Transportation, freight rates, and economic geography

We investigate the role of competitive transport markets in shaping the location of economic activity and the pattern of trade. In our model, carriers supply transport services for shipping manufactured goods, and freight rates are set to clear transport markets. Each carrier must commit to the maximum capacity for a round-trip and thus faces a logistics problem as there are opportunity costs of returning empty. These costs increase the freight rates charged to firms located in regions that are net exporters of manufactured goods. Since demand for transport services depends on the spatial distribution of economic activity, the concentration of production in one region raises freight rates to serve foreign markets from there, thus working against specialization and the agglomeration of firms. Consequently, a more even spatial distribution of firms and production prevails at equilibrium when freight rates are endogenously determined than when they are assumed to be exogenous as in the literature. ► We model a competitive transport sector in a model of trade and geography. ► We compare the equilibrium spatial allocation of production under exogenous and endogenous freight rates. ► We show that freight rate asymmetries work against the agglomeration of firms in the larger region. ► Freight rate responses to trade imbalances provide a strong dispersion force. ► We prove these results both in the footloose capital and the core–periphery models.