Transportation Costs Are Stunting Exports in Brazil and LatAm

by Dave

Over long distances, hauling freight by rail is the most economical option. Private companies in LatAm need to put building and upgrading rail lines to ports on the governmental agenda. Or do it themselves in conjunction with overseas investment partners where possible.

Brazil – Brazzil Mag

Latin American exports’ growth depends more on lower transport costs than on reduction of tariffs. This warning is in research “Unclogging the Arteries: A Report on the Impact of Transport Costs on Latin American and Caribbean Trade.”

Produced by the Inter-American Development Bank (IDB), the study includes figures for nine countries: Argentina, Bolivia, Brazil, Chile, Colombia, Ecuador, Peru, Paraguay and Uruguay.

The study should be presented on Wednesday, October 1st, in Brazilian capital Brasília, during seminar “Transport for Trade and Regional Integration”, promoted by the National Confederation of Industries (CNI) in partnership with the IDB. The participants should discuss relations between transport costs and foreign trade in Latin America and propose solutions to the logistics bottlenecks that affect Brazilian exports.

According to the study, a 10% reduction in the value of tariffs would increase exports by these countries by less than 2%. On the other hand, if the same reduction were made in transport costs, foreign sales to the United States would grow 39%. This calculation considers stability of other factors, like exchange rates and economic growth.

To IDB economist Mauricio Mesquita Moreira, one of the authors of the research, the governments of the countries in Latin America are more concerned with tariff and non-tariff barriers and forget other greater obstacles, like transport. “The trade policy in the region is out of focus,” criticizes Moreira.

The report also shows that if the countries in Latin America reduced freight costs by 10%, there would be trade growth of over 20% in the region. In case the reduction was in tariffs, the growth would be just 10%. The reduction of transport costs would benefit products made in Brazil, Chile, Ecuador, Peru and Uruguay and ore and metal exports by Argentina, Colombia and Paraguay.

Latin America spends 7% of export value on freight, almost double the 3.7% spent by the United States. In the case of Brazil, this cost is equivalent to 5.5% of the product price.

“Despite being lower than the Latin American average, the country has been spending much more with transport than the United States,” stated Moreira. “Customs costs are not the main obstacles to foreign trade, with a few exceptions, as is the case with alcohol, cotton and orange. In most products, transport cost may be as much as 50% higher than tariffs.”

The researcher points out that there is space for reduction in transport costs. However, he recognizes that the products exported by the countries in Latin America require greater freight allocation, which ends up increasing costs.

“The comparison between exports of one dollar of chips and one dollar of soy is very different, as the latter is significantly larger. If we divide the weight of the product by its value, transport cost is much higher for primary products than for electronic products,” he explained.

Transport costs in Latin American are almost double that of the United States. According to the study, Argentina spends 22% more than the North Americans, Chile twice, and Paraguay, over four times. Latin American and Caribbean exports to the United States pay ocean freight almost 70% higher than those paid by Dutch products.

The report also shows that around 30% of the transport costs in Latin America are due to port inefficiency. To Moreira, this is the most important figure for the establishment of sector public policies.

“One of the main causes for inefficiency is port competition, which is smaller in Latin America than in the United States and the Netherlands,” he pointed out. “In this area, it is possible to reduce government interference, like the agreements that restrict coastwise navigation.”

Another obstacle is in air imports. According to the research, airfreight costs have grown faster in Latin America than in China and the rest of the world. Freight costs in the Caribbean in 2006, for example, were 36% higher than in 1995. In the same period, China kept the cost below the 1995 figure, despite higher oil prices.

Moreira adds that, in Brazil, airfreight is almost three times more expensive than in the United States. Another problem is that consumers and producers are not informed of these costs.