Ryan Avent's picture

Thank Ryan for the Post!

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