Security and the economy: Transportation

Trade and trade-offs
Economics Department
Page 12 

A medium-term economic fallout of 11 September is the effect on commerce, in particular, transportation. During the “new economy” boom it was perhaps forgotten that we live not in cyberspace but in a physical world where even goods ordered online still have to be packaged with real paper, processed and sent to their final destination. All of this means transport. But following the 11 September terrorist attacks, the air transportation system was shut off for four days and the Port Authority of New York and New Jersey closed its operations for two days. The entire US transportation system was subject to severe disruptions that reverberated throughout the world.

The most severe disruption occurred at the US-Canada land border, virtually stopping some half a million vehicles from doing their normal trade, worth some US$1.4 billion a day. Long waits affected many businesses, in particular the automotive industry where just-in-time supply chains simply could not operate. Security measures were gradually eased and more personnel hired to bring the flow back to near normal. The signing in December 2001 of the US-Canada “smart border” initiative to facilitate trade through improved technology and better co-ordination has helped. But that was a land border: what of intercontinental trade?

Tighter security requirements and a series of surcharges also affect the cost of transporting goods by sea and air. Notification requirements, more frequent coast guard inspections and escorts: all have resulted in longer waiting times. The same for airfreight, with higher insurance premiums and war surcharges, particularly for transport of goods in sensitive geopolitical zones, also pushing up costs.

Despite all of this, most indices six months after the attacks showed little increase in shipping costs, while some declined. The 5-10% increase in maritime shipping rates was quickly reversed, but airfreight rates were some 10% up by the end of the year compared with before the attacks. Easing demand and sharply lower fuel costs should otherwise have led to a decline; according to the Air Transport Association, the average price of fuel used by the US airline industry has fallen from 79.6 cents in September 2001 and 60.1 cents in December. So, because of the attacks, underlying transportation costs may have risen.

Some still believe that US borders remain too porous and advocate more controls. The US Customs Service has recommended initiatives to increase the security of containers, which account for some 60% of the volume of world trade. This would involve significant capital investment so that cargo might go through more expeditious customs procedures – a sort of “fast lane”. Such requirements cost money and could affect delivery times. Yet affordable airfreight and lower overall shipping costs have helped to drive growth in recent decades, and several industries have been able to internationalise their supply chains as a result. They depend on speed and reliability of delivery and an efficient transportation system. Speed has allowed businesses to reduce inventories, for instance, and to raise productivity, not just in the United States, but in economies the world over. Making transport and shipping less affordable could affect growth in all countries, rich or poor.

Industry experts believe that post-attacks, the total cost of new security measures could amount to 1-3% of the goods’ value. These are not insignificant amounts, though even small differences in the cost of trading internationally, compared with selling in domestic markets, can have a large effect on trade patterns. The possibility that security measures can undermine trade flows should not be discarded.

What can be done, for security is clearly important. A co-operative approach is needed between the private and the public sector in both the design and implementation phases. Even though a trade-off between security and efficiency of border crossings cannot be fully avoided in the short-term, it might be overcome in the medium term. New security measures can be devised in ways that do not diminish the efficiency of merchandise border crossings, using risk-management to ensure that the most sensitive cases are prioritised.

The air cargo security regime introduced by the United Kingdom in the wake of the Lockerbie disaster of 1988 is a good example in this regard. “Fast lanes” for containers originating from secure ports appear at first glance to be an efficient solution, but could be discriminatory, especially against developing countries. International co-operation and consensus building would help make new security measures more efficient, while reducing their potentially negative impact on trade flows.

The 11 September attacks were tragic and shocking in the extreme. The fact that activity appears to be bouncing back is testimony to the resilience that the OECD area, and the US in particular, have developed over the years. Managing risks simply forms part of the test ahead.

Reference

• "The Economic Consequences of Terrorism", Economics Department Working Paper, forthcoming, OECD, 2002. 

©OECD Observer No 231/232, May 2002 




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