The size of the market determines, in static terms, the opportunities for the division of labour and specialization. Market size is, on the other hand, limited by natural and human imposed barriers to trade. The impact of natural obstacles to trade such as distance or geography could be moderated by the construction of new roads, railways, bridges, tunnels and ports. In addition, a fall in costs of transport per unit of transported good (or per passenger) reduces barriers that may exist between two or more places. International economic integration is able to mitigate or even eliminate the impact of artificial barriers to trade such as tariffs, quotas, taxes and NTBs. Developed and relatively cheap transport and communication links among states are necessary conditions for successful economic integration.
There was little intervention in trade during the nineteenth century. None the less, markets among many countries remained detached because of relatively high costs of transport and a lack of full and timely information about opportunities for trade. Since then, heavy public investment in infrastructure has shortened the distance between various markets.
Classic models of international economic integration have excluded the space dimension from considerations (alternatively, when transport costs were included, they were assumed to be equal to zero). Although increasing productivity reduces cost per unit of transported goods, this was not entirely legitimate. Transportation distances vary because of new markets; and speed (and price) of delivery depends on the method of transport. In addition, the transport industry is a significant contributor to the GDP and employment. In a standard case, transport costs have the same effect on the final price of goods and trade as tariffs. When the cost of transport is reduced (as with the reduction in tariffs), new trade among states may be created.
Transport services have at least four characteristics. First, there is public intervention regarding rates, investment in infrastructure, taxes, subsidies and conditions for operations (safety, dimensions of vehicles, pollution and the like). 1 It is most pronounced in railways, the mode of transport that is almost entirely monopolized. 2 Second, transport services are significant employers of labour and consumers of capital goods and energy. Third, the demand for transport services depends on the level of economic activity and income. The supply of these services is, however, inelastic in the short term. Fourth, transport services play a crucial role in the successful operation and competitiveness of an economy.