CID Faculty Spotlight: Myrto Kalouptsidi on Why Ships and Ports Are Vital to World Trade and Development

Shipping has long been the invisible hand of world trade, propelling globalization and the growth of emerging economies. Ships move 90 percent of the world’s goods – 11 billion tons of food, raw materials, and consumer products valued at $20 trillion dollars per year. 

“Transport markets are many times more volatile than the U.S. stock market,” says Myrto Kalouptsidi, CID Faculty Affiliate and Professor of Economics at Harvard. “You see dramatic booms and busts, [going] back centuries.” 

Any bottleneck in the flow of goods can trigger massive delays down the supply chain, as seen during Covid-19, when hundreds of vessels were stuck for weeks in the waters surrounding key ports, grinding trade to a halt, and dramatically raising freight costs and consequently, consumer prices. But the pandemic was not the first time a shipping disruption caused havoc in global trade; nor will it be the last. 

What Covid did, she says, is make apparent the usually hidden connections between sea transport, trade, and people’s everyday lives – as well as how little we understand about those connections.

Kalouptsidi has been at the forefront of an emerging literature on the impact of transportation markets, particularly maritime disruptions, on international trade. When she first started studying fluctuations in shipping for her doctoral dissertation, few scholars recognized that transport markets affected trade, much less examined how.

For the last 15 years, her work has made visible the mechanisms through which the transport sector impacts trade, with an eye to improving policy. Using quantitative models calibrated by satellite and firm-level data, Kalouptsidi has shown how shipping interacts with global trade flows and costs, how oil prices impact world trade, how China employed industrial policies to transform itself from a bit player into the largest shipbuilder in the world, the impact of Chinese protectionism on the shipping industry, and most recently, how to optimally invest in ports for trade and welfare gains.

An applied microeconomist who specializes in industrial organization, Kalouptsidi is fascinated by the interplay between firms and markets, and the larger, global economy – an interest shaped by the 2008 recession.

At the time, Kalouptsidi, who grew up in Athens, was completing a Ph.D. in economics at Yale. Between semesters, she witnessed the devastating effects of the fiscal crisis during visits to her hometown.

“You couldn’t even recognize the neighborhoods you grew up in, because, all of a sudden, they were full of pawn shops, people selling their grandmothers’ gold necklaces,” she says. Then there were the bankruptcies, austerity measures, and bank closures.

Driven to connect her work in firm competition to macroeconomic instability, she started studying the evolution of specific industries. Her focus on shipping was accidental, the result of a serendipitous encounter with a childhood friend who worked in a maritime brokerage office. Kalouptsidi became captivated by shipping cycles, a millennia-old story with striking ups and downs linked ineluctably to the tides of history.

On the surface, shipping volatility is a simple tale of constrained capacity. Neither ships, nor ports, can respond quickly to shifting demand. Ships can only make so many trips in a month, and take a long time to build. Ports get congested when demand is high, rather like supermarket queues, says Kalouptsidi. While a small demand shock is fine, when you have a series of shocks, a ship’s time in port can skyrocket.

The details of how shipping shocks impact trade are more complex. In a groundbreaking paper that was awarded the Frisch Medal, Kalouptsidi and her co-authors overturned a convenient  assumption. “For decades, trade models assumed that trade costs between two countries are primarily a function of distance,” she says. It was believed that “the further they are, the more costly it is to trade.”

In fact, as she explains, trade costs “depend on trade flows, the whole network of countries, on how transport companies search for cargo.” China, for example, is a big exporter of manufactured goods. Ships arrive in the United States full of cargo, and return to China half empty, traveling the same distance. Yet it is much more expensive to ship to China from the U.S., than from China to the U.S.

“The ship knows that once it goes from China to the U.S., it will be hard to find another load,” says Kalouptsidi. “It’s like taking a taxi to Queens; the driver has to wait to find another customer, or return without another fare.” The freight cost differential, in turn, leads to particular trade patterns. The ships have to return, she says, and the cost structure incentivizes the U.S. to send ships back to China with low-quality materials such as hay, scrap metal, and until China’s recent ban, plastic recyclables.

To examine the economic mechanisms that transport markets activate in greater detail, Kalouptsidi ran experiments to predict changes in trade patterns. What would happen if you closed the Suez canal, or opened the Northwest passage? What if China slowed down, or oil prices changed?

The experiments demonstrate that shipping impacts world trade in three vital ways: first, it mitigates differences in comparative advantage across countries, reducing trade imbalances (without shipping’s cost equilibrium, which limits how much a country can export or import, trade inequalities between rich and poor countries would be even greater); second, it weakens the impact of shocks on trade flows (a slowdown in China, for example, would negatively impact the region, but those declines would be offset by ships reallocating to distant countries such as Brazil; similarly, a fall in fuel prices would lead to a drop in shipping costs, but that, in turn, would be offset by a rise in exports); and third, local changes in trade routes and ports impact the entire global network (for example, the melting of Arctic ice (the Northwest passage) would reduce the travel distance between Northeast America, Northern Europe and the Far East, giving ships in Northeast America bargaining power to command higher prices; the local rise in prices, in turn, would push down exports everywhere else.

Her most recent project expands upon these insights, and examines when and where to invest in port infrastructure for optimal gains. By measuring the investment returns on 51 U.S. ports, Kalouptsidi and her co-investigators show that investments bring significant gains, but only if targeted at specific ports; improving the infrastructure of a targeted port benefits not just that port, but decongests other in-demand ports. On average, welfare gains double when volatility doubles – at certain ports. Substantial gains were seen where shippers have few substitution options, while some ports show no returns even if volatility triples.

“What surprised us was how much the whole network of ports matter,” says Kalouptsidi. “You can’t just invest in one, you have to think about the entire network, and the choice sets of the shippers.”

Shocks are unpredictable, but they are becoming more frequent, making port capacity crucial for economic resilience.

“We’re just scratching the surface with the ports study,” says Kalouptsidi, whose next project will look at a little-studied phenomenon with big implications for regional development: monopoly power in African ports.