Trade implications of transport cost in the Philippines

Trade costs play an important role in economic development. This is easily appreciated in the case of the Philippines, an archipelago of over 7000 islands that faces serious connectivity challenges. The Roll-on Roll-off (RORO) Terminal System (RRTS) introduced in 2003 presents an opportunity to study the effects of a transport system on trade costs, and how these in turn inflence patterns of trade and pricing behavior. The design of the RRTS and its context are described in Chapter 2, which also outlines the process of building the historical data set on RRTS services by route. This data set is key to the empirical analyses in the subsequent chapters. Chapter 3 estimates trade costs using province border effects, and examines how the RRTS affected them and their distribution. Results suggest that border effects are lower by a factor of 0.65 with the RRTS. However, this reduction is unevenly distributed, and limited to provinces that are near Metro Manila, the capital and the biggest demand center in the Philippines. Chapter 4, which investigates the effect of the RRTS on trade patterns show that RRTS port-pairs trade 35% more compared to unconnected pairs with comparable characteristics. This gain comes from the intensive margins and more consistently through the extensive margins. Trade transactions are 7% to 9% more frequent in RRTS routes, suggestive of inventory management as an avenue of trade costs savings. High value and time-sensitive products systematically benefit more from the RRTS. These RRTS-associated gains do not come from displacing trade from competing non-RRTS ports. Instead, the RRTS complements trade in liner routes by supporting feeder traffic. Finally, Chapter 5 uses an origin-destination mapped data set to evaluate how agricultural prices in supplying and destination provinces respond to changes in transport costs from the RRTS. Conditional on distance, price gaps as proportion of farmgate prices are on average 28% smaller in province pairs that have RRTS connection. The gap narrowing effect is driven by higher farm prices without the corresponding rise in consumer prices. During periods of positive price shocks, farmers in RRTS provinces retain a higher share of the rents from price increases, while changes in consumer prices are not significantly different in RRTS provinces compared to unconnected areas. The results are consistent with a reduction in markups from RRTS-induced competition in intermediation and shipping services.